-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KnfKLuWyx8W9GykLGCj8hbXLUJWOXoV88ORPaoAdTIUshVVH3iy/XgqbrcB/DofA w6JoNHtgeEQB5KnMqpbl/w== 0000950109-97-002571.txt : 19970329 0000950109-97-002571.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950109-97-002571 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPTICAL SENSORS INC CENTRAL INDEX KEY: 0000907658 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 411643592 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27600 FILM NUMBER: 97568147 BUSINESS ADDRESS: STREET 1: 7615 GOLDEN TRIANGLE DRIVE STREET 2: STE A CITY: EDEN PRARIE STATE: MN ZIP: 55344 BUSINESS PHONE: 6179445857 MAIL ADDRESS: STREET 1: 7615 GOLDEN TRIANGLE DR STE A CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 10-K 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------ FORM 10-K (Mark one) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1996 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________________ to __________________. Commission File No. 0-27600 -------------------- OPTICAL SENSORS INCORPORATED (Exact name of registrant as specified in its charter) Delaware 41-164359 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7615 Golden Triangle Drive Suite A Minneapolis, Minnesota 55344-3733 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (612) 944-5857 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Preferred Share Purchase Rights Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [x] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of March 12, 1997, 8,349,279 shares of Common Stock of the Registrant were outstanding, and the aggregate market value of the Common Stock of the Registrant as of that date (based upon the last reported sale price of the Common Stock at that date as reported by the Nasdaq National Market System), excluding outstanding shares beneficially owned by directors and executive officers, was $62,403,112.50 DOCUMENTS INCORPORATED BY REFERENCE Parts I, II and IV of this Annual Report on Form 10-K incorporate by reference information (to the extent specific pages are referred to herein) from the Registrant's Annual Report to Shareholders for the year ended December 31, 1996 (the "1996 Annual Report"). Part III of this Annual Report on Form 10-K incorporates by reference information (to the extent specific sections are referred to herein) from the Registrant's Proxy Statement for its 1997 Annual Meeting to be held May 13, 1997 (the "1997 Proxy Statement"). ================================================================================ PART I This Form 10-K contains certain forward-looking statements. For this purpose, any statements contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "estimate" or "continue" or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, including those set forth in the section below entitled "Certain Important Factors." Item 1. BUSINESS. General Optical Sensors Incorporated (the "Company") has developed the SensiCath system, a patient-attached, on-demand arterial blood gas ("ABG") monitoring system, which provides precise and accurate ABG results within 60 seconds without exposure to potentially infectious blood or depleting the patients blood supply (the "SensiCath System"). ABG tests measure oxygen ("O\2\"), carbon dioxide ("CO\2\") and acid-base ("pH") in a sample of blood taken from a patient's artery. The Company believes that the SensiCath System is the first ABG analyzer to be integrated into both an arterial pressure monitoring line and a critical care patient monitoring system. The SensiCath System utilizes a disposable, fiberoptic sensor device (the "SensiCath Sensor") connected to a small modular instrument that can be configured to integrate with bedside monitoring systems or to serve as a stand-alone monitor. The SensiCath System is currently available in two configurations. The first configuration of the SensiCath System combines the SensiCath Sensor with a module (the "OnlineABG Module") that plugs into bedside monitors manufactured by Marquette Medical Systems, Inc. ("Marquette"). The second configuration of the SensiCath System consists of the SensiCath Sensor, the OnlineABG Module and a stand-alone monitor (the "OpticalCAM/TM/") that can be used as a stand-alone monitoring device or can interface with bedside monitors manufactured by other manufacturers of patient monitoring equipment. The Company plans to market the OpticalCAM monitor to all hospitals regardless of the type of patient monitoring system used by the hospital. Currently, the OpticalCAM is able to interface with patient monitoring systems manufactured by the Hewlett-Packard Company and SpaceLabs Medical, Inc. The two configurations of the SensiCath System give the Company access to over 80% of the monitored critical care beds in the United States. The Company's strategy is to become the leader in the design, development and commercialization of sensors and integrated monitoring systems for the measurement of ABG values and other critical blood analytes at the point-of-care and thereby establish a new standard of care for critically ill patients. The Company completed product development of the initial configuration of the SensiCath System in June 1995 and received 510(k) clearance to market the SensiCath System from the FDA in January 1996. In April 1996, Marquette completed development of the OnlineABG Module. Both companies began marketing the SensiCath System in May 1996. However, full-scale commercial launch of the SensiCath System was delayed throughout 1996 while Marquette completed scale-up of commercial production of the OnlineABG Module and an upgrade to its software package for its Solar patient monitoring systems necessary to accommodate several new Marquette products and performance features, including the OnlineABG Module and the SensiCath System. During this period, the Company implemented a marketing program involving the purchase by the Company of OnlineABG Modules and the short-term rental of portable Solar monitors, which the Company has been providing to customers under various marketing and rental programs. Marquette released the upgrade to its software package and commenced commercialization of the upgrade in January 1997. The Company completed development of the OpticalCAM monitor in September 1996 and received 510(k) clearance to market the OpticalCAM monitor from the FDA in January 1997. In order to increase market awareness and customer demand for the SensiCath System, the Company initiated and completed a number of sales and marketing objectives during 1996. The Company completed the initial hiring of its sales and marketing staff, identified a distribution partner for European markets and continued its clinical marketing study program. A number of papers have been published in medical peer review journals and several abstracts have been presented at medical conferences regarding the SensiCath System. The Company has established reference sites for the SensiCath System at key hospitals and medical centers in the U.S. and Europe. With Marquette's completion of its Solar software and the introduction of the OpticalCAM monitor, the Company positioned itself to increase sales and marketing activities in the first quarter of 1997. In addition, the Company has made initial sales of the SensiCath System in Europe to its distribution partner and plans to increase European marketing efforts in the first quarter of 1997. During 1996, the Company also completed a number of research and development activities. The Company confirmed through extended clinical laboratory testing that the SensiCath sensor can be used for 144 hours without any compromise in performance. The extension from 72 hours to 144 hours of use will enable customers to realize additional cost savings for their high acuity patients and potentially expand its use to less acute patients. In May 1996, the Company submitted a 510(k) application to the FDA covering the 144-hour SensiCath sensor, which is currently under review. The 144-hour sensor is currently available for commercial sale outside of the United States. In June 1996, the Centers for Disease Control and Prevention notified the Company that the SensiCath System is not subject to regulation under the Clinical Laboratory Improvements Act of 1988, and the Company completed acquisition of ownership of all of the technology in the SensiCath System, pursuant to a previously disclosed agreement with Marquette. In September 1996, the Company completed development of the OpticalCAM monitor. The Company plans to phase in a miniaturized sensor in 1997 and has begun development programs to provide analysis of other critical blood analytes. In the first quarter of 1996, the Company completed an initial public offering of its Common Stock, raising net proceeds of approximately $33,916,000. The Company was incorporated in Minnesota in May 1989 and reincorporated in Delaware in January 1996. The Company's executive offices are located at 7615 Golden Triangle Drive, Suite A, Minneapolis, Minnesota 55344, and its telephone number is (612) 944-5857. The SensiCath Solution By integrating an ABG module as part of an existing bedside monitor and an ABG sensor as part of an existing arterial line, the Company believes that the SensiCath System presents the first patient-attached ABG system which addresses the needs of the critically ill, unstable patient population. The SensiCath System has the following benefits: . Fast and Easy to Use. The SensiCath System provides ABG results within 60 seconds. Once installed in the arterial line, the health care provider need only push a button on the monitor and draw the blood over the sensors to obtain ABG readings and automatically record and transmit all results. Testing with the SensiCath System can be conducted by one health care professional, while testing with traditional ABG analyzers requires several hospital personnel. . Clinically Superior. The SensiCath System provides accurate and precise ABG results on demand that are comparable to results generated by traditional ABG analyzers. By integrating ABG data with other critical care parameters on a bedside monitor, the SensiCath System provides a valuable management tool for a patient experiencing rapid changes in cardiopulmonary status. By eliminating 2 the requirement for any blood removal, the risk of human error in removing, handling and analyzing the blood sample is significantly reduced. The SensiCath System has also been designed with a quality assurance routine that is easily integrated into standard hospital practices. Furthermore, the SensiCath System only needs to be calibrated once during the period of use approved for the sensor (currently 72 hours in the U.S. and 144 hours outside of the U.S.), while traditional ABG analyzers require calibration prior to each test. . Cost-Effective. The 72-hour SensiCath Sensor can be used to take up to 100 ABG tests, and the 144-hour sensor can be used to take up to 200 ABG tests. The SensiCath System provides cost-effective ABG testing for patients requiring a large number of ABG tests because, unlike other ABG technologies, the SensiCath System does not have a direct per test cost. All test results are immediately captured as part of the patient's paperless record, which is an increasingly important benefit in the current environment for managing health care costs. The Company has priced the SensiCath Sensor to allow hospitals to reduce the cost of ABG testing for critically ill, unstable patients requiring frequent testing during their hospital stay. . Eliminates Blood Exposure and Loss. The SensiCath Sensor is placed in an arterial line creating a closed-loop system. As a result, no blood is removed from the patient during ABG testing, and the health care provider's exposure to blood is eliminated. Elimination of blood loss is significant for all patients, and is extremely important for neonatal patients who can require blood transfusions as a direct result of frequent ABG analysis using traditional technology. The closed-loop system also significantly reduces the risk of infection to both the health care provider and the patient by removing the need to open the arterial line, attach a syringe and remove blood. The health care provider is not exposed to potentially infectious blood samples or blood contaminated materials during testing. SensiCath System The first configuration of the SensiCath System consists of a SensiCath Sensor and the OnlineABG Module. The second configuration of the SensiCath System consist of the SensiCath Sensor, the OnlineABG Module and the OpticalCAM monitor. The SensiCath Sensor contains three optical fibers with fluorescent chemistries for sensing O\2\, CO\2\ and pH. The disposable, single-patient sensor has been designed to provide accurate ABG data for the approved period of use (currently 72 hours in the U.S. and 144 hours outside of the U.S.). The OnlineABG Module, which plugs into Marquette's bedside monitoring system, is the source and receptor of optical signals, provides signal processing and communicates with other components in the monitoring system. Many of the clinical benefits of the SensiCath System result from what the Company describes as the Paracorporeal Advantage. This means that the fiberoptic sensors are located outside the patient's artery (paracorporeal) as a part of an existing arterial pressure monitoring line which is secured to the patient's forearm. The integration of the SensiCath Sensor with an existing arterial line and a bedside monitoring system enables the health care provider to provide integrated bedside management of rapid changes in the patient's cardiopulmonary status. The closed-loop system of the SensiCath Sensor and the arterial line eliminates blood loss and blood exposure resulting from traditional ABG analysis. The SensiCath Sensor is attached to the standard arterial line already in place on critically ill patients. A standard line includes an arterial cannula, pressure monitoring tubing and pressure transducer. The arterial line is constantly filled with saline or other physiologic solution as part of its function as a pressure monitor. The SensiCath Sensor is added to the arterial line in a flow-through configuration which does not disrupt the arterial pressure waveform or interfere with fluid delivery. 3 Unlike electrochemical ABG analyzers, the SensiCath System needs to be calibrated only once at the outset of its use. The calibration procedure takes approximately five minutes and requires only two small pouches of initialization fluid which will be included with the SensiCath Sensor. The SensiCath System is then ready to provide ABG measurements. To take an ABG measurement, the health care provider pushes a button on the bedside monitor and draws blood past the sensor. A tone from the monitor signals the health care provider to return the blood to the patient and flush the line. The ABG results then appear on the monitor screen within 60 seconds. The time-consuming and complicated process of removing, handling and analyzing a blood sample, all of which can contribute to delayed and inaccurate results, is unnecessary with the SensiCath System. The SensiCath Sensor contains three fiberoptic chemical sensors enclosed in a sterile, disposable device. The O\2\ and pH sensors consist of fluorescent dyes immobilized within unique polymer matrices, which are directly bonded onto the distal region of a polymer clad glass fiber. The CO\2\ sensor consists of a dissolved fluorescent dye within an ultra-miniaturized mechanically encapsulated housing, also bonded onto the distal region of a glass fiber. These captive dyes react with the analyte of interest (i.e., O\2\, CO\2\ and pH) to influence optical signals within the fiberoptics. The SensiCath Sensor also contains a temperature control device which enables the sensors to provide accurate measurements at varying blood temperatures. The Company's optical platform, by means of a proprietary ratiometric methodology, provides light source and light detection using solid-state, miniature components. The optics in combination with the sensor dyes provide fully ratioed capability which maintains calibration for the entire 72-hour period. The initialization fluids are liquid stable solutions, administered once to the SensiCath System to enable a two point calibration. This calibration is stable for the 72-hour period of use of the SensiCath System. No external gas tanks with O\2\ and CO\2\ are required because the fluids are calibrated at the time of manufacture, unlike traditional ABG analyzers which require calibration prior to each test. Sales and Marketing The Company's sales and marketing staff consists of sales, marketing and clinical support personnel. The Company's sales, clinical and marketing activities have been designed to support customer evaluation of the SensiCath System as it integrates/interfaces with critical care patient bedside monitoring systems. During 1996, the Company completed the initial hiring of its sales and marketing staff, identified a distribution partner for European markets and continued its clinical marketing study program. The Company plans to sell the SensiCath System primarily through its direct sales force in the United States and through distributors outside of the United States. The Company believes that its team marketing and focused selling strategies eliminate the need to establish a large sales force to support U.S. sales. The Company regularly exhibits its products at major U.S. and European medical conferences. In addition, a number of papers have been published in medical peer review journals and several abstracts have been presented at medical conferences regarding the SensiCath System. The Company plans to continue to support publications and abstract presentations. The Company has established reference sites for the SensiCath System at key hospitals and medical centers in the U.S. and Europe. Research and Development The Company's research and development staff is dedicated to the research, design and development of the technology used in the SensiCath System. The Company's principal research and development activities currently consist of design and development of additional sensors to measure 4 other blood analytes and additional configurations of the SensiCath System. There can be no assurance that the Company will be able to successfully develop new products on a timely basis or at all. The Company's research and development expenses for the fiscal years ended December 31, 1994, 1995 and 1996 were $4,774,487, $5,955,344 and $5,632,458, respectively. The Company anticipates that it will continue to spend significant amounts on research and development activities for the foreseeable future. Manufacturing and Supply The Company manufactures the SensiCath Sensor at its facility in Minneapolis, Minnesota, which includes approximately 4,000 square feet of manufacturing space. The Company's manufacturing facility has passed an FDA good manufacturing practices ("GMP") inspection. In December 1996, the Company received ISO 9001 certification, indicating compliance with the requirements of this world-wide quality standard. The SensiCath Sensors are manufactured in a unique, reproducible process. The finished device is packaged and sterilized prior to being shipped. The Company has entered into an agreement with a third party in Europe which packages sterilized sensors manufactured by the Company and non-proprietary components for sale of the SensiCath System in Europe. The Company purchases components from various suppliers and relies on single sources for the OpticalCAM monitor, as well as a few key components. To date, the Company has qualified only single sources for certain purchased components of the Company's unique optical platform. While the Company believes that alternate suppliers are available and can be approved in accordance with the Company's vendor qualification procedures, identifying and qualifying such vendors could cause a delay in production of the Company's products. Any such delay could have a material adverse effect on the Company. In addition, the OnlineABG Module is currently manufactured solely by Marquette. While the Company has entered into a supply agreement with Marquette for the OnlineABG Module, any delay or disruption in the supply of OnlineABG Modules could have a material adverse effect on the Company. Competition Competition in the medical device industry in general and the ABG analyzer market in particular is intense and expected to increase. The Company believes that the principal competitive factors for ABG analyzers and monitors are accuracy, rapid results, cost-effectiveness, integration with bedside monitors, reduction of blood loss and exposure, and price. The Company believes that it competes favorably with respect to all of these factors. Several other point-of-care or near-patient blood gas testing manufacturers have commercially available products including AVL Scientific Corp., i-STAT Corporation, Diametrics Medical, Inc., SenDx Medical Inc. and Instrumentation Laboratory. In addition, some manufacturers of laboratory equipment are marketing "mobile" versions of traditional blood gas testing equipment. The Company also expects that manufacturers of central and satellite laboratory testing equipment will compete to maintain their revenues and market share. Most of the Company's competitors have significantly greater financial, technical, research, marketing, sales, distribution and other resources than the Company. There can be no assurance that the Company's competitors will not succeed in developing or marketing technologies and products that are more effective or less expensive than those developed or marketed by the Company or that would render the Company's technology and products obsolete or noncompetitive. Furthermore, there can be no assurance that the emergence of new products, technologies or procedures will not reduce the need for ABG analysis. Patents and Proprietary Rights The Company seeks to protect technology, inventions and improvements that it considers important through the use of patents and trade secrets. The Company owns or has rights to several U.S. 5 patents and has filed a number of patent applications in the United States, Japan and key European countries. There can be no assurance, however, that the Company's patents will provide competitive advantages for the Company's products, or that such rights will not be challenged or circumvented by competitors. In addition, there can be no assurance that any pending patent applications will issue. Claims made under patent applications may be denied or significantly narrowed and the issued patents, if any, may not provide significant commercial protection to the Company. The Company could incur substantial costs in proceedings before the U.S. Patent and Trademark Office, including interference proceedings. These proceedings could result in adverse decisions as to the priority of the Company's inventions. While the Company does not believe that any of its products infringe any valid claims of patents or other proprietary rights held by third parties, there can be no assurance that the Company does not infringe any patents or other proprietary rights held by third parties. If an infringement claim were made, the costs incurred to defend the claim could be substantial and adversely affect the Company, even if the Company were ultimately successful in defending the claim. If the Company's products were found to infringe any proprietary right of a third party, the Company could be required to pay significant damages or license fees to the third party or cease production. Litigation may also be necessary to enforce patent rights held by the Company, or to protect trade secrets or techniques owned by the Company. Any such claims or litigation could result in substantial costs and diversion of effort by management of the Company. The Company also relies on trade secrets and other unpatented proprietary technology. There can be no assurance that the Company can meaningfully protect its rights in such unpatented proprietary technology or that others will not independently develop substantially equivalent proprietary products or processes or otherwise gain access to the Company's proprietary technology. The Company seeks to protect its trade secrets and proprietary know-how, in part, with confidentiality agreements with employees and consultants. There can be no assurance that the agreements will not be breached, that the Company will have adequate remedies for any breach or that the Company's trade secrets will not otherwise become known to or independently developed by competitors. SensiCath/(R)/, OpticalCAM/TM/ and SensiCath the Paracorporeal Advantage/TM/ are trademarks of the Company. OnlineABG/TM/, Solar/TM/ and Tramscope/(R)/ are trademarks of Marquette Medical Systems, Inc. Government Regulation The Company's products, development activities and manufacturing processes are subject to regulation by numerous governmental authorities, principally the United States Food and Drug Administration ("FDA") and corresponding foreign agencies. In the United States, the FDA administers the Federal Food, Drug and Cosmetics Act and amendments thereto, including the Safe Medical Devices Act of 1990. The Company is subject to the standards and procedures respecting manufacture and marketing of medical devices contained in the Federal Food, Drug and Cosmetics Act and the regulations promulgated thereunder and is subject to inspection by the FDA for compliance with such standards and procedures. