<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Diametrics Medical, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
DIAMETRICS MEDICAL, INC.
2658 PATTON ROAD
ROSEVILLE, MINNESOTA 55113
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 13, 1998
TO THE SHAREHOLDERS OF DIAMETRICS MEDICAL, INC.:
Notice is hereby given that the Annual Meeting of Shareholders of Diametrics
Medical, Inc. (the "Company") will be held at 3:30 p.m. on Wednesday, May 13,
1998, at the Minneapolis Marriott City Center, 30 South Seventh Street,
Minneapolis, Minnesota, for the following purposes:
1. To elect two members to the Board of Directors to serve for a term
beginning May 13, 1998 and until their terms expire and until their
successors are elected and qualified.
2. To approve an amendment to the Company's 1990 Stock Option Plan to
increase the number of shares authorized for issuance under the Plan.
3. To approve an amendment to the Company's 1993 Directors' Stock Option
Plan to increase the number of shares authorized for issuance under the
Plan.
4. To consider and act upon such other matters as may properly come before
the meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on March 27, 1998 as
the record date for the determination of shareholders entitled to notice of
and to vote at the meeting or any adjournment thereof. A copy of the Company's
annual report is included with this mailing, which is being first made
available on approximately the date shown below.
We encourage you to take part in the affairs of your Company either in
person or by executing and returning the enclosed proxy.
By Order of the Board of Directors,
/s/ Kenneth L. Cutler
Kenneth L. Cutler
Secretary
Dated: April 10, 1998
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE MARK, DATE AND SIGN THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. IF YOU LATER
DESIRE TO REVOKE YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE IT IS EXERCISED.
<PAGE>
DIAMETRICS MEDICAL, INC.
2658 PATTON ROAD
ROSEVILLE, MINNESOTA 55113
----------------
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
MAY 13, 1998
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Diametrics Medical, Inc. (the "Company")
for use at the Annual Meeting of Shareholders to be held on Wednesday, May 13,
1998, at the Minneapolis Marriott City Center, 30 South Seventh Street,
Minneapolis, Minnesota at 3:30 p.m., Minneapolis time, and at any adjournment
thereof, for the purposes set forth in the Notice of Annual Meeting of
Shareholders. This Proxy Statement and the form of proxy enclosed are being
mailed to shareholders commencing on or about April 10, 1998.
If the enclosed proxy is properly executed and returned, and if a
shareholder specifies a choice on the proxy, shares of the Common Stock, $.01
par value (the "Common Stock"), represented by the proxy will be voted in the
manner directed by the shareholder. If the proxy is signed and returned but no
direction is made, the proxy will be voted FOR the election of the nominees
for director named in this Proxy Statement, FOR the amendment of the Company's
1990 Stock Option Plan and FOR the amendment of the Company's 1993 Directors'
Stock Option Plan. Shares voted as abstentions on any matter will be counted
as shares that are present and entitled to vote for purposes of determining
the presence of a quorum at the meeting and as unvoted, although present and
entitled to vote, for purposes of determining the approval of each matter as
to which the shareholder has abstained. If a broker submits a proxy which
indicates that the broker does not have discretionary authority as to certain
shares to vote on one or more matters, those shares will be counted as shares
that are present and entitled to vote for purposes of determining the presence
of a quorum at the meeting, but will not be considered as present and entitled
to vote with respect to such matters. Proxies may be revoked at any time
before being exercised, by delivery to the Secretary of the Company of a
written notice of termination of the proxies' authority or a duly executed
proxy bearing a later date. Any proxy also may be revoked by the shareholder
attending the Annual Meeting and voting in person. A notice of revocation need
not be on any specific form.
All holders of the Common Stock whose names appear of record on the
Company's books at the close of business on March 27, 1998 will be entitled to
vote at the Annual Meeting or any adjournment thereof. At the close of
business on March 27, 1998, a total of 20,986,555 shares of Common Stock were
outstanding, each share being entitled to one vote. The holders of a majority
of the Common Stock entitled to vote shall constitute a quorum for the
transaction of business at the Annual Meeting. If such quorum shall not be
present or represented at the Annual Meeting, the shareholders present or
represented at the Annual Meeting may adjourn the Annual Meeting from time to
time without notice other than announcement at the Annual Meeting until a
quorum shall be present or represented. Officers, directors and regular
employees of the Company, who will receive no extra compensation for their
services, may solicit proxies by telephone or in person. Expenses in
connection with the solicitation of proxies will be paid by the Company.
So far as the management of the Company is aware, no matters other than
those described in this Proxy Statement will be acted upon at the meeting. In
the event that any other matters properly come before the meeting calling for
a vote of shareholders, the persons named as proxies in the enclosed form of
proxy will vote in accordance with their best judgment on such other matters.
A copy of the Company's Annual Report for the year ended December 31, 1997
is being furnished to each shareholder with this Proxy Statement.
<PAGE>
PROPOSAL ONE:
ELECTION OF DIRECTORS
NOMINEES
The Company's Articles of Incorporation provide for a "classified board" of
directors. The number of members of the Board of Directors is currently set at
six, and the directors are divided into three classes comprised as follows:
(i) Gerald L. Cohn and Mark B. Knudson, Ph.D., whose terms expire at the
Annual Meeting; (ii) David T. Giddings, Andre de Bruin and Richard A. Norling,
whose terms expire at the annual meeting in 1999; and (iii) Roy S. Johnson,
whose term expires at the annual meeting in 2000 (or, in all cases, when their
respective successors are elected and qualified). The Board has nominated Mr.
Cohn and Dr. Knudson for reelection to the Board of Directors at the Annual
Meeting for terms expiring at the annual meeting in 2001. The nominees have
indicated a willingness to serve, but in case a nominee is not a candidate at
the meeting, for reasons not now known to the Company, the proxies named in
the enclosed form of proxy may vote for a substitute nominee in their
discretion. The other directors of the Company will continue in office for
their existing terms.
Certain biographical information furnished by the Company's current
directors and nominees for director is presented below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
David T. Giddings (/1/).................. 54 President, Chief Executive Officer
and Chairman of the Board
Gerald L. Cohn (/2/)(/3/)................ 69 Director
Andre de Bruin (/1/)(/3/)................ 51 Director
Roy S. Johnson (/1/)..................... 45 Director
Mark B. Knudson, Ph.D. (/2/)............. 49 Director
Richard A. Norling (/2/)(/3/)............ 52 Director
</TABLE>
- --------
(1) Member of the Nominating Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
(3) Member of the Audit Committee of the Board of Directors.
