-----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, DMSMRgUa2WEvFz+6QLTbBSgtbs7q15nC/sTpceTnfE0xxFuLfF6zNYH1bbu3HZfH ZWJDlZRCJ6IBO7JcvBzEHw== 0001045969-00-000233.txt : 20000331 0001045969-00-000233.hdr.sgml : 20000331 ACCESSION NUMBER: 0001045969-00-000233 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIAMETRICS MEDICAL INC CENTRAL INDEX KEY: 0000895380 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 411663185 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21982 FILM NUMBER: 586219 BUSINESS ADDRESS: STREET 1: 2658 PATTON RD CITY: ROSEVILLE STATE: MN ZIP: 55113 BUSINESS PHONE: 6516398035 MAIL ADDRESS: STREET 1: 2658 PATTON ROAD CITY: ROSEVILLE STATE: MN ZIP: 55113 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________ FORM 10-K [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 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-21982 DIAMETRICS MEDICAL, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-1663185 (State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number) 2658 Patton Road Roseville, Minnesota 55113 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (651) 639-8035 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 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 ((S)229.405 of this chapter) 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 From 10-K or any amendment to this Form 10-K. [_] As of February 29, 2000, 25,957,396 shares of Common Stock were outstanding, and the aggregate market value of the common shares (based upon the closing price on said date on The Nasdaq National Market) of DIAMETRICS MEDICAL, INC. held by non-affiliates was approximately $279,042,007. Documents Incorporated by Reference Parts of the Registrant's Annual Report to Shareholders for the year ended December 31, 1999 are incorporated by reference in Part II hereof. Parts of the Registrant's definitive Proxy Statement for the 2000 Annual Meeting of Shareholders to be held on May 17, 2000 are incorporated by reference in Part III hereof. PART I Unless the context otherwise indicates, all references to the "Registrant," the "Company," or "Diametrics" in this Annual Report on Form 10-K are to Diametrics Medical, Inc., a Minnesota corporation, incorporated in January 1990, and where the context requires, its subsidiary, Diametrics Medical, Ltd. ("DML"). The following federally registered trademarks of the Company are used in this Annual Report on Form 10-K: Diametrics Medical, Inc.(R), IRMA(R)SL, IDMS(R), Paratrend 7(R), Neotrend(TM), Neurotrend(TM) and Trendcare(R). SureStep(R)Pro is a registered trademark of LifeScan, a Johnson & Johnson company. Item 1. Business Overview The Company develops, manufactures and commercializes blood and tissue analysis systems that provide immediate or continuous diagnostic results at the point-of-patient care. Since its commencement of operations in 1990, the Company has transitioned from a development stage company to a full-scale development, manufacturing and sales organization. The Company's goal is to be the world leader in critical care blood and tissue analysis systems. Blood and tissue analysis is an integral part of patient diagnosis and treatment, and access to timely and accurate results is critical to effective patient care. The Company believes that its blood and tissue analysis systems will result in more timely therapeutic interventions by providing accurate, precise and immediate or continuous test results, thereby allowing faster patient transfers out of expensive critical care settings and reducing patient length of stay. In addition, point-of-care testing can save money for hospitals by reducing the numerous steps, paperwork and personnel involved in collecting, transporting, documenting and processing blood and tissue samples. Moreover, point-of-care blood and tissue analysis could ultimately eliminate the need for hospitals to maintain expensive and capital intensive stat laboratories. The Company's primary product focus since its inception in 1990 has been the development, manufacturing and marketing of the IRMA ("Immediate Response Mobile Analysis") System, an electrochemical-based blood analysis system that provides rapid and accurate diagnostic results at the point-of-patient care. The IRMA SL System consists of a portable, microprocessor-based analyzer that employs single-use, disposable cartridges to perform simultaneously several of the most frequently ordered blood tests in a simple 90-second procedure. The Company's first disposable electrochemical cartridge, introduced in May 1994, performs three of the most frequently ordered blood tests for critical care patients--the measurement of oxygen, carbon dioxide and acidity (the "blood gases"). In June 1995, the Company expanded the IRMA System test menu with the introduction of its electrolyte cartridge which measures inorganic compounds including sodium, potassium and ionized calcium. The Company further expanded its critical or "stat" test menu during the third quarter of 1996 with the release of the second-generation system, IRMA SL, and the addition of the measurement of hematocrit (i.e., the concentration of red blood cells in whole blood) to its electrolyte cartridge. With the addition of hematocrit, the IRMA SL System is able to perform the majority of the critical or stat tests performed annually in the United States, comprising an estimated $1.2 billion annual market. In 1997, the Company introduced its third-generation system, IRMA SL Series 2000, and a new combination cartridge. The combination cartridge is based upon the Company's new "snapfit" cartridge design and gives clinicians the ability to perform all critical blood gas, electrolyte and hematocrit tests using one small blood sample and one single-use cartridge. During 1998, the Company expanded the test menu of the IRMA System by integrating the LifeScan (a Johnson & Johnson company) SureStepPro glucose strip testing module into the analyzer. Also under development in 1998 and 1999 were two additional blood tests, blood urea nitrogen ("BUN") and chloride, currently undergoing beta clinical trials, and a reusable version of the single use disposable cartridge, called IRMA-M. 2 In the fourth quarter of 1996, the Company expanded its product line with the introduction of a number of new products through the acquisition of Biomedical Sensors, Ltd. ("BSL"), a Pfizer company. With the acquisition of BSL (now known as Diametrics Medical, Ltd.), the Company acquired a world-class continuous monitoring fiberoptic technology platform, which complements the Company's existing electrochemical sensor intermittent testing platform. This product line includes indwelling continuous monitoring systems, consisting of a monitor, calibration system and intravascular disposable sensors. Primary products include the Trendcare monitoring system, consisting of Paratrend 7, which provides direct continuous monitoring of blood gases and temperature in critically ill adult and pediatric patients, and Neotrend, which provides direct continuous monitoring of blood gases and temperature in critically ill newborn babies; and the Neurotrend monitoring system, which measures oxygen, carbon dioxide, acidity and temperature in brain tissue and fluids as an indication of cerebral ischemia (i.e., deficient blood supply to the brain) and hypoxia (i.e., inadequate oxygenation of the blood) in patients with severe head injury and in patients undergoing surgical intervention in the brain. The Company has obtained clearances under Section 510(k) of the Food Drug and Cosmetic Act (the "FDC Act") to market the IRMA SL System to test blood gases, electrolytes, glucose, BUN and hematocrit in whole blood in hospital laboratories and at the point-of-care, and the Paratrend 7 and Neotrend to monitor blood gases and temperature. Additionally, in the first quarter of 1998, the Company received clearance from the United States Food and Drug Administration (the "FDA") to market the new IRMA-M multi-use cartridge for its IRMA SL System. In November 1999, the Company received clearance from the FDA to market the Neurotrend monitoring system. In October 1998, the Company entered into an exclusive distribution agreement with CODMAN, a Johnson & Johnson company, for worldwide market development and distribution of the Company's Neurotrend monitoring system. The term of the agreement is for six years and is renewable for two years. If minimum sales levels and marketing expenditure levels are not achieved by CODMAN, certain payments will be due to the Company. Also, CODMAN has the right of first refusal to market new continuous monitoring products developed for the neuro market. In addition, Johnson & Johnson Development Corporation ("JJDC") committed to purchase up to $5 million of the Company's Common Stock at the Company's option over the twelve-month period ended September 30, 1999 at the then current market value. The Company exercised approximately $4 million of the available Put Option resulting in the issuance of 773,184 shares of the Company's Common Stock to JJDC at a per share price of $5.17. On June 7, 1999, the Company and Hewlett Packard Company ("HP") announced that HP had signed an exclusive worldwide distribution agreement to market, sell and distribute the Company's Trendcare continuous blood-gas monitoring systems and the IRMA SL point-of-care blood analysis system. Under the terms of the distribution agreement, the Company transferred full responsibility for marketing, sales and distribution of these products to HP. The initial term of the distribution agreement is three and a half years, with the option for extensions. Concurrently with the execution of the distribution agreement, HP agreed to acquire $9.5 million of the Company's Common Stock at $7.00 per share, with a warrant to purchase 452,381 shares of Common Stock at $8.40 per share. The sale of shares of Common Stock to HP for $9.5 million was completed on June 28, 1999. In addition to HP's equity investment, the distribution agreement also provides for minimum purchase commitments, market development commitments, research and development funding and royalty payments over the initial term of the agreement, as well as funding of sales and marketing costs during a sales transition period. In November 1999, HP assigned the distribution agreement, with all its related rights and obligations, and its equity investment with the Company to Agilent Technologies, Inc. ("Agilent"), a leading provider of test and measurement solutions and communications components. Agilent was formed as a new company and subsidiary of HP in November 1999. HP plans to spin-off its ownership in Agilent to HP shareholders during 2000. The Company's principal executive office is located at 2658 Patton Road, Roseville, Minnesota 55113, and its telephone number is (651) 639-8035. Principal Products Additional information regarding the Company's principal products is provided below: 3 IRMA SL Series 2000 Blood Analysis System. The IRMA SL Series 2000 ("IRMA SL System"), the third generation IRMA analysis system, was released in the third quarter 1997, and provides the necessary foundation for current and future product enhancements. The IRMA SL System is comprised of the IRMA SL analyzer and a variety of electrochemical-based disposable cartridges which simultaneously perform select combinations of the most frequently ordered critical care diagnostic tests of blood gases, electrolytes and hematocrit in a simple 90-second procedure. The IRMA SL System also features electronic quality control, as an alternative to aqueous quality control measures, which eliminates the need for this costly and time-consuming process for many customers. The IRMA SL analyzer is a battery or AC operated, portable, microprocessor-based instrument weighing approximately four pounds, and includes an on-board printer. The analyzer can be easily linked for data downloading purposes to a hospital's laboratory or information system. In conjunction with a marketing alliance reached in 1997 with LifeScan, the Company incorporated blood glucose monitoring into the IRMA platform by integrating LifeScan's SureStepPro Glucose Module into the IRMA SL System. The Company began marketing the new integrated workstation during the first half of 1998. IDMS - The IRMA Data Management System. Released in the third quarter of 1996, IDMS, an advanced data management software program, provides a comprehensive data management system for point-of-care testing technologies. Developed initially for the IRMA SL System, IDMS is network compatible and features an open architecture design that provides for the integration of IDMS data with other laboratory or clinical information systems. Capillary Collection Device. The Capillary Collection Device was introduced in the third quarter of 1996 as a feature for use on the IRMA SL System, which provides the capability to collect and test a capillary blood sample. The Capillary Collection Device is used with the IRMA SL System's single use cartridges to perform blood gas, electrolyte, and hematocrit testing. The capillary collection capability of the IRMA SL System is useful in such patient areas as neonatal and pediatric intensive care, and in other situations where a capillary sample is preferred over an arterial or venous sample. AVOXimeter 4000. Under a distribution agreement initiated in the third quarter of 1996 with A-VOX Systems, Inc., the Company exclusively distributes the AVOXimeter 4000 in the United States. The AVOXimeter 4000 is a battery- operated and easily portable system which provides an accurate and timely assessment of the levels of hemoglobin and calculated oxygen content in a patient's blood. The Company has exclusive distribution rights for the AVOXimeter 4000 through April 2000. Trendcare Continuous Blood Gas Monitoring System. The Trendcare Continuous Blood Gas Monitoring System ("Trendcare"), consists of a monitor, patient data module and calibration system which provides the platform for the Paratrend 7 and Neotrend intravascular disposable sensors (described below). The Trendcare monitor displays trended patient data which allows constant surveillance of the patient's condition, while the patient data module stores critical calibration and patient information which moves with the patient during transfers. Paratrend 7. Paratrend 7 is the Company's second generation sensor for its continuous monitoring products, and is the only multi- parameter sensor for direct continuous monitoring of blood gases (oxygen, carbon dioxide and acidity) and temperature in critically ill adult and pediatric patients. Inserted via an arterial catheter, the sensor provides constant, precise measurement of vital blood gas parameters. The new technology uses a fluorescent optical sensor for monitoring oxygen, replacing the electrochemical version of its predecessor. Neotrend. Based upon the new fluorescent optical sensor technology introduced with the Paratrend 7, Neotrend is the only multi- parameter system for direct continuous monitoring of blood gases (oxygen, carbon dioxide and acidity) and temperature in critically ill newborn babies. Neotrend was introduced in the United Kingdom in November 1997 and 4 the Company received FDA clearance to market Neotrend in the United States in December 1997. Neurotrend Cerebral Tissue Monitoring System. The Neurotrend Cerebral Tissue Monitoring System ("Neurotrend") is designed for direct continuous monitoring of oxygen, carbon dioxide, acidity and temperature in brain tissue and fluids as an indication of cerebral ischemia and hypoxia in patients with severe head injury, and also for use during surgical intervention in the brain. Neurotrend continuously measures these parameters through a small fiberoptic sensor placed directly into the brain tissue or fluids. CE Mark approval was received in the second quarter 1998, allowing the system to be marketed in Europe, and the Company received clearance from the FDA in November 1999, allowing the system to be marketed in the United States. Regulatory Status Human diagnostic products are subject, prior to clearance for marketing, to rigorous pre-clinical and clinical testing mandated by the FDA and comparable agencies in other countries and, to a lesser extent, by state regulatory authorities. The Company and its products are regulated by the FDA under a number of statutes including the FDC Act. The FDC Act provides two basic review procedures for medical devices. Certain products may qualify for a submission authorized by Section 510(k) of the FDC Act, wherein the manufacturer gives the FDA a pre-market notification of the manufacturer's intention to commence marketing the product. The manufacturer must, among other things, establish that the product to be marketed is substantially equivalent to another legally marketed product. Marketing may commence when the FDA issues a letter finding substantial equivalence. If a medical device does not qualify for the 510(k) procedure, the manufacturer must file a pre-market approval ("PMA") application. This procedure requires more extensive prefiling testing than the 510(k) procedure and involves a significantly longer FDA review process. The Company has obtained clearances under Section 510(k) of the FDC Act to market the IRMA SL System to test blood gases, electrolytes, hematocrit, glucose and BUN in whole blood in hospital laboratories and at the point-of- patient care. The IRMA-M cartridge, which allows multiple test panels to be performed on a single cartridge, received clearance during 1998. Continuous monitoring products which have been cleared under Section 510(k) include the monitoring systems used with the Paratrend 7 sensor for direct continuous monitoring of blood gases and temperature in adults and pediatric patients, the Neotrend sensor for monitoring of blood gases and temperature in critically ill newborn babies, and the Neurotrend sensor designed for direct continuous monitoring of oxygen, carbon dioxide, acidity and temperature in brain tissue or fluids as an indication of cerebral ischemia and hypoxia in patients with severe head injury and also for use during surgical intervention in the brain. A 510(k) clearance is subject to continual review, and later discovery of previously unknown problems may result in restrictions on the product's marketing or withdrawal of the product from the market. The Company's long-term business strategy includes development of cartridges and sensors for performing additional blood and tissue chemistry tests, and any such additional tests will be subject to the same regulatory process. No assurance can be given that the Company will be able to develop such additional products or uses on a timely basis, if at all, or that the necessary clearances for such products and uses will be obtained by the Company on a timely basis or at all, or that the Company will not be subjected to a more extensive prefiling testing and FDA approval process. The Company also markets its products in several foreign markets. Requirements vary widely from country to country, ranging from simple product registrations to detailed submissions such as those required by the FDA. Manufacturing facilities are also subject to FDA inspection on a periodic basis and the Company and its contract manufacturers must demonstrate compliance with current Good Manufacturing Practices promulgated by the FDA. The Company's intermittent testing products are affected by the Clinical Laboratory Improvement Act of 1988 ("CLIA") which has been implemented by the FDA. This law is intended to assure the quality and reliability of all medical testing in the United States regardless of where tests are performed. The regulations require laboratories performing blood chemistry tests to meet specified 5 standards in the areas of personnel qualification, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The regulations have established three levels of regulatory control based on test complexity; "waived," "moderate complexity" and "high complexity." The tests performed by the Company's IRMA SL System have been categorized under CLIA as "moderate complexity" tests by the FDA, which places this system in the same category as most other commercially available blood gas and blood chemistry testing instruments. The glucose test is categorized as a "waived" test, which places this test in the same category as most other commercially available point-of-care glucose testing systems. The Company's continuous monitoring products are not affected by CLIA. Research and Development The Company owns two complementary technology platforms; an electrochemical platform, on which IRMA intermittent testing products are based, and a fiberoptic platform, on which the Paratrend 7, Neotrend and Neurotrend continuous monitoring products are primarily based. The Company is pursuing product line extensions from both of these core technology platforms. The Company intends to continue to expand its cartridge and test menus available on the IRMA SL System. Currently undergoing beta clinical trials is the H4 cartridge which tests sodium, potassium, hematocrit, chloride and BUN using one single-use cartridge. Commercial release of the H4 cartridge is scheduled for 2000. In addition to the single-use cartridge, the Company is developing a multi-use cartridge that will incorporate the Company's current sensor and calibration technologies into products that can perform multiple blood test panels over a period of days before disposal. A multi-use system will serve the needs of high volume critical care centers where rapid patient throughput and a low cost per test panel are required. The multi-use module was initially scheduled for commercial release in 1999; however, feedback from customer focus groups has lead to further enhancements to its design, with commercial release scheduled for the last half of 2000. The Company is also in the design stages for new additions to the IRMA SL's cartridge blood test menu, including glucose, lactate and creatinine. The Company believes that the IRMA SL System and related core technologies provide a flexible platform which, with a limited amount of additional development, will be capable of performing an even wider variety of blood chemistry tests. The Company plans to continually improve the IRMA SL System through software upgrades, manufacturing process improvements and equipment redesign, based on the results of ongoing marketing studies and field experience. Development activities for the continuous monitoring platform are currently focused on improving the access for the Paratrend 7 with a non-kinking catheter, providing compatibility of the Neotrend system with a standard umbilical artery catheter and improving the bolt access and insertion devices for Neurotrend. Studies are also underway to apply the continuous monitoring technology to new neurological and tissue applications. The Company's future development plans also include further expansion of the blood and tissue analysis test menu available on the continuous monitoring platform. Another new application initiative under development is the integration of the Company's point-of-care intermittent testing and continuous monitoring product lines into Agilent's patient monitoring platforms. The integration of these technologies will create a communications interface that facilitates monitor display of both biochemical and physiological information at the patient's bedside. The Company has incurred research and development expenses of approximately $4,847,000, $6,466,000 and $7,232,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 6 Sales and Marketing The Company markets and distributes its products primarily through two global partnerships with CODMAN and Agilent, and on an interim basis, certain third-party distributors where pre-existing contracts apply until the distribution rights are transitioned to Agilent. The Company