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing approvals and criminal prosecution. In the United States, medical devices are classified into one of three classes (class I, II or III), on the basis of the controls deemed necessary by the FDA to reasonably assure their safety and effectiveness. Under FDA regulations, class I devices are subject to general controls (e.g., labeling, premarket notification 6 and adherence to good manufacturing practices) and class II devices are subject to general and special controls (e.g., performance standards, postmarket surveillance, patient registries and FDA guidelines ). In general, class III devices (e.g., life-sustaining, life-supporting and implantable devices, or new devices which have not been found substantially equivalent to a legally marketed device), in addition to being subject to general and special controls, must receive premarket approval ("PMA") by the FDA to ensure their safety and effectiveness. Before a new or significantly modified device can be introduced into the market, the manufacturer must generally obtain marketing clearance through a 510(k) notification or approval of a PMA application. A 510(k) clearance will be granted if the proposed device is "substantially equivalent" to a predicate device (i.e., a legally marketed class I or class II medical device, or a class III medical device for which the FDA has not called for the submission of a PMA application). Commercial distribution of a device for which a 510(k) notification is required can begin only after the FDA issues a written determination that the device is "substantially equivalent" to a predicate device. The process of obtaining a 510(k) clearance typically can take several months to a year or longer. A PMA application must be filed if a proposed device is not substantially equivalent to a legally marketed class I or class II device, or if it is a class III device for which the FDA has called for a PMA application. Certain class III devices that were on the market before May 28, 1976 ("preamendments class III devices"), and devices that are substantially equivalent to them, can be brought to market through the 510(k) process until the FDA calls for the submission of PMA applications for preamendments class III devices. The process of obtaining a PMA can be expensive, uncertain and lengthy, frequently requiring anywhere from one to several years from the date the PMA is submitted to the FDA, if approval is obtained at all. The Company has received 510(k) clearance to market the 72-hour SensiCath System and the OpticalCAM monitor from the FDA. The Company submitted a 510(k) notification regarding the 144-hour SensiCath Sensor in May 1997, which is currently under review. The Company also anticipates submitting 510(k) notifications for other configurations of the SensiCath System and other products that the Company may develop in the future. There can be no assurance that these future 510(k) submissions will be cleared by the FDA on a timely basis, if at all. The Company's 510(k) notice claimed that the SensiCath System is substantially equivalent to certain preamendments class III devices for which the FDA has published a final regulation placing the devices in class III. Pursuant to the FDA's August 14, 1995 order requiring manufacturers of preamendments class III devices to submit safety and effectiveness information to the FDA, the Company may be required to submit safety and effectiveness information to the FDA for the SensiCath System by August 1997. The Company plans to submit appropriate data to the FDA prior to August 1997. Failure on the part of the Company to submit the required safety and effectiveness information could subject the Company to FDA enforcement action and may result in the SensiCath System being deemed misbranded as a preamendments class III device, thereby requiring a PMA application. In addition, if the FDA publishes a final regulation calling for PMA applications for the SensiCath predicate devices based on information submitted by the Company and other manufacturers, the Company may be required to submit a PMA application within 90 days after the FDA calls for PMA applications. Although the FDA order requiring submission of safety and effectiveness information characterized the predicate devices as having a high potential for down-classification, there can be no assurance that the devices will be down-classified or that the Company will not be required to submit a PMA application for the SensiCath System. The Company is also subject to regulation in each of the foreign countries in which it sells its products with regard to product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. Many of the regulations applicable to the 7 Company's products in such countries are similar to those of the FDA. The national health or social security organizations of certain of such countries require the Company's products to be qualified before they can be marketed in those countries. Delays in receipt of, or a failure to receive such approvals or clearances, or the loss of any previously received approvals or clearances, could have a material adverse effect on the Company. To date, the Company has not experienced significant difficulty in complying with these regulations. In February 1997, the Company received the European Medical Devices Directorate ("MDD") approval to place the "CE" mark on its products. The CE mark enables the Company's products to be marketed, sold and used throughout the European Union, subject to limited "safeguard" powers of member states. The Company is subject to periodic inspections by the FDA, which is charged with auditing the Company's compliance with good manufacturing practices ("GMP") established by the FDA and other applicable government standards. The Company is also subject to inspections by the MDD and other European regulatory agencies. Strict regulatory action may be initiated in response to audit deficiencies or to product performance problems. The Company believes that its manufacturing and quality control procedures are in compliance with the requirements of the FDA and MDD regulations. The Company's manufacturing facilities and processes are also subject to periodic inspection and review by its Notified Body in conjunction with the Company's ISO 9001 certification. Failure to maintain GMP and ISO 9001 certifications could have a material adverse effect on the Company. Some of the currently available methods for performing ABG analysis are subject to the Clinical Laboratory Improvements Act of 1988 ("CLIA"), which is intended to ensure the quality and reliability of all medical testing in the United States, regardless of testing site. In June 1996, the Company as notified by the Centers for Disease Control and Prevention ("CDC") that the SensiCath System was not subject to regulation under CLIA. Under CLIA, testing sites are required to comply with certain requirements regarding personnel qualification, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections based on the level of "complexity" associated with the test, and each manufacturer of a test analyzer must obtain a classification of the tests its product performs from the FDA and CDC. There can be no assurance that future CDC regulations will not apply to the SensiCath System. Third Party Reimbursement Hospitals that purchase and physicians who use medical devices such as the Company's products generally rely upon third party payors such as Medicare, Medicaid, private health insurers and others to pay for some or all of the costs associated with the product. Medicare is the largest single third-party payor for services involving the use of the Company's products which are used primarily for hospital inpatients who are receiving critical care services. The patient population that the Company has initially targeted for the SensiCath System requires numerous ABG tests as part of their critical care stay. Using the average cost of traditional ABG tests and comparing it to the costs associated with the SensiCath System, the Company believes that it will be able to demonstrate the cost-effectiveness of the SensiCath System. However, there can be no assurance that the use of the SensiCath System will be considered cost-effective by certain hospitals and physicians in relation to the level of reimbursement typically received for ABG tests or for any reimbursement that might be received for each SensiCath Sensor. Furthermore, the level of reimbursement for ABG testing could decrease in the future. Failure by hospitals and other users of the Company's products to obtain sufficient reimbursement from third party payors and/or changes in governmental and private third party payors' policies toward coverage for ABG tests could have a materially adverse affect on the Company. 8 Employees As of December 31, 1996, the Company employed 67 persons full-time and 5 persons on a contract or part-time basis. No employees are covered by collective bargaining agreements, and the Company considers its relationship with its employees to be good. Certain Important Factors In addition to the factors identified above, there are several important factors that could cause the Company's actual results to differ materially from those anticipated by the Company or which are reflected in any forward-looking statements of the Company. These factors, and their impact on the success of the Company's operations and its ability to achieve its goals, include the following: . Market Acceptance of the SensiCath System. The Company's future revenues will depend on market acceptance of the SensiCath System. The Company will need to demonstrate to health care professionals, hospital administrators and third-party payors the accuracy, reliability, ease of use, safety and cost effectiveness of the SensiCath System. In order to use the SensiCath System, hospitals need to acquire the OnlineABG Module, and, if they do not have a Marquette patient bedside monitoring system the OpticalCAM monitor, both of which may require capital expenditure approvals by the hospital. . Timely Installation of the SensiCath System. The Company's ability to increase sales in the near-term will depend on timely installation and in- service training for the OnlineABG Module, which is provided by Marquette. The Company does not have control over the scheduling of this installation and in-service training for the OnlineABG Module. . Sales to Installed Base. The Company's plans for increasing sales in 1997 is based, in part, on its ability to sell the SensiCath System to Marquette's installed base of Tramscope and Solar patient monitoring systems. In order to interface with the SensiCath System, Tramscope systems need either hardware or software upgrades or both, and previously installed Solar systems need a software upgrade. These upgrades require an additional investment by hospitals with Tramscope systems and hospitals with Solar systems that are not under warranty. Hospitals may be reluctant to absorb the costs associated with the purchase of an OnlineABG Module and upgrades needed to interface the Solar and Tramscope system with the SensiCath System. . Competition. Competition among companies attempting to provide ABG and other critical blood analyte analysis at the point-of-care is intense and increasing. There can be no assurance that the Company's competitors will not succeed in developing or marketing technologies and products that are more effective or less expensive than the Company's products or that would render the Company's products obsolete or non-competitive. . Future Regulatory Approvals. The Company's ability to market new configurations of or improvements to the SensiCath System and any products it may develop in the future will require clearances or approvals from the FDA and in some instances foreign governmental agencies. The process for obtaining necessary regulatory clearances and approvals can be expensive and time consuming. There can be no assurance that the Company will be able to obtain necessary regulatory approvals and clearances in the future on a timely basis, or at all. 9 . Sole Sources of Supply. Currently, the Company has only one supplier for the OnlineABG Module, the OpticalCAM Monitor and certain other key components. Any disruption or delay in the supply of key components or instrumentation could have a material adverse effect on the Company. Item 2. PROPERTIES. The Company's facilities are located at 7615 Golden Triangle Drive, Suite A, Minneapolis, Minnesota, and consist of approximately 18,300 square feet. The Company leases these facilities pursuant to a lease that expires on November 30, 1999. The lease provides for rent of approximately $17,000 per month, including base rent and a pro rata share of operating expenses and real estate taxes. The Company expects that these facilities will be sufficient for its operations for the foreseeable future. Item 3. LEGAL PROCEEDINGS. There are no material pending or threatened legal, governmental, administrative or other proceedings to which the Company is a party or of which any of its property is subject. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report. Item 4a. EXECUTIVE OFFICERS OF THE COMPANY. The executive officers of the Company, their ages and the offices held, as of March 15, 1997, are as follows:
Name Age Title - -------------------------------------------- ------------ ----------------------------------------------------------------- Sam B. Humphries 54 President and Chief Executive Officer Paulita M. LaPlante 39 Vice President of Worldwide Sales, Marketing and Business Development Byron (Buzz) Moran 54 Vice President of Research and Development and Operations Wesley G. Peterson 49 Chief Financial Officer, Vice President of Finance and Administration and Secretary
Information regarding the business experience of the executive officers of the Company is set forth below. Sam B. Humphries has been the President, Chief Executive Officer and a Director of the Company since October 1991. From January 1988 to October 1991, he served as President and Chief Executive Officer of American Medical Systems ("AMS"), a medical device manufacturer which is a subsidiary of Pfizer, Inc. Mr. Humphries also served as a member of the Board of Directors of the Hospital Products Group at Pfizer, Inc. Mr. Humphries is a Director of Universal Hospital Services, Inc. 10 Paulita M. LaPlante has been the Company's Vice President of Worldwide Sales, Marketing and Business Development since June 1994 and was Director of Marketing and Business Development from April 1992 to June 1994. She also served as the Company's interim Vice President of Research and Development from January 1994 to September 1994. From 1986 to April 1992, Ms. LaPlante held a variety of positions with AMS, including Manager for Prostate Products, Manager of New Business Development and Manager of Worldwide Technical Training. Byron (Buzz) Moran has been the Company's Vice President of Research and Development and Operations since September 1994. From January 1985 to August 1994, Mr. Moran held several management positions, including Vice President and General Manager and Vice President of Research and Development, for Spectramed Incorporated, a medical device manufacturer which is a subsidiary of British Oxygen Corporation. Wesley G. Peterson has been the Company's Chief Financial Officer since January 1992, Vice President of Finance and Administration since June 1994 and Secretary since July 1992. He was also Director of Finance and Administration from January 1992 to June 1994. From December 1986 to December 1991, Mr. Peterson was the Vice President of Finance and Administration for CIMA Labs, Inc., a manufacturer and distributor of pharmaceuticals based in Minneapolis, Minnesota. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information under the caption "Market for Company's Common Stock and Related Stockholder Matters" on page 20 of the Company's 1996 Annual Report is incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA. The financial information under the caption "Selected Financial Data" on page 19 of the Company's 1996 Annual Report is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 6 to 7 of the Company's 1996 Annual Report is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Financial Statements and Independent Auditors' Report thereon on pages 8 to 19 of the Company's 1996 Annual Report are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 11 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (a) Directors, Executive Officers, Promoters and Control Persons The information under the captions "Election of Directors -- Information About Nominees" and "Election of Directors -- Other Information About Nominees" in the Company's 1997 Proxy Statement is incorporated herein by reference. The information concerning executive officers of the Company is included in this Report under Item 4a, "Executive Officers of the Company." (b) Section 16(a) Beneficial Ownership Reporting Compliance The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 1997 Proxy Statement is incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION. The information under the captions "Election of Directors -- Director Compensation" and "Executive Compensation and Other Benefits" in the Company's 1997 Proxy Statement is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information under the caption "Principal Shareholders and Beneficial Ownership of Management" in the Company's 1997 Proxy Statement is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the caption "Certain Transactions" in the Company's 1997 Proxy Statement is incorporated herein by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. The following Financial Statements of the Company are incorporated herein by reference from the pages indicated in the Company's 1996 Annual Report: Financial Statements: Page: --------------------- ----- Independent Auditors' Report............................. 19 12 Balance Sheets as of December 31, 1996 and 1995.......... 9 Statements of Operations for the years ended December 31, 1996, 1995 and 1994 and for the period from May 23, 1989 (inception) to December 31, 1996............ 8 Statement of Shareholders' Equity for the period May 23, 1989 (inception) to December 31, 1996............ 10 Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 and for the period from May 23, 1989 (inception) to December 31, 1996....... 12 Notes to Financial Statements............................ 13 2. Financial Statement Schedules. All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes thereto. 3. Exhibits The exhibits to this Report are listed in the Exhibit Index on pages 16 to 20 below. A copy of the exhibits referred to above will be furnished at a reasonable cost to any person who was a stockholder of the Company as of March 20, 1997, upon receipt from any such person of a written request for any such exhibit. Such request should be sent to: Optical Sensors Incorporated, 7615 Golden Triangle Drive, Suite A, Minneapolis, Minnesota 55344; Attn: Stockholder Information. The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 13(a): A. Employment Agreement dated October 1, 1991 between the Company and Sam B. Humphries. B. 1989 Omnibus Stock Option Plan, as amended. C. 1991 Stock Option Plan, as amended. D. Non-Statutory Stock Option Agreement dated August 2, 1995 between the Company and Sam B. Humphries. E. Non-Recourse Promissory Note dated September 1, 1995 between the Company and Sam B. Humphries. F. 1993 Stock Option Plan, as amended. G. Form of Non-Statutory Stock Option Agreement for Nonemployees pursuant to 1993 Stock Option Plan. 13 H. Form of Non-Statutory Stock Option Agreement for Nonemployee Directors pursuant to 1993 Stock Option Plan I. Form of Incentive Stock Option Agreement for Employees pursuant to 1993 Stock Option Plan. J. Warrant dated April 28, 1992 to purchase 4,548 shares issued to Gary A. Peterson. (b) Reports on Form 8-K On December 4, 1996, the Company filed a Current Report on Form 8-K reporting the adoption of the Rights Plan, dated as of December 3, 1996 between the Company and Norwest Bank Minnesota, N.A. 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OPTICAL SENSORS INCORPORATED Dated: March 27, 1997 By: /s/ Sam B. Humphries ---------------------------------------------- Sam B. Humphries President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on March 27, 1997 by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Title - ---- ----- /s/ Sam B. Humphries President, Chief Executive Officer and Director - ------------------------------ (principal executive officer) Sam B. Humphries /s/ Wesley G. Peterson Chief Financial Officer, Vice President of Finance and - ------------------------------ Administration and Secretary (principal financial and Wesley G. Peterson accounting officer) /s/ Promod Haque, Ph.D. Director - ------------------------------ Promod Haque, Ph.D. /s/ Peter H. McNerney Director - ------------------------------ Peter H. McNerney /s/ John M. Nehra Director - ------------------------------ John M. Nehra /s/ Demetre M. Nicoloff, M.D. Director - ------------------------------ Demetre M. Nicoloff, M.D. /s/ Gary A. Peterson Director - ------------------------------ Gary A. Peterson
15 OPTICAL SENSORS INCORPORATED EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996
Item No. Item Method of Filing - -------- ---- ---------------- 3.1 Restated Certificate of Incorporation of Incorporated by reference to Exhibit 3.3 the Company. contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 3.2 Certificate of Designation, Preferences Filed herewith electronically. and Rights of Series A Junior Preferred Stock. 3.3 Bylaws of the Company. Incorporated by reference to Exhibit 3.5 contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 4.1 Specimen Common Stock Certificate Incorporated by reference to Exhibit 4.1 contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 4.2 Form of Warrant issued in connection Incorporated by reference to Exhibit 4.3 with the sale of Convertible Preferred contained in the Company's Registration Stock, Series B Statement on Form S-1 (File No. 33-99904). 4.3 Form of Warrant issued in connection Incorporated by reference to Exhibit 4.4 with the Convertible Bridge Loan contained in the Company's Registration Agreement dated November 22, 1991 Statement on Form S-1 (File No. 33-99904). 4.4 Form of Warrant issued in connection Incorporated by reference to Exhibit 4.5 with the On-Call Bridge Loan contained in the Company's Registration Agreement dated December 6, 1991 Statement on Form S-1 (File No. 33-99904). 4.5 Form of Warrant issued in connection Incorporated by reference to Exhibit 4.6 with the Convertible Bridge Loan contained in the Company's Registration Agreement dated May 4, 1993 Statement on Form S-1 (File No. 33-99904). 4.6 Form of Warrant issued in connection Incorporated by reference to Exhibit 4.7 with the Bridge Loan Agreement dated contained in the Company's Registration June 1, 1995 Statement on Form S-1 (File No. 33-99904).
16 4.7 Warrant dated November 6, 1992 issued Incorporated by reference to Exhibit 4.8 to Comdisco, Inc. contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 4.8 Warrant Dated August 31, 1995 issued to Incorporated by reference to Exhibit 4.9 Comdisco, Inc. contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 4.9 Warrant dated September 3, 1993 issued Incorporated by reference to Exhibit 4.10 to Alex. Brown & Sons Incorporated contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 4.10 Warrant dated April 28, 1992 to purchase Incorporated by reference to Exhibit 4.11 40,938 shares issued to Edson Spencer, Jr. contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 4.11 Warrant dated April 28, 1992 to purchase Incorporated by reference to Exhibit 4.14 40,938 shares issued to Gary A. Peterson contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 4.12 Rights Agreement dated as of Incorporated by reference to Exhibit 4.1 December 3, 1996 between the Company contained in the Company's Current and Norwest Bank Minnesota, N.A. Report on Form 8-K filed December 3, 1996 (File No. 0-27600). 10.1 Lease dated October 7, 1991 between Incorporated by reference to Exhibit 10.1 Registrant and First Industrial L.P. contained in the Company's Registration (successor to MIG Kappa III Companies) Statement on Form S-1 (File No. 33-99904). 10.2 Equipment Lease dated November 6, Incorporated by reference to Exhibit 10.2 1992, as amended, between the Company contained in the Company's Registration and Comdisco, Inc. Statement on Form S-1 (File No. 33-99904). 10.3 Letter Agreement dated October 1, 1995 Incorporated by reference to Exhibit 10.3 between the Company and Marquette contained in the Company's Registration Electronics, Inc. Statement on Form S-1 (File No. 33-99904).