Mr. Giddings was appointed Chairman of the Board of Directors, President and
Chief Executive Officer of the Company in April 1996. Mr. Giddings was
formerly President and Chief Operating Officer of the United States operations
of Boehringer Mannheim Corporation ("BMC"), a global leader in diagnostics
products. He joined BMC in 1992 after a 26 year career with Eastman Kodak
Company, where he held a number of senior management positions, including
General Manager and Vice President of Marketing and Sales, clinical products
division. He also served as Vice President and General Manager of Kodak's
imaging information system group and of its printing and publishing division.
Mr. Cohn has been a director of the Company since June 1996 and has been a
private investor and consultant since 1991. Mr. Cohn is also a consultant to
and a director of DVI Inc., a health care finance company, and a director of
Niagara Steel Corporation, a steel manufacturing company.
Mr. de Bruin has been a director of the Company since June 1996. He was
appointed President and Chief Executive Officer of Somatogen, Inc. on July 13,
1994, and was elected Chairman of the Board on January 22, 1996. From 1989
until he joined Somatogen, he was Chairman, President and Chief Executive
Officer of the United States operations of Boehringer Mannheim Corporation, a
global leader in diagnostic products. Mr. de Bruin is also a director of
Metabolex, Inc., a privately held company founded to develop therapeutics for
diabetes and related metabolic diseases, and Quidez Corporation, a public
company engaged in point-of-care in-vitro diagnostics.
2
<PAGE>
Mr. Johnson joined the Company in November 1996 as an Executive Vice
President, and the President and Managing Director of Diametrics Medical, Ltd.
("DML"), a subsidiary of the Company acquired in November 1996 with the
purchase of Biomedical Sensors, Ltd. ("BSL"). DML markets a line of indwelling
monitoring systems for continuous blood and tissue assessment of critically
ill patients. Beginning in 1977, Mr. Johnson served in a number of management
positions for the predecessors of the BSL business, most recently as President
and Chief Executive Officer while it was a subsidiary of Orange Medical
Instruments, Inc. and later when it was an operating unit of Pfizer Inc. Mr.
Johnson started his career in 1974 with Burroughs Welcome in pharmaceutical
production management and was the head of manufacturing in Burroughs' Sidney,
Australia subsidiary.
Dr. Knudson has been a director of the Company since March 1990. Since 1989,
Dr. Knudson has been a Managing Partner of Medical Innovation Partners ("MIP")
and, since 1993, a Managing Venture Partner of Medical Innovation Partners II
("MIP II"), each a private investment partnership active in the formation,
management, financing and development of start-up medical technology and
service companies. MIP and MIP II are the general partners, respectively, of
Medical Innovation Fund, a Limited Partnership, and Medical Innovation Fund
II, a Limited Partnership. Dr. Knudson is also a director of InControl, Inc.,
Integ Inc. and Heartstream, Inc.
Mr. Norling has been a director of the Company since June 1996. He is the
Chief Operating Officer and a director of Premier, Inc. From July 1989 to
September 1997, he was President and Chief Executive Officer of Fairview
Hospital and HealthCare Services. From June 1988 to June 1989, Mr. Norling was
Executive Vice President and Chief Operating Officer of UniHealth America
("UniHealth"), a nonprofit system of hospitals and health care organizations
headquartered in Burbank, California. Prior to joining UniHealth, Mr. Norling
was employed in management positions with a variety of hospitals, HMO's and
healthcare related organizations that were predecessors to UniHealth,
including Executive Vice President and Chief Operating Officer of LHS
Corporation and President and Executive Director of the California Medical
Center, both located in Los Angeles. Mr. Norling is also a director of Express
Scripts, Inc., a managed care pharmaceutical company.
BOARD COMMITTEES; ATTENDANCE
The Board of Directors has a Compensation Committee which consists of Dr.
Knudson, Mr. Cohn and Mr. Norling. The Compensation Committee held two
meetings during the year ended December 31, 1997. The Compensation Committee
of the Board of Directors makes recommendations concerning executive salaries
and incentive compensation for employees of the Company, subject to
ratification by the full Board, and administers the Company's 1990 Stock
Option Plan.
The Board of Directors of the Company has an Audit Committee which consists
of Messrs. Cohn, de Bruin and Norling. The Audit Committee held two meetings
during the year ended December 31, 1997. The Audit Committee reviews the
results and scope of the audit and other services provided by the Company's
independent auditors, as well as the Company's accounting principles and its
system of internal controls, and reports the results of their review to the
full Board and to management.
The Board of Directors of the Company has a Nominating Committee which
consists of Messrs. Giddings, de Bruin and Johnson. The Nominating Committee
held one meeting during the year ended December 31, 1997. The Nominating
Committee of the Board of Directors makes recommendations concerning members
of the Board of Directors and other matters relevant to the Company's
organizational structure.
During the year ended December 31, 1997, the Board of Directors held six
meetings. All incumbent directors attended at least 75% of the aggregate of
those meetings of the Board and committees of which they were members that
were held while they were serving on the Board or on such committees. The
Company's Board and committees also act from time to time by written consent
in lieu of meetings.
3
<PAGE>
DIRECTOR COMPENSATION
Members of the Board of Directors who are not employees of the Company
receive an annual retainer of $8,000 and $2,000 per Board meeting attended in
person and $500 where the meeting is attended by means of telephonic
communication, with the proviso that there shall be not less than six Board
meetings in any 12-month period. In addition, each non-employee member of the
Board of Directors of the Company serving on the Compensation Committee, the
Audit Committee and the Nominating Committee receives $500 per committee
meeting attended. Each non-employee Director may elect, not later than the
last day of the Company's fiscal year, to be granted stock options in lieu of
the compensation and fees otherwise payable to such Director for the next
fiscal year. Such options shall be granted in quarterly installments on the
last day of each fiscal quarter in which such compensation and fees are
earned, to be fully exercisable immediately. The number of shares covered by
each option shall be determined by dividing the total amount of compensation
and fees payable at the end of each quarter by the option value of one share
on the date of grant. All Directors are reimbursed for expenses actually
incurred in attending meetings of the Board of Directors and its committees.