also continues to sell direct to end-users in the veterinary market which is not subject to an exclusive distribution agreement. Additionally, the Company's marketing strategy is to pursue partnerships with market leaders who will help identify and promote future applications in continuous monitoring. Effective October 1, 1998, the Company entered into an exclusive distribution agreement with CODMAN for worldwide market development and distribution of the Company's Neurotrend monitoring system. Additionally, on June 7, 1999, the Company entered into an exclusive distribution agreement with Agilent for worldwide market development and distribution of the Company's Trendcare continuous blood gas monitoring systems and the IRMA SL blood analysis system. Information concerning the Company's export sales is contained in the financial section of the Company's Annual Report to Shareholders for the year ended December 31, 1999, under note 16 of Notes to Consolidated Financial Statements, and is incorporated herein by reference. Prior to entering into the exclusive distribution agreements described above, the Company's marketing efforts for its blood analysis systems focused on acute care hospitals. Under the Company's new distribution agreements, near term end-user sales of the Company's products are expected to continue to come from hospital critical care departments where blood tests are frequently requested on a stat basis. The Company's distributors' objectives will also include penetration of smaller hospitals and alternate-site markets, such as emergency medical facilities, home healthcare agencies, outpatient clinics, skilled nursing homes and doctors' offices or clinics. The Company believes that the advantages of its blood analysis and monitoring systems will help overcome the possible reluctance of acute care hospitals to change standard operating procedures for performing blood testing or incur additional capital expenses. The Company's established arrangements with hospital systems, healthcare facilities and other influential healthcare buying groups which established the Company as a sole, preferred or dual source supplier of its blood analysis systems are now administered by Agilent. These organizations include Columbia HCA, Vencor, Inc., Health Services Corporation of America and University Healthsystem Consortium (now part of Novation). The Company expects its distribution partners to continue to enter into arrangements with other buying groups and customers with respect to purchases of its blood and tissue analysis systems. Manufacturing The Company's manufacturing facilities support its intermittent testing and continuous monitoring platforms and are located in Roseville, Minnesota and High Wycombe, United Kingdom, respectively. The Company manufactures its IRMA electrochemical thick-film sensors in its Roseville, Minnesota facility. Components for the Company's continuous monitoring sensors used in the Paratrend 7, Neotrend and Neurotrend products are sourced from a variety of outside vendors, but the unique assembly and testing of the sensing elements is performed in the Company's High Wycombe facility. The sub-assembly of external plastic assemblies is sub-contracted to outside vendors. The Company uses external manufacturers to produce a range of hardware items, including the Trendcare and Neurotrend monitors. The Company assembles in-house the IRMA SL analyzer and the continuous monitoring calibrator at the Roseville and High Wycombe facilities, respectively. These devices could be manufactured by a number of microelectronics assembly companies, using primarily off-the-shelf components. Software for the IRMA SL analyzer is developed and maintained by the Company, and software for the continuous monitoring products is jointly developed with an external source, with acceptance and validation performed by the Company. The majority of the raw materials and purchased components used to manufacture the Company's products are readily available. Most of the Company's raw materials are or may be obtained 7 from more than one source. A small number of these materials, however, are unique in their nature, and are therefore single sourced. Plans are ongoing to add additional second sourcing where appropriate. The Company's manufacturing facilities include four clean rooms in Roseville which range from Class 1,000 to Class 100,000, and two clean rooms in High Wycombe, both rated as Class 10,000. The Company believes its current facilities can support production of required cartridges and sensors for the foreseeable future. The Company maintains a comprehensive quality assurance and quality control program, which includes complete documentation of all material specifications, operating procedures, maintenance and equipment calibration procedures, training programs and quality control test methods. To control the quality of its finished product, the Company utilizes ongoing statistical process control systems during the manufacturing process and comprehensive performance testing of finished goods. The Company continues to successfully undergo required inspections of its manufacturing facilities by the FDA (most recently in October 1998 and October 1999 for Roseville and High Wycombe facilities, respectively), and by the British Standards Institution for the High Wycombe facility (most recently in August 1999). As a result of these inspections, the Company's manufacturing facilities and documentation and quality control systems are deemed satisfactory and in compliance with Good Manufacturing Practices. Patents and Proprietary Rights The Company has implemented a strategy of pursuing patent applications to provide both design freedom and protection from competitors. This strategy includes evaluating and seeking patent protection both for inventions most likely to be used in its blood and tissue analysis systems and for those inventions most likely to be used by others as competing alternatives. For its intermittent testing platform, the Company currently maintains three patents issued for its calibration technology, three patents related to its sensor technology and three for companion technology. In addition, two patents have been issued and maintained covering the IRMA SL analyzer and disposable cartridge designs. Additionally, the Company has submitted patent applications pertaining to an enzymatic sensor, coagulation measurement technology and an analyzer with multiple test modules. Overseas, the Company has foreign patent applications pending, filed under the Patent Cooperation Treaty, designating various jurisdictions, including Canada, the major European countries, Brazil, Australia and Japan, corresponding to one or more U.S. applications. The Company maintains 15 foreign patents; two issued in the United Kingdom, two in Germany, two in France, five in Canada and four in Japan. As it relates to its continuous monitoring platform, the Company currently maintains nine U.S. patents associated with the design and manufacture of its sensor technology platforms, and has filed two patent applications. These patents are at various patent process stages in the major European countries and Japan. Material patents have expirations ranging from the year 2006 to 2017. The Company is not currently a party to any patent litigation. The Company has federally registered the trademarks "IRMA SL," "Diametrics Medical, Inc.," "IRMA Data Management System (IDMS)," "Neocath," "Paratrend," "Tissutrak," "Paratrend 7+," "Neotrend," "Trendcare," "Neurotrend," "CAL-POD," "TOM 2000" and claims trademark rights in "When Stat Isn't Fast Enough." Competition The Company believes that potential purchasers of point-of-care blood and tissue analysis systems will base their purchase decision upon a combination of factors, including the product's test menu, ease of use, accuracy, price and ability to manage the data collected. The Company is aware of one company, i- STAT, that is marketing a portable point-of-care blood analysis system. The Company believes 8 that the IRMA SL System possesses distinct competitive advantages over i-STAT's products including ease of use, closed instead of open handling of blood samples and room temperature instead of refrigerated storage of reagents. The Company also competes with companies that market near-patient multi- use blood analysis systems. These companies include AVL Scientific Corporation, Radiometer, Inc., Instrumentation Laboratories and Bayer (with their acquisition of Chiron Diagnostics). However, the Company believes that to be successful in the point-of-care market, a device must not only be able to perform a variety of commonly ordered blood chemistry tests, but also be very portable to facilitate ease of use at the patient's bedside. The Company's blood analysis systems also compete with manufacturers providing traditional blood analysis systems to central and stat laboratories of hospitals. Although these laboratory-based instruments provide the same tests available with the Company's products, they are complex, expensive and require the use of skilled technicians. The Company believes that its blood analysis systems offer several advantages over these laboratory-based instruments including immediate or continuous results, ease-of-use, reduced opportunity for error and cost effectiveness. The Company believes that its multi-parameter continuous arterial blood gas and tissue monitoring systems are currently the only products of its kind commercially available. The Company's products are competitively priced with other point-of-care product offerings. While competitive cost data is not easily attainable, the high volume, centralized testing labs can provide testing at a lower cost per test, but do not provide the convenience and fast turnaround time for test results that point-of-care products offer. Their costs are also highly dependent on volume, given the large investment required for facilities, equipment and trained personnel. Many of the companies in the medical technology industry have substantially greater capital resources, research and development staffs and facilities than the Company. Such entities may be developing or could in the future attempt to develop additional products competitive with the Company's blood and tissue analysis systems. Many of these companies also have substantially greater experience than the Company in research and development, obtaining regulatory approvals, manufacturing and marketing, and may therefore represent significant competition for the Company. There can be no assurance that the Company's competitors will not succeed in developing or marketing technologies and products that will be more effective or less expensive than those being sold by the Company or that would render the Company's technology and products obsolete or noncompetitive. Executive Officers Name Age Position ---- --- -------- David T. Giddings 56 President, Chief Executive Officer and Chairman Roy S. Johnson 47 Executive Vice President and President and Managing Director of Diametrics Medical, Ltd. Laurence L. Betterley 46 Senior Vice President and Chief Financial Officer James R. Miller 46 Senior Vice President of Sales and Marketing and Commercial Development Mr. Giddings was appointed Chairman of the Board of Directors, President and Chief Executive Officer of the Company in April 1996. Mr. Giddings was formerly President and Chief Operating Officer of the United States operations of Boehringer Mannheim Corporation ("BMC"), a U.S. 9 subsidiary of Corange Ltd., a private global healthcare corporation. He joined BMC in 1992 after a 26-year career with Eastman Kodak Company, where he held a number of senior management positions, including General Manager and Vice President of Marketing and Sales, clinical products division. He also served as Vice President and General Manager of Kodak's imaging information system group and of its printing and publishing division. Mr. Johnson joined the Company in November 1996 as an Executive Vice President, and the President and Managing Director of DML, a subsidiary of the Company established in conjunction with the acquisition in November 1996 of BSL. DML markets a line of indwelling monitoring systems for continuous blood and tissue assessment of critically ill patients. Beginning in 1977, Mr. Johnson served in a number of management positions for the predecessors of the BSL business, most recently as President and Chief Executive Officer while it was a subsidiary of Orange Medical Instruments, Inc. and later when it was an operating unit of Pfizer Inc. Mr. Johnson started his career in 1974 with Burroughs Wellcome in pharmaceutical production management and was the head of manufacturing in Burroughs' Sydney, Australia subsidiary. Mr. Betterley has been Senior Vice President of the Company since October 1996 and Chief Financial Officer since August 1996. Prior to this, he was with Cray Research, Inc. in various management and financial positions including Chief Financial Officer from 1994 to 1996, Vice President of Finance from 1993 to 1994 and Corporate Controller from 1989 to 1993. Cray Research develops, manufactures and sells high performance computing systems used for computational research. Mr. Miller joined the Company in March 1995 as Vice President of Sales and Marketing, was Senior Vice President of Commercial and Business Development since July 1996, and Senior Vice President of Sales and Marketing and Commercial Development since January 1998. From 1991 to early 1995, Mr. Miller was Vice President of Sales and Marketing at IMED Corporation, where he had global sales and marketing responsibility for infusion and monitoring products for hospital and alternate site markets. Employees As of December 31, 1999, the Company had a total of 146 full-time employees, including 43 persons engaged in research and development activities. None of the Company's employees are covered by a collective bargaining agreement, and Diametrics believes it maintains good relations with its employees. Forward-Looking Statements This Form 10-K Annual Report and the Company's financial statements, "Management's Discussion and Analysis of Results of Operations and Financial Condition" in Item 7 and other documents incorporated by reference contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our expectations or beliefs, including, but not limited to, our current assumptions about future financial performance, anticipated problems, and our plans for future operations, which are subject to various risks and uncertainties. When used in this Form 10-K and in future filings by the Company with the Securities and Exchange Commission, in our press releases, presentations to securities analysts or investors, in oral statements made by or with the approval of an executive officer of the Company, the words or phrases "believes," "may," "will," "expects," "should," "continue," "anticipates," "intends," "will likely result," "estimates," "projects," or similar expressions and variations thereof are intended to identify such forward-looking statements. However, any statements contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. We caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending upon a variety of important factors, including those described in Exhibit 99 to this Form 10-K. 10 Item 2. Properties The Company's principal properties are as follows:
Location of Use of Approximate Lease Property Facility Square Footage Expiration Date - ----------------------------------------------------------------------------------------------------------------------------- Roseville, Minnesota Manufacturing, research 43,300 February 2004 and development, sales, marketing and administration Malvern, Pennsylvania Research and development 2,000 March 2002 High Wycombe, Manufacturing, process 14,500 September 2005 United Kingdom engineering, purchasing and distribution High Wycombe, Sales, marketing and 5,500 January 2015 (1) United Kingdom administration High Wycombe, Research and development 6,000 April 2004 (2) United Kingdom
(1) Lease can be terminated without penalty at the Company's sole discretion in July 2002 and January 2005. (2) Lease can be terminated without penalty at the Company's sole discretion in April of 2001, 2002 and 2003. The Company believes that its facilities are sufficient for its projected needs through 2001. Item 3. Legal Proceedings The Company is currently not subject to any material pending or threatened legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1999. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock, $.01 par value, trades on The Nasdaq National Market under the symbol "DMED." The information contained under the heading "Stock Information" on page 35 in the Company's Annual Report to Shareholders for the year ended December 31, 1999 (the "Annual Report to Shareholders"), is incorporated herein by reference. 11 Item 6. Selected Financial Data The information contained under the heading "Selected Five-Year Financial Data" on page 13 in the Annual Report to Shareholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition The information contained under the heading "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 13 through 18 in the Annual Report to Shareholders is incorporated herein by reference. Item 7.a. Quantitative and Qualitative Disclosures About Market Risk The information contained under the heading "Market Risk" on page 17 in the Annual Report to Shareholders is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The information contained under the headings "Consolidated Statements of Operations," "Consolidated Balance Sheets," "Consolidated Statements of Shareholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial Statements" on pages 19 through 32 and "Report of Independent Auditors" on page 33 in the Annual Report to Shareholders is 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 Directors of the Registrant The information contained under the heading "Election of Directors" in the Company's definitive Proxy Statement for its 2000 Annual Meeting of Shareholders to be held on May 17, 2000, which definitive Proxy Statement will be filed within 120 days after the close of the fiscal year ended December 31, 1999 (the "Proxy Statement"), is incorporated herein by reference. Executive Officers of the Registrant See Part I, Item 1 of this Report for information on Executive Officers of the Company. The information contained under the heading "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement is incorporated herein by reference. Item 11. Executive Compensation The information contained under the heading "Executive Compensation" in the Proxy Statement is incorporated herein by reference, except that, pursuant to Item 402(a)(8) of Regulation S-K, the subsections under "Executive Compensation" entitled "Report of Compensation Committee on Executive Compensation" and "Comparative Stock Performance" provided in response to paragraphs (k) and (l) of Item 402 are not incorporated by reference herein. 12 Item 12. Security Ownership of Certain Beneficial Owners and Management The information contained under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information contained under the heading "Certain Transactions" in the Proxy Statement is incorporated by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements The following consolidated financial statements of Diametrics Medical, Inc., which are included in the Annual Report to Shareholders, are incorporated by reference in Item 8 hereof: Report of Independent Auditors Consolidated Statements of Operations for each of the years in the three year period ended December 31, 1999 Consolidated Balance Sheets at December 31, 1999 and 1998 Consolidated Statements of Shareholders' Equity for each of the years in the three year period ended December 31, 1999 Consolidated Statements of Cash Flows for each of the years in the three year period ended December 31, 1999 Notes to Consolidated Financial Statements Except for the financial statements listed above and the items specifically incorporated by reference in Items 5, 6, 7, 7.a. and 8 hereof, the Annual Report to Shareholders is not deemed to be filed as part of this Annual Report on Form 10-K. 2. Financial Statement Schedules All schedules have been omitted because they are not applicable or not required, or because the required information is included in the financial statements or the notes thereto. 3. Exhibits
Exhibit No. Description Method of Filing - ------- ----------- ---------------- 3.1 Articles of Incorporation of the Company (as amended) (7) 3.2 Bylaws of the Company (as amended) Filed herewith 4.1 Form of Certificate for Common Stock (1) 4.2 Form of Registration Rights Agreement between the Company and certain of its shareholders and warrant holders (1) 4.3 Form of Registration Rights Agreement dated as of February 3, 1995 between the Company and certain of its shareholders (3)
13
4.4 Registration Rights Agreement, dated as of January 30, 1997, by and between the Company and purchasers of Series I Junior Participating Preferred Stock (5) 4.5 Registration Rights Agreement, dated as of June 10, 1997, by and between the Company and the Purchasers (8) 4.6 Form of Certificate for Series I Junior Participating Preferred Stock (5) 4.7 Form of Stock Purchase Warrant, dated as of January 30, 1997 (5) 4.8 Form of Stock Purchase Warrant, dated as of June 10, 1997 (8) 10.1 Real Property Lease Agreements dated July 31, 1996, between Commers-Klodt, a Minnesota General Partnership, and the Company (12) 10.2 Amendments, dated June 15, 1999, to Real Property Lease Agreements dated July 31, 1996, between Commers-Klodt, a Minnesota General Partnership, and the Company Filed herewith 10.3 Master Equipment Lease Agreement dated as of June 15, 1993, between the Company and Phoenix Growth Capitol Corp., as amended by Amendment No. 1 dated June 8, 1994 (including form of warrant issued in connection therewith) (1) 10.4* 1990 Stock Option Plan (as amended and restated), including form of option agreement (10) 10.5* 1993 Directors' Stock Option Plan, as amended and restated (10) 10.6* 1995 Equalizing Director Stock Option Plan (4) 10.7 1995 Employee Stock Purchase Plan (as revised and restated) (6) 10.8 Agreement dated January 1, 1995 between the Company and Vencor, Inc. (3) 10.9 Letter agreement dated as of February 1, 1995 among the Company, Allstate Venture Capital and Frazier and Company L.P. (2) 10.10 Stock Purchase Agreement, dated as of January 30, 1997, between the Company and the Purchasers named therein (5) 10.11 Stock Purchase Agreement dated as of June 10, 1997, between the Company and the Purchasers named therein (8) 10.12 Loan and Security Agreement, dated March 31, 1998, between DVI Business Credit and the Company (9) 10.13 Common Stock Purchase Agreement, dated June 30, 1998, between the Company and the Purchasers named therein (10) 10.14 Form of Stock Purchase Warrant, dated August 4, 1998 (10)
14
10.15 Note Purchase Agreement, dated August 4, 1998, between the Company and the Purchasers named therein (10) 10.16 Form of Convertible Senior Secured Fixed Rate Note due August 4, 2003 (10) 10.17 Distribution Agreement, dated October 1, 1998, between the Company and Johnson & Johnson Professional, Inc. (11) 10.18 Put Option and Stock Purchase Agreement, dated October 1, 1998, between the Company and Johnson & Johnson Development Corporation (11) 10.19 Severance Pay Agreement (in the event of Change of Control) dated July 31, 1998, between the Company and David T. Giddings (11) 10.20 Form of Severance Pay Agreement (in the event of Change of Control) dated July 31, 1998, between the Company and its executive officers (11) 10.21 Form of Severance Pay Agreement (in the event of Termination Without Cause) dated July 31, 1998, between the Company and its executive officers (11) 10.22 Distribution Agreement, dated June 6, 1999, between the Company and Hewlett-Packard Company (13) 10.23 Common Stock Purchase Agreement, dated June 6, 1999, between the Company and Hewlett-Packard Company (13) 10.24 Stock Purchase Warrant, dated effective as of June 28, 1999 (13) 13 Portions of the Company's Annual Report to Shareholders for the year ended December 31, 1999 incorporated by reference in this Form 10-K Filed herewith 21 List of Subsidiaries Filed herewith 23 Consent of KPMG LLP Filed herewith 24 Powers of Attorney (included in signature page of Report) Filed herewith 27 Financial Data Schedule (electronic filing only) Filed herewith 99 Cautionary Statements Under the Private Securities Litigation Reform Act Filed herewith
