<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1663185
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
2658 PATTON ROAD
ROSEVILLE, MINNESOTA 55113
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 639-8035
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
From 10-K or any amendment to this Form 10-K. [_]
As of February 28, 1997, 15,235,139 shares of Common Stock were
outstanding, and the aggregate market value of the common shares (based upon the
closing price on said date , on The Nasdaq Stock Market) of DIAMETRICS MEDICAL,
INC., held by non-affiliates was approximately $60,900,000.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Annual Report to Shareholders for the year ended
December 31, 1996: Part II hereof Parts of the Registrant's definitive Proxy
Statement for 1997 Annual Meeting of Shareholders to be held on May 7, 1997:
Part III hereof
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PART I
Unless the context otherwise indicates, all references to the "Registrant,"
the "Company," or "Diametrics" in this Annual Report on Form 10-K are to
Diametrics Medical, Inc., a Minnesota corporation, incorporated in January 1990,
and where the context requires, its subsidiary, Biomedical Sensors, Ltd. (BSL).
The following federally registered trademarks of the Company are used in
this Annual Report on Form 10-K: Diametrics Medical, Inc.(R) and IRMA (R).
ITEM 1. BUSINESS
The Company develops, manufactures and markets blood analysis systems
that provide immediate or continuous diagnostic results at the point of patient
care. The Company's goal is to be the world leader in critical care blood and
tissue analysis systems.
Blood analysis is an integral part of patient diagnosis and treatment,
and access to timely and accurate results is critical to effective patient care.
The Company believes that its blood analysis systems will result in more timely
therapeutic interventions by providing accurate, precise and immediate or
continuous test results, thereby allowing faster patient transfers out of
expensive critical care settings and reducing patient length of stay. In
addition, point-of-care testing can save money for hospitals by reducing the
numerous steps, paperwork and personnel involved in collecting, transporting,
documenting and processing blood samples. Moreover, point-of-care blood
analysis could ultimately eliminate the need for hospitals to maintain expensive
and capital intensive stat laboratories.
The Company's primary product focus since its inception in 1990 has
been the development, manufacturing and marketing of the IRMA (Immediate
Response Mobile Analysis) System, an electrochemical-based blood analysis system
that provides rapid and accurate diagnostic results at point of patient care.
IRMA consists of a portable, microprocessor-based analyzer (the "IRMA Analyzer")
that employs single-use, disposable cartridges to perform simultaneously several
of the most frequently ordered blood tests in a simple 90-second procedure.
The Company's first disposable electrochemical cartridge, introduced
in May 1994, performs three of the most frequently ordered blood tests for
critical care patients--the measurement of oxygen, carbon dioxide and acidity
(pH) (the "blood gases"). In June 1995, the Company expanded the IRMA System
test menu with the introduction of its electrolyte cartridge which measures
sodium, potassium and ionized calcium. The Company further expanded its critical
or "stat" test menu during the third quarter of 1996 with the release of the
second-generation system, IRMA SL, and the addition of the measurement of
hematocrit to its electrolyte cartridge. With the addition of hematocrit, the
IRMA System is able to perform 95% of the critical or stat tests performed
annually in the United States, comprising an estimated $1.2 billion annual
market.
During 1996, the Company expanded its product line with the
introduction of a number of new products and features, and the acquisition of
Biomedical Sensors, Ltd., a Pfizer company. With the acquisition of BSL, the
Company acquired a world-class continuous monitoring fiber optic technology
platform, which complements the Company's existing electrochemical sensor
platform. A description of the Company's principal products follows.
PRODUCTS
IRMA SL BLOOD ANALYSIS SYSTEM IRMA SL, the second generation IRMA
blood analyzer, was released in the third quarter 1996. The IRMA SL Blood
Analysis System is comprised of the IRMA SL Analyzer and a variety of
electrochemical-based single-use disposable cartridges which simultaneously
perform select combinations of the most frequently ordered critical care
diagnostic tests of blood gases, electrolytes and hematocrit, in a simple 90-
second procedure. IRMA SL also features electronic quality control, as an
alternative to aqueous quality control measures, which eliminates the need for
this costly and time-consuming process for many customers.
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The IRMA SL Analyzer is a battery or AC operated, portable
microprocessor-based instrument weighing approximately four pounds, and includes
an on-board printer. The IRMA SL Analyzer can be easily linked for data
downloading purposes to a hospital's laboratory or information system.
IDMS - THE IRMA DATA MANAGEMENT SYSTEM Also released in the third
quarter 1996 was IDMS, an advanced data management software program that
provides a comprehensive data management system for point of care testing
technologies. Developed initially for the IRMA Blood Analysis System, IDMS is
network compatible and features an open architecture design that allows the
program to accept applications and information from other devices.
CAPILLARY COLLECTION DEVICE The Capillary Collection Device was
introduced in the third quarter 1996 as a new feature for use on the IRMA or
IRMA SL Blood Analysis Systems, which provides the capability to collect and
test a capillary blood sample. The Capillary Collection device is used with the
System's single use cartridges to perform blood gas, electrolyte, and hematocrit
testing. The capillary collection capability of the IRMA SL is useful in such
patient areas as neonatal and pediatric intensive care, and in other situations
where a capillary sample is preferred over an arterial or venous sample.
AVOXIMETER 4000 Under a distribution agreement initiated in the third
quarter 1996 with A-VOX Systems, Inc., the Company exclusively distributes the
AVOXimeter 4000 in the United States. The AVOXimeter 4000 is a battery-operated
and easily portable system which provides an accurate and timely assessment of
the levels of hemoglobin and calculated oxygen content in a patient's blood.
PARATREND 7 As part of its acquisition of BSL in November 1996, the
Company began marketing the Paratrend 7, which was part of BSL's existing
product line. Paratrend 7 is an intravascular continuous monitoring system for
blood gases and temperature. The Paratrend 7 consists of a monitoring system and
intravascular disposable sensors. Inserted via an arterial catheter, the sensor
provides constant, precise measurement of vital blood gas parameters.
NEOCATH 1000 Also introduced as part of the Company's acquisition of
BSL, the Company markets Neocath 1000, an umbilical artery oxygen monitoring
system for neonatal patients. The Neocath 1000 consists of a monitoring system
and an umbilical artery catheter, which allows direct, continuous and accurate
measurement of oxygen, with minimal physical disturbance to the neonate.
TISSUTRAK Another BSL product, Tissutrak is a system for monitoring
tissue oxygenation of muscle flaps during plastic reconstructive surgery.
Tissutrak is currently being marketed in Europe, and does not yet have FDA
clearance for sale in the U.S.
REGULATORY STATUS
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 pre-market 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, electrolytes and hematocrit in whole blood in
hospital laboratories and at the point of care and the Paratrend 7 to monitor
blood gases. A 510(k) clearance is subject to continual review and later
discovery of previously unknown problems may result in restrictions on the
product's marketing or withdrawal of the product from the market. The Company's
long-term business strategy includes development of cartridges and sensors for
performing additional blood and tissue chemistry tests, and any such additional
tests will be subject to the same regulatory process. No assurance can be given
that the Company will be able to develop such additional products or uses on a
timely basis, if at all, or that the necessary clearances for such products and
uses will be obtained by the Company on a timely basis or at all, or that the
Company will not be subjected to a more extensive prefiling testing and FDA
approval process. The Company also plans to market its products in several
foreign markets. Requirements vary
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widely from country to country, ranging from simple product registrations to
detailed submissions such as those required by the FDA. Manufacturing facilities
are also subject to FDA inspection on a periodic basis and the Company and its
contract manufacturers must demonstrate compliance with current Good
Manufacturing Practices ("GMP") promulgated by the FDA.
As noted, the Company has obtained 510(k) clearance to market the IRMA
and IRMA SL Systems. The IRMA SL system, introduced in the third quarter 1996,
adds electronic quality control testing capability, significantly reducing the
burden of running traditional liquid quality control products to meet laboratory
regulations as described in the Clinical Laboratory Improvement Act (CLIA).
The Company also has 510(k) clearance to market two products obtained
through the acquisition of BSL; the Paratrend 7, used for in-vivo measurement of
blood gases in the critically ill patient, and Neocath, used for in-vivo
monitoring of oxygen in critically ill neonates. These products are also
marketed internationally. The Company plans to expand the use of the Paratrend 7
for other applications in the United States and will be seeking 510(k) clearance
during 1997. These applications include monitoring of blood gases (oxygen,
carbon dioxide and pH) in critically ill neonates, monitoring of tissue
perfusion during neuro-surgery, and monitoring of gastric pH as a possible
indicator of the onset of multiple organ failure.
The tests performed by the Company's Blood Analysis Systems have been
categorized under CLIA as "moderate complexity" tests by the FDA, which places
these systems in the same category as all other commercially available blood gas
and blood chemistry testing instruments.
RESEARCH AND DEVELOPMENT
The Company owns two complimentary technology platforms; an
electrochemical platform, on which IRMA discrete testing products are based, and
a fiber optic platform, on which the Paratrend 7 continuous monitoring product
is primarily based. The Company is pursuing product line extensions from both
of these core technology platforms.
The Company intends to expand its cartridge and test menus available
on the IRMA System. Currently under development is a combination cartridge which
tests blood gases, hematocrit and electrolytes using one single-use cartridge.
This cartridge will be very suitable for high-volume testing situations.
Development is also currently underway to provide glucose testing on the IRMA
platform. Point of care glucose testing is the single largest point of care test
segment in hospitals. Application for 510(k) clearance is scheduled for mid-
1997. In addition to the single-use cartridge, the Company is developing a
multi-use application that will incorporate the Company's current biosensor and
calibration technologies into products that can be used to perform up to
hundreds of blood tests over an extended period of time. A multi-use system will
serve the needs of high volume critical care centers where rapid patient
throughput and a low cost per test panel is required. The Company believes that
the IRMA System and related core technologies provide a flexible platform which,
with a limited amount of additional development, will be capable of performing a
variety of blood chemistry tests.
The Company plans to continually improve the IRMA System through
software upgrades, manufacturing process improvements and equipment redesign,
based on the results of ongoing marketing studies and field experience.
The Company is also pursuing new multi-parameter applications of the
Paratrend 7 technology for use with neonates. Such an application will provide
the only continuous blood gas monitoring of neonatal patients and will give
clinicians a more complete analysis of the respiratory status and temperature of
their patients. 510(k) trial studies will be initiated in the United Kingdom
and in the United States in 1997. Studies are also underway to apply the
Paratrend 7 continuous monitoring technology to other areas, such as
neurological and intramucosal applications.
The Company has incurred research and development expenses of
approximately $6,056,000 $6,321,000 and $5,119,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
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SALES AND MARKETING
The Company is focusing its marketing efforts for its Blood Analysis
Systems on acute care hospitals. Near term sales of the Company's products are
expected to continue to come from hospital critical care departments where blood
tests are frequently requested on a stat basis. The Company has also begun to
market the IRMA system for use in emergency transport vehicles. The Company's
longer-term marketing objective is to penetrate smaller hospitals and alternate-
site markets, such as emergency medical facilities, home healthcare agencies,
outpatient clinics, skilled nursing homes and doctors' offices or clinics. The
Company believes that the potential advantages of its Blood Analysis Systems
will form the basis of the Company's marketing efforts to overcome the possible
reluctance of acute care hospitals to change standard operating procedures for
performing blood testing or incur additional capital expenses.
The Company markets and distributes its products in the United States,
the United Kingdom and Germany through its direct sales and marketing
organization. Outside of these countries, the Company markets and distributes
its products through third party distribution channels, including corporate
partners strategically positioned to access targeted foreign markets, including
Japan and other Pacific Rim Countries, Europe, Mexico, Canada and Latin America.
The Company may also consider additional distribution channels in the United
States, including joint ventures, licensing arrangements or OEM relationships
with strategically positioned corporate partners.
Additionally, the Company has entered into several arrangements with
hospital systems, healthcare facilities and other influential healthcare buying
groups which establish the Company as a preferred or sole source supplier of its
blood analysis systems. The Company expects to continue to enter into
arrangements with other buying groups and customers with respect to purchases of
its Blood Analysis Systems.
MANUFACTURING
The Company's manufacturing facilities support its discrete testing
and continuous monitoring platforms and are located in Roseville, Minnesota and
High Wycombe, United Kingdom, respectively. The Company manufactures its IRMA
electrochemical thick-film sensor chips in its Roseville, Minnesota facility.
All other components of the IRMA cartridge are manufactured to the Company's
specifications by outside vendors. Components for the Company's continuous
monitoring sensors used in the Paratrend 7 and Neocath 1000 products are sourced
from a variety of outside vendors, but the unique assembly of the sensing
elements is performed in the Company's High Wycombe facility. Sub-assembly of
external plastic assemblies are sub-contracted to outside vendors. The Company
uses external manufacturers to produce a range of hardware items, including the
IRMA Analyzer and Paratrend 7 and Neocath 1000 monitors. These devices could be
manufactured by a number of microelectronics assembly companies, using primarily
off-the-shelf components. Software for the IRMA SL Analyzer is developed and
maintained by the Company, and software for the Paratrend 7 and Neocath 1000
products is jointly developed with an external source, with acceptance and
validation performed by the Company.
The majority of the raw materials and purchased components used to
manufacture the Company's products are readily available. Most of the Company's
raw materials are or may be obtained from more than one source. A small number
of these materials, however, are unique in their nature, and are therefore
single sourced. A plan is underway to add additional second sourcing where
appropriate.
The Company's manufacturing facilities include five clean rooms in
Roseville which range from Class 1,000 to Class 10,000, and two clean rooms in
High Wycombe, both rated as Class 10,000. The Company believes its current
facilities, with further planned development, can support production of required
cartridges and sensors for the foreseeable future.
The Company maintains a comprehensive quality assurance and quality
control program, which includes complete documentation of all material
specifications, operating procedures,
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maintenance and equipment calibration procedures, training programs and quality
control test methods. To control the quality of its finished product, the
Company utilizes ongoing statistical process control systems during the
manufacturing process and comprehensive performance testing of finished goods.
The Company continues to successfully undergo regular routine
inspections of its manufacturing facilities by the FDA (most recently in
February and March 1996 for Roseville and High Wycombe facilities,
respectively), and by BSI for the High Wycombe facility (most recently in
February 1996). As a result of these inspections, the Company's manufacturing
facilities, documentation and quality control systems are deemed satisfactory
and free of any violations of Good Manufacturing Practices (GMP).
PATENTS AND PROPRIETARY RIGHTS
The Company has implemented a strategy of pursuing patent applications
to provide both design freedom and protection from competitors. This strategy
includes evaluating and seeking patent protection both for inventions most
likely to be used in its Blood Analysis Systems and for those inventions most
likely to be used by others as competing alternatives. The Company currently
holds three patents to its calibration technology, two patents related to its
sensor technology and one for other technology. In addition, two patents have
been issued covering the IRMA analyzer and disposable cartridge designs. The
Company has additional patent applications pending in the United States
relating to electronic quality control and its Capillary Collection Device.
Overseas, the Company has foreign patent applications pending, filed
under the Patent Cooperation Treaty, designating various jurisdictions,
including Canada, the major European countries, Brazil, Australia and Japan,
corresponding to one or more U.S. applications. The Company has been issued
design patents, related to its U.S. design patents, in the United Kingdom,
Germany, and Canada, and has design patent applications pending in France,
Italy, and Japan.
As it relates to its continuous monitoring platform, the Company has
issued eight U.S. patents associated with the design of its multiparameter
sensor, the Paratrend 7, and has issued three U.S. patents associated with its
manufacture, with an additional two pending. These 13 patents are at various
patent process stages in the major European countries and Japan. The Company
also has issued eight other sensor technology based patents in the U.S. These
eight patents are also at various patent process stages in the major European
countries and Japan.
The Company is not currently a party to any patent litigation.
The Company has federally registered the trademarks "IRMA" and
"Diametrics Medical, Inc." and claims trademark rights in "When Stat Isn't Fast
Enough."
COMPETITION
The Company believes that potential purchasers of point-of-care blood
analysis systems will base their purchase decision upon a combination of
factors, including the product's test menu, ease of use, accuracy, price and
ability to manage the data collected. The Company is aware of one company,
i-STAT, that has introduced and is marketing a portable point-of-care blood
analysis system. The Company believes that the IRMA System possesses distinct
competitive advantages over i-STAT's products including ease of use, closed
instead of open handling of blood samples and the ability to interface to the
hospital's laboratory or information system.
The Company also competes with companies that market portable multi-
use blood gas systems. These companies include AML Scientific Corporation, SenDx
Medical, Inc. and Instrumentation Laboratories with their acquisition of the GEM
Premier. However, the Company believes that to be successful in the point-of-
care market, a company's device must be able to perform a variety of commonly-
ordered blood chemistry tests, as well as blood gas tests.
The Company's Blood Analysis Systems also compete with manufacturers
providing traditional blood analysis systems to central and stat laboratories of
hospitals. Although these laboratory-based instruments provide the same tests
available with the Companies products, they are
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complex, expensive and require the use of skilled technicians. The Company
believes that its Blood Analysis Systems offer several advantages over these
laboratory-based instruments including immediate or continuous results, ease-of-
use, reduced opportunity for error and cost effectiveness.
Many of the companies in the medical technology industry have
substantially greater capital resources, research and development staffs and
facilities than the Company. Such entities may be developing or could in the
future attempt to develop additional products competitive with the Company's
Blood Analysis Systems. Many of these companies also have substantially greater
experience than the Company in research and development, obtaining regulatory
approvals, manufacturing and marketing, and may therefore represent significant
competition for the Company. There can be no assurance that the Company's
competitors will not succeed in developing or marketing technologies and
products that will be more effective or less expensive than those being marketed
by the Company or that would render the Company's technology and products
obsolete or noncompetitive.
EMPLOYEES
As of December 31, 1996, the Company had a total of 220 full-time
employees, including 45 persons engaged in research and development activities.
None of the Company's employees is covered by a collective bargaining agreement,
and Diametrics believes it maintains good relations with its employees.
ITEM 2. PROPERTIES
The Company's principal properties are as follows:
<TABLE>
<CAPTION>
Location of Use of Approximate Lease
Property Facility Square Footage Expiration Date
<S> <C> <C> <C>
Roseville, Minnesota Manufacturing, research 50,000 September 1999
and development, marketing to September 2001
and administrative operations
Malvern, Pennsylvania Research and development 2,000 October 1997
High Wycombe, Manufacturing, process 14,500 September 2005
United Kingdom engineering, purchasing
and distribution
High Wycombe, Sales and marketing 5,500 January 2015
United Kingdom
High Wycombe, Research and development 6,000 April 1997
United Kingdom
</TABLE>
The Company believes that its facilities are sufficient for its projected needs
through 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
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<CAPTION>
Name Age Position
<S> <C> <C>
David T. Giddings 53 President, Chief Executive Officer and
Chairman
Roy S. Johnson 44 Executive Vice President
President and Managing Director of
Diametrics Medical, Ltd.
Laurence L. Betterley 43 Senior Vice President and
Chief Financial Officer
James R. Miller 43 Senior Vice President of Commercial and
Business Development
</TABLE>
Information concerning the background of Messrs. Giddings and Johnson is
contained in the Proxy Statement under the heading "Election of Directors" and
is incorporated herein by reference.
Mr. Betterley has been Senior Vice President of the Company since October
1996 and Chief Financial Officer since August 1996. Prior to this, he was with
Cray Research, Inc. in various management and financial positions including
Chief Financial Officer from 1994 to 1996, Vice President of Finance from 1993
to 1994 and Corporate Controller from 1989 to 1993. Cray Research develops,
manufactures and sells high performance computing systems used for computational
research.
Mr. Miller joined the Company in March 1995 as Vice President of Sales and
Marketing and has been Senior Vice President of Commercial and Business
Development since July 1996. From 1991 to early 1995, Mr. Miller was Vice
President of Sales and Marketing at IMED Corporation, where he had global sales
and marketing responsibility for infusion and monitoring products for hospital
and alternate site markets.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.01 par value, trades on The Nasdaq Stock
Market under the symbol "DMED." The information contained under the heading
"Stock Information" in the Company's Annual Report to Shareholders for the year
ended December 31, 1996 (the "Annual Report to Shareholders"), is incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the heading "Selected Five-Year Financial
Data" on page 13 in the Annual Report to Shareholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The information contained under the heading "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on pages 14 through
17 in the Annual Report to Shareholders is incorporated herein by reference.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information contained under the headings "Consolidated Statements of
Operations", "Consolidated Balance Sheets," "Consolidated Statements of Common
Shareholders' Equity (Deficit)," "Consolidated Statements of Cash Flows," "Notes
to Consolidated Financial Statements" on pages 18 through 31 and "Report of
Independent Auditors" on page 32 in the Annual Report to Shareholders is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
The information contained under the heading "Election of Directors" in the
Company's definitive Proxy Statement for its 1997 Annual Meeting of Shareholders
to be held on May 7, 1997, which definitive Proxy Statement will be filed within
120 days after the close of the fiscal year ended December 31, 1996 (the "Proxy
Statement"), is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
See part I of this report for information on Executive Officers of the
Company.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the heading "Executive Compensation" in the
Proxy Statement is incorporated herein by reference, except that, pursuant to
Item 402(a)(8) of Regulation S-K, the subsections under "Executive Compensation"
entitled "Report of Compensation Committee on Executive Compensation" and
"Comparative Stock Performance" provided in response to paragraphs (k) and (l)
of Item 402 are not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Certain Transactions" in the
Proxy Statement is incorporated by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of Diametrics Medical,
Inc., which are included in the Annual Report to Shareholders, are incorporated
by reference in Item 8 hereof:
Report of Independent Auditors
Consolidated Statements of Operations for each of the years in the three
year period ended December 31, 1996
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Common Shareholders' Equity (Deficit) for each
of the years in the three year period ended December 31, 1996
Consolidated Statements of Cash Flows for each of the years in the three
year period ended December 31, 1996
Notes to Consolidated Financial Statements
Except for the financial statements listed above and the items specifically
incorporated by reference in Items 5, 6, 7 and 8 hereof, the Annual Report to
Shareholders is not deemed to be filed as part of this Annual Report on Form 10-
K.
(a) 2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not applicable or not
required, or because the required information is included in the financial
statements or the notes thereto.
(a) 3. EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- --- ----------- ----------------
<S> <C> <C>
3.1 Articles of Incorporation of the Company (as amended) Filed herewith
3.2 Bylaws of the Company (as amended) Filed herewith
4.1 Form of Certificate for Common Stock (1)
4.2 Form of Registration Rights Agreement between the
Company and certain of its shareholders and
warrant holders (1)
4.3 Form of Registration Rights Agreement dated as of February 3, 1995
between the Company and certain of its shareholders (3)
4.4 Registration Rights Agreement, dated as of January 30, 1997,
by and between the Company and purchasers of Series I Junior
Participating Preferred Stock (5)
4.5 Form of Certificate for Series I Junior Participating Preferred Stock (5)
4.6 Form of Stock Purchase Warrant, dated as of January 30, 1997 (5)
</TABLE>
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<TABLE>
<S> <C> <C>
10.1 Real Property Lease dated May 3, 1990, between Commers-
Klodt, a Minnesota General Partnership and the Company (1)
10.2 Real Property Lease dated May 28, 1991, between Commers-
Klodt, a Minnesota General Partnership and the Company (1)
10.3 Real Property Lease dated July 2, 1991, between Commers-
Klodt, a Minnesota General Partnership and the Company (1)
10.4 Real Property Lease dated December 20, 1992, between Commers-
Klodt, a Minnesota General Partnership and the Company (1)
10.5 Real Property Lease dated May 10, 1993, between Commers-
Klodt, a Minnesota General Partnership and the Company (1)
10.6 Equipment Sublease Agreement dated August 12, 1992, between
FIM, Inc. and the Company (1)
10.7 Master Lease Agreement dated November 11, 1992, between
Bankers Leasing Association, Inc. and the Company (1)
10.8 Master Equipment Lease Agreement dated as of June 15, 1993,
between the Company The Northern Leasing Fund, as amended
by Amendment No. 1 dated June 8, 1994 (including form of warrant
issued in connection therewith) (1)
10.9 Master Equipment Lease Agreement dated as of June 15, 1993,
between the Company and Phoenix Growth Capitol Corp., as
amended by Amendment No. 1 dated June 8, 1994 (including
form of warrant issued in connection therewith) (1)
10.10* 1990 Stock Option Plan (as revised and restated), including
form of option agreement Filed herewith
10.11* 1993 Directors' Stock Option Plan, as amended. (4)
10.12* 1995 Equalizing Director Stock Option Plan. (4)
10.13 1995 Employee Stock Purchase Plan (as revised and restated) Filed herewith
10.14 Agreement dated July 7, 1993 between the Company and
AmHS Purchasing Partners, L.P. (1)
10.15 Agreement dated January 1, 1995 between the Company and
Vencor, Inc. (3)
10.16 Settlement Agreement and Mutual General Releases
dated March 25, 1994 among PPG Industries, Inc., the
Company, Walter L. Sembrowich, David W. Deetz and
Kee Van Sin (1)
10.17 Letter agreement dated as of February 1, 1995 among
the Company, Allstate Venture Capital and Frazier
and Company L.P. (2)
10.18 Letter agreement dated January 5, 1993 between the
Company and Michael F. Connoy (2)
</TABLE>
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<TABLE>
<S> <C> <C>
10.19 Agreement dated June 29, 1990 between the
Company and David W. Deetz, as supplemented by
the letter agreement dated March 28, 1995 (2)
10.20 Agreement dated June 29, 1990 between the
Company and Walter L. Sembrowich, Ph.D. (2)
10.21 Agreement dated December 21, 1995 between the
Company and Walter L. Sembrowich, Ph.D. (4)
10.22 Agreement dated March 1, 1996 between the
Company and Barbara E. Roth (4)
10.23 Agreement dated April 12, 1996 between the Company and
David T. Giddings Filed herewith
10.24 Stock Purchase Agreement, dated as of January 30, 1997,
between the Company and the Purchasers named therein (5)
13.1 Portions of the Company's Annual Report to Shareholders
for the year ended December 31, 1996 incorporated by reference
in this Form 10-K Filed herewith
23.1 Consent of KPMG Peat Marwick LLP Filed herewith
24.1 Powers of Attorney Filed herewith
27 Financial Data Schedule Filed herewith
99 Cautionary Factors Under the Private Securities Litigation
Reform Act Filed herewith
</TABLE>
___________________
* Management compensatory plan filed pursuant to Item 601(b)(10)(iii)(A) of
Regulation S-K.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration Number 33-78518) (the "Registration Statement").
