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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
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
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
2658 Patton Road
Roseville, Minnesota 55113
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (651) 639-8035
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.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 26, 1999, 23,391,597 shares of Common Stock were
outstanding, and the aggregate market value of the common shares (based upon the
closing price on said date on The Nasdaq National Market) of DIAMETRICS MEDICAL,
INC. held by non-affiliates was approximately $104,532,000.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Annual Report to Shareholders for the year ended
December 31, 1998 are incorporated by reference in Part II hereof. Parts of the
Registrant's definitive Proxy Statement for the 1999 Annual Meeting of
Shareholders to be held on May 12, 1999 are incorporated by reference in 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, Diametrics
Medical, Ltd. ("DML").
The following federally registered trademarks of the Company are used
in this Annual Report on Form 10-K: Diametrics Medical, Inc.(R), IRMA(R)SL,
Neocath(R), Paratrend 7(R), Paratrend 7+(TM), Neotrend(TM) and Neurotrend(TM).
SureStep(R)Pro is a registered trademark of LifeScan, a Johnson & Johnson
company.
Item 1. Business
Overview
The Company develops, manufactures and markets blood and tissue
analysis systems that provide immediate or continuous diagnostic results at the
point-of-patient care. Since its commencement of operations in 1990, the Company
has transitioned from a development stage company to a full-scale development,
manufacturing and sales organization. The Company's goal is to be the world
leader in critical care blood and tissue analysis systems.
Blood and tissue analysis is an integral part of patient diagnosis and
treatment, and access to timely and accurate results is critical to effective
patient care. The Company believes that its blood and tissue analysis systems
will result in more timely therapeutic interventions by providing accurate,
precise and immediate or continuous test results, thereby allowing faster
patient transfers out of expensive critical care settings and reducing patient
length of stay. In addition, point-of-care testing can save money for hospitals
by reducing the numerous steps, paperwork and personnel involved in collecting,
transporting, documenting and processing blood and tissue samples. Moreover,
point-of-care blood and tissue analysis could ultimately eliminate the need for
hospitals to maintain expensive and capital intensive stat laboratories.
The Company's primary product focus since its inception in 1990 has
been the development, manufacturing and marketing of the IRMA ("Immediate
Response Mobile Analysis") System, an electrochemical-based blood analysis
system that provides rapid and accurate diagnostic results at the
point-of-patient care. The IRMA SL System consists of a portable,
microprocessor-based analyzer that employs single-use, disposable cartridges to
perform simultaneously several of the most frequently ordered blood tests in a
simple 90-second procedure.
The Company's first disposable electrochemical cartridge, introduced in
May 1994, performs three of the most frequently ordered blood tests for critical
care patients--the measurement of oxygen, carbon dioxide and acidity (the "blood
gases"). In June 1995, the Company expanded the IRMA System test menu with the
introduction of its electrolyte cartridge which measures inorganic compounds
including sodium, potassium and ionized calcium. The Company further expanded
its critical or "stat" test menu during the third quarter of 1996 with the
release of the second-generation system, IRMA SL, and the addition of the
measurement of hematocrit (i.e., the concentration of red blood cells in whole
blood) to its electrolyte cartridge. With the addition of hematocrit, the IRMA
SL System is able to perform 95% of the critical or stat tests performed
annually in the United States, comprising an estimated $1.2 billion annual
market. In 1997, the Company introduced its third-generation system, IRMA SL
Series 2000, and a new combination testing cartridge. The combination cartridge
is based upon the Company's new "snapfit" cartridge design and gives clinicians
the ability to perform all critical blood gas, electrolyte and hematocrit tests
using one small blood sample and one single-use cartridge. During 1998, the
Company expanded the test menu of the IRMA System by integrating the LifeScan (a
Johnson & Johnson company) SureStep Pro glucose strip testing module into the
analyzer. Also under development in 1998 were two additional blood tests, blood
urea nitrogen ("BUN") and chloride, and a reusable version of the single use
disposable cartridge, called IRMA-M.
In the fourth quarter of 1996, the Company expanded its product line
with the introduction of a number of new products through the acquisition of
Biomedical Sensors, Ltd. ("BSL"), a Pfizer
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company. With the acquisition of BSL (now known as Diametrics Medical, Ltd.),
the Company acquired a world-class continuous monitoring fiberoptic technology
platform, which complements the Company's existing electrochemical sensor
platform. This product line includes indwelling continuous blood monitoring
systems, consisting of a monitor, calibration system and intravascular
disposable sensors. Primary products include Paratrend 7+, which provides direct
continuous monitoring of blood gases and temperature in critically ill adult and
pediatric patients; Neotrend, which provides direct continuous monitoring of
blood gases and temperature in critically ill premature babies; and Neurotrend,
which measures oxygen, carbon dioxide and acidity in brain tissue and fluids as
an indication of cerebral ischemia (i.e., deficient blood supply to the brain)
and hypoxia (i.e., inadequate oxygenation of the blood) in patients with severe
head injury and in patients undergoing surgical intervention in the brain.