17 10.4 Employment Agreement dated October Incorporated by reference to Exhibit 10.4 1, 1991 between the Company and contained in the Company's Registration Sam B. Humphries Statement on Form S-1 (File No. 33-99904). 10.5 Non-Competition Agreement, dated Incorporated by reference to Exhibit 10.6 April 28, 1992 between the Company contained in the Company's Registration and Sam B. Humphries Statement on Form S-1 (File No. 33-99904). 10.6 Series D Convertible Preferred Stock Incorporated by reference to Exhibit 10.7 Purchase Agreement dated July 25, 1995 contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 10.7 Series E Convertible Preferred Stock Incorporated by reference to Exhibit 10.8 Purchase Agreement dated contained in the Company's Registration November 14, 1995 Statement on Form S-1 (File No. 33-99904). 10.8 Registration Rights Agreement, dated Incorporated by reference to Exhibit 10.9 April 28, 1992, as amended contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 10.9 Bridge Loan Agreement, dated June 1, Incorporated by reference to Exhibit 1995 10.10 contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 10.10 1989 Omnibus Stock Option Plan, as Incorporated by reference to Exhibit amended 10.11 contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 10.11 1991 Stock Option Plan, as amended Incorporated by reference to Exhibit 10.12 contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 10.12 Non-Statutory Stock Option Agreement Incorporated by reference to Exhibit dated August 2, 1995 between the 10.13 contained in the Company's Company and Sam B. Humphries Registration Statement on Form S-1 (File No. 33-99904). 10.13 Non-Recourse Promissory Note dated Incorporated by reference to Exhibit September 1, 1995 between the 10.14 contained in the Company's Company and Sam B. Humphries Registration Statement on Form S-1 (File No. 33-99904).
18 10.14 Pledge Agreement dated September 1, Incorporated by reference to Exhibit 1995 between the Company and Sam B. 10.15 contained in the Company's Humphries Registration Statement on Form S-1 (File No. 33-99904). 10.15 1993 Stock Option Plan, as amended Incorporated by reference to Exhibit 10.21 contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 10.16 Form of Non-Statutory Stock Option Incorporated by reference to Exhibit Agreement for Nonemployees pursuant 10.21 contained in the Company's to 1993 Stock Option Plan Registration Statement on Form S-1 (File No. 33-99904). 10.17 Form of Non-Statutory Stock Option Incorporated by reference to Exhibit Agreement for Nonemployee Directors 10.18 contained in the Company's pursuant to 1993 Stock Option Plan Registration Statement on Form S-1 (File No. 33-99904). 10.18 Form of Incentive Stock Option Incorporated by reference to Exhibit Agreement for Employees pursuant to 10.19 contained in the Company's 1993 Stock Option Plan Registration Statement on Form S-1 (File No. 33-99904). 10.19 Manufacturing Supply Agreement dated Incorporated by reference to Exhibit October 26, 1994 between the Company 10.20 contained in the Company's and SpecTran Specialty Optics Company Registration Statement on Form S-1 (File No. 33-99904). 10.20 Employee Stock Purchase Plan Incorporated by reference to Exhibit 99.1 contained in the Company's Registration Statement on Form S-8 (File No. 333-17493). 10.21 First Amendment to Lease Agreement Filed herewith electronically. dated April 26, 1996 between First Industrial Financing Partnership, L.P. and the Company. 10.22 Supply Agreement dated August 22, Filed herewith electronically. 1996 between the Company and Marquette Electronics, Inc. (1) 10.23 Manufacturing Supply Agreement dated Filed herewith electronically. September 10, 1996 between the Company and SpecTran Specialty Optics Company. (1).
19 10.24 Purchase Order dated February 21, 1997 Filed herewith electronically. between the Company and SeaMED Corporation. (1) 11.1 Statement regarding computation of per Filed herewith electronically. share loss 13.1 Excerpts from the Company's 1996 Filed herewith electronically. Annual Report to Shareholders incorporated by reference herein. 23.1 Independent Auditors' Consent Filed herewith electronically. 27.1 Financial Data Schedule Filed herewith electronically.
- --------------------- (1) Confidential treatment has been requested with respect to designated portions contained within document. Such portions have been omitted and filed separately with the Commission pursuant to Rule 24b-2 of the Securities and Exchange Act of 1934, as amended. 20 EX-3.2 2 DESIG., PREF., & RIGHTS OF SERIES A JUNIOR PREFERRED STOCK EXHIBIT 3.2 FORM of CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS of SERIES A JUNIOR PREFERRED STOCK of OPTICAL SENSORS INCORPORATED Pursuant to Section 151 of the Delaware General Corporation Law of the State of Delaware __________________ We, Sam B. Humphries, Chief Executive Officer, and Wesley G. Peterson, Chief Financial Officer, of Optical Sensors Incorporated, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), in accordance with the provisions thereof, DO HEREBY CERTIFY: That pursuant to the authority vested in the Board of Directors by the Certificate of Incorporation of the Corporation, the said Board of Directors on December 3, 1996, adopted the following resolution creating a series of two hundred fifty thousand (250,000) shares of Preferred Stock designated as Series A Junior Preferred Stock: RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of its Certificate of Incorporation, a series of Preferred Stock of the Corporation be and it hereby is created, and that the designation and amount thereof and the voting powers, preferences and relative, participation, optional and other special rights of the shares of such series, and the qualifications, limitation or restrictions thereof are as follows: Section 1. Designation and Amount. The shares of such series shall be ---------------------- designated as Series A Junior Preferred Stock, par value $.01 per share (the "Series A Junior Preferred Share(s)"), and the number of shares constituting such series shall be two hundred fifty thousand (250,000). Section 2. Dividends and Distributions. --------------------------- (a) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to Series A Junior Preferred Shares with respect to dividends, the holders of Series A Junior Preferred Shares shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of January, March, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date," commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a Series A Junior Preferred Share, in an amount per share (rounded to the nearest cent) equal to (subject to the provision for adjustment hereinafter set forth), 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $.01 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a Series A Junior Preferred Share. In the event the Corporation shall at any time after December 3, 1996 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of Series A Junior Preferred Shares were entitled immediately prior to such event under the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Series A Junior Preferred Shares as provided in paragraph (a) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock). (c) Dividends shall begin to accrue and be cumulative on outstanding Series A Junior Preferred Shares from the Quarterly Dividend Payment Date next preceding the date of issue of such Series A Junior Preferred Shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of Series A Junior Preferred Shares entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the Series A Junior Preferred Shares in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Series A Junior Preferred Shares entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. In addition to any other voting rights required ------------- by law, the holders of Series A Junior Preferred Shares shall have the following voting rights: (a) Subject to the provision for adjustment hereinafter set forth, each Series A Junior Preferred Share shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of 2 the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of Series A Junior Preferred Shares were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) If, on the date used to determine stockholders of record for any meeting of stockholders for the election of directors, a default in dividends on the Series A Junior Preferred Shares shall exist, the number of directors constituting the Board of Directors of the Corporation shall be increased by two, and the holders of the Series A Junior Preferred Shares shall have the right at such meeting, voting together as a single class, to elect two directors of the Corporation to fill such newly created directorships. Each director elected by the holders of Series A Junior Preferred Shares (herein called a "Series A Preferred Director") shall continue to serve as such director for the full term for which he shall have been elected, notwithstanding that prior to the end of such term a default in dividends shall cease to exist. Any Series A Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of the outstanding Series A Junior Preferred Shares, voting together as a single class, at a meeting of the stockholders, or of the holders of Series A Junior Preferred Shares called for such purpose. Thereafter, so long as a default in dividends on the Series A Preferred Shares shall exist (i) any vacancy in the office of a Series A Preferred Director may be filled (except as provided in the following clause (ii)) by an instrument in writing signed by the remaining Series A Preferred Director and filed with the Corporation and (ii) in the case of the removal of any Series A Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding Series A Junior Preferred Shares, voting together as a class, at the same meeting at which such removal shall be voted. Each director appointed as aforesaid by the remaining Series A Preferred Director shall be deemed, for all purposes hereof, to be a Series A Preferred Director. Whenever the term of office of the Series A Preferred Directors shall end and no default in dividends on the Series A Junior Preferred Shares shall exist, the number of directors constituting the Board of Directors of the Corporation shall be reduced by two. For the purposes of this Section 3(b), a "default in dividends" on the Series A Junior Preferred Shares shall be deemed to have occurred whenever there shall be an arrearage in the payment of any dividends to which the holders of the Series A Junior Preferred Shares are entitled to receive, whether or not any such dividends have been declared by the Board of Directors, for six consecutive quarters, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accrued dividends on all shares of Series A Junior Preferred Shares then outstanding shall have been paid through the last Quarterly Dividend Payment Date. At any time when such right to elect directors separately as a class shall have so vested, the Corporation may, and upon the written request of the holders of record of not less than 20% of the then outstanding total number of the Series A Junior Preferred Shares shall, call a special meeting of holders of such Series A Junior Preferred Shares for the election of directors. In the case of such a written request, such special meeting shall be held within 90 days after the delivery of such request, and, in either case, at the place and upon the notice provided by law and in the Bylaws of the Corporation; provided that the Corporation shall not be required to call such a special meeting if such request is received less than 120 days before the date fixed for the next ensuing annual or special meeting of stockholders of the Corporation. After the number of directors of the Corporation shall have been increased by two as hereinabove provided, the number as so increased may thereafter be further increased or decreased in such manner as may be permitted by the Certificate of Incorporation or By-laws, provided that no such action 3 shall impair the right of the holders of Series A Junior Preferred Shares to elect and to be represented by two directors as herein provided. (c) Except as otherwise provided herein, in the Certificate of Incorporation of the Corporation or by law, the holders of Series A Junior Preferred Shares and the holders of Common Stock (and the holders of shares of any other series or class entitled to vote thereon) shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. Section 4. Certain Restrictions. -------------------- (a) Whenever any dividends or other distributions payable on the Series A Junior Preferred shares as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on Series A Junior Preferred Shares outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any share ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Preferred Shares; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Preferred Shares, except dividends paid ratably on the Series A Junior Preferred Shares and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Preferred Shares, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Junior Preferred Shares; or (iv) purchase or otherwise acquire for consideration any Series A Junior Preferred Shares, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any Series A Junior Preferred Shares ----------------- purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors. 4 Section 6. Liquidation, Dissolution or Winding Up. In the event of any -------------------------------------- voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of Series A Junior Preferred Shares shall be entitled to receive the greater of (a) $1,000.00 per share, plus accrued dividends to the date of distribution, whether or not earned or declared, or (b) an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount to be distributed per share to holders of Common Stock. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the amount to which holders of Series A Junior Preferred Shares were entitled immediately prior to such event pursuant to clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, Etc. In case the Corporation shall -------------------------- enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the Series A Junior Preferred Shares shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of Series A Junior Preferred Shares shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The Series A Junior Preferred Shares shall not ------------- be redeemable. Section 9. Ranking. The Series A Junior Preferred Stock shall rank junior ------- to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. Section 10. Fractional Shares. Series A Junior Preferred Shares may be ----------------- issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Preferred Shares. Section 11. Amendment. The Certificate of Incorporation of the --------- Corporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Preferred Shares so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding Series A Junior Preferred Shares, voting separately as a class. 5 IN WITNESS WHEREOF, the undersigned have executed and subscribed this Certificate and do affirm the foregoing as true under penalties of perjury this 3rd day of December, 1996. /s/ Sam B. Humphries ------------------------- Sam B. Humphries Chief Executive Officer ATTEST: /s/ Wesley G. Peterson - ---------------------------- Wesley G. Peterson Chief Financial Officer 6 EX-10.21 3 FIRST AMENDMENT TO LEASE AGREEMENT EXHIBIT 10.21 FIRST AMENDMENT TO LEASE AGREEMENT TO THE LEASE dated October 7, 1991, by and between MIG III-Kappa Corporation and now assigned to First Industrial Financing Partnership, L.P. (a Delaware Limited Partnership) as Landlord, and Optical Sensors Incorporated (a Delaware corporation and successor to Optical Sensors for Medicine, Inc.) as Tenant. THIS AMENDMENT TO LEASE, entered into and made as of April 26, 1996, by and between First Industrial Financing Partnership, L.P., as Landlord and Optical Sensors Incorporated, as Tenant. WITNESSETH: WHEREAS, Landlord and Tenant have heretofore entered into a certain Lease dated October 7, 1991 (the "Lease") covering that certain space at 7615 Golden Triangle Drive, Suite A, Eden Prairie, MN 55344 (the "Premises"), upon terms and conditions described in said Lease; and WHEREAS, Landlord and Tenant desire to amend said Lease as described below: 1. The term of the Lease as set forth in Section 1.3 thereof shall be extended through November 30, 1999. 2. Monthly Base Rent as set forth in Section 1.4 of the Lease shall be as follows: December 1, 1996 - November 30, 1999 $11,888.00 per month 3. Landlord will, at Landlord's sole cost and expense, provide the improvements to the Premises described on Exhibit A attached hereto. 4. Landlord acknowledges that Tenant uses the chemicals set forth on Exhibit B hereto in connection with its business and that such chemicals may constitute "Hazardous Substances" as defined in Section 14.8 of the Lease. Landlord agrees that Tenant's use of such chemicals will not constitute a breach of or default under the Lease as long as Tenant complies with all federal, state and local laws and regulations applicable to the use of such chemicals. 5. Except as hereinabove set forth, all terms, provisions and covenants of the Lease shall remain unchanged and in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date and year first above written. LANDLORD: TENANT: FIRST INDUSTRIAL PARTNERSHIP, L.P., OPTICAL SENSORS INCORPORATED, a Delaware Limited Partnership a Delaware corporation By: First Industrial Finance Corporation, a Maryland corporation, its general partner By: /s/ Duane Lund By: /s/ Sam B. Humphries ------------------------------- ------------------------------- Its: Senior Regional Director Its: President and CEO ------------------------------ ------------------------------ EX-10.22 4 SUPPLY AGREEMENT EXHBIT 10.22 SUPPLY AGREEMENT This Agreement, made and entered into at Milwaukee, Wisconsin this 22nd day of August, 1996, by and between Marquette Electronics, Inc., a Wisconsin corporation, whose principal offices are located at 8200 West Tower Avenue, Milwaukee, Wisconsin 53223 ("Marquette") and Optical Sensors Incorporated, a Delaware corporation ("OSI") whose principal offices are located at 7615 Golden Triangle, Suite A, Minneapolis, Minnesota 55344; WITNESSETH: WHEREAS, Marquette and OSI were parties to a certain Cross Development and Cross Supply Agreement dated July 8, 1992 which agreement was amended on October 31, 1994 and terminated by letter agreement dated September 7, 1995 (the original agreement and October 31, 1994 amendment hereinafter collectively referred to as the "Cross Development Agreement" and the letter agreement dated September 7, 1995 being referred to as the "September Letter") pursuant to which the parties contributed to the joint development of a blood chemistry sensor and analysis system; WHEREAS, pursuant to the terms of the September Letter, Marquette transferred to OSI its technology so developed under the terms and conditions therein set forth, reserving onto itself certain rights with respect to the "Purchased Technology" and the "Marquette Product" as defined in the Cross Development Agreement; WHEREAS, Marquette, under its reserved rights, will shortly commence the manufacture of the Arterial Blood Gas Module (the "ABG Module") for use in Marquette's monitoring systems by use of the Purchased Technology and OSI has requested that Marquette manufacture the ABG Module and sell the ABG Module to OSI upon the terms hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants herein contained the parties agree as follows: 1. Manufacture. Marquette shall manufacture in accordance with the ----------- specifications for the ABG Module set forth in Exhibit A (the "ABG Module Specifications") and sell to OSI such quantities of the ABG Module as OSI orders pursuant to Section 5 of this Agreement. 2. Design Changes. Marquette may modify the specifications from time to -------------- time upon not less than 60 days prior written notice to OSI. 3. Price. The purchase price payable by OSI to Marquette for each ABG ----- Module shall be the sum of $________ per module, plus sales, use, excise or similar taxes, that may be payable with respect to each transaction. Marquette shall have the right, as of each anniversary date of this Agreement, to change the unit price of the ABG Module by delivering written notice of such change to OSI not less than thirty days prior to the end of the Contract Year. For purposes of this Agreement, a Contract Year shall be the period ending on the first anniversary of the execution of this Agreement and each 365 day period to the next anniversary date. [Portions of this section have been omitted pursuant to a request for confidentiality under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. A copy of this Agreement with this section intact has been filed separately with the Securities and Exchange Commission.] 4. Forecasts. OSI will furnish Marquette with a rolling twelve month --------- forecast, the first of which shall be delivered to Marquette coincident with the execution of this Agreement and thereafter succeeding forecasts shall be delivered to Marquette as of the first day of the third full calendar month succeeding the date of this Agreement and as of the first day of each third month thereafter, each such forecast to be delivered within fifteen (15) days prior to the first day of the first month of the calendar quarter. The first three months of such forecast shall constitute a firm order by OSI to purchase the number of ABG Modules covered by each such forecast. The last nine months of each forecast shall constitute a non-binding good faith estimate of expected orders for the ABG Module covered by the forecast. Marquette will use reasonable efforts to ship ABG Modules ordered pursuant to the forecasts provided that OSI's purchasing history substantially conforms to the forecast. 5. Purchase Order. OSI will submit purchase orders for ABG Modules -------------- ordered pursuant to its forecast at the time that each forecast is updated. Such purchase order shall cover the portion of the forecast that has become a firm order under Section 4 of this Agreement. Provided that OSI is not in default hereunder with respect to its payment obligations or otherwise, each purchase order delivered to Marquette during the term of this Agreement, without necessity for acceptance by Marquette, shall give rise to a contract for the purchase of ABG Modules under the terms set forth in this Agreement to the exclusion of any additional or contrary terms set forth in any purchase order, acceptance, invoice or other document. 6. Delivery and Shipment. All deliveries of ABG Modules shall be F.O.B. --------------------- shipping point. All risk of loss or damage to ABG Modules shall pass to OSI upon delivery to a common carrier at the shipping point. Marquette will make all arrangements for shipment of ABG Modules in accordance with OSI's shipping instructions. OSI shall insure each shipment of ABG Modules with a reputable insurer for the full invoice value of such shipment. Marquette reserves all rights with respect to delivered ABG Modules permitted by applicable law, including, without limitation, the right of reclusion, repossession, resale and stoppage in transit until the full amount due from OSI in respect of such delivered ABG Modules has been paid. Title to the ABG Modules shall pass to OSI upon payment in full. 7. Invoices and Payment. Marquette will invoice OSI upon shipment of ABG -------------------- Modules. All invoices shall be due and payable in full within thirty (30) days from the date of invoice. Interest at the rate of 1.5% per month, or such lesser rate as is the maximum rate of interest permitted by law, shall be charged on all overdue accounts. Any duties, taxes of other governmental charges imposed by any governmental entity upon the importation, sale, purchase, resale, shipment or possession of the ABG Modules shall be borne by OSI. Nothing contained in this Agreement or any other agreement or understanding between the parties shall prevent OSI from freely and unilaterally setting resale prices for the ABG Modules. 