(2) Incorporated by reference to the Company's 1994 Annual Report on Form 10-K.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration Number 33-94442).
(4) Incorporated by reference to the Company's 1995 Annual Report on Form 10-K.
(5) Incorporated by reference to the Company's Current Report on Form 8-K filed
March 25, 1997.
(b) REPORTS ON FORM 8-K
On November 21, 1996, the Company filed a Current Report on Form 8-K
relating to the acquisition of Biomedical Sensors, Ltd. On January 20,
1977, the Company filed an amendment to that report to include the
financial statements and pro forma financial information required by Item
7(a) and (b) of Form 8-K, which were omitted from that report as initially
filed.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 28, 1997.
DIAMETRICS MEDICAL, INC.
By /s/ David T. Giddings
--------------------------------
David T. Giddings
President, Chief Executive
Officer and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on March 28, 1997.
Name Title
---- -----
/s/ David T. Giddings President, Chief Executive Officer and
- -----------------------------------
David T. Giddings Chairman (Principal Executive Officer)
/s/ Laurence L. Betterley Senior Vice President and Chief
- -----------------------------------
Laurence L. Betterley Financial Officer (Principal Financial
Officer)
/s/ Jill M. Nussbaum Corporate Controller
- -----------------------------------
Jill M. Nussbaum (Principal Accounting Officer)
James E. Ashton* Director
Gerald L. Cohn* Director
Andre' de Bruin* Director
Roy S. Johnson* Director
Mark B. Knudson, Ph.D.* Director
Richard A. Norling* Director
Fred E. Silverstein, M.D.* Director
*By /s/ Laurence L. Betterley
--------------------------
Laurence L. Betterley
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page
- --- ----------- ----
<S> <C> <C>
3.1 Articles of Incorporation of the Company (as amended)
3.2 Bylaws of the Company (as amended)
10.10 1990 Stock Option Plan (as revised and restated), including form
of option agreement
10.13 1995 Employee Stock Purchase Plan (as revised and restated)
10.23 Agreement dated April 12, 1996 between the Company and
David T. Giddings
13.1 Portions of the Company's Annual Report to Shareholders
for the year ended December 31, 1996 incorporated by reference
in this Form 10-K
23.1 Consent of KPMG Peat Marwick LLP
24.1 Power of Attorney
27 Financial Data Schedule
99 Cautionary Statements Under the Private Securities Litigation Reform Act
</TABLE>
<PAGE>
EXHIBIT 3.1
ARTICLES OF AMENDMENT
AMENDING AND RESTATING
ARTICLES OF INCORPORATION
OF
DIAMETRICS MEDICAL, INC.
1. The name of the corporation is Diametrics Medical, Inc., a Minnesota
corporation.
2. The document entitled "Amended and Restated Articles of Incorporation of
Diametrics Medical, Inc." marked as Exhibit A attached hereto, contains the full
text of the amendments to the articles of incorporation of Diametrics Medical,
Inc.
3. The date of adoption of the amendment by the board of directors of such
corporation was as of April 21, 1994.
4. The date of adoption of the amendment by the shareholders of such
corporation was May 3, 1994.
5. The amendment has been adopted pursuant to Chapter 302A of the Minnesota
Business Corporation Act.
IN WITNESS WHEREOF, the undersigned, the Secretary of Diametrics
Medical, Inc., being duly authorized on behalf of Diametrics Medical, Inc., has
executed this document on this 21st day of June, 1994.
/s/ Kenneth L. Cutler
------------------------------
Kenneth L. Cutler
Secretary
<PAGE>
EXHIBIT A
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
DIAMETRICS MEDICAL, INC.
The following Amended and Restated Articles of Incorporation shall
supersede and take the place of the existing Amended and Restated Articles of
Incorporation and all amendments thereto:
ARTICLE 1. NAME
----------------
The name of the corporation is Diametrics Medical, Inc.
ARTICLE 2. REGISTERED OFFICE
-----------------------------
The address of the registered office of the corporation is 2658 Patton
Road, Roseville, Minnesota 55113.
ARTICLE 3. AUTHORIZED SHARES
-----------------------------
1. Authorized Shares.
-----------------
The total number of shares of capital stock which the corporation is
authorized to issue shall be 25,000,000 shares, consisting of 20,000,000 shares
of common stock, par value $.01 per share ("Common Stock"), and 5,000,000 shares
of preferred stock, par value $.01 per share ("Preferred Stock").
2. Common Stock.
------------
All shares of Common Stock shall be voting shares and shall be
entitled to one vote per share. Holders of Common Stock shall not be entitled
to cumulate their votes in the election of directors and shall not be entitled
to any preemptive rights to acquire shares of any class or series of capital
stock of the corporation. Subject to any preferential rights of holders of
Preferred Stock, holders of Common Stock shall be entitled to receive their pro
rata share, based upon the number of shares of Common Stock held by them, of
such dividends or other distributions as may be declared by the board of
directors from time to time and of any distribution of the assets of the
corporation upon its liquidation, dissolution or winding up, whether voluntary
or involuntary.
3. Preferred Stock.
---------------
The board of directors of the corporation is hereby authorized to provide,
by resolution or resolutions adopted by such board, for the issuance of
Preferred Stock
<PAGE>
from time to time in one or more classes and/or series, to establish the
designation and number of shares of each such class or series, and to fix the
relative rights and preferences of the shares of each such class or series, all
to the full extent permitted by the Minnesota Business Corporation Act, Section
302A.401, or any successor provision. Without limiting the generality of the
foregoing, the board of directors is authorized to provide that shares of a
class of series of Preferred Stock:
(a) are entitled to cumulative, partially cumulative or noncumulative
dividends or other distributions payable in cash, capital stock or
indebtedness of the corporation or other property, at such times and in
such amounts as are set forth in the board resolutions establishing such
class or series or as are determined in a manner specified in such
resolutions;
(b) are entitled to a preference with respect to payment of dividends
over one or more other classes and/or series of capital stock of the
corporation;
(c) are entitled to a preference with respect to any distribution of
assets of the corporation upon its liquidation, dissolution or winding up
over one or more other classes and/or series of capital stock of the
corporation in such amount as is set forth in the board resolutions
establishing such class or series or as is determined in a manner specified
in such resolutions;
(d) are redeemable or exchangeable at the option of the corporation
and/or on a mandatory basis for cash, capital stock or indebtedness of the
corporation or other property, at such times or upon the occurrence of such
events, and at such prices, as are set forth in the board resolutions
establishing such class or series or as are determined in a manner
specified in such resolutions;
(e) are entitled to the benefits of such sinking fund, if any, as is
required to be established by the corporation for the redemption and/or
purchase of such shares by the board resolutions establishing such class or
series;
(f) are convertible at the option of the holders thereof into shares
of any other class or series of capital stock of the corporation, at such
times or upon the occurrence of such events, and upon such terms, as are
set forth in the board resolutions establishing such class or series or as
are determined in a manner specified in such resolutions;
2
<PAGE>
(g) are exchangeable at the option of the holders thereof for cash,
capital stock or indebtedness of the corporation or other property, at such
times or upon the occurrence of such events, and at such prices, as are set
forth in the board resolutions establishing such class or series or as are
determined in a manner specified in such resolutions;
(h) are entitled to such voting rights, if any, as are specified in
the board resolutions establishing such class or series (including, without
limiting the generality of the foregoing, the right to elect one or more
directors voting alone as a single class or series or together with one or
more other classes and/or series of Preferred Stock, if so specified by
such board resolutions) at all times or upon the occurrence of specified
events; and
(I) are subject to restrictions on the issuance of additional shares
of Preferred Stock of such class or series or of any other class or series,
or on the reissuance of shares of Preferred Stock of such class or series
or of any other class or series, or on increases or decreases in the number
of authorized shares of Preferred Stock of such class or series or of any
other class or series.
Without limiting the generality of the foregoing authorizations, any of the
rights and preferences of a class or series of Preferred Stock may be made
dependent upon facts ascertainable outside the board resolutions establishing
such class or series, and may incorporate by reference some or all of the terms
of any agreements, contracts or other arrangements entered into by the
corporation in connection with the issuance of such class or series, all to the
full extent permitted by the Minnesota Business Corporation Act. Unless
otherwise specified in the board resolutions establishing a class or series of
Preferred Stock, holders of a class or series of Preferred Stock shall not be
entitled to cumulate their votes in any election of directors in which they are
entitled to vote and shall not be entitled to any preemptive rights to acquire
shares of any class or series of capital stock of the corporation.
ARTICLE 4. NO CUMULATIVE VOTING
--------------------------------
There shall be no cumulative voting by the shareholders of the
corporation.
ARTICLE 5. NO PREEMPTIVE RIGHTS
--------------------------------
The shareholders of the corporation shall not have any preemptive
rights to subscribe for or acquire securities or rights to purchase securities
of any class, kind or series of the corporation.
3
<PAGE>
ARTICLE 6. WRITTEN ACTION BY DIRECTORS
---------------------------------------
An action required or permitted to be taken at a meeting of the board
of directors of the corporation may be taken by a written action signed, or
counterparts of a written action signed in the aggregate, by all of the
directors unless the action need not be approved by the shareholders of the
corporation, in which case the action may be taken by a written action signed,
or counterparts of a written action signed in the aggregate, by the number of
directors that would be required to take the same action at a meeting of the
board of directors of the corporation at which all of the directors were
present.
ARTICLE 7. DIRECTOR LIABILITY
------------------------------
To the fullest extent permitted by the Minnesota Business Corporation
Act as the same exists or may hereafter be amended, a director of this
corporation shall not be liable to this corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director.
4
<PAGE>
AMENDMENT TO
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
DIAMETRICS MEDICAL, INC.
1. The name of the corporation is Diametrics Medical, Inc.
2. Attached hereto as Exhibit A is the full and complete text of the
amendments to Article VIII of the Amended and Restated Articles of
Incorporation of Diametrics Medical, Inc.
3. The date of adoption of the amendment by the board of directors of such
corporation was April 17, 1996.
4. The date of adoption of the amendment by the shareholders of such
corporation was June 27, 1996.
5. The amendment has been adopted pursuant to Chapter 302A of the Minnesota
Business Corporation Act.
IN WITNESS WHEREOF, the undersigned, the Secretary of Diametrics
Medical, Inc., being duly authorized on behalf of Diametrics Medical, Inc., has
executed this document on this 29th day of January, 1997.
/s/ Kenneth L. Cutler
-----------------------------
Kenneth L. Cutler
Secretary
<PAGE>
EXHIBIT A
ARTICLE VIII
The Board of Directors shall have the power, to the extent permitted by
law, to adopt, amend or repeal the Bylaws of this corporation, subject to the
power of the shareholders to adopt, amend or repeal such Bylaws. Bylaws fixing
the number of directors or their classifications, qualifications or terms of
office, or prescribing procedures for removing directors or filling vacancies in
the Board may be adopted, amended or repealed only by the affirmative vote of
the holders of 80% of the outstanding shares of Common Stock entitled to vote.
The number of directors shall be no less than three nor more than twenty
and shall be established by resolution of the Board of Directors. The number of
directors may be increased or decreased from time to time by a resolution
adopted by the holders of at least 80% of the outstanding shares of Common Stock
entitled to vote. In case of any increase or decrease in the number of
directors, the increase or decrease shall be distributed among the several
classes of directors as equally as possible as shall be determined by the Board
of Directors or by the holders of at least 80% of the outstanding shares of
Common Stock entitled to vote. The affirmative vote of shareholders holding at
least 80% of the outstanding shares of Common Stock entitled to vote at an
election of directors may remove any or all of the directors from office at any
time, with or without cause.
Notwithstanding any other provisions of these Restated Articles of
Incorporation or the Bylaws of the corporation or the fact that a lesser
percentage may be specified by law, these Restated Articles of Incorporation or
the Bylaws of the corporation, the affirmative vote of the holders of at least
80% of outstanding shares of Common Stock entitled to vote shall be required to
amend or repeal all or any portion of this Article VIII; provided, however, that
if the Continuing Directors shall be majority vote of all Continuing Directors
have adopted a resolution approving the amendment or repeal proposal and have
determined to recommend it for approval by the holders of Common Stock, then the
vote required shall be the affirmative vote of the holders of at least a
majority of the outstanding Common Stock entitled to vote.
The term "Common Stock" shall mean the Common Stock, par value $.01 per
share, of the corporation.
The term "Continuing Director" shall mean any member of the Board of
Directors of the corporation who is unaffiliated with a Controlling Person and
was a member of the Board prior to the time that the Controlling Person became a
Controlling Person, and any successor of a Continuing Director who is
unaffiliated with a Controlling Person and is recommended or elected to succeed
a Continuing Director by a majority of all Continuing Directors.
The term "Controlling Person" shall mean any Person who beneficially owns a
number of shares of Common Stock, whether or not such number includes shares not
then issued, which exceeds a number equal to ten percent of the outstanding
shares of Common Stock.
The term "Person" shall mean an individual, a corporation, a partnership,
an association, a joint-stock company, a trust, any unincorporated organization
and any other entity or group.
<PAGE>
CERTIFICATE OF DESIGNATION
OF
SERIES I JUNIOR PARTICIPATING PREFERRED STOCK
OF
DIAMETRICS MEDICAL, INC.
The undersigned hereby certifies that the Board of Directors of
Diametrics Medical, Inc. (the "Corporation"), a corporation organized and
existing under the Minnesota Business Corporation Act, duly approved the terms
contained in the following resolution effective on January 29, 1997:
RESOLVED, that a series of preferred stock of the Corporation is
hereby created, and the designation and amount thereof and the relative rights
and preferences of the shares of such series, are as follows:
Section 1. Designation and Amount. The shares of such series shall be
----------------------
designated as "Series I Junior Participating Preferred Stock" (the "Preferred
Shares") and the number of shares constituting the Preferred Shares shall be
1,000,000. Such number of shares may be increased or decreased by resolution of
the Board of Directors and any necessary shareholder approval; provided,
--------
however, that no decrease shall reduce the number of shares of Preferred Shares
- -------
to a number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Corporation convertible into Preferred Shares.
Section 2. Dividends and Distributions.
---------------------------
(a) Dividends shall be payable on the Preferred Shares out of funds
legally available for the declaration of dividends only if and when declared by
the Board of Directors. In no event shall any dividend be paid or declared, nor
shall any distribution be made, on the Common Stock, other than a dividend or
distribution payable solely in shares of Common Stock, unless the holders of the
Preferred Shares shall participate in such dividend on a pro rata basis with the
holders of Common Stock, counting one Preferred Share for each four shares of
Common Stock. In no event shall any dividend be paid or declared, nor shall any
distribution be made, on any outstanding series of preferred stock, unless the
holders of all of the outstanding Preferred Shares shall participate in such
dividend or distribution on a pro rata basis with the holders of such series of
preferred stock, counting shares of both such series and shares of the Preferred
Shares on an as-if-converted basis.
(b) If the Conversion Date (as defined in Section 4 hereof) has not
occurred on or before July 29, 1997, then in such event dividends shall accrue
on the
<PAGE>
Preferred Shares at the rate of 7.0% per annum of the liquidation preference
thereof compounded quarterly from the initial date of issuance of such Preferred
Shares to and including the later of the Conversion Date or the Redemption Date
(as hereinafter defined). Such dividends shall be cumulative from the Accrual
Date and shall be paid on March 31, June 30, September 30 and December 31 of
each year, commencing September 30, 1997. Each such dividend shall be paid to
the holders of record of the Preferred Shares on such record date, not exceeding
15 days preceding the payment date thereof, as shall be fixed by the Board of
Directors. Dividends on account of arrears for any past dividend periods may be
declared and paid at any time, without reference to any regular dividend payment
date, to holders of record on such date, not exceeding 30 days preceding the
payment date thereof, as may be fixed by the Board of Directors.
Section 3. Voting Rights.
-------------
(a) Subject to the provision for adjustment hereinafter set forth,
each Preferred Share shall entitle the holder thereof to 2.844 votes on all
matters submitted to a vote of the shareholders of the Corporation. In the
event the Corporation shall at any time, declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise) into a greater or lesser number of shares of
Common Stock, then in each such case the number of votes per share to which
holders of shares of Preferred Shares were entitled immediately prior to such
event shall be adjusted by multiplying such number by a fraction, the numerator
of which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
(b) Unless the vote of the holders of a greater number of shares
shall then be required by law, none of the following actions may be taken by the
Corporation without the approval by vote of the holders of 66.667% of issued and
outstanding Preferred Shares, voting together as a single class:
(i) Any amendment, restatement or modification of the Articles of
Incorporation, By-laws or other governance documents which would reasonably
be expected to adversely affect the powers, preferences, privileges or
rights of the Preferred Shares;
(ii) Declaration of payment of any dividend or making of any
distribution on or with respect to the Common Stock;
(iii) Purchase, redemption or retirement, directly or indirectly, of
any shares of capital stock or other equity securities of the Corporation;
-2-
<PAGE>
(iv) Authorization, creation or issuance of any additional shares of
capital stock or other securities which would reasonably be expected to
adversely affect the powers, preferences, privileges or rights of the
Preferred Shares, or are ranked prior to or pari passu with, the Preferred
---- -----
Shares; or
(v) A voluntary dissolution, liquidation or winding up.
(c) Except as otherwise provided herein or by law, the holders of
Preferred Shares and the holders of Common Stock and any other capital stock of
the Corporation having general voting rights shall vote together as one class on
all matters submitted to a vote of shareholders of the Corporation.
(d) Except as set forth herein or required by law, holders of
Preferred Shares shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
Section 4. Mandatory Conversion. When the shareholders of the
--------------------
Corporation have properly authorized a sufficient number of shares of Common
Stock to allow the conversion of all outstanding Preferred Shares into shares of
Common Stock and appropriate filings have been made with governmental
authorities to effect such authorization (such event being herein referred to as
a "Conversion Event"), which filings will be promptly made by the Corporation,
the Preferred Shares shall automatically be converted into fully paid and
nonassessable shares of Common Stock (and such other securities and property as
the holders of Preferred Shares may be entitled to upon the conversion thereof,
as hereinafter provided) at the Conversion Rate (as hereinafter defined) plus an
amount equal to any accrued and unpaid dividends thereon. The Corporation shall
give prompt notice of such mandatory conversion by first class mail, postage
prepaid, to the holders of record of the Preferred Shares, addressed to such
holders at their last addresses as shown on the stock books of the Corporation.
The date (the "Conversion Date") of such mandatory conversion shall be the date
of consummation of the Conversion Event. Each notice of mandatory conversion
shall specify: the Conversion Date and then-effective Conversion Rate (which
shall be four shares of Common Stock for each Preferred Share, unless otherwise
adjusted hereunder); that the holders of Preferred Shares were deemed to have
become holders of record of Common Stock on the Conversion Date; that, from and
after the Conversion Date, the Preferred Shares were no longer considered
outstanding; and that all rights with respect to the shares of Preferred Shares
(and such other securities and property as the holders of the Preferred Shares
may be entitled to upon the conversion thereof, as hereinafter provided) so
converted terminated on the Conversion Date, except the right to receive Common
Stock (and such other securities and property as the holders of Preferred Shares
may be entitled to upon the conversion thereof, as hereinafter provided) as
herein provided. On and after the Conversion Date, each holder of Preferred
Shares shall surrender the certificate or certificates evidencing such shares to
the Corporation at a place to be designated
-3-
<PAGE>
in such notice and shall thereupon be entitled to receive the Common Stock (and
such other securities and property as the holders of Preferred Shares may be
entitled to upon the conversion thereof, as hereinafter provided) receivable in
exchange therefor. Notwithstanding that the certificates evidencing any shares
of Preferred Shares mandatorily converted into Common Stock shall not have been
surrendered on the Conversion Date, such shares shall no longer be deemed
outstanding, and the holders thereof shall nevertheless be deemed to have become
holders of record of Common Stock (and such other securities and property as the
holders of Preferred Shares may be entitled to upon the conversion thereof, as
hereinafter provided) on the Conversion Date.
Except where registration is requested in a name other than the name
of the registered holder, the Corporation will pay any and all documentary stamp
or similar issue or transfer taxes payable in respect of the issue or delivery
of shares of Common Stock on conversion of the Preferred Shares pursuant hereto.
Section 5. Reacquired Shares. Any Preferred Shares purchased,
-----------------
converted or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
preferred stock and may be reissued as part of a new series of preferred stock
subject to the conditions and restrictions on issuance set forth herein, in the
Articles of Incorporation, or in any other certificate of designation creating a
series of preferred stock or any similar stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up; Rank. Upon any
--------------------------------------------
liquidation, dissolution or winding up of the Corporation, no distribution shall
be made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Preferred
Shares unless, prior thereto, the holders of Preferred Shares shall have
received the greater of (i) $16.00 per share, plus an amount equal to any
accrued and unpaid dividends and distributions thereon, to the date of such
payment, or (ii) an aggregate amount per share, subject to the provision for
adjustment hereinafter set forth, equal to four times the aggregate amount to be
distributed per share to holders of Common Stock, or (2) to the holders of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Preferred Shares, except distributions made ratably on the
Preferred Shares and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Corporation shall at any time,
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise) into a
greater or lesser number of shares of Common Stock, then in each such case the
aggregate amount to which holders of shares of Preferred Shares were entitled
immediately prior to such event under clause (1)(ii) of the preceding sentence
shall be adjusted by multiplying such amount by a fraction the numerator of
which is the
-4-
<PAGE>
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event. For the purposes hereof, a
consolidation or merger of the Corporation with or into any other person or
entity, or a sale or transfer of all or substantially all the Corporation's
assets for cash or securities, shall be considered a liquidation, dissolution or
winding up of the Company, unless, with respect to a merger, consolidation or
sale, the holders of shares of Common Stock immediately preceding such merger or
consolidation hold at least a majority of the equity securities of the surviving
entity entitled to vote in the election of directors (or similar governing body)
of the surviving entity.
So long as any Preferred Shares remain outstanding, no stock of any
class or series of the Corporation shall rank prior to or pari passu with the
----------
Preferred Shares, as to liquidation preference, dividends or distributions.
Section 7. Consolidation, Merger, etc. In case of any
---------------------------
reclassification or change of outstanding shares of Common Stock (other than a
change in par value, or as a result of a subdivision or combination), or in case
of any consolidation of the Corporation with, or merger of the Corporation with
or into, any other entity that results in a reclassification, change,
conversion, exchange or cancellation of outstanding shares of Common Stock or
any sale or transfer of all or substantially all of the assets of the
Corporation, each holder of shares of the Preferred Shares then outstanding, if
it has elected not to require a distribution pursuant to Section 6, shall have
the right thereafter to convert the shares of the Preferred Shares held by the
holder into the kind and amount of securities, cash and other property which the
holder would have been entitled to receive upon such reclassification, change,
consolidation, merger, sale or transfer if the holder had held the Common Stock
issuable upon the conversion of the Preferred Stock immediately prior to the
reclassification, change, consolidation, merger, sale or transfer.
Section 8. Redemption. (a) The Preferred Shares shall not be
----------
redeemable at the option of the Corporation and shall be redeemable at the
option of the holder thereof only as provided in this Section 8(b).
