<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-Q
__________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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.
Incorporated pursuant to the Laws of Minnesota
__________________
Internal Revenue Service -- Employer Identification No. 41-1663185
2658 Patton Road, Roseville, Minnesota 55113
(612) 639-8035
__________________
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 [_]
The total number of shares of the registrant's Common Stock, $.01 par value,
outstanding on June 30, 1996, was 15,149,185.
<PAGE>
DIAMETRICS MEDICAL, INC.
PAGE
<TABLE> ----
<CAPTION>
PART I -- FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Condensed Balance Sheets as of June 30, 1996
and December 31, 1995..................................3
CONDENSED STATEMENTS OF OPERATIONS:
Three Months Ended June 30, 1996 and 1995............4
Six Months Ended June 30, 1996 and 1995..............4
CONDENSED STATEMENTS OF CASH FLOWS:
Three Months Ended June 30, 1996 and 1995............5
Six Months Ended June 30, 1996 and 1995..............5
NOTES TO CONDENSED FINANCIAL STATEMENTS................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................9
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.....................................11
ITEM 2. CHANGES IN SECURITIES.................................11
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.......................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...11
ITEM 5. OTHER INFORMATION.....................................11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................11
SIGNATURES..............................................................14
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DIAMETRICS MEDICAL, INC.
CONDENSED BALANCE SHEETS
June 30, December 31,
1996 1995
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 624,636 $ 2,702,232
Marketable securities 15,371,945 25,789,265
Accounts receivable:
Trade, net 572,871 562,409
Nontrade 341,482 400,639
Inventories 2,321,219 1,114,332
Prepaid expenses and other current assets 277,220 128,374
----------- ------------
Total current assets 19,509,373 30,697,251
Property and equipment 11,334,452 10,840,323
Less accumulated depreciation and
amortization (6,324,235) (5,000,597)
----------- ------------
5,010,217 5,839,726
----------- ------------
Other assets 137,066 82,624
----------- ------------
$24,656,656 $ 36,619,601
=========== ============
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 492,650 $ 1,554,573
Accrued expenses 1,213,958 847,544
Short-term note payable 95,803 44,608
Capital lease obligations, current
portion 1,072,809 1,056,130
Deferred gain on sale/leaseback,
current portion 71,045 71,045
----------- ------------
Total current liabilities 2,946,265 3,573,900
Long-term liabilities:
Capital lease obligations, excluding
current portion 1,346,564 1,803,982
Deferred gain on sale/leaseback,
excluding current portion 11,849 47,369
----------- ------------
Total liabilities 4,304,678 5,425,251
----------- ------------
Common shareholders' equity:
Common stock, $.01 per value: 20,000,000
authorized 15,149,185 and 14,900,141
shares issued and outstanding 151,492 149,001
Additional paid-in capital 88,257,010 87,489,392
Accumulated deficit (68,056,524) (56,444,043)
----------- ------------
Total common shareholders' equity 20,351,978 31,194,350
----------- ------------
$24,656,656 $ 36,619,601
=========== ============
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
DIAMETRICS MEDICAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
---------------- ---------------- ---------------- ----------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 583,530 $ 310,176 $ 1,193,101 $ 642,943
Cost of sales 1,985,267 1,997,389 4,281,564 3,986,421
----------- ----------- ------------ -----------
Gross profit (loss) (1,401,737) (1,687,213) (3,088,463) (3,343,478)
----------- ----------- ------------ -----------
Operating expenses:
Research and development 1,862,464 1,292,699 3,389,946 2,664,405
General and administrative 1,187,482 653,618 2,113,457 1,327,095
Sales and marketing 1,662,730 1,349,069 3,265,864 2,537,566
----------- ----------- ------------ -----------
Total operating expenses 4,712,676 3,295,386 8,769,267 6,529,066
----------- ----------- ------------ -----------
Operating loss (6,114,413) (4,982,599) (11,857,730) (9,872,544)
Other income (expense), net 49,942 14,319 245,249 (15,643)
----------- ----------- ------------ -----------
Net loss $(6,064,471) $(4,996,918) $(11,612,481) $(9,888,187)
=========== =========== ============ ===========
Net loss per common share (unaudited) $ (0.40) $ (0.44) $ (0.77) $ (0.89)
=========== =========== ============ ===========
Weighted average number of
common shares outstanding (unaudited) 15,094,419 11,346,335 15,003,639 11,064,468
=========== =========== ============ ===========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
DIAMETRICS MEDICAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flow from operating activities:
Net loss $ (6,064,471) $ (4,996,918) $(11,612,481) $ (9,888,187)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 706,319 597,678 1,372,642 1,193,377
Common stock issued in lieu of salaries and wages - 182,325 - 182,325