Non-employee Directors are eligible to participate in the Company's 1993
Directors' Stock Option Plan (the "Directors' Plan"). The Directors' Plan, as
amended, provides for an automatic grant of nonqualified stock options to
purchase 18,000 shares of Common Stock to non-employee Directors of the
Company on the date such individuals become directors of the Company (the
"Initial Grant"), and an option to purchase 8,000 shares of Common Stock on
each subsequent annual shareholder meeting date (a "Subsequent Grant"),
subject to certain limitations.
Options granted in connection with the Initial Grant vest and become
exercisable as to 50% of such shares on the twelve month anniversary of the
date of such Initial Grant and 25% at each such successive anniversary date
thereafter if the holder remains a director on such dates. Options granted on
the date of each annual meeting of shareholders become exercisable six months
subsequent to the date of grant.
The affirmative vote of a majority of the shares of Common Stock represented
at the meeting is required for the election of the nominees for director.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE NOMINEES.
EXECUTIVE COMPENSATION
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Under rules established by the Securities and Exchange Commission, the
Company is required to provide certain data and information in regard to the
compensation and benefits provided to the Company's Chief Executive Officer
and its other executive officers. The disclosure requirements for these
individuals include the use of tables and a report explaining the rationale
and considerations that led to fundamental executive compensation decisions
affecting those individuals. In fulfillment of the report requirement, the
Compensation Committee of the Board of Directors (the "Committee"), at the
direction of the Board of Directors, has prepared the following report for
inclusion in this Proxy Statement.
Overview
The Committee is responsible for establishing and making certain
recommendations to the Board of Directors concerning executive compensation,
including annual base salaries, grants of stock options and other benefits.
The Committee is composed entirely of independent outside directors of the
Company. The Committee annually reviews and evaluates the Company's corporate
performance, compensation levels and equity ownership of its executive
officers. The goal of the Committee is to establish compensation policies and
programs that will attract and retain highly qualified executives and provide
an incentive to such executives to focus on the Company's long-term strategic
goals by aligning their financial interests closely with long-term shareholder
interests.
4
<PAGE>
The Committee intends to make the executive compensation program competitive
with the marketplace, with emphasis on compensation in the form of equity
ownership, the value of which is contingent on the Company's long-term market
performance. For this purpose, the Committee compares the Company with a
selected group of emerging growth companies with similar business
characteristics and strategies, and has considered the recommendations of
Shuman Management Consulting as independent compensation consultants to the
Company.
In evaluating compensation relative to Company performance, the Committee
considers specific objective goals, such as the Company's stock performance,
its operating revenues and earnings, and its progress toward profitability.
The Committee also ties compensation to performance goals that involve a more
subjective element and take into account the achievement of nonfinancial goals
such as the introduction of new products, development of the Company's sales
and marketing force and growing market acceptance of the Company's products.
Executive Compensation Program
The components of the Company's executive compensation program which are
subject to the discretion of the Committee on an individual basis consist
primarily of base salaries, bonuses and stock options. The ultimate
composition of executive compensation reflects the Company's goals of
attracting and retaining highly qualified personnel and supporting a
performance-oriented environment that rewards both corporate and personal
performance over the long term. In general, stock option grants are used to
enhance the competitiveness of compensation packages, to reward exceptional
performance and provide incentive for reaching further performance goals.
Base Salary and Bonus. Annual base salaries and bonuses are established as a
result of the Committee's analysis of each executive officer's individual
performance during the prior year, the overall performance of the Company
during the prior year and historical compensation levels within the executive
officer group.
Stock Options. The Company's 1990 Stock Option Plan (the "Stock Option
Plan") is designed to align a portion of executive and other senior employee
compensation with the long-term interests of shareholders. The stock options
give the holder the right to purchase shares of the Common Stock over a ten-
year period at the fair market value per share as of the date the option is
granted. In addition to options, the Stock Option Plan permits the granting of
several types of stock-based awards, including stock bonuses, and the
Committee has granted performance-based stock bonuses.
In determining whether to grant options to an executive officer, the
Committee typically considers the individual's performance as such performance
relates to the achievement of Company objectives and any planned change in
functional responsibility. Although the stock option position of executive
officers generally is reviewed on an annual basis, the Company's policy is to
not grant stock options annually, but to review each individual's stock option
position, at which point the Committee may or may not grant additional options
at its discretion. The determination of whether any additional options will be
granted to an executive officer is based on a number of factors, including
Company performance, individual performance and levels of options granted by
the comparable companies referred to above.
Compensation of Chief Executive Officer
Compensation for the Chief Executive Officer consists of the following
components: base salary, incentive bonus and stock options. Mr. Giddings
joined the Company in April 1996 as Chief Executive Officer. His 1997 base
salary remained unchanged from 1996 at $300,000. Reflecting the Committee's
favorable view of Mr. Giddings' individual performance and contributions to
the Company, he was awarded a bonus of $180,000. He was also granted stock
options to purchase 100,000 shares of Common Stock in 1997. As part of his
1996 compensation, Mr. Giddings received a $100,000 signing incentive advance,
to be earned in equal increments of $33,333 per year over a period of three
years. Should Mr. Giddings elect to leave the Company prior to the end of the
three year period, the unearned portion of this incentive will be returned to
the Company.
5
<PAGE>
Mr. Giddings' original compensation package was established by the Committee
based on the general experience of the Committee members in dealing with
compensation matters at other emerging growth companies, and was designed to
attract an individual with Mr. Giddings' abilities and experience to the
Company. The Committee believes that stock options granted to Mr. Giddings
provide a significant and appropriate tie between overall compensation and the
performance of the Company over the long term.
Section 162(m)
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), did not affect the deductibility of compensation paid to the
Company's executive officers in 1997 and will not affect the deductibility of
such compensation expected to be paid in 1998. The Committee will continue to
monitor this matter and may propose additional changes to the executive
compensation program if warranted.
MARK B. KNUDSON,
GERALD L. COHN and
RICHARD A. NORLING
The Members of the Compensation
Committee
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Dr. Knudson, Mr. Cohn and Mr. Norling served as members of the Company's
Compensation Committee during 1997. Dr. Knudson is a limited partner of MIP,
the general partner of Medical Innovation Fund. During the first half of 1997,
the Company made the final payments under a sublease agreement with FIM, Inc.
