-----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, GFCV+11x2YN5a79QucCJb5tMUVkVXvC54l3OzWXw73a2YPi5lIRN07ndwibZM+kC qJp69ByTPkPlJRLIf3132A== 0001045969-00-000228.txt : 20000331 0001045969-00-000228.hdr.sgml : 20000331 ACCESSION NUMBER: 0001045969-00-000228 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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: SEC FILE NUMBER: 000-27600 FILM NUMBER: 584381 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, 1999 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to __________________. Commission File No. 0-27600 -------------------- OPTICAL SENSORS INCORPORATED (Exact name of registrant as specified in its charter) Delaware 41-164359 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7615 Golden Triangle Drive, Suite C Technology Park V Minneapolis, Minnesota 55344-3733 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (952) 944-5857 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Preferred Share Purchase Rights Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of March 15, 2000, 8,962,777 shares of Common Stock of the Registrant were outstanding, and the aggregate market value of the Common Stock of the Registrant as of that date (based upon the last reported sale price of the Common Stock at that date as reported by the Nasdaq National Market System), excluding outstanding shares beneficially owned by directors and executive officers, was $27,832,268. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report on Form 10-K incorporates by reference information (to the extent specific sections are referred to herein) from the Registrant's Proxy Statement for its 2000 Annual Meeting of Stockholders to be held on May 4, 2000 (the "2000 Proxy Statement"). ================================================================================ 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 Since October 1998, Optical Sensors Incorporated (the "Company") has been focusing its resources on development and commercialization of the CapnoProbe, which is a handheld device with a carbon dioxide ("CO2") probe that is slipped under the tongue like a thermometer. It non-invasively measures the tissue CO2 of the mucous membrane in the mouth -- a sensitive measure that can indicate reduced blood flow to non-vital organs. Reduced blood flow, or "hypoperfusion" can be an early manifestation of clinical shock, even when traditional vital signs may still appear relatively normal. Diagnosis of inadequate tissue perfusion may be difficult in its early stages when the signs and symptoms are masked by the body's natural compensatory mechanisms that preserve blood supply to vital organs by reducing blood flow to other organs. If treatment is delayed to the point that the body's compensatory systems can no longer maintain adequate circulation and vital tissue perfusion, the consequences can be disastrous for the patient. To date, there has been no rapid, low-cost, noninvasive method to objectively determine when a patient has inadequate tissue perfusion. In December 1998, the Company filed a 510(k) application for FDA clearance of the CapnoProbe as a Class II medical device. Prototype versions of the CapnoProbe system are currently being evaluated at clinical sites in the United States. The Company has completed set up of one manufacturing pod for manual assembly of the prototype probes and finished preliminary plans for automated probe assembly. The Company currently estimates that the CapnoProbe product will be available for limited release in 2000 and full commercial release in the first quarter of 2001. Prior to January 1999, the Company had also been actively marketing its SensiCath system, a patient-connected, on-demand arterial blood gas ("ABG") monitoring system, which provides precise and accurate ABG results within 60 seconds without exposure to potentially infectious blood or depleting the patient's blood supply (the "SensiCath System"). ABG tests measure oxygen, carbon dioxide and acid-base in a sample of blood taken from a patient's artery. Because of the Company's need to conserve resources, in January 1999, the Company significantly reduced its workforce, suspended direct sales activities and implemented product cost reduction programs for the SensiCath System and reduced associated expenses. The Company recognized approximately $300,000 in employee severance costs for the first quarter of 1999 related to the workforce reduction. Accrued severance costs, consisting of payments to employees and related employer payroll taxes, were paid in the second quarter of 1999. The Company also exercised its right to convert Instrumentation Laboratory Company ("IL") to a non-exclusive distributor of the SensiCath System in January 1999, and is currently pursuing termination of the IL distribution agreement through an arbitration proceeding filed by the Company. Since January 1999, IL has not placed any material orders for the SensiCath System, and the only sales of the SensiCath System have been to existing customers who have continued to order SensiCath sensors. The Company does not expect meaningful sales of the SensiCath System in the future. In January 1999, the Company also announced that it had engaged Volpe Brown Whelan & Company, LLC, to serve as financial advisor to the Company. The Company continues to explore 1 strategic alternatives, including joint ventures, corporate strategic alliances, sale of the business or product lines, or other business combinations. In January 2000, the Company signed a non-binding letter of intent with a major supplier of medical products and services to negotiate a definitive agreement for the Company's CapnoProbe product and technology. The agreement includes a confidentiality understanding that precludes the Company from identifying the other party. On March 10, 2000, the Company entered into an Investment Agreement with two of the Company's principal stockholders, Circle F Ventures, LLC, a Georgia limited liability company, and Special Situations Fund III, L.P., a Delaware limited partnership, pursuant to which the Company agreed to issue convertible promissory notes in the aggregate principal amount of up to $3,000,000. The Company received advances under these notes in the aggregate amount of $1,400,000 on March 10, 2000. The Company has the right to request additional advances up to the aggregate principal amount of $1,600,000 at any time during the 60 day period beginning on the first day after both of the following have occurred: (1) the Company executes a definitive distribution agreement for the Company's CapnoProbe product with a major medical company, and (2) the stockholders of the Company approve the conversion of the notes. The Company's right to request additional advances will expire on June 15, 2000. The notes are convertible into units, each unit consisting of 50,000 shares of the Company's Common Stock and a five-year warrant to purchase 12,500 shares of Common Stock at an exercise price of $1.00 per share, at a conversion price equal to $50,000 per unit, in accordance with the Investment Agreement. The proceeds from the issuance of these convertible promissory notes will provide the Company additional funds to continue development of its CapnoProbe technology as the Company moves forward with its continuing strategic negotiations with this major supplier of medical products and completing development of the CapnoProbe product. The Company was incorporated in Minnesota in May 1989 and reincorporated in Delaware in January 1996. The Company's executive offices are located at 7615 Golden Triangle Drive, Suite C, Technology Park V, Minneapolis, Minnesota 55344, and its telephone number is (952) 944-5857. The CapnoProbe The CapnoProbe is a handheld device with a CO2 probe that is slipped under the tongue like a thermometer that non-invasively measures the tissue CO2 of the mucous membrane in the mouth -- a sensitive measure that can indicate reduced blood flow to non-vital organs. Reduced blood flow, or "hypoperfusion" can be an early manifestation of clinical shock, even when traditional vital signs may still appear relatively normal, as in compensated shock cases. According to the Wilkerson Group, a leading market research organization, the U.S. market potential for the CapnoProbe is more than $300 million in the emergency department and intensive care markets alone. In December 1998, the Company filed a 510(k) for FDA clearance of the CapnoProbe as a Class II medical device. At the FDA's request and as part of that submission, the Company provided additional data to the FDA on March 20, 2000. The CapnoProbe's disposable CO2 probe is self-calibrating and is planned to provide CO2 readings in approximately one minute. One CapnoProbe sensor will be used on one patient for a single measurement. Multiple measurements would be made depending on the severity of the patient's state and response to therapy. The CapnoProbe instrument will be portable, rugged and battery operated. The Company is using its proven designs from its existing OpticalCAM blood analyte monitor and the CO2 component of its SensiCath blood gas sensor to reduce technical risk in the program and to speed development to market. No new research is required for the product and all milestones to commercialization are engineering related. Prototype versions of the CapnoProbe system are currently being evaluated at clinical sites in the United States. 2 Sales and Marketing In January 1999, the Company suspended sales activity of the SensiCath System and reduced expenses and personnel (including sales and marketing personnel) in order to concentrate its resources on the CapnoProbe. The Company does not expect meaningful sales of the SensiCath System in the future. In January 1998, the Company entered into an agreement with IL for worldwide distribution of the Company's SensiCath Sensors and OpticalCAM instrumentation. IL was required to purchase sufficient quantities of products from the Company that would result in preestablished annual minimum revenues to the Company. IL failed to meet the quota requirements for 1998, and, accordingly, the Company exercised its right to convert IL's exclusive right to a non-exclusive right in January 1999. The Company is currently pursuing termination of the IL distribution agreement through an arbitration proceeding filed by the Company. The Company is exploring strategic alternatives, including joint ventures, corporate strategic alliances, sale of the business or product lines, or other business combinations. One of the strategic alternatives could include a distribution and/or development partner for the CapnoProbe and/or other platform technologies based upon the Company's proprietary technology. Research and Development The Company's research and development staff is currently focusing on the design and development of the CapnoProbe technology. There can be no assurance that the Company will be able to successfully develop the CapnoProbe product on a timely basis or at all. The Company's research and development expenses for the fiscal years ended December 31, 1999, 1998 and 1997 were $3,115,075, $4,248,029 and $4,975,037 respectively. The Company anticipates that it will continue to spend significant amounts on research and development activities for the foreseeable future. Manufacturing and Supply The Company used to manufacture the SensiCath Sensor at its facility in Minneapolis, Minnesota, which includes approximately 4,000 square feet of manufacturing space. The FDA conducted a scheduled good manufacturing practices inspection of the Company's manufacturing facility in November 1997, and the Company passed the inspection. The Company's manufacturing facility is ISO 9001 compliant. The Company has not yet established commercial manufacturing for the CapnoProbe. Competition Competition in the medical device industry in general is intense and expected to increase. To the Company's knowledge, however, there are no commercially available products that would be directly competitive with the CapnoProbe. The CapnoProbe would indirectly compete with the Datex-Ohmeda (Instrumentariun Corporation) TONOCAP system. This product measures CO2 in the tissue of the stomach wall as an indicator of shock and has only recently been introduced to critical care medicine. The TONOCAP system requires placement of a balloon catheter into the stomach and measures air or saline from the balloon at regular intervals. However, the administration of a histamine-2 receptor (e.g., Tagamet) and a stomach free of food are required for accurate measurements, making this a difficult product to use in emergency situations where it is most needed. Even with its limitations, there is a growing body of literature that reinforces the importance of measuring gastrointestinal CO2 as a method 3 of diagnosing shock since there is evidence that if elevated CO2 cannot be reversed within six to 24 hours, aggressive treatment will not be effective. The Company believes that the principal competitive factors for its CapnoProbe will be accuracy, rapid results, cost-effectiveness and price. Most of the Company's competitors have significantly greater financial, technical, research, marketing, sales, distribution and other resources than the Company. There can be no assurance that the Company's competitors will not succeed in developing or marketing technologies and products that are more effective or less expensive than those developed or marketed by the Company or that would render the Company's technology and products obsolete or noncompetitive. Furthermore, there can be no assurance that the emergence of new products, technologies or procedures will not reduce the need for the CapnoProbe. Patents and Proprietary Rights The Company seeks to protect technology, inventions and improvements that it considers important through the use of patents and trade secrets. The Company currently holds or has a license to practice 21 U.S. patents covering the Company's opto-electronic technology, four of which are specifically related to the CapnoProbe, and has filed a number of patent applications in the United States, Japan and key European countries. There can be no assurance, however, that the Company's patents will provide competitive advantages for the Company's products, or that such rights will not be challenged or circumvented by competitors. In addition, there can be no assurance that any patents covered under any pending patent applications will be issued. Claims made under patent applications may be denied or significantly narrowed and the issued patents, if any, may not provide significant commercial protection to the Company. The Company could incur substantial costs in proceedings before the U.S. Patent and Trademark Office, including interference proceedings. These proceedings could result in adverse decisions as to the priority of the Company's inventions. In July 1998, the Company entered into a patent license agreement with Institute of Critical Care Medicine, which provides the Company with the exclusive, worldwide right under ICCM's pending and issued patents to use the Company's technology to assess tissue perfusion under the tongue (sublingually) and in the esophagus to aid in the diagnosis and monitoring of shock. The CapnoProbe product being developed by the Company is expected to be subject to royalties under the license agreement. The Company is obligated to pay ICCM a minimum annual royalty of $300,000 for five years in order to maintain exclusivity. The Company may elect, on one years' written notice, not to make the annual minimum royalty payment of $300,000, but ICCM would have the right to terminate the license agreement. The Company is obligated to pay ICCM a customary royalty equal to a percentage of sales, which varies depending on the selling price to the customer of the CapnoProbe. The Company is also obligated to meet certain product development milestones under the license agreement. While the Company does not believe that any of its products infringe any valid claims of patents or other proprietary rights held by third parties, there can be no assurance that the Company does not infringe any patents or other proprietary rights held by third parties. If an infringement claim were made, the costs incurred to defend the claim could be substantial and adversely affect the Company, even if the Company were ultimately successful in defending the claim. If the Company's products were found to infringe any proprietary right of a third party, the Company could be required to pay significant damages or license fees to the third party or cease production. Litigation may also be necessary to enforce patent rights held by the Company, or to protect trade secrets or techniques owned by the Company. Any such claims or litigation could result in substantial costs and diversion of effort by management of the Company. 4 The Company also relies on trade secrets and other unpatented proprietary technology. There can be no assurance that the Company can meaningfully protect its rights in such unpatented proprietary technology or that others will not independently develop substantially equivalent proprietary products or processes or otherwise gain access to the Company's proprietary technology. The Company seeks to protect its trade secrets and proprietary know-how, in part, with confidentiality agreements with employees and consultants. There can be no assurance that the agreements will not be breached, that the Company will have adequate remedies for any breach or that the Company's trade secrets will not otherwise become known to or independently developed by competitors. SensiCath(R),OpticalCAM(TM), and CapnoProbeTM are trademarks of the Company. Government Regulation The Company's products, development activities and manufacturing processes are subject to regulation by numerous governmental authorities, principally the United States Food and Drug Administration ("FDA") and corresponding foreign agencies. In the United States, the FDA administers the Federal Food, Drug and Cosmetics Act and amendments thereto, including the Safe Medical Devices Act of 1990. The Company is subject to the standards and procedures respecting manufacture and marketing of medical devices contained in the Federal Food, Drug and Cosmetics Act and the regulations promulgated thereunder and is subject to inspection by the FDA for compliance with such standards and procedures. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing approvals and criminal prosecution. In the United States, medical devices are classified into one of three classes (class I, II or III), on the basis of the controls deemed necessary by the FDA to reasonably assure their safety and effectiveness. Under FDA regulations, class I devices are subject to general controls (e.g., labeling, premarket notification and adherence to good manufacturing practices) and class II devices are subject to general and special controls (e.g., performance standards, postmarket surveillance, patient registries and FDA guidelines ). In general, class III devices (e.g., life-sustaining, life-supporting and implantable devices, or new devices which have not been found substantially equivalent to a legally marketed device), in addition to being subject to general and special controls, must receive premarket approval ("PMA") by the FDA to ensure their safety and effectiveness. Before a new or significantly modified device can be introduced into the market, the manufacturer must generally obtain marketing clearance through a 510(k) notification or approval of a PMA application. A 510(k) clearance will be granted if the proposed device is "substantially equivalent" to a predicate device (i.e., a legally marketed class I or class II medical device, or a class III medical device for which the FDA has not called for the submission of a PMA application). Commercial distribution of a device for which a 510(k) notification is required can begin only after the FDA issues a written determination that the device is "substantially equivalent" to a predicate device. The process of obtaining a 510(k) clearance typically can take several months to a year or longer. A PMA application must be filed if a proposed device is not substantially equivalent to a legally marketed class I or class II device, or if it is a class III device for which the FDA has called for a PMA application. Certain class III devices that were on the market before May 28, 1976 ("preamendments class III devices"), and devices that are substantially equivalent to them, can be brought to market through the 510(k) process until the FDA calls for the submission of PMA applications for preamendments class III devices. The process of obtaining a PMA can be expensive, uncertain and lengthy, frequently requiring anywhere from one to several years from the date the PMA is submitted to the FDA, if approval is obtained at all. 5 The Company has received 510(k) clearance to market the SensiCath System and the OpticalCAM monitor from the FDA. In December 1998, the Company submitted a 510(k) for the CapnoProbe, but has not yet received clearance to market. At the FDA's request and as part of that submission, the Company provided additional data to the FDA on March 20, 2000. There can be no assurance that this or any other future 510(k) submissions will be cleared by the FDA on a timely basis, if at all. The Company is also subject to regulation in each of the foreign countries in which it sells its products with regard to product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. Many of the regulations applicable to the Company's products in such countries are similar to those of the FDA. The national health or social security organizations of certain of such countries require the Company's products to be qualified before they can be marketed in those countries. Delays in receipt of, or a failure to receive such approvals or clearances, or the loss of any previously received approvals or clearances, could have a material adverse effect on the Company. To date, the Company has not experienced significant difficulty in complying with these regulations. In February 1997, the Company received the European Medical Devices Directorate ("MDD") approval to place the "CE" mark on its products. The CE mark enables the Company's products to be marketed, sold and used throughout the European Union, subject to limited "safeguard" powers of member states. The Company is subject to periodic inspections by the FDA, which is charged with auditing the Company's compliance with good manufacturing practices ("GMP") established by the FDA and other applicable government standards. The Company is also subject to inspections by the MDD and other European regulatory agencies. Strict regulatory action may be initiated in response to audit deficiencies or to product performance problems. The Company believes that its manufacturing and quality control procedures are in compliance with the requirements of the FDA and MDD regulations. The Company's manufacturing facilities and processes are also subject to periodic inspection and review by its Notified Body in conjunction with the Company's ISO 9001 certification. Failure to maintain GMP and ISO 9001 certifications could have a material adverse effect on the Company. Employees As of March 15, 2000, the Company had 23 full-time and no part-time employees. No employees are covered by collective bargaining agreements, and the Company considers its relationship with its employees to be good. Item 2. PROPERTIES. The Company's facilities are located at 7615 Golden Triangle Drive, Suite C, Technology Park V, Minneapolis, Minnesota, and consist of approximately 18,300 square feet. The Company leases these facilities pursuant to a lease that expires on May 31, 2000. The lease provides for rent of approximately $18,000 per month, including base rent and a pro rata share of operating expenses and real estate taxes. The Company believes it will be able to renew this lease if necessary. Item 3. LEGAL PROCEEDINGS. In April 1999, the Company initiated an arbitration proceeding against Instrumentation Laboratory Company by filing a demand for arbitration with the American Arbitration Association. The Company is seeking a declaration that it has no further limitations or obligations with respect to IL under the Private Label Reseller Agreement, dated January 7, 1998 between the Company and IL. In addition, 6 the Company is seeking monetary damages based on various legal theories, including breach of the Agreement by IL for failing to adequately promote and sell the Company's SensiCath System as required under the Agreement. IL has filed a counterclaim also seeking damages from the Company. The arbitration proceeding is pending. There are no other material pending or threatened legal, governmental, administrative or other proceedings to which the Company is a party or of which any of its property is subject. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report. Item 4a. EXECUTIVE OFFICERS OF THE COMPANY. The executive officers of the Company, their ages and the offices held, as of March 15, 2000, are as follows: Name Age Title - ------------------- ----- ------------------------------------------- Paulita M. LaPlante 42 President and Chief Executive Officer Wesley G. Peterson 52 Chief Financial Officer, Vice President of Finance and Administration and Secretary Victor Kimball 36 Vice President, Strategic Planning and Product Development Information regarding the business experience of the executive officers of the Company is set forth below. Paulita M. LaPlante has been the President and a Director of the Company since September 1998 and Chief Executive Officer of the Company since December 1998. From June 1994 to September 1998, Ms. LaPlante served as the Company's Vice President of Worldwide Sales, Marketing and Business Development and was Director of Marketing and Business Development from April 1992 to June 1994. She also served as the Company's interim Vice President of Research and Development from January 1994 to September 1994. Wesley G. Peterson has been the Company's Chief Financial Officer since January 1992, Vice President of Finance and Administration since June 1994 and Secretary since July 1992. He was also Director of Finance and Administration from January 1992 to June 1994. Victor Kimball has been the Company's Vice President, Strategic Planning and Product Development since December 1998. From June 1997 to October 1998, Mr. Kimball was Director of Engineering and Business Development and from January 1995 to June 1997, he was Director of Engineering. From June 1992 to January 1995 he was Engineering Manager of the Company. 7 PART II ------- Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The common stock of Optical Sensors Incorporated has been traded on The Nasdaq National Market, under the symbol OPSI, since the Company's initial public offering on February 14, 1996. The following table sets forth the high and low closing prices for the Company's common stock, as reported by the Nasdaq National Market, for the periods indicated: Quarter Ended High Low --------------------- --------- --------- March 31, 1999 $1.81 $1.03 June 30, 1999 1.50 0.75 September 30, 1999 1.50 0.88 December 31, 1999 1.34 0.50 March 31, 1998 $6.00 $4.63 June 30, 1998 5.13 3.50 September 30, 1998 4.13 1.00 December 31, 1998 1.88 0.91 The foregoing prices reflect inter-dealer prices, without dealer markup, mark-down or commissions, and may not represent actual transactions. As of March 15, 2000, the Company had 209 stockholders of record of its common stock and an estimated 2,780 beneficial holders whose shares were registered in the names of nominees. The Company has never paid any cash dividends on its common stock, and does not anticipate paying any cash dividends on its common stock in the foreseeable future. 8 Item 6. SELECTED FINANCIAL DATA.
Years Ended December 31, ------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- --------- ----------- ---------- ---------- (in thousands, except per share data) Statements of Operations Data Net sales..................... $ 134 $ 1,019 $ 141 $ 163 $ -- Operating expenses............ 5,968 10,533 10,472 9,734 8,249 Loss from operations.......... 7,879 (12,420) (12,527) (10,941) (8,249) Interest income, net.......... 101 628 1,193 1,555 118 Net loss...................... (7,785) (11,817) (11,333) (9,385) (8,131) Net loss per common share, basic and diluted........... (.88) (1.34) (1.35) (1.30) (19.27) December 31, ------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- --------- ----------- ---------- ---------- (in thousands) Balance Sheet Data Cash and cash equivalents...... $ 1,451 $ 8,080 $17,101 $30,135 $ 5,395 Working capital................ -- 9,103 18,220 30,039 5,242 Total assets................... 2,001 12,565 21,626 32,369 6,367 Long-term obligations.......... 4,296 495 472 -- -- Total shareholders' equity..... 10,411 10,984 20,157 31,050 5,778
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Result of Operations Fiscal Years Ended December 31, 1999 and 1998 Net sales in 1999 decreased $884,733 or 87% to $134,131 from $1,018,864 in 1998. The decrease in sales is the result of the Company's suspension of direct sales and support activities of the SensiCath System in January 1999. Net sales for 1999 consisted of development fees and sales of SensiCath sensors to existing customers, less OpticalCAM product returns. No new customer sales were made during 1999. The Company does not expect meaningful sales of the SensiCath System in the future. Costs of products sold in 1999 decreased $860,383 or 30% to $2,045,183 from $2,905,506 in 1998. The decreased cost of products sold for 1999 was directly related to the suspension of SensiCath production in January 1999. Costs of products sold for 1999 included approximately $400,000 in fourth quarter writeoffs of SensiCath production tooling, equipment and inventories. Remaining fixed overhead costs and costs of personnel in support of CapnoProbe activities and the Company's proprietary technologies are expected to continue at approximately $250,000 per quarter through 2000. Research and development costs for 1999 decreased $1,132,954 or 27% to $3,115,075 from $4,248,029 in 1998. The decrease for 1999 is due primarily to a reduction in research and development staffing of approximately 25% in the first quarter of 1999. Research and development efforts during 1999 9 were directed towards product development and regulatory activities for the CapnoProbe product. Research and development expenses are expected to be approximately $500,000 per quarter through 2000. Under the July 1998 license agreement with ICCM, the Company paid $300,000 in minimum royalties in 1999 and expects to pay $300,000 in minimum royalties in 2000. The minimum royalty payments paid in 1999 were recorded as research and development expenses because no CapnoProbe sales took place in 1999. The Company is obligated to pay ICCM a customary royalty equal to a percentage of sales, which varies depending on the selling price to the customer of the CapnoProbe. Selling, general and administrative expenses in 1999 decreased $3,431,932 or 55% to $2,852,974 from $6,284,904 for 1998. Substantially all sales and marketing activities were suspended during the first quarter of 1999, accounting for the decrease from 1998. The Company expects selling, general and administrative expenses to be approximately $450,000 per quarter through 2000, not including expenses that might result from its activities in securing a corporate merger, sale of a portion or all of the Company. Selling, general and administrative expenses consist primarily of the cost of CapnoProbe marketing clinical activities, ongoing administrative activities and costs of maintaining the Company's public status. Net interest income in 1999 decreased $527,074 to $101,270 from $628,344 in 1998. The decrease in net interest income in 1999 is due to declining cash balances. The Company expects interest income to continue to decline in future periods as it uses cash for operations. Since its inception, the Company has experienced significant operating losses. The Company incurred a net loss of $7,785,274 for 1999, compared to a net loss of $11,817,330 for 1998. As of December 31, 1999, the Company had an accumulated deficit of $66,151,324. The Company anticipates that its operating losses will continue in the foreseeable future. Except for historical information contained herein, the disclosures in this report are forward looking statements. See "Certain Important Factors." Fiscal Years Ended December 31, 1998 and 1997 Net sales were $1,018,864 and $140,936 for 1998 and 1997, respectively. Sales in 1997 were adversely affected by a recall of the SensiCath initiated by the Company in May 1997 because of an interference problem with a certain portion of the critical care patient population. In December 1997, the Company introduced an enhanced version of its SensiCath Sensor that solved the inference problems, accounting for the sales increase in 1998. In 1998, approximately 26% of net sales were from the sale of SensiCath Sensors, and approximately 74% of net sales were from the placement of OpticalCAM instrumentation. In January 1999, the Company discontinued direct sales activities of the SensiCath System in order to focus its resources on development of the CapnoProbe product. Costs of products sold were $2,905,506 and $2,195,714 in 1998 and 1997, respectively, an increase of $709,792 in 1998. The increase in 1998 was the result of higher sales and manufacturing levels. A total of $446,000 in 1997 represented a write-down of OpticalCAM inventories to estimated market value. The amount of the write-down reflected the difference between the Company's estimated net realizable value based on the future selling price to its customers of the OpticalCAM System and the cost of inventories on hand or on order at the end of 1997. Under the agreement between the Company and IL, the Company agreed to sell OpticalCAM instrumentation to IL at the lower of the Company's direct cost of manufacturing or previously scheduled amounts. Research and development expenses were $4,248,029 and $4,975,037 in 1998 and 1997, respectively, a decrease of $727,008, or 15% in 1998. Research and development expenses in 1997 included a $500,000 payment to Marquette Medical Systems, Inc. under a previously disclosed 10 technology purchase agreement. No comparable payments occurred in 1998. In 1998 the Company's research and development efforts were directed primarily towards SensiCath System improvements. Towards the end of 1998, research and development efforts were directed increasingly towards development of the CapnoProbe product. Selling, general and administrative expenses were $6,284,904 and $5,496,772 in 1998 and 1997, respectively, an increase of $788,132, or 14%, in 1998. The increase is attributable primarily to increased sales activities in 1998. The Company's administrative expenses were essentially unchanged in 1998 from the prior year. In January 1999, the Company discontinued direct sales activities. Net interest income decreased $618,318 to $628,344 in 1998 from $1,246,662 in 1997, due to declining cash reserves resulting from negative cash flows. The Company incurred a net loss of $11,817,330 in 1998 compared to a net loss of $11,333,358 in 1997. The increase in net loss in 1998 was primarily due to the decrease in net interest income described above. Increased spending in selling expenses were offset by reductions in other areas. Liquidity and Capital Resources To date, the Company has financed its operations primarily through the sale of equity securities. From inception through December 31, 1995, the Company raised net proceeds of $30,400,000 from private equity financings and stock option exercises. In the first quarter of 1996, the Company completed an initial public offering of 2,875,000 shares of Common Stock. The net proceeds to the Company from the public offering were approximately $33,916,000. In January 1998, the Company sold 441,203 shares of Common Stock to IL, which represented 4.99% of the Company's outstanding Common Stock following completion of the transaction, at a price of $5.00 per share (which is equal to the closing market price on the date before signing of the agreement) for a total price of $2,206,015. In March 2000, the Company entered into an Investment Agreement with Circle F Ventures, LLC and Special Situations Fund III, L.P., pursuant to which the Company agreed to issue convertible promissory notes in the aggregate principal amount of up to $3,000,000. These notes are convertible into units, each unit consisting of 50,000 shares of Common Stock and a five-year warrant to purchase 12,500 shares of Common Stock at an exercise price of $1.00 per share, at a conversion price equal to $50,000 per unit, in accordance with the Investment Agreement. The Company received advances under these notes in the aggregate amount of $1,400,000 on March 10, 2000. The Company has the right to request additional advances up to the aggregate principal amount of $1,600,000 at any time during the 60 day period beginning on the first day after both of the following have occurred: (1) the Company executes a definitive distribution agreement for the Company's CapnoProbe product with a major medical company, and (2) the stockholders of the Company have approved the conversion of any additional advances to be made under the notes into units at the Company's 2000 Annual Meeting of Stockholders. The Company's right to request additional advances expires on June 15, 2000. The proceeds from the sales of these securities have been used to fund costs of producing products and for the operating expenses described above and capital expenditures described below. The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "OPSI." The Company's cash and cash equivalents