(Gain)/loss on disposal of property and equipment - 382 (1,686) 18,359
Change in operating assets and liabilities:
Trade receivables, net (13,507) 19,381 (10,462) (134,341)
Nontrade receivables 30,150 (3,043) 59,157 7,074
Inventories 39,984 (224,677) (1,206,887) (317,646)
Prepaid expenses and other current assets (48,840) 31,846 (53,043) 90,702
Accounts payable (313,915) (149,378) (1,061,923) (408,416)
Accrued lawsuit settlement - 14,100 - 28,200
Accrued expenses 100,011 (103,629) 366,414 137,662
------------ ------------ ------------ ------------
Net cash used in operating activities (5,564,269) (4,631,933) (12,148,269) (9,090,891)
Cash flow from investing activities:
Purchases of property and equipment (386,825) (577,525) (576,967) (1,487,679)
Proceeds from sales of property and equipment - 1,538 102,586 672,674
Purchases of marketable securities (1,940,324) (1,141,845) (5,907,680) (12,850,628)
Proceeds from maturities of marketable securities 5,500,000 5,675,369 16,325,000 14,279,369
Other assets (12,267) 13,030 (54,442) 205,476
------------ ------------ ------------ ------------
Net cash used in investing activities 3,160,584 3,970,567 9,888,497 819,212
Cash flow from financing activities:
Principal payments on short-term note payable (11,152) (36,050) (44,608) (73,010)
Net proceeds from issuance of common stock 623,391 14,168 770,109 8,673,012
Payments for redeemable common stock - - - (1,000,000)
Principal payments on capital lease obligations (263,343) (227,247) (543,325) (451,617)
------------ ------------ ------------ ------------
Net cash provided by financing activities 348,896 (249,129) 182,176 7,148,385
------------ ------------ ------------ ------------
Net (decrease) increase in cash
and cash equivalents (2,054,789) (910,495) (2,077,596) (1,123,294)
Cash and cash equivalents at beginning of period 2,679,425 936,512 2,702,232 1,149,311
============ ============ ============ ============
Cash and cash equivalents at end of period $ 624,636 $ 26,017 $ 624,636 $ 26,017
============ ============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 134,034 $ 132,688 $ 273,641 $ 239,694
============ ============ ============ ============
Supplemental disclosure of noncash investing and financing activities:
The Company entered into short-term notes payable of $95,803 and $147,569 during the three months ended June 30, 1996 and 1995,
respectively.
The Company entered into capital lease obligations for equipment of $102,586 and $669,186 for the six months ended June 30, 1996 and
1995, respectively.
</TABLE>
5
<PAGE>
DIAMETRICS MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 1 - UNAUDITED FINANCIAL STATEMENTS
- ---------------------------------------
The interim condensed financial statements of Diametrics Medical, Inc. (the
"Company") are unaudited and have been prepared by the Company in accordance
with generally accepted accounting principles for interim financial information,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Pursuant to such rules and regulations, certain financial information and
footnote disclosures normally included in the financial statements have been
condensed or omitted. However, in the opinion of management, the financial
statements include all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the interim periods presented. Operating
results for these interim periods are not necessarily indicative of results to
be expected for the entire year, due to seasonal, operating and other factors.
These statements should be read in conjunction with the financial statements and
related notes which are incorporated by reference in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
NOTE 2 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
DESCRIPTION OF THE BUSINESS
Diametrics Medical, Inc. (the "Company"), a medical device company,
was incorporated in the state of Minnesota on January 26, 1990, and
commenced operation in June 1990. The Company develops, manufactures
and markets a proprietary in vitro blood chemistry testing system that
provides immediate diagnostic results at the point of patient care.
The Company emerged from development stage in the third quarter of
1994.
LIQUIDITY
The Company has incurred net operating losses since inception and has
had limited revenue-producing activities. The Company's current
operating plan will require the Company to raise additional capital by
mid-1997. Management's intentions are to raise the capital through an
alliance with a strategic corporate partner, issuance of debt, or an
equity offering. There can be no assurance that adequate funds will
be available when needed or on acceptable terms.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include U.S. government money market funds.
For purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
MARKETABLE SECURITIES
In accordance with the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," marketable debt and equity securities have been
classified as held-to-maturity and are stated at amortized cost, which
approximates estimated fair value. Securities held by the Company
include U.S. government, Federal Agency obligations, certificates of
deposit and high grade commercial debt securities.
These securities are classified as held-to-maturity because of the
Company's positive intent and ability hold its investments to
maturity.
