<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 September 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 September 30, 1996, was 15,187,047.
================================================================================
<PAGE>
DIAMETRICS MEDICAL, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF OPERATIONS:
Three Months Ended September 30, 1996 and 1995......... 3
Nine Months Ended September 30, 1996 and 1995.......... 3
CONDENSED BALANCE SHEETS as of September 30, 1996
and December 31, 1995.................................... 4
CONDENSED STATEMENTS OF CASH FLOWS:
Three Months Ended September 30, 1996 and 1995......... 5
Nine Months Ended September 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...................... 8
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>
DIAMETRICS MEDICAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 669,848 $ 377,708 $ 1,862,949 $ 1,020,651
Cost of sales 1,874,630 1,698,529 6,156,194 4,782,276
----------- ----------- ------------ -------------
Gross profit (loss) (1,204,782) (1,320,821) (4,293,245) (3,761,625)
----------- ----------- ------------ -------------
Operating expenses:
Research and development 1,854,272 1,452,218 5,244,218 4,557,906
General and administrative 871,314 872,794 2,984,771 2,661,280
Sales and marketing 1,591,027 1,515,369 4,856,891 4,052,935
----------- ----------- ------------ -------------
Total operating expenses 4,316,613 3,840,381 13,085,880 11,272,121
----------- ----------- ------------ -------------
Operating loss (5,521,395) (5,161,202) (17,379,125) (15,033,746)
Other income (expense), net 37,123 64,809 282,372 49,166
----------- ----------- ------------ -------------
Net loss $(5,484,272) $(5,096,393) $(17,096,753) $(14,984,580)
=========== =========== ============ ============
Net loss per common share $ (0.36) $ (0.38) $ (1.14) $ (1.26)
=========== =========== ============ ============
Weighted average number of
common shares outstanding 15,155,812 13,515,258 15,054,734 11,890,375
=========== =========== ============ ============
</TABLE>
3
<PAGE>
DIAMETRICS MEDICAL, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,303,774 $ 2,702,232
Marketable securities 9,615,529 25,789,265
Accounts receivable:
Trade, net 707,288 562,409
Nontrade 290,068 400,639
Inventories 2,347,825 1,114,332
Prepaid expenses and other current assets 250,671 128,374
------------ ------------
Total current assets 14,515,155 30,697,251
Property and equipment 11,937,528 10,840,323
Less accumulated depreciation and amortization (7,020,704) (5,000,597)
------------ ------------
4,916,824 5,839,726
------------ ------------
Other assets 59,700 82,624
------------ ------------
$ 19,491,679 $ 36,619,601
============ ============
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 602,947 $ 1,554,573
Accrued expenses 1,590,483 847,544
Short-term note payable 63,869 44,608
Capital lease obligations, current portion 1,329,930 1,056,130
Deferred gain on sale/leaseback, current portion 65,134 71,045
------------ ------------
Total current liabilities 3,652,363 3,573,900
Long-term liabilities:
Capital lease obligations, excluding current portion 855,376 1,803,982
Deferred gain on sale/leaseback, excluding current portion - 47,369
------------ ------------
Total liabilities 4,507,739 5,425,251
------------ ------------
Common shareholders' equity:
Common stock, $.01 par value: 20,000,000 authorized 15,187,047
and 14,900,141 shares issued and outstanding 151,870 149,001
Additional paid-in capital 88,372,866 87,489,392
Accumulated deficit (73,540,796) (56,444,043)
------------ ------------
Total common shareholders' equity 14,983,940 31,194,350
------------ ------------
$ 19,491,679 $ 36,619,601
============ ============
</TABLE>
4
<PAGE>
DIAMETRICS MEDICAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1996 1995
------------ ------------
<S> <C> <C>
Cash flow from operating activities:
Net loss $(17,096,753) $(14,984,580)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,051,351 1,860,818
Common stock issued in lieu of salaries and wages - 182,325
(Gain)/loss on disposal of property and equipment (1,686) 129,472
Change in operating assets and liabilities:
Trade receivables, net (144,879) (202,269)
Nontrade receivables 110,571 (173,990)
Inventories (1,233,493) (1,040,066)
Prepaid expenses and other current assets (26,494) 71,948
Accounts payable (951,626) 101,036
Accrued expenses 742,939 372,607
------------ ------------
Net cash used in operating activities (16,550,070) (13,682,699)
Cash flow from investing activities:
Purchases of property and equipment (1,151,571) (2,387,097)
Proceeds from sales of property and equipment 102,586 1,066,467
Purchases of marketable securities (8,363,881) (39,634,081)
Proceeds from maturities of marketable securities 24,537,617 21,280,369
Other assets 22,924 420,658
------------ ------------
Net cash provided by (used in) investing activities 15,147,675 (19,253,684)
Cash flow from financing activities:
Principal payments on short-term note payable (76,542) (117,060)
Net proceeds from issuance of common stock 886,343 42,634,722
Payments for redeemable common stock - (1,000,000)
Principal payments on capital lease obligations (805,864) (693,828)
------------ ------------
Net cash (used in) provided by financing activities 3,937 40,823,834
------------ ------------
Net increase (decrease) in cash
and cash equivalents (1,398,458) 7,887,451
Cash and cash equivalents at beginning of period 2,702,232 1,149,311
------------ ------------
Cash and cash equivalents at end of period $ 1,303,774 $ 9,036,762
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 395,098 $ 368,412
============ ============
</TABLE>
Supplemental disclosure of noncash investing and financing activities: The
Company entered into capital lease obligations for equipment of $131,058 and
$1,027,975 for the nine months ended September 30, 1996 and 1995, respectively.