(b) In the event that as of January 29, 1999 (the "Put Date") the
Conversion Date has not occurred and the Corporation has not caused the
Preferred Shares to be registered for inclusion on the automated quotation
system of the National Association of Securities Dealers, Inc. or any national
securities exchange on which a class of the Corporation's equity securities is
listed, the Preferred Shares shall be redeemable at the option of the holder
thereof at a price equal to the greater of (i) Current Market Price on the Put
Date (as hereinafter defined) and (ii) the liquidation preference thereof, plus
accrued and unpaid dividends thereon to the date fixed for redemption (the
"Redemption Price") as of the close of business on the 30th business day
following the Put Date (the "Redemption Date"). Notwithstanding the foregoing,
in the event that the Corporation fails to declare and pay a dividend pursuant
to Section 2(b) above, the Put Date shall be accelerated
-5-
<PAGE>
to the payment date that would otherwise apply to such defaulted dividend
payment. The Corporation shall give prompt notice of the Put Date (the "Put Date
Notice") by certified mail, return-receipt requested, to the holders of record
of the Preferred Shares, addressed to such holders at their last addresses as
shown on the stock books of the Corporation. A holder of record of the Preferred
Shares as of the Put Date shall be required to give written notice to the
Corporation of such holder's election to require such redemption (a "Notice of
Redemption") on or before the 20th business day following the date receipt of
such notice is acknowledged. In the event that the Corporation receives Notices
of Redemption from holders representing in excess of 75% of the Preferred Shares
outstanding, the Corporation shall redeem all outstanding Preferred Shares on
the Redemption Date. Notice of Redemption having been given as aforesaid, the
Preferred Shares so to be redeemed shall, on the Redemption Date, become due and
payable at the Redemption Price, and from and after such date such Preferred
Shares shall cease to accrue dividends. Upon surrender of any certificate
representing Preferred Shares for redemption, the record holder of such
Preferred Shares shall be paid by the Corporation the Redemption Price. "Current
Market Price" means four (the "Multiple") times (a) the closing price on the
previous trading day for the Common Stock on the principal stock exchange on
which the Common Stock is traded or (b)if not so traded, the closing price (or,
if no closing price is available, the average of the bid and asked prices) for
such date on the NASDAQ if the Common Stock is listed on the NASDAQ or (c)if not
listed on any exchange or quoted on the NASDAQ, such value as may be determined
in good faith by the Corporation's Board of Directors, which determination shall
be conclusively binding. In the event the Corporation shall at any time, declare
or pay any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise) into a greater or lesser
number of shares of Common Stock, then in each such case the Multiple shall be
adjusted by multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 9. Fractional Shares. Preferred Shares may be issued in
-----------------
fractions of a share which are integral multiples of one one-hundredth of a
share which shall entitle the holder, in proportion to such holder's fractional
shares, to receive dividends, participate in distributions and to have the
benefit of all other rights of holders of Preferred Shares.
-6-
<PAGE>
IN WITNESS WHEREOF, I have subscribed my name this 29th day of
January, 1997.
DIAMETRICS MEDICAL, INC.
/s/ Laurence L. Betterley
-----------------------------
Laurence L. Betterley
Chief Financial Officer
<PAGE>
ARTICLES OF CORRECTION
OF
DIAMETRICS MEDICAL, INC.
In order to correct the Certificate of Designation of Series I Junior
Participating Preferred Stock as filed with the Minnesota Secretary of State on
January 29, 1997, in accordance with the provisions set forth in Minnesota
Statutes Section5.16, the undersigned hereby makes the following statements:
1. The name of the person who filed the instrument is Laurence L.
Betterley.
2. The instrument to be corrected is the Certificate of Designation of
Series I Junior Participating Preferred Stock of Diametrics Medical, Inc. filed
with the Minnesota Secretary of State on January 29, 1997.
3. The error to be corrected is the number of votes each Preferred Share
entitles its holder to cast, as set forth in Section 3(a) of the Certificate of
Designation.
4. The following portion of the Certificate of Designation is hereby set
forth in its corrected form as follows:
"Section 3. Voting Rights.
-------------
(a) Subject to the provision for adjustment hereinafter set forth,
each Preferred Share shall entitle the holder thereof to 3.16 votes on all
matters submitted to a vote of the shareholders of the Corporation. In the
event the Corporation shall at any time, declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise) into a greater or lesser number of shares of
Common Stock, then in each such case the number of votes per share to which
holders of shares of Preferred Shares were entitled immediately prior to such
event shall be adjusted by multiplying such number by a fraction, the numerator
of which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
(b) Unless the vote of the holders of a greater number of shares
shall then be required by law, none of the following actions may be taken by the
Corporation without the approval by vote of the holders of 66.667% of issued and
outstanding Preferred Shares, voting together as a single class:
(i) Any amendment, restatement or modification of the Articles of
Incorporation, By-laws or other governance documents which would reasonably
be expected to adversely affect the powers, preferences, privileges or
rights of the Preferred Shares;
<PAGE>
(ii) Declaration of payment of any dividend or making of any
distribution on or with respect to the Common Stock;
(iii) Purchase, redemption or retirement, directly or indirectly, of
any shares of capital stock or other equity securities of the Corporation;
(iv) Authorization, creation or issuance of any additional shares of
capital stock or other securities which would reasonably be expected to
adversely affect the powers, preferences, privileges or rights of the
Preferred Shares, or are ranked prior to or pari passu with, the Preferred
---- -----
Shares; or
(v) A voluntary dissolution, liquidation or winding up.
(c) Except as otherwise provided herein or by law, the holders of
Preferred Shares and the holders of Common Stock and any other capital stock of
the Corporation having general voting rights shall vote together as one class on
all matters submitted to a vote of shareholders of the Corporation.
(d) Except as set forth herein or required by law, holders of
Preferred Shares shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action."
<PAGE>
IN WITNESS WHEREOF, I have subscribed my name this 30th day of
January, 1997.
DIAMETRICS MEDICAL, INC.
/s/ Laurence L. Betterley
------------------------------
Laurence L. Betterley
Chief Financial Officer
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
DIAMETRICS MEDICAL, INC.
ARTICLE I.
OFFICES, CORPORATE SEAL
Section 1.01. Registered Office. The registered office of the
-----------------
corporation in Minnesota shall be that set forth in the articles of
incorporation or in the most recent amendment of the articles of incorporation
or resolution of the directors filed with the secretary of state of Minnesota
changing the registered office.
Section 1.02. Other Offices. The corporation may have such other
-------------
offices, within or without the state of Minnesota, as the directors shall, from
time to time, determine.
Section 1.03. Corporate Seal. The corporation shall have no seal.
--------------
ARTICLE II.
MEETINGS OF SHAREHOLDERS
Section 2.01. Place and Time of Meetings. Except as provided
--------------------------
otherwise by the Minnesota Business Corporation Act, meetings of the
shareholders may be held at any place, within or without the state of Minnesota,
as may from time to time be designated by the directors.
Section 2.02. Regular Meetings.
----------------
(a) A regular meeting of the shareholders shall be held on such date
as the board of directors shall by resolution establish.
(b) At a regular meeting, the shareholders, voting as provided in the
articles of incorporation and these bylaws, shall elect qualified successors for
directors who serve for an indefinite term or whose terms have expired or are
due to expire within six months after the date of the meeting and shall transact
such other business as may properly come before them.
(c) To be properly brought before a regular meeting of shareholders,
business must be either (1) specified in the notice of the meeting, (2) directed
to be brought before the meeting by the board of directors or (3) proposed by a
shareholder in the manner herein provided. For business to be properly brought
before a regular meeting by a shareholder, the shareholder must give written
notice to the Secretary of the corporation so as to be received at the principal
executive offices of the corporation not later than the close of business on the
15th day following the day on which the notice of the regular meeting was mailed
to shareholders. Such notice
<PAGE>
shall set forth (1) a brief description of the business desired to be brought
before the regular meeting and the reasons for conducting such business, (2) the
name and record address of the shareholder proposing such business, (3) the
class and number of shares of the corporation beneficially owned by the
shareholder and (4) any material interest of the shareholder in such business.
Section 2.03. Special Meetings. Special meetings of the shareholders
----------------
may be held at any time and for any purpose and may be called by the Chief
Executive Officer, the Chief Financial Officer, two or more directors or by a
shareholder or shareholders holding 10% or more of the voting power of all
shares entitled to vote, except that a special meeting for the purpose of
considering any action to directly or indirectly facilitate or affect a business
combination, including any action to change or otherwise affect the composition
of the board of directors for that purpose, must be called by 25% or more of the
voting power of all shares entitled to vote. A shareholder or shareholders
holding the requisite percentage of the voting power of all shares entitled to
vote may demand a special meeting of the shareholders by written notice of
demand given to the Chief Executive Officer or Chief Financial Officer of the
corporation and containing the purposes of the meeting. Within 30 days after
receipt of demand by one of those officers, the board of directors shall cause a
special meeting of shareholders to be called and held on notice no later than 90
days after receipt of the demand, at the expense of the corporation. Special
meetings shall be held on the date and at the time and place fixed by the Chief
Executive Officer or the board of directors, except that a special meeting
called by or at demand of a shareholder or shareholders shall be held in the
county where the principal executive office is located. The business transacted
at a special meeting shall be limited to the purposes as stated in the notice of
the meeting.
Section 2.04. Quorum, Adjourned Meetings. The holders of a majority
--------------------------
of the shares entitled to vote shall constitute a quorum for the transaction of
business at any regular or special meeting. In case a quorum shall not be
present at a meeting, the meeting may be adjourned from time to time without
notice other than announcement at the time of adjournment of the date, time and
place of the adjourned meeting. If a quorum is present, a meeting may be
adjourned from time to time without notice other than announcement at the time
of adjournment of the date, time and place of the adjourned meeting. At
adjourned meetings at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally noticed. If a
quorum is present when a meeting is convened, the shareholders present may
continue to transact business until adjournment notwithstanding the withdrawal
of enough shareholders originally present to leave less than a quorum.
Section 2.05. Voting. At each meeting of the shareholders, every
------
shareholder having the right to vote shall be entitled to vote either in person
or by
2
<PAGE>
proxy. Each shareholder, unless the articles of incorporation or statutes
provide otherwise, shall have one vote for each share having voting power
registered in such shareholder's name on the books of the corporation. Jointly
owned shares may be voted by any joint owner unless the corporation receives
written notice from any one of them denying the authority of that person to vote
those shares. Upon the demand of any shareholder, the vote upon any question
before the meeting shall be by ballot. All questions shall be decided by a
majority vote of the number of shares entitled to vote and represented at the
meeting at the time of the vote except if otherwise required by statute, the
articles of incorporation, or these bylaws.
Section 2.06. Record Date. The board of directors may fix a date,
-----------
not exceeding 60 days preceding the date of any meeting of shareholders, as a
record date for the determination of the shareholders entitled to notice of, and
to vote at, such meeting, notwithstanding any transfer of shares on the books of
the corporation after any record date so fixed. If the board of directors fails
to fix a record date for determination of the shareholders entitled to notice
of, and to vote at, any meeting of shareholders, the record date shall be the
20th day preceding the date of such meeting.
Section 2.07. Notice of Meetings. There shall be mailed to each
------------------
shareholder, shown by the books of the corporation to be a holder of record of
voting shares, at his address as shown by the books of the corporation, a notice
setting out the date, time and place of each regular meeting and each special
meeting, except where the meeting is an adjourned meeting and the date, time and
place of the meeting were announced at the time of adjournment, which notice
shall be mailed at least five days prior thereto. Every notice of any special
meeting called pursuant to section 2.03 hereof shall state the purpose or
purposes for which the meeting has been called, and the business transacted at
all special meetings shall be confined to the purposes stated in the notice.
Section 2.08. Waiver of Notice. Notice of any regular or special
----------------
meeting may be waived by any shareholder either before, at or after such meeting
orally or in writing signed by such shareholder or a representative entitled to
vote the shares of such shareholder. A shareholder, by his attendance at any
meeting of shareholders, shall be deemed to have waived notice of such meeting,
except where the shareholder objects at the beginning of the meeting to the
transaction of business because the meeting is not lawfully called or convened,
or objects before a vote on an item of business because the item may not
lawfully be considered at that meeting and does not participate in the
consideration of the item at that meeting.
Section 2.09. Conduct of Meetings. The presiding officer at each
-------------------
meeting of shareholders shall conclusively determine the order of business, all
matters of procedure and whether or not a proposal is proper business to be
3
<PAGE>
transacted at the meeting and has been properly brought before the meeting.
Following completion of the business of the meeting as determined by the
presiding officer, the presiding officer shall have the exclusive authority and
power to adjourn the meeting.
Section 2.10. Nomination of Directors. Only persons nominated in
-----------------------
accordance with the following procedures shall be eligible for election by
shareholders as directors. Nominations of persons for election as directors may
be made at a meeting of shareholders called for the purpose of electing
directors (a) by or at the direction of the board of directors or (b) by any
shareholder in the manner herein provided. For a nomination to be properly made
by a shareholder, the shareholder must give written notice to the Secretary of
the corporation so as to be received at the principal executive offices of the
corporation not later than the close of business on the fifteenth day following
the day on which the notice of the meeting of shareholders was mailed to
shareholders. Such notice shall set forth (a) as to each person the shareholder
proposes to nominate (1) the name, age, business address and residence address
of the person, (2) the principal occupation or employment of the person, (3) the
class and number of shares of the corporation's capital stock beneficially owned
by the person and (4) any other information required to be disclosed in
solicitations of proxies for election of directors pursuant to Regulation 14A
under the Securities Exchange Act of 1934; and (b) as to the shareholder giving
the notice (1) the name and record address of the shareholder and (2) the class
and number of shares of the corporation beneficially owned by the shareholder.
ARTICLE III.
DIRECTORS
Section 3.01. General Powers. The business and affairs of the
--------------
corporation shall be managed by or under the authority of the board of
directors, except as otherwise permitted by statute.
Section 3.02. Number, Qualification and Term of Office. The board
----------------------------------------
shall consist of one or more directors. The number of directors shall be fixed
by resolution of the board of directors and thereafter shall be increased or
decreased from time to time by resolution of the board of directors or the
shareholders. Directors need not be shareholders. Each of the directors shall
hold office until the regular meeting of shareholders next held after such
director's election and until such director's successor shall have been elected
and shall qualify, or until the earlier death, resignation, removal, or
disqualification of such director.
Section 3.03. Board Meetings. Meetings of the board of directors may
--------------
be held from time to time at such time and place within or without the state of
Minnesota as may be designated in the notice of such meeting.
4
<PAGE>
Section 3.04. Calling Meetings; Notice. Meetings of the board of
------------------------
directors may be called by the Chairman of the Board and/or the Chief Executive
Officer by giving at least twenty-four hours' notice, or by any other director
by giving at least five days' notice, of the date, time and place thereof to
each director by mail, telephone, telegram or in person. If the day or date,
time and place of a meeting of the board of directors has been announced at a
previous meeting of the board, no notice is required. Notice of an adjourned
meeting of the board of directors need not be given other than by announcement
at the meeting at which adjournment is taken.
Section 3.05. Waiver of Notice. Notice of any meeting of the board
----------------
of directors may be waived by any director either before, at, or after such
meeting orally or in a writing signed by such director. A director, by his
attendance at any meeting of the board of directors, shall be deemed to have
waived notice of such meeting, except where the director objects at the
beginning of the meeting to the transaction of business because the meeting is
not lawfully called or convened and does not participate thereafter in the
meeting.
Section 3.06. Quorum. A majority of the directors holding office
------
immediately prior to a meeting of the board of directors shall constitute a
quorum for the transaction of business at such meeting.
Section 3.07. Absent Directors. A director may give advance written
----------------
consent or opposition to a proposal to be acted on at a meeting of the board of
directors. If such director is not present at the meeting, consent or
opposition to a proposal does not constitute presence for purposes of
determining the existence of a quorum, but consent or opposition shall be
counted as a vote in favor of or against the proposal and shall be entered in
the minutes or other record of action at the meeting, if the proposal acted on
at the meeting is substantially the same or has substantially the same effect as
the proposal to which the director has consented or objected.
Section 3.08. Conference Communications. Any or all directors may
-------------------------
participate in any meeting of the board of directors, or of any duly constituted
committee thereof, by any means of communication through which the directors may
simultaneously hear each other during such meeting. For the purposes of
establishing a quorum and taking any action at the meeting, such directors
participating pursuant to this section 3.08 shall be deemed present in person at
the meeting; and the place of the meeting shall be the place of origination of
the conference telephone conversation or other comparable communication
technique.
Section 3.09. Vacancies; Newly Created Directorships. Vacancies on
--------------------------------------
the board of directors of this corporation occurring by reason of death,
resignation,
5
<PAGE>
removal or disqualification shall be filled for the unexpired term by a majority
of the remaining directors of the board although less than a quorum; newly
created directorships resulting from an increase in the authorized number of
directors by action of the board of directors as permitted by section 3.02 may
be filled by a majority vote of the directors serving at the time of such
increase; and each director elected pursuant to this section 3.09 shall be a
director until such director's successor is elected by the shareholders at their
next regular or special meeting.
Section 3.10. Removal. Any or all of the directors may be removed
-------
from office at any time, with or without cause, by the affirmative vote of the
shareholders holding a majority of the shares entitled to vote at an election of
directors. In the event that the entire board or any one or more directors be
so removed by the shareholders, new directors may be elected at the same
meeting. A director named by the board of directors to fill a vacancy may be
removed from office at any time, with or without cause, by the affirmative vote
of the remaining directors if the shareholders have not elected directors in the
interim between the time of the appointment to fill such vacancy and the time of
the removal.
Section 3.11. Committees. A resolution approved by the affirmative
----------
vote of a majority of the board of directors may establish committees having the
authority of the board in the management of the business of the corporation to
the extent provided in the resolution. A committee shall consist of one or more
persons, who need not be directors, appointed by affirmative vote of a majority
of the directors present. Committees are subject to the direction and control
of, and vacancies in the membership thereof shall be filled by, the board of
directors. A majority of the members of the committee present at a meeting is a
quorum for the transaction of business.
Section 3.12. Written Action. Any action which might be taken at a
--------------
meeting of the board of directors, or any duly constituted committee thereof,
may be taken without a meeting if done in writing and signed by all of the
directors or committee members, unless the articles provide otherwise and the
action need not be approved by the shareholders.
Section 3.13. Compensation. Directors who are not salaried officers
------------
of this corporation shall receive such fixed sum per meeting attended or such
fixed annual sum as shall be determined, from time to time, by resolution of the
board of directors. The board of directors may, by resolution, provide that all
directors shall receive their expenses, if any, of attendance at meetings of the
board of directors or any committee thereof. Nothing herein contained shall be
construed to preclude any director from serving this corporation in any other
capacity and receiving proper compensation therefor.
6
<PAGE>
ARTICLE IV.
OFFICERS
Section 4.01. Number and Designation. The corporation shall have one
----------------------
or more natural persons exercising the functions of the offices of Chief
Executive Officer and Chief Financial Officer. The board of directors may elect
or appoint such other officers or agents as it deems necessary for the operation
and management of the corporation, with such powers, rights, duties, and
responsibilities as may be determined by the board of directors, including,
without limitation, Chairman of the Board, a President, one or more Vice
Presidents, a Secretary, a Treasurer and such assistant officers or other
officers as may from time to time be elected or appointed by the board of
directors. Each such officer shall have the powers, rights, duties and
responsibilities set forth in these bylaws unless otherwise determined by the
board of directors. Any number of offices may be held by the same person.
Section 4.02. Chief Executive Officer. Unless provided otherwise by
-----------------------
a resolution adopted by the board of directors, the Chief Executive Officer: (a)
shall have general active management of the business of the corporation; (b)
shall, when present, preside at all meetings of the shareholders; (c) shall see
that all orders and resolutions of the board of directors are carried into
effect; (d) shall sign and deliver in the name of the corporation any deeds,
mortgages, bonds, contracts or other instruments pertaining to the business of
the corporation, except in cases in which the authority to sign and deliver is
required by law to be exercised by another person or is expressly delegated by
these bylaws or the board of directors to some other officer or agent of the
corporation; and (e) shall perform such other duties as from time to time may be
assigned by the board of directors.
Section 4.03. Chief Financial Officer. Unless provided otherwise by
-----------------------
a resolution adopted by the board of directors, the Chief Financial Officer: (a)
shall cause to be kept accurate financial records for the corporation; (b) shall
cause to be deposited all monies, drafts and checks in the name of and to the
credit of the corporation in such banks and depositories as the board of
directors shall designate from time to time; (c) shall cause to be endorsed for
deposit all notes, checks and drafts received by the corporation as ordered by
the board of directors, making proper vouchers therefor; (d) shall cause to be
disbursed corporate funds and shall cause to be issued checks and drafts in the
name of the corporation, as ordered by the board of directors; (e) shall render
to the Chief Executive Officer and the board of directors, whenever requested,
an account of all the transactions as Chief Financial Officer and of the
financial condition of the corporation; and (f) shall perform such other duties
as may be prescribed by the board of directors or the Chief Executive Officer
from time to time.
7
<PAGE>
Section 4.04. Chairman of the Board. The Chairman of the Board, if
---------------------
one is elected, shall preside at all meetings of the directors and shall have
such other duties as may be prescribed, from time to time, by the board of
directors.
Section 4.05. President. Unless otherwise determined by the board of
---------
directors, the President shall be the Chief Executive Officer of the
corporation. If an officer other than the President is designated Chief
Executive Officer, the President shall perform such duties as may from time to
time be assigned by the board of directors.
Section 4.06. Vice President. Each Vice President shall perform such
--------------
duties as may be prescribed from time to time by these bylaws or by the board of
directors.
Section 4.07. Secretary. Unless provided otherwise by a resolution
---------
adopted by the board of directors, the Secretary: (a) shall attend all meetings
of the shareholders and board of directors, and shall record all the proceedings
of such meetings in the minute book of the corporation; (b) shall give proper
notice of meetings of shareholders and board of directors and other notices
required by law or these bylaws; and (c) shall perform such other duties as from
time to time may be assigned by the board of directors.
Section 4.08. Treasurer. Unless otherwise determined by the board of
---------
directors, the Treasurer shall be the Chief Financial Officer of the
corporation. If an officer other than the Treasurer is designated Chief
Financial Officer, the Treasurer shall perform such duties as may from time to
time be assigned by the board of directors.
Section 4.09. Authority and Duties. In addition to the foregoing
--------------------
authority and duties, all officers of the corporation shall respectively have
such authority and perform such duties in the management of the business of the
corporation as may be determined from time to time by the board of directors.
Unless prohibited by a resolution of the board of directors, an officer elected
or appointed by the board of directors may, without specific approval of the
board of directors, delegate some or all of the duties and powers of an office
to other persons.
Section 4.10. Removal and Vacancies. The board of directors may
---------------------
remove any officer from office at any time, with or without cause, by a
resolution approved by the affirmative vote of a majority of the directors
present. Such removal, however, shall be without prejudice to the contract
rights of the person so removed. A vacancy in an office of the corporation by
reason of death, resignation, removal, disqualification, or otherwise may, or in
the case of a vacancy in the office of the Chief Executive Officer or Chief
Financial Officer shall, be filled for the unexpired term by the board of
directors.
8
<PAGE>
Section 4.11. Compensation. The officers of this corporation shall
------------
receive such compensation for their services as may be determined by or in
accordance with resolutions of the board of directors or by one or more
committees to the extent so authorized from time to time by the board of
directors.
ARTICLE V.
SHARES AND THEIR TRANSFER
Section 5.01. Certificates for Shares. All shares of the corporation
-----------------------
shall be certificated shares. Each holder of shares of the corporation shall be
entitled to a certificate for shares in such form as the board of directors may,
from time to time, approve. Certificates shall be signed by an authorized
representative of the corporation's transfer agent. A certificate representing
shares of this corporation shall contain on its face the information required by
the Minnesota Business Corporation Act, section 302A.417. A certificate
representing shares issued by this corporation shall set forth upon the face or
back of the certificate, or shall state that the corporation will furnish to any
shareholder upon request and without charge, a full statement of the
designations, preferences, limitations and relative rights of the shares of each
class or series authorized to be issued, so far as they have been determined,
and the authority of the board to determine relative rights and preferences of
subsequent classes or series.
Section 5.02. Issuance of Shares. The board of directors is
------------------
authorized to cause to be issued shares of the corporation up to the full amount
authorized by the articles of incorporation in such amounts as may be determined
by the board of directors and as may be permitted by law. Shares may be issued
for any consideration, including, without limitation, in consideration of cash
or other property, tangible or intangible, received or to be received by the
corporation under a written agreement or of services rendered or to be rendered
to the corporation under a written agreement. At the time of approval of the
issuance of shares, the board of directors shall state, by resolution, its
determination of the fair value to the corporation in monetary terms of any
consideration other than cash for which shares are to be issued.
Section 5.03. Transfer of Shares. Transfer of shares on the books of
------------------
the corporation may be authorized only by the shareholder named in the
certificate, or the shareholder's legal representative, or the shareholder's
duly authorized attorney-in-fact, and upon surrender of the certificate or the
certificates for such shares. The corporation may treat as the absolute owner
of shares of the corporation, the person or persons in whose name shares are
registered on the books of the corporation.