were $1,450,872 and $8,079,871 at December 31, 1999 and 1998, respectively. The decrease in the Company's cash balance is due to the operating losses described above. The Company incurred cash expenditures of $6,413,007 for operations and $38,364 for capital expenditures in 1999. In addition, the Company acquired equipment and tooling under capital 11 leases for a total of $140,036 in 1999. The capital equipment expenditures were principally for payments related to end of lease provisions under operating and capital leases. The inventory at December 31, 1999 consisted primarily of OpticalCAM monitors and ABG Modules for which the Company plans to use in conjunction with future configurations of the CapnoProbe product and other research and commercial applications. The Company has contracts to purchase minimum quantities of instrumentation and other sole source inventory items with an outstanding aggregate commitment of approximately $1,400,000 in 2000. The Company is currently negotiating nullification of these obligations. It is the Company's opinion based on discussions with the parties to these obligations that any future costs to the Company under these agreements are unlikely. The Company is obligated to pay ICCM $300,000 annually under the previously described license agreement. As of December 31, 1999, the Company had no material commitments outstanding for tooling, equipment or outside development contracts. The Company is currently in discussion with its equipment lessor regarding prepayment of certain lease obligations. The Company had previously reported that it was renegotiating an obligation to prepay $238,393 in certain end of lease provisions due to underutilization of a lease line. The negotiations resulted in this payment plus interest being rescheduled into twelve monthly installments beginning January 2000. The Company believes that its current cash balances, including the proceeds received on March 10, 2000 from advances under the notes issued under the Investment Agreement described above, will be sufficient to fund the Company's operations through June 30, 2000. Accordingly, the report of the independent auditors on the Company's 1999 financial statements contains an explanatory paragraph regarding the Company's ability to continue as a going concern. Based on additional advances the Company expects to receive in 2000 under the Investment Agreement if the Company signs a definitive distribution agreement for its CapnoProbe product and the Company's stockholders approve the conversion of any additional advances to be made under the notes into units at the Company's 2000 Annual Meeting of Stockholders and payments the Company expects to receive in 2000 if it signs a definitive distribution agreement for its CapnoProbe product, the Company believes that it will have sufficient cash to fund its operations through 2000. There can be no assurance, however, that the Company will enter into a definitive distribution agreement for its CapnoProbe product, obtain the approval of the conversion of the notes into units by the Company's stockholders or otherwise obtain additional financing on satisfactory terms, or at all. In addition, the Company has based its estimates of how long its cash balances will last on assumptions that may prove to be wrong. If the Company is unable to obtain additional financing when needed, it will likely be forced to cease operations. Certain Important Factors In addition to the factors identified above, there are several important factors that could cause the Company's actual results to differ materially from those anticipated by the Company or which are reflected in any forward-looking statements of the Company. These factors, and their impact on the success of the Company's operations and its ability to achieve its goals, include the following: o Need for Additional Financing. The Company believes that its current cash balances, including the proceeds received on March 10, 2000 from advances under the notes issued under the Investment Agreement described above, will be sufficient to fund the Company's operations through June 30, 2000. Accordingly, the report of the independent auditors on the Company's 1999 financial statements contains an explanatory paragraph regarding the Company's ability to continue as a going concern. Based on additional advances the Company expects to receive in 2000 under the Investment Agreement if the Company signs a definitive distribution agreement for its CapnoProbe product and the Company's stockholders approve the conversion of any additional advances to be made under the notes into units at the Company's 2000 Annual Meeting of Stockholders and payments the Company expects to receive in 2000 if it signs a definitive distribution agreement for its CapnoProbe product, the Company believes that it will have sufficient cash to fund its operations through 2000. There can be no assurance, however, that the Company will enter into a definitive distribution agreement for its CapnoProbe product, obtain the approval of the conversion of the notes into units by the Company's stockholders or otherwise obtain additional financing on satisfactory terms, or at all. In addition, the Company has based its estimates of how long its cash balances will last on assumptions that may prove to be wrong. If the Company is unable to obtain additional financing when needed, it will likely be forced to cease operations. Additionally, any additional equity financings may be dilutive to the Company's existing stockholders, and debt financing, if available, may involve restrictive covenants on the Company's business. o Development and Commercialization of CapnoProbe. The Company's future success will depend, in large part, on successful development and commercialization of the CapnoProbe product. The Company is in the later stages of developing and testing prototypes and is currently engaged in human clinical trials of the CapnoProbe product. The Company has set up one manufacturing pod for manual assembly of the prototype probes and finished preliminary plans for automated probe assembly. The Company projects that the product will be available for limited release in 2000 and full commercial release in the first quarter of 2001. The Company has not yet established commercial manufacturing for the CapnoProbe. Accordingly, there can be no assurance that the Company will successfully develop a commercial CapnoProbe product. o Completion of Corporate Alliance or Business Combination. In January 1999, the Company announced that it had engaged Volpe Brown Whelan & Company, LLC, to serve as financial advisor to the Company. The Company continues to explore strategic alternatives, including joint ventures, corporate strategic alliances, sale of the business or product lines, or other business combinations. In January 2000, the Company signed a non-binding letter of intent with a major supplier of medical products and services to negotiate a definitive agreement for the Company's CapnoProbe product. 12 There can be no assurance that the Company will be able to enter into a definitive distribution agreement for its CapnoProbe product with this party or otherwise complete a transaction with terms favorable to the Company. o Nasdaq Listing Requirements. The Company's Common Stock is currently quoted on the Nasdaq National Market under the symbol "OPSI." In order to be listed on the Nasdaq National Market, the Company must maintain total net tangible assets of at least $4.0 million. As of December 31, 1999, the Company had total net tangible assets of approximately $2.8 million. On March 10, 2000, the Company entered into an Investment Agreement with two of the Company's principal stockholders, Circle F Ventures, LLC, a Georgia limited liability company, and Special Situations Fund III, L.P., a Delaware limited partnership, pursuant to which the Company agreed to issue convertible promissory notes in the aggregate principal amount of up to $3.0 million. The Company received advances under the notes in the aggregate amount of $1.4 million on March 10, 2000. The $1.4 million received by the Company, however, will not count towards the $4.0 million net tangible asset requirement until the amount is converted into equity. The Company has the right to request additional advances up to the aggregate principal amount of $1.6 million at any time during the 60 day period beginning on the first day after both of the following have occurred: (1) the Company executes a definitive distribution agreement for the Company's CapnoProbe product with a major medical company, and (2) the stockholders of the Company have approved the conversion of any additional advances to be made under the notes into units at the Company's 2000 Annual Meeting of Stockholders. The Company's right to request additional advances will expire on June 15, 2000. In addition to the net tangible asset requirement, the closing bid price for the Company's Common Stock cannot be less than $1.00 per share for 30 consecutive days. The closing bid price for the Company's Common Stock has been less than $1.00 per share on several occasions within the last year, but never for 30 or more consecutive days. If, in the future, the Company had less than $4.0 million in total net tangible assets but more than $2.0 million in total net tangible assets, the Company's Common Stock would be eligible for quotation on the Nasdaq Small Cap Market, provided that the $1.00 minimum bid price requirement was met. If the Common Stock was not eligible for either the Nasdaq National Market or the Nasdaq Small Cap Market, it would likely be quoted in the "over-the-counter" market and eligible to trade on the OTC bulletin board. If the Company's Common Stock traded on the OTC bulletin board, trading, if any, would be subject to the "penny stock" rules under the Securities Exchange Act of 1934 as amended, and the public trading market for the Company's Common Stock could be adversely affected. o Competition. Competition among medical device companies is intense and increasing. There can be no assurance that the Company's competitors will not succeed in developing or marketing technologies and products that are more effective or less expensive than the Company's products or that would render the Company's products obsolete or non- competitive. o Regulatory Approvals. The Company's ability to market its current products and any products that it may develop in the future requires clearances or approvals from the FDA and other governmental agencies, including, in some instances, foreign and state agencies. The process for maintaining and obtaining necessary regulatory clearances and approvals can be expensive and time consuming. There can be no assurance that the Company will be able to maintain or obtain necessary regulatory approvals and clearances in the future. 13 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. Not applicable. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Financial Statements and Independent Auditors' Report thereon on pages 25 to 45 of this Report are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (a) Directors, Executive Officers, Promoters and Control Persons The information under the captions "Election of Directors--Information About Nominees" and "Election of Directors--Other Information About Nominees" in the Company's 2000 Proxy Statement is incorporated herein by reference. The information concerning executive officers of the Company is included in this Report under Item 4a, "Executive Officers of the Company." (b) Section 16(a) Beneficial Ownership Reporting Compliance The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 2000 Proxy Statement is incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION. The information under the captions "Election of Directors--Director Compensation" and "Executive Compensation and Other Benefits" in the Company's 2000 Proxy Statement is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information under the caption "Principal Shareholders and Beneficial Ownership of Management" in the Company's 2000 Proxy Statement is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the caption "Certain Transactions" in the Company's 2000 Proxy Statement is incorporated herein by reference. 14 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. The following Financial Statements of the Company are set forth herein: Financial Statements Page -------------------- ---- Report of Independent Auditors............................... 25 Balance Sheets as of December 31, 1999 and 1998.............. 26 Statements of Operations for the years ended December 31, 1999, 1998 and 1997............................. 27 Statement of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997............................. 28 Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997............................. 29 Notes to Financial Statements................................ 30-45 2. Financial Statement Schedules. All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes thereto. 3. Exhibits The exhibits to this Report are listed in the Exhibit Index on pages 18 to 22 below. A copy of the exhibits referred to above will be furnished at a reasonable cost to any person who was a stockholder of the Company as of March 29, 2000, upon receipt from any such person of a written request for any such exhibit. Such request should be sent to: Optical Sensors Incorporated, 7615 Golden Triangle Drive, Suite C, Technology Park V Minneapolis, Minnesota 55344; Attn: Stockholder Information. The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 13(a): A. 1989 Omnibus Stock Option Plan, as amended. B. 1991 Stock Option Plan, as amended. C. 1993 Stock Option Plan, as amended. 15 D. Form of Non-Statutory Stock Option Agreement for Nonemployees pursuant to 1993 Stock Option Plan. E. Form of Non-Statutory Stock Option Agreement for Nonemployee Directors pursuant to 1993 Stock Option Plan. F. Form of Incentive Stock Option Agreement for Employees pursuant to 1993 Stock Option Plan. G. Employee Stock Purchase Plan. H. Board Advisory Agreement between the Company and Sam B. Humphries. I. Letter Agreement between the Company and Sam B. Humphries. J. Executive Severance Pay Plan. (b) Reports on Form 8-K The Company did not file any Current Reports on Form 8-K during the quarter ended December 31, 1999. 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OPTICAL SENSORS INCORPORATED Dated: March 29, 2000 By: /s/ Paulita M. LaPlante ------------------------------------- Paulita M. LaPlante President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on March 29, 2000 by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name Title - ---- ----- /s/ Paulita M. LaPlante President, Chief Executive Officer and - -------------------------------- Director (principal executive officer) Paulita M. LaPlante /s/ Wesley G. Peterson Chief Financial Officer, Vice President - -------------------------------- of Finance and Administration and Wesley G. Peterson Secretary (principal financial and accounting officer) /s/ Richard B. Egen Director - -------------------------------- Richard B. Egen /s/ Sam B. Humphries Director - -------------------------------- Sam B. Humphries /s/ Richard J. Meelia Director - -------------------------------- Richard J. Meelia /s/ Demetre M. Nicoloff, M.D. Director - -------------------------------- Demetre M. Nicoloff, M.D. /s/ Gary A. Peterson Director - -------------------------------- Gary A. Peterson 17 OPTICAL SENSORS INCORPORATED EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
Item No. Item Method of Filing - -------- ---- ---------------- 3.1 Restated Certificate of Incorporation of the Incorporated by reference to Exhibit 3.3 Company. contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 3.2 Certificate of Designation, Preferences and Incorporated by reference to Exhibit 3.2 Rights of Series A Junior Preferred Stock. contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 0-27600). 3.3 Bylaws of the Company, as amended. Incorporated by reference to Exhibit 3.3 contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 0-27600). 4.1 Specimen Common Stock Certificate Incorporated by reference to Exhibit 4.1 contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 4.2 Form of Warrant issued in connection with the Incorporated by reference to Exhibit 4.4 Convertible Bridge Loan Agreement dated November contained in the Company's Registration 22, 1991 Statement on Form S-1 (File No. 33-99904). 4.3 Form of Warrant issued in connection with the Incorporated by reference to Exhibit 4.7 Bridge Loan Agreement dated June 1, 1995 contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 4.4 Warrant dated November 6, 1992 issued to Incorporated by reference to Exhibit 4.8 Comdisco, Inc. contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 4.5 Warrant Dated August 31, 1995 issued to Incorporated by reference to Exhibit 4.9 Comdisco, Inc. contained in the Company's Registration Statement on Form S-1 (File No. 33-99904).
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4.6 Rights Agreement dated as of December 3, 1996 Incorporated by reference to Exhibit 4.1 between the Company and Norwest Bank Minnesota, contained in the Company's Current Report on N.A. Form 8-K dated December 3, 1996 (File No. 0-27600). 4.7 Amendment No. 1 to Rights Agreement dated as of Incorporated by reference to Exhibit 10.1 March 10, 2000 between the Company and Norwest contained in the Company's Current Report on Bank Minnesota, N.A. Form 8-K dated March 10, 2000 (File No. 0-27600). 10.1 Lease dated October 7, 1991 between Registrant Incorporated by reference to Exhibit 10.1 and First Industrial L.P. (successor to MIG contained in the Company's Registration Kappa III Companies) Statement on Form S-1 (File No. 33-99904). 10.2 Equipment Lease dated November 6, 1992, as Incorporated by reference to Exhibit 10.2 amended, between the Company and Comdisco, Inc. contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 10.3 Registration Rights Agreement, dated April 28, Incorporated by reference to Exhibit 10.9 1992, as amended contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 10.4 1989 Omnibus Stock Option Plan, as amended Incorporated by reference to Exhibit 10.11 contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 10.5 1991 Stock Option Plan, as amended Incorporated by reference to Exhibit 10.12 contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 10.6 1993 Stock Option Plan, as amended Filed herewith electronically. 10.7 Form of Non-Statutory Stock Option Agreement for Incorporated by reference to Exhibit 10.21 Nonemployees pursuant to 1993 Stock Option Plan contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 10.8 Form of Non-Statutory Stock Option Agreement for Incorporated by reference to Exhibit 10.18 Nonemployee Directors pursuant to 1993 Stock contained in the Company's Registration Option Plan Statement on Form S-1 (File No. 33-99904).