5
<PAGE>
DIAMETRICS MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1 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.
These statements should be read in conjunction with the annual 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 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
early 1997. Management's intentions are to raise the capital through
alliances with strategic corporate partners, issuance of debt, or an
equity offering. There can be no assurance that adequate funds will be
available when needed or on acceptable terms.
NOTE 3 Certain 1995 amounts in the Condensed Statement of Operations have been
reclassified from prior reported balances to conform to the 1996
presentation. The reclassifications had no impact on the net loss or
loss per share as reported in 1995.
NOTE 4 Selected condensed financial statement details:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
INVENTORIES:
Raw materials $1,954,447 $ 782,287
Work-in-process 124,457 238,930
Finished goods 268,921 93,115
------------ ------------
$2,347,825 $1,114,332
============ ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OTHER INCOME (EXPENSE), NET:
Interest income $ 193,244 $ 344,178 $ 819,996 $ 672,012
Interest expense (121,457) (142,818) (395,098) (410,710)
Gain (loss) on disposal of
property and equipment -- (111,113) 1,686 (129,472)
Other, net (34,664) (25,438) (144,212) (82,664)
--------- --------- --------- ---------
$ 37,123 $ 64,809 $ 282,372 $ 49,166
========= ========= ========= =========
</TABLE>
6
<PAGE>
NOTE 5 On November 6, 1996, the Company purchased Biomedical Sensors Ltd.
(BSL), an operating unit of Pfizer Inc., for $1.5 million in cash and a
$7.3 million senior secured fixed rate loan note, due November 4, 2002.
The interest rate on the note is 8.75% per annum, payable on December
31, 1997 and quarterly in arrears thereafter. The note is secured by the
issued shares of Biomedical Sensors Ltd. Biomedical Sensors Ltd., based
in Wycombe, England, was founded in 1977. BSL has successfully developed
and introduced indwelling monitoring systems for continuous blood and
tissue assessment of critically ill patients.
NOTE 6 During January 1996, the Company implemented a plan which allowed its
installed customer base to upgrade to the new IRMA SL(R) Blood Gas
Analysis System at a price below the Company's cost. Because the Company
could not estimate the number of IRMA instruments that would be upgraded
at that time, no costs were accrued. As of September 30, 1996, the
Company has estimated and reserved approximately $760,000 for these
upgrades. The resulting charge to operations for the three and nine
months ended September 30, 1996, was $42,000 and $233,000, respectively.
The impact of the reserve on the Statement of Operations was partially
offset by reductions in other reserves, primarily related to excess and
obsolete inventory, which are no longer required.
7
<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 (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 September 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 $669,848 and $1,862,949 for the three and nine months ended
September 30, 1996, compared to $377,708 and $1,020,651 for the same periods
last year. The Company's revenues are affected principally by the number of
IRMA Systems placed with customers and the rate at which IRMA cartridges are
used in connection with the IRMA System. As of September 30, 1996, the Company
had 718 IRMA System placements compared to 345 placements at September 30, 1995.
Blood gas and electrolyte cartridge units sold for the three and nine months
ended September 30, 1996 increased 137% and 166%, respectively over the prior
year.
During the quarter ended September 30, 1996, the Company successfully achieved
several milestones, including the sale and shipment of the IRMA SL Blood Gas
Analysis System and AXOXimeter 4000. The IRMA SL(R) Blood Gas Analysis System is
the Company's next-generation IRMA system that provides additional testing
capabilities, including hematocrit in whole blood, and electronic quality
control capabilities. The AVOXimeter 4000 and disposable cuvette cartridges are
used for the measurement of whole blood co-oximetry and are distributed
exclusively by the Company and manufactured by AVOX, Inc.