9
<PAGE>
Section 5.04. Loss of Certificates. Except as otherwise provided by
--------------------
the Minnesota Business Corporation Act, section 302A.419, any shareholder
claiming a certificate for shares to be lost, stolen, or destroyed shall make an
affidavit of that fact in such form as the board of directors and/or the
corporation's transfer agent shall require and shall, if the board of directors
and/or the corporation's transfer agent so requires, give the corporation and/or
the corporation's transfer agent a bond of indemnity in form, in an amount, and
with one or more sureties satisfactory to the board of directors and/or the
corporation's transfer agent, to indemnify the corporation and/or the
corporation's transfer agent against any claim which may be made against it on
account of the reissue of such certificate, whereupon a new certificate may be
issued in the same tenor and for the same number of shares as the one alleged to
have been lost, stolen or destroyed.
ARTICLE VI.
DISTRIBUTIONS, RECORD DATE
Section 6.01. Distributions. Subject to the provisions of the
-------------
articles of incorporation, of these bylaws, and of law, the board of directors
may authorize and cause the corporation to make distributions whenever, and in
such amounts or forms as, in its opinion, are deemed advisable.
Section 6.02. Record Date. Subject to any provisions of the articles
-----------
of incorporation, the board of directors may fix a date not exceeding 120 days
preceding the date fixed for the payment of any distribution as the record date
for the determination of the shareholders entitled to receive payment of the
distribution and, in such case, only shareholders of record on the date so fixed
shall be entitled to receive payment of such distribution notwithstanding any
transfer of shares on the books of the corporation after the record date.
ARTICLE VII.
BOOKS AND RECORDS, FISCAL YEAR
Section 7.01. Share Register. The board of directors of the
--------------
corporation shall cause to be kept at its principal executive office, or at
another place or places within the United States determined by the board:
(1) a share register not more than one year old, containing the
names and addresses of the shareholders and the number and
classes of shares held by each shareholder; and
(2) a record of the dates on which certificates or transaction
statements representing shares were issued.
10
<PAGE>
Section 7.02. Other Books and Records. The board of directors shall
-----------------------
cause to be kept at its principal executive office, or, if its principal
executive office is not in Minnesota, shall make available at its Minnesota
registered office within ten days after receipt by an officer of the corporation
of a written demand for them made by a shareholder or other person authorized by
the Minnesota Business Corporation Act, section 302A.461, originals or copies
of:
(1) records of all proceedings of shareholders for the last
three years;
(2) records of all proceedings of the board for the last three
years;
(3) its articles and all amendments currently in effect;
(4) its bylaws and all amendments currently in effect;
(5) financial statements required by the Minnesota Business
Corporation Act, section 302A.463 and the financial
statements for the most recent interim period prepared in
the course of the operation of the corporation for
distribution to the shareholders or to a governmental agency
as a matter of public record;
(6) reports made to shareholders generally within the last three
years;
(7) a statement of the names and usual business addresses of its
directors and principal officers; and
(8) any shareholder voting or control agreements of which the
corporation is aware.
Section 7.03. Fiscal Year. The fiscal year of the corporation shall
-----------
be determined by the board of directors.
ARTICLE VIII.
LOANS, GUARANTEES, SURETYSHIP
Section 8.01. The corporation may lend money to, guarantee an
obligation of, become a surety for, or otherwise financially assist a person if
the transaction, or a class of transactions to which the transaction belongs, is
approved by the affirmative vote of a majority of the directors present, and:
(1) is in the usual and regular course of business of the
corporation;
11
<PAGE>
(2) is with, or for the benefit of, a related corporation, an
organization in which the corporation has a financial
interest, an organization with which the corporation has a
business relationship, or an organization to which the
corporation has the power to make donations;
(3) is with, or for the benefit of, an officer or other employee
of the corporation or a subsidiary, including an officer or
employee who is a director of the corporation or a
subsidiary, and may reasonably be expected, in the judgment
of the board, to benefit the corporation; or
(4) has been approved by (a) the holders of two-thirds of the
voting power of the shares entitled to vote which are owned
by persons other than the interested person or persons, or
(b) the unanimous affirmative vote of the holders of all
outstanding shares whether or not entitled to vote.
Such loan, guarantee, surety contract or other financial assistance may be with
or without interest, and may be unsecured, or may be secured in the manner as a
majority of the directors present approve, including, without limitation, a
pledge of or other security interest in shares of the corporation. Nothing in
this section shall be deemed to deny, limit or restrict the powers of guaranty,
surety or warranty of the corporation at common law or under a statute of the
state of Minnesota.
ARTICLE IX.
INDEMNIFICATION OF CERTAIN PERSONS
Section 9.01. The corporation shall indemnify all officers and
directors of the corporation, for such expenses and liabilities, including the
advancement of reimbursement of expenses, in such manner, under such
circumstances and to such extent as permitted by Minnesota Business Corporation
Act section 302A.521, as now enacted or hereafter amended. Unless otherwise
approved by the board of directors, the corporation shall not indemnify any
employee of the corporation who is not otherwise entitled to indemnification
pursuant to the prior sentence of this section 9.01.
ARTICLE X.
AMENDMENTS
Section 10.01. These bylaws may be amended or altered by a vote of
the majority of the whole board of directors at any meeting. Such authority of
the board of directors is subject to the power of the shareholders, exercisable
in the manner provided in the Minnesota Business Corporation Act, section
302A.181, subd. 3, to
12
<PAGE>
adopt, amend, or repeal bylaws adopted, amended, or repealed by the board of
directors. The board of directors shall not in any case adopt, amend or repeal a
bylaw fixing a quorum for meetings of shareholders, prescribing procedures for
removing directors or filling vacancies in the board of directors, or fixing the
number of directors or their classifications, qualifications or terms of office,
but the board of directors may adopt or amend a bylaw to increase the number of
directors.
ARTICLE XI.
SECURITIES OF OTHER CORPORATIONS
Section 11.01. Voting Securities Held by the Corporation. Unless
-----------------------------------------
otherwise ordered by the board of directors, the Chief Executive Officer shall
have full power and authority on behalf of the corporation (a) to attend any
meeting of security holders of other corporations in which the corporation may
hold securities and to vote such securities on behalf of this corporation; (b)
to execute any proxy for such meeting on behalf of the corporation; or (c) to
execute a written action in lieu of a meeting of such other corporation on
behalf of this corporation. At such meeting, the Chief Executive Officer shall
possess and may exercise any and all rights and powers incident to the ownership
of such securities that the corporation possesses. The board of directors may,
from time to time, grant such power and authority to one or more other persons
and may remove such power and authority from the Chief Executive Officer or any
other person or persons.
Section 11.02. Purchase and Sale of Securities. Unless otherwise
-------------------------------
ordered by the board of directors, the Chief Executive Officer shall have full
power and authority on behalf of the corporation to purchase, sell, transfer or
encumber any and all securities of any other corporation owned by the
corporation, and may execute and deliver such documents as may be necessary to
effectuate such purchase, sale, transfer or encumbrance. The board of directors
may, from time to time, confer like powers upon any other person or persons.
Effective Date of Bylaws: June 21, 1994
13
<PAGE>
AMENDMENTS TO BYLAWS
AMENDED SECTION 3.02 OF ARTICLE III OF THE BYLAWS
SECTION 3.02. Number, Qualification and Term of Office. The number of
directors shall be no less than three nor more than twenty and shall be
established by resolution of the Board of Directors. Directors need not be
shareholders. The number of directors may be increased or decreased from time
to time by a resolution adopted by the affirmative vote of the holders of at
least 80% of the outstanding shares of common stock, par value $.01 per share
(the "Common Stock"), of the corporation entitled to vote. The directors shall
be divided into three classes, as equal in number as possible. At the 1996
regular meeting of the shareholders:
(i) directors in the first class (currently two directors) shall be
elected to serve until the 1997 regular meeting of shareholders,
(ii) directors in the second class (currently two directors) shall
be elected to serve until the 1998 regular meeting of the shareholders, and
(iii) directors in the third class (currently three directors) shall
be elected to serve until the 1999 regular meeting of the shareholders;
or until their successors shall be duly elected and qualified. At each regular
meeting of the shareholders following the 1996 regular shareholders' meeting,
each director elected to succeed a director whose term has expired shall hold
office until the third succeeding regular meeting of the shareholders after such
director's election and until such director's successor has been duly elected
and qualified, or until the earlier death, resignation, removal or
disqualification of such director. In case of any increase or decrease in the
number of directors, the increase or decrease shall be distributed among the
several classes as equally as possible as shall be determined by the Board of
Directors or by the affirmative vote of the holders of at least 80% of the
outstanding shares of Common Stock entitled to vote.
AMENDED SECTION 3.09 OF ARTICLE III OF THE BYLAWS
SECTION 3.09. Vacancies. Vacancies in the Board of Directors of this
corporation occurring by reason of death, resignation, removal or
disqualification shall be filled for the unexpired term by a majority of the
remaining directors, even though less than a quorum. Vacancies resulting from
an increase in the number of directors may be filled by a majority vote of the
remaining directors. Each director elected to fill a vacancy shall hold office,
subject to the provisions of these Bylaws, until a qualified successor is
elected by the shareholders at a regular or special meeting. The shareholders
shall elect a director to fill the remainder of any unexpired term for which a
director has been elected to fill a vacancy by the Board of Directors at their
next regular or special meeting.
AMENDED SECTION 3.10 OF ARTICLE III OF THE BYLAWS
SECTION 3.10. Removal. The affirmative vote of the shareholders holding
at least 80% of the outstanding shares of Common Stock entitled to vote at an
election of directors may remove any or all of the directors from office at any
time, with or without cause. In the event that the Board of Directors or any
one or more directors be so removed, new directors shall be elected at the same
meeting.
A director named by the Board of Directors to fill a vacancy may be removed from
office at any time, with or without cause, by the affirmative vote of the
remaining directors if the shareholders have not elected directors in the
interim between the time of the appointment to fill such vacancy and the time of
the removal.
14
<PAGE>
EXHIBIT 10.10
DIAMETRICS MEDICAL, INC.
1990 STOCK OPTION PLAN
(AS REVISED AND RESTATED)
1. Purpose of Plan
---------------
This plan shall be known as the "DIAMETRICS MEDICAL, INC. 1990 STOCK
OPTION PLAN" and is hereinafter referred to as the "Plan." The purpose of the
Plan is to aid in maintaining and developing personnel capable of assuring the
future success of Diametrics Medical, Inc., a Minnesota corporation ( the
"Company"), to offer such personnel additional incentives to put forth maximum
efforts for the success of the business, and to afford them an opportunity to
acquire a proprietary interest in the Company through stock options and other
long-term incentive awards as provided herein. Options granted under this Plan
may be either incentive stock options ("Incentive Stock Options") within the
meaning of Section 422 of the internal Revenue Code of 1986 (the "Code"), or
options which do not qualify as incentive Stock Options. Awards granted under
this Plan shall be SARs, restricted stock or performance awards as hereinafter
described.
2. Stock Subject to Plan
---------------------
Subject to the provisions of Section 15 hereof, the stock to be
subject to options or other awards under the Plan shall be the Company's
authorized but unissued shares of Common Stock, par value $.01 per share. Such
shares may be either authorized but unissued shares, or issued share which have
been reacquired by the Company. Subject to adjustment as provided in Section 15
hereof, the maximum number of shares on which options may be exercised or other
awards issued under this Plan shall be 3,000,000 shares. If an option or award
under the Plan expires, or for any reason is terminated unexercised with respect
to any shares, such shares shall again be available for options or awards
thereafter granted during the term of the Plan.
3. Administration of Plan
----------------------
(a) the Plan shall be administered by a committee (the "Committee") of
two or more members of the Board of Directors of the Company, none of whom shall
be officers or employees of the Company and all of whom shall be "disinterested
persons" with respect to the Plan within the meaning of Rule16b-3 under the
Securities Exchange Act of 1934, as amended ( the "Exchange Act"), or any
successor rule or regulation thereto. The members of any such committee shall be
appointed by and serve at the pleasure of the Board of Directors.
(b) The Committee shall have plenary authority in its discretion, but
subject to the express provisions of the Plan: (i) to determine the purchase
price of the Common Stock covered by each option or award, (ii) to determine the
employees to whom and the time or times at which such options and awards shall
be granted and the number of shares to be subject to each, (iii) to determine
the form of payment to be made upon the exercise of an SAR or in connection with
performance awards, either cash, Common Stock of the Company or a combination
thereof, (iv) to determine the terms of exercise of each option and award, (v)
to accelerate the time at which all or any part of an option or award may be
exercised, (vi) to amend or modify the terms of any option or award with the
consent of the optionee, (vii) to interpret the Plan, (viii) to prescribe, amend
and rescind rules and regulations relating to the Plan, (ix) to determine the
terms and provisions of each option and award agreement under the Plan (which
agreements need not be identical), including the designation of those options
intended to be Incentive Stock Options, and (x) to make all other determinations
necessary or advisable for the administration of the Plan, subject to the
exclusive authority of the Board of Directors under Section 16 herein to amend
or terminate the Plan.
<PAGE>
(c) The Committee shall select one of its Chairman and shall hold its
meetings at such times and places as it may determine. A majority of its members
shall constitute a quorum, provided that if the Committee is comprised of no
more than two members, all of its members must be present to constitute a
quorum. All determinations of the Committee shall be made by not less than a
majority of its members, provided that if the Committee is comprised of no more
than two members, such determinations may not be made by less than all of its
members. Any decision or determination reduced to writing and signed by all of
the members of the Committee shall be fully effective as if it had been made by
a majority vote at a meeting duly called and held. The grant of an option award
shall be effective only if written agreement shall have been duly executed and
delivered by and on behalf of the Company following such grant. The Committee
may appoint a Secretary and may make such rules and regulations for the conduct
of its business as it shall deem advisable.
4. Eligibility
-----------
Incentive Stock Options may only be granted under this Plan to any
full or part-time employee (which term as used herein includes, but is not
limited to, officers and director who are also employees) of the Company and of
its present and future subsidiary corporations within the meaning of Section
424(f) of the Code (herein called "subsidiaries"). Full or part-time employees,
consultants or independent contractors to the Company or one of its subsidiaries
shall be eligible to receive options
which of not qualify as Incentive Stock Options and awards. In determining the
persons to whom options and awards shall be granted and the number of shares
subject to each, the Committee may take into account the nature of services
rendered by the respective employees or consultants, their present and potential
contributions to the success of the Company and such other factors as the
Committee in its discretion shall deem relevant. A person who has been granted
an option or award under this Plan may be granted additional options or awards
under the Plan if the Committee shall so determine; provided, however, that for
Incentive Stock Options granted after December 31, 1986, to the extent the
aggregate fair market value (determined at the time the Incentive Stock Option
is granted) of the Common Stock with respect to which all Incentive Stock
Options are exercisable for the first time by an employee during any calendar
year (under all plans described in subsection (d) of Section 422 of the Code of
his employer corporation and its parent and subsidiary corporations) exceeds
$100,000 such options shall be treated as options which of not qualify as
Incentive Stock Options. Nothing in the Plan or in any agreement thereunder
shall confer on any employee any right to continue in the employ of the Company
or any of its subsidiaries or affect, in any way, the right of the Company or
any of its subsidiaries to terminate his or her employment at any time.
5. Price
-----
The option price for all Incentive Stock Options granted under the
Plan shall be determined by the Committee but shall not be less than 100% of the
fair market value of the Common Stock at the date of grant of such option. The
option price for options granted under the Plan which do not qualify as
Incentive Stock Options and, if applicable, the price for all awards shall also
be determined by the Committee. For purposes of the preceding sentence and for
all other valuation purposes under the Plan, the fair market value of shares of
Common Stock shall be (i) the closing price of the Common Stock as reported for
composite transactions if the Common Stock is then traded on a national
securities exchange, (ii) the last sale price if the Common Stock is then quoted
on the NASDAQ National Market System, or (iii) the average of the closing
representative bid and asked prices of the Common Stock as reported on NASDAQ on
the date as of which the fair market value is being determined. If on the date
of grant of any option or award hereunder the Common Stock is not traded on an
established securities market, the Committee shall make a good faith attempt to
satisfy the requirements of this Section 5 and in connection therewith shall
take such action as it deems necessary or advisable.
<PAGE>
6. Term
----
Each option and award and all rights and obligations thereunder shall
expire on the date determined by the Committee and specified in the option or
award agreement. The Committee shall be under no duty to provide terms of like
duration for options or awards granted under the Plan, but the term of an
Incentive stock option may not extend more than ten (10) years from the date of
grant of such option and the term of options granted under the Plan which do not
qualify as Incentive Stock Options may not extend more than fifteen (15) years
from the date of grating of such option.
7. Exercise of Option or Award
---------------------------
(a) The Committee shall have full and complete authority to determine
whether an option or award will be exercisable in full at any time or from time
to time during the term thereof, or to provide for the exercise thereof in such
installments, upon the occurrence of such events (such as termination of
employment for any reason) and at such times during the term of the option as
the Committee may determine and specify in the option or award agreement.
(b) The exercise of any option or award granted hereunder shall only
be effective at such time that the sale of Common Stock pursuant to such
exercise will not violate any state or federal securities or other laws. Only to
the extent required in order to comply with Rule 16b-3 under the Exchange Act,
in the case of an option or other award granted to a person considered by the
Company as one of its officers or directors for purposes of Section 16 of the
Exchange Act, the terms of the option to other award will require that such
share are not disposed of by such officer or director for a period of at least
six months from the date of grant.
(c) An optionee or grantee elected to exercise an option or award
shall give written notice to the Company of such election and of the number of
shares subject to such exercise. The full purchase price of such shares shall be
tendered with such notice of exercise. Payment shall be made to the Company in
cash (including bank check, certified check, personal check, or money order),
or, at the discretion of the Committee and as specified by the Committee, (i) by
delivering certificates for the Company's Common Stock already owned by the
optionee or grantee having a fair market value as of the date of grant equal to
the full purchase price of the shares, or (ii) by delivering the optionee's or
grantee's promissory note, which shall provide for interest at a rate not less
than the minimum rate required to avoid the imputation of income, original issue
discount or a below-market-rate loan pursuant to Sections 483, 1274, or 7872 of
the Code or any successor provisions thereto, or (iii) a combination of cash,
the option's or grantee promissory note and such shares. The fair market value
of such tendered shares shall be determined as provided in Section 5 herein. The
optionee's or grantee's promissory note shall be a full recourse liability of
the optionee and may, at the discretion of the Committee, be secured by a pledge
of the shares being purchased. Until such person has been issued the shares
subject to such exercise he or she possess no rights as a shareholder with
respect to such shares.
8. Stock Appreciation Rights
-------------------------
(a) Grant. At the time of grant of an option or award under the Plan
(or at any other time), the Committee, in its discretion, may grant a Stock
Appreciation Right ("SAR") evidenced by an agreement in such form as the
Committee shall from time to time approve. Any such SAR may be subject to
restrictions on the exercise thereof as may be set forth in the agreement
representing such SAR, which agreement shall comply with and be subject to the
following terms and conditions and any additional terms and conditions
established by the Committee that are consistent with the terms of the Plan.
<PAGE>
(b) Exercise. An SAR shall be exercised by the delivery to the Company
of a written notice which shall state that the holder thereof elects to exercise
his or her SAR as to the number of amount (hereinafter defined) the holder
thereof requests be paid to in cash and what portion, if any, is to be paid in
Common Stock of the Company. The Committee promptly shall cause to be paid to
such holder the SAR exercise amount either in cash, in Common Stock of the
Company, or any combination of cash and shares as the Committee may determine.
Such determination may be either in accordance with the request made by the
holder of the SAR or in the sole and absolute discretion of the Committee. The
SAR exercise amount is the excess of the fair market value of one share of the
Company's Common Stock on the date of exercise over the per share exercise price
in respect of which the SAR was granted, multiplied by the number of shares as
to which the SAR is exercised. For the purpose hereof, the fair market value of
the Company's shares of Common Stock shall be determined as provided in Section
5 herein.
9. Restricted Stock Awards
-----------------------
Awards of Common Stock subject to forfeiture and transfer may be
granted by the Committee. Any restricted stock award shall be evidenced by an
agreement in such form as the Committee shall from time to time approve, which
agreement shall comply with and be subject to the following terms and conditions
and any additional terms and conditions established by the Committee that are
consistent with the terms of the Plan.
(a) Grant of Restricted stock Awards. Each restricted stock award made
under the Plan shall be for such number of shares of Common Stock as shall be
determined by the Committee and set forth in the agreement containing the terms
of such restricted stock award. Such agreement shall set forth a period of time
during which the grantee must remain in the continuous employment of the Company
in order for the forfeiture and transfer restrictions to lapse. If the Committee
so determines, the restrictions may lapse during such restricted period in
installments with respect to specified portions of the shares covered by the
restricted stock award. The agreement may also, in the discretion of the
Committee set forth performance or other conditions that will subject the Common
Stock to forfeiture and transfer restrictions. The Committee may, at its
discretion, waive all or any part of the restrictions applicable to any or all
outstanding restricted stock awards.
(b) Delivery of Common Stock and Restrictions At the time of a
restricted stock award, a certificate representing the number of shares of
Common Stock awarded thereunder shall be registered in the name of the grantee.
Such certificate shall be held by the Company or any custodian appointed by the
Company fro the account of the grantee subject to the terms and conditions of
the Plan, and shall bear such a legend setting forth the restrictions imposed
thereon as the Committee, in its discretion, may determine. The grantee shall
have all rights of a shareholder with respect to the Common Stock, including the
right to receive dividends and the right to vote such shares, subject to the
following restrictions: (i) the grantee shall not be entitled to delivery of the
stock certificate until the expiration of the restricted period and the
fulfillment of any other restrictive conditions set forth in the restricted
stock agreement with respect to such Common stock; (ii) none of the shares of
Common Stock may be sold, assigned, transferred, pledged, hypothecated or
otherwise encumbered or disposed of during such restricted period or until after
the fulfillment of any such other restrictive conditions; and (iii) except as
otherwise determined by the Committee, all of the Common Stock shall be
forfeited and all rights of the grantee to such Common Stock shall terminate,
without further obligation on the part of the Company, unless the grantee
remains in the continuous employment of the Company for the entire restricted
period in relation to which such shares of Common Stock were grated and unless
any other restrictive conditions relating to the restricted stock award are met.
Any Common Stock, any other securities of the Company and any other property
(except for cash dividends) distributed with respect to Common Stock subject to
restricted stock awards shall be subject to the same restrictions, terms and
conditions as such restricted Common Stock.
<PAGE>
(c) Termination of restrictions. At the end of the restricted period
and provided that any other restrictive conditions of the restricted stock award
are met, or at such earlier time as otherwise determined by the Committee, all
restrictions set forth in the agreement relating to the restricted stock award
or in the Plan shall lapse as to the restricted Common Stock subject thereto,
and a stock certificate for the appropriate number of shares of Common Stock,
free of the restrictions and the restricted stock legend, shall be delivered to
the grantee or his beneficiary or estate, as the case may be.
10. Performance Awards
------------------
The Committee is further authorized to grant performance awards
("Performance Awards"). Subject to the terms of this Plan and any applicable
award agreement, Performance Awards granted under the Plan (i) may be
denominated or payable in cash, Common Stock (including, without limitation,
restricted stock), other securities, other awards, or other property and (ii)
shall confer on the holder thereof rights valued as determined by the Committee,
in its discretion, and payable to, or exercisable by, the holder of the
Performance Awards, in whole or in part, upon the achievement of such
performance goals during such performance periods as the Committee, in its
discretion, shall establish. Subject to the terms of this Plan and any
applicable award agreement, the performance goals, to be achieved during any
performance period, the length of nay performance period, the amount of any
Performance Awards granted, and the amount of any payment or transfer to be made
by the grantee and by the Company under Performance Awards shall be determined
by the Committee.
11. Income Tax Withholding and Tax Bonuses
--------------------------------------
(a) In order to comply with all applicable federal or state income tax
laws or regulations, the Company may take such action as it deems appropriate to
ensure that all applicable federal or state payroll, withholding, income or
other taxes, which are the sole and absolute responsibility of an optionee or
grantee under the Plan, are withheld or collected from such optionee or grantee.
In order to assist an optionee or grantee in paying all federal and state taxes
to be withheld or collected upon exercise of an option or award which does not
qualify as an Incentive Stock Option hereunder, the Committee, in its absolute
discretion and subject to such additional terms and conditions as it may adopt,
shall permit the optionee or grantee to satisfy such tax obligation by (i)
electing to have the Company withhold a portion of the shares otherwise to be
delivered upon exercise of such option or award with a fair market value,
determined in accordance with Section 5 herein, equal to such taxes or (ii)
delivering to the Company Common Stock other than the shares issuable upon
exercise of such option or award with a fair market value, determined in
accordance with section 5, equal to such taxes.
(b) The Committee shall have the authority, at the time of grant of an
option under the Plan oar at any time thereafter, to approve tax bonuses to
designated optionees or grantees to be paid upon their exercise of options or
awards granted hereunder. The amount of any such payments shall be determined by
the Committee. The Committee shall have full authority in its absolute
discretion to determine the amount of any such tax bonus and the terms and
conditions affecting the vesting and payment thereafter.
12. Additional Restrictions
-----------------------
The Committee shall have full and complete authority to determine
whether all or any part of the Common Stock of the Company acquired upon
exercise of any of the options or awards granted under the Plan shall be subject
to restrictions on the transferability thereof or any other restrictions
affecting in any manner the optionee's grantee's rights with respect thereto,
but any such restriction shall be contained in the agreement relating to such
options or awards.