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10.9 Form of Incentive Stock Option Agreement for Incorporated by reference to Exhibit 10.19 Employees pursuant to 1993 Stock Option Plan contained in the Company's Registration Statement on Form S-1 (File No. 33-99904). 10.10 Employee Stock Purchase Plan Incorporated by reference to Exhibit 99.1 contained in the Company's Registration Statement on Form S-8 (File No. 333-17493). 10.11 First Amendment to Lease Agreement dated April Incorporated by reference to Exhibit 10.21 26, 1996 between First Industrial Financing contained in the Company's Annual Report on Partnership, L.P. and the Company. Form 10-K for the year ended December 31, 1996 (File No. 0-27600). 10.12 Supply Agreement dated August 22, 1996 between Incorporated by reference to Exhibit 10.22 the Company and Marquette Electronics, Inc. (1) contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-27600). 10.13 Manufacturing Supply Agreement dated September Incorporated by reference to Exhibit 10.23 10, 1996 between the Company and SpecTran contained in the Company's Annual Report on Specialty Optics Company. (1) Form 10-K for the year ended December 31, 1996 (File No. 0-27600). 10.14 Purchase Order dated February 21, 1997 between Incorporated by reference to Exhibit 10.24 the Company and SeaMED Corporation. (1) contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-27600). 10.15 Second Amendment to Lease Agreement, dated April Incorporated by reference to Exhibit 10.21 14, 1997, between First Industrial Financing contained in the Company's Annual Report on Partnership, L.P. and the Company. Form 10-K for the year ended December 31, 1997 (File No. 0-27600) 10.16 Master Equipment Lease dated June 15, 1997 Incorporated by reference to Exhibit 10.22 between Phoenix Leasing Incorporated and the contained in the Company's Annual Report on Company Form 10-K for the year ended December 31, 1997 (File No. 0-27600)
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10.17 Amendment No. 1 to Master Equipment Lease dated Incorporated by reference to Exhibit 10.23 August 15, 1997 between Phoenix Leasing contained in the Company's Annual Report on Incorporated and the Company Form 10-K for the year ended December 31, 1997 (File No. 0-27600) 10.18 Private Label Reseller Agreement dated as of Incorporated by reference to Exhibit 10.1 January 7, 1998 between the Company and contained in the Company's Current Report on Instrumentation Laboratory Company. (1) Form 8-K, dated January 7, 1998 (File No. 0-27600). 10.19 Stock Purchase Agreement dated as of January 7, Incorporated by reference to Exhibit 10.2 1998 between the Company and Group CH Werfen, contained in the Company's Current Report on S.A. Form 8-K, dated January 7, 1998 (File No. 0-27600). 10.20 OEM Agreement dated February 5, 1998 between the Incorporated by reference to Exhibit 10.26 Company and Marquette Medical Systems, Inc. (1) contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 0-27600) 10.21 Patent License Agreement dated July 20, 1998 Incorporated by reference to Exhibit 10.1 between the Company and the Institute of contained in the Company's Quarterly Report on Critical Care Medicine (1) Form 10-Q for the quarter ended September 30, 1998 (File No. 0-27600) 10.22 Board Advisory Agreement dated September 11, Incorporated by reference to Exhibit 10.23 1998 between the Company and Sam B. Humphries contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 0-27600). 10.23 Letter Agreement dated September 14, 1998 Incorporated by reference to Exhibit 10.24 between the Company and Sam B. Humphries contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 0-27600). 10.24 Executive Severance Pay Plan Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (File No. 0-27600) 10.25 Third Amendment to Lease Agreement dated Filed herewith electronically. September 3, 1999 between First Industrial Financing Partnership, L.P. and the Company
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23.1 Independent Auditors' Consent Filed herewith electronically. 27.1 Financial Data Schedule Filed herewith electronically.
- ----------------- (1) Confidential treatment has been granted by the Commission with respect to designated portions contained within document. Such portions have been omitted and filed separately with the Commission pursuant to Rule 24b-2 of the Securities and Exchange Act of 1934, as amended. 22 Financial Statements Optical Sensors Incorporated Years ended December 31, 1999, 1998 and 1997 Optical Sensors Incorporated Financial Statements Years ended December 31, 1999, 1998 and 1997 Contents Report of Independent Auditors.............................................1 Audited Financial Statements Balance Sheets.............................................................2 Statements of Operations...................................................3 Statements of Shareholders' Equity.........................................4 Statements of Cash Flows...................................................5 Notes to Financial Statements..............................................6 Report of Independent Auditors Board of Directors Optical Sensors Incorporated We have audited the accompanying balance sheets of Optical Sensors Incorporated as of December 31, 1999 and 1998, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Optical Sensors Incorporated at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. As discussed in Note 15 to the financial statements, the Company's recurring losses from operations and its accumulated deficit raise substantial doubt about its ability to continue as a going concern. Management plans as to these matters are also described in Note 15. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Ernst & Young LLP Minneapolis, Minnesota March 28, 2000 1 Optical Sensors Incorporated Balance Sheets
December 31 1999 1998 ------------ ------------ Assets Current assets: Cash and cash equivalents ...................................... $ 1,450,872 $ 8,079,871 Accounts receivable ............................................ 52,516 162,858 Inventories .................................................... 1,305,065 1,846,294 Prepaid expenses and other current assets ...................... 29,418 99,610 ------------ ------------ Total current assets .............................................. 2,837,871 10,188,633 Property and equipment: Leased equipment ............................................... 1,157,989 1,017,953 Research and development equipment ............................. 742,971 740,444 Leasehold improvements ......................................... 340,802 339,614 Furniture and equipment ........................................ 161,048 148,621 Marketing equipment ............................................ 1,004,840 1,004,840 Production equipment ........................................... 478,919 460,118 ------------ ------------ 3,886,569 3,711,590 Less accumulated depreciation .................................. (2,975,140) (1,866,074) ------------ ------------ 911,429 1,845,516 Other assets: Patents, net ................................................... 530,198 513,547 Other assets ................................................... 16,278 16,833 ------------ ------------ 546,476 530,380 ------------ ------------ Total assets ...................................................... $ 4,295,776 $ 12,564,529 ============ ============ Liabilities and shareholders' equity Current liabilities: Accounts payable ............................................... $ 110,595 $ 353,563 Employee compensation .......................................... 134,372 441,917 Other liabilities and accrued expenses ......................... 75,499 29,714 Obligations under capital lease, current portion ............... 516,487 260,319 ------------ ------------ Total current liabilities ......................................... 836,953 1,085,513 Obligations under capital lease, less current portion ............. 104,108 494,909 Shareholders' equity: Preferred stock, par value $.01 per share Authorized shares--5,000,000 ................................. - - Common stock, par value $.01 per share: Authorized shares--30,000,000 Issued and outstanding shares 1999--8,935,304; 1998--8,829,401 89,353 88,294 Additional paid-in capital ..................................... 69,416,688 69,317,467 Accumulated deficit ............................................ (66,151,326) (58,366,050) Deferred compensation .......................................... - (55,604) ------------ ------------ Total shareholders' equity ........................................ 3,354,715 10,984,107 ------------ ------------ Total liabilities and shareholders' equity ........................ $ 4,295,776 $ 12,564,529 ============ ============
See accompanying notes. 2 Optical Sensors Incorporated Statements of Operations
Year ended December 31 1999 1998 1997 ------------ ------------ -------------- Net sales $ 134,131 $ 1,018,864 $ 140,936 Cost of goods sold (2,045,183) (2,905,566) (2,195,714) ----------- ------------ ------------ Gross margin (1,911,052) (1,886,702) (2,054,778) Operating expenses: Research and development 3,115,075 4,248,029 4,975,037 Selling, general and administrative 2,852,975 6,284,904 5,496,772 ----------- ------------ ------------ Total operating expenses 5,968,050 10,532,933 10,471,809 ----------- ------------ ------------ Operating loss (7,879,102) (12,419,635) (12,526,587) Interest expense (83,709) (95,043) (21,143) Interest income 184,979 723,387 1,267,805 Other expense (7,444) (26,039) (53,433) ----------- ------------ ------------ 93,826 602,305 1,193,229 ----------- ------------ ------------ Net loss $(7,785,276) $(11,817,330) $(11,333,358) =========== ============ ============ Net loss per common share: Basic and diluted $(.88) $(1.34) $(1.35) Shares used in calculation of net loss per share: Basic and diluted 8,868,742 8,819,000 8,375,000
See accompanying notes. 3 Optical Sensors Incorporated Statements of Shareholders' Equity Year ended December 31, 1999
Common Stock Additional Note ------------------- Paid-in Accumulated Deferred Receivable Shares Amount Capital Deficit Compensation from Officer Total --------- ------- ----------- ------------ ------------ ------------ ---------- Balance at December 31, 1996 8,341,497 $83,415 $66,974,345 $(35,215,362) $(547,774) $(245,000) $31,049,624 Issuance of common stock upon exercise of options and warrants and employee stock purchase plan 59,057 591 97,093 - - - 97,684 Value assigned to warrants in connection with debt and lease financing - - 16,932 - - - 16,932 Amortization of deferred compensation - - - - 325,984 - 325,984 Net loss - - - (11,333,358) - - (11,333,358) --------- ------- ----------- ------------ --------- --------- ------------ Balance at December 31, 1997 8,400,554 84,006 67,088,370 (46,548,720) (221,790) (245,000) 20,156,866 Issuance of common stock in connection with private placement 441,203 4,412 2,192,779 - - - 2,197,191 Issuance of common stock upon exercise of options and warrants and employee stock purchase plan 28,477 284 55,696 - - - 55,980 Value assigned to warrants in connection with debt and lease financing - - 16,964 - - - 16,964 Forfeiture of common stock (40,833) (408) (36,342) - - 36,750 - Payment on note receivable - - - - - 208,250 208,250 Amortization of deferred compensation - - - - 166,186 - 166,186 Net loss - - - (11,817,330) - - (11,817,330) --------- ------- ----------- ------------ --------- --------- ------------ Balance at December 31, 1998 8,829,401 88,294 69,317,467 (58,366,050) (55,604) - 10,984,107 Issuance of common stock upon exercise of options and warrants and employee stock purchase plan 105,903 1,059 95,983 - - - 97,042 Value assigned to warrants in connection with debt and lease financing - - 3,238 - - - 3,238 Amortization of deferred compensation - - - - 55,604 - 55,604 Net loss - - - (7,785,276) - - (7,785,276) --------- ------- ----------- ------------ --------- ------- ------------ Balance at December 31, 1999 8,935,304 $89,353 $69,416,688 $(66,151,326) $ - $ - $ 3,354,715 ========= ======= =========== ============ ========= ======= ============
See accompanying notes. 4 Optical Sensors Incorporated Statements of Cash Flows
Year ended December 31 1999 1998 1997 ----------- ------------ ------------ Operating activities Net loss $(7,785,276) $(11,817,330) $(11,333,358) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,276,108 1,059,306 510,537 Deferred compensation amortization 55,604 166,186 325,984 Writedown of inventories - - 445,706 Amortization of warrants in connection with debt and lease financing 3,238 16,964 16,932 Changes in operating assets and liabilities: Receivables 110,342 (135,758) 63,940 Inventories 437,529 62,253 (1,531,286) Prepaid expenses and other assets (5,824) (116,065) 28,085 Accounts payable and accrued expenses (504,728) (18,512) (475,867) ----------- ------------ ------------ Net cash used in operating activities (6,413,007) (10,782,956) (11,949,327) Investing activities Purchases of property and equipment (net) (38,365) (491,929) (1,127,097) ----------- ------------ ------------ Net cash used in investing activities (38,365) (491,929) (1,127,097) Financing activities Net proceeds from issuance of common stock 97,042 2,253,171 97,684 Proceeds from note receivable - 208,250 - Payments on obligations under capital leases (274,669) (207,795) (54,930) ----------- ------------ ------------ Net cash (used in) provided by financing activities (177,627) 2,253,626 42,754 ----------- ------------ ------------ Decrease in cash and cash equivalents (6,628,999) (9,021,259) (13,033,670) Cash and cash equivalents at beginning of year 8,079,871 17,101,130 30,134,800 ----------- ------------ ------------ Cash and cash equivalents at end of year $ 1,450,872 $ 8,079,871 $ 17,101,130 =========== ============ ============
Supplementary Disclosure of Non-Cash Transactions: In 1998, the Company received 40,833 forfeited shares of common stock and forgave $36,750 on the note receivable from officer. The Company also acquired property and equipment of $140,036, $338,061 and $679,892 under capital lease obligations during the years ended December 31, 1999, 1998 and 1997, respectively. See accompanying notes. 5 Optical Sensors Incorporated Notes to Financial Statements December 31, 1999 1. Business Activity Optical Sensors Incorporated (the "Company") is engaged in developing, manufacturing and marketing fiberoptic chemical sensors used in the monitoring of key physiologic parameters for medically unstable patients. The Company was incorporated on May 23, 1989 and reincorporated in Delaware on January 4, 1996. Prior to 1998 the Company was considered a development stage company. In January 1999, the Company announced that it had engaged Volpe Brown Whelan & Company, LLC, investment bankers, to explore on behalf of the Company strategic alternatives, including joint ventures, corporate strategic alliances, sale of the business or product lines, or other business combinations. In January 1999, the Company suspended direct sales activity of the SensiCath System and reduced associated expenses and personnel to focus its resources on the CapnoProbe SL(TM). This reduction resulted in severance costs of $304,000 that were recognized in 1999. During 1999 and through the date of this report, the Company has continued in these efforts. 2. Summary of Significant Accounting Policies Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Investments classified as cash equivalents consist primarily of commercial paper and municipal bonds. The market value of investments is based on quoted market prices and approximates cost. Inventories Inventories, consisting principally of finished goods, are recorded at the lower of cost (first-in, first-out basis) or market. Property and Equipment Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over three to five years. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated life of the asset. Equipment under capital leases is depreciated over the lease term. 6 Optical Sensors Incorporated Notes to Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) Patents Patents are stated at cost and are amortized upon issuance of a patent on a straight-line basis over sixty months. Accumulated amortization was $89,396 and $59,920 at December 31, 1999 and 1998, respectively. Impairment of Long-Lived Assets Management reviews the Company's long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets, the asset's value will be adjusted appropriately. Income Taxes The Company accounts for income taxes using the liability method. Deferred income taxes are provided for temporary differences between the financial reporting and tax bases of assets and liabilities. Stock-Based Compensation The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related interpretations in accounting for its stock options. Under APB 25, when the exercise price of stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has adopted the disclosure only provisions of the Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"). Accordingly, the Company has made pro forma disclosures of what net loss and net loss per share would have been had the provisions of Statement 123 been applied to the Company's stock options. 7 Optical Sensors Incorporated Notes to Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from the estimates. Revenue Recognition Sales are recorded when product is shipped. Advertising Advertising costs are charged to operations in the year incurred. The amounts in 1999, 1998 and 1997 were not material. Net Loss Per Share The net loss per share has been computed in accordance with the provisions of the Financial Accounting Standards Board Statement No. 128, "Earnings Per Share." The basic and diluted per share amounts are the same. Reclassifications Certain reclassifications of previously reported amounts have been made to conform with the current year presentation. 8 Optical Sensors Incorporated Notes to Financial Statements (continued) 3. Private Label Reseller Agreement In January 1998, the Company entered into an agreement with Instrumentation Laboratory Company (IL) for worldwide distribution of the Company's SensiCath Sensors and OpticalCAM Instruments. IL would market and distribute the Company's products throughout the world under the names GEM SensiCath and GEM OpticalCAM. The Company agreed to supply IL with SensiCath Sensors, on an exclusive basis, through 2004 and on a non-exclusive basis through 2007. The Company also agreed to supply IL with OpticalCAM Instruments, on a semi-exclusive basis, through 2004. The Company retained the right to sell OpticalCAM Instruments to manufacturers of physiological monitoring, ventilator and anesthesia delivery systems. IL is required to purchase sufficient quantities of products from the Company under the agreement that will result in preestablished annual minimum revenues to the Company. During 1998, IL did not achieve the quota requirements and the Company exercised its right to convert IL's exclusive right to a non-exclusive right. In April 1999, the Company initiated an arbitration proceeding against IL by filing a demand for arbitration with the American Arbitration Association. The Company is seeking a declaration that it has no further limitations or obligations with respect to IL under the January 1998 agreement. In addition, the Company is seeking monetary damages based on various legal theories, including breach of the agreement by IL for failing to adequately promote and sell the Company's SensiCath System as required under the agreement. IL has filed a counterclaim also seeking damages from the Company. The arbitration proceeding is pending. 