6
<PAGE>
INVENTORIES
Inventories are stated at the lower of cost or market using the first
in, first out method, with write-offs taken on IRMA/R/ (Immediate
Response Mobile Analysis) disposable cartridges at the time shelf life
falls below the number of days deemed acceptable for shipment to
customers.
PROPERTY AND EQUIPMENT
Furniture, equipment and leasehold improvements are recorded at cost.
Depreciation is calculated on a straight-line basis over the estimated
useful lives of the assets. Amortization is calculated on a straight-
line basis over the life of the lease.
REVENUE RECOGNITION
The Company recognizes revenue at the later of point of shipment or
final acceptance of trial instruments.
NET LOSS PER COMMON SHARE
Net loss per common share is computed based upon the weighted average
number of common shares outstanding.
PRODUCT WARRANTY
The Company, in general, warrants the IRMA Analyzer and Battery
Charger to be free from defects in material and workmanship under
normal use and service for a period of one year after date of
shipment, and warrants IRMA Cartridges to be free from defect in
material and workmanship under normal use until their stated
expiration date. Provisions are made for the estimated cost of
maintaining product warranties for the IRMA Analyzer System and for
the IRMA disposable cartridges at the time the products are sold.
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 as income in the
period that includes the enactment date.
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.
NEW ACCOUNTING PRONOUNCEMENTS
For 1996, the Company is required to adopt Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," and SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 121 is
not expected to result in recognition of a cumulative effect of a
change in accounting principle by the Company. SFAS No. 123
prescribes accounting and reporting standards for all stock-based
compensation plans. Since the
7
<PAGE>
Company intends to elect continued recognition of certain stock-based
compensation using the intrinsic value method prescribed under
Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, no effect on the Company's expense recognition is
expected. However, extensive new disclosures will be required in notes
to consolidated financial statements.
NOTE 3 - INVENTORIES
- --------------------
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------------- ------------
<S> <C> <C>
Raw materials $1,890,042 $ 782,287
Work-in-process 179,056 238,930
Finished goods 252,121 93,115
-------------- ------------
$2,321,219 $1,114,332
============== ============
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
This Management's Discussion and Analysis contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Act"). Refer to Exhibit 99 of this Form 10-Q for certain important cautionary
factors, risks and uncertainties related to forward-looking statements.
SUMMARY
- -------
Diametrics Medical, Inc. (the "Company"), which began operations in 1990, is
engaged in the development, manufacturing and marketing of a proprietary blood
analysis system that utilizes disposable test cartridges to provide immediate
results at the point-of-patient care. The Company's efforts have focused on
commercialization of the IRMA/R/ (Immediate Response Mobile Analysis) System as
a blood chemistry testing device for the hospital market.
The Company markets its products primarily to health care organizations in the
United States through a direct sales force and outside the United States using
various distributors.
As of June 30, 1996, the primary funding for the operations of the Company has
been approximately $88,000,000 raised through public and private sales of its
equity securities and the issuance of convertible promissory notes, all of which
have been repaid or were converted into Common Stock.
RESULTS OF OPERATIONS
- ---------------------
SALES Sales were $583,530 and $1,193,101 for the three and six months ended June
30, 1996, compared to $310,176 and $642,943 for the same periods last year. The
Company's revenues are affected principally by the number of IRMA Systems placed
in hospitals and other locations and the rate at which IRMA cartridges are used
at these locations. As of June 30, 1996, the Company had 642 IRMA System
placements compared to 555 placements at March 31, 1996.
COST OF SALES The Company incurred manufacturing costs associated with product
sales of $1,985,267 and $4,281,564 for the three and six months ended June 30,
1996, compared to $1,997,389 and $3,986,421 for the same periods in the prior
year. This resulted in a negative gross profit as sales volume was not
sufficient to absorb labor and overhead costs. To the extent that sales volume
increases, the Company expects its gross profit to improve as manufacturing
costs (including direct labor and manufacturing overhead costs) will be spread
over a larger number of production units.
OPERATING EXPENSES RESEARCH and development expenditures were $1,862,464 and
$3,389,946 for the three and six months ended June 30, 1996, compared to
$1,292,699 and $2,664,405 for the same periods in the prior year. The increase
from the prior periods reflect increased expenses associated with the continued
expansion of the test menu for the IRMA System and development of the Company's
next generation system, IRMA SL. In addition, the Company continued to invest in
product and process improvements designed to improve product performance and
reduce production costs.
General and administrative expenses totaled $1,187,482 and $2,113,457 for the
three and six months ended June 30, 1996, compared to $653,618 and $1,327,095
for the same periods in the prior year. The increase from the prior period
reflects the reclassification of certain corporate support functions to general
and administrative.