COST OF SALES The Company incurred manufacturing costs associated with product
sales of $1,874,630 and $6,156,194 for the three and nine months ended September
30, 1996, compared to $1,698,529 and $4,782,276 for the same periods in the
prior year. Manufacturing expenses increased as a result of the increase in
sales volume in 1996 and higher unit production in the third quarter of 1995
which resulted in more labor and overhead being absorbed to inventory. This
resulted in an increase in inventory in 1995 from the second to the third
quarter and subsequent charge to operations in the fourth quarter of 1995 for
excess product.
A negative gross profit resulted as sales volume was not sufficient to cover
labor and overhead costs. To the extent that sales and corresponding production
volumes increase, 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 $1,854,272 and
$5,244,218 for the three and nine months ended September 30, 1996, compared to
$1,452,218 and $4,557,906 for the same periods in the prior year. The increase
from the prior periods reflect increased expenses associated with the
development of the IRMA SL(R) system.
General and administrative expenses totaled $871,314 and $2,984,771 for the
three and nine months ended September 30, 1996, compared to $872,794 and
$2,661,280 for the same periods in the prior year. The increase
8
<PAGE>
for the nine months ended September 30, 1996, of $323,491 reflects an increase
in depreciation and a charge to operations in the second quarter related to
severance agreements and expenses of approximately $275,000.
Sales and marketing expenses totaled $1,591,027 and $4,856,891 for the three and
nine months ended September 30, 1996, compared to $1,515,369 and $4,052,935 for
the same periods in the prior year. The period-to-period increase reflects
increased compensation, benefits, and travel expenses associated with a higher
headcount in 1996 versus 1995. Offsetting this is higher recruiting,
advertising and promotion expenses incurred in 1995.
OTHER INCOME (EXPENSE) Net other income was $37,123 and $282,372 for the three
and nine months ended September 30, 1996, compared to $64,809 and $49,166 for
the same periods in the prior year. The Company realized interest income of
$193,244 and $819,996 for the three and nine months ended September 30, 1996,
compared to $344,178 and $672,012 for the same periods in the prior year. The
increase for the nine months ended September 30, 1996, reflects higher average
cash balances resulting from the Company's financing activities which occurred
in August, 1995. Interest expense totaled $121,457 and $395,098 for the three
and nine months ended September 30, 1996, compared to $142,818 and $410,710 for
the same periods in the prior year. The period-to-period decrease reflects a
decrease in capital lease obligations and in lease financing during 1996
compared to 1995. The Company realized a gain on disposal of property and
equipment of $0 and $1,686 for the three and nine months ended September 30,
1996, compared to a loss of $111,113 and $129,472 for the same periods in the
prior year.
NET LOSS The net loss for the three and nine months ended September 30, 1996
was $5,484,272 and $17,096,753 compared to $5,096,393 and $14,984,580 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 and increased cost of sales
from lower fixed cost absorption.
On November 6, 1996, the Company purchased Biomedical Sensors Ltd., an operating
unit of Pfizer Inc. It is anticipated this acquisition will significantly
enhance the revenue and earnings potential of the Company in the future.
LIQUIDITY AND CAPITAL RESOURCES
Total cash and marketable securities decreased $17,572,194 during the first nine
months of 1996 to $10,919,303. The decrease is primarily from the net loss for
the nine months ended September 30, 1996 of $17,096,753.
Operations used $16,550,070 of cash during the nine months ended September 30,
1996, compared to a use of $13,682,698 for the same period in the prior year.
The increase is primarily due to an increase in the net loss and an increase in
payments to suppliers.
Investing activities, net of purchases and proceeds from marketable securities,
used $1,026,061 during the nine months ended September 30, 1996, compared to a
use of $899,972 for the same period in the prior year, caused by a reduction in
lease financing activities.
Financing activities provided $3,937 during the nine months ended September 30,
1996, compared to $40,823,834 for the same period in the prior year. The
decrease is primarily the result of the Company receiving approximately
$42,700,000 in net proceeds from the private and public issuance of common stock
in the first and third quarters of 1995.
At September 30, 1996, the Company had working capital of $10,862,792, a
decrease of $16,260,559 from the working capital reported at December 31, 1995.
This decrease is primarily the result of the net loss for the nine months ended
September 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 September 30, 1996, the Company had property and equipment of $11,937,528 up
from $10,840,323 at December 31, 1995, less accumulated depreciation of
$7,020,704 and $5,000,597 at September 30, 1996 and
9
<PAGE>
December 31, 1995, respectively. Approximately $4,308,000 of the Company's
property and equipment are financed through capital lease obligations at
September 30, 1996.
At September 30, 1996, the Company had net operating loss and research and
development tax credit carry forwards for income tax purposes of approximately
$70,075,000 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 purchase of Biomedical Sensors Ltd. was funded with $1.5 million in cash and
a $7.3 million six year senior secured fixed rate loan note with Pfizer, Inc.
The interest rate on the note is 8.75% per annum, payable on December 31, 1997
and quarterly in arrears thereafter. The note is secured by the issued shares of
Biomedical Sensors, Ltd.