8. Inspection. OSI shall inspect the ABG Modules and notify Marquette ---------- within thirty days of receipt of any ABG Modules that do not conform to the ABG Module Specifications or the purchase order covering the ABG Modules. Failure to notify Marquette in writing within 2 thirty (30) days of receipt of a ABG Module of any such nonconformance will constitute conclusive acceptance of such ABG Module by OSI. The parties shall consult with respect to the appropriate solution to the asserted nonconformance including, but not limited to, reinspection and rework to be performed by OSI or Marquette at Marquette's expense, or sale of such ABG Module under appropriate conditions for use of such ABG Modules for demonstration or testing purposes, in each case with appropriate adjustments to the purchase price to be paid by OSI. If no such arrangements are agreed to by the parties and if such ABG Module is determined to be nonconforming, Marquette shall credit OSI with the purchase price of such ABG Modules. 9. Warranties. Marquette warrants to OSI that the ABG Module will be ---------- manufactured in accordance with the ABG Module Specifications and will be free from defects in material and workmanship for a period of one year from the date of shipment. Marquette will repair or replace, at its option and cost, any defective ABG Module. Marquette warrants that the ABG Modules will be manufactured in compliance with all applicable federal, state and local laws and regulations pertaining to the manufacture of medical devices including, but not limited to, the Food, Drug and Cosmetic Act, as amended, and U.S. Food and Drug Administration (the "FDA") and Good Manufacturing Practice for Medical Devices regulations ("GMP"). 10. Limitation of Liability. The warranties set forth in Section 9 are ----------------------- intended solely or the benefit of OSI. All claims hereunder shall be made by OSI and may not be made by OSI's customers. THE WARRANTIES SET FORTH IN SECTION 9 ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WHICH ARE HEREBY DISCLAIMED AND EXCLUDED BY MARQUETTE, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. Marquette will not be liable for any loss or damage caused by delay in furnishing ABG Modules under this Agreement. The sole and exclusive remedies for breach of any and all warranties with respect to the ABG Modules shall be limited to the remedies provided in Section 9. IN NO EVENT WILL MARQUETTE'S LIABILITY OF ANY KIND INCLUDE ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL LOSSES OF DAMAGES, EVEN IF MARQUETTE HAD BEEN ADVISED OF THE POSSIBILITY OF SUCH POTENTIAL LOSS OR DAMAGES. 11. Labeling and Trademarks. Marquette shall mark the ABG Module with the ----------------------- name "Optical Sensors" or such other name as OSI requests in accordance with OSI's instructions. OSI grants Marquette a nonexclusive, nontransferable, royalty-free license to use OSI's trademarks to the extent necessary to mark the ABG Module in accordance with OSI's instructions. Marquette shall not acquire any right, title or interest in OSI's trademark, and Marquette shall cease using OSI's trademark upon termination of this Agreement. 12. Regulatory Matters. ------------------ (a) Complaints. Each party will forward to the other copies of customer ---------- complaints and medical device reports ("MDR") relating to events required to be reported by the FDA in accordance with 21 CFR Part 803 relating to the manufacture and operation of the ABG Module, and each party will cooperate fully with the other 3 party in investigating and resolving such complaints, including any necessary testing and analysis of the ABG Module. (b) Registration. Marquette has registered or will timely register with ------------ the FDA as a Contract Medical Device manufacture, or cause to be timely registered with the FDA, in accordance with 21 CFR Part 807, each establishment which Marquette or a subcontractor of Marquette intends to manufacture and/or repair the ABG Module. (c) FDA Inspection Reports. Marquette will provide OSI with copies of any ---------------------- FDA Form 483 observations, follow-up earning letters and/or close-out reports for those portions of GMP compliance inspection reports resulting specifically to the manufacture of ABG Modules for any facility where ABG Modules are manufactured. 13. Recalls. The parties agree to establish a procedure which will enable ------- each ABG Module purchased by OSI under this Agreement to be located in the event of a recall, OSI agreeing to maintain records of the serial number and revision levels for each ABG Module sold to a customer. Each party agrees to promptly notify the other party of any event that may lead to a ABG Module recall or which may be required to be reported under the Medical Device Reporting regulations of the FDA. OSI will bear all expenses of any ABG Module recall mandated by the FDA or other administrative authority having like functions in countries other than the United States. 14. Confidentiality. Each party acknowledges and agrees that all the --------------- information provided by the other party that is marked as proprietary or confidential or which by its nature or the context in which it is given should reasonable by understood to be confidential shall be deemed "Confidential Information" for purposes of this Agreement. Each party agrees not to use any Confidential Information for any purpose other than as permitted or required for performance by it under this Agreement and not to disclose or provide any Confidential Information to any third party and to take all necessary measures to prevent any such disclosure by its employees, agents, contractors or consultants. Upon request or termination of this Agreement, each party will return all such Confidential Information of the other party to the other party. Each party's obligations under this Section 14 shall survive termination of this Agreement. 15. Indemnification. Marquette agrees to indemnify and hold harmless OSI --------------- and its affiliates, officers, directors, shareholders, employees and agents, from and against all costs, claims, losses, damages, liability and expenses (including, without limitations, reasonable attorney's fees) incurred on account of any injury to persons or property arising out of (i) any failure by Marquette to manufacture an ABG Module in accordance with the ABG Module Specifications or (ii) other manufacturing defects, unless in any such case such costs, claims, losses, damages, liability or expenses result in the negligence or willful misconduct of OSI. OSI agrees to indemnify and hold harmless Marquette and its affiliates, officers, directors, shareholders, employees and agents from and against all costs, claims, losses, damages, liability and expenses (including without limitation, reasonable attorneys fees) incurred on account of any 4 injury to person or property arising out of the design or absence of warning labels appended to the ABG Module, unless in each case such costs, claims, losses, damages, liability or expenses result in the negligence or willful misconduct of Marquette. 16. Insurance Requirements. Each party will carry product liability ---------------------- insurance covering any loss, damage, expense or liability incurred or suffered by any party other than OSI or Marquette arising out of any use of a Product. Such policy or policies shall (a) have aggregate limits of liability of not less than $5,000,000 with respect to any incident or occurrence and of not less than $20,000,000 in aggregate; (b) name both OSI and Marquette as insured parties; (c) provide for a deductible or retained amount of not more than $500,000; and (d) provide that such policy may not be canceled except upon not less than 30 days' written notice to both Marquette and OSI. Each party shall provide such evidence of the effectiveness of such insurance to the other party as may be reasonably requested. 17. Intellectual Property Rights. Marquette acknowledges that all ---------------------------- intellectual property rights relating to the ABG Module are the sole and exclusive property of OSI, subject only to the rights reserved by Marquette pursuant to the September Letter. 18. Term and Termination. This Agreement shall take effect as of the -------------------- date hereof and shall continue in force for a period of two years and shall automatically renew for additional one-year periods from the end of each Contract Year unless terminated by either party upon not less than 60 days' written notice prior to the end of such Contract Year. Notwithstanding the foregoing, either party may terminate this Agreement:
(a) by giving written notice to the other party in the event the other party is in material breach of this Agreement and shall have failed either to cure such material breach within thirty (30) days of receipt of written notice thereto or, if cure is not possible within thirty (30) days, to have taken reasonable steps to commence to cure such material breach within such thirty (30) day period; or (b) at any time by giving written notice to the other party, which notice shall be effective upon dispatch, should the other party file a bankruptcy petition or have a bankruptcy petition filed against it which is not discharged within thirty (30) days, be declared bankrupt, become insolvent, make an assignment for the benefit of creditors or go into liquidation or receivership. 19. Rights and Obligations Upon Termination. In the event of the --------------------------------------- termination of this Agreement for any reason, OSI will remain responsible for payment of all ABG Modules for which it has issued purchase orders and delivery has been made prior to the effective date of termination and for the first three months of the most recently submitted rolling forecast. 20. Miscellaneous. This Agreement shall be governed by, interpreted ------------- and construed in accordance with the laws of Wisconsin without giving effect to the principles of conflicts of laws. Neither party shall assign its rights or delegate its duties under this Agreement without the prior written consent of the other party; provided that either party may assign any or all of its rights and obligations under this Agreement to any successor in interest of all or substantially all of the 5 business of such party my merger, operation of law, assignment, purchase or otherwise or to any of its affiliates. All terms and conditions of this Agreement shall be binding on and inure to the benefit of the successors and permitted assigns of the parties. This Agreement does not make either party the employee, agent or legal representative of the other for any purpose whatsoever. Neither party is granted any right or authority to assume or to create any obligation or responsibility, express or implied, on behalf or in the name of the other party. In fulfilling its obligations pursuant to this Agreement, each party shall be acting as an independent contractor. This Agreement, including the exhibits hereto, all of which are attached to and incorporate into this Agreement, constitutes the entire agreement of the parties with respect to he subject matter of this Agreement, and supersedes all previous proposals, negotiations, conversations or discussions, oral or written, between the parties related to this Agreement. Any controversy or claim arising out of or relating to this -Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Rules of the American Arbitration Association, and judgment upon the reward rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The parties have executed this Agreement on the day and year first above written. MARQUETTE ELECTRONICS, INC. By: /s/ Fred Robertson ---------------------------- OPTICAL SENSORS INCORPORATED By: /s/ Sam B. Humphries ---------------------------- 6 Exhibit A [The material in Exhibit A has been omitted, in its entirety, pursuant to a request for confidentiality under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. A copy of this Agreement with this Exhibit intact has been filed separately with the Securities and Exchange Commission.] A-1 EX-10.23 5 MANUFACTURING SUPPLY AGREEMENT EXHIBIT 10.23 MANUFACTURING SUPPLY AGREEMENT THIS AGREEMENT is entered into effective as of September 10, 1996, between Optical Sensors Incorporated, a Delaware corporation, with its principal place of business at 7615 Golden Triangle Drive, Technology Park Five, Eden Prairie, Minnesota 55344 ("OSI") and SpecTran Specialty Optics Company, a Delaware corporation, with its principal place of business at 150 Fisher Drive, P.O. Box 1260 Avon, Connecticut 06001 ("SSOC"). RECITALS A. The parties have previously entered into a Manufacturing Supply Agreement, dated October 26, 1994 (the "Prior Agreement"), relating to the supply of a Hybrid Interconnect System which is used with the current version of OSI's arterial blood gas measuring device. B. OSI is developing a new arterial blood gas measuring device in a manner that will not require the of use the Hybrid Interconnect System (as defined in the Prior Agreement) with future versions of OSI's device. C. The parties desire to enter into this Agreement for the manufacture and supply of a fiber optic cable that will be used with OSI's new arterial blood gas measuring device. In consideration of the mutual covenants set forth below, the parties mutually agree as follows: ARTICLE 1. DEFINITIONS The following words, terms and phrases, where capitalized, shall have the meanings assigned to them in this Article 1, unless the context requires otherwise. 1.1. Annual Forecast. "Annual Forecast" shall mean OSI's annual forecast of the --------------- quantity of Products that OSI anticipates ordering each year during the term of this Agreement. 1.2. Confidential Information. "Confidential Information" shall have the ------------------------ definition given such term in Section 7.1. 1.3. Leadtime. "Leadtime" shall mean the minimum time in which SSOC shall be -------- required to deliver the Product ordered by OSI following SSOC's receipt of a purchase order from OSI, which shall be eight (8) weeks. 1.4. Product. "Product" shall mean the new patient cable assembly for OSI's ------- arterial blood gas measuring system, which is described in the system specifications set forth in Exhibit A and consisting of the components set forth in Exhibit B. 1.5. Specifications. "Specifications" shall mean the latest revision levels for -------------- the component parts of the Product, as set forth on Exhibit B, and the system specifications for the Product, as set forth in Exhibit A, which may be amended from time to time upon the mutual agreement of the parties. ARTICLE 2. MANUFACTURE OF THE PRODUCT 2.1. Agreement to Manufacture and Purchase. SSOC shall manufacture and sell to ------------------------------------- OSI, and OSI shall purchase from SSOC, such quantities of the Product for which OSI may issue purchase orders under this Agreement; provided, however, that OSI shall purchase a minimum of ____________ (_____) units of the Product during the term of this Agreement, as set forth in Section 6.1. OSI may authorize third parties to purchase the Product directly from SSOC, and such purchases shall be counted as if made by OSI for purposes of determining whether or not OSI has purchased the ______ unit minimum quantity. In no event will OSI be obligated to purchase more than ______ units of the Product (including units purchased by third parties) under this Agreement. Subject to the foregoing minimum purchase requirement, OSI shall not be restricted from purchasing the Product from other third party suppliers. SSOC shall manufacture the Product in accordance with the Specifications, as may be modified from time to time upon mutual agreement of the parties. OSI will supply to SSOC or provide for direct supply to SSOC, at no cost to SSOC, those components of the Product identified on Exhibit B as being supplied by OSI in sufficient quantities and leadtime to enable SSOC to manufacture and deliver the Product in accordance with the forecast described in Section 3.3. SSOC will procure the components of the Product that are so indicated on Exhibit B. [Portions of this section have been omitted pursuant to a request for confidentiality under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. A copy of this Agreement with this section intact has been filed separately with the Securities and Exchange Commission.] 2.2. Engineering and Development. SSOC will perform all design and development --------------------------- work necessary to manufacture the Product in accordance with the Specifications. SSOC will deliver to OSI copies of documentation as follows: the Specifications, toleranced and dimensioned mechanical drawings of the Product and its subcomponents, test procedures, performance of the Product against the test criteria, and bill of materials including supplier and supplier part numbers. OSI shall be the exclusive owner of all such documentation; provided, however, that SSOC shall be permitted to retain one (1) copy of such documentation and to use such documentation for fiber optic cables used in non-medical applications (i.e., applications not involving the diagnosis or treatment of conditions in humans). The parties acknowledge and agree that SSOC owns the crimp and cleave technology developed under the Prior Agreement and certain manufacturing assembly processes for the assembly of fiber optic cables which will be used in connection with the Product and which shall remain the exclusive property of SSOC. SSOC acknowledges that OSI does not desire to receive, be given access to or view any aspect of SSOC's proprietary manufacturing process, and SSOC agrees not to disclose in any manner any 2 aspect of such proprietary manufacturing process to OSI. Notwithstanding any other provision of this Agreement, if SSOC makes any such disclosure to OSI without declaring in advance (and confirming in writing within 30 days thereafter) that the information relating to such manufacturing process being disclosed is Confidential Information (as defined in Section 7.1), OSI shall not be prohibited from using or disclosing to third parties such manufacturing process. 2.3. Engineering Changes. OSI may from time to time direct that modifications ------------------- be made to the design of the Product. SSOC will use commercially reasonable efforts to make such modifications as soon as practicable upon receipt of such written notice from OSI. SSOC will not make any changes in the design of the Product or any material changes in the tooling or manufacturing processes related to the production of the Product, without the prior written consent of OSI, which will not be unreasonably withheld. 2.4. Equipment and Tooling. The parties acknowledge that certain equipment and --------------------- tooling used by SSOC for the manufacture of the Hybrid Interconnect System under the Prior Agreement and the manufacture of the Product is owned by OSI, which is listed on Exhibit C, and SSOC will deliver such equipment and tooling to OSI upon termination or expiration of the Prior Agreement, at OSI's expense. 2.5. Inspection Rights. During the term of this Agreement, OSI shall have the ----------------- right to witness and inspect at SSOC's facility, under the supervision of SSOC personnel, during normal business hours and one week after written notice from OSI to SSOC requesting an inspection (unless SSOC otherwise permits an earlier inspection), the manufacture and production of the Product for the purpose of verifying compliance with the Specifications and applicable law; provided, however, that SSOC shall have the right, in its sole discretion, to determine the regions of the facility that may be inspected so long as the ability of OSI to adequately verify compliance with the Specifications and applicable law is not materially impaired. ARTICLE 3. ORDERS FOR PRODUCT 3.1. Purchase Orders. OSI shall submit purchase orders for the Product to SSOC --------------- by written notice. All purchase orders shall cover a minimum of fifty (50) units of the Product. 3.2. Acceptance of Orders. All purchase orders are subject to approval and -------------------- acceptance by SSOC at its offices in Avon, Connecticut by written notice to OSI; provided, however, that the failure of SSOC to respond in writing to a purchase order within ten (10) business days of receipt thereof shall result in such purchase order being deemed approved and accepted by SSOC. Each purchase order, upon acceptance by SSOC, shall give rise to a contract for the purchase of Product under the terms set forth in this Agreement to the exclusion of any additional or contrary terms set forth in SSOC's confirmation of 3 acceptance, invoice or other document not signed by an authorized employee of OSI. Any terms of the purchase order that are contrary or in addition to the terms of this Agreement shall be ineffective. 3.3. Rolling and Annual Forecasts. Beginning on the effective date of this ---------------------------- Agreement, OSI shall furnish to SSOC within ten (10) business days of each month a written rolling twelve (12) month forecast of its expected orders of the Product. The first three (3) months of each forecast shall constitute a firm order to purchase the Product specified. The last nine (9) months of each forecast shall constitute a non-binding good faith estimate of expected orders for the Product. 3.4. Delivery Schedule. SSOC shall not deliver the Product later or ----------------- substantially earlier than the dates indicated on each purchase order, provided, that such requested delivery dates shall not be earlier than the Leadtime; provided, however, that if the actual purchase order substantially exceeds OSI's forecast, SSOC shall be granted a reasonable extension of the delivery date sufficient to fulfill such excess order. 3.5. Delivery and Shipment. All deliveries of the Product hereunder shall be --------------------- F.O.B. shipping point (in good condition and packaged for shipment in accordance with SSOC's standard practices). Title and all risk of loss or damage to the Product shall pass to OSI upon delivery to a common carrier at the shipping point. SSOC shall make all arrangements for shipments of the Product in accordance with OSI's shipping instructions. Unless otherwise agreed in writing, SSOC shall prepay all freight costs for each shipment, and such costs shall be listed separately in SSOC's commercial invoice and reimbursed to SSOC by OSI in accordance with Section 4.3 below. ARTICLE 4. PRICES AND PAYMENT 4.1. Prices. The price to be paid by OSI for the first _____________ (_____) ------ units of the Product purchased pursuant to this Agreement shall be $______ per unit. The parties will negotiate in good faith the price to be paid by OSI for any additional units of the Product purchased pursuant to this Agreement. [Portions of this section have been omitted pursuant to a request for confidentiality under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. A copy of this Agreement with this section intact has been filed separately with the Securities and Exchange Commission.] 