Sales and marketing expenses totaled $1,662,730 and $3,265,864 for the three and
six months ended June 30, 1996, compared to $1,349,069 and $2,537,566 for the
same periods in the prior year. The period-to-period increase reflects expansion
of the direct sales force, addition of marketing personnel, and increased
advertising and promotional activities. As of June 30, 1996, the Company had
twenty-one direct sales representatives, three regional managers and three
clinical specialists.
OTHER INCOME (EXPENSE) Net other income was $49,942 and $245,249 for the three
and six months ended June 30, 1996, compared to a net expense of $14,319 and
$15,643 for the same periods in the prior year. The company realized interest
income of $263,766 and $626,752 for the three and six months ended June 30,
1996, compared to $150,293 and $327,834 for the same periods in the prior
9
<PAGE>
year. The period-to-period increase reflects higher average cash balances
resulting from the Company's financing activities. Interest expense totaled
$134,034 and $273,641 for the three and six months ended June 30, 1996, compared
to $146,788 and $267,894 for the same periods in the prior year. The period-to-
period increase reflects a decrease in lease financing during 1996 compared to
1995.
NET LOSS Net loss for the three and six months ended June 30, 1996 was
$6,064,471 and $11,612,481 compared to $4,996,918 and $9,888,187 for the same
periods in the prior year. The increase in net loss from the prior periods
reflects the Company's increased investments in sales and marketing, and
development of the next generation system, IRMA SL.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1996, the Company had working capital of $16,563,108, a decrease of
$10,560,243 from the working capital reported at December 31, 1995. This
decrease is primarily the result of the net loss for the six months ended June
30, 1996. The Company has financed its operations to date primarily through the
public and private sales of its equity securities, the issuance of convertible
promissory notes and equipment financing arrangements.
At June 30, 1996, the Company had property and equipment of $11,334,452 up from
$10,840,323 at December 31, 1995, less accumulated depreciation of $6,324,235
and $5,000,597 at June 30, 1996 and December 31, 1995, respectively. The Company
has financed approximately $5,056,000 million through capital lease obligations,
including $103,000 financed during 1996.
At June 30, 1996, the Company had net operating loss and research and
development tax credit carry forwards for income tax purposes of approximately
$64,684,000 and $701,000 respectively. Pursuant to the Tax Reform Act of 1986,
use of the Company's net operating loss carry forwards may be limited if a
cumulative "change in ownership" of more than 50 percent occurs within any three
year period. In connection with prior sales by the Company of its securities, in
public and private offerings, the Company has experienced a "change of
ownership." As a result, the utilization of the Company's net operating loss and
certain credit carry forwards incurred prior to these changes are subject to
annual limitations.
The Company has incurred net operating losses since inception and has had
limited revenue-producing activities. The Company's current operating plan will
require the Company to raise additional capital by mid-1997. Management's
intentions are to raise the capital through an alliance with a strategic
corporate partner, issuance of debt, or an equity offering. There can be no
assurance that adequate funds will be available when needed or on acceptable
terms.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
EXHIBIT METHOD
NO. DESCRIPTION OF FILING
--- ----------- ---------
3.1 Articles of Incorporation of the (1)
Company
3.2 Bylaws of the Company (1)
4.1 Form of Certificate for Common (1)
Stock
4.2 Form of Registration Rights (1)
Agreement between the Company
and certain of its shareholders
and warrantholders
4.3 Form of Registration Rights (4)
Agreement dated as of February
3, 1995, between the Company and
certain of its shareholders
10.1 Real Property Lease dated May 3, (1)
1990, between CommersKlodt, a
Minnesota General Partnership
and the Company
10.2 Real Property Lease dated May (1)
28, 1991, between CommersKlodt,
a Minnesota General Partnership
and the Company
10.3 Real Property Lease dated July (1)
2, 1991, between CommersKlodt, a
Minnesota General Partnership
and the Company
10.4 Real Property Lease dated (1)
December 20, 1992, between
CommersKlodt, a Minnesota
General Partnership and the
Company
10.5 Real Property Lease dated May (1)
10, 1993, between CommersKlodt,
a Minnesota General Partnership
and the Company
10.6 Equipment Sublease Agreement (1)
dated August 12, 1992, between
FIM, Inc. and the Company
11
<PAGE>
10.7 Master Lease Agreement dated (1)
November 11, 1992, between
Bankers Leasing Association,
Inc. and the Company
10.8 Master Equipment Lease Agreement (1)
dated June 15, 1993, between the
Company and The Northern Leasing
Fund, as amended by Amendment
No. 1 dated June 8, 1994
(including form of warrant
issued in connection therewith)
10.9 Master Equipment Lease Agreement (1)
dated 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)
10.10* 1990 Stock Option Plan (as (3)
revised and restated), including
form of option agreement
10.11* 1993 Directors' Stock Option (2)
Plan, as amended
10.12 1995 Equalizing Director Stock (5)
Option Plan
10.13 1995 Employee Stock Purchase Plan (4)
10.14 Agreement dated July 7, 1993, (1)
between the Company and AmHS
Purchasing Partners, L.P.