___________________ * Management compensatory plan filed pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K. (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration Number 33-78518) (the "Registration Statement"). (2) Incorporated by reference to the Company's 1994 Annual Report on Form 10-K. (3) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration Number 33-94442). (4) Incorporated by reference to the Company's 1995 Annual Report on Form 10-K. 15 (5) Incorporated by reference to the Company's Current Report on Form 8-K filed March 25, 1997. (6) Incorporated by reference to the Company's 1996 Annual Report on Form 10-K. (7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1997. (8) Incorporated by reference to the Company's Current Report on Form 8-K filed June 26, 1997. (9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1998. (10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1998. (11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1998. (12) Incorporated by reference to the Company's 1998 Annual Report on Form 10-K. (13) Incorporated by reference to the Company's Current Report on Form 8-K filed July 23, 1999. (b) Reports on Form 8-K No Current Reports on Form 8-K were filed by the Company during the fourth quarter of the year ended December 31, 1999. (c) See Item 14(a)(3) above. (d) See Item 14(a)(2) above. 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, in the City of Roseville, State of Minnesota, on March 30, 2000. DIAMETRICS MEDICAL, INC. By /s/ David T. Giddings ---------------------- David T. Giddings President, Chief Executive Officer and Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on March 30, 2000. KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby constitute and appoint David T. Giddings and Laurence L. Betterley, and each of them, each with full power to act without the other, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to the Annual Report on Form 10-K for the year ended December 31, 1999 of Diametrics Medical, Inc. , and to file the same, with any and all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all of each of said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue thereof. Name Title ---- ----- /s/ David T. Giddings President, Chief Executive Officer and - -------------------------------- David T. Giddings Chairman (Principal Executive Officer) /s/ Laurence L. Betterley Senior Vice President and Chief Financial - -------------------------------- Laurence L. Betterley Officer (Principal Financial Officer) /s/ Jill M. Nussbaum Corporate Controller - -------------------------------- Jill M. Nussbaum (Principal Accounting Officer) /s/ Andre de Bruin Director - -------------------------------- Andre de Bruin /s/ Gerald L. Cohn Director - -------------------------------- Gerald L. Cohn /s/ Hans-Guenter Hohmann Director - -------------------------------- Hans-Guenter Hohmann /s/ Roy S. Johnson Director - -------------------------------- Roy S. Johnson /s/ Mark B. Knudson Director - -------------------------------- Mark B. Knudson, Ph.D. /s/ David V. Milligan Director - -------------------------------- David V. Milligan, Ph.D. 17 EXHIBIT INDEX Exhibit No. Description - ------- ----------- 3.2 Bylaws of the Company (as amended) 10.2 Amendments, dated June 15, 1999, to Real Property Lease Agreements dated July 31, 1996, between Commers-Klodt, a Minnesota General Partnership, and the Company 13 Portions of the Company's Annual Report to Shareholders for the year ended December 31, 1999 incorporated by reference in this Form 10-K 21 List of Subsidiaries 23 Consent of KPMG LLP 24 Powers of Attorney (included in signature page of Report) 27 Financial Data Schedule (electronic filing only) 99 Cautionary Statements Under the Private Securities Litigation Reform Act EX-3.2 2 BYLAWS OF THE COMPANY (AS AMENDED) Exhibit 3.2 BYLAWS OF DIAMETRICS MEDICAL, INC. (as amended through February 17, 2000) ARTICLE I. OFFICES, CORPORATE SEAL Section 1.01. Registered Office. The registered office of the ----------------- corporation in Minnesota shall be that set forth in the articles of incorporation or in the most recent amendment of the articles of incorporation or resolution of the directors filed with the secretary of state of Minnesota changing the registered office. Section 1.02. Other Offices. The corporation may have such other ------------- offices, within or without the state of Minnesota, as the directors shall, from time to time, determine. Section 1.03. Corporate Seal. The corporation shall have no seal. -------------- ARTICLE II. MEETINGS OF SHAREHOLDERS Section 2.01. Place and Time of Meetings. Except as provided -------------------------- otherwise by the Minnesota Business Corporation Act, meetings of the shareholders may be held at any place, within or without the state of Minnesota, as may from time to time be designated by the directors. Section 2.02. Regular Meetings. ---------------- (a) A regular meeting of the shareholders shall be held on such date as the board of directors shall by resolution establish. (b) At a regular meeting, the shareholders, voting as provided in the articles of incorporation and these bylaws, shall elect qualified successors for directors who serve for an indefinite term or whose terms have expired or are due to expire within six months after the date of the meeting and shall transact such other business as may properly come before them. (c) To be properly brought before a regular meeting of shareholders, business must be either (1) specified in the notice of the meeting, (2) directed to be brought before the meeting by the board of directors or (3) proposed by a shareholder who (i) was a shareholder of record at the time of giving of notice provided for in these bylaws, 1 (ii) is entitled to vote at the meeting and (iii) gives prior notice of the matter, which must otherwise be a proper matter for shareholder action, in the manner herein provided. For business to be properly brought before a regular meeting by a shareholder, the shareholder must give written notice of such shareholder's intent to bring a matter before the regular meeting, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the corporation no later than ninety days prior to the anniversary date of the immediately preceding regular meeting. Such notice shall set forth (1) a brief description of the business desired to be brought before the regular meeting and the reasons for conducting such business, (2) the name and record address of the shareholder, (3) the class and number of shares of the corporation owned by the shareholder, (4) such other information regarding the business proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, and (5) any material interest of the shareholder in such business. The chair of the meeting may refuse to acknowledge any proposed business not made in compliance with the foregoing procedure. Section 2.03. Special Meetings. Special meetings of the shareholders ---------------- may be held at any time and for any purpose and may be called by the Chief Executive Officer, the Chief Financial Officer, two or more directors or by a shareholder or shareholders holding 10% or more of the voting power of all shares entitled to vote, except that a special meeting for the purpose of considering any action to directly or indirectly facilitate or affect a business combination, including any action to change or otherwise affect the composition of the board of directors for that purpose, must be called by 25% or more of the voting power of all shares entitled to vote. A shareholder or shareholders holding the requisite percentage of the voting power of all shares entitled to vote may demand a special meeting of the shareholders by written notice of demand given to the Chief Executive Officer or Chief Financial Officer of the corporation and containing the purposes of the meeting. Within 30 days after receipt of demand by one of those officers, the board of directors shall cause a special meeting of shareholders to be called and held on notice no later than 90 days after receipt of the demand, at the expense of the corporation. Special meetings shall be held on the date and at the time and place fixed by the Chief Executive Officer or the board of directors, except that a special meeting called by or at demand of a shareholder or shareholders shall be held in the county where the principal executive office is located. The business transacted at a special meeting shall be limited to the purposes as stated in the notice of the meeting. Section 2.04. Quorum, Adjourned Meetings. The holders of a majority -------------------------- of the shares entitled to vote shall constitute a quorum for the transaction of business at any regular or special meeting. In case a quorum shall not be present at a meeting, the meeting may be adjourned from time to time without notice other than announcement at the time of adjournment of the date, time and place of the adjourned meeting. If a quorum is present, a meeting may be adjourned from time to time without notice other 2 than announcement at the time of adjournment of the date, time and place of the adjourned meeting. At adjourned meetings at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. If a quorum is present when a meeting is convened, the shareholders present may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders originally present to leave less than a quorum. Section 2.05. Voting. At each meeting of the shareholders, every ------ shareholder having the right to vote shall be entitled to vote either in person or by proxy. Each shareholder, unless the articles of incorporation or statutes provide otherwise, shall have one vote for each share having voting power registered in such shareholder's name on the books of the corporation. Jointly owned shares may be voted by any joint owner unless the corporation receives written notice from any one of them denying the authority of that person to vote those shares. Upon the demand of any shareholder, the vote upon any question before the meeting shall be by ballot. All questions shall be decided by a majority vote of the number of shares entitled to vote and represented at the meeting at the time of the vote except if otherwise required by statute, the articles of incorporation, or these bylaws. Section 2.06. Record Date. The board of directors may fix a date, ----------- not exceeding 60 days preceding the date of any meeting of shareholders, as a record date for the determination of the shareholders entitled to notice of, and to vote at, such meeting, notwithstanding any transfer of shares on the books of the corporation after any record date so fixed. If the board of directors fails to fix a record date for determination of the shareholders entitled to notice of, and to vote at, any meeting of shareholders, the record date shall be the 20th day preceding the date of such meeting. Section 2.07. Notice of Meetings. There shall be mailed to each ------------------ shareholder, shown by the books of the corporation to be a holder of record of voting shares, at his address as shown by the books of the corporation, a notice setting out the date, time and place of each regular meeting and each special meeting, except where the meeting is an adjourned meeting and the date, time and place of the meeting were announced at the time of adjournment, which notice shall be mailed at least five days prior thereto. Every notice of any special meeting called pursuant to section 2.03 hereof shall state the purpose or purposes for which the meeting has been called, and the business transacted at all special meetings shall be confined to the purposes stated in the notice. Section 2.08. Waiver of Notice. Notice of any regular or special ---------------- meeting may be waived by any shareholder either before, at or after such meeting orally or in writing signed by such shareholder or a representative entitled to vote the shares of such shareholder. A shareholder, by his attendance at any meeting of shareholders, shall be deemed to have waived notice of such meeting, except where the shareholder objects at the beginning of the meeting to the transaction of business because the 3 meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting. Section 2.09. Conduct of Meetings. The presiding officer at each ------------------- meeting of shareholders shall conclusively determine the order of business, all matters of procedure and whether or not a proposal is proper business to be transacted at the meeting and has been properly brought before the meeting. Following completion of the business of the meeting as determined by the presiding officer, the presiding officer shall have the exclusive authority and power to adjourn the meeting. Section 2.10. Nomination of Directors. Only persons nominated ------------------------ in accordance with the following procedures shall be eligible for election by shareholders as directors. Nominations of persons for election as directors may be made at a meeting of shareholders called for the purpose of electing directors (a) by or at the direction of the board of directors or (b) by any shareholder who (1) was a shareholder of record at the time of giving of notice provided for in these Bylaws, (2) is entitled to vote at the meeting and (3) gives prior notice of the nomination or nominations in the manner herein provided. For a nomination to be properly made by a shareholder, the shareholder must give written notice of such shareholder's intent to make such nomination or nominations, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the corporation not later than (i), with respect to an election to be held at a regular meeting of shareholders, ninety days prior to the anniversary date of the immediately preceding regular meeting, and (ii), with respect to the election to be held at a special meeting of shareholders for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to shareholders. Such notice shall set forth (a) as to the shareholder giving the notice: (1) the name and record address of the shareholder, (2) the class and number of shares of the corporation owned by the shareholder, (3) a representation that the shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, and (4) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; and (b) as to each person the shareholder proposes to nominate: (1) the name, age, business address and residence address of the person, (2) the principal occupation or employment of the person, (3) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, and (4) the consent of each nominee to serve as a director of the corporation if so elected. The chair of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. 4 ARTICLE III. DIRECTORS Section 3.01. General Powers. The business and affairs of the -------------- corporation shall be managed by or under the authority of the board of directors, except as otherwise permitted by statute. Section 3.02. Number, Qualification and Term of Office. The number of ---------------------------------------- directors shall be no less than three nor more than twenty and shall be established by resolution of the Board of Directors. Directors need not be shareholders. The number of directors may be increased or decreased from time to time by a resolution adopted by the affirmative vote of the holders of at least 80% of the outstanding shares of common stock, par value $.01 per share (the "Common Stock"), of the corporation entitled to vote. The directors shall be divided into three classes, as equal in number as possible. At the 1999 regular meeting of the shareholders: (i) directors in the first class (currently three directors) shall be elected to serve until the 2000 regular meeting of shareholders, (ii) directors in the second class (currently two directors) shall be elected to serve until the 2001 regular meeting of the shareholders, and (iii) directors in the third class (currently two directors) shall be elected to serve until the 2002 regular meeting of the shareholders; or until their successors shall be duly elected and qualified. At each regular meeting of the shareholders following the 1996 regular shareholders' meeting, each director elected to succeed a director whose term has expired shall hold office until the third succeeding regular meeting of the shareholders after such director's election and until such director's successor has been duly elected and qualified, or until the earlier death, resignation, removal or disqualification of such director. In case of any increase or decrease in the number of directors, the increase or decrease shall be distributed among the several classes as equally as possible as shall be determined by the Board of Directors or by the affirmative vote of the holders of at least 80% of the outstanding shares of Common Stock entitled to vote. Section 3.03. Board Meetings. Meetings of the board of directors may -------------- be held from time to time at such time and place within or without the state of Minnesota as may be designated in the notice of such meeting. Section 3.04. Calling Meetings; Notice. Meetings of the board of ------------------------ directors 5 may be called by the Chairman of the Board and/or the Chief Executive Officer by giving at least twenty-four hours' notice, or by any other director by giving at least five days' notice, of the date, time and place thereof to each director by mail, telephone, telegram or in person. If the day or date, time and place of a meeting of the board of directors has been announced at a previous meeting of the board, no notice is required. Notice of an adjourned meeting of the board of directors need not be given other than by announcement at the meeting at which adjournment is taken. Section 3.05. Waiver of Notice. Notice of any meeting of the board ---------------- of directors may be waived by any director either before, at, or after such meeting orally or in a writing signed by such director. A director, by his attendance at any meeting of the board of directors, shall be deemed to have waived notice of such meeting, except where the director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and does not participate thereafter in the meeting. Section 3.06. Quorum. A majority of the directors holding office ------ immediately prior to a meeting of the board of directors shall constitute a quorum for the transaction of business at such meeting. Section 3.07. Absent Directors. A director may give advance written ---------------- consent or opposition to a proposal to be acted on at a meeting of the board of directors. If such director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected. Section 3.08. Conference Communications. Any or all directors may ------------------------- participate in any meeting of the board of directors, or of any duly constituted committee thereof, by any means of communication through which the directors may simultaneously hear each other during such meeting. For the purposes of establishing a quorum and taking any action at the meeting, such directors participating pursuant to this section 3.08 shall be deemed present in person at the meeting; and the place of the meeting shall be the place of origination of the conference telephone conversation or other comparable communication technique. Section 3.09. Vacancies; Newly Created Directorships. Vacancies in -------------------------------------- the Board of Directors of this corporation occurring by reason of death, resignation, removal or disqualification shall be filled for the unexpired term by a majority of the remaining directors, even though less than a quorum. Vacancies resulting from an increase in the number of directors may be filled by a majority vote of the remaining directors. Each director elected to fill a vacancy shall hold office, subject to the 6 provisions of these Bylaws, until a qualified successor is elected by the shareholders at a regular or special meeting. The shareholders shall elect a director to fill the remainder of any unexpired term for which a director has been elected to fill a vacancy by the Board of Directors at their next regular or special meeting. Section 3.10. Removal. The affirmative vote of the shareholders ------- holding at least 80% of the outstanding shares of Common Stock entitled to vote at an election of directors may remove any or all of the directors from office at any time, with or without cause. In the event that the Board of Directors or any one or more directors be so removed, new directors shall be elected at the same meeting. A director named by the Board of Directors to fill a vacancy may be removed from office at any time, with or without cause, by the affirmative vote of the remaining directors if the shareholders have not elected directors in the interim between the time of the appointment to fill such vacancy and the time of the removal. Section 3.11. Committees. A resolution approved by the affirmative ---------- vote of a majority of the board of directors may establish committees having the authority of the board in the management of the business of the corporation to the extent provided in the resolution. A committee shall consist of one or more persons, who need not be directors, appointed by affirmative vote of a majority of the directors present. Committees are subject to the direction and control of, and vacancies in the membership thereof shall be filled by, the board of directors. A majority of the members of the committee present at a meeting is a quorum for the transaction of business. Section 3.12. Written Action. Any action which might be taken at a -------------- meeting of the board of directors, or any duly constituted committee thereof, may be taken without a meeting if done in writing and signed by all of the directors or committee members, unless the articles provide otherwise and the action need not be approved by the shareholders. Section 3.13. Compensation. Directors who are not salaried officers ------------ of this corporation shall receive such fixed sum per meeting attended or such fixed annual sum as shall be determined, from time to time, by resolution of the board of directors. The board of directors may, by resolution, provide that all directors shall receive their expenses, if any, of attendance at meetings of the board of directors or any committee thereof. Nothing herein contained shall be construed to preclude any director from serving this corporation in any other capacity and receiving proper compensation therefor. 