The Company has obtained clearances under Section 510(k) of the Food
Drug and Cosmetic Act (the "FDC Act") to market the IRMA SL System to test blood
gases, electrolytes, glucose, BUN and hematocrit in whole blood in hospital
laboratories and at the point-of-care, and the Paratrend 7 and Neotrend to
monitor blood gases and temperature. Additionally, in the first quarter of 1998,
the Company received clearance from the United States Food and Drug
Administration (the "FDA") to market the new IRMA-M multi-use cartridge for its
IRMA SL System. The Company submitted a pre-market notification for the
Neurotrend monitoring system in January 1998 that is currently under review by
the FDA.
In August 1998, the Company completed the sale in a private placement
of 2,142,858 shares of the Company's Common Stock, at a price of $7.00 per
share, for aggregate proceeds of $15,000,006. The purchasers of Common Stock
also received warrants to purchase 714,286 shares of Common Stock at $8.40 per
share. The five-year warrants are exercisable immediately, and are callable by
the Company after a twelve month waiting period if the Common Stock closing
price exceeds $12.10 for twenty consecutive trading days and at increasing
amounts in subsequent twelve month periods. Proceeds from the sale of Common
Stock and exercise of warrants will be used for product development, sales and
marketing and other general corporate purposes. In addition, the Company issued
Convertible Senior Secured Fixed Rate Notes to an investor group with proceeds
aggregating $7,300,000. The notes will be due in five years, require quarterly
interest payments at a rate of 7% per annum, and are convertible into the
Company's Common Stock at $8.40 per share. Proceeds from the notes were used to
retire other debt of the Company. The closing market price of the Company's
Common Stock as of the date the private placement was closed and the notes
issued was $5.125.
In October 1998, the Company entered into an exclusive Distribution
Agreement with CODMAN, a Johnson & Johnson company, for worldwide market
development and distribution of the Company's Neurotrend monitoring system. The
term of the agreement is for six years and is renewable for two years. If
minimum sales levels and marketing expenditure levels are not achieved by
CODMAN, certain payments will be due to the Company. Also, CODMAN has the right
of first refusal to market new continuous monitoring products developed for the
neuro market. In addition, Johnson & Johnson Development Corporation has
committed to purchase up to $5 million of the Company's Common Stock at the
Company's option over the twelve month period ending September 30, 1999 at the
then current market value, not to exceed $7.00 per share.
The Company's principal executive office is located at 2658 Patton
Road, Roseville, Minnesota 55113, and its telephone number is (651) 639-8035.
PRINCIPAL PRODUCTS
Additional information regarding the Company's principal products is
provided below:
IRMA SL Series 2000 Blood Analysis System. The IRMA SL Series 2000
("IRMA SL System"), the third generation IRMA analysis system, was released in
the third quarter 1997, and provides the necessary foundation for current and
future product enhancements. The IRMA SL System is comprised of the IRMA SL
analyzer and a variety of electrochemical-based disposable cartridges which
simultaneously perform select combinations of the most frequently ordered
critical care diagnostic tests of blood gases, electrolytes and hematocrit in a
simple 90-second procedure. The IRMA SL System also
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features electronic quality control, as an alternative to aqueous quality
control measures, which eliminates the need for this costly and time-consuming
process for many customers.
The IRMA SL analyzer is a battery or AC operated, portable,
microprocessor-based instrument weighing approximately four pounds, and includes
an on-board printer. The analyzer can be easily linked for data downloading
purposes to a hospital's laboratory or information system.
In conjunction with a marketing alliance reached in 1997 with LifeScan,
the Company incorporated blood glucose monitoring into the IRMA platform by
integrating LifeScan's SureStep Pro Glucose Module into the IRMA SL System. The
Company began marketing the new integrated workstation during the first half of
1998.
IDMS - The IRMA Data Management System. Released in the third quarter
of 1996, IDMS, an advanced data management software program, provides a
comprehensive data management system for point-of-care testing technologies.
Developed initially for the IRMA SL System, IDMS is network compatible and
features an open architecture design that provides for the integration of IDMS
data with other laboratory or clinical information systems.
Capillary Collection Device. The Capillary Collection Device was
introduced in the third quarter of 1996 as a feature for use on the IRMA SL
System, which provides the capability to collect and test a capillary blood
sample. The Capillary Collection Device is used with the IRMA SL System's single
use cartridges to perform blood gas, electrolyte, and hematocrit testing. The
capillary collection capability of the IRMA SL System is useful in such patient
areas as neonatal and pediatric intensive care, and in other situations where a
capillary sample is preferred over an arterial or venous sample.
AVOXimeter 4000. Under a distribution agreement initiated in the third
quarter of 1996 with A-VOX Systems, Inc., the Company exclusively distributes
the AVOXimeter 4000 in the United States. The AVOXimeter 4000 is a
battery-operated and easily portable system which provides an accurate and
timely assessment of the levels of hemoglobin and calculated oxygen content in a
patient's blood.
Paratrend 7+. Paratrend 7+ is the Company's second generation sensor
platform for its continuous monitoring products, and is the only multi-parameter
sensor for direct continuous monitoring of blood gases and temperature in
critically ill adult and pediatric patients. Inserted via an arterial catheter,
the sensor provides constant, precise measurement of vital blood gas parameters.
The new technology uses a fluorescent optical sensor for monitoring oxygen,
replacing the electrochemical version of its predecessor, Paratrend 7.
