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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________.
Commission File No. 0-27600
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OPTICAL SENSORS INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 41-164359
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7615 Golden Triangle Drive, Suite C
Technology Park V
Minneapolis, Minnesota 55344-3733
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (952) 944-5857
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Preferred Share Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 15, 2000, 8,962,777 shares of Common Stock of the Registrant
were outstanding, and the aggregate market value of the Common Stock of the
Registrant as of that date (based upon the last reported sale price of the
Common Stock at that date as reported by the Nasdaq National Market System),
excluding outstanding shares beneficially owned by directors and executive
officers, was $27,832,268.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific sections are referred to herein) from the
Registrant's Proxy Statement for its 2000 Annual Meeting of Stockholders to be
held on May 4, 2000 (the "2000 Proxy Statement").
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PART I
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This Form 10-K contains certain forward-looking statements. For this
purpose, any statements contained in this Form 10-K that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"estimate" or "continue" or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending on a
variety of factors, including those set forth in the section below entitled
"Certain Important Factors."
Item 1. BUSINESS.
General
Since October 1998, Optical Sensors Incorporated (the "Company") has been
focusing 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 can indicate
reduced blood flow to non-vital organs. Reduced blood flow, or "hypoperfusion"
can be an early manifestation of clinical shock, even when traditional vital
signs may still appear relatively normal. 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.
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 limited release in 2000 and full commercial release in the
first quarter of 2001.
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 implemented 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 System, and the only sales of the
SensiCath System 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.
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
continues to explore
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strategic alternatives, including joint ventures, corporate strategic alliances,
sale of the business or product lines, or other business combinations. In
January 2000, the Company signed a non-binding letter of intent with a major
supplier of medical products and services to negotiate a definitive agreement
for the Company's CapnoProbe product and technology. The agreement includes a
confidentiality understanding that precludes the Company from identifying the
other party.
On March 10, 2000, the Company entered into an Investment Agreement with
two of the Company's principal stockholders, Circle F Ventures, LLC, a Georgia
limited liability company, and Special Situations Fund III, L.P., a Delaware
limited partnership, pursuant to which the Company agreed to issue convertible
promissory notes in the aggregate principal amount of up to $3,000,000. The
Company received advances under these notes in the aggregate amount of
$1,400,000 on March 10, 2000. The Company has the right to request additional
advances up to the aggregate principal amount of $1,600,000 at any time during
the 60 day period beginning on the first day after both of the following have
occurred: (1) the Company executes a definitive distribution agreement for the
Company's CapnoProbe product with a major medical company, and (2) the
stockholders of the Company approve the conversion of the notes. The Company's
right to request additional advances will expire on June 15, 2000. The notes are
convertible into units, each unit consisting of 50,000 shares of the Company's
Common Stock and a five-year warrant to purchase 12,500 shares of Common Stock
at an exercise price of $1.00 per share, at a conversion price equal to $50,000
per unit, in accordance with the Investment Agreement. The proceeds from the
issuance of these convertible promissory notes will provide the Company
additional funds to continue development of its CapnoProbe technology as the
Company moves forward with its continuing strategic negotiations with this major
supplier of medical products and completing development of the CapnoProbe
product.
The Company was incorporated in Minnesota in May 1989 and reincorporated in
Delaware in January 1996. The Company's executive offices are located at 7615
Golden Triangle Drive, Suite C, Technology Park V, Minneapolis, Minnesota 55344,
and its telephone number is (952) 944-5857.
The CapnoProbe
The CapnoProbe is a handheld device with a CO2 probe that is slipped under
the tongue like a thermometer that non-invasively measures the tissue CO2 of the
mucous membrane in the mouth -- a sensitive measure that can indicate reduced
blood flow to non-vital organs. Reduced blood flow, or "hypoperfusion" can be an
early manifestation of clinical shock, even when traditional vital signs may
still appear relatively normal, as in compensated shock cases. According to the
Wilkerson Group, a leading market research organization, the U.S. market
potential for the CapnoProbe is more than $300 million in the emergency
department and intensive care markets alone. In December 1998, the Company filed
a 510(k) for FDA clearance of the CapnoProbe as a Class II medical device. At
the FDA's request and as part of that submission, the Company provided
additional data to the FDA on March 20, 2000. The CapnoProbe's disposable CO2
probe is self-calibrating and is planned to provide CO2 readings in
approximately one minute. One CapnoProbe sensor will be used on one patient for
a single measurement. Multiple measurements would be made depending on the
severity of the patient's state and response to therapy. The CapnoProbe
instrument will be portable, rugged and battery operated. The Company is using
its proven designs from its existing OpticalCAM blood analyte monitor and the
CO2 component of its SensiCath blood gas sensor to reduce technical risk in the
program and to speed development to market. No new research is required for the
product and all milestones to commercialization are engineering related.
Prototype versions of the CapnoProbe system are currently being evaluated at
clinical sites in the United States.
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Sales and Marketing
In January 1999, the Company suspended sales activity of the SensiCath
System and reduced expenses and personnel (including sales and marketing
personnel) in order to concentrate its resources on the CapnoProbe. The Company
does not expect meaningful sales of the SensiCath System in the future.
In January 1998, the Company entered into an agreement with IL for
worldwide distribution of the Company's SensiCath Sensors and OpticalCAM
instrumentation. IL was required to purchase sufficient quantities of products
from the Company that would result in preestablished annual minimum revenues to
the Company. IL failed to meet the quota requirements for 1998, and,
accordingly, the Company exercised its right to convert IL's exclusive right to
a non-exclusive right in January 1999. The Company is currently pursuing
termination of the IL distribution agreement through an arbitration proceeding
filed by the Company.
The Company is exploring strategic alternatives, including joint ventures,
corporate strategic alliances, sale of the business or product lines, or other
business combinations. One of the strategic alternatives could include a
distribution and/or development partner for the CapnoProbe and/or other platform
technologies based upon the Company's proprietary technology.
Research and Development
The Company's research and development staff is currently focusing on the
design and development of the CapnoProbe technology. There can be no assurance
that the Company will be able to successfully develop the CapnoProbe product on
a timely basis or at all. The Company's research and development expenses for
the fiscal years ended December 31, 1999, 1998 and 1997 were $3,115,075,
$4,248,029 and $4,975,037 respectively. The Company anticipates that it will
continue to spend significant amounts on research and development activities for
the foreseeable future.
Manufacturing and Supply
The Company used to manufacture the SensiCath Sensor at its facility in
Minneapolis, Minnesota, which includes approximately 4,000 square feet of
manufacturing space. The FDA conducted a scheduled good manufacturing practices
inspection of the Company's manufacturing facility in November 1997, and the
Company passed the inspection. The Company's manufacturing facility is ISO 9001
compliant.
The Company has not yet established commercial manufacturing for the
CapnoProbe.
Competition
Competition in the medical device industry in general is intense and
expected to increase. To the Company's knowledge, however, there are no
commercially available products that would be directly competitive with the
CapnoProbe. The CapnoProbe would indirectly compete with the Datex-Ohmeda
(Instrumentariun Corporation) TONOCAP system. This product measures CO2 in the
tissue of the stomach wall as an indicator of shock and has only recently been
introduced to critical care medicine. The TONOCAP system requires placement of a
balloon catheter into the stomach and measures air or saline from the balloon at
regular intervals. However, the administration of a histamine-2 receptor (e.g.,
Tagamet) and a stomach free of food are required for accurate measurements,
making this a difficult product to use in emergency situations where it is most
needed. Even with its limitations, there is a growing body of literature that
reinforces the importance of measuring gastrointestinal CO2 as a method
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of diagnosing shock since there is evidence that if elevated CO2 cannot be
reversed within six to 24 hours, aggressive treatment will not be effective.
The Company believes that the principal competitive factors for its
CapnoProbe will be accuracy, rapid results, cost-effectiveness and price. Most
of the Company's competitors have significantly greater financial, technical,
research, marketing, sales, distribution and other resources than the Company.
There can be no assurance that the Company's competitors will not succeed in
developing or marketing technologies and products that are more effective or
less expensive than those developed or marketed by the Company or that would
render the Company's technology and products obsolete or noncompetitive.
Furthermore, there can be no assurance that the emergence of new products,
technologies or procedures will not reduce the need for the CapnoProbe.
Patents and Proprietary Rights
The Company seeks to protect technology, inventions and improvements that
it considers important through the use of patents and trade secrets. The Company
currently holds or has a license to practice 21 U.S. patents covering the
Company's opto-electronic technology, four of which are specifically related to
the CapnoProbe, and has filed a number of patent applications in the United
States, Japan and key European countries. There can be no assurance, however,
that the Company's patents will provide competitive advantages for the Company's
products, or that such rights will not be challenged or circumvented by
competitors. In addition, there can be no assurance that any patents covered
under any pending patent applications will be issued. Claims made under patent
applications may be denied or significantly narrowed and the issued patents, if
any, may not provide significant commercial protection to the Company. The
Company could incur substantial costs in proceedings before the U.S. Patent and
Trademark Office, including interference proceedings. These proceedings could
result in adverse decisions as to the priority of the Company's inventions.
In July 1998, the Company entered into a patent license agreement with
Institute of Critical Care Medicine, which provides the Company with the
exclusive, worldwide right under ICCM's pending and issued patents to use the
Company's technology to assess tissue perfusion under the tongue (sublingually)
and in the esophagus to aid in the diagnosis and monitoring of shock. The
CapnoProbe product being developed by the Company is expected to be subject to
royalties under the license agreement. The Company is obligated to pay ICCM a
minimum annual royalty of $300,000 for five years in order to maintain
exclusivity. The Company may elect, on one years' written notice, not to make
the annual minimum royalty payment of $300,000, but ICCM would have the right to
terminate the license agreement. The Company is obligated to pay ICCM a
customary royalty equal to a percentage of sales, which varies depending on the
selling price to the customer of the CapnoProbe. The Company is also obligated
to meet certain product development milestones under the license agreement.
While the Company does not believe that any of its products infringe any
valid claims of patents or other proprietary rights held by third parties, there
can be no assurance that the Company does not infringe any patents or other
proprietary rights held by third parties. If an infringement claim were made,
the costs incurred to defend the claim could be substantial and adversely affect
the Company, even if the Company were ultimately successful in defending the
claim. If the Company's products were found to infringe any proprietary right of
a third party, the Company could be required to pay significant damages or
license fees to the third party or cease production. Litigation may also be
necessary to enforce patent rights held by the Company, or to protect trade
secrets or techniques owned by the Company. Any such claims or litigation could
result in substantial costs and diversion of effort by management of the
Company.
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The Company also relies on trade secrets and other unpatented proprietary
technology. There can be no assurance that the Company can meaningfully protect
its rights in such unpatented proprietary technology or that others will not
independently develop substantially equivalent proprietary products or processes
or otherwise gain access to the Company's proprietary technology. The Company
seeks to protect its trade secrets and proprietary know-how, in part, with
confidentiality agreements with employees and consultants. There can be no
assurance that the agreements will not be breached, that the Company will have
adequate remedies for any breach or that the Company's trade secrets will not
otherwise become known to or independently developed by competitors.
SensiCath(R),OpticalCAM(TM), and CapnoProbeTM are trademarks of the
Company.
Government Regulation
The Company's products, development activities and manufacturing processes
are subject to regulation by numerous governmental authorities, principally the
United States Food and Drug Administration ("FDA") and corresponding foreign
agencies. In the United States, the FDA administers the Federal Food, Drug and
Cosmetics Act and amendments thereto, including the Safe Medical Devices Act of
1990. The Company is subject to the standards and procedures respecting
manufacture and marketing of medical devices contained in the Federal Food, Drug
and Cosmetics Act and the regulations promulgated thereunder and is subject to
inspection by the FDA for compliance with such standards and procedures.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing approvals
and criminal prosecution.
In the United States, medical devices are classified into one of three
classes (class I, II or III), on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and effectiveness. Under FDA
regulations, class I devices are subject to general controls (e.g., labeling,
premarket notification and adherence to good manufacturing practices) and class
II devices are subject to general and special controls (e.g., performance
standards, postmarket surveillance, patient registries and FDA guidelines ). In
general, class III devices (e.g., life-sustaining, life-supporting and
implantable devices, or new devices which have not been found substantially
equivalent to a legally marketed device), in addition to being subject to
general and special controls, must receive premarket approval ("PMA") by the FDA
to ensure their safety and effectiveness.
Before a new or significantly modified device can be introduced into the
market, the manufacturer must generally obtain marketing clearance through a
510(k) notification or approval of a PMA application. A 510(k) clearance will be
granted if the proposed device is "substantially equivalent" to a predicate
device (i.e., a legally marketed class I or class II medical device, or a class
III medical device for which the FDA has not called for the submission of a PMA
application). Commercial distribution of a device for which a 510(k)
notification is required can begin only after the FDA issues a written
determination that the device is "substantially equivalent" to a predicate
device. The process of obtaining a 510(k) clearance typically can take several
months to a year or longer. A PMA application must be filed if a proposed device
is not substantially equivalent to a legally marketed class I or class II
device, or if it is a class III device for which the FDA has called for a PMA
application. Certain class III devices that were on the market before May 28,
1976 ("preamendments class III devices"), and devices that are substantially
equivalent to them, can be brought to market through the 510(k) process until
the FDA calls for the submission of PMA applications for preamendments class III
devices. The process of obtaining a PMA can be expensive, uncertain and lengthy,
frequently requiring anywhere from one to several years from the date the PMA is
submitted to the FDA, if approval is obtained at all.
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The Company has received 510(k) clearance to market the SensiCath System
and the OpticalCAM monitor from the FDA. In December 1998, the Company submitted
a 510(k) for the CapnoProbe, but has not yet received clearance to market. At
the FDA's request and as part of that submission, the Company provided
additional data to the FDA on March 20, 2000. There can be no assurance that
this or any other future 510(k) submissions will be cleared by the FDA on a
timely basis, if at all.
The Company is also subject to regulation in each of the foreign countries
in which it sells its products with regard to product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. Many of the regulations applicable to the Company's
products in such countries are similar to those of the FDA. The national health
or social security organizations of certain of such countries require the
Company's products to be qualified before they can be marketed in those
countries. Delays in receipt of, or a failure to receive such approvals or
clearances, or the loss of any previously received approvals or clearances,
could have a material adverse effect on the Company. To date, the Company has
not experienced significant difficulty in complying with these regulations. In
February 1997, the Company received the European Medical Devices Directorate
("MDD") approval to place the "CE" mark on its products. The CE mark enables the
Company's products to be marketed, sold and used throughout the European Union,
subject to limited "safeguard" powers of member states.