4.2. Non-Recurring Engineering Charges. OSI shall pay SSOC a total of $96,650 --------------------------------- in engineering charges for the development of the Product contemplated by Section 2.2, payable as follows: $10,000 paid prior to the execution of this Agreement (receipt of which is acknowledged by SSOC); $20,000 upon delivery to and acceptance by OSI of a prototype of the cable portion of the Product; $20,000 upon delivery to OSI of a valid test report showing that the cable portion of the Product meets the Specifications; $20,000 upon delivery to and acceptance by OSI of a prototype of the Product; $20,000 upon 4 delivery to OSI of a valid test report showing that the entire Product meets the Specifications; and $6,650 upon delivery to and acceptance by OSI of ten (10) final assemblies of the Product that meet Specifications. 4.3. Engineering Changes. The price set forth in Section 4.1 is based on a ------------------- Product manufactured and assembled according to the Specifications, as amended from time to time in accordance with this Agreement. In the event that OSI requests an engineering change pursuant to Section 2.3 above (i) OSI shall reimburse SSOC for the reasonable expenses, including labor, incurred by SSOC in effecting the engineering change, and (ii) the parties shall mutually agree on an increase or decrease in the unit price for the Product as a result of such change. In addition, in the event of a Product engineering change, OSI shall be obligated to purchase from SSOC the amount of OSI's three (3) month firm order outstanding, as of the date of written notice of such change, pursuant to Section 3.3 above for such Product as is made obsolete by the engineering change (which shall be delivered in accordance with Section 3.4 above) and raw materials or supplies not incorporated into final the Product subject to noncancellable order by SSOC with its vendors (or if is cancellable OSI will reimburse SSOC for any cancellation or related charges); provided that OSI's obligation to purchase raw materials or supplies shall be limited to quantities necessary to produce Products for a six month period based on OSI's most recent forecast at the time SSOC purchases such raw materials or supplies; provided further that OSI's obligation to purchase the three (3) month firm order or raw material and supplies shall be reduced (or eliminated) in the event and to the extent that OSI provides SSOC advance written notice of an engineering change. 4.4. Invoices and Payment. SSOC shall invoice OSI upon shipment of Products -------------------- hereunder for the amount payable by OSI for such items and for freight prepaid by SSOC and reimbursable by OSI. All such invoices shall be due and payable in full within thirty (30) days from the date of invoice. All payments shall be made in U.S. dollars. Interest at the rate of 1.5% per month, or such lesser rate as is the maximum rate of interest permitted by law, shall be charged on all overdue accounts. In the case of a payment default, OSI shall reimburse SSOC for all reasonable costs of collection, including, without limitation, reasonable attorneys' fees and other litigation and settlement costs. ARTICLE 5. ACCEPTANCE/REJECTION OF PRODUCT AND WARRANTY 5.1. Acceptance/Rejection of Product. OSI shall have the right to reject any ------------------------------- Product that does not conform to Specifications and the terms of this Agreement. Within thirty (30) days of receiving a nonconforming shipment of the Product at its facility in Eden Prairie, Minnesota, OSI shall provide SSOC a written notice of rejection. OSI shall state its reasons for rejecting the Product in such notice. Any Product not rejected by OSI pursuant to this Section 5.1 shall be deemed accepted. A sample of a rejected Product lot shall be returned by OSI to SSOC as soon as possible following delivery of a rejection 5 notice. SSOC agrees to analyze the rejected Product within two weeks after receipt thereof, and the parties shall use their best efforts to mutually agree upon an acceptable disposition of the rejected item. Upon agreement between the parties as to the disposition of the rejected item, SSOC shall as soon as practicable deliver additional or substitute Product without charge to OSI at the shipping address specified by OSI in the initial purchase order or as otherwise agreed by the parties. 5.2. Warranty. SSOC warrants that the Products shall conform to the -------- Specifications, as the same may be amended from time to time. THIS WARRANTY IS EXCLUSIVE AND SSOC MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. SSOC warranties made in connection with any sale shall not be effective if SSOC has determined, in its sole and reasonable discretion, that OSI has misused the Product. OSI assumes all risk and liability resulting from use of the Product whether used singularly or in combination with other products. SSOC's sole and exclusive liability and OSI's exclusive remedy with respect to Product found to be defective or non-conforming shall be the replacement of such Product without charge or refund of the purchase price, in SSOC's sole discretion, upon the disposition of such Product in accordance with SSOC instructions. SSOC SHALL NOT BE LIABLE FOR ANY INCIDENTAL, CONSEQUENTIAL, SPECIAL, INDIRECT OR LIQUIDATED DAMAGES (INCLUDING, BUT NOT LIMITED TO, DAMAGES FOR LOST PROFITS OR INJURY TO PERSON OR PROPERTY). OSI assumes all responsibility and liability for injury or damages resulting from its handling, possession, use or sale of the Product and agrees to indemnify and hold harmless SSOC from and against any and all claims, losses, liabilities and expenses (including reasonable attorneys' fees and other litigation or settlement costs) arising out of such handling, possession, use or sale. ARTICLE 6. TERM AND TERMINATION 6.1. Term. This Agreement shall take effect as of the date first written above ---- and shall continue in force for a term of two (2) years from the date that OSI receives ten (10) final assemblies of the Product that meet Specifications, unless earlier terminated pursuant to Section 6.2. 6.2. Termination. Notwithstanding the provisions of Section 6.1 above, this ----------- Agreement may be terminated in accordance with the following provisions: (a) either party may terminate this Agreement by giving written notice to the other party in the event the other party is in material breach of this Agreement and shall have failed either to cure such material breach within thirty (30) days of receipt of written notice thereof or, if cure is not possible within thirty (30) days, to have 6 taken reasonable steps to commence to cure such material breach within such thirty (30) day period; or (b) either party may terminate this Agreement, at any time by giving written notice to the other party, which notice shall be effective upon dispatch, should the other party file a petition of any type as to its bankruptcy or have a bankruptcy petition filed against it which is not discharged within thirty (30) days, be declared bankrupt, become insolvent, make an assignment for the benefit of creditors, go into liquidation or receivership, or otherwise lose legal control of its business; or (c) OSI may terminate this Agreement immediately upon written notice to SSOC if it fails to deliver three line items in any purchase order within sixty (60) days of the date SSOC acknowledges such order pursuant to Section 3.2, in accordance with the Leadtime specified in Sections 1.3 and 3.4; provided that OSI has given SSOC thirty (30) days' prior written notice that such order is at least thirty (30) days past due; and provided further that OSI has fully complied with Section 3.3. 6.3. Rights and Obligations Upon Termination. In the event of the termination --------------------------------------- of this Agreement for any reason, the parties shall have the following rights and obligations: (a) OSI shall remain responsible for payment of all units of the Product for which it has issued purchase orders and delivery has been made prior to the effective date of termination and for the first three months of the most recently submitted rolling forecast (which shall be delivered in accordance with Section 3.4 above); and (b) Each party agrees to cease using the Confidential Information disclosed to it by the other party for any purpose and return to the other party all documentation relating to the Confidential Information within sixty (60) days after termination and to destroy all other copies of such documentation, or to make such disposition thereof as instructed by the other party; and (c) Each party's obligations under Article 7 shall survive termination of this Agreement for a period of three years after termination. ARTICLE 7. CONFIDENTIALITY 7.1. Confidential Information. Except as set forth in Section 2.2, ------------------------ "Confidential Information" means any information which is disclosed by either party in any tangible form and is clearly labeled or marked as confidential, proprietary or its equivalent, or information which is disclosed orally or visually, is designated confidential, proprietary or its equivalent at the time of its disclosure and is reduced to writing and clearly marked or labeled as confidential, proprietary or its equivalent within thirty (30) days of disclosure. 7 7.2. Non-Disclosure. Neither party, nor its employees, will disclose any -------------- Confidential Information to any third party or use Confidential Information of the other party except as is necessary to perform its obligations under this Agreement. The party receiving Confidential Information will make the Confidential Information available only to its employees who have a need for such access. The obligations of each party regarding disclosure and use of Confidential Information shall be deemed to be satisfied by a party if such party exercises the same degree of care used to restrict disclosure and use of its own proprietary information. Each party represents and warrants to the other party that it has established and follows reasonable and customary procedures prevent unauthorized use and disclosure of its own proprietary information. All proprietary and copyright notices in the original must be affixed to copies or partial copies. 7.3. Exceptions. The receiving party shall not be obligated to maintain any ---------- information in confidence or refrain from use, if: (a) The information was in the receiving party's possession or was known to it prior to its receipt from the disclosing party; (b) The information is or becomes public knowledge without the fault of the receiving party; (c) The information is or becomes rightfully available on an unrestricted basis to the receiving party from a source other than the disclosing party; (d) The information becomes available on an unrestricted basis to a third party from the disclosing party or from someone acting under its control; or (e) The information is required to be disclosed by court or government order. 7.4. No Transfer of Ownership. No license or transfer of ownership in any ------------------------ Confidential Information is granted or conveyed, directly or indirectly, under any patent, trade secret, copyright, mask work right, or other intellectual property right now held by, or which may be obtained by any party as a result of the disclosure of any Confidential Information. ARTICLE 8. MISCELLANEOUS 8.1. Governing Law. This Agreement shall be governed by, interpreted and ------------- construed in accordance with the laws of Connecticut without giving effect to the principles of conflicts of laws. 8.2. Assignment. Neither party shall have the right to assign or otherwise ---------- transfer its rights and obligations under this Agreement without the prior written consent of the other party; provided that either party may assign any or all of its rights and obligations under this 8 Agreement to any successor in interest of all or substantially all of the business of such party by merger, operation of law, assignment, purchase or otherwise or to any of its affiliates. Any prohibited assignment shall be null and void. All terms and conditions of this Agreement shall be binding on and inure to the benefit of the successors and permitted assigns of the parties. 8.3. Relationship. This Agreement does not make either party the employee, ------------ agent or legal representative of the other for any purpose whatsoever. Neither party is granted any right or authority to assume or to create any obligation or responsibility, express or implied, on behalf of or in the name of the other party. In fulfilling its obligations pursuant to this Agreement, each party shall be acting as an independent contractor. 8.4. Written Notice. Notice permitted or required to be given under this -------------- Agreement shall be deemed sufficient if given in writing by facsimile, courier or by registered or certified mail, postage prepaid, return receipt requested, addressed to the respective addresses of the parties set forth below or at such other address as the respective parties may designate by like notice from time to time. Notices so given shall be effective upon (a) receipt by the party to which notice is given (which, in the instance of a facsimile, shall be deemed to have occurred at the time that the machine transmitting the facsimile verifies a successful transmission of the facsimile), or (b) on the fifth business day following the date such notice was posted, whichever occurs first. Notices shall be given as follows: If to SSOC to: SpecTran Specialty Optics Company 150 Fisher Drive P.O. Box 1260 Avon, Connecticut 06001 Attn: Bill Beck Fax: 203-674-8818 With a copy to: Hackmyer & Nordlicht 645 Fifth Avenue New York, New York 10022 Attn: Ira S. Nordlicht, Esq. Fax: 212-421-6500 If to OSI to: Optical Sensors Incorporated 7615 Golden Triangle Drive Technology Park Five Eden Prairie, Minnesota 55344 Attn: Sam B. Humphries Fax: 612-944-6022 With a copy to: Oppenheimer Wolff & Donnelly 3400 Plaza VII 45 South Seventh Street Minneapolis, Minnesota 55402 9 Attn: Thomas A. Letscher Fax: 612-344-9376 8.5. Entire Agreement. This Agreement, including Exhibits A through C, all of ---------------- which are attached to and incorporated into this Agreement, constitutes the entire agreement of the parties with respect to the subject matter of this Agreement, and supersedes all previous proposals, negotiations, conversations or discussions, oral or written, between the parties related to this Agreement. Each party acknowledges that it has not been induced to enter into this Agreement by any representations or statements, oral or written, not expressly contained in this Agreement. The Prior Agreement shall remain in effect in accordance with its terms until it expires or is terminated in accordance with its terms by either of the parties. 8.6. Amendment. This Agreement shall not be deemed or construed to be --------- modified, amended, rescinded, cancelled or waived, in whole or in part, other than by written amendment signed by the parties to this Agreement. 8.7. Waiver. No party shall be deemed to have waived the right to take any ------ action or assert any claim under this Agreement by failing to take the action or assert the claim, even though the circumstances giving rise to the action or claim have been continuing or repeating. 8.8. Severability. In the event that any of the terms of this Agreement are in ------------ conflict with any rule of law or statutory provision or otherwise unenforceable under the laws or regulations of any government or its subdivision, the terms shall be deemed to be stricken from this Agreement. The invalidity or unenforceability of these terms shall not invalidate any of the other terms of this Agreement. This Agreement shall continue in force unless the invalidity or unenforceability of any of the provisions of this Agreement substantially violates, comprises an integral part of or is otherwise inseparable from the remainder of this Agreement. 8.9. Counterparts. This Agreement may be executed in two or more counterparts, ------------ each of which shall be deemed to be an original. 8.10. Arbitration. Any controversy or claim arising out of or relating to this ----------- Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. 8.11. Force Majeure. The failure of either party to perform any obligation ------------- under this Agreement, except for the obligation to pay amounts due and owing, shall not subject the party so failing to any liability to the other if such failure shall be caused or occasioned by act of God or the public enemy, governmental action, fire, explosion, flood, drought, war, riot, sabotage, embargo, interruption or delay in transportation, shortage of fuel, energy or utilities, or by any other event or circumstance of a similar nature beyond the reasonable control of the party so failing ("Force Majeure"); provided, however, that the party whose performance is affected shall be relieved of any liability hereunder only to the extent and 10 only for so long as its performance is prevented by the event of Force Majeure. During the period the performance of one of the parties of its obligations under this Agreement has been suspended by reason of an event of Force Majeure, the other party may likewise suspend performance of all or part of its obligations, except for the obligation to pay amounts due and owing, to the extent commercially reasonable. If an event of Force Majeure prevents performance hereunder by either party for more than ninety (90) consecutive days, the party whose performance is not prevented by such event may terminate this Agreement on written notice to the other without any liability hereunder, except the obligation to make payments due to such date. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the date first written above. OPTICAL SENSORS INCORPORATED SPECTRAN SPECIALTY OPTICS COMPANY By /s/ Sam B. Humphries By /s/ William Beck --------------------------------- ------------------------------- Its President and CEO Its President 9/19/96 -------------------------------- ------------------------------ 11 EXHIBIT A - SYSTEM SPECIFICATIONS [The material in Exhibit A has been omitted, in its entirety, pursuant to a request for confidentiality under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. A copy of this Agreement with this Exhibit intact has been filed separately with the Securities and Exchange Commission.] 12 EXHIBIT B - LIST OF COMPONENTS THAT ARE NOT PART OF THE NEW PRODUCT [The material in Exhibit B has been omitted, in its entirety, pursuant to a request for confidentiality under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. A copy of this Agreement with this Exhibit intact has been filed separately with the Securities and Exchange Commission.] 13 EXHIBIT C - NEW PRODUCT BOM [The material in Exhibit C has been omitted, in its entirety, pursuant to a request for confidentiality under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. A copy of this Agreement with this Exhibit intact has been filed separately with the Securities and Exchange Commission.] 14 EXHIBIT D - EXISTING TOOLING LIST [The material in Exhibit D has been omitted, in its entirety, pursuant to a request for confidentiality under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. A copy of this Agreement with this Exhibit intact has been filed separately with the Securities and Exchange Commission.] 15 EX-10.24 6 PURCHASE ORDER EXHIBIT 10.24 OPTICAL SENSORS INCORPORATED PURCHASE ORDER Date: 2/21/97 SeaMED Corporation 14500 N.E. 87th Street Redmond, Washington 98052 Ladies/Gentlemen: This Purchase Order, upon acceptance by SeaMED Corporation ("Contractor"), constitutes the agreement of Optical Sensors Incorporated ("Buyer") to purchase from and Contractor, and Contractor to manufacture and sell to Buyer, Buyer's OpticalCam Arterial Blood Gas Monitor, Buyer's Part No. 01481 (the "Product"). Buyer's Standard Terms and Conditions of Purchase, which are attached hereto, shall apply to this Purchase Order. The term Seller in the Standard Terms and Conditions shall mean Contractor. If any terms of this Purchase Order are inconsistent with the Standard Terms and Conditions, the terms of this Purchase Order shall control. Price The per unit price to be paid by Buyer for the Product is set forth on Exhibit A Buyer will pay for any additional cost due to unavailability of piece parts from production tooling, at Contractor's cost (without any mark-up), pursuant to a separate purchase order to be issued by Buyer. [Portions of this section have been omitted pursuant to a request for confidentiality under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. A copy of this Agreement with this section intact has been filed separately with the Securities and Exchange Commission.] Quantity, Delivery Dates and Forecast This Purchase Order covers a total of _____ units of the Product. Buyer's Forecast of its anticipated delivery dates for the Product during 1997 is attached hereto as Exhibit B. The delivery dates set forth in the first four (4) months of the Forecast are firm delivery dates. The delivery dates set forth in the remainder of the Forecast represent Buyer's current estimate of its requested delivery dates during 1997 and are not binding in any manner, except that Buyer will take delivery of all units of the Product covered by this Purchase Order within eighteen (18) months of the date of this Purchase Order. Buyer will update the Forecast monthly, provided that Buyer will not be obligated to purchase more than ____ units of the Product, even if the Forecast calls for more than ____ units, unless Buyer issues a subsequent Purchase Order covering such additional units. Contractor will use its best efforts to inform Buyer of a need to authorize procurement of long lead time materials and outplant services for forecasted purchases that are not covered by this Purchase Order. Contractor will not order any such materials for forecasted quantities of Product that are not covered by this Purchase Order or any subsequent Purchase Order without the prior written consent of Buyer. Buyer will provide Contractor with an inventory deposit for all inventory procured and paid for by Contractor that is held for a period in excess of sixty (60) days due to slide in production forecast. [Portions of this section have been omitted pursuant to a request for confidentiality under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. A copy of this Agreement with this section intact has been filed separately with the Securities and Exchange Commission.] Specifications Contractor will manufacture the Product in accordance with Buyer's specifications, number 01481 (the "Specifications"), a copy of which has been previously provided to Contractor. Warranty Contractor warrants for fifteen (15) months from date of shipment to Buyer that all Products shall be free from defects in material and workmanship, and shall conform to applicable Specifications, drawings, samples and descriptions referred to in this Purchase Order. Contractor warrants it has the right to convey the Product and that the Product will be free of all liens and encumbrances. These warranties shall survive any inspection, delivery, payment and termination of this Purchase Order, and shall run to Buyer, its customers, successors and assigns. Contractor shall correct defects in Product at its facility. At Buyer's option, Contractor shall complete an assessment of the returned Product within three (3) days of receipt, and repair or replace all defective Product within fourteen (14) days of receipt. If the defective Product is covered by the foregoing warranty, Buyer will pay the cost of shipping the defective Product to Contractor, and Contractor will pay the cost of shipping the repaired or replaced Product to Buyer, except that if the defect is an "out-of-box" failure, Contractor will pay the cost of shipping to and from Contractor. Compliance Contractor warrants that all Products will be produced, manufactured and assembled in compliance with all applicable federal, state and local laws and rules and regulations, including, but not limited to, the Food, Drug and Cosmetic Act of 1938, as amended, and all regulations promulgated thereunder, including without limitation, Good Manufacturing Practices ("GMP") for Medical Devices (21 CFR Part 820). Contractor represents and warrants to Buyer that Contractor's manufacturing facility is certified "DIN EN ISO 9001/EN46001/MDD" and that Contractor has all approvals and consents required to mark the Product with the "CE" mark. Contractor further covenants with Buyer that Contractor will maintain such certification during the term of this Purchase Order. Contractor will notify Buyer of any audits of Contractor's manufacturing facility to be conducted by TUV Product Services or any other notified body for such certification, provide Buyer with a written 2 copy of the results of such audit, to the extent that such audit relates directly to the manufacture of the Product, and Contractor's proposed corrective response to such audit, if any required. Prior Letter Agreement Buyer and Seller acknowledge and agree that Paragraphs 6(b), 6(c) and 7 of the Letter Agreement, dated December 15, 1995, between Buyer and Seller shall apply to the work performed under this Purchase Order and shall remain in effect so long as Product is manufactured and delivered under this Purchase Order. OPTICAL SENSORS INCORPORATED SEAMED CORPORATION By /s/ Sam B. Humphries By /s/ Don Ried ---------------------------- ------------------------------------- Its President and CEO Its Senior Vice President - Operations --------------------------- ------------------------------------ 3 OPTICAL SENSORS INCORPORATED STANDARD TERMS AND CONDITIONS OF PURCHASE 1. Terms of Agreement. These Standard Terms and Conditions of Purchase shall be ------------------ a part of the Purchase Order issued by Optical Sensors Incorporated (the "Buyer") to which these Standard Terms and Conditions of Purchase are attached, and the Purchase Order is subject to the following terms and conditions. No waiver, alteration, or modification of the terms and conditions set forth herein shall be valid unless expressly agreed to in writing by the Buyer. Any different, additional or conflicting terms or conditions set forth in the Seller's invoice or any other document issued by the Seller are expressly objected to by the Seller; the terms of the Purchase Order shall exclusively govern the purchase and sale of the Product covered by the Purchase Order (the "Product"). 