Neotrend. Based upon the new fluorescent optical sensor technology
introduced with the Paratrend 7+, Neotrend is the only multi-parameter system
for direct continuous monitoring of blood gases (oxygen, carbon dioxide and
acidity) and temperature in critically ill premature babies. Neotrend was
introduced in the United Kingdom in November 1997 and the Company received FDA
clearance to market Neotrend in the United States in December 1997.
Neurotrend. The Neurotrend monitoring system is designed for direct
continuous monitoring for cerebral ischemia and hypoxia in patients with severe
head injury and also for use during surgical intervention in the brain.
Neurotrend continuously measures oxygen, carbon dioxide, acidity and temperature
through a small fiberoptic sensor placed directly into the brain tissue or
fluids. CE Mark approval has been received, allowing the system to be marketed
in Europe, and a 510(k) application has been filed with the FDA in the United
States. In October 1998, the Company entered into an exclusive Distribution
Agreement with CODMAN, a Johnson & Johnson company, for worldwide market
development and distribution of the Company's Neurotrend monitoring system.
REGULATORY STATUS
Human diagnostic products are subject, prior to clearance for
marketing, to rigorous pre-clinical and clinical testing mandated by the FDA and
comparable agencies in other countries and, to a lesser extent, by state
regulatory authorities. The Company and its products are regulated by the FDA
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under a number of statutes including the FDC Act. The FDC Act provides two basic
review procedures for medical devices. Certain products may qualify for a
submission authorized by Section 510(k) of the FDC Act, wherein the manufacturer
gives the FDA a pre-market notification of the manufacturer's intention to
commence marketing the product. The manufacturer must, among other things,
establish that the product to be marketed is substantially equivalent to another
legally marketed product. Marketing may commence when the FDA issues a letter
finding substantial equivalence. If a medical device does not qualify for the
510(k) procedure, the manufacturer must file a pre-market approval ("PMA")
application. This procedure requires more extensive prefiling testing than the
510(k) procedure and involves a significantly longer FDA review process.
The Company has obtained clearances under Section 510(k) of the FDC Act
to market the IRMA SL System to test blood gases, electrolytes, hematocrit,
glucose and BUN in whole blood in hospital laboratories and at the
point-of-patient care. The IRMA-M cartridge, which allows multiple test panels
to be performed on a single cartridge, received clearance during 1998.
Continuous monitoring products which have been cleared under Section 510(k)
include the monitoring systems used with the Paratrend 7 sensor for direct
continuous monitoring of blood gases and temperature in adults, and the Neotrend
sensor for monitoring of blood gases and temperature in critically ill premature
babies.
The Company submitted an additional pre-market notification for the
Neurotrend monitoring system in January 1998 that is currently under review by
the FDA. The Neurotrend monitoring system is designed for direct continuous
monitoring for cerebral ischemia and hypoxia in patients with severe head injury
and also for use during surgical intervention in the brain. Neurotrend
continuously measures oxygen, carbon dioxide, acidity and temperature in brain
tissue or fluids.
A 510(k) clearance is subject to continual review, and later discovery
of previously unknown problems may result in restrictions on the product's
marketing or withdrawal of the product from the market. The Company's long-term
business strategy includes development of cartridges and sensors for performing
additional blood and tissue chemistry tests, and any such additional tests will
be subject to the same regulatory process. No assurance can be given that the
Company will be able to develop such additional products or uses on a timely
basis, if at all, or that the necessary clearances for such products and uses
will be obtained by the Company on a timely basis or at all, or that the Company
will not be subjected to a more extensive prefiling testing and FDA approval
process. The Company also markets its products in several foreign markets.
Requirements vary widely from country to country, ranging from simple product
registrations to detailed submissions such as those required by the FDA.
Manufacturing facilities are also subject to FDA inspection on a periodic basis
and the Company and its contract manufacturers must demonstrate compliance with
current Good Manufacturing Practices promulgated by the FDA.
The Company's intermittent testing product's are affected by the
Clinical Laboratory Improvement Act of 1988 ("CLIA") which has been implemented
by the FDA. This law is intended to assure the quality and reliability of all
medical testing in the United States regardless of where tests are performed.
The regulations require laboratories performing blood chemistry tests to meet
specified standards in the areas of personnel qualification, administration,
participation in proficiency testing, patient test management, quality control,
quality assurance and inspections. The regulations have established three levels
of regulatory control based on test complexity; "waived", "moderate complexity"
and "high complexity". The tests performed by the Company's IRMA SL System have
been categorized under CLIA as "moderate complexity" tests by the FDA, which
places this system in the same category as most other commercially available
blood gas and blood chemistry testing instruments. The glucose test is
categorized as a "waived" test", which places this test in the same category as
most other commercially available point-of-care glucose testing systems. The
Company's continuous monitoring products are not affected by CLIA.
RESEARCH AND DEVELOPMENT
The Company owns two complementary technology platforms; an
electrochemical platform, on which IRMA intermittent testing products are based,
and a fiberoptic platform, on which the Paratrend
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7+, Neotrend and Neurotrend continuous monitoring products are primarily based.
The Company is pursuing product line extensions from both of these core
technology platforms.