7 ARTICLE IV. OFFICERS Section 4.01. Number and Designation. The corporation shall have one ---------------------- or more natural persons exercising the functions of the offices of Chief Executive Officer and Chief Financial Officer. The board of directors may elect or appoint such other officers or agents as it deems necessary for the operation and management of the corporation, with such powers, rights, duties, and responsibilities as may be determined by the board of directors, including, without limitation, Chairman of the Board, a President, one or more Vice Presidents, a Secretary, a Treasurer and such assistant officers or other officers as may from time to time be elected or appointed by the board of directors. Each such officer shall have the powers, rights, duties and responsibilities set forth in these bylaws unless otherwise determined by the board of directors. Any number of offices may be held by the same person. Section 4.02. Chief Executive Officer. Unless provided otherwise by ----------------------- a resolution adopted by the board of directors, the Chief Executive Officer: (a) shall have general active management of the business of the corporation; (b) shall, when present, preside at all meetings of the shareholders; (c) shall see that all orders and resolutions of the board of directors are carried into effect; (d) shall sign and deliver in the name of the corporation any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the corporation, except in cases in which the authority to sign and deliver is required by law to be exercised by another person or is expressly delegated by these bylaws or the board of directors to some other officer or agent of the corporation; and (e) shall perform such other duties as from time to time may be assigned by the board of directors. Section 4.03. Chief Financial Officer. Unless provided otherwise by ----------------------- a resolution adopted by the board of directors, the Chief Financial Officer: (a) shall cause to be kept accurate financial records for the corporation; (b) shall cause to be deposited all monies, drafts and checks in the name of and to the credit of the corporation in such banks and depositories as the board of directors shall designate from time to time; (c) shall cause to be endorsed for deposit all notes, checks and drafts received by the corporation as ordered by the board of directors, making proper vouchers therefor; (d) shall cause to be disbursed corporate funds and shall cause to be issued checks and drafts in the name of the corporation, as ordered by the board of directors; (e) shall render to the Chief Executive Officer and the board of directors, whenever requested, an account of all the transactions as Chief Financial Officer and of the financial condition of the corporation; and (f) shall perform such other duties as may be prescribed by the board of directors or the Chief Executive Officer from time to time. Section 4.04. Chairman of the Board. The Chairman of the Board, if --------------------- one is elected, shall preside at all meetings of the directors and shall have such other duties as may be prescribed, from time to time, by the board of directors. 8 Section 4.05. President. Unless otherwise determined by the board of --------- directors, the President shall be the Chief Executive Officer of the corporation. If an officer other than the President is designated Chief Executive Officer, the President shall perform such duties as may from time to time be assigned by the board of directors. Section 4.06. Vice President. Each Vice President shall perform such -------------- duties as may be prescribed from time to time by these bylaws or by the board of directors. Section 4.07. Secretary. Unless provided otherwise by a resolution --------- adopted by the board of directors, the Secretary: (a) shall attend all meetings of the shareholders and board of directors, and shall record all the proceedings of such meetings in the minute book of the corporation; (b) shall give proper notice of meetings of shareholders and board of directors and other notices required by law or these bylaws; and (c) shall perform such other duties as from time to time may be assigned by the board of directors. Section 4.08. Treasurer. Unless otherwise determined by the board of --------- directors, the Treasurer shall be the Chief Financial Officer of the corporation. If an officer other than the Treasurer is designated Chief Financial Officer, the Treasurer shall perform such duties as may from time to time be assigned by the board of directors. Section 4.09. Authority and Duties. In addition to the foregoing -------------------- authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be determined from time to time by the board of directors. Unless prohibited by a resolution of the board of directors, an officer elected or appointed by the board of directors may, without specific approval of the board of directors, delegate some or all of the duties and powers of an office to other persons. Section 4.10. Removal and Vacancies. The board of directors may --------------------- remove any officer from office at any time, with or without cause, by a resolution approved by the affirmative vote of a majority of the directors present. Such removal, however, shall be without prejudice to the contract rights of the person so removed. A vacancy in an office of the corporation by reason of death, resignation, removal, disqualification, or otherwise may, or in the case of a vacancy in the office of the Chief Executive Officer or Chief Financial Officer shall, be filled for the unexpired term by the board of directors. Section 4.11. Compensation. The officers of this corporation shall ------------ receive such compensation for their services as may be determined by or in accordance with resolutions of the board of directors or by one or more committees to the extent so authorized from time to time by the board of directors. 9 ARTICLE V. SHARES AND THEIR TRANSFER Section 5.01. Certificates for Shares. All shares of the corporation ----------------------- shall be certificated shares. Each holder of shares of the corporation shall be entitled to a certificate for shares in such form as the board of directors may, from time to time, approve. Certificates shall be signed by an authorized representative of the corporation's transfer agent. A certificate representing shares of this corporation shall contain on its face the information required by the Minnesota Business Corporation Act, section 302A.417. A certificate representing shares issued by this corporation shall set forth upon the face or back of the certificate, or shall state that the corporation will furnish to any shareholder upon request and without charge, a full statement of the designations, preferences, limitations and relative rights of the shares of each class or series authorized to be issued, so far as they have been determined, and the authority of the board to determine relative rights and preferences of subsequent classes or series. Section 5.02. Issuance of Shares. The board of directors is ------------------ authorized to cause to be issued shares of the corporation up to the full amount authorized by the articles of incorporation in such amounts as may be determined by the board of directors and as may be permitted by law. Shares may be issued for any consideration, including, without limitation, in consideration of cash or other property, tangible or intangible, received or to be received by the corporation under a written agreement or of services rendered or to be rendered to the corporation under a written agreement. At the time of approval of the issuance of shares, the board of directors shall state, by resolution, its determination of the fair value to the corporation in monetary terms of any consideration other than cash for which shares are to be issued. Section 5.03. Transfer of Shares. Transfer of shares on the books of ------------------ the corporation may be authorized only by the shareholder named in the certificate, or the shareholder's legal representative, or the shareholder's duly authorized attorney-in-fact, and upon surrender of the certificate or the certificates for such shares. The corporation may treat as the absolute owner of shares of the corporation, the person or persons in whose name shares are registered on the books of the corporation. Section 5.04. Loss of Certificates. Except as otherwise provided by -------------------- the Minnesota Business Corporation Act, section 302A.419, any shareholder claiming a certificate for shares to be lost, stolen, or destroyed shall make an affidavit of that fact in such form as the board of directors and/or the corporation's transfer agent shall require and shall, if the board of directors and/or the corporation's transfer agent so requires, give the corporation and/or the corporation's transfer agent a bond of indemnity in form, in an amount, and with one or more sureties satisfactory to the board of directors and/or the corporation's transfer agent, to indemnify the corporation and/or the corporation's transfer agent against any claim which may be made against it on account of the reissue of such certificate, whereupon a new certificate may be issued in the same 10 tenor and for the same number of shares as the one alleged to have been lost, stolen or destroyed. ARTICLE VI. DISTRIBUTIONS, RECORD DATE Section 6.01. Distributions. Subject to the provisions of the ------------- articles of incorporation, of these bylaws, and of law, the board of directors may authorize and cause the corporation to make distributions whenever, and in such amounts or forms as, in its opinion, are deemed advisable. Section 6.02. Record Date. Subject to any provisions of the articles ----------- of incorporation, the board of directors may fix a date not exceeding 120 days preceding the date fixed for the payment of any distribution as the record date for the determination of the shareholders entitled to receive payment of the distribution and, in such case, only shareholders of record on the date so fixed shall be entitled to receive payment of such distribution notwithstanding any transfer of shares on the books of the corporation after the record date. ARTICLE VII. BOOKS AND RECORDS, FISCAL YEAR Section 7.01. Share Register. The board of directors of the -------------- corporation shall cause to be kept at its principal executive office, or at another place or places within the United States determined by the board: (1) a share register not more than one year old, containing the names and addresses of the shareholders and the number and classes of shares held by each shareholder; and (2) a record of the dates on which certificates or transaction statements representing shares were issued. Section 7.02. Other Books and Records. The board of directors shall ----------------------- cause to be kept at its principal executive office, or, if its principal executive office is not in Minnesota, shall make available at its Minnesota registered office within ten days after receipt by an officer of the corporation of a written demand for them made by a shareholder or other person authorized by the Minnesota Business Corporation Act, section 302A.461, originals or copies of: (1) records of all proceedings of shareholders for the last three years; (2) records of all proceedings of the board for the last three years; 11 (3) its articles and all amendments currently in effect; (4) its bylaws and all amendments currently in effect; (5) financial statements required by the Minnesota Business Corporation Act, section 302A.463 and the financial statements for the most recent interim period prepared in the course of the operation of the corporation for distribution to the shareholders or to a governmental agency as a matter of public record; (6) reports made to shareholders generally within the last three years; (7) a statement of the names and usual business addresses of its directors and principal officers; and (8) any shareholder voting or control agreements of which the corporation is aware. Section 7.03. Fiscal Year. The fiscal year of the corporation shall ----------- be determined by the board of directors. ARTICLE VIII. LOANS, GUARANTEES, SURETYSHIP Section 8.01. The corporation may lend money to, guarantee an obligation of, become a surety for, or otherwise financially assist a person if the transaction, or a class of transactions to which the transaction belongs, is approved by the affirmative vote of a majority of the directors present, and: (1) is in the usual and regular course of business of the corporation; (2) is with, or for the benefit of, a related corporation, an organization in which the corporation has a financial interest, an organization with which the corporation has a business relationship, or an organization to which the corporation has the power to make donations; (3) is with, or for the benefit of, an officer or other employee of the corporation or a subsidiary, including an officer or employee who is a director of the corporation or a subsidiary, and may reasonably be expected, in the judgment of the board, to benefit the corporation; or 12 (4) has been approved by (a) the holders of two-thirds of the voting power of the shares entitled to vote which are owned by persons other than the interested person or persons, or (b) the unanimous affirmative vote of the holders of all outstanding shares whether or not entitled to vote. Such loan, guarantee, surety contract or other financial assistance may be with or without interest, and may be unsecured, or may be secured in the manner as a majority of the directors present approve, including, without limitation, a pledge of or other security interest in shares of the corporation. Nothing in this section shall be deemed to deny, limit or restrict the powers of guaranty, surety or warranty of the corporation at common law or under a statute of the state of Minnesota. ARTICLE IX. INDEMNIFICATION OF CERTAIN PERSONS Section 9.01. The corporation shall indemnify all officers and directors of the corporation, for such expenses and liabilities, including the advancement of reimbursement of expenses, in such manner, under such circumstances and to such extent as permitted by Minnesota Business Corporation Act section 302A.521, as now enacted or hereafter amended. Unless otherwise approved by the board of directors, the corporation shall not indemnify any employee of the corporation who is not otherwise entitled to indemnification pursuant to the prior sentence of this section 9.01. ARTICLE X. AMENDMENTS Section 10.01. These bylaws may be amended or altered by a vote of the majority of the whole board of directors at any meeting. Such authority of the board of directors is subject to the power of the shareholders, exercisable in the manner provided in the Minnesota Business Corporation Act, section 302A.181, subd. 3, to adopt, amend, or repeal bylaws adopted, amended, or repealed by the board of directors. The board of directors shall not in any case adopt, amend or repeal a bylaw fixing a quorum for meetings of shareholders, prescribing procedures for removing directors or filling vacancies in the board of directors, or fixing the number of directors or their classifications, qualifications or terms of office, but the board of directors may adopt or amend a bylaw to increase the number of directors. ARTICLE XI. SECURITIES OF OTHER CORPORATIONS Section 11.01. Voting Securities Held by the Corporation. Unless ----------------------------------------- otherwise ordered by the board of directors, the Chief Executive Officer shall have full 13 power and authority on behalf of the corporation (a) to attend any meeting of security holders of other corporations in which the corporation may hold securities and to vote such securities on behalf of this corporation; (b) to execute any proxy for such meeting on behalf of the corporation; or (c) to execute a written action in lieu of a meeting of such other corporation on behalf of this corporation. At such meeting, the Chief Executive Officer shall possess and may exercise any and all rights and powers incident to the ownership of such securities that the corporation possesses. The board of directors may, from time to time, grant such power and authority to one or more other persons and may remove such power and authority from the Chief Executive Officer or any other person or persons. Section 11.02. Purchase and Sale of Securities. Unless otherwise ------------------------------- ordered by the board of directors, the Chief Executive Officer shall have full power and authority on behalf of the corporation to purchase, sell, transfer or encumber any and all securities of any other corporation owned by the corporation, and may execute and deliver such documents as may be necessary to effectuate such purchase, sale, transfer or encumbrance. The board of directors may, from time to time, confer like powers upon any other person or persons. 14 EX-10.2 3 REAL PROPERTY LEASE AGREEMENTS (AMENDMENTS) EXHIBIT 10.2 SECOND AMENDMENT TO THE LEASE Commers-Klodt, a Minnesota General Partnership, Landlord, and Diametrics Medical, Inc., a Minnesota Corporation, Tenant, entered into a Commercial Lease (Lease) dated July 31, 1996, for the leased premises containing 31,433 square feet of space located at 2640-2652 Patton Road, Roseville, Minnesota. Both parties wish to amend this Lease as follows; 1. TERM The term of this lease shall be extended by two (2) years and five (5) months commencing October 1, 2001, and terminate on February 28, 2004. 2. RENT Beginning October 1, 2001, monthly Base Rent shall be amended as follows: Term Monthly Base Rent October 1, 2001 - February 28, 2003 $19,121.74 March 1, 2003 - February 28, 2004 $19,695.39 3. IMPROVEMENTS Tenant shall submit to Landlord paid invoices and lien waivers for reimbursement up to $50,607.13 for improvements to the Demised Premises. Any costs incurred in excess of $50,607.13 shall be paid by Tenant. All other terms, conditions and obligations outlined in the Lease remain in full force and effect. As agreed by: LANDLORD: COMMERS-KLODT, a Minnesota General Partnership, Signature: /s/ Daniel P. Commers - ---------------------------------------------------------------------------- Name: Daniel P. Commers - ---------------------------------------------------------------------------- Title: Managing Partner Dated: 6/15/99 - ---------------------------------------------------------------------------- TENANT: DIAMETRICS MEDICAL, INC. a Minnesota Corporation, - ---------------------------------------------------------------------------- Signature: /s/ Laurence L. Betterley - ---------------------------------------------------------------------------- Name: Laurence L. Betterley - ---------------------------------------------------------------------------- Title: Chief Financial Officer Dated: 6/7/99 - ---------------------------------------------------------------------------- SECOND AMENDMENT TO THE LEASE Commers-Klodt, a Minnesota General Partnership, Landlord, and Diametrics Medical, Inc., a Minnesota Corporation, Tenant, entered into a Commercial Lease (Lease) dated July 31, 1996, for the leased premises containing 15,091 square feet of space located at 2654-2662 Patton Road, Roseville, Minnesota. Both parties wish to amend this Lease as follows; 1. TERM The term of this lease shall be extended by four (4) years and five (5) months commencing October 1, 1999, and terminate on February 28, 2004. 2. DEMISED PREMISES The Demised premises shall be reduced by 3,257 square feet (Bay 2662). The adjusted total for the Demised Premises shall be 11,834 square feet. Tenant shall vacate the reduction space not later than September 30, 1999. 3. RENT Beginning October 1, 1999, monthly Base Rent shall be amended as follows: Term Monthly Base Rent October 1, 1999 - February 28, 2002 $8,313.39 March 1, 2002 - February 28, 2003 $8,562.79 March 1, 2003 - February 28, 2004 $8,819.67 4. IMPROVEMENTS Tenant shall submit to Landlord paid invoices and lien waivers for reimbursement up to $19,052.74 for improvements to the Demised Premises. Any costs incurred in excess of $19,052.74 shall be paid by Tenant. All other terms, conditions and obligations outlined in the Lease remain in full force and effect. As agreed by: LANDLORD: COMMERS-KLODT, a Minnesota General Partnership, Signature: /s/ Daniel P. Commers - ---------------------------------------------------------------------------- Name: Daniel P. Commers - ---------------------------------------------------------------------------- Title: Managing Partner Dated: 6/15/99 - ---------------------------------------------------------------------------- TENANT: DIAMETRICS MEDICAL, INC. a Minnesota Corporation, Signature: /s/ Laurence L. Betterley - ---------------------------------------------------------------------------- Name: Laurence L. Betterley - ---------------------------------------------------------------------------- Title: Chief Financial Officer Dated: 6/7/99 - ---------------------------------------------------------------------------- EX-13 4 PORTIONS OF COMPANY'S ANNUAL REPORT SELECTED FIVE-YEAR FINANCIAL DATA
(in thousands, except share and per share amounts) Years ended December 31, - ---------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 Statement of Operations Data:(3) Net sales $ 18,687 $ 12,156 $ 10,434 $ 3,797 $ 1,607 Operating loss (10,044) (17,175) (20,737) (23,831) (23,469) Net loss (10,244) (17,388) (21,037) (23,575) (23,046) Net loss per share (1), (2) (0.41) (0.79) (1.13) (1.56) (1.82) Weighted average shares outstanding 24,719,038 21,996,382 18,665,837 15,088,493 12,640,212 Balance Sheet Data: Working capital $ 15,009 $ 11,415 $ 12,509 $ 6,649 $ 27,123 Total assets (3) 31,972 25,346 28,662 24,059 36,620 Long-term liabilities 7,823 8,345 8,969 8,582 1,851 Shareholders' equity 13,841 11,366 12,773 8,674 31,194