4. Common Stock In January 1998, the Company sold 441,203 shares of common stock to Instrumentation Laboratory Company (IL) at a price of $5.00 per share that resulted in proceeds of $2,197,191, net of expenses related to the sale. The Company granted IL and its affiliates certain preemptive rights to participate in future sales of equity securities by the Company, and certain demand and incidental registration rights under a registration rights agreement previously entered into by the Company and shareholders that purchased shares of stock in private transactions prior to the Company's initial public offering in February 1996. IL was prohibited from selling or otherwise transferring its shares of common stock for a period of one year, except to an affiliate or pursuant to the exercise 9 Optical Sensors Incorporated Notes to Financial Statements (continued) 4. Common Stock (continued) of its registration rights. IL and its affiliates are also subject to certain stand still provisions for a period of five years that prohibit them from (a) acquiring more than 5.0% of the Company's outstanding common stock, (b) entering into a voting agreement with respect to the shares IL purchased from the Company, (c) participating in any proxy solicitation or becoming a participant in an election contest, or (d) joining a group for the purpose of acquiring, holding, voting or disposing of shares of common stock. Shareholder Rights Plan In December 1996, the Company's Board of Directors adopted a Shareholder Rights Plan by declaring a dividend of one preferred share purchase right (the "Right") for each outstanding share of common stock. Under certain circumstances, a Right may be exercised to purchase one one-thousandth of a share of series A junior preferred stock for $90. The rights become exercisable if a person or group acquires 24 percent or more of the Company's outstanding common stock, subject to certain exceptions. If a person or group acquires 24 percent or more of the Company's outstanding common stock, subject to certain exceptions, each right will entitle its holder to buy common stock of the Company having a market value of twice the exercise price of the Right. The Rights expire in December 2006 and may be redeemed by the Company for $.001 per Right at any time before, or, in certain circumstances, within 10 days (subject to extension) following the announcement that a person has acquired 24 percent or more of the Company's outstanding common stock. Until a Right is exercised, the holder of a Right, as such, has no rights as a shareholder of the Company. In connection with the adoption of the Shareholder Rights Plan, the Company authorized 250,000 shares of series A junior preferred stock (the "preferred stock"). Subject to the rights of holders of any Senior Securities, if any, holders of the preferred stock are entitled to quarterly dividends, when, as and if declared by the Board of Directors, in the amount of one thousand times the aggregate per share amount of dividends paid to common stock shareholders. Each preferred stock share is entitled to one thousand votes on all matters submitted to a vote of the shareholders of the Company. The preferred stock has liquidation preference over the Company's common stock. The liquidation rate on the preferred stock is the greater of (a) $1,000 per share plus accrued dividends, whether or not earned or declared, or (b) an amount equal to one thousand times the amount distributed to the common stock shareholders. 10 Optical Sensors Incorporated Notes to Financial Statements (continued) 5. Convertible Preferred Stock The Company had sold certain series (A through E) of convertible preferred stock beginning in 1991 and going through 1995. Upon completion of the Company's initial public offering of common stock in February 1996, all shares of outstanding convertible preferred stock were converted into 4,766,974 shares of common stock. In conjunction with the sale of the series C convertible preferred stock in 1993, the Company had issued warrants to a placement agent to purchase 79,869 shares of common stock at $7.38 per share. These warrants were exercised in 1997 resulting in 14,376 shares of common stock being issued in a "cashless" transaction. Upon completion of the sale of the series B convertible preferred stock in 1992, the series C convertible preferred stock in 1993 and the series D convertible preferred stock in 1995, certain working capital bridge loans were canceled as payment for some of the shares. In consideration for making the loans, the Company issued warrants to the investors to purchase 24,076 shares of common stock at $9.00 per share (relating to the series B), 26,871 shares of common stock at $12.60 per share (relating to the series C) and 61,429 shares of common stock at $3.15 per share (relating to the series D). At December 31, 1999, warrants to purchase 59,567 shares of common stock at $3.15 per share remain outstanding. All other warrants have expired or been exercised. The remaining warrants expire in 2000. 6. Leases Operating Leases The Company leases its office and research and development facility under an operating lease that expires on May 31, 2000. Operating expenses, including maintenance, utilities, real estate taxes and insurance, are paid by the Company. The Company also leases certain office equipment under operating leases. Total rent expense under operating leases was $516,000, $677,000 and $870,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 11 Optical Sensors Incorporated Notes to Financial Statements (continued) 6. Leases (continued) Future minimum lease payments under noncancelable operating leases with initial or remaining terms of one year or more as of December 31, 1999 are as follows: Year ending December 31: 2000 $108,000 2001 14,000 2002 8,000 -------- $130,000 ======== Certain of the operating leases contain end of the lease purchase options which have historically averaged 23% of the original cost of the equipment. Should the Company not be able to return assets under existing operating leases, the end of the lease purchase options could reach a total of approximately $80,000. In connection with the operating lease agreements, the Company has issued warrants to the leasing company to purchase 12,222 shares of common stock at $9.00 per share and 11,904 shares of common stock at $3.15 per share. These warrants expire in 2002 and 2005, respectively. Capital Leases In June 1997, the Company entered into an equipment lease agreement. Under the lease agreement, the Company was allowed to lease up to $2,000,000 of equipment between June 15, 1997 and June 30, 1999. Assets leased under the agreement at December 31, 1999 and 1998 were approximately $1,158,000 and $1,018,000, respectively, with a related obligation of $620,595 and $755,228 at December 31, 1999 and 1998, respectively. The term of each lease schedule under the agreement is 42 months with payments due the first of each month. 12 Optical Sensors Incorporated Notes to Financial Statements (continued) 6. Leases (continued) Future payments under capital leases are as follows: 2000 $591,000 2001 104,000 2002 6,000 2003 - -------- 701,000 Less amount representing payment of interest 80,405 -------- 620,595 Less current portion 516,487 -------- Long-term capital lease obligations $104,108 ======== The equipment lease agreement contains an "advance pay" provision that requires the Company to prepay an amount equal to soft costs (tooling, software, etc.) that exceed 25% of the total drawdown. The Company has entered into an additional agreement whereby they signed a note agreement that rescheduled an end of lease obligation totaling $238,000 into twelve monthly installments beginning January 2000. The total payments under the note are included in the payment schedule above. 7. Income Taxes At December 31, 1999, the Company has cumulative net operating loss carryforwards for tax purposes of approximately $60,225,000 plus research and development tax credit carryforwards of approximately $1,723,000. These carryforwards are available to offset future taxable income through 2014. As a result of the sales of preferred stock and additional shares of common stock, the Company has experienced a change in ownership under the net operating loss limitation rules. The use of losses, incurred through the change in ownership date, to offset future taxable income, will be limited during the carryforward period. The credits will also be subject to limitations under these same rules. 13 Optical Sensors Incorporated Notes to Financial Statements (continued) 7. Income Taxes (continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows: December 31 1999 1998 ------------ ------------ Deferred tax assets: Net operating loss carryforwards $ 21,278,000 $ 18,800,000 Tax credit carryforwards 1,723,000 1,556,000 Deferred compensation on stock options 809,000 788,000 Vacation accrual 43,000 86,000 Inventory valuation 141,000 - Book over tax depreciation 324,000 293,000 ------------ ------------ Total deferred tax assets 24,318,000 21,523,000 Deferred tax liabilities: Other 33,000 33,000 ------------ ------------ Total deferred tax liabilities 33,000 33,000 ------------ ------------ Net deferred tax assets 24,285,000 21,490,000 Valuation allowance (24,285,000) (21,490,000) ------------ ------------ $ - $ - ============ ============ 14 Optical Sensors Incorporated Notes to Financial Statements (continued) 8. Stock Options The Company has three stock option plans that include both incentive and non-statutory stock options to be granted to directors, officers, employees and consultants of the Company. Option activity is summarized as follows: Options Weighted Outstanding Average Shares ----------- Exercise Available Total Price Per for Grant Shares Share ---------- --------- --------- Balance at December 31, 1996 193,164 734,008 $3.11 Granted (148,205) 148,205 5.22 Options canceled 24,986 (24,986) 5.71 Options exercised - (40,032) 1.28 ---------- --------- Balance at December 31, 1997 69,945 817,195 3.50 Additional shares reserved 699,464 - - Granted (1,383,870) 1,383,870 2.75 Options canceled 695,573 (695,573) 5.57 Options exercised - (16,423) 1.39 ---------- --------- Balance at December 31, 1998 81,112 1,489,069 1.84 Granted (100,000) 100,000 1.25 Options canceled 306,874 (306,874) 2.29 Options exercised - (102,260) .90 ---------- --------- Balance at December 31, 1999 287,986 1,179,935 $1.76 ========== ========= The weighted average fair value of options granted is $1.07, $2.20 and $3.02 for the years ended December 31, 1999, 1998 and 1997, respectively. The exercise price of options outstanding at December 31, 1999 ranged from $-0- to $13.00 per share, as summarized in the following table:
Options Outstanding Options Exercisable ---------------------------------------------- ---------------------------- Weighted Average Weighted Average Remaining Weighted Average Range of Exercise Price Contractual Exercise Price Exercise Price Number Per Share Life Number Per Share - --------------- --------- ---------------- ---------------- -------- ---------------- $ .00 to $ 1.25 361,797 $ .65 5.8 years 257,463 $ .90 1.69 727,686 1.69 8.4 years 152,581 1.69 2.70 to 13.00 90,452 4.22 5.0 years 74,452 4.12 --------- --------- ------- Total 1,079,935 $1.76 7.5 years 484,496 $1.86 ========= ========= =======
15 Optical Sensors Incorporated Notes to Financial Statements (continued) 8. Stock Options (continued) The number of options exercisable at December 31, 1999, 1998 and 1997 was 484,496, 410,341 and 349,646, respectively, at a weighted average exercise price per share of $1.86, $2.14 and $3.50, respectively. Pro forma information regarding net loss and net loss per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: 1999 1998 1997 ---------- ---------- ------- Expected stock price volatility 97% 86% 75% Risk-free interest rate 6.5% 5.5% 6.5% Expected life of options 7.25 years 7.25 years 7 years The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows: 1999 1998 1997 ---------- ----------- ----------- Pro forma net loss $8,164,800 $12,597,330 $11,714,634 Pro forma, basic and diluted net loss per common share $.92 $1.43 $1.40 16 Optical Sensors Incorporated Notes to Financial Statements (continued) 8. Stock Options (continued) These pro forma amounts may not be indicative of future years' amounts since Statement 123 provides for a phase-in of option values beginning with those granted in 1995. Deferred Compensation In August 1995, the Company recognized deferred compensation of $2,179,693. The amount represented the excess of the deemed value for accounting purposes of the common stock issuable upon exercise of certain options over the aggregate exercise price of such options. The related options were those granted during the period June 17, 1995 through October 3, 1995 to purchase a total of 971,640 shares of common stock at exercises prices ranging from $.90 to $2.70 per share. The deferred compensation was recognized as expense over the vesting periods through 1999. 9. Technology Agreements In July 1998, the Company entered into a patent license agreement with the Institute of Critical Care Medicine ("ICCM") which provides the Company with the exclusive, worldwide right under ICCM's pending and issued patents. In consideration for the technology, the Company is obligated to pay ICCM minimum annual royalties of $300,000 (quarterly payments of $75,000 beginning with the quarter ended September 1998) for five years in order to maintain exclusivity. The Company may elect, on one year's written notice, not to make the annual minimum payment of $300,000 but ICCM would then have the right to terminate the license agreement. The Company is obligated to pay ICCM a customary royalty equal to a percentage of sales, which varies depending on the selling price to the customer. The Company is also obligated to meet certain product development milestones under the license agreement. 17 Optical Sensors Incorporated Notes to Financial Statements (continued) 9. Technology Agreements (continued) In September 1995, the Company entered into an agreement with Marquette Medical Systems, Inc. ("Marquette") to acquire exclusive ownership of certain technology that had been jointly developed by the Company and Marquette. In consideration for the technology, the Company agreed to pay $2,000,000 payable as follows: $500,000 upon execution of the agreement, $500,000 upon completion of the technology, $500,000 once the product has been sold and installed in 20 hospitals and $500,000 once the product has been sold and installed in an additional 50 hospitals. The Company also agreed to pay $50,000 per month for engineering and technical support from August 1, 1995 through January 31, 1998. As of December 31, 1999, Marquette has not met the placement goals and the Company does not expect them to in the foreseeable future. In August 1991, the Company entered into an agreement to purchase certain fiberoptic chemical sensor technology for $10,000. In addition, the Company issued 2,778 shares of common stock to the licensor upon assignment of the technology. The Company has agreed to pay royalties on sales of industrial and environmental products for which the technology purchased is a significant part. The royalties shall be 5%, 4% and 3% on the first, second and third $10 million sales increments and 2% on sales in excess of $40 million. For sales of such products by any future licensees of the Company, the Company shall pay 25% of all licensing fees received up to $500,000 and 10% thereafter. The Company has made all payments for the technology. The Company does not intend to use the technology in the future and, therefore, does not anticipate paying any royalties under the agreement. 10. Purchase Commitments The Company has entered into purchase commitments with two companies for the purchase of SensiCath instrumentation inventory. Under the terms of the agreements, the Company has agreed to purchase, under a specified pricing structure, a fixed number of units. Based on discussions with the two vendors, the Company believes the vendors will not enforce the purchase commitments and no additional payments will be required. 18 Optical Sensors Incorporated Notes to Financial Statements (continued) 11. Employment Agreement The Company had an employment agreement (the "agreement") with the former President and Chief Executive Officer of the Company. In connection with the agreement, the Company granted the President options to purchase 121,162 shares of common stock at a price of $9.00 per share. In August of 1995, these options were canceled, and the Board of Directors granted the President a non-statutory option to purchase 272,222 shares of common stock at a price of $.90 per share. In September 1995, the former President exercised this option. The right to retain certain of the shares was subject to the former President's continued employment through August 2, 1999. As payment for the shares, the former President executed a $245,000 promissory note, payable in full on August 1, 1998, at an interest rate of 5.91%. The note was secured by the shares of common stock and proceeds of any dividend or other distribution attributable to the shares. During 1998, the President made a $208,250 principal payment on the note plus accrued interest, and the Company forgave the remaining principal balance of $36,750. The Company also entered into a board advisory agreement with the former President and Chief Executive Officer that provided for a payment of $50,000 in April 1999. 12. Employee Benefit Plans The Company has a 401(k) savings plan under which employees are eligible to participate after six months of service and attaining the age of 21. Employees may contribute up to the maximum amount which will not violate provisions of the Plan or cause the Plan to exceed the maximum amount allowable as a deduction to the employer. The Company, at its discretion, may make matching contributions equal to a percentage of the employee's contribution. The Company did not contribute to the Plan in 1999, 1998 and 1997. 19 Optical Sensors Incorporated Notes to Financial Statements (continued) 13. Employee Stock Purchase Plan In December 1996, the Company adopted an Employee Stock Purchase Plan. Eligible employees can authorize payroll withholdings in each pay period to be designated for stock purchase. Payroll deductions cannot exceed 10% of total compensation and no more than 1,500 shares may be purchased by any one employee in one offering period. There are four three-month offering periods in each year. Employees may purchase shares of common stock at the end of each three-month offering period at a price equal to 85% of the market price on the first or last day of the offering period, whichever is lower. Shares issued under the plan during the years ended December 31, 1999 and 1998 were 3,643 and 12,054, respectively. 