("FIM"), a wholly-owned subsidiary of Medical Innovation Fund. Pursuant to
this agreement, FIM leased approximately $1,300,000 in laboratory and computer
equipment from an unrelated third party, which equipment was, in turn,
subleased by the Company from FIM on the same terms as the original lease. The
Company's lease obligations were guaranteed by Medical Innovation Fund. The
Company paid FIM an amount equal to FIM's lease payments. In connection with
this sublease, the Company issued warrants to purchase an aggregate of 290,994
shares of Common Stock at a weighted average exercise price of $2.25 per share
to Medical Innovation Fund. The Company has also obtained equipment financing
of approximately $1,558,000 and has a $1,000,000 receivable-based line of
credit through DVI, Inc., of which Mr. Cohn is a director.
6
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and noncash compensation for each of
the last three fiscal years awarded to or earned by the Chief Executive
Officer and the other most highly compensated executive officers of the
Company whose salary and bonus earned in the fiscal year ended December 31,
1997 exceeded $100,000 for services rendered:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL
COMPENSATION STOCK
----------------- OPTIONS ALL OTHER
YEAR SALARY BONUS (SHARES) COMPENSATION
---- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
David T. Giddings 1997 $300,000 $180,000 100,000 --
President, Chief Executive 1996 216,923 235,000 (/2/) 500,000 --
Officer and Chairman 1995 -- -- -- --
of the Board (/1/)
Roy S. Johnson 1997 $166,400 $ 40,350 25,000 $38,300 (/4/)
Executive Vice President and 1996 9,400 -- 150,000 --
President and Managing 1995 -- -- -- --
Director of DML (/3/)
Laurence L. Betterley 1997 $159,615 $ 47,885 75,000 --
Senior Vice President and 1996 53,077 -- 75,000 --
Chief Financial Officer (/5/) 1995 -- -- -- --
James R. Miller 1997 $164,415 $ 39,460 25,000 $ --
Senior Vice President of Sales 1996 159,014 47,340 24,000 57,023 (/7/)
and Marketing and 1995 143,269 25,000 100,000 88,839 (/7/)
Commercial Development (/6/)
</TABLE>
- --------
(1) Mr. Giddings was employed by the Company on April 12, 1996.
(2) Includes a $100,000 signing incentive advance, earned in equal increments
of $33,333 per year over a period of three years. Should Mr. Giddings
elect to leave the Company prior to the end of the three year period, the
unearned portion will be returned to the Company.
(3) Mr. Johnson was employed by the Company on November 6, 1996, as part of
the Company's acquisition of Biomedical Sensors, Ltd., now known as
Diametrics Medical, Ltd.
(4) Includes Company pension plan contributions made on Mr. Johnson's behalf
and Company expenses related to Mr. Johnson's use of a Company automobile.
(5) Mr. Betterley was employed by the Company on August 26, 1996.
(6) Mr. Miller was employed by the Company on March 20, 1995.
(7) Includes relocation-related tax and expense reimbursements.
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS
Except as provided below, none of the Company's executive officers has a
written employment agreement. The Company has a letter agreement with David T.
Giddings which provides for one year of severance if he is dismissed for
reasons other than "cause" as defined in the agreement. In addition, Mr.
Giddings will receive an additional year of severance if there is a change in
control of the Company resulting from a merger or acquisition in which the
price paid for the Company is equal to or greater than $18.00 per share of
Common Stock. Mr. Giddings' stock options will vest immediately in the event
of such a change in control. The severance arrangements for the Company's
executive officers in the event of a change in control are being reviewed by
the Compensation Committee and will be revised in 1998.
7
<PAGE>
As described below in footnote (1) to the table entitled "Option Grants
During the Year Ended December 31, 1997," the exercisability of options
granted to named executive officers is accelerated in the event of a "change
in control" involving the Company.
STOCK OPTIONS
The following table summarizes option grants during the year ended December
31, 1997 to the executive officers named in the "Summary Compensation Table"
above:
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
% OF POTENTIAL
TOTAL REALIZABLE VALUE
OPTIONS AT ASSUMED ANNUAL
NUMBER OF GRANTED RATES OF STOCK
SHARES TO PRICE APPRECIATION
UNDERLYING EMPLOYEES FOR OPTION TERM (3)
OPTIONS IN FISCAL EXERCISE PRICE EXPIRATION -------------------
NAME GRANTED (1) YEAR 1997 PER SHARE (2) DATE 5% 10%
- ---- ---------- --------- -------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
David T. Giddings....... 100,000 22% $4.380 3/11/07 $275,456 $1,136,059
Roy S. Johnson.......... 25,000 6 8.000 8/6/07 125,779 518,748
Laurence L. Betterley... 50,000 11 5.0625 1/30/07 159,189 656,541
25,000 6 8.000 8/6/07 125,779 518,748
------- --- -------- ----------
75,000 17 284,968 1,175,290
James R. Miller......... 25,000 6 8.000 8/6/07 125,779 518,748
</TABLE>
- --------
(1) Each option represents the right to purchase one share of Common Stock and
all grants were made pursuant to the Stock Option Plan. Stock options were
granted to Messrs. Johnson, Miller and Betterley in August 1997 and become
exercisable with respect to one-quarter of the shares on each of the first
four anniversaries of the grant date. Stock options were also granted to
Mr. Betterley in January 1997, and became exercisable with respect to one-
fifth of the shares on the date of grant and will become exercisable with
respect to an additional one-fifth on each of the first four anniversaries
of the date of grant. The stock option grant to Mr. Giddings was made in
March 1997. It will become exercisable with respect to one-quarter of the
shares on each of the first four anniversaries of the date of grant. To
the extent not already exercisable, the options granted to all four
individuals become exercisable in the event of a "change in control" (as
defined in the stock option agreements) involving the Company.
(2) The exercise price is equal to the fair market value of the Common Stock
on the date of grant in the case of each of such grants. The exercise
price may be paid in cash, in shares of Common Stock with a market value
as of the date of exercise equal to the option price or a combination of
cash and shares of Common Stock.
(3) The compounding assumes a ten year exercise period for all option grants.
These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent on the future
performance of the Common Stock and overall stock market conditions. The
amounts reflected in this table may not necessarily be achieved.