The Company is subject to periodic inspections by the FDA, which is charged
with auditing the Company's compliance with good manufacturing practices ("GMP")
established by the FDA and other applicable government standards. The Company is
also subject to inspections by the MDD and other European regulatory agencies.
Strict regulatory action may be initiated in response to audit deficiencies or
to product performance problems. The Company believes that its manufacturing and
quality control procedures are in compliance with the requirements of the FDA
and MDD regulations. The Company's manufacturing facilities and processes are
also subject to periodic inspection and review by its Notified Body in
conjunction with the Company's ISO 9001 certification. Failure to maintain GMP
and ISO 9001 certifications could have a material adverse effect on the Company.
Employees
As of March 15, 2000, the Company had 23 full-time and no part-time
employees. No employees are covered by collective bargaining agreements, and the
Company considers its relationship with its employees to be good.
Item 2. PROPERTIES.
The Company's facilities are located at 7615 Golden Triangle Drive, Suite
C, Technology Park V, Minneapolis, Minnesota, and consist of approximately
18,300 square feet. The Company leases these facilities pursuant to a lease that
expires on May 31, 2000. The lease provides for rent of approximately $18,000
per month, including base rent and a pro rata share of operating expenses and
real estate taxes. The Company believes it will be able to renew this lease if
necessary.
Item 3. LEGAL PROCEEDINGS.
In April 1999, the Company initiated an arbitration proceeding against
Instrumentation Laboratory Company 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,
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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.
There are no other material pending or threatened legal, governmental,
administrative or other proceedings to which the Company is a party or of which
any of its property is subject.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
Item 4a. EXECUTIVE OFFICERS OF THE COMPANY.
The executive officers of the Company, their ages and the offices held, as
of March 15, 2000, are as follows:
Name Age Title
- ------------------- ----- -------------------------------------------
Paulita M. LaPlante 42 President and Chief Executive Officer
Wesley G. Peterson 52 Chief Financial Officer, Vice President of
Finance and Administration and Secretary
Victor Kimball 36 Vice President, Strategic Planning and
Product Development
Information regarding the business experience of the executive officers of
the Company is set forth below.
Paulita M. LaPlante has been the President and a Director of the Company
since September 1998 and Chief Executive Officer of the Company since December
1998. From June 1994 to September 1998, Ms. LaPlante served as the Company's
Vice President of Worldwide Sales, Marketing and Business Development and was
Director of Marketing and Business Development from April 1992 to June 1994. She
also served as the Company's interim Vice President of Research and Development
from January 1994 to September 1994.
Wesley G. Peterson has been the Company's Chief Financial Officer since
January 1992, Vice President of Finance and Administration since June 1994 and
Secretary since July 1992. He was also Director of Finance and Administration
from January 1992 to June 1994.
Victor Kimball has been the Company's Vice President, Strategic Planning
and Product Development since December 1998. From June 1997 to October 1998, Mr.
Kimball was Director of Engineering and Business Development and from January
1995 to June 1997, he was Director of Engineering. From June 1992 to January
1995 he was Engineering Manager of the Company.
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PART II
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Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The common stock of Optical Sensors Incorporated has been traded on The
Nasdaq National Market, under the symbol OPSI, since the Company's initial
public offering on February 14, 1996. The following table sets forth the high
and low closing prices for the Company's common stock, as reported by the Nasdaq
National Market, for the periods indicated:
Quarter Ended High Low
--------------------- --------- ---------
March 31, 1999 $1.81 $1.03
June 30, 1999 1.50 0.75
September 30, 1999 1.50 0.88
December 31, 1999 1.34 0.50
March 31, 1998 $6.00 $4.63
June 30, 1998 5.13 3.50
September 30, 1998 4.13 1.00
December 31, 1998 1.88 0.91
The foregoing prices reflect inter-dealer prices, without dealer markup,
mark-down or commissions, and may not represent actual transactions.
As of March 15, 2000, the Company had 209 stockholders of record of its
common stock and an estimated 2,780 beneficial holders whose shares were
registered in the names of nominees.
The Company has never paid any cash dividends on its common stock, and does
not anticipate paying any cash dividends on its common stock in the foreseeable
future.
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Item 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- --------- ----------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data
Net sales..................... $ 134 $ 1,019 $ 141 $ 163 $ --
Operating expenses............ 5,968 10,533 10,472 9,734 8,249
Loss from operations.......... 7,879 (12,420) (12,527) (10,941) (8,249)
Interest income, net.......... 101 628 1,193 1,555 118
Net loss...................... (7,785) (11,817) (11,333) (9,385) (8,131)
Net loss per common share,
basic and diluted........... (.88) (1.34) (1.35) (1.30) (19.27)
December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- --------- ----------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash and cash equivalents...... $ 1,451 $ 8,080 $17,101 $30,135 $ 5,395
Working capital................ -- 9,103 18,220 30,039 5,242
Total assets................... 2,001 12,565 21,626 32,369 6,367
Long-term obligations.......... 4,296 495 472 -- --
Total shareholders' equity..... 10,411 10,984 20,157 31,050 5,778
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Result of Operations
Fiscal Years Ended December 31, 1999 and 1998
Net sales in 1999 decreased $884,733 or 87% to $134,131 from $1,018,864 in
1998. The decrease in sales is the result of the Company's suspension of direct
sales and support activities of the SensiCath System in January 1999. Net sales
for 1999 consisted of development fees and sales of SensiCath sensors to
existing customers, less OpticalCAM product returns. No new customer sales were
made during 1999. The Company does not expect meaningful sales of the SensiCath
System in the future.
Costs of products sold in 1999 decreased $860,383 or 30% to $2,045,183 from
$2,905,506 in 1998. The decreased cost of products sold for 1999 was directly
related to the suspension of SensiCath production in January 1999. Costs of
products sold for 1999 included approximately $400,000 in fourth quarter
writeoffs of SensiCath production tooling, equipment and inventories. Remaining
fixed overhead costs and costs of personnel in support of CapnoProbe activities
and the Company's proprietary technologies are expected to continue at
approximately $250,000 per quarter through 2000.
Research and development costs for 1999 decreased $1,132,954 or 27% to
$3,115,075 from $4,248,029 in 1998. The decrease for 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 1999
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were directed towards product development and regulatory activities for the
CapnoProbe product. Research and development expenses are expected to be
approximately $500,000 per quarter through 2000. Under the July 1998 license
agreement with ICCM, the Company paid $300,000 in minimum royalties in 1999 and
expects to pay $300,000 in minimum royalties in 2000. The minimum royalty
payments paid in 1999 were recorded as research and development expenses because
no CapnoProbe sales took place in 1999. The Company is obligated to pay ICCM a
customary royalty equal to a percentage of sales, which varies depending on the
selling price to the customer of the CapnoProbe.
Selling, general and administrative expenses in 1999 decreased $3,431,932
or 55% to $2,852,974 from $6,284,904 for 1998. Substantially all sales and
marketing activities were suspended during the first quarter of 1999, accounting
for the decrease from 1998. The Company expects selling, general and
administrative expenses to be approximately $450,000 per quarter through 2000,
not including expenses that might result from its activities in securing a
corporate merger, 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 1999 decreased $527,074 to $101,270 from $628,344 in
1998. The decrease in net interest income in 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 $7,785,274 for 1999, compared to a
net loss of $11,817,330 for 1998. As of December 31, 1999, the Company had an
accumulated deficit of $66,151,324. The Company anticipates that its operating
losses will continue in the foreseeable future. Except for historical
information contained herein, the disclosures in this report are forward looking
statements. See "Certain Important Factors."
Fiscal Years Ended December 31, 1998 and 1997
Net sales were $1,018,864 and $140,936 for 1998 and 1997, respectively.
Sales in 1997 were adversely affected by a recall of the SensiCath initiated by
the Company 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 inference
problems, accounting for the sales increase in 1998. In 1998, approximately 26%
of net sales were from the sale of SensiCath Sensors, and approximately 74% of
net sales were from the placement of OpticalCAM instrumentation. In January
1999, the Company discontinued direct sales activities of the SensiCath System
in order to focus its resources on development of the CapnoProbe product.
Costs of products sold were $2,905,506 and $2,195,714 in 1998 and 1997,
respectively, an increase of $709,792 in 1998. The increase in 1998 was the
result of higher sales and manufacturing levels. A total of $446,000 in 1997
represented a write-down of OpticalCAM inventories to estimated market value.
The amount of the write-down reflected the difference between the Company's
estimated net realizable value based on the future selling price to its
customers of the OpticalCAM System and the cost of inventories on hand or on
order at the end of 1997. Under the agreement between the Company and IL, the
Company agreed to sell OpticalCAM instrumentation to IL at the lower of the
Company's direct cost of manufacturing or previously scheduled amounts.
Research and development expenses were $4,248,029 and $4,975,037 in 1998
and 1997, respectively, a decrease of $727,008, or 15% in 1998. Research and
development expenses in 1997 included a $500,000 payment to Marquette Medical
Systems, Inc. under a previously disclosed
10
<PAGE>
technology purchase agreement. No comparable payments occurred in 1998. In 1998
the Company's research and development efforts were directed primarily towards
SensiCath System improvements. Towards the end of 1998, research and development
efforts were directed increasingly towards development of the CapnoProbe
product.
Selling, general and administrative expenses were $6,284,904 and $5,496,772
in 1998 and 1997, respectively, an increase of $788,132, or 14%, in 1998. The
increase is attributable primarily to increased sales activities in 1998. The
Company's administrative expenses were essentially unchanged in 1998 from the
prior year. In January 1999, the Company discontinued direct sales activities.
Net interest income decreased $618,318 to $628,344 in 1998 from $1,246,662
in 1997, due to declining cash reserves resulting from negative cash flows.
The Company incurred a net loss of $11,817,330 in 1998 compared to a net
loss of $11,333,358 in 1997. The increase in net loss in 1998 was primarily due
to the decrease in net interest income described above. Increased spending in
selling expenses were offset by reductions in other areas.
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.
In March 2000, the Company entered into an Investment Agreement with Circle
F Ventures, LLC and Special Situations Fund III, L.P., pursuant to which the
Company agreed to issue convertible promissory notes in the aggregate principal
amount of up to $3,000,000. These notes are convertible into units, each unit
consisting of 50,000 shares of Common Stock and a five-year warrant to purchase
12,500 shares of Common Stock at an exercise price of $1.00 per share, at a
conversion price equal to $50,000 per unit, in accordance with the Investment
Agreement. The Company received advances under these notes in the aggregate
amount of $1,400,000 on March 10, 2000. The Company has the right to request
additional advances up to the aggregate principal amount of $1,600,000 at any
time during the 60 day period beginning on the first day after both of the
following have occurred: (1) the Company executes a definitive distribution
agreement for the Company's CapnoProbe product with a major medical company, and
(2) the stockholders of the Company have approved the conversion of any
additional advances to be made under the notes into units at the Company's 2000
Annual Meeting of Stockholders. The Company's right to request additional
advances expires on June 15, 2000.
The proceeds from the sales of these securities 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's cash and cash equivalents were $1,450,872 and $8,079,871 at
December 31, 1999 and 1998, respectively. The decrease in the Company's cash
balance is due to the operating losses described above. The Company incurred
cash expenditures of $6,413,007 for operations and $38,364 for capital
expenditures in 1999. In addition, the Company acquired equipment and tooling
under capital
11
<PAGE>
leases for a total of $140,036 in 1999. The capital equipment expenditures were
principally for payments related to end of lease provisions under operating and
capital leases. The inventory at December 31, 1999 consisted primarily of
OpticalCAM monitors and ABG Modules for which the Company plans to use in
conjunction with future configurations of the CapnoProbe product and other
research and commercial applications.
The Company has contracts to purchase minimum quantities of instrumentation
and other sole source inventory items with an outstanding aggregate commitment
of approximately $1,400,000 in 2000. The Company is currently negotiating
nullification of these obligations. It is the Company's opinion based on
discussions with the parties to these obligations that any future costs to the
Company under these agreements are unlikely. The Company is obligated to pay
ICCM $300,000 annually under the previously described license agreement. As of
December 31, 1999, the Company had no material commitments outstanding for
tooling, equipment or outside development contracts. The Company is currently in
discussion with its equipment lessor regarding prepayment of certain lease
obligations.
The Company had previously reported that it was renegotiating an obligation
to prepay $238,393 in certain end of lease provisions due to underutilization of
a lease line. The negotiations resulted in this payment plus interest being
rescheduled into twelve monthly installments beginning January 2000.
The Company believes that its current cash balances, including the
proceeds received on March 10, 2000 from advances under the notes issued under
the Investment Agreement described above, will be sufficient to fund the
Company's operations through June 30, 2000. Accordingly, the report of the
independent auditors on the Company's 1999 financial statements contains an
explanatory paragraph regarding the Company's ability to continue as a going
concern. Based on additional advances the Company expects to receive in 2000
under the Investment Agreement if the Company signs a definitive distribution
agreement for its CapnoProbe product and the Company's stockholders approve the
conversion of any additional advances to be made under the notes into units at
the Company's 2000 Annual Meeting of Stockholders and payments the Company
expects to receive in 2000 if it signs a definitive distribution agreement for
its CapnoProbe product, the Company believes that it will have sufficient cash
to fund its operations through 2000. There can be no assurance, however, that
the Company will enter into a definitive distribution agreement for its
CapnoProbe product, obtain the approval of the conversion of the notes into
units by the Company's stockholders or otherwise obtain additional financing on
satisfactory terms, or at all. In addition, the Company has based its estimates
of how long its cash balances will last on assumptions that may prove to be
wrong. If the Company is unable to obtain additional financing when needed, it
will likely be forced to cease operations.