10.15 Agreement dated January 1, 1995, (4)
between the Company and Vencor,
Inc.
10.16 Settlement Agreement and Mutual (1)
General Releases dated March 25,
1994, among PPG Industries,
Inc., the Company, Walter L.
Sembrowich, David W. Deetz and
Kee Van Sin
10.17 Letter agreement dated as of (3)
February 1, 1995, among the
Company, Alstate Venture Capital
and Frazier and Company L.P.
10.18 Letter agreement dated January (3)
5, 1993, between the Company and
Michael F. Connoy
10.19 Agreement dated June 29, 1990, (3)
between the Company and David W.
Deetz, as supplemented by the
letter agreement dated March 28,
1995
10.20 Agreement dated June 29, 1990, (3)
between the Company and Walter
L. Sembrowich, Ph.D.
10.21 Agreement dated December 21, (5)
1995, between the Company and
Walter L. Sembrowich, Ph.D.
10.22 Agreement dated March 1, 1996, (5)
between the Company and Barbara
E. Roth
99 Cautionary Statements Under Filed herewith
Private Securities Litigation
Reform Act of 1995
B. REPORTS ON FORM 8-K
None
- -------------
* 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 1995 Statement on Form
10-K.
12
<PAGE>
(3) Incorporated by reference to the Company's 1994 Statement on Form
10-K.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration Number 33-94442).
(5) Incorporated by reference to the initial filing of the Company's
1995 Statement on Form 10-K.
13
<PAGE>
DIAMETRICS MEDICAL, INC.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIAMETRICS MEDICAL, INC.
By: /s/ David T. Giddings
------------------------------------
David T. Giddings
Chief Executive Officer
By: /s/ Travis L. Murphy
------------------------------------
Travis L. Murphy
Chief Financial Officer
Dated: August 5, 1996
14
<PAGE>
DIAMETRICS MEDICAL, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --- -----------
<S> <C>
27 Financial Data Schedule
99 Cautionary Factors Under the Private
Securities Litigation Reform Act
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Jun-30-1996
<CASH> 624,636
<SECURITIES> 15,371,945
<RECEIVABLES> 1,011,944
<ALLOWANCES> 97,591
<INVENTORY> 2,321,219
<CURRENT-ASSETS> 19,509,373
<PP&E> 11,334,452
<DEPRECIATION> 6,324,235
<TOTAL-ASSETS> 24,656,656
<CURRENT-LIABILITIES> 2,946,265
<BONDS> 1,346,564
<COMMON> 151,492
0
0
<OTHER-SE> 20,200,486
<TOTAL-LIABILITY-AND-EQUITY> 24,656,656
<SALES> 1,193,101
<TOTAL-REVENUES> 1,193,101
<CGS> 4,281,564
<TOTAL-COSTS> 8,769,267
<OTHER-EXPENSES> (549,189)
<LOSS-PROVISION> 30,299
<INTEREST-EXPENSE> 273,641
<INCOME-PRETAX> (11,612,481)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,612,481)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,612,481)
<EPS-PRIMARY> (0.77)
<EPS-DILUTED> (0.77)
</TABLE>
<PAGE>
EXHIBIT 99
CAUTIONARY FACTORS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
Diametrics Medical, Inc. (the "Company") desires to take advantage of the new
"safe harbor" provisions contained in the Private Securities Litigation Reform
Act of 1995 (the "Act"). Contained in this Form 10-Q are statements which are
intended as "forward-looking statements" within the meaning of the Act. The
words or phrases "expects," "will continue," "is anticipated," "management
believes," "estimate," "projects," "hope" or expressions of a similar nature
denote forward-looking statements. Those statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or from those results presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
forward-looking statements. Readers should be advised that the factors listed
below have affected the Company's performance in the past and could affect
future performance. Those factors include, but are not limited to, the lack of,
or slow rate of, market acceptance of the Company's products; the impact of
competitors' products and pricing; the effect of changes in customer demands;
the risk there will be technical difficulties in production; the inability of
the Company to attract and retain skilled employees in the product development
and manufacturing areas.