8
<PAGE>
The following table summarizes the value realized upon exercise of options in
the year ended December 31, 1997 and the value of options held at December 31,
1997 by the executive officers named in the "Summary Compensation Table" above:
AGGREGATE OPTION EXERCISES IN YEAR ENDED DECEMBER 31, 1997 AND
AGGREGATE OPTION VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES NUMBER OF SECURITIES IN-THE-MONEY
ACQUIRED UNDERLYING UNEXERCISED OPTIONS AT
ON VALUE OPTIONS AT 12/31/97 12/31/97
NAME EXERCISE REALIZED (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE(1))
- ---- -------- -------- -------------------------- ------------------------------
<S> <C> <C> <C> <C>
David T. Giddings....... -- -- 175,000/425,000 $ 0/$118,250
Roy S. Johnson.......... -- -- 37,500/137,500 $30,469/$ 91,406
Laurence L. Betterley... -- -- 60,000/90,000 $59,375/$ 47,188
James R. Miller......... -- -- 76,000/73,000 $ 5,000/$ 2,500
</TABLE>
- --------
(1) Value based on the difference between the fair market value of the shares
of Common Stock at December 31, 1997 ($5.5625) and the exercise price of
the options.
9
<PAGE>
COMPARATIVE STOCK PERFORMANCE
The graph below compares the cumulative total shareholder return on the
Common Stock with the cumulative total return of the Nasdaq Stock Market Index
and the Nasdaq Non-Financial Industry Index over the same period for the period
from June 14, 1994 (the date of the initial public offering of the Common
Stock) to December 31, 1997 (assuming the investment in the Common Stock and
each index was $100 on June 14, 1994, and that dividends, if any, were
reinvested).
COMPARISON OF CUMULATIVE TOTAL RETURN SINCE JUNE 14, 1994
AMONG DIAMETRICS MEDICAL, INC., THE NASDAQ STOCK MARKET INDEX
AND THE NASDAQ NON-FINANCIAL INDUSTRY INDEX
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
6/14/94 12/30/94 12/29/95 12/31/96 12/31/97
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Diametrics Medical, Inc............ $100.00 $ 84.00 $ 78.00 $ 70.00 $ 89.00
Nasdaq Stock Market Index.......... 100.00 102.84 145.36 178.88 219.51
Nasdaq Non-Financial Industry
Index............................. 100.00 104.60 145.68 177.15 207.88
</TABLE>
10
<PAGE>
CERTAIN TRANSACTIONS
On January 30, 1997, the Company completed the sale in a private placement
(the "Private Placement") of 750,000 shares of the Company's Series I Junior
Participating Preferred Stock (the "Preferred Stock"), at a price of $16.00
per share. Each purchaser of Preferred Stock also received a detachable
warrant to purchase one share of Common Stock for each share of Preferred
Stock purchased, with an exercise price (subject to adjustment) equal to
$5.0625 per share (the "Warrants"). The Company received net proceeds of
approximately $11,900,000 in connection with the Private Placement, and
received further proceeds of approximately $3,800,000 upon exercise of the
Warrants, as described below. The proceeds of the Private Placement have been
and are being used for working capital. The Board of Directors determined that
it was in the Company's best interests to complete the Private Placement,
given the Company's need for additional capital.
Gerald L. Cohn, Mark B. Knudson and Fred E. Silverstein, current or former
directors of the Company (or in some cases, entities in which they hold
interests), purchased 25,000, 4,148 and 1,250 shares, respectively, and
Laurence L. Betterley, Senior Vice President and CFO of the Company, purchased
3,125 shares of the Preferred Stock in the Private Placement, in each case on
the same terms and conditions as the purchasers who are not affiliated with
the Company.
Each share of Preferred Stock, when issued, was convertible automatically
into four shares of the Company's Common Stock upon the happening of certain
events. On April 10, 1997, all 750,000 shares of Preferred Stock were
converted into 3,000,000 shares of the Company's Common Stock in accordance
with their original terms. On August 4, 1997, the Company called the Warrants,
resulting in the issuance of 750,000 shares of Common Stock at $5.0625 per
share. The Company has registered the Common Stock issued upon conversion of
the Preferred Stock and the Common Stock issued upon exercise of the Warrants
with the Securities and Exchange Commission under the Securities Act of 1933,
as amended.
For a discussion of certain Company transactions with Dr. Knudson and Mr.
Cohn, see "Executive Compensation--Compensation Committee Interlocks and
Insider Participation" above.
11
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Common Stock, as of February 28, 1998 by: (i) each person who
is known by the Company to beneficially own more than 5% of the Common Stock,
(ii) each of the Company's directors and nominees for director, (iii) each of
the officers named under the "Summary Compensation Table" above and (iv) all
directors, nominees and executive officers of the Company as a group:
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT
BENEFICIALLY OF
NAME OF BENEFICIAL OWNER OWNED (/1/) CLASS
- ------------------------ ------------ -------
<S> <C> <C>
Investment Advisors, Inc. (/2/)........................... 2,017,400 9.7
733 Marquette
Investors Building, 5th Floor
Minneapolis, MN 55479-0047
Amarfour, L.L.C. (/3/).................................... 1,789,100 8.6
200 West Madison Street
Suite 3800
Chicago, IL 60606
State of Wisconsin Investment Board (/4/)................. 1,362,800 6.5
P.O. Box 7842
Madison, WI 53707
Timothy A. Stepanek (/5/)................................. 1,172,366 5.6
4422 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
David T. Giddings (/6/)................................... 283,229 1.4
Gerald L. Cohn (/7/)...................................... 220,921 1.1
Mark B. Knudson, Ph.D. (/8/).............................. 189,070 *
James R. Miller (/9/)..................................... 90,943 *
Laurence L. Betterley (/1//0/)............................ 89,205 *
Roy S. Johnson (/1//1/)................................... 37,500 *
Andre de Bruin (/1//2/)................................... 36,250 *
Richard A. Norling (/1//3/)............................... 11,250 *
All directors and executive officers as a group (8
persons) (/1//4/)........................................ 958,368 4.6
</TABLE>
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and includes generally voting power
and/or investment power with respect to securities. Shares of Common
Stock subject to options or warrants currently exercisable or exercisable
within 60 days of April 10, 1998 are deemed outstanding for computing the
percentage of the person holding such options but are not deemed
outstanding for computing the percentage of any other person. Except as
indicated by footnote, the persons named in the table above have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
(2) In a Schedule 13G dated as of January 30, 1998, Investment Advisors, Inc.