<PAGE>
13. Ten Percent Shareholder Rule
----------------------------
Notwithstanding any other provision in the Plan, if at the time an
option is otherwise to be granted pursuant to the Plan the optionee owns
directly or indirectly (within the meaning of Section 424(d) of the Code) Common
Stock of the Company possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or its parent or
subsidiary corporations, if any (within the meaning of Section 422(b)(6) of the
Code), then any Incentive Stock Option to be granted to such optionee pursuant
to the Plan shall satisfy the requirements of Section 422(c)(5) of the Code, and
the option price shall be not less than 110% of the fair market value of the
Common Stock of the Company determined as described herein, and such option by
its terms shall not be exercisable after the expiration of five (5) years from
the date such option is granted.
14. Non-Transferability
-------------------
No option or award granted under the Plan shall be transferable by an
optionee or grantee, otherwise than by will or the laws of descent or
distribution. Except as otherwise provided in an option or award agreement,
during the lifetime of an optionee or grantee, the option shall be exercisable
only by such optionee or grantee.
15. Dilution or Other Adjustments
-----------------------------
If there shall be any change in the Common Stock through merger,
consolidation, reorganization, recapitalization, dividend in the form of stock
(of whatever amount), stock split or other change in the corporate structure,
appropriate adjustments in the Plan and outstanding options and awards shall be
made by the Committee. In the event of any such changes, adjustments shall
include, where appropriate, changes in; the aggregate number of shares subject
to the Plan, the number of shares and the price per share subject to outstanding
options and awards and the amount payable upon exercise of outstanding awards,
in order to prevent dilution or enlargement of option or award rights.
16. Amendment or Discontinuance of Plan
-----------------------------------
The Board of Directors may amend or discontinue the Plan at any time.
Subject to the provisions of Section 15 no amendment of the Plan, however, shall
without shareholder approval: (i) increase the maximum number of shares under
the Plan as provided in Section 2 herein, (ii) decrease the minimum price
provided in Section 5 herein, (iii) extend the maximum term under Section 6, or
(iv) modify the eligibility requirements for participation in the Plan. The
Board of Directors shall not alter or impair any option or award therefore
granted under the Plan without the consent of the holder of the option.
17. Time of Granting
----------------
Nothing contained in the Plan or in any resolution adopted or to be
adopted by the Board of Directors or by the shareholder of the Company, and no
action taken by the Committee or the Board of Director (other than the execution
and delivery of an option or award agreement), shall constitute the granting of
an option or award hereunder.
18. Effective Date and Termination of Plan
--------------------------------------
(a) The Plan was approved by the Board of Directors on June 29, 1990,
and shall be approved by the shareholders of the Company within twelve (12)
months thereof.
(b) Unless the Plan shall have been discontinued as provided in
Section 16 hereof, the Plan shall terminate June 29, 2000. No option or award
may be granted after such termination, but termination of the Plan shall not,
without the consent of the optionee or
<PAGE>
grantee, alter or impair any rights or obligations under any option or award
theretofore granted.
<PAGE>
DIAMETRICS MEDICAL, INC.
INCENTIVE STOCK OPTION AGREEMENT
1990 STOCK OPTION PLAN
THIS AGREEMENT, made this ________ day of ____________________, 19 ____, by and
between Diametrics Medical, Inc., a Minnesota corporation (the "Company"), and
___________________________ ("Employee").
WITNESSETH, THAT;
WHEREAS, the Company pursuant to its Diametrics Medical, Inc. 1990 Incentive and
Stock Option Plan (the "Plan") wishes to grant this stock option to Employee;
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
herein contained, the parties hereto hereby agree as follows:
1. Grant of Option
---------------
The Company hereby grants to Employee the right and option (hereinafter called
"the option") to purchase all or any part of an aggregate of __________ shares
of common stock, par value $.01 per share, of the Company (the "Common Stock")
at the price of $__________ per share on the terms and conditions set forth
herein. This option is intended to be entitled to treatment as an incentive
stock option within the meaning of Section 422A of the Internal Revenue Code of
1986, as amended (the "Code").
2. Duration and Exercisability
---------------------------
(a) This option must be exercised before ______________, 2006. This option may
be exercised by Employee in cumulative installments as follows:
Date Number of shares exercisable
---- ----------------------------
(b) Notwithstanding the provisions contained in Section 2(a) above, but subject
to other terms and conditions set forth herein, the option may be exercised in
full on or after the eleventh business day following the date of a "Change in
Control" (as hereinafter defined). For purposes of this Agreement, the following
terms shall have the definitions set forth below:
(i) "Change in Control" shall mean:
(A) a change in control of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not
the Company is then subject to such reporting requirement;
(B) the public announcement (which, for purposes of this definition, shall
include, without limitation, a report filed pursuant to Section 13(d) of the
Exchange Act) by the Company or any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) that such person has become the "beneficial
owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly
or indirectly, of securities of the Company representing 20% or more of the
combined voting power of the Company's then outstanding securities;
<PAGE>
(C) the Continuing Directors cease to constitute a majority of the Company's
Board of Directors;
(D) the shareholders of the Company approve (x) any consolidation or merger of
the Company in which the Company is not the continuing or surviving corporation
or pursuant to which shares of Company stock would be converted into cash,
securities or other property, other than a merger of the Company in which
shareholders immediately prior to the merger have the same proportionate
ownership of stock of the surviving corporation immediately after the merger;
(y) any sale, lease, exchange or other transfer (in one transaction or a series
of related transactions) of all or substantially all of the assets of the
Company; or (z) any plan of liquidation or dissolution of the Company; or
(E) the majority of the Continuing Directors determine in their sole and
absolute discretion that there has been a change in control of the Company.
(ii) "Continuing Director" shall mean any person who is a member of the Board of
Directors of the Company, while such person is a member of the Board of
Directors, who is not an Acquiring Person (as defined below) or an Affiliate or
Associate (as defined below) of an Acquiring Person, or a representative of an
Acquiring Person or of any such Affiliate or Associate, and who (x) was a member
of the Board of Directors on the date of this Agreement as first written above
or (y) subsequently becomes a member of the Board of Directors, if such person's
initial nomination for election or initial election to the Board of Directors is
recommended or approved by a majority of the Continuing Directors. For purposes
of this subparagraph (ii), "Acquiring Person" shall mean any "person" (as such
term is used in Sections 13(d) and 14(d) of the Exchange Act) who or which,
together with all Affiliates and Associates of such person, is the "beneficial
owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly
or indirectly, of securities of the Company representing 20% or more of the
combined voting power of the Company's then outstanding securities, but shall
not include the Company, any subsidiary of the Company or any employee benefit
plan of the Company or of any subsidiary of the Company or any entity holding
shares of Common Stock organized, appointed or established for, or pursuant to
the terms of, any such plan; and "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2 promulgated under the
Exchange Act.
(c) This option shall not be assignable or transferable except by will or the
laws of descent and distribution, and this option may be exercised, during the
lifetime of Employee, only by Employee.
(d) Employee understands that to the extent that the aggregate fair market value
(determined at the time the option is granted) of the Common Stock with respect
to which all options are exercisable for the first time by Employee during any
calendar year exceeds $100,000, in accordance with Section 422A(b)(7) of the
Code, such options shall be treated as options that do not qualify as incentive
stock options.
3. Effect of Termination of Employment
-----------------------------------
(a) In the event that Employee ceases employment with the company or any of its
subsidiaries for any reason other than death, Employee shall have the right to
exercise the option at any time within ninety days after such termination of
employment to the extent of the full number of shares he was entitled to
purchase under the option on the date of termination, subject to the condition
that no option shall be exercisable after the expiration of the term of the
option.
(b) Notwithstanding the provisions contained in Section 3(a) above, but subject
to the other terms and conditions set forth herein, in the event that, within
two years following a Change in Control, the Company or any of it subsidiaries
terminates Employee's employment without "Cause" (as hereinafter defined) or
Employee voluntarily terminates his employment for "Good Reason" (as hereinafter
defined), Employee shall have the right to exercise the option in full at any
time within three years after the later of the date of such termination of
<PAGE>
employment or the eleventh business day following the date of the Change in
Control, subject to the condition that no option shall be exercisable after the
expiration of the term of the option; provided, however, that such exercise
period shall not be extended pursuant to this paragraph (b) if, within ten
business days following the date of the Change in Control, a majority of the
Continuing Directors, if any, who are members of the Stock Option Committee of
the Company's Board of Directors determines that this paragraph (b) shall not
apply with respect to such Change in Control and that the option shall remain
subject to the provisions contained in Section 3(a) above. Employee understands
that if the option or any portion of the option is exercised later than three
months from the date of termination, the option or such portion of the option
may not qualify for treatment as an incentive stock option within the meaning of
Section 422A of the Code. For purposes of this paragraph (b), the following
terms shall have the definitions set forth below:
(i) "Cause" shall mean willful and continued failure by Employee to perform his
duties or gross and willful misconduct including, but not limited to, wrongful
appropriation of funds or the commission of a gross misdemeanor or felony.
(ii) "Good Reason" shall mean the occurrence of any of the following events,
except for the occurrence of such an event in connection with the termination or
reassignment of Employee's employment by the Company or any of its subsidiaries
for Cause or by reason of disability (as defined in Section 22(e)(3) of the
Code) or death:
(A) the assignment to Employee of employment responsibilities which are not of
comparable responsibility and status as the employment responsibilities held by
Employee immediately prior to a Change in Control;
(B) a reduction in Employee's base salary as in effect immediately prior to a
Change in Control;
(C) an amendment or modification of the Company's incentive compensation program
(except as may be required by applicable law) which affects the terms or
administration of the program in a manner adverse to the interest of Employee as
compared to the terms and administration of such program immediately prior to a
Change in Control;
(D) the requirement by the Company or any of its subsidiaries that Employee be
based anywhere other than within 50 miles of Employee's office location
immediately prior to a Change in Control, except for requirements of temporary
travel on the Company's business to an extent substantially consistent with
Employee's business travel obligations immediately prior to a Change in Control;
or
(E) except to the extent otherwise required by applicable law, the failure by
the Company to continue in effect any benefit or compensation plan, stock
ownership plan, stock purchase plan, bonus plan, life insurance plan, health-
and-accident plan or disability plan in which Employee is participating
immediately prior to a Change in Control (or plans providing Employee with
substantially similar benefits), the taking of any action by the Company which
would adversely affect Employee's participation in, or materially reduce
Employee's benefits under, any of such plans or deprive Employee of any material
fringe benefit enjoyed by Employee immediately prior to a Change in Control, or
the failure by the Company to provide Employee with the number of paid vacation
days to which Employee is entitled immediately prior to a Change in Control in
accordance with the Company's vacation policy as then in effect.
(c) If Employee shall die while in the employ of the Company or any of its
subsidiaries or within one month after termination of employment, this option
may be exercised at any time within twelve months after his death by the
executors or administrators of Employee, or by any person or persons to whom the
option is transferred by will or the applicable laws of descent and
distribution, to the extent of the number of shares he was entitled to purchase
under the
<PAGE>
option on the date of death, subject to the condition that no option shall be
exercisable after the expiration of the term of the option.
4. Manner of Exercise
------------------
(a) The option can be exercised only by Employee or other proper party within
the option period by delivering written notice (marked to the attention of the
Treasurer) to the Company at its principal office which is now located at 2658
Patton Road, Roseville, Minnesota 55113. The notice shall state the number of
shares as to which the option is being exercised and be accompanied by payment
in full of the option price for all shares designated in the notice.
(b) Employee may, at Employer's election, pay the option price by check (bank
check, certified check or personal check) or by any of the means set forth in
Section 7 (c) of the Plan.
5. Adjustments
-----------
If Employee exercises all or any portion of the option subsequent to any change
in the number or character of the Common Stock (through merger, consolidation,
reorganization, recapitalization, stock dividend or otherwise), Employee shall
then receive for the aggregate price paid by him on such exercise of the option,
the number and type of securities or other consideration which he would have
received if such option had been exercised prior to the event changing the
number or character of outstanding shares.
6. Miscellaneous
-------------
(a) This option is issued pursuant to the Plan and is subject to its terms.
Employee hereby acknowledges receipt of a copy of the Plan. The Plan is also
available for inspection during business hours at the principal office of the
Company.
(b) This Agreement shall not confer on Employee any right with respect to
continuance of employment by the Company or any of its subsidiaries, nor will it
interfere in any way with the right of the Company to terminate such employment
at any time. Employee shall have none of the rights of a shareholder with
respect to shares subject to this option until such shares shall have been
issued to him upon exercise of this option.
(c) The Company shall at all times during the term of the option reserve and
keep available such number of shares as will be sufficient to satisfy the
requirements of this Agreement.
(d) If Employee shall dispose of any of the shares of Common Stock acquired by
him pursuant to the exercise of the option within two years from the date of
this option was granted or within one year after the transfer of any such shares
to him upon exercise of this option, then in order to provide the Company with
the opportunity to claim the benefit of any income tax deduction which may be
available to it under the circumstances, Employee shall promptly notify the
Company of the dates of acquisition and disposition of such shares, the number
of shares so disposed of, and the consideration, if any, received for such
shares.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
on the day and year first above written.
<PAGE>
DIAMETRICS MEDICAL, INC.
By ________________________________
Its ______________________________
EMPLOYEE
___________________________________
<PAGE>
DIAMETRICS MEDICAL, INC.
NON-INCENTIVE STOCK OPTION AGREEMENT
1990 STOCK OPTION PLAN
THIS AGREEMENT, made this ________ day of ______________________, 19____, by and
between Diametrics Medical, Inc., a Minnesota corporation (the "Company"), and
___________________________ ("Employee").
WITNESSETH, THAT:
WHEREAS, the Company pursuant to its Diametrics Medical, Inc. 1990 Incentive and
Stock Option Plan (the "Plan") wishes to grant this stock option to Employee;
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
herein contained, the parties hereto hereby agree as follows:
1. Grant of Option
---------------
The Company hereby grants to Employee the right and option (hereinafter called
"the option") to purchase all or any part of an aggregate of __________ shares
of common stock, par value $.01 per share, of the Company (the "Common Stock")
at the price of $ __________ per share on the terms and conditions set forth
herein. This option is not intended to be an incentive stock option within the
meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the
"Code").
2. Duration and Exercisability
---------------------------
(a) This option must be exercised before ____________, 2006. This option may
be exercised by Employee in cumulative installments as follows:
Date Number of shares exercisable
---- ----------------------------
(b) Notwithstanding the provisions contained in Section 2(a) above, but subject
to the other terms and conditions set forth herein, the option may be exercised
in full on or after the eleventh business day following the date of a "Change in
Control" (as hereinafter defined). For purposes of this Agreement, the
following terms shall have the definitions set forth below:
(i) "Change in Control" shall mean:
(A) a change in control of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not
the Company is then subject to such reporting requirement;
(B) the public announcement (which, for purposes of this definition, shall
include, without limitation, a report filed pursuant to Section 13(d) of the
Exchange Act) by the Company or any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) that such person has become the "beneficial
owner" (as defined in Rule 13d-3 promulgated under the Exchange
<PAGE>
Act), directly or indirectly, of securities of the Company representing 20% or
more of the combined voting power of the Company's then outstanding securities;
(C) the Continuing Directors cease to constitute a majority of the Company's
Board of Directors;
(D) the shareholders of the Company approve (x) any consolidation or merger of
the Company in which the Company is not the continuing or surviving corporation
or pursuant to which shares of Company stock would be converted into cash,
securities or other property, other than a merger of the Company in which
shareholders immediately prior to the merger have the same proportionate
ownership of stock of the surviving corporation immediately after the merger;
(y) any sale, lease, exchange or other transfer (in one transaction or a series
of related transactions) of all or substantially all of the assets of the
Company; or (z) any plan of liquidation or dissolution of the Company; or
(E) the majority of the Continuing Directors determine in their sole and
absolute discretion that there has been a change in control of the Company.
(ii) "Continuing Director" shall mean any person who is a member of the Board of
Directors of the Company, while such person is a member of the Board of
Directors, who is not an Acquiring Person (as defined below) or an Affiliate or
Associate (as defined below) of an Acquiring Person, or a representative of an
Acquiring Person or of any such Affiliate or Associate, and who (x) was a member
of the Board of Directors on the date of this Agreement as first written above
or (y) subsequently becomes a member of the Board of Directors, if such person's
initial nomination for election or initial election to the Board of Directors is
recommended or approved by a majority of the Continuing Directors. For purposes
of this subparagraph (ii), "Acquiring Person" shall mean any "person" (as such
term is used in Sections 13(d) and 14(d) of the Exchange Act) who or which,
together with all Affiliates and Associates of such person, is the "beneficial
owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly
or indirectly, of securities of the Company representing 20% or more of the
combined voting power of the Company's then outstanding securities, but shall
not include the Company, any subsidiary of the Company or any employee benefit
plan of the Company or of any subsidiary of the Company or any entity holding
shares of Common Stock organized, appointed or established for, or pursuant to
the terms of, any such plan; and "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2 promulgated under the
Exchange Act.
(c) This option shall not be assignable or transferable except by will or the
laws of descent and distribution, and this option may be exercised, during the
lifetime of Employee, only by Employee.
3. Effect of Termination of Employment
-----------------------------------
(a) In the event that the Company or any of its subsidiaries terminates
Employee's employment for any reason other than death, Employee shall have the
right to exercise the option at any time within ninety days after such
termination of employment to the extent of the full number of shares he was
entitled to purchase under the option on the date of termination, subject to the
condition that no option shall be exercisable after the expiration of the term
of the option.
(b) Notwithstanding the provisions contained in Section 3(a) above, but subject
to the other terms and conditions set forth herein, in the event that, within
two years following a Change in Control, the Company or any of its subsidiaries
terminates Employee's employment without "Cause" (as hereinafter defined) or
Employee voluntarily terminates his employment for "Good Reason" (as hereinafter
defined), Employee shall have the right to exercise the option in full at any
time within three years after the later of the date of such termination of
employment or the eleventh business day following the date of the Change in
Control, subject to the condition that no option shall be exercisable after the
expiration of the term of the option; provided, however, that such exercise
period shall not be extended pursuant to this paragraph (b) if, within ten
business days following the date of the Change in Control, a majority of the
Continuing Directors, if any, who are members of the Stock Option Committee of
the Company's
<PAGE>
Board of Directors determines that this paragraph (b) shall not apply with
respect to such Change in Control and that the Shares shall remain subject to
the provisions contained in Section 3(a) above. For purposes of this paragraph
(b), the following terms shall have the definitions set forth below:
(i) "Cause" shall mean willful and continued failure by Employee to perform his
duties or gross and willful misconduct including, but not limited to, wrongful
appropriation of funds or the commission of a gross misdemeanor or felony.
(ii) "Good Reason" shall mean the occurrence of any of the following events,
except for the occurrence of such an event in connection with the termination or
reassignment of Employee's employment by the Company or any of its subsidiaries
for Cause or by reason of disability (as defined in Section 22(e)(3) of the
Code) or death:
(A) the assignment to Employee of employment responsibilities which are not of
comparable responsibility and status as the employment responsibilities held by
Employee immediately prior to a Change in Control;
(B) a reduction in Employee's base salary as in effect immediately prior to a
Change in Control;
(C) an amendment or modification of the Company's incentive compensation program
(except as may be required by applicable law) which affects the terms of
administration of the program in a manner adverse to the interest of Employee as
compared to the terms and administration of such program immediately prior to a
Change in Control;
(D) the requirement by the Company or any of its subsidiaries that Employee be
based anywhere other than within 50 miles of Employee's office location
immediately prior to a Change in Control, except for requirements of temporary
travel on the Company's business to an extent substantially consistent with
Employee's business travel obligations immediately prior to a Change in Control;
or
(E) except to the extent otherwise required by applicable law, the failure by
the Company to continue in effect any benefit or compensation plan, stock
ownership plan, stock purchase plan, bonus plan, life insurance plan, health-
and-accident plan or disability plan in which Employee is participating
immediately prior to a Change in Control (or plans providing Employee with
substantially similar benefits), the taking of any action by the Company which
would adversely affect Employee's participation in, or materially reduce
Employee's benefits under, any of such plans or deprive Employee of any material
fringe benefit enjoyed by Employee immediately prior to a Change in Control, or
the failure by the Company to provide Employee with the number of paid vacation
days to which Employee is entitled immediately prior to a Change in Control in
accordance with the Company's vacation policy as then in effect.
(c) If Employee shall die while in the employ of the Company or any of its
subsidiaries or within one month after termination of employment, this option
may be exercised at any time within twelve months after his death by the
executors or administrators of Employee, or by any person or persons to whom the
option is transferred by will or the applicable laws of descent and
distribution, to the extent of the number of shares Employee was entitled to
purchase under the option on the date of death, subject to the condition that no
option shall be exercisable after the expiration of the term of the option.
4. Manner of Exercise
------------------
(a) The option can be exercised only by Employee or other proper party within
the option period by delivering written notice (marked to the attention of the
Treasurer) to the Company at its principal office which is now located at 2658
Patton Road, Roseville, Minnesota 55113.
<PAGE>
The notice shall state the number of shares as to which the option is being
exercised and be accompanied by payment in full of the option price for all
shares designated in the notice.
(b) Employee may, at Employee's election, pay the option price by check (bank
check, certified check or personal check) or by any of the means set forth in
Section 7 (c) of the Plan.
5. Adjustments
-----------
If Employee exercises all or any portion of the option subsequent to any change
in the number or character of the Common Stock (through merger, consolidation,
reorganization, recapitalization, stock dividend or otherwise), Employee shall
then receive for the aggregate price paid by him on such exercise of the option,
the number and type of securities or other consideration which he would have
received if such option had been exercised prior to the event changing the
number or character of outstanding shares.
6. Income Tax Withholding
----------------------
In order to provide the Company with the opportunity to claim the benefit of any
income tax deduction which may be available to it upon the exercise of the
option, and in order to comply with all applicable federal or state income tax
laws or regulations, the Company may take such action as it deems appropriate to
insure that, if necessary, all applicable federal or state payroll, withholding,
income or other taxes are withheld or collected from Employee. Employee may
elect to satisfy his federal and state income tax withholding obligations upon
exercise of this option by (i) having the Company withhold a portion of the
shares of Common Stock otherwise to be delivered upon exercise of such option
having a fair market value equal to the amount of federal and state income taxes
required to be withheld on such exercise, in accordance with the rules
established by the Company's Board of Directors, or (ii) delivering to the
Company shares of Common Stock other than the shares issuable upon exercise of
such options having a fair market value equal to such taxes, in accordance with
the rules of the Board of Directors.
7. Miscellaneous
-------------
(a) This option is issued pursuant to the Plan and is subject to its terms.
Employee hereby acknowledges receipt of a copy of the Plan. The Plan is also
available for inspection during business hours at the principal office of the
Company.
(b) This Agreement shall not confer on Employee any right with respect to
continuance of employment by the Company or any of its subsidiaries, nor will it
interfere in any way with the right of the Company to terminate such employment
at any time. Employee shall have none of the rights of a shareholder with
respect to shares subject to this option until such shares shall have been
issued to him upon exercise of this option.
(c) The Company shall at all times during the term of the option reserve and
keep available such number of shares as will be sufficient to satisfy the
requirements of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
on the day and year first above written.
DIAMETRICS MEDICAL, INC.
BY ________________________________
Its ______________________________
EMPLOYEE
___________________________________
<PAGE>
EXHIBIT 10.13
DIAMETRICS MEDICAL, INC.
1995 EMPLOYEE STOCK PURCHASE PLAN
(As revised and restated)
ARTICLE I. INTRODUCTION
------------
Section 1.01 Purpose. The purpose of the Diametrics Medical, Inc.
--------
1995 Employee Stock Purchase Plan (the "Plan") is to provide employees of
Diametrics Medical, Inc., a Minnesota corporation (the "Company"), and certain
related corporations with an opportunity to share in the ownership of the
Company by providing them with a convenient means for regular and systematic
purchases of the Company's Common Stock, par value $.01 per share, and, thus, to
develop a stronger incentive to work for the continued success of the Company.
Section 1.02 Rules of Interpretation. It is intended that the Plan
------------------------
be an "employee stock purchase plan" as defined in Section 423(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), and Treasury Regulations
promulgated thereunder. Accordingly, the Plan shall be interpreted and
administered in a manner consistent therewith if so approved. All Participants
in the Plan will have the same rights and privileges consistent with the
provisions of the Plan.
Section 1.03. Definitions. For purposes of the Plan, the following
------------
terms will have the meanings set forth below:
(a) "Acceleration Date" means the earlier of the date of shareholder
-----------------
approval or approval by the Company's Board of Directors of (i) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of
Company Common Stock would be converted into cash, securities or other
property, other than a merger of the Company in which shareholders of the
Company immediately prior to the merger have the same proportionate
ownership of stock in the surviving corporation immediately after the
merger; (ii) any sale, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the
assets of the Company; or (iii) any plan of liquidation or dissolution
of the Company.