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:
o Need for Additional Financing. The Company believes that its current
cash balances, including the proceeds received on March 10, 2000 from
advances under the notes issued under the Investment Agreement
described above, will be sufficient to fund the Company's operations
through June 30, 2000. Accordingly, the report of the independent
auditors on the Company's 1999 financial statements contains an
explanatory paragraph regarding the Company's ability to continue as
a going concern. Based on additional advances the Company expects to
receive in 2000 under the Investment Agreement if the Company signs
a definitive distribution agreement for its CapnoProbe product and the
Company's stockholders approve the conversion of any additional
advances to be made under the notes into units at the Company's 2000
Annual Meeting of Stockholders and payments the Company expects to
receive in 2000 if it signs a definitive distribution agreement for
its CapnoProbe product, the Company believes that it will have
sufficient cash to fund its operations through 2000. There can be no
assurance, however, that the Company will enter into a definitive
distribution agreement for its CapnoProbe product, obtain the
approval of the conversion of the notes into units by the Company's
stockholders or otherwise obtain additional financing on satisfactory
terms, or at all. In addition, the Company has based its estimates of
how long its cash balances will last on assumptions that may prove to
be wrong. If the Company is unable to obtain additional financing
when needed, it will likely be forced to cease operations.
Additionally, any additional equity financings may be dilutive to the
Company's existing stockholders, and debt financing, if available, may
involve restrictive covenants on the Company's business.
o Development and Commercialization of CapnoProbe. The Company's future
success will depend, in large 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 in 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 projects that the product will be available for
limited release in 2000 and full commercial release in the first
quarter of 2001. 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.
o 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 continues to explore strategic alternatives, including joint
ventures, corporate strategic alliances, sale of the business or
product lines, or other business combinations. In January 2000, the
Company signed a non-binding letter of intent with a major supplier of
medical products and services to negotiate a definitive agreement for
the Company's CapnoProbe product.
12
<PAGE>
There can be no assurance that the Company will be able to enter into
a definitive distribution agreement for its CapnoProbe product with
this party or otherwise complete a transaction with terms favorable
to the Company.
o 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 December 31,
1999, the Company had total net tangible assets of approximately $2.8
million. On March 10, 2000, the Company entered into an Investment
Agreement with two of the Company's principal stockholders, Circle F
Ventures, LLC, a Georgia limited liability company, and Special
Situations Fund III, L.P., a Delaware limited partnership, pursuant to
which the Company agreed to issue convertible promissory notes in the
aggregate principal amount of up to $3.0 million. The Company received
advances under the notes in the aggregate amount of $1.4 million on
March 10, 2000. The $1.4 million received by the Company, however,
will not count towards the $4.0 million net tangible asset requirement
until the amount is converted into equity. The Company has the right
to request additional advances up to the aggregate principal amount of
$1.6 million at any time during the 60 day period beginning on the
first day after both of the following have occurred: (1) the Company
executes a definitive distribution agreement for the Company's
CapnoProbe product with a major medical company, and (2) the
stockholders of the Company have approved the conversion of any
additional advances to be made under the notes into units at the
Company's 2000 Annual Meeting of Stockholders. The Company's right to
request additional advances will expire on June 15, 2000.
In addition to the net tangible asset requirement, the closing bid
price for the Company's Common Stock cannot be less than $1.00 per
share for 30 consecutive days. The closing bid price for the Company's
Common Stock has been less than $1.00 per share on several occasions
within the last year, but never for 30 or more 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 was 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.
o 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 Company's products
or that would render the Company's products obsolete or non-
competitive.
o 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.
13
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and Independent Auditors' Report thereon
on pages 25 to 45 of this Report are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Directors, Executive Officers, Promoters and Control Persons
The information under the captions "Election of Directors--Information
About Nominees" and "Election of Directors--Other Information About Nominees" in
the Company's 2000 Proxy Statement is incorporated herein by reference. The
information concerning executive officers of the Company is included in this
Report under Item 4a, "Executive Officers of the Company."
(b) Section 16(a) Beneficial Ownership Reporting Compliance
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's 2000 Proxy Statement is incorporated
herein by reference.
Item 11. EXECUTIVE COMPENSATION.
The information under the captions "Election of Directors--Director
Compensation" and "Executive Compensation and Other Benefits" in the Company's
2000 Proxy Statement is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the caption "Principal Shareholders and Beneficial
Ownership of Management" in the Company's 2000 Proxy Statement is incorporated
herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the caption "Certain Transactions" in the Company's
2000 Proxy Statement is incorporated herein by reference.
14
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The following Financial Statements of the Company are set forth
herein:
Financial Statements Page
-------------------- ----
Report of Independent Auditors............................... 25
Balance Sheets as of December 31, 1999 and 1998.............. 26
Statements of Operations for the years ended
December 31, 1999, 1998 and 1997............................. 27
Statement of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997............................. 28
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997............................. 29
Notes to Financial Statements................................ 30-45
2. Financial Statement Schedules.
All schedules are omitted as the required information is inapplicable
or the information is presented in the financial statements or related
notes thereto.
3. Exhibits
The exhibits to this Report are listed in the Exhibit Index on pages
18 to 22 below.
A copy of the exhibits referred to above will be furnished at a
reasonable cost to any person who was a stockholder of the Company as
of March 29, 2000, upon receipt from any such person of a written
request for any such exhibit. Such request should be sent to: Optical
Sensors Incorporated, 7615 Golden Triangle Drive, Suite C, Technology
Park V Minneapolis, Minnesota 55344; Attn: Stockholder Information.
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Annual
Report on Form 10-K pursuant to Item 13(a):
A. 1989 Omnibus Stock Option Plan, as amended.
B. 1991 Stock Option Plan, as amended.
C. 1993 Stock Option Plan, as amended.
15
<PAGE>
D. Form of Non-Statutory Stock Option Agreement for Nonemployees
pursuant to 1993 Stock Option Plan.
E. Form of Non-Statutory Stock Option Agreement for Nonemployee
Directors pursuant to 1993 Stock Option Plan.
F. Form of Incentive Stock Option Agreement for Employees pursuant
to 1993 Stock Option Plan.
G. Employee Stock Purchase Plan.
H. Board Advisory Agreement between the Company and Sam B. Humphries.
I. Letter Agreement between the Company and Sam B. Humphries.
J. Executive Severance Pay Plan.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the quarter
ended December 31, 1999.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OPTICAL SENSORS INCORPORATED
Dated: March 29, 2000 By: /s/ Paulita M. LaPlante
-------------------------------------
Paulita M. LaPlante
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on March 29, 2000 by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Name Title
- ---- -----
/s/ Paulita M. LaPlante President, Chief Executive Officer and
- -------------------------------- Director (principal executive officer)
Paulita M. LaPlante
/s/ Wesley G. Peterson Chief Financial Officer, Vice President
- -------------------------------- of Finance and Administration and
Wesley G. Peterson Secretary (principal financial and
accounting officer)
/s/ Richard B. Egen Director
- --------------------------------
Richard B. Egen
/s/ Sam B. Humphries Director
- --------------------------------
Sam B. Humphries
/s/ Richard J. Meelia Director
- --------------------------------
Richard J. Meelia
/s/ Demetre M. Nicoloff, M.D. Director
- --------------------------------
Demetre M. Nicoloff, M.D.
/s/ Gary A. Peterson Director
- --------------------------------
Gary A. Peterson
17
<PAGE>
OPTICAL SENSORS INCORPORATED
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Item No. Item Method of Filing
- -------- ---- ----------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Incorporated by reference to Exhibit 3.3
Company. contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
3.2 Certificate of Designation, Preferences and Incorporated by reference to Exhibit 3.2
Rights of Series A Junior Preferred Stock. contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998
(File No. 0-27600).
3.3 Bylaws of the Company, as amended. Incorporated by reference to Exhibit 3.3
contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998
(File No. 0-27600).
4.1 Specimen Common Stock Certificate Incorporated by reference to Exhibit 4.1
contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
4.2 Form of Warrant issued in connection with the Incorporated by reference to Exhibit 4.4
Convertible Bridge Loan Agreement dated November contained in the Company's Registration
22, 1991 Statement on Form S-1 (File No. 33-99904).
4.3 Form of Warrant issued in connection with the Incorporated by reference to Exhibit 4.7
Bridge Loan Agreement dated June 1, 1995 contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
4.4 Warrant dated November 6, 1992 issued to Incorporated by reference to Exhibit 4.8
Comdisco, Inc. contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
4.5 Warrant Dated August 31, 1995 issued to Incorporated by reference to Exhibit 4.9
Comdisco, Inc. contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
4.6 Rights Agreement dated as of December 3, 1996 Incorporated by reference to Exhibit 4.1
between the Company and Norwest Bank Minnesota, contained in the Company's Current Report on
N.A. Form 8-K dated December 3, 1996 (File No.
0-27600).
4.7 Amendment No. 1 to Rights Agreement dated as of Incorporated by reference to Exhibit 10.1
March 10, 2000 between the Company and Norwest contained in the Company's Current Report on
Bank Minnesota, N.A. Form 8-K dated March 10, 2000 (File No.
0-27600).
10.1 Lease dated October 7, 1991 between Registrant Incorporated by reference to Exhibit 10.1
and First Industrial L.P. (successor to MIG contained in the Company's Registration
Kappa III Companies) Statement on Form S-1 (File No. 33-99904).
10.2 Equipment Lease dated November 6, 1992, as Incorporated by reference to Exhibit 10.2
amended, between the Company and Comdisco, Inc. contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
10.3 Registration Rights Agreement, dated April 28, Incorporated by reference to Exhibit 10.9
1992, as amended contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
10.4 1989 Omnibus Stock Option Plan, as amended Incorporated by reference to Exhibit 10.11
contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
10.5 1991 Stock Option Plan, as amended Incorporated by reference to Exhibit 10.12
contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
10.6 1993 Stock Option Plan, as amended Filed herewith electronically.
10.7 Form of Non-Statutory Stock Option Agreement for Incorporated by reference to Exhibit 10.21
Nonemployees pursuant to 1993 Stock Option Plan contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
10.8 Form of Non-Statutory Stock Option Agreement for Incorporated by reference to Exhibit 10.18
Nonemployee Directors pursuant to 1993 Stock contained in the Company's Registration
Option Plan Statement on Form S-1 (File No. 33-99904).
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.9 Form of Incentive Stock Option Agreement for Incorporated by reference to Exhibit 10.19
Employees pursuant to 1993 Stock Option Plan contained in the Company's Registration
Statement on Form S-1 (File No. 33-99904).
10.10 Employee Stock Purchase Plan Incorporated by reference to Exhibit 99.1
contained in the Company's Registration
Statement on Form S-8 (File No. 333-17493).
10.11 First Amendment to Lease Agreement dated April Incorporated by reference to Exhibit 10.21
26, 1996 between First Industrial Financing contained in the Company's Annual Report on
Partnership, L.P. and the Company. Form 10-K for the year ended December 31, 1996
(File No. 0-27600).
10.12 Supply Agreement dated August 22, 1996 between Incorporated by reference to Exhibit 10.22
the Company and Marquette Electronics, Inc. (1) contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996
(File No. 0-27600).
10.13 Manufacturing Supply Agreement dated September Incorporated by reference to Exhibit 10.23
10, 1996 between the Company and SpecTran contained in the Company's Annual Report on
Specialty Optics Company. (1) Form 10-K for the year ended December 31, 1996
(File No. 0-27600).
10.14 Purchase Order dated February 21, 1997 between Incorporated by reference to Exhibit 10.24
the Company and SeaMED Corporation. (1) contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996
(File No. 0-27600).
10.15 Second Amendment to Lease Agreement, dated April Incorporated by reference to Exhibit 10.21
14, 1997, between First Industrial Financing contained in the Company's Annual Report on
Partnership, L.P. and the Company. Form 10-K for the year ended December 31, 1997
(File No. 0-27600)
10.16 Master Equipment Lease dated June 15, 1997 Incorporated by reference to Exhibit 10.22
between Phoenix Leasing Incorporated and the contained in the Company's Annual Report on
Company Form 10-K for the year ended December 31, 1997
(File No. 0-27600)
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.17 Amendment No. 1 to Master Equipment Lease dated Incorporated by reference to Exhibit 10.23
August 15, 1997 between Phoenix Leasing contained in the Company's Annual Report on
Incorporated and the Company Form 10-K for the year ended December 31, 1997
(File No. 0-27600)
10.18 Private Label Reseller Agreement dated as of Incorporated by reference to Exhibit 10.1
January 7, 1998 between the Company and contained in the Company's Current Report on
Instrumentation Laboratory Company. (1) Form 8-K, dated January 7, 1998 (File No.
0-27600).
10.19 Stock Purchase Agreement dated as of January 7, Incorporated by reference to Exhibit 10.2
1998 between the Company and Group CH Werfen, contained in the Company's Current Report on
S.A. Form 8-K, dated January 7, 1998 (File No.
0-27600).
10.20 OEM Agreement dated February 5, 1998 between the Incorporated by reference to Exhibit 10.26
Company and Marquette Medical Systems, Inc. (1) contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997
(File No. 0-27600)
10.21 Patent License Agreement dated July 20, 1998 Incorporated by reference to Exhibit 10.1
between the Company and the Institute of contained in the Company's Quarterly Report on
Critical Care Medicine (1) Form 10-Q for the quarter ended September 30,
1998 (File No. 0-27600)
10.22 Board Advisory Agreement dated September 11, Incorporated by reference to Exhibit 10.23
1998 between the Company and Sam B. Humphries contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998
(File No. 0-27600).
10.23 Letter Agreement dated September 14, 1998 Incorporated by reference to Exhibit 10.24
between the Company and Sam B. Humphries contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998
(File No. 0-27600).
10.24 Executive Severance Pay Plan Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999 (File No.
0-27600)
10.25 Third Amendment to Lease Agreement dated Filed herewith electronically.
September 3, 1999 between First Industrial
Financing Partnership, L.P. and the Company
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
23.1 Independent Auditors' Consent Filed herewith electronically.
27.1 Financial Data Schedule Filed herewith electronically.
</TABLE>
- -----------------
(1) Confidential treatment has been granted by the Commission with respect to
designated portions contained within document. Such portions have been omitted
and filed separately with the Commission pursuant to Rule 24b-2 of the
Securities and Exchange Act of 1934, as amended.