Other factors include the following:
EARLY STAGE OF COMMERCIALIZATION; LIMITED RELEVANT OPERATING HISTORY
The Company was founded in 1990 and until recently has been engaged primarily in
the research, development and testing of, and the development of manufacturing
capabilities for, the IRMA(R)(Immediate Response Mobile Analysis) System. The
Company began marketing the IRMA System on a national basis in the third quarter
of 1994 and on an international basis in 1995. There is no assurance that the
Company will be successful in transitioning to commercial operations, including
commercial-scale manufacturing. Additionally, the Company has limited operating
history upon which an evaluation of its prospects can be made. Such 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.
ABSENCE OF PROFITABILITY; ANTICIPATED FUTURE LOSSES
The Company has only recently begun to generate revenues from sales of the IRMA
System and has incurred net operating losses since its inception. Net losses
for the years ended December 31, 1993, 1994 and 1995 and the six months ended
June 30, 1996 were approximately $13,819,000, $12,455,000, $23,046,000 and
$11,612,000, respectively. The Company had an accumulated deficit of
approximately $68,057,000 at June 30, 1996. The Company expects to incur
substantial net operating losses at least through 1997. There is no assurance
that the Company will ever generate substantial revenues or achieve
profitability.
NEW TECHNOLOGY; UNCERTAIN MARKET ACCEPTANCE
The Company's success is dependent upon acceptance of the IRMA System by the
medical community as reliable, accurate and cost-effective. Because the IRMA
System is a point-of-care blood testing device, the IRMA System represents a new
practice in the testing of blood analytes. Critical or stat blood testing is
currently performed primarily by central and stat laboratories of hospitals or
by independent commercial laboratories, rather than at the point-of-care.
Although professional awareness of point-of-care blood testing is increasing,
most acute care hospitals have already installed costly benchtop blood testing
instruments for use in their central and stat laboratories and may be reluctant
to change standard operating procedures for performing blood testing or incur
additional capital expenditures for new blood analysis equipment. In addition,
the limited number of tests that can be performed on the IRMA System may cause
certain hospitals not to consider the IRMA System. The Company is unable to
predict how quickly, if at all, the IRMA System will be accepted by members of
the medical community or, if accepted, the number of tests that will be
performed using the IRMA System. Therefore, the Company is unable to provide any
assurance as to sales volume of the IRMA Analyzer or the related sales volume of
IRMA cartridges.
<PAGE>
FUTURE ADDITIONAL CAPITAL REQUIREMENTS
The Company expects that its existing capital resources, current and future
lease financing arrangements and strategic alliances will enable the Company to
maintain its current and planned operations through mid 1997. Nonetheless, the
Company's capital requirements depend on numerous factors, including the rate of
market acceptance of the Company's products, the level of resources devoted to
expanding the Company's marketing organization and manufacturing capabilities,
the Company's research and development activities, the availability of lease
financing for capital acquisitions and other factors. The timing and amount of
such capital requirements cannot accurately be predicted. If capital
requirements vary materially from those currently planned, the Company will
require additional capital at an earlier time. The Company has no commitments
for any additional financing, and no assurance exists that any such commitments
can be obtained on favorable terms, if at all. Any additional equity financings
may be dilutive to shareholders, and debt financing, if available, may involve
restrictive covenants. The Company is also pursuing corporate strategic
alliances. Such alliances may require the Company to relinquish rights to
certain of its technologies, products or marketing territories.
HIGHLY COMPETITIVE MARKETS; RISK OF TECHNOLOGICAL OBSOLESCENCE
The medical technology industry is characterized by rapidly evolving technology
and intense competition. The Company is aware of one other commercially
available hand-held point-of-care blood analysis system, which is manufactured
and marketed by i-STAT Corporation ("i-STAT"). The Company expects that
manufacturers of central and stat laboratory testing equipment will also compete
to maintain their revenues and market share. Many of the companies in the
medical technology industry and manufacturers of central and stat laboratory
equipment have substantially greater capital resources, research and development
staffs and facilities than the Company. Such entities have developed, may be
developing or could in the future attempt to develop additional products
competitive with the IRMA System. Many of these companies also have
substantially greater experience than the Company in research and development,
obtaining regulatory approvals, manufacturing, and sales 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 are more effective or less expensive
than those developed or marketed by the Company or that would render the
Company's technology and products obsolete or noncompetitive. Although the
Company believes that its products may offer certain technological advantages
over its competitors' currently-marketed products, earlier entrants in the
market in a therapeutic area often obtain and maintain significant market share
relative to later entrants. In the future, the Company may experience
competitive pricing pressures that may adversely affect unit prices and sales
levels.