(b) "Affiliate" means any subsidiary corporation of the Company, as
---------
defined in Section 424(f) of the Code, whether now or hereafter acquired
or established.
(c) "Committee" means the committee described in Section 10.01.
---------
(d) "Company" means Diametrics Medical, Inc., a Minnesota
---------
corporation, and its successors by merger or consolidation as
contemplated by Article XI herein.
(e) "Current Compensation" means all regular base wage or salary
--------------------
payments paid by the Company to a Participant in accordance with the
terms of his or her employment, but excluding annual bonus payments and
all other forms of special compensation.
<PAGE>
(f) "Fair Market Value" as of a given date means such value of the
-----------------
Common Stock as reasonably determined by the Committee, but shall not be
less than (i) the closing price of the Common Stock as reported for
composite transactions if the Common Stock is then traded on a national
securities exchange, (ii) the last sale price if the Common Stock is then
quoted on the NASDAQ National Market System, or (iii) the average of the
closing representative bid and asked prices of the Common Stock as
reported on NASDAQ on the date as of which the fair market value is being
determined. If on a given date the Common Stock are not traded on an
established securities market, the Committee shall make a good faith
attempt to satisfy the requirements of this Section 1.03 and in
connection therewith shall take such action as it deems necessary or
advisable.
(g) "Full-Time Employee" means an employee of the Company or a
------------------
Participating Affiliate as of the first day of a Purchase Period who has
worked for the company for at least 90 days, including an officer or
director who is also an employee, but excluding an employee whose
customary employment is less than 20 hours per week, provided, however,
that for the initial Purchase Period, all employees whose customary
employment exceeds 20 hours per week shall be eligible to participate
regardless of the number of days they have been employed by the Company.
(h) "Participant" means a Full-Time Employee who is eligible to
-----------
participate in the Plan under Section 2.01 and who has elected to
participate in the Plan.
(i) "Participating Affiliate" means an Affiliate which has been
-----------------------
designated by the Committee in advance of the Purchase Period in question
as a corporation whose eligible Full-Time Employees may participate in
the Plan.
(j) "Plan" means the Diametrics Medical, Inc. 1995 Employee Stock
----
Purchase Plan, as amended, the provisions of which are set forth herein.
(k) "Purchase Period" means the approximate 3-month periods beginning
---------------
on the first business day in January, April, July and October of each
year and ending on the last business day in the following March, June,
September and December, respectively; provided that the initial Purchase
Period will commence on July 3, 1995 and will terminate on September 29,
1995.
(l) "Common Stock" means the Company's Common Stock, $.01 par value,
------------
as such stock may be adjusted for changes in the Company as contemplated
by Article XI herein.
(m) "Stock Purchase Account" means the account maintained on the
----------------------
books and records of the Company recording the amount received from each
Participant through payroll deductions made under the Plan.
ARTICLE II. ELIGIBILITY AND PARTICIPATION
-----------------------------
Section 2.01 Eligible Employees. All Full-Time Employees shall be
-------------------
eligible to participate in the plan beginning on the first day of the first
Purchase Period to commence after such person becomes a Full-Time Employee.
Subject to the provisions of Article VI, each such employee will continue to be
eligible to participate in the Plan so long as he or she remains a Full-Time
Employee.
<PAGE>
Section 2.02 Election to Participate. An eligible Full-Time Employee
------------------------
may elect to participate in the Plan for a given Purchase Period by filing with
the Company, in advance of that Purchase Period and in accordance with such
terms and conditions as the Committee in its sole discretion may impose, a form
provided by the Company for such purpose which authorizes regular payroll
deductions from Current Compensation beginning with the first payday in that
Purchase Period and continuing until the employee withdraws from the Plan or
ceases to be eligible to participate in the Plan.
Section 2.03 Limits on Stock Purchase. No employee shall be granted
-------------------------
any right to purchase Common Stock hereunder if such employee, immediately after
such right to purchase is granted, would own, directly or indirectly, within the
meaning of Section 423(b)(3) and Section 424(d) of the Code, Common Stock
possessing 5% or more of the total combined voting power or value of all the
classes of the capital stock of the Company or all Affiliates.
Section 2.04 Voluntary Participation. Participation in the Plan on
------------------------
the part of a Participant is voluntary and such participation is not a condition
of employment nor does participation in the Plan entitle a Participant to be
retained as an employee.
ARTICLE III. PAYROLL DEDUCTIONS, COMPANY
---------------------------
CONTRIBUTIONS AND STOCK PURCHASE ACCOUNT
----------------------------------------
Section 3.01 Deduction from Pay. The form described in Section 2.02
-------------------
will permit a Participant to elect payroll deductions of any multiple of 1% but
not less than 1% or more than 10% of such Participant's Current Compensation for
each pay period, subject to such other limitations as the Committee in its sole
discretion may impose. A Participant may cease making payroll deductions at any
time, subject to such limitations as the Committee in its sole discretion may
impose.
Section 3.02 Credit to Account. Payroll deductions will be credited
------------------
to the Participant's Stock Purchase Account on each payday, and Company
contributions will be credited to the Participant's Stock Purchase Account on
the last business day of the Purchase Period at the time of and in connection
with the purchase of shares of Common Stock in accordance with Article IV and V
hereof.
Section 3.03 Interest. No interest will be paid upon payroll
---------
deductions, Company contributions or on any amount credited to, or on deposit
in, a Participant's Stock Purchase Account.
Section 3.04 Nature of Account. The Stock Purchase Account is
------------------
established solely for accounting purposes, and all amounts credited to the
Stock Purchase Account will remain part of the general assets of the Company or
the Participating Affiliate (as the case may be).
Section 3.05 No Additional Contributions. A Participant may not make
----------------------------
any payment into the Stock Purchase Account other than the payroll deductions
made pursuant to the Plan.
<PAGE>
ARTICLE IV. RIGHT TO PURCHASE SHARES
------------------------
Section 4.01 Number of Shares. Each Participant will have the right
-----------------
to purchase on the last business day of the Purchase Period all, but not less
than all, of the largest number of whole shares of Common Stock that can be
purchased at the price specified in Section 4.02 with the entire credit balance
in the Participant's Stock Purchase Account, subject to the limitations that (a)
no more than 2,000 shares of Common Stock may be purchased under the Plan by any
one Participant for a given Purchase Period and (b) in accordance with Section
423 (b)(8) of the Code, no more than $25,000 in Fair Market Value (determined at
the beginning of each Purchase Period) of Common Stock and other stock may be
purchased under the Plan and all other employee stock purchase plans (if any) of
the Company and the Affiliates by any one Participant for any calendar year. If
the purchases for all Participants would otherwise cause the aggregate number of
shares of Common Stock to be sold under the Plan to exceed the number specified
in Section 10.03, each Participant shall be allocated a pro rata portion of the
Common Stock to be sold.
Section 4.02 Purchase Price. The purchase price for any Purchase
---------------
Period shall be the lesser of (a) 85% of the Fair Market Value of the Common
Stock on the first business day of that Purchase Period or (b) 85% of the Fair
Market Value of the Common Stock on the last business day of that Purchase
Period, in each case rounded up to the next higher full cent.
ARTICLE V. EXERCISE OF RIGHT
-----------------
Section 5.01 Purchase of Stock. On the last business day of a
------------------
Purchase Period, the entire credit balance in each Participant's Stock Purchase
Account will be used to purchase the largest number of whole shares of Common
Stock purchasable with such amount (subject to the limitations of Section 4.01),
unless the Participant has filed with the Company, in advance of that date and
subject to such terms and conditions as the Committee in its sole discretion may
impose, a form provided by the Company which requests the distribution of the
entire credit balance in cash.
Section 5.02 Cash Contributions. Any amount remaining in a
-------------------
Participant's Stock Purchase Account after the last business day of a Purchase
Period will be paid to the Participant in cash within 30 days after the end of
that Purchase Period.
Section 5.03 Notice of Acceleration Date. The Company shall use its
----------------------------
best efforts to notify each Participant in writing at least ten days prior to
any Acceleration Date that the then current Purchase Period will end on such
Acceleration Date.
ARTICLE VI. WITHDRAWAL FROM PLAN:SALE OF STOCK
----------------------------------
Section 6.01 Voluntary Withdrawal. A Participant may, in accordance
---------------------
with such terms and conditions as the Committee in its sole discretion may
impose, withdraw from the Plan and cease making a payroll deductions by filing
with the Company a form provided for this purpose. In such event, the entire
credit balance in the Participant's Stock Purchase Account will be paid to the
Participant in cash within 30 days. A Participant who withdraws from the Plan
will not be eligible to reenter the Plan until the beginning of the next
Purchase Period following the date of such withdrawal.
<PAGE>
Section 6.02 Death. Subject to such terms and conditions as the
------
Committee in its sole discretion may impose, upon the death of a Participant, no
further amounts shall be credited to the Participant's Stock Purchase Account.
Thereafter, on the last business day of the Purchase Period during which such
Participant's death occurred and in accordance with Section 5.01, the entire
credit balance in such Participant's Stock Purchase Account will be used to
purchase Common Stock, unless such Participant's estate has filed with the
Company, in advance of that day and subject to such terms and conditions as the
Committee in its sole discretion may impose, a form provided by the Company
which elects to have the entire credit balance in such Participant's Stock
Account distributed in cash within 30 days after the end of that Purchase Period
or at such earlier time as the Committee in its sole discretion may decide. Each
Participant, however, may designate one or more beneficiaries who, upon death,
are to receive the Common Stock or the amount that otherwise would have been
distributed or paid to the Participant's estate and may change or revoke any
such designation form time to time. No such designation, change or revocation
will be effective unless made by the Participant in writing and filed with the
Company during the Participant's lifetime. Unless the Participant has otherwise
specified the beneficiary designation, the beneficiary or beneficiaries so
designated will become fixed as of the date of the death of the Participant so
that, if a beneficiary survives the Participant but dies before the receipt of
the payment due such beneficiary, the payment will be made to such beneficiary's
estate.
Section 6.03 Termination of Employment. Subject such terms and
--------------------------
conditions as the Committee in its sole discretion may impose, upon a
Participant's normal or early retirement with the consent of the Company under
any pension or retirement plan of the Company or Participating Affiliate, no
further amounts shall be credited to the Participant's Stock Purchase Account.
Thereafter, on the last business day of the Purchase Period during which such
Participant's approved retirement occurred and in accordance with Section 5.01,
the entire credit balance in such Participant's Stock Purchase Account will be
used to purchase Common Stock, unless such Participant has filed with Company,
in advance of that day and subject to such terms and conditions as the committee
in its sole discretion may impose, a form provided by the Company which elects
to receive the entire credit balance in such Participant's Stock Purchase
Account in cash within 30 days after the end of that Purchase Period, provided
that such Participant shall have no right to purchase Common Stock in the event
that the last day of such a Purchase Period occurs more than three months
following the termination of such Participates employment with Company by
reason of such an approved retirement. In the event of any other termination of
employment (other than death) with the Company or a participating Affiliate,
participation the Plan will cease on the date the Participant ceases to be a
Full-Time Employee for any reason. In such event, the entire credit balance in
such Participant's Stock Purchase Account will be paid to the Participant in
cash within 30 days. For purposes of this Section 6.03, a transfer of employment
to any Affiliate, or a leave of absence which has been approved by the
Committee, will not be deemed a termination of employment as a Full-Time
Employee.
ARTICLE VII. NONTRANSFERABILITY
------------------
Section 7.01 Nontranferable Right to Purchase. The right to purchase
---------------------------------
Common Stock hereunder may not be assigned, transferred, pledged or
hypothecated (whether by operation of law or otherwise), except as provided in
Section 6.02, and will not be subject to execution, attachment or similar
process. Any attempted assignment, transfer, pledge, hypothecation or other
disposition or levy of attachment or similar process upon the right to
purchase will be null and void and without effect.
Section 7.02 Nontranferable Account Except as provided in Section
----------------------
6.02, the amounts credited to a Stock Purchase Account may not be assigned,
transferred, pledged or hypothecated in any way, and any attempted assignment,
transfer, pledge, hypoothecation or other disposition of such amounts will be
null and void and without effect.
<PAGE>
ARTICLE VIII. STOCK CERTIFICATES
------------------
Section 8.01 Delivery. Promptly after the last day of each Purchase
---------
Period and subject to such terms and conditions as the Committee in its sole
discretion may impose, the Company will cause to be delivered to or for the
benefit of the Participant a certificate representing the Common Stock
purchased on the last business day of such Purchase Period.
Section 8.02 Securities Laws. The Company shall not be required to
----------------
issue or deliver any certificate representing Common Stock prior to
registration under the Securities Act of 1933, as amended, or registration or
qualification under any state law if such registrations required. The Company
shall use its best efforts to accomplish such registration (if and to the
extent required) not later than a reasonable time following the Purchase
Period, and delivery of certificates may be deferred until such registration
is accomplished.
Section 8.03 Completion of Purchase. A Participant shall have no
-----------------------
interest in the Common Stock purchased until a certificate representing the
same is issued to or for the benefit of the Participant.
Section 8.04 Form of Ownership. The certificates representing Common
------------------
Stock issued under the Plan will be registered in the name of the Participant
or jointly in the name of the Participant and another person, as the
Participant may direct on a form provided by the Company.
ARTICLE IX. EFFECTIVE DATE AMENDMENT AND TERMINATION OF PLAN
------------------------------------------------
Section 9.01 Effective Date. The Plan was approved by the Board of
---------------
Directors of the Company on April 19, 1995, and will be approved by the
shareholders within 12 months of such date.
Section 9.02 Plan Commencement. The initial Purchase Period under
------------------
the Plan will commence on July 3,1995. Thereafter each succeeding Purchase
Period will commence and terminate in accordance with Section 1.03(k).
Section 9.03 Powers of Board. The Board of Directors may amend or
----------------
discontinue the Plan at any time. No amendment or discontinuation of the Plan,
however, shall without shareholder approval be made that (i) absent such
shareholder approval, would cause Rule 16b-3 under the Securities Exchange Act
of 1934, as amended (the "Act") to become unavailable with respect to the
Plan, (ii) requires shareholder approval under any rules or regulations of the
National Association of Securities Dealers, Inc. or any securities exchange
that are applicable to the Company, or (iii)permit the issuance of Common
Stock before payment therefor in full.
Section 9.04 Automatic Termination. The Plan shall automatically
----------------------
terminate when all of the shares of Common Stock provided for in Section 10.03
have been sold.
ARTICLE X. ADMINISTRATION
--------------
Section 10.01 The Committee. The Plan shall be administered by a
--------------
committee (the "Committee") of two or more directors of the none of whom shall
be officers or employees of the Company and all of whom shall be
"disinterested persons" with respect to the Plan within the meaning of Rule
16b-3 under the Act. The members of the committee shall be appointed by and
serve at the pleasure of the Board of Directors.
<PAGE>
Section 10.02 Powers of Committee. Subject to the provisions of the
--------------------
Plan, the Committee shall have full authority to administer the plan,
including authority to interpret and construe any provision of the Plan, to
establish deadlines by which the various administrative forms must be received
in order to be effective, and to adopt such other rules and regulations for
administrating the Plan as it may deem appropriate. The Committee shall have
full and complete authority to determine whether all or any part of the Common
Stock acquired pursuant to the Plan shall be subject to restriction on the
transferability thereof or any other restrictions affecting in any manner a
Participant's rights with respect thereto but any such restrictions shall be
contained in the form by which a Participant elects to participate in the Plan
pursuant to Section 2.02. Decisions of the Committee will be final and
binding on all parties who have an interest in the Plan.
Section 10.03 Stock to be Sold. The Common Stock to be issued and
-----------------
sold under the Plan may be treasury shares or authorized but unissued shares,
or the Company may purchase Common Stock in the market for sale under the
Plan. Except as provided in Section 11.01, the aggregate number of shares of
Common Stock to be sold under the Plan will not exceed 300,000 shares.
Section 10.04 Notices. Notices to the Committee should be addressed
--------
as follows:
Compensation Committee
Diametrics Medical, Inc.
2658 Patton Road
Roseville, Minnesota 55113
ARTICLE XI. ADJUSTMENT FOR CHANGES IN STOCK OR COMPANY
------------------------------------------
Section 11.01 Stock dividend or Reclassification. If the outstanding
-----------------------------------
shares of Common Stock are increased, decreased, changed into or exchanged for a
different number or kind of securities of the Company, or shares of a different
par value or without par value, through reorganization, recapitalization,
reclassification, stock dividend, stock split, amendment to the Company's
certificate of Incorporation, reverse stock split or otherwise, and appropriate
adjustment shall be made in the maximum numbers and kind of securities to be
purchased under the Plan with a corresponding adjustment in the purchase price
to be paid therefor.
Section 11.02 Merger or Consolidation. If the Company is merged into
------------------------
or consolidated with one or more corporations during the term of the Plan,
appropriate adjustments will be made to give effect thereto on an equitable
basis in terms of issuance of shares of the corporation surviving the merger or
of the consolidated corporation, as the case may be.
ARTICLE XII. APPLICABLE LAW
--------------
Rights to purchase Common Stock granted under the Plan shall be
construed and shall take effect in accordance with the laws of the State of
Minnesota.
<PAGE>
EXHIBIT 10.23
April 12, 1996
Mr. David Giddings
955 Laurelwood
Carmel, Indiana 46032
Dear David:
On behalf of Diametrics Medical, Inc. and the Board of Directors, I am pleased
to extend a formal offer of employment to join our team as Chairman of the Board
of Directors and Chief Executive Officer. Your background, personality, style,
and approach to management are ideal for this key leadership role. This letter
will detail your offer per our recent discussions.
It is our belief that Diametrics offers you the opportunity to add your personal
mark to the development of one of the most significant business enterprises in
the diagnostic market today.
The essential elements of the offer which become effective at the time of your
employment are as follows:
. Chairman of the Board of Directors and Chief Executive Officer.
---------------------------------------------------------------
This position will report to and immediately become a member of
the Board of Directors.
. Start Date: April 12, 1996
------------
. Base Salary: $300,000
-------------
. Signing Incentive: There will be a $100,000 signing incentive advance
------------------
to the executive, and earned in equal increments of $33,333/year over
a period of three years. Should the executive elect to leave or
terminate, the unearned portion of this incentive will be returned to
the company.
. Stock Options: There will be a grant of options for 500,000 shares of
--------------
Diametrics Medical common stock at $6.125 (Fair Market Value) on date of
hire vested as outlined below. This will be divided between incentive and
non-incentive stock options in accordance with S.E.C. regulations. Also,
these shares are subject to shareholder approval.
<PAGE>
Vesting Schedule:
SHARES VESTING
------ -------
100,000 Vested upon joining Diametrics
75,000 Vested on each anniversary date
through year four.
50,000 Vested on the earlier of your
fourth anniversary or when the
stock price reaches $16/share
for 20 consecutive trading days.
50,000 Vested on the earlier of your
fourth anniversary or when the
stock price reaches $20/share
for 20 consecutive trading days.
. Employment Agreement: You will receive one year of severance, if
---------------------
dismissed for reasons other than cause. Also, you will receive an
additional year of severance if there is a change of control resulting
from a merger or acquisition at a Diametrics stock price equal to or
greater than $18/share (as adjusted). Your stock options will vest
immediately upon a change of control resulting from merger or
acquisition.
. Vacation: Four weeks of paid annual leave (vacation).
---------
. Insurance: You will be entitled to participate in the existing
----------
Diametrics health, dental, life insurance and disability programs, as
well as a 401(k) plan.
. Annual Performance Review: There will be an annual review of your
--------------------------
performance by the Compensation Committee of the Board of Directors.
This offer is contingent on ratification by the Board of Directors at the April
17, 1996 regularly scheduled Board meeting as discussed.
<PAGE>
David, we look forward to hearing of your acceptance of this offer of employment
as soon as possible. We believe that you share our vision and excitement for the
success of Diametrics and that you will be a key ingredient in the achievement
our objectives.
Should you have any questions, please do not hesitate to call. Please indicate
your acceptance of this offer by signing both copies of this letter and
returning one of them to us.
Sincerely,
Accepted by:___________________
Mark B. Knudson, Ph.D.
Chairman of the Board of Directors
Start Date____________________
Date________________________
<PAGE>
EXHIBIT 13.1
SELECTED FIVE-YEAR FINANCIAL DATA
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net sales $ 3,797 $ 1,607 $ 331 $ - $ -
Operating loss (23,782) (23,387) (12,733) (8,201) (4,030)
Net loss (23,575) (23,046) (12,455) (13,819) (4,305)
Net loss per share (1),(2) (1.56) (1.82) (1.49) (2.05) -
Weighted average shares outstanding (1),(2) 15,088,493 12,640,212 8,341,021 6,729,636 -
Balance Sheet Data
Working capital (deficit) $ 6,649 $ 27,123 $ 7,413 $ (106) $ 10,578
Total assets 24,059 36,620 17,393 10,151 14,751
Long-term liabilities 8,582 1,851 1,759 1,502 957
Common shareholders' equity (deficit) 8,674 31,194 11,157 (20,805) (6,704)
</TABLE>
(1) Due to significant capital structure changes, earnings per share and
weighted average shares outstanding for 1992 are not presented. In addition, the
Company has not paid any dividends since inception.
(2) Net loss per share and weighted average shares outstanding for 1993 are
presented on a pro forma basis and reflect the impact of the conversion of all
Preferred Shares outstanding at the time of the Company's initial public
offering in June 1994, retroactively as of the date of issuance of the Preferred
Shares. Also, pursuant to the Securities and Exchange Commission regulations,
all Common, Redeemable Common and Redeemable Convertible Preferred Shares issued
and options and warrants granted by the Company during the 12-month period
preceding the initial filing date of the June 1994 public offering have been
included in the Pro forma calculation of weighted average common and common
equivalent shares outstanding as if they were outstanding for all of 1993 using
the treasury stock method and the initial public offering price of $6 per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
SUMMARY
Diametrics Medical, Inc., which began operations in 1990, is engaged in the
development, manufacturing and marketing of critical care blood analysis systems
which provide immediate or continuous diagnostic results at the point of patient
care.
Since its commencement of operations in 1990, the Company has transitioned from
a development stage company to a full-scale manufacturing and sales
organization. As of December 31, 1996, the primary funding for the operations of
the Company has been approximately $87.2 million raised through public and
private sales of its equity securities and issuance of convertible promissory
notes, all of which have been repaid or converted into common stock.
Operating results for 1996 were highlighted by the introduction of a number of
key new products and the acquisition of Biomedical Sensors, Ltd. (BSL), an
operating unit of Pfizer Inc.
In the third quarter of 1996, the second generation IRMA blood analyzer, the
IRMA SL and the IRMA Data Management System (IDMS) were introduced. The IRMA SL
features an expanded test menu that includes testing for blood gases,
electrolytes and hematocrit, three of the most frequently ordered critical care
diagnostic tests. The IDMS is an advanced data management software program that
provides a comprehensive data management system for point of care testing
technologies.
<PAGE>
The Company also expanded its product line in July with the initiation of an
exclusive U.S. distributor agreement with A-VOX Systems, Inc., to distribute the
AVOXimeter 4000, the only battery operated, portable system for comprehensive
co-oximetry measurements, which measures the levels of hemoglobin and calculated
oxygen content in a patient's blood.
In November, the Company purchased Biomedical Sensors, Ltd. (BSL) from Pfizer
Inc. for $1.5 million cash and a $7.3 million six-year interest-bearing
promissory note. Based in England, the new subsidiary, Diametrics Medical, Ltd.,
brings an existing product line which includes the only indwelling continuous
blood gas monitoring system and utilizes a world class fiber optic and
electrochemical technology platform. Current products include Paratrend 7, an
intravascular blood gas monitoring system and Neocath, a continuous oxygen
monitoring system for newborns. In addition, Tissutrak, a system for monitoring
tissue oxygenation of muscle flaps during plastic reconstructive surgery, is
being marketed in Europe. Tissutrak is not yet FDA cleared for sale in the
United States.
Additionally, the Company continued to expand its international sales coverage
for its products with the signing of various partnership agreements. Primary
among those finalized in 1996 was a distribution agreement with Century Medical,
which markets the IRMA system and associated products in Japan through its
critical care business division. International revenues accounted for
approximately 40% of total revenues in 1996, 20% in 1995 and 30% in 1994.
RESULTS OF OPERATIONS
SALES Sales of the Company's products were $3,796,816 for 1996, compared to
$1,607,375 for 1995 and $331,495 in 1994, the first year of sales activity. The
Company's revenues are affected principally by the number of IRMA Systems placed
with customers and the rate at which disposable IRMA cartridges are used in
connection with the IRMA System. As of December 31, 1996, the Company had placed
over 900 IRMA Systems at customer locations, compared to 450 and 91 systems as
of December 31, 1995 and 1994, respectively. 1996 sales generated from IRMA
Systems increased over 100% from 1995, while cartridge sales increased over 130%
and represented 40% of total revenue.
The Company's 1997 revenues could significantly more than double the level
achieved in 1996, as a result of continued market penetration, further planned
expansion of the blood analysis product line and the inclusion of a full year of
sales related to the operations of the Company's new subsidiary, Diametrics
Medical, Ltd.