(1) The Company has not paid any dividends since inception. (2) Basic and diluted net loss per share amounts are identical as the effect of potential common shares is antidilutive. (3) On November 6, 1996 the Company acquired all of the outstanding capital stock of Biomedical Sensors, Ltd. and certain assets of Howmedica, Inc. The Company accounted for the acquisition using the purchase method of accounting and, accordingly, the results of operations of the acquired entities have been included in the Company's consolidated financial statements from November 6, 1996. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SUMMARY Diametrics Medical, Inc., which began operations in 1990, is engaged in the development, manufacturing and commercialization of critical care blood and tissue analysis systems which provide immediate or continuous diagnostic results at the point-of-patient care. Since its commencement of operations in 1990, the Company has transitioned from a development stage company to a full-scale development, manufacturing and sales organization. As of December 31, 1999, the primary funding for the operations of the Company has been approximately $144 million raised through public and private sales of its equity securities and issuance of convertible promissory notes. The Company's trend of achieving successive improvements in annual operating results continued in 1999, with annual sales growth of 54%; continued growth in gross profit, increasing 254% over 1998; and further reductions in operating expenses, declining 28% from 1998; all resulting in a 41% improvement in annual operating loss. The implementation of two key distribution partnerships in late 1998 and mid 1999 contributed significantly to the favorable financial trend in 1999, with further improvements expected in 2000 and future years. The Company's partnering strategy for distribution and commercialization of its products includes Agilent Technologies, Inc. (Agilent), the exclusive global distributor of the Company's leading critical care blood monitoring products, the IRMA(R)SL blood analysis system and the Trendcare(R) continuous blood gas monitoring systems, including Paratrend(R) and Neotrend(TM); and CODMAN, a Johnson & Johnson company, who is the exclusive worldwide distributor of the Neurotrend(TM) Cerebral Tissue Monitoring System. Neurotrend, which was cleared for marketing by the U.S. Food and Drug Administration in November 1999, is a multiparameter fiber optic system which continuously monitors oxygen, carbon dioxide, acidity and temperature in the brain, providing critical information to guide clinicians and surgeons in treating patients with severe head trauma or those requiring surgical intervention in the brain. The CODMAN distribution agreement was initiated in October 1998, has a term of six years and is renewable for two years. If minimum sales levels and marketing expenditure levels are not achieved by CODMAN, certain payments will be due to the Company. Also, CODMAN has the right of first refusal to market new continuous monitoring products developed for the neuro market. In addition, Johnson & Johnson Development Corporation (JJDC) committed to purchase up to $5 million of the Company's Common Stock at the Company's option over the twelve-month period ended September 30, 1999 at the then current market value. The Company exercised approximately $4 million of the available Put Option during 1999. 13 The Agilent distribution agreement was completed in June 1999, initially as an agreement between the Company and Hewlett Packard Company (HP). Under the terms of the distribution agreement, the Company transferred full responsibility for marketing, sales and distribution of the blood monitoring products described above to HP. The initial term of the agreement is three and a half years, with the option for extensions. Concurrently with the execution of the agreement, HP made a $9.5 million equity investment in the Company. In addition to HP's equity investment, the agreement also provides for minimum purchase commitments, market development commitments, research and development funding and royalty payments over the initial term of the agreement, as well as funding of sales and marketing costs during the sales transition period in 1999. In late 1999, HP assigned the distribution agreement and its equity investment with the Company to Agilent, a leading provider of test and measurement solutions and communications components, which was formed as a new company and subsidiary of HP, expected to be spun-off as an independent company in 2000. The Company's partnerships with these market leaders were instrumental in driving the significant sales growth and operating expense reductions achieved in 1999. Also contributing to improved financial performance was a significant improvement in IRMA cartridge yields, resulting in lower unit manufacturing costs and improved margins. In mid 1999, the Company implemented a fully automated manufacturing line for assembly of its new snap-fit cartridge format, which helped facilitate the improvement in cartridge yields, while increasing plant capacity. Further automation of the Company's manufacturing processes is planned for 2000, with expected continued improvements in production yields and unit manufacturing costs. RESULTS OF OPERATIONS Sales Sales of the Company's products were $18,687,184 for 1999, compared to $12,155,526 for 1998 and $10,434,366 for 1997. The 16% increase in sales from 1997 to 1998 reflects a 15% growth in sales of instruments and a 19% increase in disposable cartridge and sensor sales. Sales grew 54% in 1999 from 1998, reflecting a 99% increase in sales of instruments and a slight increase in disposable cartridge and sensor sales. The significant increase in instrument sales between 1998 and 1999 was impacted primarily by sales to the Company's new distribution partners, Agilent and CODMAN, partially offset by the impact of sales returns from distributors that were displaced as a result of the new exclusive distribution agreements. While unit sales of disposable cartridges and sensors grew 25% between 1998 and 1999, related revenues were relatively flat due to the impact of lower average sales prices under the Agilent and CODMAN distribution agreements. The Company's direct sales to Agilent and CODMAN comprised approximately 3% and 69% of total sales in 1998 and 1999, respectively, and are expected to increase as a percentage of total sales in 2000. Intermittent testing products represented 39%, 63% and 59% of sales in 1999, 1998 and 1997, respectively, with continuous monitoring products comprising the remaining sales in each year. For the year ended December 31, 1999, intermittent blood testing products revenue was comprised of 56% instrument related revenue and 44% disposable cartridge related revenue. Continuous monitoring products revenue was comprised of 77% instrument related revenue and 23% disposable sensor revenue. The high concentration of instrument related revenue in 1999 was largely impacted by sales to CODMAN and Agilent. The Company's revenues are affected principally by the number of instruments, both monitors and IRMA analyzers, placed with customers and the rate at which disposable sensors and cartridges are used in connection with these products. As of December 31, 1999, the Company has sold approximately 5,000 instruments. Unit sales of instruments in 1999 increased approximately 105% from 1998, while disposable sensor and cartridge unit sales increased approximately 25%. As the Company grows, it is expected that the growing end-user customer base will increase the rate of usage of disposable products, with the result that overall disposable product sales will exceed that of instrument sales. The Company has targeted continued revenue growth in 2000, as a result of further planned expansion of its blood and tissue analysis product lines and continued commercialization of these products by market leading distribution partners. Cost of Sales Cost of sales totaled $15,779,694 for 1999, compared to $11,334,721 for 1998 and $11,666,142 for 1997. Cost of sales as a percentage of revenue was 84% in 1999, 93% in 1998 and 112% in 1997. The year-to-year improvement in the Company's cost of sales as a percentage of revenue reflects increased sales volumes, improved cartridge yields, and the impact of cost controls and manufacturing process changes. Also favorably affecting gross profit in 1999 was a higher mix of instrument sales, including the sale to Agilent of a pool of used or refurbished instruments. This pool carried a lower cost value than new instrument inventory due to the impact of depreciation being recorded since initially being placed into service. These improvements were partially offset by the impact of lower average sales prices under the Agilent distribution agreement and the impact of sales returns from distributors that were displaced as a result of the Company's new exclusive distribution agreements. The Company is targeting continued improvements in gross profit during 2000 as a result of expected continued improvements in manufacturing yields and higher unit volumes. Operating Expenses Total operating expenses decreased by $5 million or 28% from 1998 to 1999, following a decrease of $1.5 million or 8% from 1997 to 1998. On a pre-restructure 14 charge basis, 1998 operating expenses decreased $1 million or 5% relative to 1997, primarily the result of work force reductions in 1997, which reduced average headcount between years by 13% in the Company's U.S. operations. The significant decline in operating expenses from 1998 to 1999 is primarily the result of research and development funding received from Agilent as part of the distribution agreement and the transfer of the Company's sales and marketing functions to Agilent. Research and development expenses totaled $4,847,463 in 1999, compared to $6,466,154 in 1998 and $7,231,669 in 1997. The 11% reduction in expenses between 1997 and 1998 is primarily the result of work force reductions during 1997, with average headcount declining 16% between years. The 25% decline in expenses from 1998 to 1999 is primarily due to the recognition in 1999 of research and development funding received from Agilent as part of the distribution agreement. The Company is targeting 2000 expenses at levels comparable to 1999, due to the impact of the expected recognition in 2000 of a full year of research and development funding, offset by additional investments to support new research and development projects. Sales and marketing expenses totaled $4,352,859 in 1999, compared to $8,268,824 in 1998 and $8,120,529 in 1997. The 2% increase in expenses from 1997 to 1998 is primarily impacted by higher commissions on increased direct sales and increased sales support costs for placement of the Company's products with new customers. The 47% reduction in expenses from 1998 to 1999 is primarily due to the recognition in 1999 of sales and marketing funding received from Agilent to cover costs during a sales transition period. Further contributing to the decline was a reduction in marketing activities in anticipation of the transition of significant portions of the Company's sales and marketing functions to Agilent. This transition was completed in late 1999, and as a result, sales and marketing expenses in 2000 are expected to decrease significantly from 1999. General and administrative expenses totaled $3,750,967 in 1999, compared to $3,261,098 in 1998 and $3,689,036 in 1997. The 12% decline in expenses from 1997 to 1998 is primarily the result of work force reductions during 1997. The 15% increase in expenses from 1998 to 1999 is primarily due to additional costs incurred in completing the Agilent transaction and increased compensation costs due to improved performance against Company objectives. Restructuring and other charges totaled $463,816 in 1997, and no charges were recorded in 1998 and 1999. Charges in 1997 consisted of severance costs of approximately $319,000 associated with work force reductions, primarily in the Company's U.S. manufacturing, research and development and general and administrative areas, and $145,000 for the write-down of excess and obsolete equipment resulting from the work force reductions and process changes. Other Income (Expense) Net other expense in 1999 was $199,748, compared to $212,391 in 1998 and $299,717 in 1997. The Company realized interest income of $528,787 in 1999, compared to $422,441 in 1998 and $658,625 in 1997. The year-to-year fluctuations reflect the impact of the timing of the Company's financing activities between 1996 and 1999 on average cash and investment balances during each year. Interest expense totaled $630,459 in 1999, compared to $807,411 in 1998 and $1,017,657 in 1997. The year-to-year decline in expense primarily reflects lower average debt balances each successive year and a reduction in the amount of higher interest bearing capital lease debt relative to total debt outstanding. Net Loss Net loss for the year ended December 31, 1999 was $10,243,547, compared to $17,387,662 in 1998 and $21,036,543 in 1997. The year-to-year improvement in net loss reflects revenue growth; improved margins, influenced by higher unit volumes, changes in product mix and improved manufacturing yields; and reduced operating expenses due primarily to research and development funding received from Agilent and the transfer of the Company's sales and marketing functions to Agilent, partially offset by costs incurred to complete the Agilent transaction. The Company is targeting continued significant improvement in net loss in 2000 relative to 1999. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, the Company had working capital of approximately $15 million, an increase of $3.6 million from the working capital of $11.4 million reported at December 31, 1998. The net increase primarily reflects the impact of the amount and timing of proceeds from private equity placements in 1998 and 1999, and an improvement in net cash used in operating activities for the year ended December 31, 1999. Through December 31, 1999, the Company raised approximately $144 million through the public and private sales of its equity securities and the issuance of convertible promissory notes. Net cash used in operating activities totaled $3 million for the year ended December 31, 1999, compared to $18.8 million and $16.6 million for the same periods in 1998 and 1997, respectively. This was the result of net losses of $10.2 million, $17.4 million and $21 million for these same periods in 1999, 1998 and 1997, respectively, adjusted by changes in key operating assets and liabilities, primarily accounts receivable, inventories, accounts payable, accrued expenses and deferred credits and revenue. As discussed in note 19 of Notes to Consolidated Financial Statements, effective January 1, 1998, the Company changed the year-end of its wholly- owned subsidiary, Diametrics Medical, Ltd. (DML), to December 31 from November 30 to produce a consistent reporting period for the consolidated entity. As a result of this change in year-end, DML's net results of operations for the 15 month of December 1997 were closed to beginning accumulated deficit as of January 1, 1998. Additionally, the changes in DML's operating assets and liabilities during the month of December 1997 are included in the Consolidated Statement of Cash Flows for the year ended December 31, 1998. The discussion below of changes in accounts receivable, inventories, accounts payable and accrued expenses includes the impact of the DML year- end change on these balances. Net accounts receivable increased $1.4 million for the year ended December 31, 1999, compared to $1.7 million in 1998 and $1.2 million in 1997. The increases are primarily due to increased sales in each year. The reduced growth in accounts receivable in 1999 relative to 1998 on a significantly larger increase in sales between years is primarily due to an improvement in days sales outstanding and the timing of sales. Inventories decreased $651,000 for the year ended December 31, 1999, after an increase of $1.3 million in 1998 and a decrease of $876,000 in 1997. The decrease in 1999 primarily reflects a decrease in finished goods inventory due to significant sales to the Company's distributors, partially offset by an increase in raw material inventory to meet anticipated production requirements in the first quarter 2000. The overall net decline in 1999 inventory levels is also impacted by an improvement in inventory turnover during the year, stemming from improved inventory management. The increase in 1998 was due to increased inventory levels needed to begin internal assembly of the Company's IRMA SL analyzers and to meet an expected increase in demand. Accounts payable and accrued expenses increased $405,000 for the year ended December 31, 1999, after a decrease of $1.5 million in 1998 and an increase of $418,000 in 1997. The increase in 1999 is primarily due to increased accruals for costs to complete committed product upgrades, and employee bonuses. The decrease in 1998 was affected primarily by a reduction in accrued interest payable, due to the timing of interest payments, and reductions in product upgrade accruals as upgrades were completed from a prior upgrade program, combined with timing of payments to vendors and employees. The increase in 1997 was primarily the result of the timing of vendor payments. Deferred credits and revenue increased $5.1 million during 1999, representing the remaining balance of prepaid funding of $9.5 million received from Agilent under the distribution agreement. The prepayment provided partial funding of current and future research and development expenses, sales and marketing costs during a sales transition period, and royalty payments. Net cash used in investing activities totaled $9.1 million for the year ended December 31, 1999, following net cash provided by investing activities of $3.2 million in 1998 and a net use of cash in 1997 of $7.8 million. These year-to-year changes were primarily affected by the amounts and timing of private equity placements, which affected the amount of cash available for the purchase of marketable securities. Purchases of property and equipment also affected net cash provided by or used in investing activities, and totaled $1.7 million for the year ended December 31, 1999, $2.3 million in 1998 and $3 million in 1997. Capital additions in each year consisted primarily of investments in development and production equipment and instruments for internal use in research and development and sales. In 2000, the Company expects total capital expenditures and new lease commitments to approximate $3 million for the year, primarily reflecting investments to support new product development and production. Net cash provided by financing activities totaled $11.8 million for the year ended December 31, 1999, compared to $16.4 million in 1998 and $25.3 million in 1997. The year-to-year changes were due primarily to the amounts and timing of private equity placements in each of these years. In late 1996 and throughout 1997, the Company entered into long-term debt obligations of approximately $8.9 million. The original debt consisted of a $7.3 million senior secured fixed rate loan note issued to Pfizer Inc. in connection with the Company's acquisition of DML and approximately $1.6 million in notes payable for equipment financing. Proceeds from the issuance in August 1998 of $7.3 million of Convertible Senior Secured Fixed Rate Notes, issued in conjunction with a private equity placement, were simultaneously used to retire the $7.3 million Pfizer note. The Company's long-term debt obligations require principal and interest repayments of approximately $900,000 in each of years 2000 and 2001, $600,000 in 2002 and $7.6 million in 2003. Effective March 31, 1998, the Company secured a $1 million receivable backed line of credit. The loan agreement requires the Company's accounts receivable collections be applied to reduce the loan balance, including advances, interest and fees. At December 31, 1999, no advances were outstanding under the line of credit. At December 31, 1999, the Company had U.S. net operating loss and research and development tax credit carryforwards for income tax purposes of approximately $112.8 million and $1.2 million, respectively. Pursuant to the Tax Reform Act of 1986, use of a portion of the Company's net operating loss carryforwards are limited due to a "change in ownership." (See note 13 of Notes to Consolidated Financial Statements for further discussion). As part of an exclusive distribution agreement initiated on October 1, 1998, the Company entered into a $5 million Put 16 Option and Stock Purchase Agreement with JJDC who committed to purchase up to $5 million of the Company's Common Stock at the Company's option over the twelve month period ended September 30, 1999. Effective March 26, 1999, the Company exercised approximately $4 million of the available Put Option resulting in the issuance of 773,184 shares of the Company's Common Stock to JJDC at a per share price of $5.17. As part of an exclusive Distribution Agreement and Common Stock Purchase Agreement with HP completed in June 1999, the Company issued 1,357,143 shares of Common Stock to HP at a price of $7.00 per share, for aggregate proceeds of $9.5 million. HP also received a warrant to purchase 452,381 shares of Common Stock at $8.40 per share, providing additional funding potential of $3.8 million. In addition, HP agreed to minimum purchase commitments, market development commitments, research and development funding and royalty payments over the initial term of the agreement. In late 1999, HP assigned the distribution agreement and its equity investment with the Company to Agilent, which was formed as a new company and subsidiary of HP. The Company believes proceeds from the funding agreements with Agilent, currently available funds and cash generated from projected revenues, supplemented by proceeds from employee stock plans, warrant exercises and asset based credit will meet the Company's working capital needs. If the amount or timing of funding from these sources or cash requirements vary materially from those currently planned, the Company could require additional capital. The Company's long- term capital requirements will depend upon numerous factors, including the rate of market acceptance of the Company's products and the level of resources devoted to expanding the Company's business, manufacturing capabilities and research and development activities. While there can be no assurance that adequate funds will be available when needed or on acceptable terms, management believes that the Company will be able to raise adequate funding if needed. YEAR 2000 COMPLIANCE During 1999, the Company completed the process of assessing and preparing for the Year 2000 date change. This process involved the review and remediation, where applicable, of date recognition issues in its products; its internal financial, manufacturing and other process control systems; and its interface with major customers and suppliers. As a result of its efforts in addressing Year 2000 concerns, the Company to date has not experienced any significant difficulties attributed to Year 2000 issues, nor has it received notice from its customers of any material incidents or difficulties related to its products or services as a result of the Year 2000 event. The incremental costs required to address the Company's Year 2000 compliance approximated $150,000, including the cost of software and hardware upgrades. The majority of this cost was incurred in 1999. MARKET RISK The Company's primary market risk exposure is foreign exchange rate fluctuations of the British pound sterling to the U.S. dollar as the financial position and operating results of the Company's U.K. subsidiary, DML, are translated into U.S. dollars for consolidation. The Company's exposure to foreign exchange rate fluctuations also arises from transferring funds to its U.K. subsidiary in British pounds sterling. Effective November 1, 1999, most of the Company's sales are made to distributors and denominated in U.S. dollars, thereby significantly mitigating the risk of exchange rate fluctuations on trade receivables. November 1, 1999 marked the completion of a sales transition period with Agilent, the Company's exclusive global distributor of the IRMA SL blood analysis system and the Trendcare continuous blood monitoring products, which followed the completion of a distribution agreement in the fourth quarter 1998 with CODMAN, who is the exclusive global distributor of Neurotrend, a continuous cerebral tissue monitoring product. The effect of foreign exchange rate fluctuations on the Company's financial results for the years ended December 31, 1999, 1998 and 1997 was not material. The Company does not currently use derivative financial instruments to hedge against exchange rate risk. Because foreign exchange exposure to these rate fluctuations increases as intercompany balances grow, the Company will continue to evaluate the need to initiate hedging programs to mitigate the impact on intercompany balances of changes in the exchange rate of the British pound sterling to the U.S. dollar. The Company's exposure to interest rate risk is limited to short-term borrowings under its $1 million receivable backed credit line. Any advances under the line of credit bear interest on the unpaid principal amount at a fluctuating rate tied to the Prime Rate. The Company does not use derivative financial instruments to manage interest rate risk. As borrowings at any one time are limited to $1 million and are generally repaid within a few months, the Company's exposure is not believed to be material. All other existing debt agreements of the Company bear interest at fixed rates, and are therefore not subject to exposure from fluctuating interest rates. EURO CONVERSION Effective January 1, 1999, 11 of the 15 member countries of the European Union (EU) adopted the euro as their common legal currency. On that date, the participating countries established fixed euro conversion rates between their existing local currencies and the euro. During the three-and-a-half year transition period following its introduction, participating countries will be allowed to transact business both in the euro and in their local currencies. On July 1, 2002, the euro will be the sole official currency in participating EU countries. 