14. Subsequent Event Investment Agreement On March 10, 2000, the Company entered into an Investment Agreement with certain investors whereby the investors would provide up to $3,000,000 of funding to the Company. The funding is in the form of Convertible Promissory Notes (the "Notes") and has three elements as follows: o $1,400,000 immediately upon execution of the Agreement. o $600,000 upon request of the Company within the 60-day period beginning after the Company has executed a definitive distribution agreement for the Company's CapnoProbe product and the Company has obtained shareholder approval of the conversion of the additional funding into "units" (as defined below). o $1,000,000 upon request of the Company and under similar circumstances as noted above for the $600,000. The period during which the Company can request the $600,000 and $1,000,000 additional fundings ends no later than June 15, 2000. 20 Optical Sensors Incorporated Notes to Financial Statements (continued) 14. Subsequent Event (Continued) The Notes are convertible into units, each unit consisting of 50,000 shares of the Company's common stock, and a warrant to purchase 12,500 shares of common stock, at a conversion price of $50,000 per unit subject to adjustment of the conversion price as set forth in the Notes agreement. The Notes shall not bear interest and shall be due and payable in full one year from the date of issuance. However, if the Notes are not paid in full or converted into units within the one-year period, any remaining unpaid balance shall bear interest at the rate of 10% per year until paid in full. The initial $1,400,000 of Notes will automatically convert into units thirty days after written notice from the Company that a distribution agreement has been executed by the Company and a major medical company. The $600,000 and $1,000,000 of Notes will automatically convert into units thirty days after the date of such fundings. The warrants will be exercisable for five years from the date of issuance. Each warrant will allow the bidder to purchase a share of the Company's common stock at a price of $1.00 subject to adjustment according to the terms of the warrant. 15. Going Concern Recurring losses from operations, including $7,785,276 for 1999, have resulted in an accumulated deficit of $66,151,326. The Company's ability to continue as a going concern and the realization of its assets and the orderly satisfaction of its liabilities are dependent on obtaining additional funds from outside sources. Although the Company has entered into an Investment Agreement (see Note 14) that would provide up to $3,000,000 of funding, $1,600,000 of that funding is dependent on the Company executing a definitive distribution agreement for the Company's CapnoProbe and obtaining shareholder approval of the conversion of the additional funding into units (as defined in Note 14). The Company is currently in negotiations with an outside party that the Company believes will result in executing a definitive distribution agreement. The Company also believes it will obtain shareholder approval for the conversion of the additional funding. The Company believes that the funding raised under a Distribution Agreement and the Investing Agreement will satisfy its cash requirements for at least the next twelve months. However, there can be no assurance that the Company will be successful in executing a definitive distribution agreement and/or that the Company will be able to obtain the necessary shareholder approval. 21 EX-10.16 2 1993 STOCK OPTION PLAN, AS AMENDED Exhibit 10.6 OPTICAL SENSORS INCORPORATED 1993 STOCK OPTION PLAN (AS AMENDED THROUGH AUGUST 16, 1999) ARTICLE 1. ESTABLISHMENT AND PURPOSE. ------------------------- 1.1. Establishment. Optical Sensors Incorporated (the "Company") ------------- hereby establishes a plan providing for stock-based compensation incentive awards for the performance by certain eligible employees of services for the Company. This plan shall be known as the Optical Sensors Incorporated 1993 Stock Option Plan (the "Plan"). 1.2. Purpose. The purpose of the Plan is to advance the interests of ------- the Company and its shareholders by enabling the Company to attract and retain persons of ability to perform services for the Company, by providing an incentive to such persons through equity participation in the Company and by rewarding such persons who contribute to the achievement by the Company of its economic objectives. ARTICLE 2. DEFINITIONS. ------------ The following terms shall have the meanings set forth below, unless the context clearly otherwise requires: 2.1. "Board" means the Board of Directors of the Company. ----- 2.2. "Broker Exercise Notice" means the written notice described in ---------------------- Section 6.6(b) of the Plan. 2.3. "Change in Control" means an event described in Section 9.1 of ----------------- the Plan. 2.4. "Code" means the Internal Revenue Code of 1986, as amended. ---- 2.5. "Committee" means the group of individuals administering the --------- Plan, as provided in Article 3 of the Plan. 2.6. "Common Stock" means the common stock of the Company, par value ------------ $.01 per share, or the number and kind of shares of stock or other securities into which such Common Stock may be changed in accordance with Section 4.3 of the Plan. 2.7. "Disability" means the disability of the Participant as defined ---------- in the long-term disability plan of the Company then covering the Participant or, if no such plan exists, the permanent and total disability of the Participant within the meaning of Section 22(e)(3) of the Code. 2.8. "Eligible Recipient" means all employees (including, without ------------------ limitation, officers and directors who are also employees) and Non-Employee Directors, consultants and independent contractors of the Company or any Subsidiary. 2.9. "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. 2.10. "Fair Market Value" means, with respect to the Common Stock, the ----------------- following: (a) If the Common Stock is listed or admitted to unlisted trading privileges on any national securities exchange or is not so listed or admitted but transactions in the Common Stock are reported on the NASDAQ National Market System, the reported closing sale price of the Common Stock on such exchange or by the NASDAQ National Market System as of such date (or, if no shares were traded on such day, as of the next preceding day on which there was such a trade). (b) If the Common Stock is not so listed or admitted to unlisted trading privileges or reported on the NASDAQ National Market System, and bid and asked prices therefor in the over-the-counter market are reported by the NASDAQ System or the National Quotation Bureau, Inc. (or any comparable reporting service), the mean of the closing bid and asked prices as of such date, as so reported by the NASDAQ System, or, if not so reported thereon, as reported by the National Quotation Bureau, Inc. (or such comparable reporting service). (c) If the Common Stock is not so listed or admitted to unlisted trading privileges, or reported on the NASDAQ National Market System, and such bid and asked prices are not so reported, such price as the Committee determines in good faith in the exercise of its reasonable discretion. 2.11. "Incentive Stock Option" means a right to purchase Common Stock ---------------------- granted to an Eligible Recipient pursuant to Article 6 of the Plan that qualifies as an "incentive stock option" within the meaning of Section 422 of the Code. 2.12. "Non-Employee Director" means any member of the Board who is not --------------------- an employee of the Company or any subsidiary. 2.13. "Non-Statutory Stock Option" means a right to purchase Common -------------------------- Stock granted to an Eligible Recipient pursuant to Article 6 of the Plan that does not qualify as an Incentive Stock Option. 2.14. "Option" means an Incentive Stock Option or a Non-Statutory Stock ------ Option. 2.15. "Participant" means an Eligible Recipient who receives one or ----------- more Options under the Plan. 2.16. "Person" means any individual, corporation, partnership, group, ------ association or other "person" (as such term is used in Section 14(d) of the Exchange Act), other than the Company, a wholly owned subsidiary of the Company or any employee benefit plan sponsored by the Company or a wholly owned subsidiary of the Company. 2.17. "Previously Acquired Shares" mean shares of Common Stock that are -------------------------- already owned by the Participant and shares of Common Stock that are to be acquired by the Participant pursuant to the exercise of an Option. 2.18. "Retirement" means the retirement of a Participant pursuant to ---------- and in accordance with the regular or, if approved by the Board for purposes of the Plan, early retirement/pension plan or practice of the Company or Subsidiary then covering the Participant. 2.19. "Securities Act" means the Securities Act of 1933, as amended. -------------- 2 2.20. "Subsidiary" means any subsidiary corporation of the Company ---------- within the meaning of Section 424(f) of the Code. 2.21. "Tax Date" means the date any withholding tax obligation arises -------- under the Code for a Participant with respect to an Option. ARTICLE 3. PLAN ADMINISTRATION. ------------------- 3.1. The Committee. The Plan will be administered by the Board or by ------------- a committee of the Board consisting of not less than two persons; provided, however, that from and after the date on which the Company first registers a class of its equity securities under Section 12 of the Exchange Act, the Plan will be administered by the Board, all of whom will be "disinterested persons" within the meaning of Rule 16b-3 under the Exchange Act, or by a committee consisting solely of not fewer than two members of the Board who are such "disinterested persons." As used in the Plan, the term "Committee" will refer to the Board or to such a committee, if established. To the extent consistent with corporate law, the Committee may delegate to any officers of the Company the duties, power and authority of the Committee under the Plan pursuant to such conditions or limitations as the Committee may establish; provided, however, that only the Committee may exercise such duties, power and authority with respect to Eligible Recipients who are subject to Section 16 of the Exchange Act. Each determination, interpretation or other action made or taken by the Committee pursuant to the provisions of the Plan will be conclusive and binding for all purposes and on all persons, and no member of the Committee will be liable for any action or determination made in good faith with respect to the Plan or any Incentive Award granted under the Plan. 3.2. Authority of the Committee. -------------------------- (a) In accordance with and subject to the provisions of the Plan, the Committee shall have the authority to determine (i) the Eligible Recipients who shall be selected as Participants, (ii) the nature and extent of the Options to be made to each Participant (including the number of shares of Common Stock to be subject to each Option, the exercise price and the manner in which Options will vest or become exercisable), (iii) the time or times when Options will be granted, (iv) the duration of each Option, (v) the restrictions and other conditions to which the exercisability or vesting of Options may be subject, and (vi) such other provisions of the Options as the Committee may deem necessary or desirable and as consistent with the terms of the Plan. The Committee shall determine the form or forms of the agreements with Participants which shall evidence the particular terms, conditions, rights and duties of the Company and the Participants with respect to Options granted pursuant to the Plan, which agreements shall be consistent with the provisions of the Plan. (b) With the consent of the Participant affected thereby, the Committee may amend or modify the terms of any outstanding Option in any manner, provided that the amended or modified terms are permitted by the Plan as then in effect. Without limiting the generality of the foregoing sentence, the Committee may, with the consent of the Participant affected thereby, modify the exercise price, number of shares or other terms and conditions of an Option, extend the term of an Option, accelerate the exercisability or vesting or otherwise terminate any restrictions relating to an Option, accept the surrender of any outstanding Option, or, to the extent not previously exercised or vested, authorize the grant of new Options in substitution for surrendered Options. (c) The Committee shall have the authority, subject to the provisions of the Plan, to establish, adopt and revise such rules and regulations relating to the Plan as it may deem 3 necessary or advisable for the administration of the Plan. The Committee's decisions and determinations under the Plan need not be uniform and may be made selectively among Participants, whether or not such Participants are similarly situated. Each determination, interpretation or other action made or taken by the Committee pursuant to the provisions of the Plan shall be conclusive and binding for all purposes and on all persons, including, without limitation, the Company and its Subsidiaries, the shareholders of the Company, the Committee and each of its members, the directors, officers and employees of the Company and its Subsidiaries, and the Participants and their respective successors in interest. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted under the Plan. ARTICLE 4. STOCK SUBJECT TO THE PLAN. ------------------------- 4.1. Number of Shares. Subject to adjustment as provided in Section ---------------- 4.3 below, the maximum number of shares of Common Stock that shall be authorized and reserved for issuance under the Plan shall be 1,727,240 shares of Common Stock or such greater number as may be approved by the Board pursuant to this Section 4.1. The Board may increase the number of shares of Common Stock that will be available for issuance under the Plan, without the approval of the Company's shareholders; provided, however, that the aggregate number of shares reserved for issuance under the Plan and the Company's 1989 Omnibus Stock Option Plan, 1991 Stock Option Plan and any similar stock option plan that the Company may adopt in the future may not exceed 20.0% of the number of shares of Common Stock outstanding as of the end of the calendar quarter immediately preceding the date on which the Board increases the number of shares available for issuance under the Plan (assuming the exercise or conversion of all options, warrants, securities or other rights to acquire Common Stock) without approval of the Company's shareholders. Notwithstanding any other provision of the Plan to the contrary, (a) no more than 944,444 shares of Common Stock may be cumulatively available for issuance under the Plan pursuant to the exercise of Incentive Stock Options, and (b) no Participant in the Plan may be granted, during any calendar year, Options relating to more than an aggregate of 277,777 shares of Common Stock, in each case subject to adjustment as provided in Section 4.3 of the Plan. To the extent permitted by applicable corporate law, the shares available for issuance under the Plan may, at the election of the Committee, be either treasury shares or shares authorized but unissued, and, if treasury shares are used, all references in the Plan to the issuance of shares will, for corporate law purposes, be deemed to mean the transfer of shares from treasury. 4.2. Shares Available for Use. Shares of Common Stock that may be ------------------------ issued upon exercise of Options shall be applied to reduce the maximum number of shares of Common Stock remaining available for use under the Plan. Any shares of Common Stock that are subject to an Option (or any portion thereof) that lapses, expires or for any reason is terminated unexercised shall automatically again become available for use under the Plan. 4.3. Adjustments to Shares. In the event of any reorganization, --------------------- merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, extraordinary dividend or divestiture (including a spin-off) or any other change in the corporate structure or shares of the Company, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation) shall make appropriate adjustment (which determination shall be conclusive) as to the number and kind of securities subject to and reserved under the Plan and, in order to prevent dilution or enlargement of the rights of Participants, the number, kind and exercise price of securities subject to outstanding Options. Without limiting the generality of the foregoing, in the event that any of such transactions are effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets, including cash, with respect to or in exchange for such Common Stock, all Participants holding outstanding Options shall upon 4 the exercise of such Options receive, in lieu of any shares of Common Stock they may be entitled to receive, such stock, securities or assets, including cash, as would have been issued to such Participants if their Options had been exercised and such Participants had received Common Stock prior to such transaction. ARTICLE 5. PARTICIPATION. ------------- Participants in the Plan shall be those Eligible Recipients who, in the judgment of the Committee, have performed, are performing, or during the term of an Option will perform, services in the management, operation and development of the Company or any Subsidiary, and significantly contributed, are significantly contributing or are expected to significantly contribute to the achievement of corporate economic objectives. Eligible Recipients may be granted from time to time one or more Options, as may be determined by the Committee in its sole discretion. The number, type, terms and conditions of Options granted to various Eligible Recipients need not be uniform, consistent or in accordance with any plan, regardless of whether such Eligible Recipients are similarly situated. Upon determination by the Committee that an Option is to be granted to an Eligible Recipient, written notice shall be given such person, specifying the terms, conditions, rights and duties related thereto. Each Eligible Recipient to whom an Option is to be granted shall, if requested by the Committee, enter into an agreement with the Company, in such form as the Committee shall determine and which is consistent with the provisions of the Plan, specifying such terms, conditions, rights and duties. Options shall be deemed to be granted as of the date specified in the grant resolution of the Committee, which date shall be the date of the related agreement with the Participant. ARTICLE 6. STOCK OPTIONS. ------------- 6.1. Grant. An Eligible Recipient may be granted one or more Options ----- under the Plan, and such Options shall be subject to such terms and conditions, consistent with the other provisions of the Plan, as shall be determined by the Committee in its sole discretion. The Committee may designate whether an Option is to be considered an Incentive Stock Option or a Non-Statutory Stock Option; provided, however, that an Incentive Stock Option shall be granted only to an Eligible Recipient who is an employee of the Company or a Subsidiary. The terms of the agreement relating to a Non-Statutory Stock Option shall expressly provide that such Option shall not be treated as an Incentive Stock Option. 