("IAI") indicated (i) that it is the beneficial owner of 1,074,600 shares
of Common Stock, (ii) that it has sole voting and dispositive power with
respect to 853,600 of such shares and shared voting and dispositive power
with respect to 221,000 of such shares, and (iii) that all of such shares
are held by various custodial institutions for the benefit of clients of
IAI, none of whom individually own beneficially more than 5% of the
Common Stock. Pursuant to a telephone conversation between the Company
and IAI, IAI confirmed that it beneficially owns 2,017,400 shares of the
Company's Common Stock. IAI is an investment adviser registered under
Section 203 of the Investment Advisers Act of 1940.
12
<PAGE>
(3) In a Schedule 13D dated as of January 21, 1998, Amarfour, L.L.C.
("Amarfour") indicated that it is the beneficial owner of 1,789,100
shares of Common Stock, with sole voting and dispositive power with
respect to such shares. Amarfour also indicated that an affiliate of
Amarfour received 25,319 shares of Common Stock through a distribution by
Frazier Healthcare Investments, L.P. Amarfour disclaims beneficial
ownership of such shares.
(4) In a Schedule 13G dated as of January 20, 1998, the State of Wisconsin
Investment Board indicated that it is the beneficial owner of 1,362,800
shares of Common Stock with sole voting and dispositive power with
respect to such shares.
(5) In a Schedule 13D dated as of September 22, 1997, Timothy A. Stepanek
indicated (i) that he is the beneficial owner of 1,172,366 shares of
Common Stock, (ii) that he has sole voting and dispositive power with
respect to 269,099 of such shares and shared voting and dispositive power
with respect to 903,267 of such shares, and (iii) that 831,017 of such
shares were held by Parsnip River Company, a Limited Partnership
("Parsnip"), and 72,250 of such shares were held by Mr. Stepanek or
members of his immediate family. The Schedule 13D related to the
beneficial ownership of shares by Mr. Stepanek personally and as a
managing general partner of Parsnip and as the trustee of that certain
Trust U/A dated August 3, 1935 with David J. Winston, Trustor. Mr.
Stepanek is a former director of the Company.
(6) Includes 275,000 shares of Common Stock issuable upon exercise of
outstanding options.
(7) Includes 126,899 shares of Common Stock held by the Gerald L. Cohn
Revocable Trust and 1,000 shares owned by Mr. Cohn's spouse. Also
includes 11,250 shares of Common Stock issuable upon exercise of
outstanding options.
(8) Includes 13,000 shares of Common Stock issuable upon the exercise of
outstanding options. Excludes 418,666 shares of Common Stock held by
Medical Innovation Fund ("MIF") and 237,806 shares of Common Stock held
by Medical Innovation Fund II ("MIF II"), as well as 290,994 shares of
Common Stock issuable upon the exercise of certain warrants held by MIF.
Medical Innovation Partners ("MIP") and Medical Innovation Partners II
("MIP II") are, respectively, the general partners of MIF and MIF II. Dr.
Knudson is a limited partner of MIP and a general partner of MIP II. Dr.
Knudson disclaims beneficial ownership of such shares except to the
extent of his proportionate pecuniary interests in such partnerships.
(9) Includes 86,000 shares of Common Stock issuable upon the exercise of
outstanding options.
(10) Includes 69,500 shares of Common Stock issuable upon the exercise of
outstanding options.
(11) Includes 37,500 shares of Common Stock issuable upon exercise of
outstanding options.
(12) Includes 35,250 shares of Common Stock issuable upon exercise of
outstanding options.
(13) Includes 11,250 shares of Common Stock issuable upon exercise of
outstanding options.
(14) See Notes (6)-(13) above.
COMPLIANCE WITH SECTION 16(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than
ten percent of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater-than ten percent shareholders are
also required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1997 all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten-percent beneficial owners were complied with, except that a
statement of change in beneficial ownership on Form 4 was not timely filed by
Mr. Miller to reflect a grant of stock options in July of 1996, but such
change was subsequently reported on Form 4.
13
<PAGE>
PROPOSAL TWO: AMENDMENT OF 1990 STOCK OPTION PLAN
The Board of Directors has approved, subject to shareholder approval, an
amendment to the Stock Option Plan to increase the number of shares of Common
Stock available for issuance thereunder from 3,000,000 shares to 3,750,000
shares. As of December 31, 1997, the Company had outstanding options to
purchase an aggregate of 2,387,797 shares, at a weighted average exercise
price of $5.26 per share, pursuant to the Stock Option Plan. The Board of
Directors believes that the Stock Option Plan has been and continues to be an
important incentive in attracting, retaining and motivating key employees, and
that it is appropriate to increase the number of shares available for option
grants and other awards under the Stock Option Plan at this time. Approval of
the proposed amendment to increase the number of authorized shares under the
Stock Option Plan will assure that sufficient shares are available to enable
the Compensation Committee to achieve the objectives of the Stock Option Plan
to aid in maintaining and developing personnel capable of assuring the future
success of the Company, to offer such personnel additional incentives to put
forth maximum effort for the success of the business and to afford them an
opportunity to acquire an interest in the Company through stock options.
The Stock Option Plan was approved by the Board of Directors in June 1990,
amended in July 1992 and June 1993 and approved by the Company's shareholders
in June 1993. The Stock Option Plan was amended by the shareholders in 1996 to
increase the number of shares of Common Stock available for issuance
thereunder from 1,740,000 to 3,000,000 shares. The Stock Option Plan was
further amended by the Board of Directors in 1997 to allow for transferability
of nonincentive stock options by optionholders to members of their immediate
family or trusts for the benefit of the optionholder or members of his or her
immediate family.
The Board of Directors may amend or discontinue the Stock Option Plan at any
time. Subject to certain provisions of the Stock Option Plan, no amendment of
the Stock Option Plan, however, shall without shareholder approval: (i)
increase the maximum number of shares under the Stock Option Plan, (ii)
decrease the minimum price, (iii) extend the maximum term, or (iv) modify the
eligibility requirements for participation in the Stock Option Plan. The Board
of Directors may not alter or impair any option or award previously granted
under the Stock Option Plan without the consent of the holder of the option.