2. Delivery Terms. The Seller shall deliver the Products at the Buyer's -------------- facility on the date set forth in the Purchase Order. The Products shall not be delivered substantially before or after the delivery date without the Buyer's prior approval. All deliveries of Products ordered by the Buyer shall be F.O.B. the Seller's manufacturing facility, with all title and risk of loss passing to the Buyer upon delivery of the Products at the F.O.B. delivery point to the common carrier specified by the Buyer. Seller shall package the Products in a manner that will prevent damage during shipping and ship the Products in accordance with the Buyer's instructions. The Buyer shall pay all insurance and freight costs directly to the carrier, or reimburse the Seller for cost of such insurance and freight if paid by the Seller, unless otherwise mutually agreed by the Buyer and the Seller. Each shipment of Products shall include separate packing slips showing: (a) Buyers' purchase order number; (b) the part number and revision level for each Product shipped; (c) a description of the goods; (d) individual serial numbers of the Product; and (e) the total quantity of Products shipped. 3. Specifications. The Seller will supply or manufacture the Product in -------------- accordance with the specifications, if any, provided by the Buyer. The Seller will not make any changes in such specifications or make any changes in any components or processes used in manufacturing the Product previously agreed to by the Buyer without the Buyer's prior consent. 4. Acceptance of Products. The Buyer shall inspect the Products upon delivery ---------------------- and shall within thirty (30) days thereof give written notice to the Seller of any claim that any or all of the Products do not conform to the terms or specifications of the Purchase Order, stating the particulars to support such claim. If the Buyer shall fail to timely give the Seller such written notice as provided hereunder, the Products shall be deemed to conform to the terms of the Purchase Order and the Buyer shall be deemed to have accepted the goods, subject to any warranty covering the Product, and shall pay for the goods in accordance with the terms of the Purchase Order. 5. Invoices. Seller's invoices shall, at a minimum, include: (a) Buyer's -------- purchase order number, against which the Products were shipped; (b) the date of shipment; (c) the part number and revision level for each Product shipped; (c) a description of the goods; (d) the total quantity of Products shipped; and (e) the per unit price of the Products shipped. 6. Payment Terms. Down payment, if required, shall be due upon execution by the ------------- Buyer of this Purchase Order and shall be returned to the Buyer if the Purchase Order is not accepted. Payment, other than any down payment, shall be made by the Buyer no later than thirty (30) days after receipt of invoice from the Seller. The Buyer shall pay a late payment charge computed at the rate of one and one-half percent (1-1/2%) per month on the unpaid amount for each calendar month (or fraction thereof) that such payment is in default. The Buyer shall pay any and all costs of collection including, without limitation, reasonable attorney's fees, whether or not suit is instituted, incurred by the Seller in the event collection of any delinquent balance is required. 7. Cancellation and Returned Goods. The parties agree that an acceptance of the ------------------------------- Products by the Buyer shall be deemed to have been made with knowledge of any alleged defects that inspection during the period designated above would have revealed. Following inspection and written notice by the Buyer as set forth hereunder, if any of the goods shall prove defective due to faults in manufacture or fail to meet the written specifications, the Seller shall repair or replace, at its option, any non-conforming goods within the time period specified in the Purchase Order, or if no such time period is specified, within a reasonable time. If the Buyer cancels all or any portion of an order, the Buyer shall pay cancellation charges which shall include all direct costs (which the Seller cannot recover from its suppliers) incurred by the Seller in obtaining raw materials and components in order to fulfill the Purchase Order until the time of the Buyer's written request for cancellation. The Buyer shall have no other liability to the Seller for cancellation. Such cancellation charges shall not include lost profits or incidental or consequential damages: 8. Taxes. The Buyer shall be responsible for and shall pay or reimburse the ----- Seller for all taxes, duties, assessments and other governmental charges, however designated, associated with the purchase of Products hereunder, the payment of any amounts by the Buyer to the Seller, or taxes based on the Products or their use which are or may be imposed under or by any federal, state or local taxing authority; provided, however, that the Seller shall not responsible for any taxes based upon Seller's income. 9. Confidential Information. The Seller acknowledges and agrees that any ------------------------ specifications and all related writings, drawings, artwork, computer assisted designs and similar works shall be deemed "Confidential Information." The Seller further acknowledges and agrees that any other information which is disclosed by Buyer in any tangible form and is clearly labeled or marked as confidential, proprietary or its equivalent, or information which is disclosed orally or visually, is designated confidential, proprietary or its equivalent at the time of its disclosure and is reduced to writing and clearly marked or labeled as confidential, proprietary or its equivalent within thirty (30) days of disclosure shall be deemed "Confidential Information." All Confidential Information shall be the exclusive property of Buyer, and Buyer retains all right, title and interest, including copyright, relating to "Confidential Information." The Seller agrees not to use any Confidential Information for any purpose other than as permitted or required for performance by the Seller under the Purchase Order and not to disclose or provide any Confidential Information to any third party and to take all necessary measures to prevent any such disclosure by its employees, agents, contractors or consultants. Upon request of the Buyer or completion of the Purchase Order, the Seller shall return all such Confidential Information to the Buyer. The return of Confidential Information shall be complete in every respect, so as to permit an experienced manufacturer to manufacture, assemble, maintain and service the Product and shall include a full drawing package in reproducible form and any revisions or updates, including but not limited but not limited to, GSF Autocad files, fabrication drawings, approved supplier list, test specifications, tooling specifications and drawings, manufacturing assembly instructions, routings, quality assurance protocols, test equipment, specifications and drawings and engineering change notice history, device master files, and device history records. 10. Indemnification. The parties agree to indemnify and hold each other, their --------------- affiliated entities, and their respective officers, directors, shareholders, employees an agents, harmless from and against all claims, losses, damages, liability, costs and expenses (including, without limitation, attorneys' fees and legal costs and disbursements) arising out of or related to a breach of the Purchase Order. 4 11. Notices. Notices and communications under the Purchase Order shall be ------- deemed given to either party at the address set forth on the Purchase Order: (a) upon the expiration of five (5) business days after the date of deposit in the U.S. mail if sent by registered mail, return receipt requested; or (b) upon the next business day if sent by recognized overnight supplemental delivery service; (c) the same business date if notice is delivered personally or (d) upon electronic confirmation of transmission if sent by facsimile. 12. Assignment. Seller may not assign or transfer the Purchase Order or any ---------- interest herein or any rights or duties hereunder without the prior written consent of Buyer. 13. Governing Law. The Purchase Order shall be interpreted and construed in ------------- accordance with the laws of the State of Minnesota. 14. Entire Agreement. This Purchase Order, including these Standard Terms and ---------------- Condition and all attachments and specifications, constitutes the complete and final agreement between the parties and supersedes all prior negotiations and agreements between the parties concerning its subject matter. 5 EXHIBIT A [The material in Exhibit A has been omitted, in its entirety, pursuant to a request for confidentiality under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. A copy of this Agreement with this Exhibit intact has been filed separately with the Securities and Exchange Commission.] 6 EXHIBIT B [The material in Exhibit B has been omitted, in its entirety, pursuant to a request for confidentiality under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. A copy of this Agreement with this Exhibit intact has been filed separately with the Securities and Exchange Commission.] 7 EX-11.1 7 COMPUTATION OF PER SHARE LOSS EXHIBIT 11.1 Optical Sensors Incorporated Exhibit 11 - Statement Re: Computation of Per Share Loss
Year Ended Primary: 1996 1995 1994 ------------------------------------------- Weighted average shares outstanding 7,222,000 315,000 290,000 Stock options - based on the treasury stock method using the initial public offering price (1) --- 2,696,000 2,696,000 ------------------------------------------- Total 7,222,000 3,011,000 2,986,000 =========================================== Net loss $(9,385,272) $(8,131,017) $(6,279,414) =========================================== Per share amount $ (1.30) $ (2.70) $ (2.10) =========================================== Supplemental: Weighted average shares outstanding 7,222,000 315,000 290,000 Stock options - based on the treasury stock method using the initial public offering price (1) --- 2,696,000 2,696,000 Convertible preferred stock - using the if-converted method 596,000 3,138,000 2,186,000 ------------------------------------------- Total 7,818,000 6,149,000 5,172,000 =========================================== Net loss $(9,385,272) $(8,131,017) $(6,279,414) =========================================== Per share amount $ (1.20) $ (1.32) $ (1.21) ===========================================
(1) In accordance with SAB No. 83. EX-13.1 8 EXCERPTS FROM THE COMPANY'S 1996 ANNUAL REPORT Exhibit 13.1 COMMON STOCK INFORMATION The common stock of Optical Sensors Incorporated has been traded on the Nasdaq National Market, under the symbol OPSI, since the company's initial public offering on February 14, 1996. The following table sets forth the high and low closing prices for the company's common stock, as reported by the Nasdaq National Market, for the periods indicated:
Quarter ended High Low - -------------------- -------- -------- March 31, 1996 $14.875 $10.375 June 30, 1996 14.250 10.250 September 30, 1996 10.750 5.250 December 31, 1996 9.250 7.750
The foregoing prices reflect inter-dealer prices, without retail mark-up, mark- down or commission. As of March 20, 1997, the company had approximately 315 of record and an estimated 3,100 beneficial holders whose shares were registered in the names of nominees. Optical Sensors Incorporated has never paid any cash dividends on its common stock, and does not anticipate paying any cash dividends on its common stock in the foreseeable future. During 1996, the company sold a total of 18,566 shares of common stock pursuant to the exercise of stock options with an exercise price of $.90 per share, under Rule 701 of the Securities Act of 1933. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA
Years ended December 31, ----------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------------------------------------------------------------- (In thousands, except per share data) STATEMENTS OF OPERATIONS DATA Net sales $ 163 $ -- $ -- $ -- $ -- Operating expenses 9,734 8,249 6,463 5,586 3,688 Loss from operations 10,940 8,249 6,463 5,586 3,688 Interest income (expense), net 1,555 118 183 149 35 Net loss 9,385 8,131 6,280 5,437 3,653 Net loss per common share $ 1.30 $ 2.70 $ 2.10 $ 1.82 $ 1.23 Years ended December 31, ----------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------------------------------------------------------------- (In thousands, except per share data) BALANCE SHEET DATA Cash and cash equivalents $ 30,135 $ 5,395 $ 2,851 $ 9,105 $ 2,284 Working capital 30,039 5,242 2,363 8,734 1,820 Total assets 32,369 6,367 3,582 9,741 2,962 Long-term debt -- -- -- 89 153 Total shareholders' equity 31,050 5,778 2,987 9,182 2,313
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS OVERVIEW Optical Sensors Incorporated (the "Company") has developed the SensiCath system, a patient-attached, on-demand arterial blood gas ("ABG") monitoring system, which provides precise and accurate ABG results within 60 seconds without exposure to potentially infectious blood or depleting the patient's blood supply (the "SensiCath System"). ABG tests measure oxygen ("O\2\"), carbon dioxide ("CO\2\"), and acid-base ("pH") in a sample of blood taken from the patient's artery. The Company believes that the SensiCath System is the first ABG analyzer to be integrated into both an arterial pressure monitoring line and a critical care patient monitoring system. The SensiCath System utilizes a disposable, fiberoptic sensor device ("the SensiCath Sensor") connected to a small modular instrument that can be configured to integrate with bedside monitoring systems or to serve as a stand-alone monitor. The SensiCath System is currently available in two configurations. The first configuration of the SensiCath System combines the SensiCath Sensor with a module (the "OnlineABG Module") that plugs into bedside monitors manufactured by Marquette Medical Systems, Inc. ("Marquette"). The second configuration of the SensiCath System consists of the SensiCath Sensor, the OnlineABG Module and a stand-alone monitor ("the OpticalCAM") that can be used as a stand-alone monitoring device or can interface with bedside monitors supplied by other manufacturers of patient monitoring equipment. The Company plans to market the OpticalCAM monitor to all hospitals regardless of the type of monitoring system used by the hospital. Currently, the OpticalCAM is able to interface with patient monitoring systems sold by the Hewlett-Packard Company and SpaceLabs Medical, Inc. The two configurations of the SensiCath System give the Company access to over 80 percent of the monitored critical care beds in the United States. The Company's strategy is to become the leader in the design, development and commercialization of sensors and integrated monitoring systems for the measurement of ABG and other critical blood analytes at the point-of- care and thereby establish a new standard of care for critically ill patients. The Company completed product development of the initial configuration of the SensiCath System in June 1995 and received 510(k) clearance to market the SensiCath System from the FDA in January 1996. The Company completed development of the OpticalCAM monitor in September 1996 and received 510(k) clearance to market the OpticalCAM monitor from the FDA in January 1997. RESULT OF OPERATIONS Fiscal Years Ended December 31, 1996 and 1995 The Company had no sales in 1995. Net sales for 1996 were $163,068. Approximately 52% of sales have been to Marquette for demonstration purposes and for clinical marketing studies, approximately 18% of sales have been to international distributors for demonstration purposes, and approximately 20% of sales have been commercial sales to customers. Costs of products sold to date have been primarily related to the establishment of commercial manufacturing operations and manufacturing of sensors for clinical studies and other testing purposes. Costs of products sold were $1,369,221 and $981,151 in 1996 and 1995 respectively. In 1995, production costs were recorded as research and development expenses because the Company had no sales in that period. The increase in 1996 is the result of increased activities to scale-up manufacturing to meet anticipated future sales demand. Research and development expenses were $5,632,458 and $4,974,193 (excluding $981,151 related to costs of products sold described above) in 1996 and 1995, respectively. Research and development expenses included payments under an agreement with Marquette entered into in September 1995 pursuant to which the Company acquired ownership of the technology used in the SensiCath System. Payments to Marquette were $553,250 and $759,750 in 1996 and 1995, respectively. The Company is obligated to make two additional payments of $500,000 each subject to Marquette selling certain minimum quantities of OnlineABG Modules. The Company currently expects to make these payments to Marquette in 1997. Research and development expenses (excluding payments to Marquette) increased $864,765, or 21%, in 1996 from 1995. The increase in 1996 is primarily attributable to development expenses incurred for the OpticalCAM. The Company expects that research and development expenses will remain at comparable levels during 1997 due to the anticipated payments to Marquette and planned development of a further miniaturized sensor and new sensors to measure additional blood analytes. Selling, general and administrative expenses were $4,102,147 and $2,293,435 in 1996 and 1995, respectively. Selling, general and administrative expenses included amortization of deferred compensation expenses (for options granted in 1995) of $623,452 and $1,008,467 in 1996 and 1995, respectively. Selling, general and administrative expenses (after adjusting for compensation expenses described above) increased $2,193,727, or 171%, in 1996 from the prior year. During 1996, the Company completed the initial hiring of its sales and marketing staff. Salaries and benefits for the expanded sales and marketing staff and travel expenses related to sales and marketing activities accounted for a significant portion of the 1996 increase in selling, general and administrative expenses. Administrative expenses also increased primarily due to the higher level of activity associated with initial commercialization of the Company's products and additional costs associated with being a public company. The Company expects selling, general and administrative expenses to increase in 1997 in an amount similar to the 1996 increase. Substantially all of the anticipated increase is for sales and marketing staff hired late in 1996 and incremental marketing activities related to the relaunch of the SenisiCath System. Net interest income increased $1,437,724 to $1,555,486 in 1996 from 1995. The increase is due to interest earned on the proceeds from the Company's initial public offering, which was completed in the first quarter of 1996. The Company incurred a net loss of $9,385,272 in 1996 compared to a net loss of $8,131,017 in 1995. Since inception, the Company has incurred a cumulative net loss of $35,215,362. The increase in net loss in 1996 was primarily due to the increase in operating expenses described above. The Company anticipates that its operating losses will continue for the foreseeable future. Fiscal Years Ended December 31, 1995 and 1994 The Company did not have any sales in 1995 or 1994. Research and development expenses increased 25% to $5,955,344 in 1995 from $4,774,487 in 1994. The increase was primarily due to payments of $750,000 made to Marquette in 1995 under the agreement referred to above. The remainder of the increase was due to additional development efforts, start-up costs for establishing commercial manufacturing facilities, initial clinical marketing studies of the SensiCath System and a write-off of prepaid license fees of $135,000 related to the cancellation of license agreements. Selling, general and administrative expenses increased 36% to approximately $2,293,435 in 1995 from approximately $1,688,309 in 1994. The increase was