The Company intends to continue to expand its cartridge and test menus
available on the IRMA SL System. Currently under development is the H5 cartridge
which tests sodium, potassium, ionized calcium, hematocrit, chloride and BUN
using one single-use cartridge. The H5 cartridge is scheduled to begin beta
clinical trials in the U.S. by the end of first quarter 1999. In addition to the
single-use cartridge, the Company is developing a multi-use application that
will incorporate the Company's current sensor and calibration technologies into
products that can perform multiple blood test panels over a period of days
before disposal. A multi-use system will serve the needs of high volume critical
care centers where rapid patient throughput and a low cost per test panel is
required. The multi-use module is scheduled to begin clinical trials by the end
of the second quarter 1999. The Company is also in the final design stages for a
new addition to the IRMA SL's blood test menu, the creatinine assay, with an FDA
filing expected by mid 1999. The Company believes that the IRMA SL System and
related core technologies provide a flexible platform which, with a limited
amount of additional development, will be capable of performing a variety of
blood chemistry tests.
The Company plans to continually improve the IRMA SL System through
software upgrades, manufacturing process improvements and equipment redesign,
based on the results of ongoing marketing studies and field experience.
In February 1998, the Company filed a 510(k) application with the FDA
for its Neurotrend monitoring system. Studies are also underway to apply the
continuous monitoring technology to other areas. These include applications
which range from the widespread clinical interest in gut perfusion, as an early
indicator of multi-system organ failure; to placement in transplants for
monitoring adequacy of perfusion; and to monitoring tissue to detect shock. The
Company's future development plans also include further expansion of the blood
and tissue analysis test menu available on the continuous monitoring platform.
The Company has incurred research and development expenses of
approximately $6,466,000, $7,232,000 and $6,360,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
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'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 primarily 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, Latin America and
South America. Effective October 1, 1998, the Company entered into an exclusive
Distribution Agreement with CODMAN, a Johnson & Johnson company, for worldwide
market development and distribution of the Company's Neurotrend monitoring
system. The Company may consider additional distribution channels for its
products, including joint ventures, licensing arrangements or OEM relationships
with strategically positioned corporate partners. Information concerning the
Company's export sales is contained in the financial section of the Company's
Annual Report to Shareholders for the year ended December 31, 1998, under note
15 of Notes to Consolidated Financial Statements, and is incorporated herein by
reference.
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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 sole, preferred or dual source supplier
of its blood analysis systems. These organizations include Columbia HCA, Vencor,
Inc., Health Services Corporation of America, University Healthsystem Consortium
(now part of Novation), and Purchase Connection. The Company expects to continue
to enter into arrangements with other buying groups and customers with respect
to purchases of its blood and tissue analysis systems.
MANUFACTURING
The Company's manufacturing facilities support its intermittent testing
and continuous monitoring platforms and are located in Roseville, Minnesota and
High Wycombe, United Kingdom, respectively. The Company manufactures its IRMA
electrochemical thick-film sensor chips in its Roseville, Minnesota facility.
Components for the Company's continuous monitoring sensors used in the Paratrend
7+, Neotrend and Neurotrend products are sourced from a variety of outside
vendors, but the unique assembly and testing of the sensing elements is
performed in the Company's High Wycombe facility. 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
Paratrend 7+, Neotrend and Neurotrend monitors. During the last half of 1998,
the Company began in-house assembly of the IRMA SL analyzer and portions of the
continuous monitoring hardware at the Roseville and High Wycombe facilities,
respectively. These devices could be manufactured by a number of
microelectronics assembly companies, using primarily off-the-shelf components.
Software for the IRMA SL analyzer is developed and maintained by the Company,
and software for the continuous monitoring products is jointly developed with an
external source, with acceptance and validation performed by the Company.
The majority of the raw materials and purchased components used to
manufacture the Company's products are readily available. Most of the Company's
raw materials are or may be obtained from more than one source. A small number
of these materials, however, are unique in their nature, and are therefore
single sourced. Plans are ongoing to add additional second sourcing where
appropriate.
The Company's manufacturing facilities include four clean rooms in
Roseville which range from Class 1,000 to Class 100,000, and two clean rooms in
High Wycombe, both rated as Class 10,000. The Company believes its current
facilities can support production of required cartridges and sensors for the
foreseeable future.
The Company maintains a comprehensive quality assurance and quality
control program, which includes complete documentation of all material
specifications, operating procedures, maintenance and equipment calibration
procedures, training programs and quality control test methods. To control the
quality of its finished product, the Company utilizes ongoing statistical
process control systems during the manufacturing process and comprehensive
performance testing of finished goods.
The Company continues to successfully undergo required inspections of
its manufacturing facilities by the FDA (most recently in October 1998 and March
1996 for Roseville and High Wycombe facilities, respectively), and by the
British Standards Institution for the High Wycombe facility (most recently in
August 1998). As a result of these inspections, the Company's manufacturing
facilities and documentation and quality control systems are deemed satisfactory
and in compliance with Good Manufacturing Practices.
PATENTS AND PROPRIETARY RIGHTS
The Company has implemented a strategy of pursuing patent applications
to provide both design freedom and protection from competitors. This strategy
includes evaluating and seeking patent protection both for inventions most
likely to be used in its blood analysis systems and for those inventions most
likely to be used by others as competing alternatives.