22
<PAGE>
Financial Statements
Optical Sensors Incorporated
Years ended December 31, 1999, 1998 and 1997
<PAGE>
Optical Sensors Incorporated
Financial Statements
Years ended December 31, 1999, 1998 and 1997
Contents
Report of Independent Auditors.............................................1
Audited Financial Statements
Balance Sheets.............................................................2
Statements of Operations...................................................3
Statements of Shareholders' Equity.........................................4
Statements of Cash Flows...................................................5
Notes to Financial Statements..............................................6
<PAGE>
Report of Independent Auditors
Board of Directors
Optical Sensors Incorporated
We have audited the accompanying balance sheets of Optical Sensors Incorporated
as of December 31, 1999 and 1998, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Optical Sensors Incorporated at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
As discussed in Note 15 to the financial statements, the Company's recurring
losses from operations and its accumulated deficit raise substantial doubt about
its ability to continue as a going concern. Management plans as to these matters
are also described in Note 15. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 28, 2000
1
<PAGE>
Optical Sensors Incorporated
Balance Sheets
<TABLE>
<CAPTION>
December 31
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ...................................... $ 1,450,872 $ 8,079,871
Accounts receivable ............................................ 52,516 162,858
Inventories .................................................... 1,305,065 1,846,294
Prepaid expenses and other current assets ...................... 29,418 99,610
------------ ------------
Total current assets .............................................. 2,837,871 10,188,633
Property and equipment:
Leased equipment ............................................... 1,157,989 1,017,953
Research and development equipment ............................. 742,971 740,444
Leasehold improvements ......................................... 340,802 339,614
Furniture and equipment ........................................ 161,048 148,621
Marketing equipment ............................................ 1,004,840 1,004,840
Production equipment ........................................... 478,919 460,118
------------ ------------
3,886,569 3,711,590
Less accumulated depreciation .................................. (2,975,140) (1,866,074)
------------ ------------
911,429 1,845,516
Other assets:
Patents, net ................................................... 530,198 513,547
Other assets ................................................... 16,278 16,833
------------ ------------
546,476 530,380
------------ ------------
Total assets ...................................................... $ 4,295,776 $ 12,564,529
============ ============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable ............................................... $ 110,595 $ 353,563
Employee compensation .......................................... 134,372 441,917
Other liabilities and accrued expenses ......................... 75,499 29,714
Obligations under capital lease, current portion ............... 516,487 260,319
------------ ------------
Total current liabilities ......................................... 836,953 1,085,513
Obligations under capital lease, less current portion ............. 104,108 494,909
Shareholders' equity:
Preferred stock, par value $.01 per share
Authorized shares--5,000,000 ................................. - -
Common stock, par value $.01 per share:
Authorized shares--30,000,000
Issued and outstanding shares 1999--8,935,304; 1998--8,829,401 89,353 88,294
Additional paid-in capital ..................................... 69,416,688 69,317,467
Accumulated deficit ............................................ (66,151,326) (58,366,050)
Deferred compensation .......................................... - (55,604)
------------ ------------
Total shareholders' equity ........................................ 3,354,715 10,984,107
------------ ------------
Total liabilities and shareholders' equity ........................ $ 4,295,776 $ 12,564,529
============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
Optical Sensors Incorporated
Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------ ------------ --------------
<S> <C> <C> <C>
Net sales $ 134,131 $ 1,018,864 $ 140,936
Cost of goods sold (2,045,183) (2,905,566) (2,195,714)
----------- ------------ ------------
Gross margin (1,911,052) (1,886,702) (2,054,778)
Operating expenses:
Research and development 3,115,075 4,248,029 4,975,037
Selling, general and administrative 2,852,975 6,284,904 5,496,772
----------- ------------ ------------
Total operating expenses 5,968,050 10,532,933 10,471,809
----------- ------------ ------------
Operating loss (7,879,102) (12,419,635) (12,526,587)
Interest expense (83,709) (95,043) (21,143)
Interest income 184,979 723,387 1,267,805
Other expense (7,444) (26,039) (53,433)
----------- ------------ ------------
93,826 602,305 1,193,229
----------- ------------ ------------
Net loss $(7,785,276) $(11,817,330) $(11,333,358)
=========== ============ ============
Net loss per common share:
Basic and diluted $(.88) $(1.34) $(1.35)
Shares used in calculation of net loss per share:
Basic and diluted 8,868,742 8,819,000 8,375,000
</TABLE>
See accompanying notes.
3
<PAGE>
Optical Sensors Incorporated
Statements of Shareholders' Equity
Year ended December 31, 1999
<TABLE>
<CAPTION>
Common Stock Additional Note
------------------- Paid-in Accumulated Deferred Receivable
Shares Amount Capital Deficit Compensation from Officer Total
--------- ------- ----------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 8,341,497 $83,415 $66,974,345 $(35,215,362) $(547,774) $(245,000) $31,049,624
Issuance of common stock upon exercise
of options and warrants and employee
stock purchase plan 59,057 591 97,093 - - - 97,684
Value assigned to warrants in connection
with debt and lease financing - - 16,932 - - - 16,932
Amortization of deferred compensation - - - - 325,984 - 325,984
Net loss - - - (11,333,358) - - (11,333,358)
--------- ------- ----------- ------------ --------- --------- ------------
Balance at December 31, 1997 8,400,554 84,006 67,088,370 (46,548,720) (221,790) (245,000) 20,156,866
Issuance of common stock in connection
with private placement 441,203 4,412 2,192,779 - - - 2,197,191
Issuance of common stock upon
exercise of options and warrants and
employee stock purchase plan 28,477 284 55,696 - - - 55,980
Value assigned to warrants in
connection with debt and lease financing - - 16,964 - - - 16,964
Forfeiture of common stock (40,833) (408) (36,342) - - 36,750 -
Payment on note receivable - - - - - 208,250 208,250
Amortization of deferred compensation - - - - 166,186 - 166,186
Net loss - - - (11,817,330) - - (11,817,330)
--------- ------- ----------- ------------ --------- --------- ------------
Balance at December 31, 1998 8,829,401 88,294 69,317,467 (58,366,050) (55,604) - 10,984,107
Issuance of common stock upon exercise of
options and warrants and employee stock
purchase plan 105,903 1,059 95,983 - - - 97,042
Value assigned to warrants in connection
with debt and lease financing - - 3,238 - - - 3,238
Amortization of deferred compensation - - - - 55,604 - 55,604
Net loss - - - (7,785,276) - - (7,785,276)
--------- ------- ----------- ------------ --------- ------- ------------
Balance at December 31, 1999 8,935,304 $89,353 $69,416,688 $(66,151,326) $ - $ - $ 3,354,715
========= ======= =========== ============ ========= ======= ============
</TABLE>
See accompanying notes.
4
<PAGE>
Optical Sensors Incorporated
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Operating activities
Net loss $(7,785,276) $(11,817,330) $(11,333,358)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,276,108 1,059,306 510,537
Deferred compensation amortization 55,604 166,186 325,984
Writedown of inventories - - 445,706
Amortization of warrants in connection with debt and
lease financing 3,238 16,964 16,932
Changes in operating assets and liabilities:
Receivables 110,342 (135,758) 63,940
Inventories 437,529 62,253 (1,531,286)
Prepaid expenses and other assets (5,824) (116,065) 28,085
Accounts payable and accrued expenses (504,728) (18,512) (475,867)
----------- ------------ ------------
Net cash used in operating activities (6,413,007) (10,782,956) (11,949,327)
Investing activities
Purchases of property and equipment (net) (38,365) (491,929) (1,127,097)
----------- ------------ ------------
Net cash used in investing activities (38,365) (491,929) (1,127,097)
Financing activities
Net proceeds from issuance of common stock 97,042 2,253,171 97,684
Proceeds from note receivable - 208,250 -
Payments on obligations under capital leases (274,669) (207,795) (54,930)
----------- ------------ ------------
Net cash (used in) provided by financing activities
(177,627) 2,253,626 42,754
----------- ------------ ------------
Decrease in cash and cash equivalents (6,628,999) (9,021,259) (13,033,670)
Cash and cash equivalents at beginning of year 8,079,871 17,101,130 30,134,800
----------- ------------ ------------
Cash and cash equivalents at end of year $ 1,450,872 $ 8,079,871 $ 17,101,130
=========== ============ ============
</TABLE>
Supplementary Disclosure of Non-Cash Transactions: In 1998, the Company received
40,833 forfeited shares of common stock and forgave $36,750 on the note
receivable from officer. The Company also acquired property and equipment of
$140,036, $338,061 and $679,892 under capital lease obligations during the years
ended December 31, 1999, 1998 and 1997, respectively.
See accompanying notes.
5
<PAGE>
Optical Sensors Incorporated
Notes to Financial Statements
December 31, 1999
1. Business Activity
Optical Sensors Incorporated (the "Company") is engaged in developing,
manufacturing and marketing fiberoptic chemical sensors used in the monitoring
of key physiologic parameters for medically unstable patients. The Company was
incorporated on May 23, 1989 and reincorporated in Delaware on January 4, 1996.
Prior to 1998 the Company was considered a development stage company.
In January 1999, the Company announced that it had engaged Volpe Brown Whelan &
Company, LLC, investment bankers, to explore on behalf of the Company strategic
alternatives, including joint ventures, corporate strategic alliances, sale of
the business or product lines, or other business combinations. In January 1999,
the Company suspended direct sales activity of the SensiCath System and reduced
associated expenses and personnel to focus its resources on the CapnoProbe
SL(TM). This reduction resulted in severance costs of $304,000 that were
recognized in 1999. During 1999 and through the date of this report, the Company
has continued in these efforts.
2. Summary of Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Investments classified as
cash equivalents consist primarily of commercial paper and municipal bonds. The
market value of investments is based on quoted market prices and approximates
cost.
Inventories
Inventories, consisting principally of finished goods, are recorded at the lower
of cost (first-in, first-out basis) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over three to five years. Leasehold improvements are
amortized over the shorter of the term of the lease or the estimated life of the
asset. Equipment under capital leases is depreciated over the lease term.
6
<PAGE>
Optical Sensors Incorporated
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Patents
Patents are stated at cost and are amortized upon issuance of a patent on a
straight-line basis over sixty months. Accumulated amortization was $89,396 and
$59,920 at December 31, 1999 and 1998, respectively.
Impairment of Long-Lived Assets
Management reviews the Company's long-lived assets for impairment when events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If impairment indicators are present and the estimated future
undiscounted cash flows are less than the carrying value of the assets, the
asset's value will be adjusted appropriately.
Income Taxes
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between the financial
reporting and tax bases of assets and liabilities.
Stock-Based Compensation
The Company follows Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company has adopted the disclosure only provisions of the Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123"). Accordingly, the Company has made pro forma disclosures of
what net loss and net loss per share would have been had the provisions of
Statement 123 been applied to the Company's stock options.
7
<PAGE>
Optical Sensors Incorporated
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from the estimates.
Revenue Recognition
Sales are recorded when product is shipped.
Advertising
Advertising costs are charged to operations in the year incurred. The amounts in
1999, 1998 and 1997 were not material.
Net Loss Per Share
The net loss per share has been computed in accordance with the provisions of
the Financial Accounting Standards Board Statement No. 128, "Earnings Per
Share." The basic and diluted per share amounts are the same.
Reclassifications
Certain reclassifications of previously reported amounts have been made to
conform with the current year presentation.
8
<PAGE>
Optical Sensors Incorporated
Notes to Financial Statements (continued)
3. Private Label Reseller Agreement
In January 1998, the Company entered into an agreement with Instrumentation
Laboratory Company (IL) for worldwide distribution of the Company's SensiCath
Sensors and OpticalCAM Instruments. IL would market and distribute the Company's
products throughout the world under the names GEM SensiCath and GEM OpticalCAM.
The Company agreed to supply IL with SensiCath Sensors, on an exclusive basis,
through 2004 and on a non-exclusive basis through 2007. The Company also agreed
to supply IL with OpticalCAM Instruments, on a semi-exclusive basis, through
2004. The Company retained the right to sell OpticalCAM Instruments to
manufacturers of physiological monitoring, ventilator and anesthesia delivery
systems. IL is required to purchase sufficient quantities of products from the
Company under the agreement that will result in preestablished annual minimum
revenues to the Company. During 1998, IL did not achieve the quota requirements
and the Company exercised its right to convert IL's exclusive right to a
non-exclusive right.
In April 1999, the Company initiated an arbitration proceeding against 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 January 1998 agreement. 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.
4. Common Stock
In January 1998, the Company sold 441,203 shares of common stock to
Instrumentation Laboratory Company (IL) at a price of $5.00 per share that
resulted in proceeds of $2,197,191, net of expenses related to the sale. The
Company granted IL and its affiliates certain preemptive 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 was 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
9
<PAGE>
Optical Sensors Incorporated
Notes to Financial Statements (continued)
4. Common Stock (continued)
of its registration rights. IL and its affiliates are also subject to certain
stand still 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.
Shareholder Rights Plan
In December 1996, the Company's Board of Directors adopted a Shareholder Rights
Plan by declaring a dividend of one preferred share purchase right (the "Right")
for each outstanding share of common stock. Under certain circumstances, a Right
may be exercised to purchase one one-thousandth of a share of series A junior
preferred stock for $90. The rights become exercisable if a person or group
acquires 24 percent or more of the Company's outstanding common stock, subject
to certain exceptions. If a person or group acquires 24 percent or more of the
Company's outstanding common stock, subject to certain exceptions, each right
will entitle its holder to buy common stock of the Company having a market value
of twice the exercise price of the Right. The Rights expire in December 2006 and
may be redeemed by the Company for $.001 per Right at any time before, or, in
certain circumstances, within 10 days (subject to extension) following the
announcement that a person has acquired 24 percent or more of the Company's
outstanding common stock. Until a Right is exercised, the holder of a Right, as
such, has no rights as a shareholder of the Company.
In connection with the adoption of the Shareholder Rights Plan, the Company
authorized 250,000 shares of series A junior preferred stock (the "preferred
stock"). Subject to the rights of holders of any Senior Securities, if any,
holders of the preferred stock are entitled to quarterly dividends, when, as and
if declared by the Board of Directors, in the amount of one thousand times the
aggregate per share amount of dividends paid to common stock shareholders. Each
preferred stock share is entitled to one thousand votes on all matters submitted
to a vote of the shareholders of the Company. The preferred stock has
liquidation preference over the Company's common stock. The liquidation rate on
the preferred stock is the greater of (a) $1,000 per share plus accrued
dividends, whether or not earned or declared, or (b) an amount equal to one
thousand times the amount distributed to the common stock shareholders.
10
<PAGE>
Optical Sensors Incorporated
Notes to Financial Statements (continued)
5. Convertible Preferred Stock
The Company had sold certain series (A through E) of convertible preferred stock
beginning in 1991 and going through 1995. Upon completion of the Company's
initial public offering of common stock in February 1996, all shares of
outstanding convertible preferred stock were converted into 4,766,974 shares of
common stock.