17 As noted under "Market Risk", the Company sells and distributes most of its products globally through distributors, with sales denominated in U.S. dollars. The Company's subsidiary, DML, conducts its operations from the U.K. The U.K. is one of the four countries of the EU that did not adopt the euro as its legal currency effective January 1, 1999; however, the U.K. may convert to the euro at a later date. The conversion to the euro by the participating countries of the EU is not expected to result in large-scale changes to the denominations or pricing of the Company's sales contracts. The Company has assessed the potential impact of the euro conversion on business processes, information technology systems and fixed assets in its U.K. operations, and has made required changes in tandem with required Year 2000 related upgrades. While the Company will continue to evaluate the impact of the euro conversion over time, based upon currently available information, management does not believe that the conversion to the euro currency will have a material impact on the Company's financial condition or overall trends in results of operations. NEW ACCOUNTING PRONOUNCEMENTS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," (as amended by SFAS No. 137 with respect to the effective date) will be effective for the Company in January 2001. SFAS No. 133 requires all derivatives to be recognized as assets or liabilities on the balance sheet and measured at fair value on a mark-to-market basis. This applies whether the derivatives are stand-alone instruments, such as forward currency exchange contracts and interest rate swaps or collars, or embedded derivatives, such as call options contained in convertible debt investments. Along with the derivatives, the underlying hedged items are also to be marked-to-market on an ongoing basis. These market value adjustments are to be included either in net earnings or loss in the statement of operations or in other comprehensive income (and accumulated in stockholders' equity), depending on the nature of the transaction. The Company is currently evaluating SFAS No. 133, but does not expect that it will have a material effect on its financial statements. In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 will be effective for the Company in the first quarter of 2000. The Company believes that its revenue recognition policies are in compliance with SAB 101, and does not expect it to have a material impact on its financial condition or results of operations. The Company's discussion and analysis of results of operations and financial condition, including statements regarding the Company's expectations about new and existing products, future financial performance, Year 2000 compliance, market risk exposure and other forward looking statements are subject to various risks and uncertainties, including, without limitation, demand and acceptance of new and existing products, technological advances and product obsolescence, competitive factors, stability of domestic and international financial markets and the availability of capital to finance growth. These and other risks are discussed in greater detail in an exhibit in the Company's Form 10-K filed with the U.S. Securities and Exchange Commission. 18 CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, ------------------------------------------------------------- DIAMETRICS MEDICAL, INC. AND SUBSIDIARY 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $ 18,687,184 $ 12,155,526 $ 10,434,366 Cost of sales 15,779,694 11,334,721 11,666,142 ------------------------------------------------------------- Gross profit (loss) 2,907,490 820,805 (1,231,776) Operating expenses: Research and development 4,847,463 6,466,154 7,231,669 Sales and marketing 4,352,859 8,268,824 8,120,529 General and administrative 3,750,967 3,261,098 3,689,036 Restructuring and other charges - - 463,816 ------------------------------------------------------------- 12,951,289 17,996,076 19,505,050 ------------------------------------------------------------- Operating loss (10,043,799) (17,175,271) (20,736,826) Interest income 528,787 422,441 658,625 Interest expense (630,459) (807,411) (1,017,657) Other income (expense), net (98,076) 172,579 59,315 -------------------------------------------------------------- Net loss $(10,243,547) $(17,387,662) $(21,036,543) ============================================================== Basic and diluted net loss per common share $ (0.41) $ (0.79) $ (1.13) ============================================================== Weighted average common shares outstanding 24,719,038 21,996,382 18,665,837 ==============================================================
The accompanying notes are an integral part of these consolidated financial statements. 19 Consolidated Balance Sheets
December 31, --------------------------------- Diametrics Medical, Inc. and Subsidiary 1999 1998 - -------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 2,786,162 $ 3,432,614 Marketable securities 11,339,009 2,976,443 Accounts receivable, net of allowance for doubtful accounts of $200,000 in 1999 and $280,000 in 1998 6,790,673 5,420,092 Inventories 4,116,348 4,767,537 Prepaid expenses and other current assets 285,336 454,291 --------------------------------- Total current assets 25,317,528 17,050,977 --------------------------------- Property and equipment, net 5,774,497 6,922,793 Other assets, net 880,171 1,372,544 --------------------------------- $31,972,196 $25,346,314 --------------------------------- Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 2,438,550 $ 2,535,343 Accrued expenses 2,414,785 1,855,004 Deferred credits and revenue 5,105,214 - Short-term borrowings - 828,823 Current portion of long-term liabilities 349,511 416,509 --------------------------------- Total current liabilities 10,308,060 5,635,679 --------------------------------- Long-term liabilities: Long-term liabilities, excluding current portion 7,813,796 8,163,307 Other liabilities 9,684 181,764 --------------------------------- Total liabilities 18,131,540 13,980,750 --------------------------------- Shareholders' equity: Preferred stock, $.01 par value: 5,000,000 shares authorized, none issued - - Common stock, $.01 par value: 35,000,000 shares authorized, 25,778,499 and 23,391,597 shares issued and outstanding at December 31, 1999 and 1998, respectively 257,785 233,916 Additional paid-in capital 143,463,332 130,477,220 Accumulated other comprehensive loss (516,507) (225,165) Accumulated deficit (129,363,954) (119,120,407) --------------------------------- Total shareholders' equity 13,840,656 11,365,564 --------------------------------- Commitments and contingencies (notes 8, 17, and 18) $31,972,196 $25,346,314 ---------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 20
Consolidated Statements of Shareholders' Equity Additional Preferred Common paid-in Accumulated Diametrics Medical, Inc. and Subsidiary stock stock capital deficit - ---------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $ - $152,095 $ 88,451,972 $ (80,019,137) ------------------------------------------------------------ Net loss - - - (21,036,543) Foreign currency translation adjustment - - - - Minimum pension liability - - - - ------------------------------------------------------------ Comprehensive loss for the year ended December 31, 1997 - - - (21,036,543) Issued preferred stock 7,500 - 11,857,799 - Conversion of preferred stock to common stock (7,500) 30,000 (22,500) - Issued common stock - 14,933 7,840,236 - Issued common stock under employee stock purchase plan - 554 205,574 - Exercise of options to common stock - 2,291 1,057,733 - Exercise of warrants to common stock - 9,026 4,551,025 - Issued stock options in lieu of cash compensation - - 28,408 - ------------------------------------------------------------ Balance, December 31, 1997 - 208,899 113,970,247 (101,055,680) ------------------------------------------------------------ Net loss - - - (17,387,662) Foreign currency translation adjustment - - - - Minimum pension liability - - - - ------------------------------------------------------------ Comprehensive loss for the year ended December 31, 1998 - - - (17,387,662) Issued common stock - 21,582 14,792,052 - Issued common stock under employee stock purchase plan - 450 209,646 - Exercise of options to common stock - 2,441 1,183,531 - Exercise of warrants to common stock - 544 309,144 - Issued stock options in lieu of cash compensation - - 12,600 - Effect of subsidiary's year-end change - - - (677,065) ------------------------------------------------------------ Balance, December 31, 1998 - 233,916 130,477,220 (119,120,407) ------------------------------------------------------------ Net loss - - - (10,243,547) Foreign currency translation adjustment - - - - Minimum pension liability - - - - ------------------------------------------------------------ Comprehensive loss for the year ended December 31, 1999 - - - (10,243,547) Issued common stock - 21,303 11,849,017 - Issued common stock under employee stock purchase plan - 329 146,284 - Exercise of options to common stock - 2,237 976,708 - Issued stock options in lieu of cash compensation - - 14,103 - ------------------------------------------------------------ Balance, December 31, 1999 $ - $257,785 $143,463,332 $(129,363,954) ------------------------------------------------------------ Accumulated other Total Total comprehensive shareholders' comprehensive Diametrics Medical, Inc. and Subsidiary income (loss) equity income (loss) - ----------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $ 89,309 $ 8,674,239 ----------------------------------------- Net loss - (21,036,543) $(21,036,543) Foreign currency translation adjustment (69,725) (69,725) (69,725) Minimum pension liability (369,773) (369,773) (369,773) ------------------------------------------------------------- Comprehensive loss for the year ended December 31, 1997 (439,498) - $(21,476,041) ------------ Issued preferred stock - 11,865,299 Conversion of preferred stock to common stock - - Issued common stock - 7,855,169 Issued common stock under employee stock purchase plan - 206,128 Exercise of options to common stock - 1,060,024 Exercise of warrants to common stock - 4,560,051 Issued stock options in lieu of cash compensation - 28,408 ----------------------------------------- Balance, December 31, 1997 (350,189) 12,773,277 ----------------------------------------- Net loss - (17,387,662) $(17,387,662) Foreign currency translation adjustment (98,328) (98,328) (98,328) Minimum pension liability 223,352 223,352 223,352 ------------------------------------------------------------- Comprehensive loss for the year ended December 31, 1998 125,024 - $(17,262,638) ------------ Issued common stock - 14,813,634 Issued common stock under employee stock purchase plan - 210,096 Exercise of options to common stock - 1,185,972 Exercise of warrants to common stock - 309,688 Issued stock options in lieu of cash compensation - 12,600 Effect of subsidiary's year-end change - (677,065) ----------------------------------------- Balance, December 31, 1998 (225,165) 11,365,564 ----------------------------------------- Net loss - (10,243,547) $(10,243,547) Foreign currency translation adjustment (405,483) (405,483) (405,483) Minimum pension liability 114,141 114,141 114,141 ------------------------------------------------------------- Comprehensive loss for the year ended December 31, 1999 (291,342) - $(10,534,889) ------------ Issued common stock - 11,870,320 Issued common stock under employee stock purchase plan - 146,613 Exercise of options to common stock - 978,945 Issued stock options in lieu of cash compensation - 14,103 ----------------------------------------- Balance, December 31, 1999 $(516,507) $ 13,840,656 -----------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 21 Consolidated Statements of Cash Flows
Years ended December 31, ------------------------------------------- Diametrics Medical, Inc. and Subsidiary 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net loss $(10,243,547) $ (17,387,662) $ (21,036,543) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,224,519 3,147,460 4,162,997 Other 12,988 13,252 (52,513) Changes in operating assets and liabilities Receivables, net (1,370,581) (1,652,185) (1,178,760) Inventories 651,189 (1,325,613) 875,881 Prepaid expenses and other current assets 168,955 (44,360) 232,582 Accounts payable (96,793) 393,253 649,432 Accrued expenses 501,842 (1,899,428) (231,365) Deferred credits and revenue 5,105,214 - - ------------------------------------------- Net cash used in operating activities (3,046,214) (18,755,283) (16,578,289) ------------------------------------------- Cash flows from investing activities: Purchases of property and equipment (1,689,372) (2,252,544) (2,957,958) Sale of evaluation and demonstration instruments 944,737 - - Purchases of marketable securities (16,026,009) (6,558,430) (26,208,044) Proceeds from maturities of marketable securities 7,663,443 11,983,629 21,209,000 Other 25,819 11,891 199,954 ------------------------------------------- Net cash provided by (used in) investing activities (9,081,382) 3,184,546 (7,757,048) ------------------------------------------- Cash flows from financing activities: Principal payments on borrowings (1,143,337) (1,306,067) (129,714) Proceeds from borrowings - 1,818,823 1,058,626 Net proceeds from issuance of preferred stock - - 11,865,299 Net proceeds from issuance of common stock 12,995,878 16,519,390 13,681,372 Principal payments on capital lease obligations (101,995) (611,809) (1,165,522) ------------------------------------------- Net cash provided by financing activities 11,750,546 16,420,337 25,310,061 ------------------------------------------- Effect of subsidiary's year-end change on cash and cash equivalents - (664,819) - Effect of exchange rate changes on cash and cash equivalents (269,402) (110,851) (68,033) Net increase (decrease) in cash and cash equivalents (646,452) 73,930 906,691 Cash and cash equivalents at beginning of year 3,432,614 3,358,684 2,451,993 ------------------------------------------- Cash and cash equivalents at end of year $ 2,786,162 $ 3,432,614 $ 3,358,684 ------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 630,459 $ 1,544,161 $ 377,849 ===========================================
Supplemental disclosure of noncash investing and financing activities: On August 4, 1998, the Company entered into a convertible senior secured fixed rate note of $7,300,000 in connection with a private equity placement and used the proceeds to retire another note. The accompanying notes are an integral part of these consolidated financial statements. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF THE BUSINESS Diametrics Medical, Inc. along with its subsidiary (the Company), is a medical device company engaged in the development, manufacture and commercialization of critical care blood and tissue analysis systems which provide immediate or continuous diagnostic results at the point-of-patient care. The Company markets its products to health care organizations primarily through distribution partners with exclusive global distribution rights, and on an interim basis, certain third-party distributors where pre- existing contracts with the Company apply until the distribution rights are transitioned to the Company's exclusive distributors. The Company also continues to sell direct to end-users for a small volume of products and transactions that are not subject to the exclusive distribution agreements. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Diametrics Medical, Inc. and Diametrics Medical, Ltd., its wholly-owned subsidiary (the Company). All material intercompany accounts and transactions have been eliminated. TRANSLATION OF FOREIGN CURRENCIES The financial statements of the Company's foreign subsidiary are translated into U.S. dollars for consolidation. All assets and liabilities are translated using period-end exchange rates and statements of operations items are translated using average exchange rates for the period. The resulting translation adjustments are recorded as a separate component of shareholders' equity. Foreign currency transaction gains and losses are included in determining net income, but have not been material in any of the years presented. CASH AND CASH EQUIVALENTS The Company considers highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 1999, cash and cash equivalents consist mainly of U.S. government money market funds. MARKETABLE SECURITIES Investments in marketable debt securities are classified as held to maturity and are stated at amortized cost, which approximates estimated fair value. At December 31, 1999, marketable securities consist mainly of investment grade commercial paper, with original maturities ranging from five to nine months. These securities are classified as held-to-maturity because of the Company's intent and ability to hold its investments to maturity. CONCENTRATION OF CREDIT RISK Financial instruments that may subject the Company to significant concentrations of credit risk consist primarily of trade receivables. The Company has two major distribution partners in the medical diagnostic device industry who market and sell the Company's products globally under exclusive distribution agreements. As of December 31, 1999, outstanding accounts receivable for one of these distributors represented 80% of total outstanding accounts receivable, and sales to this distributor represented 62% of sales for the year ended December 31, 1999. Customer creditworthiness is routinely monitored and collateral is not required. INVENTORIES Inventories are stated at the lower of cost or market using the first in, first out method. PROPERTY AND EQUIPMENT Leasehold improvements are recorded at cost and amortized over the term of the underlying lease. Furniture and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives of 2 to 7 years. Maintenance and repairs are expensed as incurred. OTHER ASSETS Other assets consist principally of intangible assets representing purchased completed technology and other intangible assets resulting from the excess of the cost of a purchased business over the fair value of the net assets acquired. The intangible assets are amortized using the straight-line method over five years. The recoverability of the purchased completed technology and other intangible assets is assessed quarterly based upon an analysis of undiscounted cash flows projected to be generated by the acquired business. REVENUE RECOGNITION The Company recognizes revenue upon shipment of product to its distributors or customers or, in the case of trial instruments and monitors placed directly with end-user customers, upon the customer's acceptance of the product. NET LOSS PER COMMON SHARE Basic earnings per share (EPS) is calculated by dividing net loss by the weighted average common shares outstanding during the period. Diluted EPS reflects the potential dilution to basic EPS that could occur upon conversion or exercise of securities, options, or other such items, to common shares using the treasury stock method based upon the weighted average fair value of the Company's common shares during the period. For each period presented, basic and diluted loss per share amounts are identical, as the effect of potential common shares is antidilutive. PRODUCT WARRANTY The Company, in general, warrants its new hardware and operating system software products to be free from defects in material and workmanship under normal use and service for a period of eighteen months after date of shipment in the case of distributors, and one year after date of sale in the case of end-user customers. The Company warrants its disposable products to be free from defects in material and workmanship under normal use until its stated expiration date. Provisions are made for the estimated cost of maintaining product warranties for the hardware, software and disposable products at the time the products are sold. 23 INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Due to historical net losses of the Company, a valuation allowance is established to offset the net deferred tax asset. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. STOCK BASED COMPENSATION The Company applies the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," to account for the issuance of stock incentives to employees and directors and, accordingly, no compensation expense related to employees' and directors' stock incentives has been recognized in the financial statements. IMPAIRMENT OF LONG-LIVED ASSETS The Company utilizes the undiscounted cash flows alternative to detect impairment in long-lived assets. RECLASSIFICATIONS Certain 1998 and 1997 amounts have been reclassified from prior reported balances to conform to the 1999 presentation. (2) LIQUIDITY The Company incurred a net loss of $10,243,547 for the year ended December 31, 1999. In addition, the Company has incurred net losses and has had negative cash flows from operating activities since inception. During 1999, the Company received proceeds totaling approximately $13.5 million from equity investments made under Common Stock Purchase Agreements with the Company's exclusive global distributors, CODMAN and Agilent. Additionally, the Agilent distribution agreement provides for minimum purchase commitments, market development commitments, research and development funding and royalty payments over the initial term of the agreement. The Company believes proceeds from the funding agreements with Agilent, currently available funds and cash generated from projected revenues, supplemented by proceeds from employee stock plans, warrant exercises and asset based credit, will meet the Company's working capital needs. (3) INVENTORIES December 31, 1999 1998 ---------------------------- Raw materials $2,260,586 $1,989,953 Work-in-process 658,983 741,719 Finished goods 1,196,779 2,035,865 ---------------------------- $4,116,348 $4,767,537 ---------------------------- (4) PROPERTY AND EQUIPMENT December 31, 1999 1998 ---------------------------- Manufacturing equipment $ 6,412,203 $ 5,653,623 Laboratory fixtures and equipment 1,874,789 1,970,294 Office furniture and equipment 3,494,892 3,421,541 Leasehold improvements 3,338,370 3,388,445 Tooling 2,071,556 2,069,438 Demonstration instruments 1,300,443 2,513,659 Equipment-in-progress 963,045 1,060,383 ---------------------------- 19,455,298 20,077,383 Less accumulated depreciation & amortization (13,680,801) (13,154,590) ---------------------------- $ 5,774,497 $ 6,922,793 ---------------------------- (5) OTHER ASSETS December 31, 1999 1998 ------------------------------ Purchased completed technology, net $722,442 $1,122,569 Acquired customer base and other intangible assets, net 147,970 222,615 Other 9,759 27,360 ------------------------------ $880,171 $1,372,544 ------------------------------ Amortization charged to expense for intangible assets was $474,772, $474,772 and $507,981 in 1999, 1998 and 1997, respectively. (6) ACCRUED EXPENSES December 31, 1999 1998 -------------------------------- Employee compensation $1,236,319 $1,015,850 Product upgrades 292,746 73,629 Customer advance payments 167,501 174,662 Distributor reserve 93,091 - Other 625,128 590,863 -------------------------------- $2,414,785 $1,855,004 -------------------------------- 24 (7) DEFERRED CREDITS AND REVENUE December 31, 1999 1998 ------------------------ Deferred research and development funding $2,833,334 $ - Deferred royalty payments 2,271,880 - ------------------------ $5,105,214 $ - ------------------------ The Company's distribution agreement with Agilent provides for prepaid funding of research and development costs and royalty payments over the initial term of the agreement. These prepayments will be recognized over the periods benefited. (8) BORROWINGS December 31, 1999 1998 ------------------------ Long-term debt: Convertible senior secured fixed rate notes $7,300,000 $7,300,000 