LIMITED MANUFACTURING EXPERIENCE
The Company must manufacture the IRMA System in compliance with regulatory
requirements, in sufficient quantities and on a timely basis, while maintaining
product quality and acceptable manufacturing costs. The IRMA System consists of
two principal components: the portable, microprocessor-based IRMA Analyzer and
the disposable IRMA cartridge. The Company has limited experience producing the
IRMA cartridge for testing blood gases in large commercial quantities, and has
only recently begun to produce the cartridge for testing electrolytes. Although
the Company believes that, based on its manufacturing experience to date, it
will be able to achieve and maintain product accuracy and reliability when
producing IRMA cartridges in the quantities required for profitable operations,
on a timely basis and at an acceptable cost, there can be no assurance that it
will be able to do so. The IRMA Analyzer is manufactured for the Company by an
outside vendor, and there can be no assurance that such vendor will be able to
provide the Company with a sufficient number of IRMA Analyzers to meet the
Company's needs.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend in part on its ability to obtain patent
protection for products and processes, to preserve its trade secrets and to
operate without infringing the proprietary rights of third parties. The validity
and breadth of claims covered in medical technology patents involves complex
<PAGE>
legal and factual questions and, therefore, may be highly uncertain. No
assurance can be given that any patents under pending patent applications or any
future patent applications will be issued, that the scope of any patent
protection will exclude competitors or provide competitive advantages to the
Company, that any of the Company's patents will be held valid if subsequently
challenged or that others will not claim rights in or ownership to the patents
and other proprietary rights held by the Company. Furthermore, there can be no
assurance that others have not developed or will not develop similar products,
duplicate any of the Company's products or, if patents are issued to the
Company, design around such patents. In addition, whether or not the Company's
patents are issued, others may hold or receive patents which contain claims
having a scope that covers products developed by the Company. The Company also
relies upon unpatented trade secrets to protect its proprietary technology, and
no assurance can be given that others will not independently develop or
otherwise acquire substantially equivalent techniques or otherwise gain access
to the Company's proprietary technology or disclose such technology or that the
Company can ultimately protect meaningful rights to such unpatented proprietary
technology.
RISK OF PATENT LITIGATION
There has been substantial litigation regarding patent and other intellectual
property rights in the medical device industry. Litigation, which could result
in substantial cost to and diversion of effort by the Company, may be necessary
to enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company, to defend the Company against claimed infringement of the
rights of others or to determine the ownership, scope or validity of the
proprietary rights of the Company and others. An adverse determination in any
such litigation could subject the Company to significant liabilities to third
parties, could require the Company to seek licenses from third parties and could
prevent the Company from manufacturing, selling or using its products, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company is not currently a party to any
patent litigation.
DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL
The success of the Company and of its business strategy is dependent in large
part on the ability of the Company to attract and retain key management and
operating personnel. Such individuals are in high demand and are often subject
to competing offers. In particular, the Company's success will depend on its
ability to retain the services of its executive officers. In addition, the
Company will have an ongoing need to expand its management personnel and support
staff. The loss of the services of one or more members of the management group
or the inability to hire additional personnel as needed may have an adverse
effect on the Company.
UNCERTAINTY OF GOVERNMENT HEALTH CARE POLICY AND FUTURE REIMBURSEMENT
The willingness of hospitals to purchase the IRMA System may depend on the
extent to which hospitals limit capital expenditures due to cost reimbursement
regulations, including regulations promulgated by the Health Care Financing
Administration ("HCFA"), and general uncertainty relating to government health
care policy. In addition, sales volumes and prices of the Company's products in
certain markets will be dependent in part on the level of availability 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. There can be no assurance that current
reimbursement amounts, if any, will not be decreased in the future, and that any
such decrease will not reduce the demand for or the price of the Company's
products. Any health care reform measures adopted by the federal government
could adversely affect the price of medical devices in the United States or the
amount of reimbursement available, and consequently could be adverse to the
Company. No prediction can be made as to the outcome of any reform initiatives
or their impact on the Company.
GOVERNMENT REGULATION AND NEW PRODUCT DEVELOPMENT
Human diagnostic products are subject, prior to clearance for marketing, 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. The Company has
obtained premarket notification clearances under Section 510(k)
("Section 501(k)") of the
<PAGE>
Food, Drug and Cosmetic Act (the "FDC Act") to market the IRMA System to test
blood gases, electrolytes and hematocrit in whole blood in hospital laboratories
and at the point of care. 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 IRMA cartridges containing
sensors for performing additional blood 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 plans to market the IRMA System in several
foreign markets. Requirements pertaining to the IRMA System vary widely from
country to country, ranging from simple product registrations to detailed
submissions such as those required by the FDA. No regulatory clearances have yet
been obtained in any other countries and there is no assurance that any will be
received. 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 ("GMP") promulgated by the
FDA. The Company will be required to expend time, resources and effort in the
areas of production and quality control to ensure full technical compliance. If
violations of the applicable regulations are noted during FDA inspections of the
Company's manufacturing facilities or the manufacturing facilities of its
contract manufacturers, the continued marketing of the Company's products may be
adversely affected.