6.2. Exercise. An Option shall become exercisable at such times and -------- in such installments (which may be cumulative) as shall be determined by the Committee in its sole discretion at the time the Option is granted. Upon the completion of its exercise period, an Option, to the extent not then exercised, shall expire. 6.3. Exercise Price. -------------- (a) Incentive Stock Options. The per share price to be paid by ----------------------- the Participant at the time an Incentive Stock Option is exercised shall be determined by the Committee, in its discretion, at the date of its grant; provided, however, that such price shall not be less than (i) 100% of the Fair Market Value of one share of Common Stock on the date the Incentive Stock Option is granted, or (ii) 110% of the Fair Market Value of one share of Common Stock on the date the Incentive Stock Option is granted if, at that time the Incentive Stock Option is granted, the Participant owns, directly or indirectly (as determined pursuant to Section 424(d) of the Code), more than 10% of the total combined voting power of all classes of stock of the Company or any subsidiary or parent corporation of the Company (within the meaning of Sections 424(f) and 424(e), respectively, of the Code). 5 (b) Non-Statutory Stock Options. The per share price to be paid --------------------------- by the Participant at the time a Non-Statutory Stock Option is exercised shall be determined by the Committee in its sole discretion at the time the Option is granted; provided, however, that such price shall not be less than 85% of the Fair Market Value of one share of Common Stock on the date the Non-Statutory Stock Option is granted. 6.4. Duration. -------- (a) Incentive Stock Options. The period during which an ----------------------- Incentive Stock Option may be exercised shall be fixed by the Committee in its sole discretion at the time such Option is granted; provided, however, that in no event shall such period exceed 10 years from its date of grant or, in the case of a Participant who owns, directly or indirectly (as determined pursuant to Section 424(d) of the Code), more than 10% of the total combined voting power of all classes of stock of the Company or any subsidiary or parent corporation of the Company (within the meaning of Sections 424(f) and 424(e), respectively, of the Code), five years from its date of grant. (b) Non-Statutory Stock Options. The period during which a --------------------------- Non-Statutory Stock Option may be exercised shall be fixed by the Committee in its sole discretion at its date of grant. (c) Effect of Termination of Employment or Other Service. ---------------------------------------------------- Notwithstanding this Section 6.4, except as provided in Articles 8 and 9 of the Plan, all Options granted to a Participant shall terminate and may no longer be exercised if the Participant's employment or other service with the Company and all Subsidiaries ceases. 6.5. Manner of Exercise. An Option may be exercised by a Participant ------------------ in whole or in part from time to time, subject to the conditions contained herein and in the agreement evidencing such Option, by delivery, in person or through certified or registered mail, of written notice of exercise to the Company at its principal executive office in Minneapolis, Minnesota (Attention: Chief Financial Officer), and by paying in full the total Option exercise price for the shares of Common Stock purchased. Such notice shall be in a form satisfactory to the Committee and shall specify the particular Option (or portion thereof) that is being exercised and the number of shares with respect to which the Option is being exercised. Subject to compliance with Section 12.1 of the Plan, the exercise of the Option shall be deemed effective upon receipt of such notice and payment complying with the terms of the Plan and the agreement evidencing such Option. As soon as practicable after the effective exercise of the Option, the Participant shall be recorded on the stock transfer books of the Company as the owner of the shares purchased, and the Company shall deliver to the Participant one or more duly issued stock certificates evidencing such ownership. If a Participant exercises any Option with respect to some, but not all, of the shares of Common Stock subject to such Option, the right to exercise such Option with respect to the remaining shares shall continue until it expires or terminates in accordance with its terms. An Option shall only be exercisable with respect to whole shares. 6.6. Payment of Exercise Price. ------------------------- (a) The total purchase price of the shares to be purchased upon exercise of an Option shall be paid entirely in cash (including check, bank draft or money order); provided, however, that the Committee, in its sole discretion, may allow such payments to be made, in whole or in part, by delivery of a Broker Exercise Notice or a promissory note (containing such terms and conditions as the Committee may in its discretion determine), by transfer from the Participant to the Company of Previously Acquired Shares, or by a combination thereof. In determining whether or upon what terms and conditions a Participant will be permitted to pay the purchase 6 price of an Option in a form other than cash, the Committee may consider all relevant facts and circumstances, including, without limitation, the tax and securities law consequences to the Participant and the Company, the financial accounting consequences to the Company and any contractual restrictions applicable to the Company. In the event the Participant is permitted to pay the total purchase price of an Option in whole or in part with Previously Acquired Shares, the value of such shares shall be equal to their Fair Market Value on the date of exercise of the Option. (b) For purposes of this Section 6.6, a "Broker Exercise Notice" shall mean a written notice from a Participant to the Company at its principal executive office in Minneapolis, Minnesota (Attention: Chief Financial Officer), made on a form and in the manner as the Committee may from time to time determine, pursuant to which the Participant irrevocably elects to exercise all or any portion of an Option and irrevocably directs the Company to deliver the Participant's stock certificates to be issued to such Participant upon such Option exercise directly to a broker or dealer. A Broker Exercise Notice must be accompanied by or contain irrevocable instructions to the broker or dealer (i) to promptly sell a sufficient number of shares of such Common Stock or to loan the Participant a sufficient amount of money to pay the exercise price for the Options and, if not otherwise satisfied by the Participant, to fund any related employment and withholding tax obligations due upon such exercise, and (ii) to promptly remit such sums to the Company upon the broker's or dealer's receipt of the stock certificates. 6.7. Rights as a Shareholder. The Participant shall have no rights as ----------------------- a shareholder with respect to any shares of Common Stock covered by an Option until the Participant shall have become the holder of record of such shares, and no adjustments shall be made for dividends or other distributions or other rights as to which there is a record date preceding the date the Participant becomes the holder of record of such shares, except as the Committee may determine pursuant to Section 4.3 of the Plan. 6.8. Disposition of Common Stock Acquired Pursuant to the Exercise of ---------------------------------------------------------------- Incentive Stock Options. Prior to making a disposition (as defined in Section - ----------------------- 424(c) of the Code) of any shares of Common Stock acquired pursuant to the exercise of an Incentive Stock Option granted under the Plan before the expiration of two years after its date of grant or before the expiration of one year after its date of exercise and the date on which such shares of Common Stock were transferred to the Participant pursuant to exercise of the Option, the Participant shall send written notice to the Company of the proposed date of such disposition, the number of shares to be disposed of, the amount of proceeds to be received from such disposition and any other information relating to such disposition that the Company may reasonably request. The right of a Participant to make any such disposition shall be conditioned on the receipt by the Company of all amounts necessary to satisfy any federal, state or local withholding and employment-related tax requirements attributable to such disposition. The Committee shall have the right, in its sole discretion, to endorse the certificates representing such shares with a legend restricting transfer and to cause a stop transfer order to be entered with the Company's transfer agent until such time as the Company receives the amounts necessary to satisfy such withholding and employment-related tax requirements or until the later of the expiration of two years from its date of grant or one year from its date of exercise and the date on which such shares were transferred to the Participant pursuant to the exercise of the Option. 6.9. Aggregate Limitation of Stock Subject to Incentive Stock Options. ---------------------------------------------------------------- To the extent that the aggregate Fair Market Value (determined as of the date an Incentive Stock Option is granted) of the shares of Common Stock with respect to which incentive stock options (within the meaning of Section 422 of the Code) are exercisable for the first time by a Participant during any calendar year (under the Plan and any other incentive stock option plans of the Company or any subsidiary or any parent corporation of the Company (within the meaning of Sections 424(f) and 424(e), respectively, of the 7 Code)) exceeds $100,000 (or such other amount as may be prescribed by the Code from time to time), such excess Options shall be treated as Non-Statutory Stock Options. The determination shall be made by taking incentive stock options into account in the order in which they were granted. If such excess only applies to a portion of an Incentive Stock Option, the Committee, in its discretion, shall designate which shares shall be treated as shares to be acquired upon exercise of an Incentive Stock Option. ARTICLE 7. CASH BONUSES. ------------ In connection with any grant of Options or at any time thereafter, the Committee may, in its sole discretion, grant a cash bonus to a Participant in connection with the grant or vesting or exercise of an Option. The determination of whether to grant such a cash bonus, the nature and amount of any such cash bonus and the terms and conditions of such cash bonus shall be within the sole discretion of the Committee. ARTICLE 8. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE. ---------------------------------------------------- 8.1. Termination of Employment or Other Service Due to Death, -------------------------------------------------------- Disability or Retirement. Except as otherwise provided in Article 9 of the - ------------------------ Plan, in the event a Participant's employment or other service with the Company and all Subsidiaries is terminated by reason of such Participant's death, Disability or Retirement, all outstanding Options then held by the Participant shall remain exercisable to the extent exercisable as of such termination for a period of one year after such termination in the case of death or Disability and three months in the case of Retirement (but in no event after the expiration date of any such Option). 8.2. Termination of Employment or Other Service for Reasons Other than ----------------------------------------------------------------- Death, Disability or Retirement. Except as otherwise provided in Article 9 of - ------------------------------- the Plan, in the event a Participant's employment or other service is terminated with the Company and all Subsidiaries for any reason other than death, Disability or Retirement, all rights of the Participant under the Plan shall immediately terminate without notice of any kind, and no Options then held by the Participant shall thereafter be exercisable; provided, however, that if such termination is due to any reason other than termination by the Company or any Subsidiary for "cause," all outstanding Options then held by such Participant shall remain exercisable to the extent exercisable as of such termination for a period of three months after such termination (but in no event after the expiration date of any such Option). For purposes of this Article 8, "cause" shall be as defined in any employment or other agreement or policy applicable to the Participant or, if no such agreement or policy exists, shall mean (a) dishonesty, fraud, misrepresentation, embezzlement or material or deliberate injury or attempted injury, in each case related to the Company or any Subsidiary, (b) any unlawful or criminal activity of a serious nature, (c) any willful breach of duty, habitual neglect of duty or unreasonable job performance, or (d) any material breach of a confidentiality or noncompete agreement entered into with the Company or any Subsidiary. 8.3. Death Following Termination. If a Participant dies within three --------------------------- months following termination of employment or other service to the Company for any reason other than cause, as defined above, all outstanding Options held by the Participant at the time of termination shall remain exercisable to the extent exercisable as of such termination for a period of one year after such termination. 8.4. Modification of Effect of Termination. Notwithstanding the ------------------------------------- provisions of this Article 8, upon a Participant's termination of employment or other service with the Company and all Subsidiaries, the Committee may, in its sole discretion (which may be exercised before or following such termination), cause Options, or any portions thereof, then held by such Participant to become exercisable and remain exercisable following such termination in the manner determined by the Committee; provided, however, that no Option shall be exercisable after the expiration date thereof and any Incentive Stock Option that 8 remains unexercised more than three months following employment termination by reason of Retirement or more than one year following employment termination by reason of Disability shall thereafter be deemed to be a Non-Statutory Stock Option. 8.5. Breach of Confidentiality or Non-Compete Agreements. --------------------------------------------------- Notwithstanding anything in the Plan to the contrary, in the event that a Participant materially breaches the terms of any confidentiality or non-compete agreement entered into with the Company or any Subsidiary, whether such breach occurs before or after termination of such Participant's employment or other service with the Company or any Subsidiary, the Committee in its sole discretion may immediately terminate all rights of the Participant under the Plan and any agreements evidencing an Option then held by the Participant without notice of any kind. 8.6. Date of Termination. Unless the Committee shall otherwise ------------------- determine in its sole discretion, a Participant's employment or other service shall, for purposes of the Plan, be deemed to have terminated on the date such Participant ceases to perform services for the Company and all Subsidiaries, as determined in good faith by the Committee. ARTICLE 9. CHANGE OF CONTROL. ----------------- 9.1. Change in Control. For purposes of this Article 9, a "Change in ----------------- Control" is the occurrence of any of the following on or after August 16, 1999: (a) the sale, lease, exchange or other transfer, directly or indirectly, of all or substantially all of the assets of the Company, in one transaction or in a series of related transactions, to any Person; (b) the approval by the shareholders of the Company of any plan or proposal for the liquidation or dissolution of the Company; (c) any Person is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of (a) 20 percent or more, but not more than 50 percent, of the combined voting power of the Company's outstanding securities ordinarily having the right to vote at elections of directors, unless the transaction resulting in such ownership has been approved in advance by the "continuity directors," as defined at Subsection (b), or (b) more than 50 percent of the combined voting power of the Company's outstanding securities ordinarily having the right to vote at elections of directors (regardless of any approval by the continuity directors); (d) a merger or consolidation to which the Company is a party if the shareholders of the Company immediately prior to the effective date of such merger or consolidation have, solely on account of ownership of securities of the Company at such time, "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act) immediately following the effective date of such merger or consolidation of securities of the surviving company representing (a) 50 percent or more, but not more than 80 percent, of the combined voting power of the surviving corporation's then outstanding securities ordinarily having the right to vote at elections of directors, unless such merger or consolidation has been approved in advance by the continuity directors, or (b) less than 50 percent of the combined voting power of the surviving corporation's then outstanding securities ordinarily having the right to vote at elections of directors (regardless of any approval by the continuity directors); 9 (e) the continuity directors cease for any reason to constitute at least a majority the Board; or (f) a change in control of a nature that is determined by outside legal counsel to the Company, in a written opinion specifically referencing this provision of the Plan, to be required to be reported (assuming such event has not been "previously reported") pursuant to section 13 or 15(d) of the Exchange Act, whether or not the Company is then subject to such reporting requirement, as of the effective date of such change in control. The sale, lease, exchange or other transfer, directly or indirectly, of the assets comprising the Company's CapnoProbe Product Line, in one transaction or in a series of related transactions, to any Person shall constituted a Change in Control under Section 9.1(a). For purposes of this Section 9.1, "continuity director" means any individual who is a member of the Board on August 16, 1999, while he or she is a member of the Board, and any individual who subsequently becomes a member of the Board whose election or nomination for election by the Company's shareholders was approved by a vote of at least a majority of the directors who are continuity directors (either by a specific vote or by approval of the proxy statement of the Company in which such individual is named as a nominee for director without objection to such nomination). For example, if a majority of the six individuals constituting the Board on August 16, 1999, approved a proxy statement in which two different individuals were nominated to replace two of the individuals who were members of the Board on August 16, 1999, upon their election by the Company's shareholders, the two newly elected directors would join the four remaining directors who were members of the Board on August 16, 1999 as continuity directors. Similarly if a majority of those six directors approved a proxy statement in which three different individuals were nominated to replace three other directors who were members of the Board on August 16, 1999, upon their election by the Company's shareholders, the three newly elected directors would also become, along with the three other directors, continuity directors. Individuals subsequently joining the Board could become continuity directors under the principles reflected in this example. 