In conjunction with the sale of the series C convertible preferred stock in
1993, the Company had issued warrants to a placement agent to purchase 79,869
shares of common stock at $7.38 per share. These warrants were exercised in 1997
resulting in 14,376 shares of common stock being issued in a "cashless"
transaction.
Upon completion of the sale of the series B convertible preferred stock in 1992,
the series C convertible preferred stock in 1993 and the series D convertible
preferred stock in 1995, certain working capital bridge loans were canceled as
payment for some of the shares. In consideration for making the loans, the
Company issued warrants to the investors to purchase 24,076 shares of common
stock at $9.00 per share (relating to the series B), 26,871 shares of common
stock at $12.60 per share (relating to the series C) and 61,429 shares of common
stock at $3.15 per share (relating to the series D).
At December 31, 1999, warrants to purchase 59,567 shares of common stock at
$3.15 per share remain outstanding. All other warrants have expired or been
exercised. The remaining warrants expire in 2000.
6. Leases
Operating Leases
The Company leases its office and research and development facility under an
operating lease that expires on May 31, 2000. Operating expenses, including
maintenance, utilities, real estate taxes and insurance, are paid by the
Company. The Company also leases certain office equipment under operating
leases.
Total rent expense under operating leases was $516,000, $677,000 and $870,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
11
<PAGE>
Optical Sensors Incorporated
Notes to Financial Statements (continued)
6. Leases (continued)
Future minimum lease payments under noncancelable operating leases with initial
or remaining terms of one year or more as of December 31, 1999 are as follows:
Year ending December 31:
2000 $108,000
2001 14,000
2002 8,000
--------
$130,000
========
Certain of the operating leases contain end of the lease purchase options which
have historically averaged 23% of the original cost of the equipment. Should the
Company not be able to return assets under existing operating leases, the end of
the lease purchase options could reach a total of approximately $80,000.
In connection with the operating lease agreements, the Company has issued
warrants to the leasing company to purchase 12,222 shares of common stock at
$9.00 per share and 11,904 shares of common stock at $3.15 per share. These
warrants expire in 2002 and 2005, respectively.
Capital Leases
In June 1997, the Company entered into an equipment lease agreement. Under the
lease agreement, the Company was allowed to lease up to $2,000,000 of equipment
between June 15, 1997 and June 30, 1999. Assets leased under the agreement at
December 31, 1999 and 1998 were approximately $1,158,000 and $1,018,000,
respectively, with a related obligation of $620,595 and $755,228 at December 31,
1999 and 1998, respectively. The term of each lease schedule under the agreement
is 42 months with payments due the first of each month.
12
<PAGE>
Optical Sensors Incorporated
Notes to Financial Statements (continued)
6. Leases (continued)
Future payments under capital leases are as follows:
2000 $591,000
2001 104,000
2002 6,000
2003 -
--------
701,000
Less amount representing payment of interest 80,405
--------
620,595
Less current portion 516,487
--------
Long-term capital lease obligations $104,108
========
The equipment lease agreement contains an "advance pay" provision that requires
the Company to prepay an amount equal to soft costs (tooling, software, etc.)
that exceed 25% of the total drawdown. The Company has entered into an
additional agreement whereby they signed a note agreement that rescheduled an
end of lease obligation totaling $238,000 into twelve monthly installments
beginning January 2000. The total payments under the note are included in the
payment schedule above.
7. Income Taxes
At December 31, 1999, the Company has cumulative net operating loss
carryforwards for tax purposes of approximately $60,225,000 plus research and
development tax credit carryforwards of approximately $1,723,000. These
carryforwards are available to offset future taxable income through 2014.
As a result of the sales of preferred stock and additional shares of common
stock, the Company has experienced a change in ownership under the net operating
loss limitation rules. The use of losses, incurred through the change in
ownership date, to offset future taxable income, will be limited during the
carryforward period. The credits will also be subject to limitations under these
same rules.
13
<PAGE>
Optical Sensors Incorporated
Notes to Financial Statements (continued)
7. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
December 31
1999 1998
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 21,278,000 $ 18,800,000
Tax credit carryforwards 1,723,000 1,556,000
Deferred compensation on stock options 809,000 788,000
Vacation accrual 43,000 86,000
Inventory valuation 141,000 -
Book over tax depreciation 324,000 293,000
------------ ------------
Total deferred tax assets 24,318,000 21,523,000
Deferred tax liabilities:
Other 33,000 33,000
------------ ------------
Total deferred tax liabilities 33,000 33,000
------------ ------------
Net deferred tax assets 24,285,000 21,490,000
Valuation allowance (24,285,000) (21,490,000)
------------ ------------
$ - $ -
============ ============
14
<PAGE>
Optical Sensors Incorporated
Notes to Financial Statements (continued)
8. Stock Options
The Company has three stock option plans that include both incentive and
non-statutory stock options to be granted to directors, officers, employees and
consultants of the Company. Option activity is summarized as follows:
Options Weighted
Outstanding Average
Shares ----------- Exercise
Available Total Price Per
for Grant Shares Share
---------- --------- ---------
Balance at December 31, 1996 193,164 734,008 $3.11
Granted (148,205) 148,205 5.22
Options canceled 24,986 (24,986) 5.71
Options exercised - (40,032) 1.28
---------- ---------
Balance at December 31, 1997 69,945 817,195 3.50
Additional shares reserved 699,464 - -
Granted (1,383,870) 1,383,870 2.75
Options canceled 695,573 (695,573) 5.57
Options exercised - (16,423) 1.39
---------- ---------
Balance at December 31, 1998 81,112 1,489,069 1.84
Granted (100,000) 100,000 1.25
Options canceled 306,874 (306,874) 2.29
Options exercised - (102,260) .90
---------- ---------
Balance at December 31, 1999 287,986 1,179,935 $1.76
========== =========
The weighted average fair value of options granted is $1.07, $2.20 and $3.02 for
the years ended December 31, 1999, 1998 and 1997, respectively.
The exercise price of options outstanding at December 31, 1999 ranged from $-0-
to $13.00 per share, as summarized in the following table:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------
Weighted Average
Weighted Average Remaining Weighted Average
Range of Exercise Price Contractual Exercise Price
Exercise Price Number Per Share Life Number Per Share
- --------------- --------- ---------------- ---------------- -------- ----------------
<S> <C> <C> <C> <C> <C>
$ .00 to $ 1.25 361,797 $ .65 5.8 years 257,463 $ .90
1.69 727,686 1.69 8.4 years 152,581 1.69
2.70 to 13.00 90,452 4.22 5.0 years 74,452 4.12
--------- --------- -------
Total 1,079,935 $1.76 7.5 years 484,496 $1.86
========= ========= =======
</TABLE>
15
<PAGE>
Optical Sensors Incorporated
Notes to Financial Statements (continued)
8. Stock Options (continued)
The number of options exercisable at December 31, 1999, 1998 and 1997 was
484,496, 410,341 and 349,646, respectively, at a weighted average exercise price
per share of $1.86, $2.14 and $3.50, respectively.
Pro forma information regarding net loss and net loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
1999 1998 1997
---------- ---------- -------
Expected stock price volatility 97% 86% 75%
Risk-free interest rate 6.5% 5.5% 6.5%
Expected life of options 7.25 years 7.25 years 7 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
1999 1998 1997
---------- ----------- -----------
Pro forma net loss $8,164,800 $12,597,330 $11,714,634
Pro forma, basic and diluted net
loss per common share $.92 $1.43 $1.40
16
<PAGE>
Optical Sensors Incorporated
Notes to Financial Statements (continued)
8. Stock Options (continued)
These pro forma amounts may not be indicative of future years' amounts since
Statement 123 provides for a phase-in of option values beginning with those
granted in 1995.
Deferred Compensation
In August 1995, the Company recognized deferred compensation of $2,179,693. The
amount represented the excess of the deemed value for accounting purposes of the
common stock issuable upon exercise of certain options over the aggregate
exercise price of such options. The related options were those granted during
the period June 17, 1995 through October 3, 1995 to purchase a total of 971,640
shares of common stock at exercises prices ranging from $.90 to $2.70 per share.
The deferred compensation was recognized as expense over the vesting periods
through 1999.
9. Technology Agreements
In July 1998, the Company entered into a patent license agreement with the
Institute of Critical Care Medicine ("ICCM") which provides the Company with the
exclusive, worldwide right under ICCM's pending and issued patents. In
consideration for the technology, the Company is obligated to pay ICCM minimum
annual royalties of $300,000 (quarterly payments of $75,000 beginning with the
quarter ended September 1998) for five years in order to maintain exclusivity.
The Company may elect, on one year's written notice, not to make the annual
minimum payment of $300,000 but ICCM would then have the right to terminate the
license agreement. The Company is obligated to pay ICCM a customary royalty
equal to a percentage of sales, which varies depending on the selling price to
the customer. The Company is also obligated to meet certain product development
milestones under the license agreement.
17
<PAGE>
Optical Sensors Incorporated
Notes to Financial Statements (continued)
9. Technology Agreements (continued)
In September 1995, the Company entered into an agreement with Marquette Medical
Systems, Inc. ("Marquette") to acquire exclusive ownership of certain technology
that had been jointly developed by the Company and Marquette. In consideration
for the technology, the Company agreed to pay $2,000,000 payable as follows:
$500,000 upon execution of the agreement, $500,000 upon completion of the
technology, $500,000 once the product has been sold and installed in 20
hospitals and $500,000 once the product has been sold and installed in an
additional 50 hospitals. The Company also agreed to pay $50,000 per month for
engineering and technical support from August 1, 1995 through January 31, 1998.
As of December 31, 1999, Marquette has not met the placement goals and the
Company does not expect them to in the foreseeable future.
In August 1991, the Company entered into an agreement to purchase certain
fiberoptic chemical sensor technology for $10,000. In addition, the Company
issued 2,778 shares of common stock to the licensor upon assignment of the
technology. The Company has agreed to pay royalties on sales of industrial and
environmental products for which the technology purchased is a significant part.
The royalties shall be 5%, 4% and 3% on the first, second and third $10 million
sales increments and 2% on sales in excess of $40 million. For sales of such
products by any future licensees of the Company, the Company shall pay 25% of
all licensing fees received up to $500,000 and 10% thereafter. The Company has
made all payments for the technology. The Company does not intend to use the
technology in the future and, therefore, does not anticipate paying any
royalties under the agreement.
10. Purchase Commitments
The Company has entered into purchase commitments with two companies for the
purchase of SensiCath instrumentation inventory. Under the terms of the
agreements, the Company has agreed to purchase, under a specified pricing
structure, a fixed number of units. Based on discussions with the two vendors,
the Company believes the vendors will not enforce the purchase commitments and
no additional payments will be required.
18
<PAGE>
Optical Sensors Incorporated
Notes to Financial Statements (continued)
11. Employment Agreement
The Company had an employment agreement (the "agreement") with the former
President and Chief Executive Officer of the Company. In connection with the
agreement, the Company granted the President options to purchase 121,162 shares
of common stock at a price of $9.00 per share. In August of 1995, these options
were canceled, and the Board of Directors granted the President a non-statutory
option to purchase 272,222 shares of common stock at a price of $.90 per share.
In September 1995, the former President exercised this option. The right to
retain certain of the shares was subject to the former President's continued
employment through August 2, 1999. As payment for the shares, the former
President executed a $245,000 promissory note, payable in full on August 1,
1998, at an interest rate of 5.91%. The note was secured by the shares of common
stock and proceeds of any dividend or other distribution attributable to the
shares. During 1998, the President made a $208,250 principal payment on the note
plus accrued interest, and the Company forgave the remaining principal balance
of $36,750. The Company also entered into a board advisory agreement with the
former President and Chief Executive Officer that provided for a payment of
$50,000 in April 1999.
12. Employee Benefit Plans
The Company has a 401(k) savings plan under which employees are eligible to
participate after six months of service and attaining the age of 21. Employees
may contribute up to the maximum amount which will not violate provisions of the
Plan or cause the Plan to exceed the maximum amount allowable as a deduction to
the employer. The Company, at its discretion, may make matching contributions
equal to a percentage of the employee's contribution. The Company did not
contribute to the Plan in 1999, 1998 and 1997.
19
<PAGE>
Optical Sensors Incorporated
Notes to Financial Statements (continued)
13. Employee Stock Purchase Plan
In December 1996, the Company adopted an Employee Stock Purchase Plan. Eligible
employees can authorize payroll withholdings in each pay period to be designated
for stock purchase. Payroll deductions cannot exceed 10% of total compensation
and no more than 1,500 shares may be purchased by any one employee in one
offering period. There are four three-month offering periods in each year.
Employees may purchase shares of common stock at the end of each three-month
offering period at a price equal to 85% of the market price on the first or last
day of the offering period, whichever is lower. Shares issued under the plan
during the years ended December 31, 1999 and 1998 were 3,643 and 12,054,
respectively.
14. Subsequent Event
Investment Agreement
On March 10, 2000, the Company entered into an Investment Agreement with certain
investors whereby the investors would provide up to $3,000,000 of funding to the
Company. The funding is in the form of Convertible Promissory Notes (the
"Notes") and has three elements as follows:
o $1,400,000 immediately upon execution of the Agreement.
o $600,000 upon request of the Company within the 60-day period
beginning after the Company has executed a definitive distribution
agreement for the Company's CapnoProbe product and the Company has
obtained shareholder approval of the conversion of the additional
funding into "units" (as defined below).
o $1,000,000 upon request of the Company and under similar circumstances
as noted above for the $600,000.
The period during which the Company can request the $600,000 and $1,000,000
additional fundings ends no later than June 15, 2000.
20
<PAGE>
Optical Sensors Incorporated
Notes to Financial Statements (continued)
14. Subsequent Event (Continued)
The Notes are convertible into units, each unit consisting of 50,000 shares of
the Company's common stock, and a warrant to purchase 12,500 shares of common
stock, at a conversion price of $50,000 per unit subject to adjustment of the
conversion price as set forth in the Notes agreement. The Notes shall not bear
interest and shall be due and payable in full one year from the date of
issuance. However, if the Notes are not paid in full or converted into units
within the one-year period, any remaining unpaid balance shall bear interest at
the rate of 10% per year until paid in full.
The initial $1,400,000 of Notes will automatically convert into units thirty
days after written notice from the Company that a distribution agreement has
been executed by the Company and a major medical company. The $600,000 and
$1,000,000 of Notes will automatically convert into units thirty days after the
date of such fundings.
The warrants will be exercisable for five years from the date of issuance. Each
warrant will allow the bidder to purchase a share of the Company's common stock
at a price of $1.00 subject to adjustment according to the terms of the warrant.