COST OF SALES Cost of sales totaled $9,591,358 for 1996, compared to $8,795,153
for 1995 and $3,070,272 for 1994. Included in cost of sales for 1995 was a
charge of approximately $1.3 million associated with the write-down of inventory
to the lower of cost or market as a result of product obsolescence and
unfavorable manufacturing variances. Without the impact of the 1995 charge, 1996
cost of sales increased approximately $2 million from 1995. Cost of sales in
1996 declined significantly as a percentage of revenue as a result of improved
manufacturing yields, lower production costs, increased cartridge volumes and
increased shelf life of the Company's cartridges. The Company expects unit costs
to continue to decline in 1997 as sales volumes increase and continued
improvements are realized in manufacturing yields, processes, costs and product
design. Depending upon product mix and production volumes, gross margins are
expected to approximate break-even levels for the full year 1997.
<PAGE>
OPERATING EXPENSES Total operating expenses for 1996 increased $1.8 million or
11% compared to 1995, primarily due to restructuring and other charges incurred
during 1996 and the inclusion of expenses for the operations of Biomedical
Sensors, Ltd. (BSL), acquired by the Company in November 1996. Without the
impact of the above, operating expenses increased approximately $370,000 or 2%
from 1995, due to investments made in sales and marketing. Operating expenses
increased by $6.2 million or 62% from 1994 to 1995, due to increased research
and development expenses associated with the expansion of the test menu for the
IRMA System and development of the next generation system, the IRMA SL, as well
as increased investments in sales and marketing and general and administrative
expenses to support expanded operating activities.
Research and development expenses decreased $264,000 or 4% from 1995 to 1996,
after an increase of $1.2 million or 23% from 1994 to 1995. The increase in
expense from 1994 to 1995 reflects costs to support the continued expansion of
the test menu for the IRMA System and development of the Company's next
generation system, IRMA SL. Research and development expenses declined in 1996
primarily as a result of the completion during 1996 of development of the
IRMA SL, partially offset by the inclusion of research and development expenses
for BSL operations.
Sales and marketing expenses totaled $6,655,240 in 1996, compared to $5,681,334
in 1995 and $2,215,349 in 1994. Expansion of the direct sales force, addition of
marketing personnel, and increased advertising and promotional activities
produced the increase in sales and marketing expenses from 1994 to 1995. The
smaller increase in 1996 expenses is associated with costs to support the
increased direct sales force base established during 1995, higher commissions on
increased sales during 1996, and the inclusion of BSL expenses from the date of
acquisition.
General and administrative expenses totaled $3,941,522 in 1996, compared to
$3,805,216 in 1995 and $2,659,313 in 1994. The 1994 to 1995 increase reflects
the Company's requirement for administrative personnel and services to support
expanded operating activities. The smaller increase from 1995 to 1996 is
primarily attributed to the inclusion of expenses related to BSL operations.
Restructuring and other charges totaled $1,334,661 in 1996, compared to $391,834
in 1995 and no charges in 1994. 1995 charges reflect severance costs associated
with a management reorganization in late 1995. 1996 charges consist of
approximately $580,000 for severance costs related to continued restructuring of
the management team in early 1996 and a work force reduction, $450,000 for the
write-off of purchased in-process research and development created from the BSL
acquisition, and $300,000 for the write-down of excess and obsolete equipment,
resulting from the work force reductions and process changes.
Excluding the impact of 1996 restructuring and other charges, operating expenses
in 1997 are expected to increase approximately 20% from 1996, due to the
acquisition of BSL. Without the impact of additional operating expenses related
to BSL operations, operating expenses are expected to decline by approximately
25%, as a result of staff reductions in late 1996, primarily affecting research
and development and general and administrative functions and better cost
containment and alignment of resources with the Company's strategy.
OTHER INCOME (EXPENSE) Net other income declined approximately $133,000 from
1995 to 1996, after an increase of $63,000 from 1994 to 1995. The Company
realized interest income of $929,603 in 1996, compared to $1,148,352 in 1995 and
$369,044 in 1994. The increase from 1994 to 1995 reflects the impact of higher
average cash
<PAGE>
balances resulting from the Company's financing activities during 1994 and 1995.
Interest income declined in 1996 from 1995 due to lower average cash balances
resulting from a net use of cash in operations.
Interest expense totaled $607,342 in 1996, compared to $550,607 in 1995 and
$237,635 in 1994. The increase from 1994 to 1995 reflects the impact of
increased capital lease financing, while the increase from 1995 to 1996
primarily reflects interest accrued on a long-term note payable to Pfizer Inc.
issued in connection with the Company's acquisition of BSL in November 1996.
Other expense decreased from 1995, primarily due to a reduction in losses on
disposal of property and equipment.
NET LOSS Net loss for the year ended December 31, 1996 was $23,575,094,
compared to $23,046,314 in 1995 and $12,454,760 in 1994. Net of restructuring
and other charges and the impact of BSL operations, the 1996 net loss was
approximately $800,000 less than the 1995 net loss. The Company expects a
reduced net loss in 1997 relative to 1996.
LIQUIDITY AND CAPITAL RESOURCES
Most of the major changes from 1995 to 1996 in the Company's working capital
balance sheet accounts (excluding cash, cash equivalents and marketable
securities), were the result of the consolidation of BSL's operating assets and
liabilities.
At December 31, 1996, the Company had working capital of approximately $6.6
million, a decrease of $20.5 million from the working capital of $27.1 million
reported at December 31, 1995. The decrease is primarily the result of the net
use of cash in operations during 1996, following the Company's receipt of $42.4
million in net proceeds from the private and public issuance of common stock in
the first and third quarters of 1995. Based upon the Company's projections of
cash requirements, additional capital was not raised until early 1997 (see
footnote 19). Through December 31, 1995, the Company raised approximately $87.2
million through the public and private sales of its equity securities and the
issuance of convertible promissory notes, all of which have been repaid or
converted into common stock.
At December 31, 1996, the Company had property and equipment of $16,295,952, up
from $10,840,323 at December 31, 1995, less accumulated depreciation of
$8,008,200 and $5,000,597 at December 31, 1996 and 1995, respectively. The $5.5
million increase in the cost of property and equipment is the result of the
consolidation of BSL property and equipment balances of $3.9 million upon the
acquisition of BSL, and $1.6 million of capital additions, consisting primarily
of investments in development and production equipment, and IRMA analyzers for
internal R&D and sales use to bring new products to market and facilitate sales.
Since its inception in 1990, the Company has financed approximately $5 million
of capital additions through capital lease obligations, including $103,000 in
1996. In 1997, the Company expects capital expenditures and new lease
commitments to approximate $3 million, primarily reflecting investments to
support new product development and production.
In late 1996, the Company entered into long-term debt obligations of $7.8
million. The debt consists of a $7.3 million senior secured fixed rate loan note
issued to Pfizer in connection with the Company's acquisition of BSL and a
$500,000 note payable for equipment financing. The Company's long-term debt and
capital lease obligations require principal and interest repayments of
approximately $2.2 million in 1997, $1.5
<PAGE>
million in 1998, $850,000 in 1999, $790,000 in both 2000 and 2001, and $7.9
million thereafter.
At December 31, 1996, the Company had U.S. net operating loss and research and
development tax credit carryforwards for income tax purposes of approximately
$75,000,000 and $844,000, respectively. Pursuant to the Tax Reform Act of 1986,
use of the Company's net operating loss carryforwards are limited due to a
"change in ownership." (See footnote 12 for further discussion and amount of
limitation).
With the completion of a private equity placement in January 1997 of 750,000
shares of convertible preferred stock, resulting in net proceeds of
approximately $11.9 million (see footnote 19), the Company believes that
currently available funds and cash generated from 1997 revenues, supplemented by
proceeds from employee stock plans, warrant exercises and receivable based
credit, will meet the Company's working capital needs through early 1998. If
capital requirements vary materially from those currently planned, the Company
could require additional capital at an earlier time. Additional funds may also
be required for the Company to meet significantly greater than anticipated
demand for its products. As a result, the Company has and will continue to
evaluate raising additional capital through, but not limited to, public or
private sales of equity or debt securities. There can be no assurance that
adequate funds will be available when needed or on acceptable terms. The
Company's long-term capital requirements will depend upon numerous factors,
including the rate of market acceptance of the Company's products, the level of
resources devoted to expanding the sales and marketing organization,
manufacturing capabilities and the Company's research and development
activities.
Statements regarding the Company's expectations about new and existing products,
future financial performance and other forward looking statements are subject to
various risks and uncertainties, including, without limitation, demand and
acceptance of new and existing products, technological advances and product
obsolescence, competitive factors and the availability of capital to finance
growth. These and other risks are discussed in greater detail as an exhibit in
the Company's Form 10-K filing with the Securities and Exchange Commission.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
Diametrics Medical, Inc. 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 3,796,816 $ 1,607,375 $ 331,495
Cost of sales 9,591,358 8,795,153 3,070,272
-------------------------------------------------
Gross profit (loss) (5,794,542) (7,187,778) (2,738,777)
Operating expenses:
Research and development 6,056,246 6,320,739 5,119,133
Sales and marketing 6,655,240 5,681,334 2,215,349
General and administrative 3,941,522 3,805,216 2,659,313
Restructuring and other charges 1,334,661 391,834 -
-------------------------------------------------
Total operating expenses 17,987,669 16,199,123 9,993,795
-------------------------------------------------
Operating loss (23,782,211) (23,386,901) (12,732,572)
Interest income 929,603 1,148,352 369,044
Interest expense (607,342) (550,607) (237,635)
Lawsuit settlement and related legal fees - - 488,426
Other expense, net (115,144) (257,158) (342,023)
-------------------------------------------------
Net loss $ (23,575,094) $ (23,046,314) $ (12,454,760)
-------------------------------------------------
Net loss per common share $ (1.56) $ (1.82) $ (1.49)
-------------------------------------------------
Weighted average common shares outstanding 15,088,493 12,640,212 8,341,021
-------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
DIAMETRICS MEDICAL, INC. 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,451,993 $ 2,702,232
Marketable securities 3,402,598 25,789,265
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $110,000 in 1996 and $80,876 in 1995 2,033,496 562,409
Nontrade 556,272 400,639
Inventories 4,464,099 1,114,332
Prepaid expenses and other current assets 543,755 128,374
--------------------------------
Total current assets 13,452,213 30,697,251
--------------------------------
PROPERTY AND EQUIPMENT 16,295,952 10,840,323
Less accumulated depreciation and amortization (8,008,200) (5,000,597)
--------------------------------
8,287,752 5,839,726
--------------------------------
OTHER ASSETS 2,318,674 82,624
--------------------------------
$ 24,058,639 $ 36,619,601
================================
LIABILITIES AND COMMON SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,612,390 $ 1,554,573
Accrued expenses 3,848,248 847,544
Short-term note payable 31,934 44,608
Current portion of long-term liabilities 1,310,154 1,127,175
--------------------------------
Total current liabilities 6,802,726 3,573,900
--------------------------------
LONG-TERM LIABILITIES:
Long-term obligations, excluding current portion 7,795,851 -
Capital lease obligations, excluding current portion 666,668 1,803,982
Other liabilities, excluding current portion 119,155 47,369
--------------------------------
Total liabilities 15,384,400 5,425,251
--------------------------------
COMMON SHAREHOLDERS' EQUITY:
Undesignated preferred stock, $.01 par value: 5,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, $.01 par value 20,000,000 authorized, 15,209,481
and 14,900,141 shares issued and outstanding on December 31, 1996
and 1995, respectively 152,095 149,001
Additional paid-in capital 88,451,972 87,489,392
Cumulative translation adjustment 89,309 -
Accumulated deficit (80,019,137) (56,444,043)
--------------------------------
Total common shareholders' equity 8,674,239 31,194,350
--------------------------------
Commitments and contingencies (notes 7, 8, 16 and 17) $ 24,058,639 $ 36,619,601
================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total
Additional Cumulative common
Common stock paid-in Accumulated translation shareholders'
-------------------
Diametrics Medical, Inc. Shares Amount capital deficit adjustment equity (deficit)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 885,945 $ 8,859 $ 27,141 $(20,840,566) $ - $(20,804,566)
Adjustment to reflect redemption
value of preferred stock - - - (102,403) - (102,403)
Issued common stock upon the exercise
of stock purchase warrants 79,750 798 549,477 - - 550,275
Issued common stock pursuant to the
Company's initial public offering 2,875,000 28,750 15,681,252 - - 15,710,002
Conversion of preferred stock
to common stock 5,743,745 57,438 28,196,428 - - 28,253,866
Exercise of options common stock 2,536 25 4,337 - - 4,362
Net loss - - - (12,454,760) - (12,454,760)
-----------------------------------------------------------------------------------
BALANCE, December 31, 1994 9,586,976 95,870 44,458,635 (33,397,729) - 11,156,776
Issued common stock
on February 3, 1995 1,754,635 17,546 8,631,244 - - 8,648,790
Issued common stock
On August 3 and 10, 1995 3,450,000 34,500 33,746,032 - - 33,780,532
Issued common stock under
employee stock purchase plan 34,760 347 192,855 - - 193,202
Issued common stock in lieu of
salaries and wages 38,900 389 337,224 - - 337,613
Exercise of options to common stock 33,124 331 115,091 - - 115,422
Exercise of warrants to common stock 1,746 18 8,311 - - 8,329
Net loss - - - (23,046,314) - (23,046,314)
-----------------------------------------------------------------------------------
BALANCE, December 31, 1995 14,900,141 149,001 87,489,392 (56,444,043) - 31,194,350
Issued common stock under
employee stock purchase plan 74,096 741 300,140 - - 300,881
Exercise of options to common stock 235,244 2,353 662,440 - - 664,793
Change in cumulative translation
adjustment - - - - 89,309 89,309
Net loss - - - (23,575,094) - (23,575,094)
-----------------------------------------------------------------------------------
BALANCE, December 31, 1996 15,209,481 $ 152,095 $ 88,451,972 $(80,019,137) $ 89,309 $ 8,674,239
-----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
Diametrics Medical, Inc. 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(23,575,094) $(23,046,314) $(12,454,760)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,114,293 2,590,022 1,640,198
Write-off of acquired in-process technology 464,460 - -
Common stock issued in lieu of salaries and wages - 337,613 -
(Gain) loss on disposal of property and equipment (1,686) 144,192 138,183
Changes in operating assets and liabilities
(net of effects of BSL acquisition):
Receivables, net (580,891) (665,221) (225,767)
Inventories (632,551) (414,089) (18,893)
Prepaid expenses and other current assets 523,050 135,143 206,326
Accounts payable (97,319) 324,951 923,781
Accrued expenses 445,619 (475,130) (3,211,923)
-------------------------------------------------
Net cash used in operating activities (20,340,119) (21,068,833) (13,002,855)
-------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,597,218) (2,715,937) (2,090,629)
Proceeds from sales of property and equipment 102,586 1,405,565 1,983,025
Purchases of marketable securities (8,343,433) (40,907,468) (15,489,358)
Proceeds from sales of marketable securities 30,730,100 23,705,369 6,902,192
Acquisition of BSL, net of cash received (1,067,848) - -
Other assets (36,892) 452,483 (347,077)
-------------------------------------------------
Net cash provided by (used in) investing activities 19,787,295 (18,059,988) (9,041,847)
-------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on short-term note payable (108,477) (100,502) (109,971)
Proceeds from long-term borrowings 500,000 - -
Net proceeds from issuance of common stock 965,674 42,746,275 20,290,169
Payments for redeemable common stock - (1,000,000) -
Principal payments on capital lease obligations (1,078,802) (964,031) (515,107)
-------------------------------------------------
Net cash provided by financing activities 278,395 40,681,742 19,665,091
-------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENT 24,190 - -
Net increase (decrease) in cash and cash equivalents (250,239) 1,552,921 (2,379,611)
Cash and cash equivalents at beginning of year 2,702,232 1,149,311 3,528,922
-------------------------------------------------
Cash and cash equivalents at end of year $ 2,451,993 $ 2,702,232 $ 1,149,311
=================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 510,399 $ 550,607 $ 181,232
=================================================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company entered into capital lease obligations for equipment of $131,058,
$1,367,073, $1,983,025 during the years ended December 31, 1996, 1995, and
1994, respectively.
On November 6, 1996, the Company entered into a senior secured fixed rate loan
note of $7,300,000 in connection with the acquisition of BSL.
During 1994, $28,253,866 of preferred stock was converted into common stock.
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) 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 critical care blood analysis systems
which provide immediate or continuous diagnostic results at the point-of-
patient care. The Company emerged from development stage in the third
quarter of 1994.
The Company markets its products primarily to health care organizations
through a direct sales force in the United States, the United Kingdom and
Germany and various distributors outside of these countries.
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial
statements include the accounts of Diametrics Medical, Inc. and Diametrics
Medical, Ltd., its wholly-owned subsidiary (the Company). All material
intercompany accounts and transactions have been eliminated. The accounts
of the foreign subsidiary have been consolidated since the date of
acquisition. The Company did not have any subsidiaries prior to 1996.
TRANSLATION OF FOREIGN CURRENCIES The financial statements of the Company's
foreign subsidiary were translated in accordance with the provisions of
SFAS No. 52. Under this Statement, all assets and liabilities are
translated using period-end exchange rates and statements of operations
items are translated using average exchange rates for the period. The
resulting translation adjustments are recorded as a separate component of
shareholders' equity. Foreign currency transaction gains and losses are
included in determining net income, but have not been material in any of
the years presented.
CASH AND CASH EQUIVALENTS The Company considers highly liquid debt
instruments purchased with an original maturity of three months or less to
be cash equivalents. At December 31, 1996, cash and cash equivalents
consisted mainly of U.S. government money market funds and investment grade
commercial paper.
MARKETABLE SECURITIES In accordance with the provisions of Statement of
Financial Accounting Standards No. 115, "Investment in Certain Instruments
in Debt and Equity Securities", investments in marketable debt securities
have been classified as held to maturity and are stated at amortized cost,
which approximates estimated fair value. At December 31, 1996, marketable
securities consisted mainly of investment grade commercial paper, with
original maturities ranging from six to twelve months.
These securities are classified as held-to-maturity because of the
Company's intent and ability to hold its investments to maturity.
INVENTORIES Inventories are stated at the lower of cost or market using the
first in, first out method.
PROPERTY AND EQUIPMENT Leasehold improvements are recorded at cost and
amortized over the term of the underlying lease. Furniture and equipment
are recorded at cost and depreciated on a straight-line basis over their
estimated useful lives of 2 to 7 years. Maintenance and repairs are
expensed as incurred.
<PAGE>
OTHER ASSETS Other assets consist principally of goodwill representing
purchased technology and other intangible assets resulting from the excess
of the cost of a purchased business over the fair value of the net assets
acquired. Goodwill is amortized using the straight-line method over five
years. The recoverability of goodwill is assessed quarterly based upon an
analysis of undiscounted cash flows projected to be generated by the
acquired business.
REVENUE RECOGNITION The Company recognizes revenue upon shipment of product
to customers or, in the case of trial instruments, upon the customer's
acceptance of the product.
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 its new hardware and
software products to the original purchaser 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 its disposable products to be
free from defect in material and workmanship under normal use until its
stated expiration date. Provisions are made for the estimated cost of
maintaining product warranties for the hardware, software and disposable
products at the time the products are sold.
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.
Under SFAS No. 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Due to historical net losses of the Company, a valuation
allowance is established to offset the net deferred tax asset.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS Effective January 1, 1996, the Company
adopted Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets To Be
Disposed Of, which prescribes accounting and reporting standards when
circumstances indicate that the carrying amount of an asset may not be
recoverable. No cumulative effect adjustment occurred as a result of this
change in accounting principle.
STOCK BASED COMPENSATION The Company applies APB Opinion No. 25 in
accounting for the issuance of stock incentives to employees and directors
and, accordingly, no compensation expense has been recognized in the
financial statements. Effective January 1, 1996, in accordance with
Statement of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation, pro forma information reflecting compensation cost for
such issuances is presented in footnote 9.
<PAGE>
RECLASSIFICATIONS Certain 1995 and 1994 amounts in the Consolidated
Statements 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 and 1994.
(2) LIQUIDITY
As reflected in the accompanying consolidated financial statements, the
Company has incurred a net loss of $23,575,094 for the year ended December
31, 1996. In addition, the Company has incurred net losses and has had
negative cash flows from operating activities since inception. During
January 1997 the Company completed a private placement which generated net
cash proceeds to the Company of approximately $11.9 million (see footnote
19). Management believes proceeds from this offering combined with current
working capital and projected operating revenues, supplemented by proceeds
from employee stock plans, warrant exercises and receivable based credit,
will provide the Company with sufficient liquidity through 1997 and into
early 1998. It is probable the Company will be required to raise additional
capital by early 1998. Management's intentions are to raise this additional
capital through alliances with strategic corporate partners, issuance of
debt, or an equity offering. If capital requirements vary materially from
those currently planned, the Company could require additional capital at an
earlier time. There can be no assurance that adequate funds will be
available when needed or on acceptable terms.
(3) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------
<S> <C> <C>
Raw materials $ 1,623,243 $ 782,287
Work-in-process 569,505 238,930
Finished goods 2,271,351 93,115
-------------------------
$ 4,464,099 $ 1,114,332
=========================
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1995
--------------------------
<S> <C> <C>
Manufacturing equipment $ 3,988,933 $ 3,159,579
Laboratory fixtures and equipment 2,024,811 1,170,995
Office furniture and equipment 3,656,348 2,979,547
Leasehold improvements 3,350,731 2,752,341
Tooling 1,333,097 574,543
Demonstration instruments 1,317,378 203,318
Vehicles 212,596 -
Capital-in-progress 412,058 -
--------------------------
16,295,952 10,840,323
Less accumulated depreciation & amortization (8,008,200) (5,000,597)
--------------------------
$ 8,287,752 $ 5,839,726
==========================
</TABLE>
<PAGE>
(5) OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
1996 1995
--------------------------
<S> <C> <C>
Goodwill $ 2,259,974 $ -
Other 58,700 82,624
--------------------------
$ 2,318,674 $ 82,624
==========================
</TABLE>
Amortization charged to expense for goodwill was $45,925 in 1996 and $0 in
1995.
(6) ACCRUED EXPENSES
Accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------
<S> <C> <C>
Employee compensation $ 1,129,241 $ 721,606
Product upgrades 1,138,420 -
Acquisition expenses 295,207 -
Other 1,285,380 125,938
-------------------------
$ 3,848,248 $ 847,544
=========================
</TABLE>
(7) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
--------------------------
<S> <C> <C>
Senior secured fixed rate loan note $ 7,300,000 $ -
Note payable 500,000 -
--------------------------
7,800,000 -
Less current portion (4,149)
--------------------------
$ 7,795,851 $ -
==========================
</TABLE>
The aggregate maturities of outstanding long-term debt are:
<TABLE>
<S> <C>
year ending December 31:
1997 $ 4,149
1998 106,059
1999 117,297
2000 129,726
Thereafter 7,442,769
-------------
$ 7,800,000
=============
</TABLE>
<PAGE>
The senior secured fixed rate loan note of $7,300,000 is payable to Pfizer
Inc., issued in connection with the Company's acquisition of Biomedical
Sensors, Ltd. (BSL), an operating unit of Pfizer Inc., on November 6, 1996.
Interest is payable on December 31, 1997 and quarterly in arrears
thereafter, at 8.75% per annum. The full principal balance is due November
4, 2002. The Pfizer note is secured by the issued shares of BSL, 100% of
which were purchased by the Company.
The note agreement with Pfizer Inc. contains provisions which will require
acceleration of payment of principal in full in the event that prior to
November 6, 1998, the Company issues securities listed or traded on any
securities exchange, with aggregate net proceeds to the Company exceeding
$40 million. If this doesn't occur, then, in the event the Company issues
securities from November 6, 1998 to November 4, 2002 resulting in
cumulative net proceeds of more than $5 million, a proportion of the
outstanding principal balance shall become immediately payable. During this
period, cumulative net proceeds from a securities issuance of more than $5
million but less than $10 million would require a $1 million payment of
principal, while cumulative net proceeds between $10 million and less than
$20 million and between $20 million and less than $40 million would require
principal payments of $2.5 million and $4.5 million, respectively.
Cumulative net proceeds of $40 million or greater would require full
payment of the note's principal.
The $500,000 note payable requires principal and interest payments in
monthly installments beginning on January 1, 1997 at an annual interest
rate of 10.1%. The note matures December 1, 2001 and is secured by
equipment.