For its intermittent testing platform, the Company currently maintains
three patents issued for its calibration technology, two patents related to its
sensor technology and three for companion technology. In addition, two patents
have been issued and maintained covering the IRMA SL analyzer and
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disposable cartridge designs. Additionally, the Company has submitted patent
applications pertaining to a multi-use sensor module, an enzymatic sensor and
coagulation measurement technology. Overseas, the Company has foreign patent
applications pending, filed under the Patent Cooperation Treaty, designating
various jurisdictions, including Canada, the major European countries, Brazil,
Australia and Japan, corresponding to one or more U.S. applications. The Company
maintains nine foreign patents; two issued in the United Kingdom, two in
Germany, two in Canada and three in Japan.
As it relates to its continuous monitoring platform, the Company
currently maintains nine U.S. patents associated with the design and manufacture
of its sensor technology platforms. These patents are at various patent process
stages in the major European countries and Japan.
Material patents have expirations ranging from the year 2006 to 2016.
The Company is not currently a party to any patent litigation.
The Company has federally registered the trademarks "IRMA SL",
"Diametrics Medical, Inc.", "Neocath", "Paratrend", "Tissuetrak", "Paratrend
7+", "Neotrend", "Neurotrend", "CAL-POD", "TOM 2000" and claims trademark rights
in "When Stat Isn't Fast Enough."
COMPETITION
The Company believes that potential purchasers of point-of-care blood
analysis systems will base their purchase decision upon a combination of
factors, including the product's test menu, ease of use, accuracy, price and
ability to manage the data collected. The Company is aware of one company,
i-STAT, that is marketing a portable point-of-care blood analysis system. The
Company believes that the IRMA SL System possesses distinct competitive
advantages over i-STAT's products including ease of use, closed instead of open
handling of blood samples and room temperature instead of refrigerated storage
of reagents.
The Company also competes with companies that market near-patient
multi-use blood analysis systems. These companies include AVL Scientific
Corporation, Radiometer, Inc. (with their acquisition of Sendx Medical, Inc.),
Instrumentation Laboratories (with their acquisition of the GEM Premier) and
Bayer (with their acquisition of Chiron Diagnostics). However, the Company
believes that to be successful in the point-of-care market, a device must not
only be able to perform a variety of commonly ordered blood chemistry tests, but
also be very portable to facilitate ease of use at the patient's bedside.
The Company's blood analysis systems also compete with manufacturers
providing traditional blood analysis systems to central and stat laboratories of
hospitals. Although these laboratory-based instruments provide the same tests
available with the Company's products, they are complex, expensive and require
the use of skilled technicians. The Company believes that its blood analysis
systems offer several advantages over these laboratory-based instruments
including immediate or continuous results, ease-of-use, reduced opportunity for
error and cost effectiveness. The Company believes that its multi-parameter
continuous arterial blood gas monitoring systems are currently the only products
of its kind commercially available.
The Company's products are competitively priced with other
point-of-care product offerings. While competitive cost data is not easily
attainable, the high volume, centralized testing labs can provide testing at a
lower cost per test, but do not provide the convenience and fast turnaround time
for test results that point-of-care products offer. Their costs are also highly
dependent on volume, given the large investment required for facilities,
equipment and trained personnel.
Many of the companies in the medical technology industry have
substantially greater capital resources, research and development staffs and
facilities than the Company. Such entities may be developing or could in the
future attempt to develop additional products competitive with the Company's
blood and tissue analysis systems. Many of these companies also have
substantially greater experience than the Company in research and development,
obtaining regulatory approvals, manufacturing and marketing, and may therefore
represent significant competition for the Company. There can be no
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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.
EXECUTIVE OFFICERS
Name Age Position
---- --- --------
David T. Giddings 55 President, Chief Executive Officer and
Chairman
Roy S. Johnson 46 Executive Vice President and
President and Managing Director of
Diametrics Medical, Ltd.
Laurence L. Betterley 45 Senior Vice President and
Chief Financial Officer
James R. Miller 45 Senior Vice President of Sales and
Marketing and Commercial Development
Mr. Giddings was appointed Chairman of the Board of Directors,
President and Chief Executive Officer of the Company in April 1996. Mr. Giddings
was formerly President and Chief Operating Officer of the United States
operations of Boehringer Mannheim Corporation ("BMC"), a U.S. subsidiary of
Corange Ltd., a private global healthcare corporation. He joined BMC in 1992
after a 26 year career with Eastman Kodak Company, where he held a number of
senior management positions, including General Manager and Vice President of
Marketing and Sales, clinical products division. He also served as Vice
President and General Manager of Kodak's imaging information system group and of
its printing and publishing division.
Mr. Johnson joined the Company in November 1996 as an Executive Vice
President, and the President and Managing Director of DML, a subsidiary of the
Company established in conjunction with the acquisition in November 1996 of BSL.
DML markets a line of indwelling monitoring systems for continuous blood and
tissue assessment of critically ill patients. Beginning in 1977, Mr. Johnson
served in a number of management positions for the predecessors of the BSL
business, most recently as President and Chief Executive Officer while it was a
subsidiary of Orange Medical Instruments, Inc. and later when it was an
operating unit of Pfizer Inc. Mr. Johnson started his career in 1974 with
Burroughs Welcome in pharmaceutical production management and was the head of
manufacturing in Burroughs` Sidney, Australia subsidiary.