15. Going Concern
Recurring losses from operations, including $7,785,276 for 1999, have resulted
in an accumulated deficit of $66,151,326. The Company's ability to continue as
a going concern and the realization of its assets and the orderly satisfaction
of its liabilities are dependent on obtaining additional funds from outside
sources. Although the Company has entered into an Investment Agreement (see Note
14) that would provide up to $3,000,000 of funding, $1,600,000 of that funding
is dependent on the Company executing a definitive distribution agreement for
the Company's CapnoProbe and obtaining shareholder approval of the conversion of
the additional funding into units (as defined in Note 14). The Company is
currently in negotiations with an outside party that the Company believes will
result in executing a definitive distribution agreement. The Company also
believes it will obtain shareholder approval for the conversion of the
additional funding. The Company believes that the funding raised under a
Distribution Agreement and the Investing Agreement will satisfy its cash
requirements for at least the next twelve months. However, there can be no
assurance that the Company will be successful in executing a definitive
distribution agreement and/or that the Company will be able to obtain the
necessary shareholder approval.
21
<PAGE>
Exhibit 10.6
OPTICAL SENSORS INCORPORATED
1993 STOCK OPTION PLAN
(AS AMENDED THROUGH AUGUST 16, 1999)
ARTICLE 1. ESTABLISHMENT AND PURPOSE.
-------------------------
1.1. Establishment. Optical Sensors Incorporated (the "Company")
-------------
hereby establishes a plan providing for stock-based compensation incentive
awards for the performance by certain eligible employees of services for the
Company. This plan shall be known as the Optical Sensors Incorporated 1993 Stock
Option Plan (the "Plan").
1.2. Purpose. The purpose of the Plan is to advance the interests of
-------
the Company and its shareholders by enabling the Company to attract and retain
persons of ability to perform services for the Company, by providing an
incentive to such persons through equity participation in the Company and by
rewarding such persons who contribute to the achievement by the Company of its
economic objectives.
ARTICLE 2. DEFINITIONS.
------------
The following terms shall have the meanings set forth below, unless the
context clearly otherwise requires:
2.1. "Board" means the Board of Directors of the Company.
-----
2.2. "Broker Exercise Notice" means the written notice described in
----------------------
Section 6.6(b) of the Plan.
2.3. "Change in Control" means an event described in Section 9.1 of
-----------------
the Plan.
2.4. "Code" means the Internal Revenue Code of 1986, as amended.
----
2.5. "Committee" means the group of individuals administering the
---------
Plan, as provided in Article 3 of the Plan.
2.6. "Common Stock" means the common stock of the Company, par value
------------
$.01 per share, or the number and kind of shares of stock or other securities
into which such Common Stock may be changed in accordance with Section 4.3 of
the Plan.
2.7. "Disability" means the disability of the Participant as defined
----------
in the long-term disability plan of the Company then covering the Participant
or, if no such plan exists, the permanent and total disability of the
Participant within the meaning of Section 22(e)(3) of the Code.
2.8. "Eligible Recipient" means all employees (including, without
------------------
limitation, officers and directors who are also employees) and Non-Employee
Directors, consultants and independent contractors of the Company or any
Subsidiary.
2.9. "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
<PAGE>
2.10. "Fair Market Value" means, with respect to the Common Stock, the
-----------------
following:
(a) If the Common Stock is listed or admitted to unlisted
trading privileges on any national securities exchange or is not so
listed or admitted but transactions in the Common Stock are reported on
the NASDAQ National Market System, the reported closing sale price of the
Common Stock on such exchange or by the NASDAQ National Market System as
of such date (or, if no shares were traded on such day, as of the next
preceding day on which there was such a trade).
(b) If the Common Stock is not so listed or admitted to unlisted
trading privileges or reported on the NASDAQ National Market System, and
bid and asked prices therefor in the over-the-counter market are reported
by the NASDAQ System or the National Quotation Bureau, Inc. (or any
comparable reporting service), the mean of the closing bid and asked
prices as of such date, as so reported by the NASDAQ System, or, if not
so reported thereon, as reported by the National Quotation Bureau, Inc.
(or such comparable reporting service).
(c) If the Common Stock is not so listed or admitted to unlisted
trading privileges, or reported on the NASDAQ National Market System, and
such bid and asked prices are not so reported, such price as the
Committee determines in good faith in the exercise of its reasonable
discretion.
2.11. "Incentive Stock Option" means a right to purchase Common Stock
----------------------
granted to an Eligible Recipient pursuant to Article 6 of the Plan that
qualifies as an "incentive stock option" within the meaning of Section 422 of
the Code.
2.12. "Non-Employee Director" means any member of the Board who is not
---------------------
an employee of the Company or any subsidiary.
2.13. "Non-Statutory Stock Option" means a right to purchase Common
--------------------------
Stock granted to an Eligible Recipient pursuant to Article 6 of the Plan that
does not qualify as an Incentive Stock Option.
2.14. "Option" means an Incentive Stock Option or a Non-Statutory Stock
------
Option.
2.15. "Participant" means an Eligible Recipient who receives one or
-----------
more Options under the Plan.
2.16. "Person" means 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, a wholly owned subsidiary of the Company
or any employee benefit plan sponsored by the Company or a wholly owned
subsidiary of the Company.
2.17. "Previously Acquired Shares" mean shares of Common Stock that are
--------------------------
already owned by the Participant and shares of Common Stock that are to be
acquired by the Participant pursuant to the exercise of an Option.
2.18. "Retirement" means the retirement of a Participant pursuant to
----------
and in accordance with the regular or, if approved by the Board for purposes of
the Plan, early retirement/pension plan or practice of the Company or Subsidiary
then covering the Participant.
2.19. "Securities Act" means the Securities Act of 1933, as amended.
--------------
2
<PAGE>
2.20. "Subsidiary" means any subsidiary corporation of the Company
----------
within the meaning of Section 424(f) of the Code.
2.21. "Tax Date" means the date any withholding tax obligation arises
--------
under the Code for a Participant with respect to an Option.
ARTICLE 3. PLAN ADMINISTRATION.
-------------------
3.1. The Committee. The Plan will be administered by the Board or by
-------------
a committee of the Board consisting of not less than two persons; provided,
however, that from and after the date on which the Company first registers a
class of its equity securities under Section 12 of the Exchange Act, the Plan
will be administered by the Board, all of whom will be "disinterested persons"
within the meaning of Rule 16b-3 under the Exchange Act, or by a committee
consisting solely of not fewer than two members of the Board who are such
"disinterested persons." As used in the Plan, the term "Committee" will refer
to the Board or to such a committee, if established. To the extent consistent
with corporate law, the Committee may delegate to any officers of the Company
the duties, power and authority of the Committee under the Plan pursuant to such
conditions or limitations as the Committee may establish; provided, however,
that only the Committee may exercise such duties, power and authority with
respect to Eligible Recipients who are subject to Section 16 of the Exchange
Act. Each determination, interpretation or other action made or taken by the
Committee pursuant to the provisions of the Plan will be conclusive and binding
for all purposes and on all persons, and no member of the Committee will be
liable for any action or determination made in good faith with respect to the
Plan or any Incentive Award granted under the Plan.
3.2. Authority of the Committee.
--------------------------
(a) In accordance with and subject to the provisions of the
Plan, the Committee shall have the authority to determine (i) the
Eligible Recipients who shall be selected as Participants, (ii) the
nature and extent of the Options to be made to each Participant
(including the number of shares of Common Stock to be subject to each
Option, the exercise price and the manner in which Options will vest or
become exercisable), (iii) the time or times when Options will be
granted, (iv) the duration of each Option, (v) the restrictions and other
conditions to which the exercisability or vesting of Options may be
subject, and (vi) such other provisions of the Options as the Committee
may deem necessary or desirable and as consistent with the terms of the
Plan. The Committee shall determine the form or forms of the agreements
with Participants which shall evidence the particular terms, conditions,
rights and duties of the Company and the Participants with respect to
Options granted pursuant to the Plan, which agreements shall be
consistent with the provisions of the Plan.
(b) With the consent of the Participant affected thereby, the
Committee may amend or modify the terms of any outstanding Option in any
manner, provided that the amended or modified terms are permitted by the
Plan as then in effect. Without limiting the generality of the foregoing
sentence, the Committee may, with the consent of the Participant affected
thereby, modify the exercise price, number of shares or other terms and
conditions of an Option, extend the term of an Option, accelerate the
exercisability or vesting or otherwise terminate any restrictions
relating to an Option, accept the surrender of any outstanding Option,
or, to the extent not previously exercised or vested, authorize the grant
of new Options in substitution for surrendered Options.
(c) The Committee shall have the authority, subject to the
provisions of the Plan, to establish, adopt and revise such rules and
regulations relating to the Plan as it may deem
3
<PAGE>
necessary or advisable for the administration of the Plan. The
Committee's decisions and determinations under the Plan need not be
uniform and may be made selectively among Participants, whether or not
such Participants are similarly situated. Each determination,
interpretation or other action made or taken by the Committee pursuant to
the provisions of the Plan shall be conclusive and binding for all
purposes and on all persons, including, without limitation, the Company
and its Subsidiaries, the shareholders of the Company, the Committee and
each of its members, the directors, officers and employees of the Company
and its Subsidiaries, and the Participants and their respective
successors in interest. No member of the Committee shall be liable for
any action or determination made in good faith with respect to the Plan
or any Option granted under the Plan.
ARTICLE 4. STOCK SUBJECT TO THE PLAN.
-------------------------
4.1. Number of Shares. Subject to adjustment as provided in Section
----------------
4.3 below, the maximum number of shares of Common Stock that shall be authorized
and reserved for issuance under the Plan shall be 1,727,240 shares of Common
Stock or such greater number as may be approved by the Board pursuant to this
Section 4.1. The Board may increase the number of shares of Common Stock that
will be available for issuance under the Plan, without the approval of the
Company's shareholders; provided, however, that the aggregate number of shares
reserved for issuance under the Plan and the Company's 1989 Omnibus Stock Option
Plan, 1991 Stock Option Plan and any similar stock option plan that the Company
may adopt in the future may not exceed 20.0% of the number of shares of Common
Stock outstanding as of the end of the calendar quarter immediately preceding
the date on which the Board increases the number of shares available for
issuance under the Plan (assuming the exercise or conversion of all options,
warrants, securities or other rights to acquire Common Stock) without approval
of the Company's shareholders. Notwithstanding any other provision of the Plan
to the contrary, (a) no more than 944,444 shares of Common Stock may be
cumulatively available for issuance under the Plan pursuant to the exercise of
Incentive Stock Options, and (b) no Participant in the Plan may be granted,
during any calendar year, Options relating to more than an aggregate of 277,777
shares of Common Stock, in each case subject to adjustment as provided in
Section 4.3 of the Plan. To the extent permitted by applicable corporate law,
the shares available for issuance under the Plan may, at the election of the
Committee, be either treasury shares or shares authorized but unissued, and, if
treasury shares are used, all references in the Plan to the issuance of shares
will, for corporate law purposes, be deemed to mean the transfer of shares from
treasury.
4.2. Shares Available for Use. Shares of Common Stock that may be
------------------------
issued upon exercise of Options shall be applied to reduce the maximum number of
shares of Common Stock remaining available for use under the Plan. Any shares of
Common Stock that are subject to an Option (or any portion thereof) that lapses,
expires or for any reason is terminated unexercised shall automatically again
become available for use under the Plan.
4.3. Adjustments to Shares. In the event of any reorganization,
---------------------
merger, consolidation, recapitalization, liquidation, reclassification, stock
dividend, stock split, combination of shares, rights offering, extraordinary
dividend or divestiture (including a spin-off) or any other change in the
corporate structure or shares of the Company, the Committee (or, if the Company
is not the surviving corporation in any such transaction, the board of directors
of the surviving corporation) shall make appropriate adjustment (which
determination shall be conclusive) as to the number and kind of securities
subject to and reserved under the Plan and, in order to prevent dilution or
enlargement of the rights of Participants, the number, kind and exercise price
of securities subject to outstanding Options. Without limiting the generality of
the foregoing, in the event that any of such transactions are effected in such a
way that holders of Common Stock shall be entitled to receive stock, securities
or assets, including cash, with respect to or in exchange for such Common Stock,
all Participants holding outstanding Options shall upon
4
<PAGE>
the exercise of such Options receive, in lieu of any shares of Common Stock they
may be entitled to receive, such stock, securities or assets, including cash, as
would have been issued to such Participants if their Options had been exercised
and such Participants had received Common Stock prior to such transaction.
ARTICLE 5. PARTICIPATION.
-------------
Participants in the Plan shall be those Eligible Recipients who, in the
judgment of the Committee, have performed, are performing, or during the term of
an Option will perform, services in the management, operation and development of
the Company or any Subsidiary, and significantly contributed, are significantly
contributing or are expected to significantly contribute to the achievement of
corporate economic objectives. Eligible Recipients may be granted from time to
time one or more Options, as may be determined by the Committee in its sole
discretion. The number, type, terms and conditions of Options granted to various
Eligible Recipients need not be uniform, consistent or in accordance with any
plan, regardless of whether such Eligible Recipients are similarly situated.
Upon determination by the Committee that an Option is to be granted to an
Eligible Recipient, written notice shall be given such person, specifying the
terms, conditions, rights and duties related thereto. Each Eligible Recipient to
whom an Option is to be granted shall, if requested by the Committee, enter into
an agreement with the Company, in such form as the Committee shall determine and
which is consistent with the provisions of the Plan, specifying such terms,
conditions, rights and duties. Options shall be deemed to be granted as of the
date specified in the grant resolution of the Committee, which date shall be the
date of the related agreement with the Participant.
ARTICLE 6. STOCK OPTIONS.
-------------
6.1. Grant. An Eligible Recipient may be granted one or more Options
-----
under the Plan, and such Options shall be subject to such terms and conditions,
consistent with the other provisions of the Plan, as shall be determined by the
Committee in its sole discretion. The Committee may designate whether an Option
is to be considered an Incentive Stock Option or a Non-Statutory Stock Option;
provided, however, that an Incentive Stock Option shall be granted only to an
Eligible Recipient who is an employee of the Company or a Subsidiary. The terms
of the agreement relating to a Non-Statutory Stock Option shall expressly
provide that such Option shall not be treated as an Incentive Stock Option.