Pursuant to the Stock Option Plan, executive officers, other full or part-
time employees, consultants or independent contractors of the Company may
receive options to purchase Common Stock. The Stock Option Plan provides for
the grant of both incentive stock options ("ISOs") intended to qualify for
preferential tax treatment under Section 422 of the Internal Revenue Code of
1986, as amended, and nonqualified stock options that do not qualify for such
treatment. The exercise price of all ISOs granted under the Stock Option Plan
must equal or exceed the fair market value of the Common Stock at the time of
grant. Only full or part-time employees are eligible for the grant of ISOs.
The Stock Option Plan also provides for grants of stock appreciation rights
("SARs"), restricted stock awards and performance awards. The Stock Option
Plan is administered by the Compensation Committee; however, the Compensation
Committee may delegate to the Chief Executive Officer of the Company the right
to grant awards with respect to participants who are not subject to Section
16(b) of the Securities Exchange Act of 1934.
The following is a summary of the principal federal income tax consequences
generally applicable to options and awards under the Stock Option Plan. The
grant of an option is not expected to result in any tax consequences for the
recipient or the Company or any subsidiary employing such individual (the
"employer"). The holder of an ISO generally will have no taxable income upon
exercising the ISO (except that the alternative minimum tax may apply), and
the employer generally will receive no tax deduction when an ISO is exercised.
Upon exercise of a stock option other than an ISO, the optionee must recognize
ordinary income equal to the excess of the fair market value of the shares
acquired on the date of exercise over the option price, and the employer will
then be entitled to a tax deduction for the same amount. The tax consequences
to an optionee of a disposition of shares acquired through the exercise of an
option will depend on how long the shares have been held and upon whether such
shares were acquired by exercising an ISO or stock option other than an ISO.
Generally, there will be no tax consequence to the employer in connection with
a disposition of shares acquired under an option except that the employer may
be entitled to a tax deduction in the case of a disposition of shares acquired
under an ISO before the applicable ISO holding period has been satisfied.
14
<PAGE>
The tax consequences of the grant of an SAR are generally governed by
Section 83 of the Code. At the time an SAR is granted, an optionholder will
not recognize any taxable income. At the time of exercise of an SAR the
optionholder will recognize ordinary income equal to the cash or the fair
market value of the shares received at such time. Any additional gain
recognized on a subsequent sale or exchange of such shares will not be
compensation income but generally will qualify as a capital gain. The Company
generally will be allowed an income tax deduction in the amount that, and for
its taxable year in which, the optionholder recognizes ordinary income upon
the exercise of an SAR, but only if the Company properly reports such income
to the Internal Revenue Service or withholds income tax upon such amount as
required under the Code.
The tax consequences of restricted stock and performance awards
(collectively hereinafter referred to as "deferred awards") also are governed
by Section 83 of the Code. At the time a deferred award is granted, a
recipient will not recognize any taxable income. At the time a deferred award
matures, the recipient will recognize ordinary income equal to cash or fair
market value of the shares received at such time. Any additional gain
recognized on a subsequent sale or exchange of such shares will not be
compensation income but will be treated as capital gain. Section 83(b) of the
Code provides that a recipient of a restricted stock award may elect, not
later than 30 days after the date the restricted stock award is originally
made, to include as ordinary income the fair market value of the stock at that
time. Any future appreciation in the fair market value of the stock will be
capital gain. If the stock is subsequently forfeited under the terms of the
restricted stock award, the recipient will not be allowed a tax deduction with
respect to such forfeiture. The Company generally will be allowed an income
tax deduction in the amount that, and for its taxable year in which, a
recipient recognizes ordinary income pursuant to a restricted stock award or
performance award, but only if the Corporation properly reports such income to
the Internal Revenue Service or withholds income tax upon such amount as
required under the Code.
Special rules apply in the case of individuals subject to Section 16(b) of
the Securities Exchange Act of 1934. In particular, under current law, shares
received pursuant to the exercise of a stock option, other purchase right, or
SAR may be treated as restricted as to transferability and subject to a
substantial risk of forfeiture for a period of up to six months after the date
of exercise. Accordingly, unless a special tax election is made, the amount of
ordinary income recognized and the amount of the employer's deduction may be
determined as of such date.
As of December 31, 1997, there were outstanding options to purchase an
aggregate of 2,387,797 shares of Common Stock under the Stock Option Plan,
including outstanding options granted to executive officers as follows: David
T. Giddings (600,000); Roy S. Johnson (175,000); Laurence L. Betterley
(150,000); and James R. Miller (149,000). Future grants of options and awards
to executive officers and other employees under the Stock Option Plan are not
determinable.
The affirmative vote of a majority of the shares of Common Stock represented
at the meeting is required for the approval of the amendment to the Stock
Option Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDMENT TO THE 1990
STOCK OPTION PLAN.
PROPOSAL THREE: AMENDMENT OF 1993 DIRECTORS' STOCK OPTION PLAN
The Board of Directors has approved, subject to shareholder approval, an
amendment to the Directors' Plan to increase the number of shares of Common
Stock available for issuance thereunder from 217,500 shares to 367,500 shares.
The purpose of the Directors' Plan is to attract and retain the best available
individuals for service as directors of the Company and provide additional
incentive to the non-employee Directors of the Company to serve as directors.
As of December 31, 1997, the Company had outstanding options to purchase an
aggregate of 122,000 shares, at a weighted average exercise price of $6.13 per
share, pursuant to the Directors' Plan. In light of the Initial and Subsequent
Grants of stock options pursuant to the Directors' Plan, and the ability of
non-employee Directors to elect to receive stock options in lieu of annual
compensation and fees, the Board of Directors believes that approval of the
proposed amendment to increase the number of authorized shares under the
Directors' Plan will assure that sufficient shares are available to enable the
Company to achieve the objectives of the Directors' Plan.
15
<PAGE>
The Directors' Plan provides for an automatic Initial Grant of nonqualified
stock options to non-employee Directors on the date such individuals become
directors of the Company, and Subsequent Grants of nonqualified stock options
on each subsequent annual shareholder meeting date, subject to certain
limitations. The Board of Directors approved an amendment to the Directors'
Plan, effective August 14, 1997, to increase the number of shares of Common
Stock subject to the Initial Grant of options thereunder from 14,500 shares to
18,000 shares and the number of shares of Common Stock subject to the
Subsequent Grants of options thereunder from 4,000 shares to 8,000 shares.