Mr. Betterley has been Senior Vice President of the Company since
October 1996 and Chief Financial Officer since August 1996. Prior to this, he
was with Cray Research, Inc. in various management and financial positions
including Chief Financial Officer from 1994 to 1996, Vice President of Finance
from 1993 to 1994 and Corporate Controller from 1989 to 1993. Cray Research
develops, manufactures and sells high performance computing systems used for
computational research.
Mr. Miller joined the Company in March 1995 as Vice President of Sales
and Marketing, was Senior Vice President of Commercial and Business Development
since July 1996, and Senior Vice President of Sales and Marketing and Commercial
Development since January 1998. From 1991 to early 1995, Mr. Miller was Vice
President of Sales and Marketing at IMED Corporation, where he had global sales
and marketing responsibility for infusion and monitoring products for hospital
and alternate site markets.
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EMPLOYEES
As of December 31, 1998, the Company had a total of 179 full-time
employees, including 45 persons engaged in research and development activities.
None of the Company's employees are covered by a collective bargaining
agreement, and Diametrics believes it maintains good relations with its
employees.
FORWARD-LOOKING STATEMENTS
This Form 10-K Annual Report and the Company's financial
statements and other documents incorporated by reference contain forward-looking
statements that involve risk and uncertainties. The Company's actual results may
differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those contained above in this Item 1-Business, the "Management's
Discussion and Analysis of Results of Operations and Financial Condition" in
Item 7 and Exhibit 99 to this Report.
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 46,500 September 1999
and development, sales, to September 2001
marketing and administration
Malvern, Pennsylvania Research and development 2,000 March 1999(1)
High Wycombe, Manufacturing, process 14,500 September 2005
United Kingdom engineering, purchasing
and distribution
High Wycombe, Sales, marketing and 5,500 January 2015
United Kingdom administration
High Wycombe, Research and development 6,000 April 1999(1)
United Kingdom
</TABLE>
(1) During the first quarter 1999, lease was extended through March 2002
and April 2004, respectively.
The Company believes that its facilities are sufficient for its projected needs
through 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently not subject to any material pending or
threatened legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
10
<PAGE>
The Company's Common Stock, $.01 par value, trades on The Nasdaq
National Market under the symbol "DMED." The information contained under the
heading "Stock Information" in the Company's Annual Report to Shareholders for
the year ended December 31, 1998 (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 13
through 19 in the Annual Report to Shareholders is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained under the heading "Market Risk" on page 18 in
the Annual Report to Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information contained under the headings "Consolidated Statements
of Operations", "Consolidated Balance Sheets," "Consolidated Statements of
Shareholders' Equity," "Consolidated Statements of Cash Flows," "Notes to
Consolidated Financial Statements" on pages 20 through 34 and "Report of
Independent Auditors" on page 35 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 1999 Annual Meeting of
Shareholders to be held on May 12, 1999, which definitive Proxy Statement will
be filed within 120 days after the close of the fiscal year ended December 31,
1998 (the "Proxy Statement"), is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
See Part I, Item 1 of this Report for information on Executive Officers
of the Company.
The information contained under the heading "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Proxy Statement is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the heading "Executive Compensation" in
the Proxy Statement is incorporated herein by reference, except that, pursuant
to Item 402(a)(8) of Regulation S-K, the subsections
11
<PAGE>
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.
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, 1998
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Shareholders' Equity for each of the years
in the three year period ended December 31, 1998
Consolidated Statements of Cash Flows for each of the years in the
three year period ended December 31, 1998
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.
2. Financial Statement Schedules
All schedules have been omitted because they are not applicable or not
required, or because the required information is included in the financial
statements or the notes thereto.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- --- ----------- ----------------
<S> <C> <C>
3.1 Articles of Incorporation of the Company (as amended) (7)
3.2 Bylaws of the Company (as amended) (6)
4.1 Form of Certificate for Common Stock (1)
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C>
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 Registration Rights Agreement, dated as of June 10, 1997,
by and between the Company and the Purchasers (8)
4.6 Form of Certificate for Series I Junior Participating Preferred Stock (5)
4.7 Form of Stock Purchase Warrant, dated as of January 30, 1997 (5)
4.8 Form of Stock Purchase Warrant, dated as of June 10, 1997 (8)
10.1 Real Property Lease Agreements dated July 31, 1996, between
Commers-Klodt, a Minnesota General Partnership, and the Company Filed herewith
10.2 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)
10.3* 1990 Stock Option Plan (as amended and restated), including
form of option agreement (10)
10.4* 1993 Directors' Stock Option Plan, as amended and restated (10)
10.5* 1995 Equalizing Director Stock Option Plan (4)
10.6 1995 Employee Stock Purchase Plan (as revised and restated) (6)
10.7 Agreement dated January 1, 1995 between the Company and
Vencor, Inc. (3)
10.8 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)
10.9 Letter agreement dated as of February 1, 1995 among the Company,
Allstate Venture Capital and Frazier
and Company L.P. (2)
10.10 Agreement dated June 29, 1990 between the
Company and David W. Deetz, as supplemented by
the letter agreement dated March 28, 1995 (2)