due to an increase in compensation expense of $1,008,000 related to stock options granted from June through October 1995, offset in part by cost reduction measures taken by the Company in the fourth quarter of 1994. These measures were instituted because of a delay in product development that began in late 1994. Net interest income decreased 36% to approximately $118,000 in 1995 from approximately $183,000 in 1994. The decrease was due to a decline in short-term investments caused by continued operating losses and capital equipment purchases. LIQUIDITY AND CAPITAL RESOURCES In the first quarter of 1996, the Company completed an initial public offering of 2,875,000 shares of Common Stock. The net proceeds to the Company from the public offering were approximately $33,916,000. The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "OPSI." The Company's cash and cash equivalents were $30,134,800 and $5,394,721 at December 31, 1996 and December 31, 1995, respectively. The increase is due to the proceeds from the public offering, offset by cash used in 1996. The Company incurred cash expenditures of $8,779,365 for operations (including lease payments of $725,150 under operating leases for capital equipment) and $496,084 for capital expenditures in 1996. The capital equipment expenditures and operating lease payments were principally for the acquisition of tooling and equipment, primarily for commercial launch of the Company's products and for research and development purposes. As of December 31, 1996, the Company had no material commitments outstanding for tooling and equipment. Subsequent to year end, the Company entered into commitments of approximately $225,000 to acquire tooling for production of the OpticalCAM monitor. As of December 31, 1996, the Company had commitments outstanding for approximately $500,000 to purchase OpticalCAM monitors and OnlineABG Modules. Subsequent to year end, the Company entered into additional commitments of approximately $1,700,000 to purchase OpticalCAM monitors and OnlineABG Modules. The Company increased its inventory levels during 1996 to support future product sales. A substantial portion of the inventory level at December 31, 1996 consisted of key components and OnlineABG Modules for which the Company relies on sole suppliers. With the proceeds of the initial public offering, the Company believes that sufficient liquidity is available to satisfy its working capital needs at least through 1997. CERTAIN IMPORTANT FACTORS There are several important factors that could cause the Company's actual results to differ materially from those anticipated by the Company or which are reflected in any forward-looking statements of the Company. These factors, and their impact on the success of the Company's operations and its ability to achieve its goals, include the following: . MARKET ACCEPTANACE OF THE SENSICATH SYSTEM. The Company's future revenues will depend on market acceptance of the SensiCath System. The company will need to demonstrate to health care professionals, hospital administrators and third-party payors the accuracy, reliability, ease of use, safety and cost effectiveness of the sensicath system. in order to use the SensiCath System, hospitals need to acquire the OnlineABG Module, and if they do not have a Marquette patient bedside monitoring system the OpticalCAM monitor, both of which may require capital expenditure approvals by the hospital. . TIMELY INSTALLATION OF THE SENSICATH SYSTEM. The Company's ability to increase sales in the near-term will depend on timely installation and in- service training of the onlineABG Module, which is provided by Marquette. the company does not have control over the scheduling of this installation and in-service training for the OnlineABG Module. . SALES TO INSTALLED BASE. The Company's plan for increasing sales in 1997 is based, in part, on its ability to sell the SensiCath System to Marquette's installed base of Tramscope and Solar patient monitoring systems. in order to interface with the SensiCath System, Tramscope systems need either hardware or software upgrades or both, and previously installed solar systems need a software upgrade. These upgrades require an additional investment by hospitals with Tramscope systems and hospitals with Solar Systems that are not under warranty. Hospitals may be reluctant to absorb the costs associated with the purchase of an OnlineABG Module and upgrades needed to interface the solar and tramscope system with the SensiCath System. . COMPETITION. Competition among companies attempting to provide ABG and other critical blood analyte analysis at the point-of-care is intense and increasing. there can be no assurance that the Company's competitors will not succeed in developing or marketing technologies and products that are more effective or less expensive than the Company's products or that would render the Company's products obsolete or non-competitive. . FUTURE REGULATORY APPROVALS. The Company's ability to market new configurations of or improvements to the SensiCath System and any products it may develop in the future will require clearances or approvals from the FDA and in some instances foreign governmental agencies. The process for obtaining necessary regulatory clearances and approvals can be expensive and time consuming. There can be no assurance that the Company will be able to obtain necessary regulatory approvals and clearances in the future on a timely basis, or at all. . SOLE SOURCES OF SUPPLY. Currently, the Company has only one supplier for the OnlineABG module, the OpticalCAM monitor and certain other key components. Any disruption or delay in the supply of key components or instrumentation could have a material adverse effect on the Company. Optical Sensors Incorporated (A Development Stage Company) Financial Statements Years ended December 31, 1995 and 1996 CONTENTS Report of Independent Auditors........................ 1 Audited Financial Statements Balance Sheets........................................ 2 Statements of Operations.............................. 3 Statement of Shareholders' Equity..................... 4 Statements of Cash Flows.............................. 12 Notes to Financial Statements......................... 13
Report of Independent Auditors Board of Directors Optical Sensors Incorporated We have audited the accompanying balance sheets of Optical Sensors Incorporated (a development stage company) as of December 31, 1995 and 1996, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996 and the period from May 23, 1989 (inception) to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Optical Sensors Incorporated (a development stage company) at December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 and the period from May 23, 1989 (inception) to December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota February 7, 1997 1 Optical Sensors Incorporated (A Development Stage Company) Balance Sheets
DECEMBER 31 1995 1996 ----------------------------- ASSETS Current assets: Cash and cash equivalents $ 5,394,721 $ 30,134,800 Accounts receivable - 91,040 Inventory - 931,917 Prepaid expenses and other current assets 436,503 200,731 ------------ ------------ Total current assets 5,831,224 31,358,488 Property and equipment: Research and development equipment 375,124 292,488 Leasehold improvements 174,673 199,211 Furniture and equipment 35,796 77,895 Marketing equipment - 344,448 Production equipment - 167,635 ------------ ------------ 585,593 1,081,677 Less accumulated depreciation (373,237) (488,043) ------------ ------------ 212,356 593,634 Other assets: Patents 230,549 328,630 Other assets 93,002 88,445 ------------ ------------ 323,551 417,075 ------------ ------------ Total assets $ 6,367,131 $ 32,369,197 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 116,609 $ 740,804 Employee compensation 468,952 577,228 Other liabilities and accrued expenses 3,753 1,541 ------------ ------------ Total current liabilities 589,314 1,319,573 Commitments SHAREHOLDERS' EQUITY Preferred Stock, par value $.01 per share Authorized shares--5,000,000 Convertible Preferred Stock, Series A through E, par value $.01 per share: Issued and outstanding shares 1995--4,766,974; 1996--0 47,670 - Common Stock, par value $.01 per share: Authorized shares--30,000,000 Issued and outstanding shares 1995--610,443; 1996--8,341,497 6,105 83,415 Additional paid-in capital 32,970,358 66,974,345 Deficit accumulated during the development stage (25,830,090) (35,215,362) Deferred compensation (1,171,226) (547,774) Note receivable from officer (245,000) (245,000) ------------ ------------ Total shareholders' equity 5,777,817 31,049,624 ------------ ------------ Total liabilities and shareholders' equity $ 6,367,131 $ 32,369,197 ============ ============
See accompanying notes. 2 Optical Sensors Incorporated (A Development Stage Company) Statements of Operations
CUMULATIVE MAY 23, 1989 (INCEPTION) TO YEAR ENDED DECEMBER 31 DECEMBER 31, 1994 1995 1996 1996 ----------------------------------------------------------- Net sales $ $ $ 163,068 $ 163,068 Cost of goods sold (1,369,221) (1,369,221) ----------------------------------------------------------- Gross margin (1,206,153) (1,206,153) Operating expenses: Research and development 4,774,487 5,955,344 5,632,458 25,022,866 Selling, general and administrative 1,688,309 2,293,435 4,102,147 11,020,959 ----------------------------------------------------------- Operating loss (6,462,796) (8,248,779) (10,940,758) (37,249,978) Interest expense 17,057 19,333 141,385 Interest income (200,439) (137,095) (1,555,486) (2,176,001) ----------------------------------------------------------- (183,382) (117,762) (1,555,486) (2,034,616) ----------------------------------------------------------- Net loss and deficit accumulated during development stage $(6,279,414) $(8,131,017) $ (9,385,272) $(35,215,362) =========================================================== Net loss per common share: Primary $ (2.10) $ (2.70) $(1.30) Supplemental $ (1.21) $ (1.32) $(1.20) Shares used in calculation of net loss per share: Primary 2,986,000 3,011,000 7,222,000 Supplemental 5,172,000 6,149,000 7,818,000
See accompanying notes. 3 Optical Sensors Incorporated (A Development Stage Company) Statement of Shareholders' Equity Period from May 23, 1989 (inception) to December 31, 1996
SERIES A SERIES B SERIES C CONVERTIBLE CONVERTIBLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK --------------------------------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------------------------------------------------- Subscriptions for sale of Common Stock at $.45 per share Payments received on stock subscriptions, net of placement costs Issuance of Common Stock Issuance of Common Stock for consulting services Net loss for period of May 23, 1989 (inception) to December 31, 1989 --------------------------------------------------- Balance at December 31, 1989 Issuance of Common Stock, net of offering costs of $121,502 Issuance of Common Stock for services provided in the private placement Issuance of Common Stock for consulting services Issuance of Common Stock upon debt conversion Payments received on stock subscription Issuance of Common Stock Net loss --------------------------------------------------- Balance at December 31, 1990 Issuance of Series A Convertible Preferred Stock net of offering costs of $49,904 94,370 $944 Issuance of Common Stock for technology Net loss --------------------------------------------------- Balance at December 31, 1991 94,370 944
4
DEFICIT ACCUMULATED PREFERRED AND COMMON STOCK ADDITIONAL DURING THE COMMON - ----------------- PAID-IN DEVELOPMENT STOCK DEFERRED SHARES AMOUNT CAPITAL STAGE SUBSCRIPTION COMPENSATION TOTAL - ----------------------------------------------------------------------------------------- 127,037 $1,270 $ 57,022 $(58,292) $ - (3,987) 55,792 51,805 9,560 96 13,205 (10,000) 3,301 350 4 1,256 1,260 $ (181,793) (181,793) - ----------------------------------------------------------------------------------------- 136,947 1,370 67,496 (181,793) (12,500) (125,427) 92,678 927 711,671 712,598 6,260 63 (63) - 640 6 5,751 5,757 26,088 261 117,135 117,396 12,500 12,500 16,667 167 149,833 150,000 (636,266) (636,266) - ----------------------------------------------------------------------------------------- 279,280 2,794 1,051,823 (818,059) 236,558 1,011,652 (10,635) 1,001,961 2,778 28 24,972 25,000 (1,511,013) (1,511,013) - ----------------------------------------------------------------------------------------- 282,058 2,822 2,088,447 (2,329,072) (10,635) (247,494)
5 Optical Sensors Incorporated (A Development Stage Company) Statement of Shareholders' Equity (continued)
SERIES A SERIES B SERIES C CONVERTIBLE CONVERTIBLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK ------------------------------------------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------ Issuance of Series B Convertible Preferred Stock, net of offering costs of $93,903 418,387 $4,184 Issuance of Series B Convertible Preferred Stock upon debt cancellation 81,129 811 Issuance of Common Stock for consulting services Payment received on stock subscriptions Net loss ------------------------------------------------------ Balance at December 31, 1992 94,370 $944 499,516 4,995 Issuance of Series C Convertible Preferred Stock, net of offering costs of $815,320 958,200 $ 9,582 Issuance of Series C Convertible Preferred Stock upon debt cancellation 79,817 798 Issuance of Common Stock upon exercise of warrants Issuance of Common Stock Net loss ------------------------------------------------------ Balance at December 31, 1993 94,370 944 499,516 4,995 1,038,017 10,380 Issuance of Common Stock upon exercise of warrants and options Value assigned to warrants issued in connection with debt and lease financings Net loss ------------------------------------------------------ Balance at December 31, 1994 94,370 944 499,516 4,995 1,038,017 10,380
6
DEFICIT ACCUMULATED PREFERRED AND COMMON STOCK ADDITIONAL DURING THE COMMON - ----------------- PAID-IN DEVELOPMENT STOCK DEFERRED SHARES AMOUNT CAPITAL STAGE SUBSCRIPTION COMPENSATION TOTAL - ---------------------------------------------------------------------------------------- $ 5,173,589 $ 5,177,773 1,021,416 1,022,227 317 $ 3 2,853 2,856 $10,635 10,635 $ (3,653,474) (3,653,474) - ---------------------------------------------------------------------------------------- 282,375 2,825 8,286,305 (5,982,546) $ -- 2,312,523 11,248,418 11,258,000 1,004,924 1,005,722 6,658 66 35,787 35,853 833 8 7,492 7,500 (5,437,113) (5,437,113) - ---------------------------------------------------------------------------------------- 289,866 2,899 20,582,926 (11,419,659) 9,182,485 778 7 7,493 7,500 76,051 76,051 (6,279,414) (6,279,414) - ---------------------------------------------------------------------------------------- 290,644 2,906 20,666,470 (17,699,073) 2,986,622
7 Optical Sensors Incorporated (A Development Stage Company) Statement of Shareholders' Equity (continued)
SERIES A SERIES B SERIES C SERIES D SERIES E CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK ------------------------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------------------------------- Value assigned to options issued in connection with a consulting agreement Issuance of Series D Convertible Preferred Stock, net of offering costs of $88,501 1,900,183 $19,002 Issuance of Series D Convertible Preferred Stock upon debt cancellation Issuance of Common Stock upon exercise of options and warrants Issuance of Convertible Preferred Stock pursuant to antidilution provisions in Series A through C 18,853 $ 189 157,061 $1,571 377,991 $ 3,779 Issuance of Series E Convertible Preferred Stock, net of offering costs of $33,660 370,338 $3,703 Value assigned to warrants in connection with debt and lease financing Deferred compensation related to stock options Amortization of deferred compensation Net loss ----------------------------------------------------------------------------------------- Balance at December 31, 1995 113,223 1,133 656,577 6,566 1,416,008 14,159 2,210,828 22,109 370,338 3,703
8
DEFICIT ACCUMULATED PREFERRED AND COMMON STOCK ADDITIONAL OFFICER DURING THE COMMON - ----------------- PAID-IN RECEIVABLE DEVELOPMENT STOCK DEFERRED SHARES AMOUNT CAPITAL FOR STOCK STAGE SUBSCRIPTION COMPENSATION TOTAL - ------------------------------------------------------------------------------------------------------ $ 6,150 $ 6,150 5,877,647 5,896,649 975,689 978,796 319,799 3,199 288,147 $(245,000) 46,346 (5,539) 2,962,637 2,966,340 19,464 19,464 2,179,693 $(2,179,693) 1,008,467 1,008,467 $ (8,131,017) (8,131,017) - ------------------------------------------------------------------------------------------------------ 610,443 6,105 32,970,358 (245,000) (25,830,090) (1,171,226) 5,777,817
9 Optical Sensors Incorporated (A Development Stage Company) Statement of Shareholders' Equity (continued)
SERIES A SERIES B SERIES C SERIES D SERIES E CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK --------------------------------------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------------------------------------------------------------------------------------------------------- Issuance of Common Stock in conjunction with public offering, net of expenses of $3,459,218 Conversion of Preferred Stock in conjunction with (113,223) $(1,133) (656,577) $(6,566) (1,416,008) $(14,159) (2,210,828) $(22,109) (370,338) $(3,703) public offering Issuance of Common Stock upon exercise of options and warrants Value assigned to warrants in connection with debt and lease financing Amortization of deferred compensation Net loss -------------------------------------------------------------------------------------------------------- Balance at December 31, - $ - - $ - - $ - - $ - - $ - 1996 ========================================================================================================
See accompanying notes. 10
DEFICIT ACCUMULATED PREFERRED AND COMMON STOCK ADDITIONAL OFFICER DURING THE COMMON - -------------------- PAID-IN RECEIVABLE DEVELOPMENT STOCK DEFERRED SHARES AMOUNT CAPITAL FOR STOCK STAGE SUBSCRIPTION COMPENSATION TOTAL - --------------------------------------------------------------------------------------------------------- 2,875,000 $28,750 $33,887,032 $33,915,782 4,766,974 47,670 - 89,080 890 98,856 99,746 18,099 18,099 623,452 623,452 $ (9,385,272) (9,385,272) - --------------------------------------------------------------------------------------------------------- 8,341,497 $83,415 $66,974,345 $(245,000) $(35,215,362) $ - $(547,774) $31,049,624 =========================================================================================================
11 Optical Sensors Incorporated (A Development Stage Company) Statements of Cash Flows
CUMULATIVE MAY 23, 1989 (INCEPTION) TO YEAR ENDED DECEMBER 31 DECEMBER 31, 1994 1995 1996 1996 ---------------------------------------------------------- OPERATING ACTIVITIES Net loss $(6,279,414) $(8,131,017) $(9,385,272) $(35,215,362) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 110,453 104,800 124,452 634,904 Loss on write-off of research and development equipment - - - 133,919 Loss on write-off of prepaid royalties - 135,201 - 135,201 Amortization of deferred loss on sale leaseback 11,196 - - 11,196 Deferred compensation amortization - 1,008,467 623,452 1,631,919 License fee financed with long-term debt - - - 193,700 Issuance of Common Stock for services - - - 37,091 Issuance of Common Stock in lieu of interest payments on notes payable - - - 35,412 Amortization of warrants in connection with debt and lease financing 26,534 19,464 18,099 64,097 Issuance of options in connection with consulting services 49,540 6,150 - 55,690 Changes in operating assets and liabilities: Receivables - - (91,040) (91,040) Inventories - - (931,917) (931,917) Prepaid expenses and other assets (131,337) (414,391) 132,602 (617,394) Accounts payable and accrued expenses 100,732 82,572 730,259 1,319,573 ---------------------------------------------------------- Net cash used in operating activities (6,112,296) (7,188,754) (8,779,365) (32,603,011) INVESTING ACTIVITIES Purchases of property, plant and equipment (85,637) (66,999) (496,084) (1,704,529) Proceeds from disposal of equipment - - - 46,947 --------------------------------------------------------- Net cash used in investing activities (85,637) (66,999) (496,084) (1,657,582) FINANCING ACTIVITIES Proceeds from sale leaseback - - - 283,030 Net proceeds from issuance of Common Stock 7,477 46,346 34,015,528 35,044,676 Net proceeds from issuance of Preferred Stock - 9,841,785 - 27,290,155 Proceeds from notes payable - 1,053,663 - 3,177,926 Payments on long-term debt (63,806) (1,142,415) (1,396,894) Reimbursement to founder and shareholder - - - (3,500) Net cash provided by (used in) ---------------------------------------------------------- financing activities (56,329) 9,799,379 34,015,528 64,395,393 ---------------------------------------------------------- Increase (decrease) in cash and cash equivalents (6,254,262) 2,543,626 24,740,079 30,134,800 Cash and cash equivalents at beginning of period 9,105,357 2,851,095 5,394,721 - Cash and cash equivalents at end of ---------------------------------------------------------- period $ 2,851,095 $ 5,394,721 $30,134,800 $ 30,134,800 ==========================================================