Based on a review of similar plans of other public companies and the
recommendations of Shuman Management Consulting as independent compensation
consultants to the Company, the Board of Directors believed that an increase
in the number of shares subject to the Initial Grant of options and the
Subsequent Grants of options under the Directors' Plan is consistent with the
plans of other public companies and is desirable in order to attract qualified
individuals to serve as the Company's directors. The Directors' Plan was also
amended to provide for transferability of options by optionholders to members
of their immediate family or trusts for the benefit of the optionholder or
members of his or her immediate family.
The Directors' Plan is designed to operate automatically and not to require
administration; however, to the extent administration is necessary, it will be
provided by the Board of Directors. Only non-employee Directors are eligible
to participate in the Directors' Plan. In the event of a merger in which the
Company is not the surviving corporation, a transfer of all of the Company's
stock, a sale of substantially all of the Company's assets or a dissolution or
liquidation of the Company, all outstanding options will become exercisable in
full at least ten days prior to such event on such conditions as the Board
shall determine, unless the successor corporation assumes the outstanding
options or substitutes substantially equivalent options.
The Board may at any time amend, alter, suspend, or discontinue the
Directors' Plan, but no amendment, alteration, suspension or discontinuance
may be made that would impair the rights of any optionholder under any grant
previously made, without his or her consent. In addition, to the extent
necessary and desirable to comply with Rule 16b-3 under the Securities
Exchange Act of 1934, the Company will obtain shareholder approval of any
amendment in such a manner and to such a degree as required.
The following is a summary of the principal federal income tax consequences
generally applicable to options and awards under the Directors' Plan. The
grant of an option under the Directors' Plan is not expected to result in any
taxable income for the recipient. Upon exercising a non-qualified stock
option, the optionee must recognize ordinary income equal to the excess of the
fair market value of the shares of Common Stock acquired on the date of
exercise over the exercise price, and the Company will be entitled at that
time to a tax deduction for the same amount. The tax consequence to a director
upon a disposition of shares acquired through the exercise of a non-qualified
option granted under the Directors' Plan will depend upon how long the shares
have been held. Generally, there will be no tax consequence to the Company in
connection with the disposition of shares acquired pursuant to such an option.
Special rules apply to directors under Section 16(b) of the Securities
Exchange Act of 1934. Under certain circumstances, shares received pursuant to
the exercise of a stock option may be deemed restricted under the Internal
Revenue Code of 1986, as amended, for a period of up to six months after the
date of exercise resulting in the amount of any ordinary income recognized,
and the amount of the Company's tax deduction, being determined as of the end
of such period instead of on the date of exercise.
The affirmative vote of a majority of the shares of Common Stock represented
at the meeting is required for the approval of the amendment to the Directors'
Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDMENT TO THE 1993
DIRECTORS' STOCK OPTION PLAN.
16
<PAGE>
APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed KPMG Peat Marwick LLP as independent
auditors for the Company for the fiscal year ending December 31, 1998. KPMG
Peat Marwick LLP has served as the Company's independent auditors since 1990
and has no relationship with the Company other than that arising from its
employment as independent auditors. Representatives of KPMG Peat Marwick LLP
are expected to be present at the Annual Meeting, will have an opportunity to
make a statement if they desire to do so, and will be available to respond to
appropriate questions from shareholders.
PROPOSALS FOR THE NEXT ANNUAL MEETING
Any proposal by a shareholder to be presented at the next Annual Meeting
must be received at the Company's principal executive offices, 2658 Patton
Road, Roseville, Minnesota 55113, no later than December 11, 1998.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Kenneth L. Cutler
Kenneth L. Cutler
Secretary
April 10, 1997
17
<PAGE>
DIAMETRICS MEDICAL, INC.
2658 Patton Road
Roseville, Minnesota 55113
Annual Meeting of Shareholders May 13, 1998
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned appoints David T. Giddings and Laurence L. Betterley, and
each of them, with power to act without the other and with all the right of
substitution in each, the proxies of the undersigned to vote all shares of
Diametrics Medical, Inc. (the "Company") held by the undersigned on March 27,
1998, at the Annual Meeting of Shareholders of the Company to be held on
Wednesday, May 13, 1998 at 3:30 p.m., at the Minneapolis Marriott City Center,
30 South Seventh Street, Minneapolis, Minnesota, and at all adjournments
thereof, with all powers the undersigned would possess if present in person. All
previous proxies given with respect to the meeting are revoked.
Receipt of Notice of Annual Meeting of Shareholders and Proxy Statement is
acknowledged by your execution of this proxy. Complete, sign, date and return
the proxy in the addressed envelope -- no postage required. Please mail promptly
to save further solicitation expenses.
1. Election of Directors:
[_] FOR all nominees (except as marked [_] WITHHOLD AUTHORITY to vote
to the contrary below) for all nominees
To withhold authority to vote for a specific nominee, place a line through such
nominee's name below:
Gerald L. Cohn Mark B. Knudson, Ph.D.
2. Approval of Amendment of 1990 Stock Option Plan:
FOR [_] AGAINST [_] ABSTAIN [_]
3. Approval of Amendment of 1993 Directors' Stock Option Plan:
FOR [_] AGAINST [_] ABSTAIN [_]
4. To vote with discretionary authority on such other matters as may properly
come before the meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS PROVIDED BY THE UNDERSIGNED
SHAREHOLDER, THE PROXY WILL BE VOTED "FOR" ALL PERSONS NAMED IN ITEM 1 ABOVE,
AND "FOR" APPROVAL OF ITEMS 2 AND 3 ABOVE. ON ALL OTHER MATTERS THE PROXIES
SHALL VOTE AS THEY DEEM IN THE BEST INTEREST OF THE COMPANY.
SIGNATURE(S)
_____________________________
_____________________________
Dated _________________, 1998
INSTRUCTION: When shares are held by joint tenants, all joint tenants should
sign. When signing as attorney, executor, administrator, custodian or guardian,
please give full title as such. If shares are held by a corporation, this proxy
should be signed in full corporate name by its president or other authorized
officer. If a partnership holds the shares subject to this proxy, an authorized
person should sign in the name of such partnership.