10.11 Agreement dated December 21, 1995 between the
Company and Walter L. Sembrowich, Ph.D. (4)
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C>
10.12 Stock Purchase Agreement, dated as of January 30, 1997,
between the Company and the Purchasers named therein (5)
10.13 Stock Purchase Agreement dated as of June 10, 1997,
between the Company and the Purchasers named therein (8)
10.14 Loan and Security Agreement, dated March 31, 1998, between
DVI Business Credit and the Company (9)
10.15 Common Stock Purchase Agreement, dated June 30, 1998, between
the Company and the Purchasers named therein (10)
10.16 Form of Stock Purchase Warrant, dated August 4, 1998 (10)
10.17 Note Purchase Agreement, dated August 4, 1998, between the
Company and the Purchasers named therein (10)
10.18 Form of Convertible Senior Secured Fixed Rate Note due August 4, 2003 (10)
10.19 Distribution Agreement, dated October 1, 1998, between the Company
and Johnson & Johnson Professional, Inc. (11)
10.20 Put Option and Stock Purchase Agreement, dated October 1, 1998,
between the Company and Johnson & Johnson Development Corporation (11)
10.21 Severance Pay Agreement (in the event of Change of Control) dated
July 31, 1998, between the Company and David T. Giddings (11)
10.22 Form of Severance Pay Agreement (in the event of Change of Control)
dated July 31, 1998, between the Company and its executive officers (11)
10.23 Form of Severance Pay Agreement (in the event of Termination Without
Cause) dated July 31, 1998, between the Company and its executive
officers (11)
13 Portions of the Company's Annual Report to Shareholders for the year
ended December 31, 1998 incorporated by reference in this Form 10-K Filed herewith
21 List of Subsidiaries Filed herewith
23 Consent of KPMG Peat Marwick LLP Filed herewith
24 Powers of Attorney (included in signature page of Report) Filed herewith
27 Financial Data Schedule (electronic filing only) Filed herewith
99 Cautionary 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.
14
<PAGE>
(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.
(6) Incorporated by reference to the Company's 1996 Annual Report on Form
10-K.
(7) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the Quarter ended March 31, 1997.
(8) Incorporated by reference to the Company's Current Report on Form 8-K
filed June 26, 1997.
(9) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the Quarter ended March 31, 1998.
(10) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the Quarter ended June 30, 1998.
(11) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the Quarter ended September 30, 1998.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the Company during the
fourth quarter of the year ended December 31, 1998.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
15
<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, in the City of
Roseville, State of Minnesota, on March 30, 1999.
DIAMETRICS MEDICAL, INC.
By /s/ David T. Giddings
------------------------
David T. Giddings
President, Chief Executive
Officer and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on March 30, 1999.
KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby
constitute and appoint David T. Giddings and Laurence L. Betterley, and each of
them, each with full power to act without the other, his true and lawful
attorneys-in-fact and agents, each with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to the Annual Report on Form 10-K for
the year ended December 31, 1998 of Diametrics Medical, Inc. , and to file the
same, with any and all exhibits thereto, and all other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done as fully to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and confirming all of each of said attorneys-in-fact and agents or any
of them may lawfully do or cause to be done by virtue thereof.
Name Title
---- -----
/s/ David T. Giddings President, Chief Executive Officer and
-------------------------- Chairman (Principal Executive Officer)
David T. Giddings
/s/ Laurence L. Betterley Senior Vice President and Chief Financial
-------------------------- Officer (Principal Financial Officer)
Laurence L. Betterley
/s/ Jill M. Nussbaum Corporate Controller
-------------------------- (Principal Accounting Officer)
Jill M. Nussbaum
/s/ Gerald L. Cohn
--------------------------
Gerald L. Cohn Director
/s/ Andre de Bruin
--------------------------
Andre de Bruin Director
/s/ Roy S. Johnson
--------------------------
Roy S. Johnson Director
/s/ Mark B. Knudson
--------------------------
Mark B. Knudson, Ph.D. Director
/s/ David V. Milligan
--------------------------
David V. Milligan, Ph.D. Director
/s/ Richard A. Norling
--------------------------
Richard A. Norling Director
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
10.1 Real Property Lease Agreements dated July 31, 1996, between
Commers-Klodt, a Minnesota General Partnership, and the Company
13 Portions of the Company's Annual Report to Shareholders for the year
ended December 31, 1998 incorporated by reference in this Form 10-K
21 List of Subsidiaries
23 Consent of KPMG Peat Marwick LLP
24 Power of Attorney (included in signature page of Report)
27 Financial Data Schedule (electronic filing only)
99 Cautionary Statements Under the Private Securities Litigation
Reform Act
<PAGE>
EXHIBIT 10.1
LEASE AGREEMENT
This Lease Agreement, made this 31st day of July, 1996, between
Roseville Properties Management Company, Inc., as agent for COMMERS-KLODT, a
Minnesota general partnership (hereinafter called "Landlord"), and Diametrics
Medical, Inc., a Minnesota Corporation (hereinafter called "Tenant");
Witnesseth, That:
1. DEMISED PREMISES. Landlord, subject to the terms and conditions
hereof, hereby leases to Tenant the premises (hereinafter referred to as the
"Demised Premises") shown outlined in red on the floor plan attached hereto as
Exhibit A and comprising approximately 26,113 square feet of Office and 5,320
square feet of Warehouse, for a total of 31,433 square feet in the building
known as Roseville Business Commons II, located at 2640- 2652 Patton Road,
Roseville, Minnesota, 55113 (hereinafter referred to as the "Building"), to be
used by Tenant for general office, showroom, light manufacturing and/or
warehouse uses and purposes and for no other use or purpose, together with a
right of access over and across all common areas of the Project. The parcel or
parcels of land on which they are built, and all improvements thereon, are
hereinafter referred to as the "Project".