Notes payable 863,307 1,177,821 ------------------------ 8,163,307 8,477,821 Less current portion of long-term debt (349,511) (314,514) ------------------------ $7,813,796 $8,163,307 ------------------------ Short-term borrowings: Credit line $ - $ 828,823 ------------------------ The aggregate maturities of outstanding long-term debt are: Year ending December 31: 2000 $ 349,511 2001 388,400 2002 125,396 2003 7,300,000 ---------- $8,163,307 ========== On August 4, 1998, the Company issued Convertible Senior Secured Fixed Rate Notes with proceeds aggregating $7,300,000. Interest on the Convertible Senior Secured Fixed Rate Notes is payable quarterly in arrears, at 7.00% per annum. The full principal balance is due August 4, 2003. The notes are secured by the issued and outstanding shares of DML, 100% of which are owned by the Company. The Convertible Senior Secured Fixed Rate Note agreements contain provisions, which in the event of a change in control of the Company, allow the note holders to require the Company to repurchase all or a portion of the holder's notes at a purchase price of 100% of the principal amount plus accrued and unpaid interest. In addition, the note agreements contain provisions under which the note holders may convert the notes into shares of Common Stock of the Company at a conversion price of $8.40 per share, subject to adjustment for the impact of certain transactions initiated by the Company that result in dilution of the note holders investment in the Company. The notes payable balance requires principal and interest payments in monthly installments at varying amounts through September 2002, at annual interest rates ranging from 10.1% to 10.95%. Maturity dates of the notes range from December 1, 2001 to September 25, 2002, and all notes are secured by equipment. See also note 15. The Company has a $1,000,000 receivable backed credit line. The loan agreement requires the Company's accounts receivable collections be applied to reduce the loan balance, including advances, interest and fees. All advances under the line of credit bear interest on the unpaid principal amount at a fluctuating rate equal to the Prime Rate plus three percent. Interest is payable monthly in arrears. The loan agreement requires the monthly payment of an annualized unutilized loan fee equal to one half of one percent (.5%) of the difference between the committed available loan amount and the average outstanding loan balance. The full $1,000,000 available under the line of credit was unused at December 31, 1999. See also note 15. (9) LEASES At December 31, 1999 the Company had no outstanding obligations under capital leases. The gross amount included in property and equipment and related accumulated amortization relating to capital leases at December 31, 1998 was as follows: 1998 --------- Manufacturing equipment $ 144,370 Laboratory fixtures and equipment 40,202 Office furniture and equipment 345,090 --------- 529,662 Less accumulated amortization (524,667) --------- $ 4,995 --------- 25 (10) STOCK OPTIONS AND WARRANTS Under the terms of the 1990 Stock Option Plan, incentive stock options and non-qualified stock options to purchase up to 3,750,000 shares of common stock may be granted to Company employees and consultants. Additionally, the 1993 Directors' Stock Option Plan provides grants to non- employee directors of the Company of non-qualified stock options to purchase up to an aggregate of 367,500 shares of common stock. Under the plans, the option price is equal to the fair value on the date of grant. Under the 1990 Stock Option Plan, options become exercisable over varying periods and terminate up to ten years from the date of grant. Under the 1993 Directors' Stock Option Plan, initial grants of options to new directors become exercisable over a three-year period and terminate ten years from the date of grant. Subsequent annual grants to directors vest six months after the date of grant. At December 31, 1999, 529,818 and 129,588 additional shares were available for grant under the 1990 Stock Option Plan and 1993 Directors' Stock Option Plan, respectively. The following tables reflect the per share weighted-average fair value of stock options granted during 1999, 1998 and 1997 under each of the plans on the date of grant using the Black Scholes option-pricing model with the following assumptions: annualized volatility of 76.93%, 84.42% and 74.15% for 1999, 1998 and 1997, respectively; risk-free interest rate of 5.6% in 1999, 5.0% in 1998 and 5.7% in 1997; and for each year, an expected life of five and three years for the 1990 Stock Option Plan and 1993 Directors' Stock Option Plan, respectively. Summarized below is the status of the Company's stock option plans as of December 31, 1999, 1998 and 1997 and changes during those years:
1999 1998 ------------------------------------ ------------------------------------ Weighted Weighted average average 1990 Stock Option Plan Shares exercise price Shares exercise price ------------- ------------------- ------------- ------------------- Outstanding at beginning of year 2,388,425 $5.43 2,387,797 $ 5.26 Granted 444,550 6.03 317,265 6.61 Exercised (223,723) 4.38 (236,062) 4.87 Expired (324,580) 6.46 (80,575) 6.63 ------------- ------------- Outstanding at end of year 2,284,672 5.50 2,388,425 5.43 ------------- ------------- Options exercisable at year-end 1,421,954 5.22 1,420,403 5.05 Weighted-average fair value of options granted during the year $ 4.00 $4.59 1993 Directors' Stock Option Plan Outstanding at beginning of year 160,131 $6.12 114,375 $ 5.89 Granted 44,031 6.38 64,631 7.32 Exercised - - (8,000) 4.63 Expired - - (10,875) 12.00 ------------- ------------- Outstanding at end of year 204,162 6.17 160,131 6.12 ------------- ------------- Options exercisable at year-end 195,162 6.13 131,256 6.08 Weighted-average fair value of options granted during the year $ 3.42 $4.45 1997 ------------------------------------ Weighted average 1990 Stock Option Plan Shares exercise price ------------- ------------------- Outstanding at beginning of year 2,290,395 $5.15 Granted 452,415 5.94 Exercised (210,621) 4.63 Expired (144,392) 6.57 ------------- Outstanding at end of year 2,387,797 5.26 ------------- Options exercisable at year-end 1,258,262 4.85 Weighted-average fair value of options granted during the year $3.84 1993 Directors' Stock Option Plan Outstanding at beginning of year 170,000 $6.16 Granted 40,000 6.00 Exercised (18,500) 4.63 Expired (77,125) 6.84 ------------- Outstanding at end of year 114,375 5.89 ------------- Options exercisable at year-end 76,625 5.81 Weighted-average fair value of options granted during the year $3.13
26 The following table summarizes information concerning stock options outstanding and exercisable options at December 31, 1999 for the above plans:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------------------------ ----------------------------------- Weighted Weighted Weighted average average average Range of Number remaining exercise Number exercise exercise outstanding life price exercisable price prices ------------------------------------------------------------------------------ -------------------------------- $ 1.72 - 1.72 130,910 1.0 $1.72 130,910 $1.72 3.25 - 3.88 89,175 3.9 3.57 86,175 3.57 4.13 - 4.94 588,193 6.3 4.64 428,943 4.66 5.00 - 5.94 644,966 7.2 5.55 269,399 5.27 6.00 - 6.88 695,858 5.9 6.14 507,733 6.14 7.00 - 7.95 128,960 7.3 7.36 70,360 7.30 8.00 - 12.00 210,772 6.9 8.31 123,596 8.44 --------------- ----------- ----------- --------------- ---------- 2,488,834 6.2 5.56 1,617,116 5.33 --------------- ---------------
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock- based compensation plans as they relate to employees and directors. Had the Company determined compensation cost based upon the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss and net loss per share would have increased to the pro forma amounts indicated below:
1999 1998 1997 -------------------------------------------------------- Net loss as reported $(10,243,547) $(17,387,662) $(21,036,543) Net loss pro forma $(12,045,839) $(19,284,933) $(23,331,303) Net loss per share as reported $ (0.41) $ (0.79) $ (1.13) Net loss per share pro forma $ (0.49) $ (0.88) $ (1.25)
27 In connection with certain financing and marketing arrangements entered into since the Company's inception, the Company has granted stock purchase warrants for the purchase of common stock. The stock purchase warrants become exercisable over varying periods and expire up to ten years from the date of grant. At December 31, 1999, stock purchase warrants representing 2,112,880 shares were exercisable with an additional 8,337 shares becoming exercisable over the first four months of 2000. Stock warrants outstanding under these arrangements are summarized as follows:
1999 1998 ---------------------------------- ---------------------------------- Exercise Exercise price price Shares per share Shares per share -------------- --------------- -------------- --------------- Outstanding at beginning of year 1,713,086 $ 1.72 - 8.40 1,028,160 $ 1.72 - 6.75 Granted 452,381 8.40 739,286 5.19 - 8.40 Exercised - - (54,360) 5.19 - 6.13 Expired (44,250) 6.00 - - -------------- -------------- Outstanding at end of year 2,121,217 1.72 - 8.40 1,713,086 1.72 - 8.40 -------------- -------------- Warrants exercisable at year-end 2,112,880 1.72 - 8.40 1,671,753 1.72 - 8.40 1997 ---------------------------------- Exercise price Shares per share --------------- -------------- Outstanding at beginning of year 786,814 $ 1.72 - 6.13 Granted 1,328,334 4.53 - 6.75 Exercised (902,617) 4.77 - 6.75 Expired (184,371) 4.77 - 5.06 --------------- Outstanding at end of year 1,028,160 1.72 - 6.75 --------------- Warrants exercisable at year-end 961,827 1.72 - 6.75
(11) EMPLOYEE STOCK PURCHASE PLAN The Company adopted an employee stock purchase plan (the "Plan") effective July 3, 1995, under which 300,000 shares of common stock are available for sale to employees. The Plan enables all employees, after a 90-day waiting period, to contribute up to 10 percent of their wages toward the purchase of the Company's common stock at 85 percent of the lower of fair market value for such shares on the first business day of each quarter or the last business day of each quarter. Participant elections resulted in the issuance of 32,852 shares at an average price per share of $4.46 in 1999, 45,012 shares at an average price per share of $4.67 in 1998 and 55,394 shares at an average price per share of $3.72 in 1997. (12) EMPLOYEE BENEFIT PLANS The Company has a 401(k) savings plan for its U.S. employees. U.S. employees of the Company who meet certain age and service requirements may contribute up to 20 percent of their salaries to the plan on a pre-tax basis. The Company has the discretion to match employee contributions up to 6 percent of compensation. As of December 31, 1999, the Company has not made any contributions to the plan. As part of its acquisition of DML in November 1996, the Company assumed sponsorship of the subsidiary's contributory defined benefit retirement plan (the "Retirement Plan"), covering the majority of the subsidiary's employees. The Retirement Plan provides benefits based upon final pensionable salary and years of credited service. The Company's funding policy for the Retirement Plan is to contribute into a trust fund at a rate that is intended to remain at a level percentage of total pensionable payroll. The assets of the Retirement Plan are held separately from those of the Company and invested in the London and Manchester Secure Growth Fund, Balanced Fund and a small holding in the Performance Fund. A portion of the Retirement Plan assets are also invested in the Scottish Equitable Funds. 28 Contributions to the Retirement Plan are charged to expense so as to spread the cost of the pensions over the employees' working lives with the Company. The contributions are determined by a qualified actuary on the basis of a valuation using the "attained age" valuation method. The following provides a reconciliation of the projected benefit obligation, plan assets and funded status of the Retirement Plan at December 31, along with the components of net periodic pension cost for each year presented:
1999 1998 -------------------------------------- Change in Projected Benefit Obligation Projected benefit obligation at beginning of year $4,924,458 $3,954,675 Service cost 373,689 344,864 Interest cost 279,862 268,596 Plan participants' contributions 94,316 95,537 Actuarial (gain) loss (16,021) 265,965 Benefits paid (10,352) (38,192) Foreign currency exchange rate changes (203,544) 33,013 ----------------------------------- Projected benefit obligation at end of year $5,442,408 $4,924,458 =================================== Change in Plan Assets Fair value of plan assets at beginning of year $3,970,197 $3,234,425 Actual return on plan assets 830,259 368,134 Employer contribution 292,580 284,145 Plan participants' contributions 94,316 95,537 Benefits paid (10,352) (38,192) Foreign currency exchange rate changes (165,530) 26,148 -------------------------------------- Fair value of plan assets at end of year $5,011,470 $3,970,197 ====================================== Funded status $ (430,938) $ (954,261) Unrecognized actuarial loss 453,534 918,918 -------------------------------------- Net amount recognized $ 22,596 $ (35,343) ====================================== Amounts recognized in the balance sheet consist of: Accrued benefit liability $ (9,684) $ (181,764) Minimum pension liability 32,280 146,421 --------=----------------------------- Net amount recognized $ 22,596 $ (35,343) ====================================== Rate assumptions: Discount rate 5.75% 6.00% Rate of salary progression 3.50% 3.75% Long-term rate of return on assets 9.50% 7.75% Years ended December 31, Components of Net Periodic Benefit Cost 1999 1998 -------------------------------------- Service cost $ 373,689 $ 344,864 Interest cost 279,862 268,596 Expected return on plan assets (310,598) (271,912) Recognized net actuarial loss 21,030 13,264 -------------------------------------- $ 363,983 $ 354,812 ======================================
29 (13) INCOME TAXES The Company has incurred net operating losses since inception. The Company has not reflected any benefit of such net operating loss carryforwards in the accompanying financial statements. As of December 31, 1999 the Company had U.S. tax net operating loss and research and development tax credit carryforwards of approximately $112,842,000 and $1,181,000, respectively. Use of the Company's net operating loss carryforwards may be limited if a cumulative "change in ownership" of more than 50 percent occurs within a three-year period. In connection with prior sales by the Company of its securities in private and public offerings, the Company has experienced a "change in ownership". As a result, the utilization of the Company's net operating loss and certain credit carryforwards incurred prior to these changes are subject to annual limitations. The Company estimates that as of December 31, 1999, U.S. net operating loss carryforwards of $2,900,000 are not available due to these annual limitations. Net operating losses incurred since August 4, 1995 are not currently subject to the "change in ownership" limitations. If not used, these net operating loss carryforwards begin to expire in 2005. The Company's foreign subsidiary also has a net operating loss carryforward of approximately $46,693,000 which can be carried forward indefinitely. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows at December 31:
1999 1998 ----------------------------------- Tax credits $ 1,181,000 $ 939,000 Federal net operating loss carryforward 41,752,000 38,424,000 Foreign net operating loss carryforward 15,409,000 15,089,000 Fixed asset depreciation 705,000 895,000 Amortization of goodwill 371,000 254,000 Accrued expenses 163,000 195,000 Other differences 100,000 141,000 Valuation allowance (59,681,000) (55,937,000) ---------------------------------- Net deferred tax asset $ - $ - ----------------------------------
The provision for income taxes differs from the expected tax expense, computed by applying the federal corporate rate of 34% to earnings before income taxes as follows: Expected federal benefit $ (3,483,000) $ (5,912,000) $ (7,152,000) State tax, net of federal benefit (293,000) (522,000) (493,000) Other 32,000 (70,000) (88,000) Increase in valuation allowance 3,744,000 6,504,000 7,733,000 ------------------------------------------------------- $ - $ - $ - -------------------------------------------------------
(14) RESTRUCTURING AND OTHER CHARGES During 1997, the Company continued to make operational changes initiated in 1996 which were intended to better align its resources with its evolving strategy, improve its efficiency, and achieve a more competitive cost structure. Restructuring and other charges totaled $463,816 in 1997. Charges consisted of severance costs of approximately $319,000 associated with work force reductions, primarily in the Company's U.S. manufacturing, research and development and general and administrative areas, and $145,000 for the write-down of excess and obsolete equipment resulting from the work force reductions and process changes. These restructuring activities were completed before or shortly after the end of the quarter in which charges were incurred, and the Company does not have any material future cash obligations relative to the described restructuring activities. The impact of work force reductions on future operating results and cash flows is not expected to be material in future periods, as savings achieved in these areas have been and will continue to be reinvested in other areas of the Company, including the Company's international operations. 30 (15) RELATED PARTY TRANSACTIONS In August 1998, the Company completed the sale in a private placement of 2,142,858 shares of Common Stock at a price of $7.00 per share as part of a Common Stock Purchase Agreement, resulting in aggregate proceeds to the Company of $15,000,006. The purchasers also received five-year warrants to purchase 714,286 shares of Common Stock at $8.40 per share. In addition, the Company issued Convertible Senior Secured Fixed Rate Notes, with proceeds aggregating $7,300,000, which were used to retire other debt of the Company. The investor group in both transactions was lead by BCC Acquisition II LLC. Two of the directors of the Company are affiliated with BCC Acquisition II LLC, and one of these directors participated in the Common Stock Purchase Agreement and the related sale of Convertible Senior Secured Fixed Rate Notes. This director is also a director of DVI, Inc., a health care finance company with which the Company has outstanding notes payable as of December 31, 1999 and an available receivable backed credit line. See note 8 for further detail on the credit line, notes payable and Convertible Senior Secured Fixed Rate Notes. The Company's exclusive distributors, CODMAN and Agilent, are shareholders of the Company. Sales to these parties were approximately $12.8 million for the year ended December 31, 1999. (16) BUSINESS SEGMENT INFORMATION The Company develops, manufactures and markets blood and tissue analysis systems that provide immediate or continuous diagnostic results at the point-of-patient care. The Company's blood and tissue analysis systems consist of two technology platforms. The first platform includes intermittent blood testing products based on electrochemical and optical technology, and the second platform includes continuous monitoring products based on fiberoptic technology. Effective November 1, 1999, the Company's products are sold primarily to acute care hospitals via third party distribution channels including corporate partners strategically positioned to access foreign markets. Prior to this, sales in the U.S., United Kingdom and Germany were made through the Company's direct sales force. The Company's disposable cartridges and sensors for the intermittent and continuous monitoring technology platforms, respectively, are manufactured at the Company's facilities. Hardware components of both technology platforms are sub-contracted to outside vendors with portions of the hardware assembly performed internally at the Company's facilities. Both technology platforms are subject to similar regulatory monitoring by the United States Food and Drug Administration and comparable agencies in other countries. The Company's long term outlook for the two technology platforms is that with increased sales volumes, they will exhibit similar financial performance in terms of sales trends and gross margins. Based upon the above, the Company has identified one reportable operating segment consisting of medical diagnostic products which provide blood and tissue analysis at the point-of-patient care. Information regarding the Company's operations in different geographies for the years ended December 31 is as follows:
1999 1998 1997 ------------------------------------------------------------ Sales to unaffiliated customers United States $10,281,646 $ 4,879,367 $ 3,947,287 Germany 6,250,366 150,101 596,000 Japan 968,118 1,215,037 2,222,610 All other foreign countries 1,187,054 5,911,021 3,668,469 ------------------------------------------------------------ $18,687,184 $12,155,526 $10,434,366 ------------------------------------------------------------ Long-lived assets United States $ 3,301,162 $ 3,682,879 $ 4,053,383 United Kingdom 2,473,335 3,239,914 3,332,589 ------------------------------------------------------------ $ 5,774,497 $ 6,922,793 $ 7,385,972 ------------------------------------------------------------
Sales attributed to geographic areas are based upon customer location. Long-lived assets consist of property and equipment located at the Company's facilities in the United States and the United Kingdom. Sales to major customers that exceeded 10% of total net sales for the years ended December 31 were as follows: 1999 1998 1997 ----------------------------- Customer A 62% - - Customer B - 14% 22% The customers for which the above sales were generated are distributors of the Company operating in the medical diagnostic device industry. 31 (17) COMMITMENTS The Company leases its facilities and some of its equipment under non- cancelable operating lease arrangements. The rental payments under these leases are charged to expense as incurred. Rent expense included in the accompanying consolidated statements of operations was $873,687, $940,027 and $829,106 for the years ended December 31, 1999, 1998 and 1997, respectively. The following is a schedule of future minimum rental payments, excluding property taxes and other operating expenses, required under all non- cancelable operating leases: Year ending December 31: 2000 $ 847,639 2001 757,519 2002 618,918 2003 548,558 2004 231,444 Thereafter 127,103 ----------- Total minimum lease payments $ 3,131,181 ----------- (18) LEGAL PROCEEDINGS There are no legal proceedings pending, threatened against or involving the Company, which, in the opinion of management, will have a material adverse effect upon consolidated results of operations or financial condition. (19) CHANGE IN YEAR-END OF SUBSIDIARY Effective January 1, 1998, the Company changed the year-end of its wholly- owned subsidiary, DML, to December 31 from November 30 to produce a consistent reporting period for the consolidated entity. As a result of this change in year-end, DML's net results of operations for the month of December 1997 were closed to beginning accumulated deficit on the balance sheet as of January 1, 1998. The impact of this change was an increase in the beginning accumulated deficit of approximately $677,000. (20) QUARTERLY RESULTS OF OPERATIONS (unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter --------------------------------------------------------------- 1999 Net sales $ 4,243,187 $ 4,639,746 $ 4,694,294 $ 5,109,957 Gross profit 726,281 723,373 603,890 853,946 Operating loss (3,736,242) (2,718,719) (1,983,824) (1,605,014) Net loss (3,907,742) (2,782,173) (1,981,187) (1,572,445) Net loss per common share (0.17) (0.11) (0.08) (0.06) 1998 Net sales $ 2,416,703 $ 3,052,048 $ 3,102,430 $ 3,584,345 Gross profit 14,013 241,980 155,952 408,860 Operating loss (4,240,007) (4,094,835) (4,710,851) (4,129,578) Net loss (4,303,193) (4,326,440) (4,792,354) (3,965,675) Net loss per common share (0.21) (0.20) (0.21) (0.17)