(8) LEASES
The Company is obligated under various capital leases for furniture and
equipment that expire at various dates during the next three years. The
gross amount included in property and equipment and related accumulated
amortization relating to capital leases is as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------
<S> <C> <C>
Manufacturing equipment $ 2,124,241 $ 2,520,423
Laboratory fixtures and equipment 599,940 969,530
Office furniture and equipment 1,358,874 1,440,333
Leasehold improvements 16,668 16,668
Tooling 7,030 7,030
---------------------------
4,106,753 4,953,984
Less accumulated amortization (2,893,465) (2,419,791)
---------------------------
$ 1,213,288 $ 2,534,193
===========================
</TABLE>
The present value of future minimum capital lease payments is as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997 $ 1,525,255
1998 667,257
1999 61,144
------------
Total minimum lease payments 2,253,656
Less amount representing interest (341,288)
------------
Present value of minimum capital lease payments 1,912,368
Less current portion of capital lease obligations (1,245,700)
------------
Capital lease obligations, excluding current portion $ 666,668
============
</TABLE>
<PAGE>
(9) STOCK OPTIONS AND WARRANTS
Under the terms of the 1990 Stock Option Plan, incentive stock options and
non-qualified stock options to purchase up to 3,000,000 shares of common
stock may be granted to Company employees and consultants.
Additionally, the Directors' Plan provides grants to non-employee directors
of the Company of non-qualified stock options to purchase up to an
aggregate of 217,500 shares of common stock.
Under the plans, the option price is equal to the fair value on the date of
grant. Under the 1990 Stock Option Plan, options become exercisable over
varying periods and terminate up to ten years from the date of grant. Under
the Directors' Plan, options become exercisable over a three year period
and terminate ten years from the date of grant. At December 31, 1996,
479,901 and 40,250 additional shares were available for grant under the
1990 Stock Option Plan and Directors' Plan, respectively.
The following tables reflect the per share weighted-average fair value of
stock options granted during 1996 and 1995 under each of the plans on the
date of grant using the Black Scholes option-pricing model with the
following assumptions: 1996 - annualized volatility of 70.81%, risk-free
interest rate of 5.5%, and an expected life of five and three years for the
1990 Stock Option Plan and Directors' Plan, respectively; 1995 - annualized
volatility 80.04%, risk-free interest rate of 5.5% and an expected life of
five and three years for the 1990 Stock Option Plan and Directors' Plan,
respectively.
The status of the Company's stock option plans as of December 31, 1996,
1995 and 1994 and changes during those years, is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
1990 STOCK OPTION PLAN Shares exercise price Shares exercise price Shares exercise price
----------- -------------- ----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,450,188 $ 4.66 1,175,494 $ 4.01 922,570 $ 3.30
Granted 1,286,500 5.45 310,375 7.04 259,500 6.53
Exercised (235,244) 2.83 (25,874) 3.18 (2,536) 1.72
Expired (246,449) 6.24 (9,807) 5.83 (4,040) 3.93
----------- ----------- -----------
Outstanding at end of year 2,254,995 5.13 1,450,188 4.66 1,175,494 4.01
----------- ----------- -----------
Options exercisable at year-end 1,158,730 4.68 941,286 3.78 722,419 3.26
Weighted-average fair value of
options granted during the year $ 3.43 $ 4.52 -
1993 DIRECTORS' STOCK OPTION PLAN
Outstanding at beginning of year 126,500 $ 6.89 82,500 $ 4.82 72,500 $ 4.60
Granted 55,500 4.95 58,500 9.24 10,000 6.40
Exercised - - (7,250) 4.60 - -
Expired (12,000) 8.27 (7,250) 4.60 - -
---------- ----------- -----------
Outstanding at end of year 170,000 6.16 126,500 6.89 82,500 4.82
========== =========== ===========
Options exercisable at year-end 112,000 6.08 $ 59,000 5.25
Weighted-average fair value of
options granted during the year $ 2.50 5.10 -
</TABLE>
<PAGE>
At December 31, 1996, the range of exercise prices and weighted average
remaining contractual life of outstanding options for the above plans were
$1.72 - $12.00 and eight years, respectively.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its plans.
Accordingly, no compensation expense has been recognized for its stock-
based compensation plans. Had the Company determined compensation cost
based upon the fair value at the grant date for its stock options under
SFAS No. 123, the Company's net loss and net loss per share would have
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------
<S> <C> <C>
Net loss as reported $ (23,575,094) $ (23,046,314)
Net loss pro forma $ (26,072,231) $ (23,738,550)
Net loss per share as reported $ (1.56) $ (1.82)
Net loss per share pro forma $ (1.73) $ (1.87)
</TABLE>
Pro forma net loss reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented, because compensation cost is reflected over the options'
vesting period and compensation cost for options granted prior to January
1, 1995 is not considered.
In connection with certain financing and marketing arrangements, the
Company has granted stock purchase warrants for the purchase of 977,060
shares of common stock. The stock purchase warrants become exercisable over
varying periods and expire up to 10 years from the date of grant. At
December 31, 1996, stock purchase warrants representing 706,314 shares were
exercisable with an additional 80,500 shares becoming exercisable upon
achieving certain purchasing levels of the Company's products. Stock
warrant transactions under these arrangements are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------------------------------------
Exercise Exercise Exercise
price price price
Shares per share Shares per share Shares per share
---------- ------------ --------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 843,314 $1.72 - 6.13 861,310 $1.72 - 6.13 921,110 $1.72 - 6.13
Granted 16,000 5.00 20,000 5.25 19,950 6.00
Exercised - - (1,746) 5.25 - 6.00 (79,750) 6.00
Expired (72,500) - (36,250) 5.25 - 6.00 - -
---------- --------- --------
Outstanding at end of year 786,814 1.72 - 6.13 843,314 1.72 - 6.13 861,310 1.72 - 6.13
========== ========= ========
Warrants exercisable at year-end 706,314 1.72 - 6.13 698,314 1.72 - 6.13 537,000 1.72 - 6.13
Weighted-average fair value of
warrants granted during the year $ 2.86 $ 3.26 -
</TABLE>
<PAGE>
(10) EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an employee stock purchase plan (the "Plan") effective
July 3, 1995, under which 300,000 shares of common stock are available for
sale to employees. The Plan enables all employees, after a 90-day waiting
period, to contribute up to 10 percent of their wages toward the purchase
of the Company's common stock at 85 percent of the lower of fair market
value for such shares on the first business day of each quarter or the last
business day of each quarter.
Participant elections resulted in the issuance of 74,096 shares at an
average price per share of $4.06 in 1996 and 34,760 shares at an average
price per share of $5.56 in 1995. The fair value expense of these purchases
is included in the pro forma information in footnote 9.
(11) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan for its U.S. employees. U.S.
employees of the Company who meet certain age and service requirements may
contribute up to 20 percent of their salaries to the plan on a pre-tax
basis. The Company has the discretion to match employee contributions up to
6 percent of compensation. The Company has not made any contributions to
the plan.
As part of its acquisition of the England-based Biomedical Sensors, Ltd.
(BSL), the Company assumed sponsorship of BSL's defined benefit retirement
plan. The Plan covers the majority of the new subsidiary's employees and
provides benefits based upon final pensionable salary. The assets of the
Plan are held separately from those of the Company and invested in the
London and Manchester Secure Growth Fund, Balanced Fund and a small holding
in the Performance Fund. A portion of plan assets are also invested in the
Scottish Equitable Funds.
Contributions to the Plan are charged to expense so as to spread the cost
of the pensions over the employees' working lives with the Company. The
contributions are determined by a qualified actuary on the basis of a
valuation using the "attained age" valuation method.
The Company's Statement of Operations for the year ended December 31, 1996
includes approximately one month of activity for BSL, and pension expense
charged to operations during that period was minimal. The net periodic
pension cost and related assumptions are shown in the following table on a
pro forma basis for 1996, as if the Company had included a full year of BSL
activity in its 1996 results. The second table reflects a description of
the funded status of the plan.
<PAGE>
NET PERIODIC PENSION COST
<TABLE>
<CAPTION>
Pro forma
year ended
December 31, 1996
-----------------
<S> <C>
Service cost $ 258,430
Actual return on plan assets (51,387)
-----------------
$ 207,043
=================
RATE ASSUMPTIONS:
Discount rate 8.50%
Rate of salary progression 6.25%
Long-term rate of return on assets 9.25%
</TABLE>
FUNDED STATUS OF DEFINED BENEFIT RETIREMENT PLAN AT DECEMBER 31, 1996
<TABLE>
<S> <C>
Actuarial present value of obligation:
Vested benefit obligation $ 2,585,814
=================
Accumulated benefit obligation $ 2,616,059
=================
Projected benefit obligation $ 2,762,245
=================
Plan assets at fair value $ 2,660,923
=================
Net pension liability recognized in balance sheet $ (101,322)
=================
</TABLE>
The net pension liability recognized as of December 31, 1996 was part of a
required purchase accounting fair value adjustment recorded upon the
acquisition of BSL to reflect the U.K. to U.S. GAAP adjustment relating to
the accounting for pension costs under the provisions of SFAS No. 87.
(12) INCOME TAXES
The Company has incurred net operating losses since inception. The Company
has not reflected any benefit of such net operating loss carryforwards in
the accompanying financial statements in accordance with Statement of
Financial Accounting Standards No. 109.
As of December 31, 1996 the Company has U.S. tax net operating loss and
research and development tax credit carryforwards of approximately
$75,000,000 and $844,000, respectively. Pursuant to the Tax Reform Act of
1986, use of the Company's net operating loss carryforwards may be limited
if a cumulative "change in ownership" of more than 50 percent occurs within
a three-year period. In connection with prior sales by the Company of its
securities in private and public offerings, the Company has experienced a
"change in ownership". As a result, the utilization of the Company's net
operating loss and certain credit carryforwards incurred prior to these
changes are subject to annual limitations.
The Company estimates that the use of the U.S. net operating losses
incurred from January 26, 1990 (inception) through February 11, 1991 is
limited to approximately $418,000 per year; the use of net operating losses
incurred from February 12, 1991
<PAGE>
through December 7, 1992 is limited to approximately $1.9 million per year.
If not used, these net operating loss carryforwards begin to expire in
2005.
The Company's foreign subsidiary also has a net operating loss carryforward
of approximately $35,800,000 which can be carried forward indefinitely.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------
<S> <C> <C>
Tax credits $ 844,000 $ 701,000
Federal net operating loss carryforward 27,787,000 19,590,000
Foreign net operating loss carryforward 11,828,000 -
Fixed asset depreciation 587,000 173,000
Vacation accrual 117,000 134,000
Inventory reserve 96,000 471,000
Product upgrade accrual 286,000 -
Other differences 169,000 60,000
Valuation allowance (41,714,000) (21,129,000)
-------------------------------
Net deferred tax asset $ - $ -
-------------------------------
</TABLE>
The provision for income taxes differs from the expected tax expense,
computed by applying the federal corporate rate of 34% to earnings before
income taxes as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------
<S> <S> <C>
Expected federal benefit $ (8,016,000) $ (7,836,000)
State tax, net of federal benefit (699,000) (691,000)
Other (42,000) (116,000)
Increase in valuation allowance 20,585,000 8,643,000
Increase in valuation allowance of acquired
foreign subsidiary (11,828,000) -
-------------------------------
$ - $ -
-------------------------------
</TABLE>
(13) RESTRUCTURING AND OTHER CHARGES
In late 1995 and throughout 1996, the Company made operational changes
intended to better align its resources with its evolving strategy, improve
its efficiency, and achieve a more competitive cost structure.
Restructuring and other charges totaled $1,334,661 in 1996 and $391,834 in
1995. 1995 charges reflect severance costs associated with a management
reorganization in late 1995. 1996 charges consist of approximately $580,000
for severance costs related to continued restructuring of the management
team in early 1996 and a work force reduction in November, $450,000 for the
write-off of purchased in-process research and development created from the
BSL acquisition, and $300,000 for the write-down of excess and obsolete
equipment, resulting from the work force reductions and process changes.
(14) RELATED PARTY TRANSACTIONS
Certain equipment used by the Company is leased under a sublease
arrangement with FIM, an entity that is related to the Company through
stockholders. FIM leases the
<PAGE>
equipment from an unrelated entity. The Company pays FIM an amount equal to
FIM's lease payments. The leases are accounted for as capital leases.
Payments on leases of equipment, under the arrangement with FIM discussed
above, are guaranteed up to a principal amount of approximately $1,300,000
by Medical Innovation Fund, a holder of approximately 8% of the Company's
common stock as of December 31, 1996.
(15) MAJOR CUSTOMERS, EXPORT SALES AND DOMESTIC AND FOREIGN OPERATIONS
Sales to major customers that exceeded 10% of total net sales for the years
ended December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
Customer A - 14% -
Customer B - - 27%
Customer C - - 18%
</TABLE>
The Company's export sales (i.e. sales to unaffiliated customers outside of
the U.S.) were $1,248,915, $318,219, and $100,639 for the years ended
December 31, 1996, 1995, and 1994, respectively. These sales were primarily
in Europe and Asia.
Information regarding operations in different geographies for the year
ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
United Adjustments
States Europe and eliminations Consolidated
------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 3,566,952 $ 278,743 $ (48,879) $ 3,796,816
Operating loss (23,531,879) (257,952) 7,620 (23,782,211)
Other income (expense) 214,255 (7,138) - 207,117
Net loss (23,317,624) (265,090) 7,620 (23,575,094)
Identifiable assets at December 31, 1996 22,866,059 8,172,640 (6,980,060) 24,058,639
</TABLE>
The Company did not have operations outside of the United States prior to
1996.
(16) COMMITMENTS
The Company leases its facilities and some of its equipment under non-
cancelable operating lease arrangements. The rental payments under these
leases are charged to expense as incurred. Rent expense included in the
accompanying consolidated statements of operations was $412,295, $376,558
and $337,254 for the years ended December 31, 1996, 1995, and 1994,
respectively.
The following is a schedule of future minimum rental payments, excluding
property taxes and other operating expenses, required under all non-
cancelable operating leases as of December 31, 1996:
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1997 $ 442,705
1998 395,028
1999 361,045
2000 246,442
2001 186,229
------------
Total minimum lease payments $ 1,631,449
------------
</TABLE>
(17) LEGAL PROCEEDINGS
There are no legal proceedings pending against or involving the Company,
which, in the opinion of management, will have a material adverse effect
upon consolidated results of operations or financial condition.
(18) ACQUISITIONS
On November 6, 1996, the Company acquired all the outstanding capital stock
of Biomedical Sensors, Ltd. (BSL), an operating unit of Pfizer Inc. and
certain assets from Howmedica, Inc. (a wholly-owned subsidiary of Pfizer
Inc.), for $1,500,000 in cash and a $7,300,000 senior secured fixed rate
loan note, due November 4, 2002 (see footnote 7). The Company has accounted
for the acquisition using the purchase method. As such, the excess of the
purchase price over the fair value of the identifiable assets acquired was
recorded as goodwill, which consisted of purchased technology and other
intangible assets totaling $2,305,899.
The unaudited pro forma consolidated condensed results of operations for
the Company for fiscal years 1996 and 1995, had the acquisition occurred at
the beginning of each fiscal year presented, are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------
<S> <C> <C>
Net sales $ 7,021,000 $ 5,387,000
Net loss (33,586,000) (35,517,000)
Net loss per common share (2.23) (2.81)
</TABLE>
Included in total revenue and net loss for 1996 are revenues and net loss
from the BSL operations of $326,000 and $(421,000), respectively.
(19) SUBSEQUENT EVENT
In January 1997, the Company completed a private placement of 750,000
shares of Series I Junior Participating Convertible Preferred Stock at
$16.00 per share, resulting in net proceeds to the Company of approximately
$11.9 million. Each share of Preferred Stock will automatically convert
into four shares of common stock upon shareholder approval of additional
authorized common shares. In addition, each purchaser received a warrant to
purchase one share of common stock, at a purchase price of $5.062, for each
share of Preferred Stock purchased, providing additional future funding
potential of approximately $3.8 million. The warrants can be exercised at
any time during the five year period ending January 29, 2002. Additionally,
the Company can call the warrants and require their exercise, after a six
month waiting period, if the Company's Common Stock trades for any
consecutive 20 trading days at $7.062 or greater in the first 12 months, or
$8.50, $9.00, $9.50 and $10.00 in each subsequent year, respectively.
The Company expects to use the net proceeds from this private placement for
product development, sales and marketing and other general corporate
purposes.
<PAGE>
(20) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------
1996
<S> <C> <C> <C> <C>
Net sales $ 609,571 $ 583,530 $ 669,848 $ 1,933,867
Gross profit (loss) (1,681,794) (1,534,417) (1,442,690) (1,135,641)
Operating loss (5,743,317) (6,114,413) (5,521,395) (6,403,086)
Net loss (5,548,010) (6,064,471) (5,484,272) (6,478,341)
Net loss per common share (0.37) (0.40) (0.36) (0.43)
1995
Net sales $ 332,767 $ 310,176 $ 377,708 $ 586,724
Gross profit (loss) (1,250,774) (1,294,328) (1,302,464) (3,340,212)
Operating loss (4,889,945) (4,982,599) (5,161,202) (8,353,155)
Net loss (4,891,269) (4,996,918) (5,096,393) (8,061,734)
Net loss per common share (0.45) (0.44) (0.38) (0.54)
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
DIAMETRICS MEDICAL, INC.:
We have audited the accompanying consolidated balance sheets of Diametrics
Medical, Inc. and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, common shareholders' equity (deficit) and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 24, 1997
<PAGE>
SHAREHOLDER INFORMATION
STOCK LISTING
The Company's common stock is traded on The Nasdaq Stock Market under the
symbol DMED.
STOCK TRANSFER AGENT
Norwest Bank Minnesota, N.A.
Stock Transfer Department
161 North Concord Exchange
P.O. Box 738
South St. Paul, MN 55075-0738
FORM 10-K
A copy of the Company's annual report on form 10-K as filed with the
Securities and Exchange Commission is available free of charge by writing to
Diametrics Medical, Inc.
ANNUAL MEETING
The annual meeting of Diametrics Medical, Inc. shareholders will be held May
7, 1997, at 3:30 p.m. at the Hilton Hotel & Tower, 1001 Marquette Avenue,
Minneapolis, Minnesota. All shareholders and other interested parties are
invited to attend.
INVESTOR INQUIRIES
Please direct all inquiries to Laurence L. Betterley, Senior Vice President
and Chief Financial Officer, at the Company's corporate offices.
STOCK INFORMATION
High and low quarterly closing prices for Diametrics Medical, Inc., common
stock as quoted on The Nasdaq Stock Market were:
<TABLE>
<CAPTION>
1996
High Low
- ----------------------------------------------------------------
<S> <C> <C>
First Quarter $ 6 7/8 $ 4 1/4
Second Quarter 8 4 1/2
Third Quarter 5 5/8 4 1/4
Fourth Quarter 4 7/8 3 1/4
<CAPTION>
1995
High Low
- ----------------------------------------------------------------
<S> <C> <C>
First Quarter $ 8 7/8 $ 4 7/8
Second Quarter 10 1/4 4 15/16
Third Quarter 13 3/8 8 1/4
Fourth Quarter 11 1/2 4 3/8
</TABLE>
There were 440 common shareholders of record and the Company estimates
approximately 4200 shareholders holding stock in "street name" accounts as of
December 31, 1996. The Company has not paid any stock dividends on its common
stock since its inception, and management does not anticipate paying cash
dividends in the foreseeable future.
CORPORATE ADDRESS
Diametrics Medical Incorporated
2658 Patton Road
St. Paul, Minnesota 55113
Phone: (612) 639-8035
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Shareholders
Diametrics Medical, Inc.:
We consent to incorporation by reference in the Registration Statements (Nos.
33-83572, 33-97540, 333-24167 and 333-24169) on Form S-8 and (No.333-24079) on
Form S-3 of Diametrics Medical, Inc. of our report dated February 21, 1997,
relating to the consolidated balance sheets of Diametrics Medical, Inc. as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, common shareholders' equity (deficit) and cash flows for each of the
years in the three-year period ended December 31, 1996, which report is
incorporated by reference in the annual report on Form 10-K of Diametrics
Medical, Inc.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 28, 1997
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints David T. Giddings and Laurence L.
Betterley, and each of them, and Messrs. Giddings and Betterley each hereby
appoints the other, his true and lawful attorney-in-fact and agent, each acting
alone, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign the Annual Report on
Form 10-K of Diametrics Medical, Inc., and any and all amendments thereto, and
to file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each acting
alone, or his substitutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/S/ President, Chief Executive
- ---------------------------------
David T. Giddings Officer and Director March 11, 1997
/S/ Senior Vice President and Chief
- ---------------------------------
Laurence L. Betterley Financial Officer March 11, 1997
/S/ Director March 11, 1997
- ---------------------------------
James E. Ashton, Ph.D.
Director March __, 1997
- ---------------------------------
Andre de Bruin
/S/ Director March 11, 1997
- ---------------------------------
Gerald L. Cohn
/S/ Director March 11, 1997
- ---------------------------------
Roy S. Johnson
/S/ Director March 11, 1997
- ---------------------------------
Mark B. Knudson, Ph.D.
/S/ Director March 11, 1997
- ---------------------------------
Richard A. Norling
_________________________________ Director March __, 1997
Fred. E. Silverstein, M.D.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,451,993
<SECURITIES> 3,402,598
<RECEIVABLES> 2,699,768
<ALLOWANCES> 110,000
<INVENTORY> 4,464,099
<CURRENT-ASSETS> 13,452,213
<PP&E> 16,295,952
<DEPRECIATION> 8,008,200
<TOTAL-ASSETS> 24,058,639
<CURRENT-LIABILITIES> 6,802,726
<BONDS> 8,462,519
152,095
0
<COMMON> 0
<OTHER-SE> 8,522,144
<TOTAL-LIABILITY-AND-EQUITY> 24,058,639
<SALES> 3,796,816
<TOTAL-REVENUES> 3,796,816
<CGS> 9,591,358
<TOTAL-COSTS> 17,987,669
<OTHER-EXPENSES> (863,301)
<LOSS-PROVISION> 48,842
<INTEREST-EXPENSE> 607,342
<INCOME-PRETAX> (23,575,094)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,575,094)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,575,094)
<EPS-PRIMARY> (1.56)
<EPS-DILUTED> (1.56)
</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-K 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 and
the Paratrend(R) 7. Marketing efforts began for both products during 1994. 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 and has incurred net
operating losses since its inception. Net losses for the years ended
December 31, 1994, 1995 and 1996 were approximately $12,455,000, $23,046,000 and
$23,575,000, respectively. The Company had an accumulated deficit of
approximately $80,019,000 at December 31, 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 its products by the
medical community as reliable, accurate and cost-effective. Because the products
are point-of-care blood testing devices, they represent 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 products may cause certain
hospitals not to consider them. The Company is unable to predict how quickly, if
at all, the products will be accepted by members of the medical community
<PAGE>
or, if accepted, what the utilization of disposable cartridges and sensors may
be. Therefore, the Company is unable to provide any assurance as to sales volume
of the products or the related disposable cartridges and sensors.
FUTURE ADDITIONAL CAPITAL REQUIREMENTS
The Company expects that its existing capital resources and $11.9 million of net
proceeds from its private placement of convertible preferred stock in January
1997, current and future lease financing arrangements and strategic alliances
will enable the Company to maintain its current and planned operations through
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 Company's. 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. 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 its products in compliance with regulatory
requirements, in sufficient quantities and on a timely basis, while maintaining
product quality and acceptable manufacturing costs. The products consist of two
principal components: portable, microprocessor-based analyzers/monitors and
disposable cartridges/sensors. The Company has limited experience producing in
large commercial quantities. 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 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 analyzers and monitors are
manufactured for the Company by outside vendors, and there can be no assurance
that such vendors will be able to provide the Company with a sufficient quantity
to meet the Company's needs.
<PAGE>
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 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 Company's products 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
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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 pre-market 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, electrolytes and hematocrit in whole blood
in hospital laboratories and at the point of care and the Paratrend 7 to monitor
blood gases. A 510(k) clearance is subject to continual review and later
discovery of previously unknown problems may result in restrictions on the
product's marketing or withdrawal of the product from the market. The Company's
long-term business strategy includes development of cartridges and sensors for
performing additional blood and tissue chemistry tests, and any such additional
tests will be subject to the same regulatory process. No assurance can be given
that the Company will be able to develop such additional products or uses on a
timely basis, if at all, or that the necessary clearances for such products and
uses will be obtained by the Company on a timely basis or at all, or that the
Company will not be subjected to a more extensive prefiling testing and FDA
approval process. The Company also plans to market its products in several
foreign markets. Requirements vary widely from country to country, ranging from
simple product registrations to detailed submissions such as those required by
the FDA. Manufacturing facilities are also subject to FDA inspection on a
periodic basis and the Company and its contract manufacturers must demonstrate
compliance with current Good Manufacturing Practices ("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 products 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
products as high complexity tests could affect the Company's ability to
successfully market them. 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.
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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. The Company also carries umbrella liability insurance which provides
coverage up to $10,000,000. There can be no assurance that liability claims will
not exceed the coverage limits of such policies 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 and Paratrend 7 monitor are manufactured for the Company by
single vendors, generally from off-the-shelf components. A few components are
supplied by a single source and manufactured to the Company's specifications.
Although the Company believes that it could find alternative vendors, any
interruption in supply could have a material adverse effect on the Company.
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 its products.
CONTROL BY EXISTING SHAREHOLDERS
As of December 31, 1996, directors, executive officers and principal
shareholders of the Company, and certain of their affiliates, owned beneficially
approximately 39% 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.
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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.