6.2. Exercise. An Option shall become exercisable at such times and
--------
in such installments (which may be cumulative) as shall be determined by the
Committee in its sole discretion at the time the Option is granted. Upon the
completion of its exercise period, an Option, to the extent not then exercised,
shall expire.
6.3. Exercise Price.
--------------
(a) Incentive Stock Options. The per share price to be paid by
-----------------------
the Participant at the time an Incentive Stock Option is exercised shall
be determined by the Committee, in its discretion, at the date of its
grant; provided, however, that such price shall not be less than (i) 100%
of the Fair Market Value of one share of Common Stock on the date the
Incentive Stock Option is granted, or (ii) 110% of the Fair Market Value
of one share of Common Stock on the date the Incentive Stock Option is
granted if, at that time the Incentive Stock Option is granted, the
Participant owns, directly or indirectly (as determined pursuant to
Section 424(d) of the Code), more than 10% of the total combined voting
power of all classes of stock of the Company or any subsidiary or parent
corporation of the Company (within the meaning of Sections 424(f) and
424(e), respectively, of the Code).
5
<PAGE>
(b) Non-Statutory Stock Options. The per share price to be paid
---------------------------
by the Participant at the time a Non-Statutory Stock Option is exercised
shall be determined by the Committee in its sole discretion at the time
the Option is granted; provided, however, that such price shall not be
less than 85% of the Fair Market Value of one share of Common Stock on
the date the Non-Statutory Stock Option is granted.
6.4. Duration.
--------
(a) Incentive Stock Options. The period during which an
-----------------------
Incentive Stock Option may be exercised shall be fixed by the Committee
in its sole discretion at the time such Option is granted; provided,
however, that in no event shall such period exceed 10 years from its date
of grant or, in the case of a Participant who owns, directly or
indirectly (as determined pursuant to Section 424(d) of the Code), more
than 10% of the total combined voting power of all classes of stock of
the Company or any subsidiary or parent corporation of the Company
(within the meaning of Sections 424(f) and 424(e), respectively, of the
Code), five years from its date of grant.
(b) Non-Statutory Stock Options. The period during which a
---------------------------
Non-Statutory Stock Option may be exercised shall be fixed by the
Committee in its sole discretion at its date of grant.
(c) Effect of Termination of Employment or Other Service.
----------------------------------------------------
Notwithstanding this Section 6.4, except as provided in Articles 8 and 9
of the Plan, all Options granted to a Participant shall terminate and may
no longer be exercised if the Participant's employment or other service
with the Company and all Subsidiaries ceases.
6.5. Manner of Exercise. An Option may be exercised by a Participant
------------------
in whole or in part from time to time, subject to the conditions contained
herein and in the agreement evidencing such Option, by delivery, in person or
through certified or registered mail, of written notice of exercise to the
Company at its principal executive office in Minneapolis, Minnesota (Attention:
Chief Financial Officer), and by paying in full the total Option exercise price
for the shares of Common Stock purchased. Such notice shall be in a form
satisfactory to the Committee and shall specify the particular Option (or
portion thereof) that is being exercised and the number of shares with respect
to which the Option is being exercised. Subject to compliance with Section 12.1
of the Plan, the exercise of the Option shall be deemed effective upon receipt
of such notice and payment complying with the terms of the Plan and the
agreement evidencing such Option. As soon as practicable after the effective
exercise of the Option, the Participant shall be recorded on the stock transfer
books of the Company as the owner of the shares purchased, and the Company shall
deliver to the Participant one or more duly issued stock certificates evidencing
such ownership. If a Participant exercises any Option with respect to some, but
not all, of the shares of Common Stock subject to such Option, the right to
exercise such Option with respect to the remaining shares shall continue until
it expires or terminates in accordance with its terms. An Option shall only be
exercisable with respect to whole shares.
6.6. Payment of Exercise Price.
-------------------------
(a) The total purchase price of the shares to be purchased upon
exercise of an Option shall be paid entirely in cash (including check,
bank draft or money order); provided, however, that the Committee, in its
sole discretion, may allow such payments to be made, in whole or in part,
by delivery of a Broker Exercise Notice or a promissory note (containing
such terms and conditions as the Committee may in its discretion
determine), by transfer from the Participant to the Company of Previously
Acquired Shares, or by a combination thereof. In determining whether or
upon what terms and conditions a Participant will be permitted to pay the
purchase
6
<PAGE>
price of an Option in a form other than cash, the Committee may consider
all relevant facts and circumstances, including, without limitation, the
tax and securities law consequences to the Participant and the Company,
the financial accounting consequences to the Company and any contractual
restrictions applicable to the Company. In the event the Participant is
permitted to pay the total purchase price of an Option in whole or in
part with Previously Acquired Shares, the value of such shares shall be
equal to their Fair Market Value on the date of exercise of the Option.
(b) For purposes of this Section 6.6, a "Broker Exercise Notice"
shall mean a written notice from a Participant to the Company at its
principal executive office in Minneapolis, Minnesota (Attention: Chief
Financial Officer), made on a form and in the manner as the Committee may
from time to time determine, pursuant to which the Participant
irrevocably elects to exercise all or any portion of an Option and
irrevocably directs the Company to deliver the Participant's stock
certificates to be issued to such Participant upon such Option exercise
directly to a broker or dealer. A Broker Exercise Notice must be
accompanied by or contain irrevocable instructions to the broker or
dealer (i) to promptly sell a sufficient number of shares of such Common
Stock or to loan the Participant a sufficient amount of money to pay the
exercise price for the Options and, if not otherwise satisfied by the
Participant, to fund any related employment and withholding tax
obligations due upon such exercise, and (ii) to promptly remit such sums
to the Company upon the broker's or dealer's receipt of the stock
certificates.
6.7. Rights as a Shareholder. The Participant shall have no rights as
-----------------------
a shareholder with respect to any shares of Common Stock covered by an Option
until the Participant shall have become the holder of record of such shares, and
no adjustments shall be made for dividends or other distributions or other
rights as to which there is a record date preceding the date the Participant
becomes the holder of record of such shares, except as the Committee may
determine pursuant to Section 4.3 of the Plan.
6.8. Disposition of Common Stock Acquired Pursuant to the Exercise of
----------------------------------------------------------------
Incentive Stock Options. Prior to making a disposition (as defined in Section
- -----------------------
424(c) of the Code) of any shares of Common Stock acquired pursuant to the
exercise of an Incentive Stock Option granted under the Plan before the
expiration of two years after its date of grant or before the expiration of one
year after its date of exercise and the date on which such shares of Common
Stock were transferred to the Participant pursuant to exercise of the Option,
the Participant shall send written notice to the Company of the proposed date of
such disposition, the number of shares to be disposed of, the amount of proceeds
to be received from such disposition and any other information relating to such
disposition that the Company may reasonably request. The right of a Participant
to make any such disposition shall be conditioned on the receipt by the Company
of all amounts necessary to satisfy any federal, state or local withholding and
employment-related tax requirements attributable to such disposition. The
Committee shall have the right, in its sole discretion, to endorse the
certificates representing such shares with a legend restricting transfer and to
cause a stop transfer order to be entered with the Company's transfer agent
until such time as the Company receives the amounts necessary to satisfy such
withholding and employment-related tax requirements or until the later of the
expiration of two years from its date of grant or one year from its date of
exercise and the date on which such shares were transferred to the Participant
pursuant to the exercise of the Option.
6.9. Aggregate Limitation of Stock Subject to Incentive Stock Options.
----------------------------------------------------------------
To the extent that the aggregate Fair Market Value (determined as of the date an
Incentive Stock Option is granted) of the shares of Common Stock with respect to
which incentive stock options (within the meaning of Section 422 of the Code)
are exercisable for the first time by a Participant during any calendar year
(under the Plan and any other incentive stock option plans of the Company or any
subsidiary or any parent corporation of the Company (within the meaning of
Sections 424(f) and 424(e), respectively, of the
7
<PAGE>
Code)) exceeds $100,000 (or such other amount as may be prescribed by the Code
from time to time), such excess Options shall be treated as Non-Statutory Stock
Options. The determination shall be made by taking incentive stock options into
account in the order in which they were granted. If such excess only applies to
a portion of an Incentive Stock Option, the Committee, in its discretion, shall
designate which shares shall be treated as shares to be acquired upon exercise
of an Incentive Stock Option.
ARTICLE 7. CASH BONUSES.
------------
In connection with any grant of Options or at any time thereafter, the
Committee may, in its sole discretion, grant a cash bonus to a Participant in
connection with the grant or vesting or exercise of an Option. The determination
of whether to grant such a cash bonus, the nature and amount of any such cash
bonus and the terms and conditions of such cash bonus shall be within the sole
discretion of the Committee.
ARTICLE 8. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE.
----------------------------------------------------
8.1. Termination of Employment or Other Service Due to Death,
--------------------------------------------------------
Disability or Retirement. Except as otherwise provided in Article 9 of the
- ------------------------
Plan, in the event a Participant's employment or other service with the Company
and all Subsidiaries is terminated by reason of such Participant's death,
Disability or Retirement, all outstanding Options then held by the Participant
shall remain exercisable to the extent exercisable as of such termination for a
period of one year after such termination in the case of death or Disability and
three months in the case of Retirement (but in no event after the expiration
date of any such Option).
8.2. Termination of Employment or Other Service for Reasons Other than
-----------------------------------------------------------------
Death, Disability or Retirement. Except as otherwise provided in Article 9 of
- -------------------------------
the Plan, in the event a Participant's employment or other service is terminated
with the Company and all Subsidiaries for any reason other than death,
Disability or Retirement, all rights of the Participant under the Plan shall
immediately terminate without notice of any kind, and no Options then held by
the Participant shall thereafter be exercisable; provided, however, that if such
termination is due to any reason other than termination by the Company or any
Subsidiary for "cause," all outstanding Options then held by such Participant
shall remain exercisable to the extent exercisable as of such termination for a
period of three months after such termination (but in no event after the
expiration date of any such Option). For purposes of this Article 8, "cause"
shall be as defined in any employment or other agreement or policy applicable to
the Participant or, if no such agreement or policy exists, shall mean (a)
dishonesty, fraud, misrepresentation, embezzlement or material or deliberate
injury or attempted injury, in each case related to the Company or any
Subsidiary, (b) any unlawful or criminal activity of a serious nature, (c) any
willful breach of duty, habitual neglect of duty or unreasonable job
performance, or (d) any material breach of a confidentiality or noncompete
agreement entered into with the Company or any Subsidiary.
8.3. Death Following Termination. If a Participant dies within three
---------------------------
months following termination of employment or other service to the Company for
any reason other than cause, as defined above, all outstanding Options held by
the Participant at the time of termination shall remain exercisable to the
extent exercisable as of such termination for a period of one year after such
termination.
8.4. Modification of Effect of Termination. Notwithstanding the
-------------------------------------
provisions of this Article 8, upon a Participant's termination of employment or
other service with the Company and all Subsidiaries, the Committee may, in its
sole discretion (which may be exercised before or following such termination),
cause Options, or any portions thereof, then held by such Participant to become
exercisable and remain exercisable following such termination in the manner
determined by the Committee; provided, however, that no Option shall be
exercisable after the expiration date thereof and any Incentive Stock Option
that
8
<PAGE>
remains unexercised more than three months following employment termination by
reason of Retirement or more than one year following employment termination by
reason of Disability shall thereafter be deemed to be a Non-Statutory Stock
Option.
8.5. Breach of Confidentiality or Non-Compete Agreements.
---------------------------------------------------
Notwithstanding anything in the Plan to the contrary, in the event that a
Participant materially breaches the terms of any confidentiality or non-compete
agreement entered into with the Company or any Subsidiary, whether such breach
occurs before or after termination of such Participant's employment or other
service with the Company or any Subsidiary, the Committee in its sole discretion
may immediately terminate all rights of the Participant under the Plan and any
agreements evidencing an Option then held by the Participant without notice of
any kind.
8.6. Date of Termination. Unless the Committee shall otherwise
-------------------
determine in its sole discretion, a Participant's employment or other service
shall, for purposes of the Plan, be deemed to have terminated on the date such
Participant ceases to perform services for the Company and all Subsidiaries, as
determined in good faith by the Committee.
ARTICLE 9. CHANGE OF CONTROL.
-----------------
9.1. Change in Control. For purposes of this Article 9, a "Change in
-----------------
Control" is the occurrence of any of the following on or after August 16, 1999:
(a) 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;
(b) the approval by the shareholders of the Company of any plan
or proposal for the liquidation or dissolution of the Company;
(c) 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);
(d) 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 right to vote at elections
of directors (regardless of any approval by the continuity directors);
9
<PAGE>
(e) the continuity directors cease for any reason to constitute
at least a majority the Board; or
(f) 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 Section 9.1(a).
For purposes of this Section 9.1, "continuity director" means any
individual who is a member of the Board on August 16, 1999, 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 August 16, 1999, approved a proxy
statement in which two different individuals were nominated to replace two of
the individuals who were members of the Board on August 16, 1999, 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 August 16,
1999 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 August 16,
1999, 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.
9.2. Acceleration of Vesting. If a Change of Control of the Company
-----------------------
shall occur, then, without any action by the Committee or the Board, all
outstanding Options shall become immediately exercisable in full and shall
remain exercisable during the remaining term thereof, regardless of whether the
employment or other status of the Participants with respect to which Options
have been granted shall continue with the Company or any subsidiary.
9.3. Cash Payment. If a Change in Control of the Company shall occur,
------------
then the Committee, in its discretion, and with the consent of any Participant
effected thereby, may determine that some or all Participants holding
outstanding Options shall receive, with respect to some or all of the shares of
Common Stock subject to such Options, as of the effective date of any such
Change in Control of the Company, cash in an amount equal to the excess of the
Fair Market Value of such shares immediately prior to the effective date of such
Change in Control of the Company over the exercise price per share of such
Options.
9.4. Limitation on Acceleration of Vesting. Notwithstanding anything
-------------------------------------
in Sections 9.2 or 9.3 above to the contrary, if, with respect to a Participant,
acceleration of the vesting of Options as provided in Section 9.2 or the payment
of cash in exchange for all or part of an Option and as provided in Section 9.3
above (which acceleration or payment could be deemed a "payment" within the
meaning of Section 280G(b)(2) of the Code), together with any other payments
which such Participant has the right to receive from the Company or any
corporation which is a member of an "affiliated group" (as defined in Section
1504(a) of the Code without regard to Section 1504(b) of the Code) of which the
Company is a member,
10
<PAGE>
would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the
Code), then the acceleration of exercisability and the payments to such
Participant pursuant to Sections 9.2 and 9.3 above shall be reduced to the
largest amount as, in the sole judgment of the Committee, will result in no
portion of such payments being subject to the excise tax imposed by Section 4999
of the Code.