32 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Diametrics Medical, Inc.: We have audited the accompanying consolidated balance sheets of Diametrics Medical, Inc. and subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diametrics Medical, Inc. and subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP Minneapolis, Minnesota January 27, 2000 33 CORPORATE AND SHAREHOLDER INFORMATION EXECUTIVE OFFICERS David T. Giddings President, Chief Executive Officer and Chairman of the Board Roy S. Johnson Executive Vice President and President and Managing Director of Diametrics Medical, Ltd. Laurence L. Betterley Senior Vice President and Chief Financial Officer James R. Miller Senior Vice President Sales and Marketing and Commercial Development DIRECTORS Andre de Bruin (2) President and Chief Executive Officer QUIDEL Corporation Gerald L. Cohn (1) (2) Consultant and Private Investor David T. Giddings Hans-Guenter Hohmann (1) Managing Director, Agilent Technologies, GmbH and General Manager, Point-of-Care Diagnostics Division, Agilent Technologies Roy S. Johnson Mark B. Knudson, Ph.D. (1) Chairman and CEO Venturi Group, LLC and Chairman and Founder HeartStent David V. Milligan, Ph.D. (2) Vice President Bay City Capital (1) Member of the Compensation Committee of the Board of Directors (2) Member of the Audit Committee of the Board of Directors 34 SHAREHOLDER INFORMATION STOCK LISTING The Company's common stock is traded on The Nasdaq National Market under the symbol DMED. STOCK TRANSFER AGENT American Stock Transfer & Trust Company 40 Wall Street New York, NY 10005 Phone: (800) 937-5449 FORM 10-K A copy of the Company's annual report on Form 10-K as filed with the Securities and Exchange Commission is available to stockholders free of charge by writing to Diametrics Medical, Inc. ANNUAL MEETING The annual meeting of Diametrics Medical, Inc. shareholders will be held May 17, 2000, at 3:30 p.m. at the Minneapolis Marriott City Center, 30 South Seventh Street, Minneapolis, Minnesota. All shareholders and other interested parties are invited to attend. INVESTOR INQUIRIES Please direct all inquiries to Laurence L. Betterley, Senior Vice President and Chief Financial Officer, at the Company's corporate offices. STOCK INFORMATION High and low quarterly closing prices for Diametrics Medical, Inc., common stock as quoted on The Nasdaq National Market were:
1999 High Low --------------------------------------------------------------------------------------- First Quarter $ 8 9/16 $ 4 1/32 Second Quarter 6 3/4 4 13/16 Third Quarter 7 1/2 5 5/16 Fourth Quarter 6 13/16 3 3/4 1998 High Low --------------------------------------------------------------------------------------- First Quarter $ 8 1/4 $ 5 1/4 Second Quarter 8 7/8 6 5/8 Third Quarter 7 15/16 3 5/8 Fourth Quarter 5 1/2 2 3/4
There were 463 common shareholders of record and the Company estimates approximately 7,100 shareholders holding stock in "street name" accounts as of December 31, 1999. The Company has not paid any stock dividends on its common stock since its inception, and management does not anticipate paying cash dividends in the foreseeable future. CORPORATE ADDRESS INTERNATIONAL SUBSIDIARY Diametrics Medical, Inc. Diametrics Medical, Ltd. 2658 Patton Road 5 Manor Court Yard, Hughenden Ave. St. Paul, Minnesota 55113 High Wycombe, Bucks. HP13 5RE Phone: (651) 639-8035 England Website: www.diametrics.com Phone: +44(0)1494 446651 35 EX-21 5 LIST OF SUBSIDIARIES Exhibit 21 SUBSIDIARIES OF DIAMETRICS MEDICAL, INC. The Company's consolidated subsidiaries are shown below, together with the percentage of voting securities owned and the state or jurisdiction of each subsidiary: Percentage of Outstanding Voting Subsidiaries Securities Owned - ------------ ---------------- Diametrics Medical, Ltd. 100% (United Kingdom) EX-23 6 CONSENT OF KPMG LLP EXHIBIT 23 Independent Auditor's Consent The Board of Directors and Shareholders Diametrics Medical, Inc. We consent to the incorporation by reference in the Registration Statement (Nos. 333-63689, 333-63687, 333-51951, 333-33257, 333-24169, 333-24167, 333-24079 and 33-83572) on Forms S-3 and S-8 of Diametrics Medical, Inc., of our report dated January 27, 2000, relating to the consolidated balance sheets of Diametrics Medical, Inc. and Subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999, which report is incorporated by reference in the Annual Report on Form 10-K of Diametrics Medical, Inc. /s/ KPMG LLP Minneapolis, Minnesota March 30, 2000 EX-27 7 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 2,786,162 11,339,009 6,990,673 200,000 4,116,348 25,317,528 19,455,298 13,680,801 31,972,196 10,308,060 7,813,796 0 0 257,785 13,582,871 31,972,196 18,687,184 18,687,184 15,779,694 12,631,671 (430,711) 319,618 630,459 (10,243,547) 0 (10,243,547) 0 0 0 (10,243,547) (.41) (.41)
EX-99 8 CAUTIONARY STATEMENTS Exhibit 99 CAUTIONARY STATEMENT Forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "PSLRA") are included in our Form 10-K. The words or phrases "believes," "may," "will," "expects," "should," "continue," "anticipates," "intends," "will likely result," "estimates," "projects" or similar expressions identify forward-looking statements in our Form 10-K and in our future filings with the Securities and Exchange Commission, in our press releases, in our presentations to securities analysts or investors, and in oral statements made by or approved by an executive officer of Diametrics Medical, Inc. Forward-looking statements involve risks and uncertainties that may materially and adversely affect our business, results of operations, financial condition or prospects, and may cause our actual results to differ materially from historical results or the results discussed in the forward-looking statements. You should consider carefully the following cautionary statements if you own our common stock or are planning to buy our common stock. We intend to take advantage of the "safe harbor" provisions of the PSLRA by providing this discussion. We are not undertaking to address or update each factor in future filings or communications regarding our business or results except to the extent required by law. We are at an early stage of commercialization with limited operating history Founded in 1990, we were engaged primarily in the research, development and testing of, and the development of manufacturing capabilities for, the IRMA(R) (Immediate Response Mobile Analysis) System and the Paratrend(R) 7 until 1995. Since then, we have developed and are marketing product line extensions from both of these core technology platforms, primarily an expansion of the blood analysis test menu available on the IRMA System, and the extension of the continuous monitoring technology available on the Paratrend 7 to two new continuous monitoring products, Neotrend(TM) and Neurotrend(TM). We have limited operating history upon which an evaluation of our prospects can be made. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered in establishing a new business in the evolving, heavily regulated medical device industry, which is characterized by an increasing number of entrants, intense competition and a high failure rate. We have a history of operating losses We have only recently begun to generate revenues and have incurred net operating losses since our inception. We expect to incur net operating losses at least through the first half 2000. We cannot assure you that we will ever generate substantial revenues or achieve profitability. Our success depends upon market acceptance of new technology Our success depends upon acceptance of our products by the medical community as reliable, accurate and cost-effective. Our point-of-care blood testing and monitoring devices represent a new practice in critical or stat blood testing, which is currently performed primarily by central and stat laboratories of hospitals or by independent commercial laboratories. Although professional awareness of point-of-care blood testing is increasing, most acute care hospitals have already installed expensive blood testing instruments for use in their central and stat laboratories and may be reluctant to change standard operating procedures or incur additional capital expenditures for new blood analysis equipment. In addition, the limited number of blood analytes that can be analyzed on our products may cause certain hospitals not to consider them. We are unable to predict how quickly, if at all, our products will be accepted by the medical community or, if accepted, predict the volume of our products or the related disposable cartridges and sensors we can expect to sell. 1 We face significant industry competition and risk of product obsolescence The medical technology industry is characterized by rapidly evolving technology and intense competition. We are aware of one other commercially available hand-held point-of-care blood analysis system, which is manufactured and marketed by i-STAT Corporation, but we expect that manufacturers of central and stat laboratory testing equipment will also develop new products to maintain their revenues and market share. Many of our competitors have substantially greater capital resources, research and development staffs, and facilities than we do, and many of these companies also have greater experience in research and development, obtaining regulatory approvals, manufacturing, and sales and marketing. We cannot assure you that our competitors will not succeed in developing or marketing technologies and products that are more effective or less expensive than ours that could render our products obsolete or noncompetitive. Although we believe that our products may offer certain technological advantages over our competitors' current products, earlier entrants in the market in a therapeutic area often obtain and maintain significant market share. Our product pricing is competitive with other point-of-care suppliers and is, in general, slightly higher than prices of existing high volume central and near patient labs operating near capacity, but which lack the convenience and turnaround time of point-of-care testing. In the future, we may experience competitive pricing pressures that may cause a decrease in unit prices and sales levels. We have limited manufacturing experience We must manufacture our products in compliance with regulatory requirements, in sufficient quantities and on a timely basis, and still maintain product quality and acceptable manufacturing costs. Our products consist of two principal components: portable, microprocessor-based instruments and disposable sensors. We have limited experience producing our products in large commercial quantities. Although we believe that we will be able to achieve and maintain product accuracy and reliability when producing in large quantities, on a timely basis and at an acceptable cost, we cannot assure you that we will be able to do so. Also, product design changes, equipment failures and manufacturing process changes may disrupt our existing operations and impact sales. We depend on patents and proprietary technology, which we may not be able to protect Our success will depend in part on our ability to obtain patent protection for our products and processes, to preserve our trade secrets and to operate without infringing the intellectual property rights of others. The patent positions of medical device companies are uncertain and involve complex and evolving legal and factual questions. We cannot assure you that any of our pending or future patent applications will result in issued patents, that any current or future patents will not be challenged, invalidated or circumvented, that the scope of any of our patents will exclude competitors or that the patent rights granted to us will provide us any competitive advantage. In addition, we cannot assure you that our competitors will not seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make, use or sell our products either in the United States or in international markets. Further, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. In addition to patents, we rely on trade secrets and proprietary knowledge that we seek to protect, in part, through confidentiality agreements with employees, consultants and others. We cannot assure you that our proprietary information or confidentiality agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors. 2 We may face intellectual property infringement claims which would be costly to resolve There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry and our competitors may resort to intellectual property litigation as a means of competition. Intellectual property litigation is complex and expensive and the outcome is difficult to predict. We cannot assure you that we will not become subject to patent infringement claims or litigation. Litigation or regulatory proceedings may also be necessary to enforce our patents or other intellectual property rights. We may not always have the financial resources to assert patent infringement suits or to defend ourselves from claims. An adverse result in any litigation could subject us to liabilities to, or require us to seek licenses from or pay royalties to, others that may be substantial. Furthermore, we cannot assure you that the necessary licenses would be available to us on satisfactory terms, if at all. Our success may depend in part on uncertain government health care policies and reimbursement by third parties The willingness of hospitals to purchase our products may depend on the extent to which hospitals limit their own capital expenditures due to existing or future cost reimbursement regulations. In addition, sales volumes and prices of our products in certain markets will depend in part on the level of reimbursement to hospitals for blood analysis from third-party payors, such as government and private insurance plans, health maintenance organizations and preferred provider organizations. Third-party payors are increasingly challenging the pricing of medical procedures they consider unnecessary, inappropriate or not cost-effective. We cannot assure you that current reimbursement amounts, if any, will not be decreased in the future, and that any decrease will not reduce the demand for or the price of our products. Any federal or state health care reform measures could adversely affect the price of medical devices in the United States, including our products, or the amount of reimbursement available. We cannot predict whether any reform measures will be adopted or what impact they may have on us. We must obtain regulatory approval for new products we develop Human diagnostic products are subject to rigorous pre-clinical and clinical testing mandated by the United States Food and Drug Administration (the "FDA") and comparable agencies in other countries and, to a lesser extent, by state regulatory authorities. We have obtained pre-market notification clearances under Section 510(k) of the Food, Drug and Cosmetic Act (the "FDC Act") to market our IRMA SL System to test blood gases, electrolytes (i.e., inorganic compounds including sodium, potassium, chloride and ionized calcium), blood urea nitrogen and hematocrit (i.e., concentration of red blood cells) in whole blood in hospital laboratories and at the point-of-care, and to market the Paratrend 7 to monitor blood gases and temperature. Additional pre-market notification clearances were obtained in late 1997 to market Neotrend for blood gas monitoring of critically ill babies, and in early 1998 for the addition of glucose testing capability to the IRMA SL System. In November 1999, we obtained 510(k) clearance to market Neurotrend, designed for direct continuous monitoring of oxygen, carbon dioxide, acidity and temperature in the brain. A Section 510(k) clearance is subject to continual review, and later discovery of previously unknown problems may result in restrictions on marketing or withdrawal of the product from the market. Our long-term business strategy includes development of cartridges and sensors for performing additional blood and tissue chemistry tests, and any new tests will be subject to the same regulatory process. We cannot assure you that we will be able to develop additional products or uses or that we will obtain the necessary clearances for new products and uses on a timely basis or at all. We also market our products in several foreign markets. Requirements vary widely from country to country, ranging from simple product registrations to detailed submissions such as those required by the FDA. Our manufacturing facilities are also subject to FDA inspection on a periodic basis and we and our contract manufacturers must demonstrate compliance with current Good Manufacturing Practices promulgated by the FDA. Violations of the applicable regulations at our manufacturing facilities or the manufacturing facilities of our contract manufacturers may prevent us from marketing of our products. 3 Our products and the technicians authorized to use them may be restricted by the Clinical Laboratory Improvement Act of 1988 Our products are affected by the Clinical Laboratory Improvement Act of 1988 ("CLIA") which has been implemented by the FDA. This law is intended to assure the quality and reliability of all medical testing in the United States regardless of where tests are performed. The regulations require laboratories performing blood chemistry tests to meet specified standards in the areas of: . personnel qualification, . administration, . participation in proficiency testing, . patient test management, . quality control, . quality assurance, and . inspections. The regulations have established three levels of regulatory control based on test complexity - "waived," "moderate complexity" and "high complexity." Although the tests performed by our products have been categorized as moderate complexity tests, we cannot assure you that our products will not be placed in a more restrictive category. Personnel standards for high complexity tests are more rigorous than those for moderate complexity tests, requiring more education and experience. If our products are recategorized as high complexity tests, our ability to successfully market them to hospitals or other potential buyers may suffer. We cannot assure you that the CLIA regulations or various state licensing requirements for technicians will not have a material adverse effect on our financial condition or results of operation. Our products may expose us to costly litigation We may be exposed to product liability claims if a patient is adversely affected by our products. We maintain a general insurance policy which includes coverage for product liability claims. The policy is limited to a maximum of $1,000,000 per product liability claim and an annual aggregate policy limit of $2,000,000. We also carry umbrella liability insurance which provides coverage up to $10,000,000. We cannot assure you that our existing insurance coverage limits are adequate to cover any liabilities we might incur or that insurance will continue to be available on commercially reasonable terms, if at all. We depend on contract manufacturers and suppliers for key components of our products Our monitors and IRMA analyzers are manufactured for us by single vendors, generally from off-the-shelf components. A few components are supplied by a single source and manufactured to our specifications. Although we believe that we could find alternative vendors, any interruption in supply could have a material and adverse effect on our ability to manufacture our products, and our financial condition and results of operations. 4 We depend on distribution partners to sell, market and distribute most of our products We currently market most of our products through two global distribution partners, who have exclusive distribution rights for these products. Although we believe our distribution partners will successfully perform under the terms of their respective distribution agreements, any significant failure to do so, or a significant failure on our part to meet requirements under the distribution agreements, may result in early termination of the agreement(s). The time and cost required to re-establish distribution channels with other partners or on our own may be prohibitive, and could have a material and adverse effect on our ability to commercialize our products, and on our financial condition and results of operations. International operations will expose us to additional risks We currently market most of our products through two global distribution partners whose distribution channels include international markets, subject to receipt of required foreign regulatory approvals. We cannot assure you that our distribution partners will devote adequate resources to selling our products internationally. Doing business outside of the United States also exposes us to various risks that could have a material and adverse effect on our ability to market our products internationally, including: . changes in overseas economic and political conditions, . currency exchange rate fluctuations, . foreign tax laws, or . tariffs or other trade regulations. Our business is also expected to subject us and our representatives, agents and distributors to laws and regulations of the foreign jurisdictions in which they operate or our products are sold. We may depend on foreign distributors and agents for compliance and adherence to foreign laws and regulations. We have no control over most of these risks and may be unable to anticipate changes in international economic and political conditions, and may be unable to alter our business practices in time to avoid any adverse effects. Concentration of ownership may give some shareholders substantial influence and may prevent or delay a change in control As of December 31, 1999, directors, executive officers and principal shareholders, and certain of their affiliates, owned beneficially approximately 44.5% of our outstanding common stock, assuming all vested stock options, stock purchase warrants and convertible debt held by them are exercised or converted. These shareholders may be able to exercise substantial influence over all matters requiring shareholder approval, including the election of directors, and approval of significant corporate transactions. This concentration of ownership could also have the effect of delaying, deferring or preventing a change in control of Diametrics Medical, Inc. We may be unable to meet our future capital requirements We expect that our existing capital resources and proceeds from funding agreements with our distribution partners should enable us to maintain our current and planned operations. Nonetheless, our capital requirements depend on many factors, including the rate of market acceptance of our products, the level of resources we devote to expanding our business and manufacturing capabilities, our research and development activities, the availability of financing for capital acquisitions and other factors. We cannot accurately predict the timing and amount of our capital needs. If capital requirements vary materially from those currently planned, we will require additional capital. Issuing additional shares of capital stock may be dilutive to our shareholders, and debt financing, if available, may involve restrictive covenants. 5 -----END PRIVACY-ENHANCED MESSAGE-----