9.2. Acceleration of Vesting. If a Change of Control of the Company ----------------------- shall occur, then, without any action by the Committee or the Board, all outstanding Options shall become immediately exercisable in full and shall remain exercisable during the remaining term thereof, regardless of whether the employment or other status of the Participants with respect to which Options have been granted shall continue with the Company or any subsidiary. 9.3. Cash Payment. If a Change in Control of the Company shall occur, ------------ then the Committee, in its discretion, and with the consent of any Participant effected thereby, may determine that some or all Participants holding outstanding Options shall receive, with respect to some or all of the shares of Common Stock subject to such Options, as of the effective date of any such Change in Control of the Company, cash in an amount equal to the excess of the Fair Market Value of such shares immediately prior to the effective date of such Change in Control of the Company over the exercise price per share of such Options. 9.4. Limitation on Acceleration of Vesting. Notwithstanding anything ------------------------------------- in Sections 9.2 or 9.3 above to the contrary, if, with respect to a Participant, acceleration of the vesting of Options as provided in Section 9.2 or the payment of cash in exchange for all or part of an Option and as provided in Section 9.3 above (which acceleration or payment could be deemed a "payment" within the meaning of Section 280G(b)(2) of the Code), together with any other payments which such Participant has the right to receive from the Company or any corporation which is a member of an "affiliated group" (as defined in Section 1504(a) of the Code without regard to Section 1504(b) of the Code) of which the Company is a member, 10 would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Code), then the acceleration of exercisability and the payments to such Participant pursuant to Sections 9.2 and 9.3 above shall be reduced to the largest amount as, in the sole judgment of the Committee, will result in no portion of such payments being subject to the excise tax imposed by Section 4999 of the Code. ARTICLE 10. RIGHT TO WITHHOLD; PAYMENT OF WITHHOLDING TAXES. ----------------------------------------------- 10.1. General Rules. The Company is entitled to (a) withhold and ------------- deduct from future wages of the Participant (or from other amounts that may be due and owing to the Participant from the Company or a Subsidiary), or make other arrangements for the collection of, all legally required amounts necessary to satisfy any and all federal, state and local withholding and employment- related tax requirements attributable to an Option, including, without limitation, the grant, exercise or vesting of an Option or a disqualifying disposition of stock received upon exercise of an Incentive Stock Option, or (require the Participant promptly to remit the amount of such withholding to the Company before taking any action, including issuing any shares of Common Stock, with respect to an Option. 10.2. Special Rules. The Committee may, in its sole discretion and ------------- upon terms and conditions established by the Committee, permit or require a Participant to satisfy, in whole or in part, any withholding or employment- related tax obligation described in Section 10.1 of the Plan by electing to tender Previously Acquired Shares, a Broker Exercise Notice or a promissory note (on terms acceptable to the Committee in its sole discretion), or by a combination of such methods. ARTICLE 11. RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS; TRANSFERABILITY. --------------------------------------------------------------- 11.1. Employment or Service. Nothing in the Plan shall interfere with --------------------- or limit in any way the right of the Company or any Subsidiary to terminate the employment or service of any Eligible Recipient or Participant at any time, nor confer upon any Eligible Recipient or Participant any right to continue in the employ or service of the Company or any Subsidiary. 11.2. Restrictions on Transfer. Other than pursuant to a qualified ------------------------ domestic relations order (as defined by the Code), no right or interest of any Participant in an Option prior to the exercise of such Option shall be assignable or transferrable, or subjected to any lien, during the lifetime of the Participant, either voluntarily or involuntarily, directly or indirectly, by operation of law or otherwise, including execution, levy, garnishment, attachment, pledge, divorce or bankruptcy. A Participant shall, however, be entitled to designate a beneficiary to receive an Option upon such Participant's death. In the event of a Participant's death, such Participant's rights and interest in Options shall be transferrable by testamentary will or the laws of descent and distribution, and payment of any amounts due under the Plan shall be made to, and exercise of any Options (to the extent permitted pursuant to Article 8 of the Plan) may be made by, the Participant's legal representatives, heirs or legatees. If in the opinion of the Committee a Participant holding an Option is disabled from caring for his or her affairs because of mental condition, physical condition or age, any payments due the Participant may be made to, and any rights of the Participant under the Plan shall be exercised by, such Participant's guardian, conservator or other legal personal representative upon furnishing the Committee with evidence satisfactory to the Committee of such status. 11.3. Non-Exclusivity of the Plan. Nothing contained in the Plan is --------------------------- intended to amend, modify or rescind any previously approved compensation plans or programs entered into by the Company. The Plan will be construed to be in addition to any and all such other plans or programs. Neither the adoption of the Plan nor the submission of the Plan to the shareholders of the Company for approval will be construed as creating any limitations on the power or authority of the Board to adopt such additional or other compensation arrangements as the Board may deem necessary or desirable. 11 ARTICLE 12. SECURITIES LAW RESTRICTIONS. --------------------------- 12.1. Share Issuances. Notwithstanding any other provision of the Plan --------------- or any agreements entered into pursuant hereto, the Company shall not be required to issue or deliver any certificate for shares of Common Stock under this Plan, and an Option shall not be considered to be exercised notwithstanding the tender by the Participant of any consideration therefor, unless and until each of the following conditions has been fulfilled: (a) (i) There shall be in effect with respect to such shares a registration statement under the Securities Act and any applicable state securities laws if the Committee, in its sole discretion, shall have determined to file, cause to become effective and maintain the effectiveness of such registration statement; or (ii) if the Committee has determined not to so register the shares of Common Stock to be issued under the Plan, (A) exemptions from registration under the Securities Act and applicable state securities laws shall be available for such issuance (as determined by counsel to the Company) and (B) there shall have been received from the Participant (or, in the event of death or disability, the Participant's heir(s) or legal representative(s)) any representations or agreements requested by the Company in order to permit such issuance to be made pursuant to such exemptions; and (b) There shall have been obtained any other consent, approval or permit from any state or federal governmental agency which the Committee shall, in its sole discretion upon the advice of counsel, deem necessary or advisable. 12.2. Share Transfers. Shares of Common Stock issued pursuant to --------------- Options granted under the Plan may not be sold, assigned, transferred, pledged, encumbered or otherwise disposed of, whether voluntarily or involuntarily, directly or indirectly, by operation of law or otherwise, except pursuant to registration under the Securities Act and applicable state securities laws or pursuant to exemptions from such registrations. The Company may condition the sale, assignment, transfer, pledge, encumbrance or other disposition of such shares not issued pursuant to an effective and current registration statement under the Securities Act and all applicable state securities laws on the receipt from the party to whom the shares of Common Stock are to be so transferred of any representations or agreements requested by the Company in order to permit such transfer to be made pursuant to exemptions from registration under the Securities Act and applicable state securities laws. 12.3. Legends. ------- (a) Unless a registration statement under the Securities Act is in effect with respect to the issuance or Transfer of shares of Common Stock under the Plan, each certificate representing any such shares shall be endorsed with a legend in substantially the following form, unless counsel for the Company is of the opinion as to any such certificate that such legend is unnecessary: THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("THE ACT"), OR UNDER APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH STATE LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH STATE LAWS, THE 12 AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY. (b) The Committee, in its sole discretion, may endorse certificates representing shares issued pursuant to the exercise of Incentive Stock Options with a legend in substantially the following form: THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF ON OR BEFORE [THE LATER OF THE ONE-YEAR OR TWO-YEAR INCENTIVE STOCK OPTION HOLDING PERIODS], WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY. ARTICLE 13. PLAN AMENDMENT, MODIFICATION AND TERMINATION. -------------------------------------------- The Board may suspend or terminate the Plan or any portion thereof at any time, and may amend the Plan from time to time in such respects as the Board may deem advisable in order that Options under the Plan shall conform to any change in applicable laws or regulations or in any other respect the Board may deem to be in the best interests of the Company; provided, however, that no such amendment shall be effective, without approval of the shareholders of the Company, if shareholder approval of the amendment is then required pursuant to Rule 16b-3 under the Exchange Act or any successor rule or Section 422 of the Code or under the applicable rules or regulations of any securities exchange or the NASD. No termination, suspension or amendment of the Plan shall alter or impair any outstanding Option without the consent of the Participant affected thereby; provided, however, that this sentence shall not impair the right of the Committee to take whatever action it deems appropriate under Section 4.3 or Article 9 of the Plan. ARTICLE 14. EFFECTIVE DATE OF THE PLAN. -------------------------- 14.1. Effective Date. The Plan is effective as of October 5, 1993, the -------------- date it was adopted by the Board. 14.2. Duration of the Plan. The Plan shall terminate at midnight on -------------------- October 4, 2003, and may be terminated prior thereto by Board action, and no Option shall be granted after such termination. Options outstanding upon termination of the Plan may continue to be exercised in accordance with their terms. ARTICLE 15. MISCELLANEOUS. ------------- 15.1. Construction and Headings. The use of the masculine gender shall ------------------------- also include within its meaning the feminine, and the singular may include the plural and the plural may include the singular, unless the context clearly indicates to the contrary. The headings of the Articles, Sections and subparts of the Plan are for convenience of reading only and are not meant to be of substantive significance and shall not add or detract from the meaning of such Article, Section or subpart. 15.2. Public Policy. No person shall have any claim or right to ------------- receipt of an Option if, in the opinion of counsel to the Company, such receipt conflicts with law or is opposed to governmental or public policy. 13 15.3. Governing Law. The place of administration of the Plan shall be ------------- conclusively deemed to be within the State of Minnesota, and the rights and obligations of any and all persons having or claiming to have had an interest under the Plan or under any agreements evidencing Options shall be governed by and construed exclusively and solely in accordance with the laws of the State of Minnesota without regard to the conflict of laws provisions of any jurisdictions. All parties agree to submit to the jurisdiction of the state and federal courts of Minnesota with respect to matters relating to the Plan and agree not to raise or assert the defense that such forum is not convenient for such party. 15.4. Successors and Assigns. This Plan shall be binding upon and ---------------------- inure to the benefit of the successors and permitted assigns of the Company, including, without limitation, whether by way of merger, consolidation, operation of law, assignment, purchase or other acquisition of substantially all of the assets or business of the Company, and any and all such successors and assigns shall absolutely and unconditionally assume all of the Company's obligations under the Plan. 15.5. Survival of Provisions. The rights, remedies, agreements, ---------------------- obligations and covenants contained in or made pursuant to the Plan, any agreement evidencing an Option and any other notices or agreements in connection therewith, including, without limitation, any notice of exercise of an Option, shall survive the execution and delivery of such notices and agreements and the delivery and receipt of shares of Common Stock and shall remain in full force and effect. 14 EX-10.25 3 THIRD AMDMT TO LEASE AGREEMENT Exhibit 10.25 THIRD AMENDMENT TO LEASE AGREEMENT THIS THIRD AMENDMENT TO LEASE AGREEMENT (the "Third Amendment") is made and entered into this 3rd day of September, 1999, by and between FIRST INDUSTRIAL, L.P., a Delaware Limited Partnership ("Landlord"), and OPTICAL SENSORS INCORPORATED, a Delaware corporation ("Tenant"). WITNESSETH: WHEREAS, Landlord and Tenant have heretofore entered into a certain Standard Commercial Lease dated October 7, 1991 (the "Original Lease") pursuant to which Landlord leased to Tenant and Tenant leased from Landlord certain premises commonly known as 7615 Golden Triangle Drive, Suite A, Eden Prairie, Minnesota (the "Premises"); and WHEREAS, Landlord and Tenant entered into a certain First Amendment to Lease Agreement dated April 26, 1996 (the "First Amendment"; the original Lease and the First Amendment are hereinafter collectively referred to as the "Lease"); and WHEREAS, Landlord and Tenant entered into a certain Second Amendment to Lease Agreement dated April 14, 1997 (the "Second Amendment"; the Original Lease and Second Amendment are hereinafter collectively referred to as the "Lease"); NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Recitals. The foregoing recitals are hereby incorporated as if fully -------- rewritten and restated in the body of this Third Amendment. All initially capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Lease. 2. Term. The term of the Lease shall be extended through May 31, 2000. ---- 3. Premises. The premises shall total 18,339 square feet; (7,906 square feet -------- office, 8,205 square feet lab, 2,228 square feet warehouse) located at 7615 Golden Triangle Drive, Suite A, as attached on Exhibit A. 4. Tenant's Proportionate Share. Tenant's Proportionate Share of Operating ---------------------------- Expenses shall be 14.56%. 5. Base Rent. Effective December 1, 1999, the monthly Base Rent for the --------- Premises shall be $11,888.00. 6. Full Force and Effect. Except as otherwise expressly set forth in this --------------------- Third Amendment, all terms, provisions and covenants set forth in the Lease shall remain in full force and effect and are hereby ratified and confirmed as of the date hereof. 7. Conflicts. In the event that any of the terms, covenants and conditions of --------- this Third Amendment conflict with any of the terms, covenants and conditions of the Lease, the terms, covenants and conditions of this Third Amendment shall control. IN WITNESS WHEREOF, the parties hereto have executed this Third Amendment as of the date and year first above written. LANDLORD: FIRST INDUSTRIAL, L.P., TENANT: OPTICAL SENSORS INCORPORATED, a a Delaware Limited Partnership Delaware corporation By: First Industrial Realty Trust, Inc., a Maryland corporation, its general partner By: /s/ Signature illegible By: /s/ Paulita M. LaPlante ----------------------------- ----------------------------- Its: Regional Director Its: President & CEO ---------------------------- ---------------------------- 2 EX-23.1 4 INDEPENDENT AUDITORS' CONSENT Exhibit 23.1 Consent of Ernst & Young LLP We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-04373) pertaining to the Optical Sensors Incorporated 1989 Omnibus Stock Option Plan and the Optical Sensors Incorporated 1993 Stock Option Plan and, in the Registration Statement (Form S-8 No. 333-17493) pertaining to the Optical Sensors Incorporated Employee Stock Purchase Plan, of our report dated March 28, 2000 with respect to the financial statements of Optical Sensors Incorporated, included in the Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ Ernst & Young LLP Minneapolis, Minnesota March 28, 2000 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 105,110 1,345,762 52,516 0 1,305,065 2,837,871 3,886,569 2,975,140 4,295,776 836,953 0 0 0 89,353 3,265,362 4,295,776 134,131 134,131 2,045,183 2,045,183 5,968,050 0 83,709 (7,785,276) 0 0 0 0 0 (7,785,276) (.88) 0
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