ARTICLE 10. RIGHT TO WITHHOLD; PAYMENT OF WITHHOLDING TAXES.
-----------------------------------------------
10.1. General Rules. The Company is entitled to (a) withhold and
-------------
deduct from future wages of the Participant (or from other amounts that may be
due and owing to the Participant from the Company or a Subsidiary), or make
other arrangements for the collection of, all legally required amounts necessary
to satisfy any and all federal, state and local withholding and employment-
related tax requirements attributable to an Option, including, without
limitation, the grant, exercise or vesting of an Option or a disqualifying
disposition of stock received upon exercise of an Incentive Stock Option, or
(require the Participant promptly to remit the amount of such withholding to the
Company before taking any action, including issuing any shares of Common Stock,
with respect to an Option.
10.2. Special Rules. The Committee may, in its sole discretion and
-------------
upon terms and conditions established by the Committee, permit or require a
Participant to satisfy, in whole or in part, any withholding or employment-
related tax obligation described in Section 10.1 of the Plan by electing to
tender Previously Acquired Shares, a Broker Exercise Notice or a promissory note
(on terms acceptable to the Committee in its sole discretion), or by a
combination of such methods.
ARTICLE 11. RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS; TRANSFERABILITY.
---------------------------------------------------------------
11.1. Employment or Service. Nothing in the Plan shall interfere with
---------------------
or limit in any way the right of the Company or any Subsidiary to terminate the
employment or service of any Eligible Recipient or Participant at any time, nor
confer upon any Eligible Recipient or Participant any right to continue in the
employ or service of the Company or any Subsidiary.
11.2. Restrictions on Transfer. Other than pursuant to a qualified
------------------------
domestic relations order (as defined by the Code), no right or interest of any
Participant in an Option prior to the exercise of such Option shall be
assignable or transferrable, or subjected to any lien, during the lifetime of
the Participant, either voluntarily or involuntarily, directly or indirectly, by
operation of law or otherwise, including execution, levy, garnishment,
attachment, pledge, divorce or bankruptcy. A Participant shall, however, be
entitled to designate a beneficiary to receive an Option upon such Participant's
death. In the event of a Participant's death, such Participant's rights and
interest in Options shall be transferrable by testamentary will or the laws of
descent and distribution, and payment of any amounts due under the Plan shall be
made to, and exercise of any Options (to the extent permitted pursuant to
Article 8 of the Plan) may be made by, the Participant's legal representatives,
heirs or legatees. If in the opinion of the Committee a Participant holding an
Option is disabled from caring for his or her affairs because of mental
condition, physical condition or age, any payments due the Participant may be
made to, and any rights of the Participant under the Plan shall be exercised by,
such Participant's guardian, conservator or other legal personal representative
upon furnishing the Committee with evidence satisfactory to the Committee of
such status.
11.3. Non-Exclusivity of the Plan. Nothing contained in the Plan is
---------------------------
intended to amend, modify or rescind any previously approved compensation plans
or programs entered into by the Company. The Plan will be construed to be in
addition to any and all such other plans or programs. Neither the adoption of
the Plan nor the submission of the Plan to the shareholders of the Company for
approval will be construed as creating any limitations on the power or authority
of the Board to adopt such additional or other compensation arrangements as the
Board may deem necessary or desirable.
11
<PAGE>
ARTICLE 12. SECURITIES LAW RESTRICTIONS.
---------------------------
12.1. Share Issuances. Notwithstanding any other provision of the Plan
---------------
or any agreements entered into pursuant hereto, the Company shall not be
required to issue or deliver any certificate for shares of Common Stock under
this Plan, and an Option shall not be considered to be exercised notwithstanding
the tender by the Participant of any consideration therefor, unless and until
each of the following conditions has been fulfilled:
(a) (i) There shall be in effect with respect to such shares a
registration statement under the Securities Act and any applicable state
securities laws if the Committee, in its sole discretion, shall have
determined to file, cause to become effective and maintain the
effectiveness of such registration statement; or (ii) if the Committee
has determined not to so register the shares of Common Stock to be issued
under the Plan, (A) exemptions from registration under the Securities Act
and applicable state securities laws shall be available for such issuance
(as determined by counsel to the Company) and (B) there shall have been
received from the Participant (or, in the event of death or disability,
the Participant's heir(s) or legal representative(s)) any representations
or agreements requested by the Company in order to permit such issuance
to be made pursuant to such exemptions; and
(b) There shall have been obtained any other consent, approval
or permit from any state or federal governmental agency which the
Committee shall, in its sole discretion upon the advice of counsel, deem
necessary or advisable.
12.2. Share Transfers. Shares of Common Stock issued pursuant to
---------------
Options granted under the Plan may not be sold, assigned, transferred, pledged,
encumbered or otherwise disposed of, whether voluntarily or involuntarily,
directly or indirectly, by operation of law or otherwise, except pursuant to
registration under the Securities Act and applicable state securities laws or
pursuant to exemptions from such registrations. The Company may condition the
sale, assignment, transfer, pledge, encumbrance or other disposition of such
shares not issued pursuant to an effective and current registration statement
under the Securities Act and all applicable state securities laws on the receipt
from the party to whom the shares of Common Stock are to be so transferred of
any representations or agreements requested by the Company in order to permit
such transfer to be made pursuant to exemptions from registration under the
Securities Act and applicable state securities laws.
12.3. Legends.
-------
(a) Unless a registration statement under the Securities Act is
in effect with respect to the issuance or Transfer of shares of Common
Stock under the Plan, each certificate representing any such shares shall
be endorsed with a legend in substantially the following form, unless
counsel for the Company is of the opinion as to any such certificate that
such legend is unnecessary:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
("THE ACT"), OR UNDER APPLICABLE STATE SECURITIES LAWS.
THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE OFFERED FOR SALE, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED
OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT AND SUCH STATE LAWS OR PURSUANT
TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND
SUCH STATE LAWS, THE
12
<PAGE>
AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE
SATISFACTION OF THE COMPANY.
(b) The Committee, in its sole discretion, may endorse
certificates representing shares issued pursuant to the exercise of
Incentive Stock Options with a legend in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
SOLD, TRANSFERRED, ENCUMBERED, HYPOTHECATED OR
OTHERWISE DISPOSED OF ON OR BEFORE [THE LATER OF THE
ONE-YEAR OR TWO-YEAR INCENTIVE STOCK OPTION HOLDING
PERIODS], WITHOUT THE PRIOR WRITTEN CONSENT OF THE
COMPANY.
ARTICLE 13. PLAN AMENDMENT, MODIFICATION AND TERMINATION.
--------------------------------------------
The Board may suspend or terminate the Plan or any portion thereof at any
time, and may amend the Plan from time to time in such respects as the Board may
deem advisable in order that Options under the Plan shall conform to any change
in applicable laws or regulations or in any other respect the Board may deem to
be in the best interests of the Company; provided, however, that no such
amendment shall be effective, without approval of the shareholders of the
Company, if shareholder approval of the amendment is then required pursuant to
Rule 16b-3 under the Exchange Act or any successor rule or Section 422 of the
Code or under the applicable rules or regulations of any securities exchange or
the NASD. No termination, suspension or amendment of the Plan shall alter or
impair any outstanding Option without the consent of the Participant affected
thereby; provided, however, that this sentence shall not impair the right of the
Committee to take whatever action it deems appropriate under Section 4.3 or
Article 9 of the Plan.
ARTICLE 14. EFFECTIVE DATE OF THE PLAN.
--------------------------
14.1. Effective Date. The Plan is effective as of October 5, 1993, the
--------------
date it was adopted by the Board.
14.2. Duration of the Plan. The Plan shall terminate at midnight on
--------------------
October 4, 2003, and may be terminated prior thereto by Board action, and no
Option shall be granted after such termination. Options outstanding upon
termination of the Plan may continue to be exercised in accordance with their
terms.
ARTICLE 15. MISCELLANEOUS.
-------------
15.1. Construction and Headings. The use of the masculine gender shall
-------------------------
also include within its meaning the feminine, and the singular may include the
plural and the plural may include the singular, unless the context clearly
indicates to the contrary. The headings of the Articles, Sections and subparts
of the Plan are for convenience of reading only and are not meant to be of
substantive significance and shall not add or detract from the meaning of such
Article, Section or subpart.
15.2. Public Policy. No person shall have any claim or right to
-------------
receipt of an Option if, in the opinion of counsel to the Company, such receipt
conflicts with law or is opposed to governmental or public policy.
13
<PAGE>
15.3. Governing Law. The place of administration of the Plan shall be
-------------
conclusively deemed to be within the State of Minnesota, and the rights and
obligations of any and all persons having or claiming to have had an interest
under the Plan or under any agreements evidencing Options shall be governed by
and construed exclusively and solely in accordance with the laws of the State of
Minnesota without regard to the conflict of laws provisions of any
jurisdictions. All parties agree to submit to the jurisdiction of the state and
federal courts of Minnesota with respect to matters relating to the Plan and
agree not to raise or assert the defense that such forum is not convenient for
such party.
15.4. Successors and Assigns. This Plan shall be binding upon and
----------------------
inure to the benefit of the successors and permitted assigns of the Company,
including, without limitation, whether by way of merger, consolidation,
operation of law, assignment, purchase or other acquisition of substantially all
of the assets or business of the Company, and any and all such successors and
assigns shall absolutely and unconditionally assume all of the Company's
obligations under the Plan.
15.5. Survival of Provisions. The rights, remedies, agreements,
----------------------
obligations and covenants contained in or made pursuant to the Plan, any
agreement evidencing an Option and any other notices or agreements in connection
therewith, including, without limitation, any notice of exercise of an Option,
shall survive the execution and delivery of such notices and agreements and the
delivery and receipt of shares of Common Stock and shall remain in full force
and effect.
14
<PAGE>
Exhibit 10.25
THIRD AMENDMENT TO LEASE AGREEMENT
THIS THIRD AMENDMENT TO LEASE AGREEMENT (the "Third Amendment") is made and
entered into this 3rd day of September, 1999, by and between FIRST INDUSTRIAL,
L.P., a Delaware Limited Partnership ("Landlord"), and OPTICAL SENSORS
INCORPORATED, a Delaware corporation ("Tenant").
WITNESSETH:
WHEREAS, Landlord and Tenant have heretofore entered into a certain Standard
Commercial Lease dated October 7, 1991 (the "Original Lease") pursuant to which
Landlord leased to Tenant and Tenant leased from Landlord certain premises
commonly known as 7615 Golden Triangle Drive, Suite A, Eden Prairie, Minnesota
(the "Premises"); and
WHEREAS, Landlord and Tenant entered into a certain First Amendment to Lease
Agreement dated April 26, 1996 (the "First Amendment"; the original Lease and
the First Amendment are hereinafter collectively referred to as the "Lease");
and
WHEREAS, Landlord and Tenant entered into a certain Second Amendment to Lease
Agreement dated April 14, 1997 (the "Second Amendment"; the Original Lease and
Second Amendment are hereinafter collectively referred to as the "Lease");
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Recitals. The foregoing recitals are hereby incorporated as if fully
--------
rewritten and restated in the body of this Third Amendment. All initially
capitalized terms used but not defined herein shall have the meanings
ascribed to such terms in the Lease.
2. Term. The term of the Lease shall be extended through May 31, 2000.
----
3. Premises. The premises shall total 18,339 square feet; (7,906 square feet
--------
office, 8,205 square feet lab, 2,228 square feet warehouse) located at 7615
Golden Triangle Drive, Suite A, as attached on Exhibit A.
4. Tenant's Proportionate Share. Tenant's Proportionate Share of Operating
----------------------------
Expenses shall be 14.56%.
5. Base Rent. Effective December 1, 1999, the monthly Base Rent for the
---------
Premises shall be $11,888.00.
6. Full Force and Effect. Except as otherwise expressly set forth in this
---------------------
Third Amendment, all terms, provisions and covenants set forth in the Lease
shall remain in full force and effect and are hereby ratified and confirmed
as of the date hereof.
<PAGE>
7. Conflicts. In the event that any of the terms, covenants and conditions of
---------
this Third Amendment conflict with any of the terms, covenants and
conditions of the Lease, the terms, covenants and conditions of this Third
Amendment shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Third Amendment as of
the date and year first above written.
LANDLORD: FIRST INDUSTRIAL, L.P., TENANT: OPTICAL SENSORS INCORPORATED, a
a Delaware Limited Partnership Delaware corporation
By: First Industrial Realty Trust,
Inc., a Maryland corporation, its
general partner
By: /s/ Signature illegible By: /s/ Paulita M. LaPlante
----------------------------- -----------------------------
Its: Regional Director Its: President & CEO
---------------------------- ----------------------------
2
<PAGE>
Exhibit 23.1
Consent of Ernst & Young LLP
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-04373) pertaining to the Optical Sensors Incorporated 1989 Omnibus
Stock Option Plan and the Optical Sensors Incorporated 1993 Stock Option Plan
and, in the Registration Statement (Form S-8 No. 333-17493) pertaining to the
Optical Sensors Incorporated Employee Stock Purchase Plan, of our report dated
March 28, 2000 with respect to the financial statements of Optical Sensors
Incorporated, included in the Annual Report (Form 10-K) for the year ended
December 31, 1999.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 105,110
<SECURITIES> 1,345,762
<RECEIVABLES> 52,516
<ALLOWANCES> 0
<INVENTORY> 1,305,065
<CURRENT-ASSETS> 2,837,871
<PP&E> 3,886,569
<DEPRECIATION> 2,975,140
<TOTAL-ASSETS> 4,295,776
<CURRENT-LIABILITIES> 836,953
<BONDS> 0
0
0
<COMMON> 89,353
<OTHER-SE> 3,265,362
<TOTAL-LIABILITY-AND-EQUITY> 4,295,776
<SALES> 134,131
<TOTAL-REVENUES> 134,131
<CGS> 2,045,183
<TOTAL-COSTS> 2,045,183
<OTHER-EXPENSES> 5,968,050
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,709
<INCOME-PRETAX> (7,785,276)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,785,276)
<EPS-BASIC> (.88)
<EPS-DILUTED> 0
</TABLE>