See accompanying notes. 12 Optical Sensors Incorporated (A Development Stage Company) Notes to Financial Statements December 31, 1996 1. BUSINESS ACTIVITY Optical Sensors Incorporated (the "Company") is a development stage company engaged in developing, manufacturing and marketing fiberoptic chemical sensors for blood gas monitoring for medically unstable patients in critical and intensive care units. The Company was incorporated on May 23, 1989 and reincorporated in Delaware on January 4, 1996. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Investments classified as cash equivalent consist primarily of commercial paper and municipal bonds. The market value of investments is based on quoted market prices which approximates cost. INVENTORIES Inventories consist of ABG modules and raw materials which are recorded at the lower of cost (FIFO basis) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over three to five years. Leasehold improvements are amortized over the shorter of the term of the lease or life of the asset. 13 Optical Sensors Incorporated (A Development Stage Company) Notes to Financial Statements (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PATENTS Patents are stated at cost and are amortized upon issuance of a patent on a straight-line basis over sixty months. The carrying value of patents will be reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that patent cost will not be recoverable, as determined based on the undiscounted cash flows over the remaining amortization period, the Company's carrying value of the patents will be reduced by the estimated shortfall of cash flows. INCOME TAXES The Company accounts for income taxes using the liability method. Deferred income taxes are provided for temporary differences between the financial reporting and tax bases of assets and liabilities. STOCK-BASED COMPENSATION The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related interpretations in accounting for its stock options. Under APB 25, when the exercise price of stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"). The Company adopted the disclosure only provisions of Statement 123. Accordingly, the Company has made pro forma disclosures of what net loss and loss per share would have been had the provisions of Statement 123 been applied to the Company's stock options. 14 Optical Sensors Incorporated (A Development Stage Company) Notes to Financial Statements (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from the estimates. ACCOUNTING FOR LONG-LIVED ASSETS The Company records losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. NET LOSS PER SHARE Net loss per share is computed using the weighted average number of common shares outstanding. Common equivalent shares from stock options and warrants are excluded from the computation as their effect is antidilutive except that, pursuant to the Securities and Exchange and Exchange Commission (SEC) Staff Accounting Bulletins, common and common equivalent shares issued during the period beginning twelve months prior to the filing of the Company's initial public offering at prices substantially below the public offering price have been included in the calculation as if they were outstanding for all periods prior to the initial public offering presented (using the treasury stock method and the public offering price for stock options, warrants and the if-converted method for convertible preferred stock). 3. SALES OF COMMON STOCK In 1989, the Company issued 4,930 shares of Common Stock in exchange for a release from a covenant not to compete. The non-compete covenant related to the founder's position of president with a former company. 15 Optical Sensors Incorporated (A Development Stage Company) Notes to Financial Statements (Continued) 3. SALES OF COMMON STOCK (CONTINUED) Also, in 1989 and 1990, the Company sold 93,789 shares of Common Stock in a private placement for $844,100 less related costs of $121,502 plus 6,260 shares of Common Stock issued at $9.00 per share for services provided in the private placement. Additionally, in July 1990, the Company sold 16,667 shares of Common Stock for $150,000 related to the same offering. 4. CONVERTIBLE PREFERRED STOCK In February 1991, the Company created a new class of stock, Convertible Preferred Stock, Series A. From March 1991 to November 1991, the Company sold 94,370 shares of this new class at $11.25 per share for a total consideration of $1,062,500, less related offering costs of $49,904. Each share sold includes a warrant to purchase one-fifth of a share of Common Stock at $11.25 per share. The shares had a liquidation preference of $11.25 per share. In April 1992, the Company created a new class of Preferred Stock, Convertible Preferred Stock, Series B. From April 1992 to July 1992, the Company sold 418,387 shares of this new class at $12.60 per share for a total consideration of $5,271,676 less related offering costs of $93,903. Each share sold includes a warrant to purchase one-fourth of a share of Common Stock at $12.60 per share. The shares had a liquidation preference of $12.60 per share. See Note 5 for cancellation of related bridge loans. In June 1993, the Company created a new class of Preferred Stock, Convertible Preferred Stock, Series C. From June 1993 to September 1993, the Company sold 958,200 shares of this new class at $12.60 per share for a total consideration of $12,073,752 less related offering costs of $815,320. In connection with the sale thereof, the Company issued warrants to a placement agent to purchase 79,869 shares of Common Stock at $7.38 per share. The shares had liquidation preference of $12.60 per share. See Note 5 for cancellation of related bridge loans. 16 Optical Sensors Incorporated (A Development Stage Company) Notes to Financial Statements (Continued) 4. CONVERTIBLE PREFERRED STOCK (CONTINUED) In July 1995, the Company created a new class of Preferred Stock, Convertible Preferred Stock, Series D. From July 1995 to September 1995, the Company sold 2,210,828 shares of this new class at $3.15 per share for a total consideration of $6,963,946 less related offering costs of $88,501. The shares also had a liquidation preference of $3.15 per share. See Note 5 for cancellation or conversion of related bridge loans. On November 28, 1995, the Company sold an aggregate of 370,338 shares of Series E Preferred Stock to certain existing shareholders, pursuant to the Company's Series E Convertible Preferred Stock Purchase Agreement, at a price of $8.10 per share for a total consideration of $3,000,000 less related offering costs of $33,660. These shares had a liquidation preference of $8.10 per share. The Company completed an initial public offering of Common Stock in 1996 in which it sold 2,875,000 shares of Common Stock, resulting in net proceeds of $33,915,782. At the time of the initial public offering, all shares of outstanding Preferred Stock were converted into an aggregate of 4,766,974 shares of Common Stock. 5. NOTES PAYABLE In 1989, the Company received working capital loans totaling $110,000. The notes bore interest at an annual rate of 12%. In April 1990, notes totaling $85,000 plus the accrued interest of $4,396 were converted to Common Stock at a conversion price of $4.50 per share. In November 1990, the remaining note totaling $25,000 plus the accrued interest of $3,000 was converted to Common Stock at a conversion price of $4.50 per share. 17 Optical Sensors Incorporated (A Development Stage Company) Notes to Financial Statements (Continued) 5. NOTES PAYABLE (CONTINUED) In 1991, the Company received working capital convertible bridge loans totaling $220,000. One of the notes for $50,000 was from a company that is owned by a Company Director. In 1992, the Company received an additional $780,000 of working capital convertible bridge loans. The notes bore interest at an annual rate of 2% over the First Bank National Association reference rate. Upon the completion of the sale of Series B Convertible Preferred Stock on April 28, 1992, the convertible bridge loans of $1,000,000 plus the accrued interest of $22,227 were automatically canceled as payment for 81,129 shares of Series B Convertible Preferred Stock at a price of $12.60 per share. In consideration of the purchase of the notes, the Company issued warrants to the investors to purchase 24,076 shares of Common Stock at $9.00 per share. In 1993, the Company received working capital convertible bridge loans totaling $999,933. The notes bore interest at an annual rate of 8%. Upon completion of the sale of Series C Convertible Preferred Stock, bridge loans of $999,933 plus the accrued interest of $5,789 were automatically canceled as payment for 79,817 shares of Series C Convertible Preferred Stock at a price of $12.60 per share. In consideration of the purchase of the notes, the Company issued warrants to the investors to purchase 26,871 shares of Common Stock at $12.60 per share. In 1995, the Company received working capital convertible bridge loans totaling $967,887. The notes bore interest at an annual rate of 8%. Upon completion of the sale of Series D Convertible Preferred Stock, bridge loans of $967,887, plus the accrued interest of $10,909, were automatically canceled or converted into 310,645 shares of Series D Convertible Preferred Stock at a price of $3.15 per share. In consideration of the purchase of the notes, the Company issued warrants to the investors to purchase 61,429 shares of Common Stock at $3.15 per share. 18 Optical Sensors Incorporated (A Development Stage Company) Notes to Financial Statements (Continued) 6. LEASES The Company leases its office and research and development facility under an operating lease that expires on November 30, 1999. Operating expenses, including maintenance, utilities, real estate taxes and insurance, are paid by the Company. The Company also leases certain office equipment under operating leases. In November 1992, the Company entered into an operating lease for capital equipment, which included a sale leaseback transaction. The Company recognized a loss on the sale leaseback of approximately $39,000. The loss has been deferred and was amortized over the term of the lease as an increase of rental expense. Under the lease agreement, the Company is allowed to lease up to $1,000,000 of equipment between November 5, 1992 and May 4, 1994. Assets leased under the agreement at December 31, 1995 and 1996 were approximately $1,002,000. The term of the lease is 42 months with payments due the first of each month. Rental payments are based on the total amount of equipment leased each month. In March 1994, the Company entered into two lease transactions. Under the lease agreements, the Company was allowed to lease up to $1,350,000 and $150,000, respectively, of equipment between April 1, 1994 and April 1, 1995. Assets leased under the agreement at December 31, 1996 were approximately $462,000 and $79,000, respectively. Terms of the lease are 42 and 33 months, respectively, with payments due the first of each month. Rental payments are based on the total amount of equipment leased each month. In August 1995, the Company entered into an equipment lease agreement in which $500,000 became available immediately to the Company and the remaining balance of $475,000 became available after the Company received FDA marketing clearance for its product. Assets leased under the agreement at December 31, 1996 were approximately $799,267. The term of the lease is 42 months with payments due the first of each month. Rent payments are based on the total amount of equipment leased each month. Total rent expense under operating leases was $585,000, $765,000 and $921,000 for the years ended December 31, 1994, 1995 and 1996, respectively. 19 Optical Sensors Incorporated (A Development Stage Company) Notes to Financial Statements (Continued) 6. LEASES (CONTINUED) Future minimum lease payments under noncancelable operating leases with initial or remaining terms of one year or more as of December 31, 1996 are as follows:
Year ending December 31: 1997 $ 660,000 1998 475,000 1999 372,000 2000 32,000 ------------ $1,539,000 ============
7. INCOME TAXES At December 31, 1996, the Company had cumulative net operating loss carryforwards for tax purposes of approximately $32,300,000 plus research and development tax credit carryforwards of approximately $1,000,000. These carryforwards are available to offset future taxable income through 2011. As a result of the sales of Preferred Stock and additional shares of Common Stock, the Company has experienced a change in ownership under the net operating loss limitation rules. The use of losses, incurred through the change in ownership date, to offset future taxable income, will be limited during the carryforward period. The credits will also be subject to limitations under these same rules. 20 Optical Sensors Incorporated (A Development Stage Company) Notes to Financial Statements (Continued) 7. INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31 1996 1995 ----------------------------- Deferred tax assets: Net operating loss carryforwards $ 11,900,000 $ 8,900,000 Tax credit carryforwards 1,000,000 800,000 Deferred compensation on stock options 604,000 373,000 Vacation accrual 71,000 69,000 Book over tax depreciation 98,000 69,000 Other 1,000 ----------------------------- Total deferred tax assets 13,673,000 10,212,000 Deferred tax liabilities: Deferred loss on sale leaseback - 2,000 ----------------------------- Total deferred tax liabilities - 2,000 ----------------------------- Net deferred tax assets 13,673,000 10,210,000 Valuation allowance (13,673,000) (10,210,000) ----------------------------- $ - $ - =============================
21 Optical Sensors Incorporated (A Development Stage Company) Notes to Financial Statements (Continued) 8. STOCK OPTIONS AND WARRANTS The Company has three stock option plans that include both incentive and non- statutory stock options to be granted to directors, officers, employees and consultants of the Company. Option activity is summarized as follows:
WEIGHTED AVERAGE SHARES EXERCISE AVAILABLE OPTIONS PRICE PER FOR GRANT OUTSTANDING SHARE ------------------------------------- Balance at December 31, 1993 60,261 273,072 $9.05 Additional shares reserved for 51,556 9.00 issuance Granted--incentive stock options (83,687) 83,687 9.00 Granted--non-statutory stock options (1,498) 1,498 9.00 Options canceled 15,650 (15,650) 9.00 ------------------------------------- Balance at December 31, 1994 42,282 342,607 9.04 Additional shares reserved 948,444 Granted--incentive stock options (698,666) 698,666 1.25 Granted--non-statutory stock options (289,240) 289,240 .94 Options canceled 305,854 (305,854) 8.83 Options exercised (319,861) .91 ------------------------------------- Balance at December 31, 1995 308,674 704,798 1.80 Granted--incentive stock options (151,650) 151,650 8.42 Options canceled 36,140 (36,140) 4.62 Options exercised (86,300) .94 ------------------------------------- Balance at December 31, 1996 193,164 734,008 $3.11 =====================================
22 Optical Sensors Incorporated (A Development Stage Company) Notes to Financial Statements (Continued) 8. STOCK OPTIONS AND WARRANTS (CONTINUED) The weighted average fair value of options granted is summarized as follows:
1996 1995 -------------- Stock price = exercise price $5.22 $4.03 Stock price > exercise price 5.36 2.70
The exercise price of options outstanding at December 31, 1996 ranged from $.90 to $13.00 per share, as summarized in the following table:
WEIGHTED AVERAGE NUMBER OF WEIGHTED RANGE OF SHARES OUTSTANDING AT REMAINING SHARES AVERAGE EXERCISE EXERCISE PRICE DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISABLE PRICE PER SHARE - ---------------------------------------------------------------------------------------------------------------------- $ .90 to $ 5.00 538,619 8.54 years 155,015 $1.13 5.01 to 9.00 139,009 9.23 34,528 8.94 9.01 to 13.00 56,380 7.87 14,110 9.90 ---------------------------------------------------------------------------------------- Total 734,008 8.62 years 203,653 $3.06 ========================================================================================
The number of shares exercisable at December 31, 1994 and 1995 was 154,240 and 197,887 respectively at a weighted average exercise price of $9.08 and $1.90 per share, respectively. Pro forma information regarding net loss and loss per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement 123. The fair value for these options was estimated at the date of grant using a minimum value option pricing model with the following weighted-average assumptions for 1996 and 1995, respectively: risk-free interest rates ranging from 5.5% to 6.3%, volatility factor of the expected market price of the Company's Common Stock of .79 and a weighted-average expected life of the option of 7 years. 23 Optical Sensors Incorporated (A Development Stage Company) Notes to Financial Statements (Continued) 8. STOCK OPTIONS AND WARRANTS (CONTINUED) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value statement, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows:
1995 1996 -------------------------- Pro forma net loss $ 8,131,017 $ 9,451,264 Pro forma net loss per common share $ 2.70 $ 1.31
These pro forma amounts may not be indicative of future years' amounts since the Statement provides for a phase-in of option values beginning with those granted in 1995. At December 31, 1996, the Company has total exercisable warrants outstanding to purchase shares of its Common Stock as follows: 2,777 shares at $.90 per share, 71,706 shares at $3.15 per share, 79,869 shares at $7.38 per share, 36,298 shares at $9.00 per share, 9,095 shares at $11.25 per share and 151,730 shares at $12.60 per share. These warrants expire at various dates in 1997 through 2001. DEFERRED COMPENSATION For options granted during the period June 17, 1995 through October 3, 1995 to purchase a total of 971,640 shares of Common Stock at exercise prices ranging from $.90 to $2.70 per share in August 1995, the Company recognized $2,179,693 as deferred compensation for the excess of the deemed value for accounting purposes of the Common Stock issuable upon exercise of such options over the aggregate exercise price of such options. The deferred compensation expense is amortized ratably over the vesting period of the options. Deferred compensation expense was $1,008,467 and $623,452 for the years ended December 31, 1995 and 1996, respectively. 24 Optical Sensors Incorporated (A Development Stage Company) Notes to Financial Statements (Continued) 8. STOCK OPTIONS AND WARRANTS (CONTINUED) The remaining unamortized deferred compensation is expected to be charged to operations as follows: 1997 $325,984 1998 166,186 1999 55,604 ---------- $547,774 ==========
9. LICENSE AGREEMENTS In June 1991, the Company entered into a license agreement to license certain fiberoptic chemical sensor technology from another licensor. In consideration for the technology, the Company agreed to pay $88,000 upon execution of the agreement and executed a promissory note in the amount of $352,000 payable in four equal amounts annually. In June 1995, the final payment was made on the promissory note. The Company does not intend to use the technology in the future and, therefore, does not anticipate paying any royalties under the agreement. In August 1991, the Company entered into an agreement to purchase additional fiberoptic chemical sensor technology for $10,000. In addition, the Company issued 2,778 shares of Common Stock to the licensor upon assignment of the technology. The Company also issued a warrant to the licensor to purchase 2,777 shares of Common Stock which may be exercised if sales of product that are based significantly on the technology acquired aggregate $1,000,000. In addition, the Company has agreed to pay royalties on sales of industrial and environmental products for which the technology purchased is a significant part. The royalties shall be 5%, 4% and 3% on the first, second and third $10 million sales increments and 2% on sales in excess of $40 million. For sales of such products by any future licensees of the Company, the Company shall pay 25% of all licensing fees received up to $500,000 and 10% thereafter. The Company has made all payments for the technology. The Company does not intend to use the technology in the future and, therefore, does not anticipate paying any royalties under the agreement. 25 Optical Sensors Incorporated (A Development Stage Company) Notes to Financial Statements (Continued) 9. LICENSE AGREEMENTS (CONTINUED) In October of 1994, the Company entered into an agreement to have certain mathematical models developed related to chemical sensor technology. In consideration for the mathematical models, the Company has agreed to pay a fee of $45,000, payable in four installments of $11,250 beginning October 1, 1994. The Company has made all payments under the agreement. This agreement can be canceled with a 90 day notice. In September 1995, the Company entered into an agreement to acquire technology and the exclusive worldwide right to transfer and exploit such technology. In consideration for the technology, the Company has agreed to pay $2,000,000 payable as follows: $500,000 upon execution of the agreement, $500,000 upon completion of the technology, $500,000 once the product has been sold and installed in 20 hospitals and $500,000 once the product has been sold and installed in an additional 50 hospitals. The Company also agreed to pay $50,000 per month for engineering and technical support from August 1, 1995 through January 31, 1996. As of December 31, 1996, the Company has $1,000,000 remaining under this agreement which directly relates to products sold. 26 Optical Sensors Incorporated (A Development Stage Company) Notes to Financial Statements (Continued) 10. EMPLOYMENT AGREEMENT The Company has an employment agreement ("agreement") with the President and Chief Executive Officer of the Company. The agreement provides for a base salary currently at $185,000 per year, which may be increased by the Board of Directors and provides for an annual incentive bonus in an amount not less than 20% of the base salary if the Company reaches milestones agreed to by the Board and the President. The President also receives an automobile allowance of $500 per month. The agreement requires the President to assign to the Company patents and other proprietary rights related to the Company's business and to keep the Company's proprietary information confidential. The President is also prohibited from competing with the Company for a period of one year following termination of employment with the Company. Additionally, the agreement provides for severance pay equal to twelve months of base salary if the President is terminated without cause. In connection with the employment agreement, the Company granted the President options to purchase 121,162 shares of Common Stock at a price of $9.00 per share. In August of 1995, these options were canceled, and the Board of Directors granted the President a non-statutory option to purchase 272,222 shares of Common stock at a price of $.90 per share. In September 1995, the President exercised this option under the Company's 1991 Stock Option Plan to purchase 272,222 shares of Common Stock at a price of $.90 per share. The right to retain certain of the shares is subject to the President's continued employment through August 2, 1999. As payment for the shares, the President executed a $245,000 promissory note, payable in full on August 1, 1998, at an interest rate of 5.91%. The note is secured by the shares of Common Stock and proceeds of any dividend or other distribution attributable to the shares. 27 Optical Sensors Incorporated (A Development Stage Company) Notes to Financial Statements (Continued) 11. EMPLOYEE BENEFIT PLANS In July 1992, the Company adopted a 401(k) savings plan. Employees employed on July 1, 1992 were automatically eligible to participate and employees hired after July 1, 1992 are eligible to participate after six months of service and attaining the age of 21. Employees may contribute up to the maximum amount which will not violate provisions of the Plan or cause the Plan to exceed the maximum amount allowable as a deduction to the employer. The Company, at its discretion, may make matching contributions equal to a percentage of the employee's contribution. The Company did not contribute to the Plan in 1994, 1995 or 1996. 28 EX-23.1 9 CONSENT OF ERNST & YOUNG LLP Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP We consent to the incorporation by reference in this Annual Report (Form 10-K) of Optical Sensors Incorporated of our report dated February 7, 1997, included in the 1996 Annual Report to Shareholders of Optical Sensors Incorporated. We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-04373) pertaining to the Optical Sensors Incorporated 1989 Omnibus Stock Option Plan and the Optical Sensors Incorporated 1993 Stock Option Plan and, in the Registration Statement (Form S-8 No. 333-17493) pertaining to the Optical Sensors Incorporated Employee Stock Purchase Plan, of our report dated February 7, 1997, with respect to the financial statements of Optical Sensors Incorporated, incorporated by reference in this Annual Report (Form 10-K) of Optical Sensors Incorporated. Minneapolis, Minnesota /s/ Ernst & Young LLP March 27, 1997 EX-27 10 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 617,003 29,517,797 91,040 0 931,917 31,158,488 1,081,677 488,043 32,369,197 1,319,573 0 0 0 83,415 30,966,209 32,369,197 163,068 163,068 1,369,221 1,369,221 10,940,758 0 0 (9,385,272) 0 (9,385,272) 0 0 0 (9,385,272) (1.30) (1.20)
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