EFFECT OF CLINICAL LABORATORY IMPROVEMENT ACT OF 1988
The Company's products are affected by the Clinical Laboratory Improvement
Amendment 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 the IRMA System have been
categorized as moderate complexity tests, there can be no assurance that they
will continue to be so categorized. Personnel standards for high complexity
tests are more rigorous than those for moderate complexity tests, requiring that
testing personnel have more education and experience than personnel conducting
moderate complexity tests. Any recategorization of the tests performed by the
Company's IRMA System as high complexity tests could affect the Company's
ability to successfully market the IRMA System. As a result of the CLIA
requirements, hospitals may be discouraged from expanding point-of-care testing
and previously unregulated testing markets, including physician office
laboratories and small volume test sites, and may be dissuaded from initiating,
continuing or expanding patient testing. There can be no assurance that the CLIA
regulations or future administrative interpretations of CLIA or various state
regulations requiring licensed technicians to operate point-of-care devices will
not have a material adverse effect on the Company.
PRODUCT LIABILITY RISK; NO ASSURANCE INSURANCE IS ADEQUATE
The Company faces an inherent business risk of exposure to product liability
claims in the event that the use of its products is alleged to have resulted in
adverse effects to a patient. Although the Company has not experienced any
product liability claims to date, any such claims could have an adverse impact
on the Company. The Company maintains 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. There can be no assurance that liability claims will not exceed the
coverage limits of such policy or that such insurance will continue to be
available on commercially reasonable terms or at all. Consequently, a product
liability claim or other claim with respect to uninsured liabilities or in
excess of insured liabilities could have a material adverse effect on the
Company.
DEPENDENCE ON CONTRACT MANUFACTURERS AND SUPPLIERS
<PAGE>
The IRMA Analyzer is manufactured for the Company by a single vendor, generally
from off-the-shelf components. One component of the IRMA Analyzer is currently
supplied by a single source and manufactured to the Company's specifications.
Although the Company believes that it could find alternative vendors for the
IRMA Analyzer (the Company has already switched manufacturing of the IRMA
Analyzer from its original vendor) and for the single-source component of the
IRMA Analyzer, any interruption in supply could have a material adverse effect
on the Company. Materials used in the IRMA cartridges are purchased from
outside suppliers and are readily available from multiple sources. The Company
is developing alternative materials for one of the components of the IRMA
cartridge which it presently obtains from a single source. Although the Company
believes that alternative sources for key components are available, any
interruption in supply of these components could have a material adverse effect
on the Company's ability to manufacture the IRMA cartridges.
CONTROL BY EXISTING SHAREHOLDERS
As of July 1, 1996, directors, executive officers and principal shareholders of
the Company, and certain of their affiliates, owned beneficially approximately
37% of the Company's outstanding Common Stock. Accordingly, these shareholders,
individually and as a group, may be able to influence the outcome of shareholder
votes, including votes concerning the election of directors, adopting or
amending provisions in the Company's Articles of Incorporation and Bylaws and
approving certain mergers or other similar transactions, such as sales of
substantially all of the Company's assets. Such control by existing
shareholders could have the effect of delaying, deferring or preventing a change
in control of the Company.
POSSIBLE VOLATILITY OF STOCK PRICE IN THE PUBLIC MARKET
The securities markets have from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. The market prices of the common stock of many publicly
traded medical device companies have in the past been, and can in the future be
expected to be, especially volatile. Announcements of technological innovations
or new products by the Company or its competitors, developments or disputes
concerning patents or proprietary rights, regulatory developments and economic
and other external factors, as well as period-to-period fluctuations in the
Company's financial results, may have a significant impact on the market price
of the Common Stock. Sales of Common Stock in the public market could adversely
affect prevailing market prices.
POSSIBLE ISSUANCES OF PREFERRED STOCK; ANTI-TAKEOVER EFFECT OF MINNESOTA LAW
The Board of Directors has authority to issue up to 5,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the shareholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock could
have the effect of delaying, deferring or preventing a change in control of the
Company. In addition, certain provisions of Minnesota law applicable to the
Company could have the effect of discouraging certain attempts to acquire the
Company which could deprive the Company's shareholders of opportunities to sell
their shares of Common Stock at prices higher than prevailing market prices.