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 early 1997. Management's
intentions are to raise the capital through alliances with strategic corporate
partners, and private or public securities offerings. 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
<TABLE>
<CAPTION>
EXHIBIT METHOD
NO. DESCRIPTION OF FILING
------- ----------- ---------
<S> <C> <C>
3.1 Articles of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
4.1 Form of Certificate for Common Stock (1)
4.2 Form of Registration Rights Agreement between the Company (1)
and certain of its shareholders and warrantholders
4.3 Form of Registration Rights Agreement dated as of February 3, (4)
1995, between the Company and certain of its shareholders
10.1 Real Property Lease dated May 3, 1990, between (1)
CommersKlodt, a Minnesota General Partnership and the
Company
10.2 Real Property Lease dated May 28, 1991, between (1)
CommersKlodt, a Minnesota General Partnership and the
Company
10.3 Real Property Lease dated July 2, 1991, between (1)
CommersKlodt, a Minnesota General Partnership and the
Company
10.4 Real Property Lease dated December 20, 1992, between (1)
CommersKlodt, a Minnesota General Partnership and the
Company
10.5 Real Property Lease dated May 10, 1993, between (1)
CommersKlodt, a Minnesota General Partnership and the
Company
10.6 Equipment Sublease Agreement dated August 12, 1992, (1)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
between FIM, Inc. and the Company
10.7 Master Lease Agreement dated November 11, 1992, between (1)
Bankers Leasing Association, Inc. and the Company
10.8 Master Equipment Lease Agreement dated June 15, 1993, (1)
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 dated June 15, 1993, (1)
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 revised and restated), including (3)
form of option agreement
10.11* 1993 Directors' Stock Option Plan, as amended (2)
10.12 1995 Equalizing Director Stock Option Plan (5)
10.13 1995 Employee Stock Purchase Plan (4)
10.14 Agreement dated July 7, 1993, between the Company and (1)
AmHS Purchasing Partners, L.P.
10.15 Agreement dated January 1, 1995, between the Company and (4)
Vencor, Inc.
10.16 Settlement Agreement and Mutual General Releases dated (1)
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 February 1, 1995, among the (3)
Company, Alstate Venture Capital and Frazier and Company L.P.
10.18 Letter agreement dated January 5, 1993, between the Company (3)
and Michael F. Connoy
10.19 Agreement dated June 29, 1990, between the Company and (3)
David W. Deetz, as supplemented by the letter agreement dated
March 28, 1995
10.20 Agreement dated June 29, 1990, between the Company and (3)
Walter L. Sembrowich, Ph.D.
10.21 Agreement dated December 21, 1995, between the Company and (5)
Walter L. Sembrowich, Ph.D.
10.22 Agreement dated March 1, 1996, between the Company and (5)
Barbara E. Roth
27 Financial Data Schedule Filed herewith
99 Cautionary Statements Under Private Securities Litigation Filed herewith
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.
</TABLE>
12
<PAGE>
(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.
(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/ Laurence L. Betterley
-------------------------------
Laurence L. Betterley
Chief Financial Officer
Dated: November 14, 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>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Sep-30-1996
<CASH> 1,303,774
<SECURITIES> 9,615,529
<RECEIVABLES> 1,097,356
<ALLOWANCES> 100,000
<INVENTORY> 2,347,825
<CURRENT-ASSETS> 14,515,155
<PP&E> 11,937,528
<DEPRECIATION> 7,020,704
<TOTAL-ASSETS> 19,491,679
<CURRENT-LIABILITIES> 3,652,363
<BONDS> 855,376
<COMMON> 151,870
0
0
<OTHER-SE> 14,832,070
<TOTAL-LIABILITY-AND-EQUITY> 19,491,679
<SALES> 1,862,949
<TOTAL-REVENUES> 1,862,949
<CGS> 6,156,194
<TOTAL-COSTS> 13,085,880
<OTHER-EXPENSES> (701,419)
<LOSS-PROVISION> 23,949
<INTEREST-EXPENSE> 395,098
<INCOME-PRETAX> (17,096,753)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,096,753)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,096,753)
<EPS-PRIMARY> (1.14)
<EPS-DILUTED> (1.14)
</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 nine months ended
September 30, 1996 were approximately $13,819,000, $12,455,000, $23,046,000 and
$17,097,000, respectively. The Company had an accumulated deficit of
approximately $73,541,000 at September 30, 1996. The Company expects to incur
substantial net operating losses at least through 1998. 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 the first quarter of 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 legal and factual questions and, therefore, may be highly uncertain. No
assurance can be given that
<PAGE>
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 Food, Drug and Cosmetic Act (the "FDC Act") to market
the IRMA System to test blood gases,
<PAGE>
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
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
<PAGE>
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 September 30, 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.