2. TERM. Tenant takes the Demised Premises from Landlord, upon the
terms and conditions herein contained, to have and to hold the same for the term
("Lease Term") of Five (5) years and two (2) months commencing on the first day
of August , 1996, and ending on the thirtieth day of September, 2001, unless
sooner terminated as herein provided.
a. If the Landlord, for any reason whatsoever, cannot deliver
possession of the said Demised Premises to the Tenant at the
commencement of the Lease Term hereof, this Lease shall not be void or
voidable, nor shall Landlord be liable to Tenant for any loss or damage
resulting therefrom, nor shall the expiration date of the above Lease
Term be in any way extended, but in that event, all rent shall be
abated during the period between the commencement of said Lease Term
and the time when Landlord delivers possession.
b. In the event that Landlord shall permit Tenant to occupy
the Demised Premises prior to the commencement date of the Lease Term,
such occupancy shall be subject to all the provisions of this Lease.
Said early possession shall not advance the termination date
hereinabove provided.
3. BASE RENT. For years one and two of the lease term, Tenant shall pay
to Landlord base rent in equal monthly installments of nineteen thousand one
hundred twenty-one and 74/100 dollars ($19,l21.74) payable on or before the
first day of each month in advance at the office of Landlord at 2575 Fairview
Avenue North, Suite 250, Roseville, Minnesota, 55113, or at such other place as
may from time to time be designated by Landlord.
4. OPERATING COSTS. Tenant shall, for the entire Lease Term, pay to
Landlord as additional rent, without any set-off or deduction therefrom,
Tenant's share of all costs which Landlord may incur in owning, maintaining and
operating the Project for each calendar year during the Lease Term. Said costs
are referred to herein as "Operating Costs" and are hereby defined to include,
but shall not be limited to, all real estate taxes and annual installments of
special assessments payable with respect to the Project, maintenance, repair,
replacement and care of all heating, lighting, plumbing and air conditioning
fixtures, equipment and
<PAGE>
systems serving the common areas, parking and landscape areas, signs, snow
removal, non-structural repair and maintenance of the exterior of the Building
(including the costs of equipment purchased and used for such purposes),
management fees, insurance premiums, utility costs, costs of wages, services,
equipment and supplies, and all other costs of any nature whatsoever which for
federal tax purposes may be expensed rather than capitalized, but exclusive only
of leasing commissions, depreciation, costs of tenant improvements, and payments
of principal and interest on any mortgages covering the Project. Operating Costs
shall also include any expenses or the yearly amortization of capital costs
incurred by Landlord for improvements or structural repairs to the Project
required to comply with any change in the laws, rules or regulations of any
governmental authority having jurisdiction, or for purpose of reducing Operating
Costs, which costs shall be amortized over the useful life of such improvements
or repairs, as reasonably estimated by Landlord. Tenant's proportionate share of
operating expenses shall be that fraction, the numerator of which is the area of
Tenant's Demised Premises and the denominator of which is the total area of the
Building.
As soon as reasonably practicable prior to the commencement of each
calendar year during the Lease Term, Landlord shall furnish to Tenant an
estimate of Tenant's share of Operating Costs for the ensuing calendar year, and
Tenant shall pay, as additional rent hereunder together with each installment of
monthly base rent, one-twelfth (1/12th) of its estimated annual share of such
Operating Costs. As soon as reasonably practicable after the end of each
calendar year during the Lease Term, Landlord shall furnish to Tenant a
statement of the actual Operating Costs for the previous calendar year,
including Tenant's share of such amount, and within thirty (30) days thereafter,
Tenant shall pay to Landlord, or Landlord to Tenant as the case may be, the
difference between such actual and estimated excess Operating Costs paid by
Tenant. Tenant's share of such excess Operating Costs for the years in which
this Lease commences and terminates, and shall be prorated based upon the dates
of commencement and termination of the Lease Term.
5. ADDITIONAL TAXES. Tenant shall pay as additional rent to Landlord,
together with each installment of monthly base rent, the amount of any gross
receipts tax, sales tax or similar tax (but excluding therefrom any income tax)
payable, or which will be payable, by Landlord, by reason of the receipt of the
monthly base rent and adjustments thereto.
6. UTILITIES. Landlord shall provide mains and conduits to supply
water, gas, electricity and sanitary sewer service to the Demised Premises.
Tenant shall pay, when due, either directly to the utility company if billed
individually, or to Landlord if billed as an operating expense, all charges for
sewer usage or rental, garbage disposal, refuse removal, water, electricity,
gas, telephone and/or other utility services or energy source furnished to the
Demised Premises during the term of this Lease, or any renewal or extension
thereof. Landlord shall not exceed the rate Tenant would be required to pay to a
utility company or service company furnishing any of the foregoing utilities or
services. The charges thereof shall be deemed operating costs in accordance with
Section 4 if the charges are not billed directly to Tenant by the utility
company.
Tenant agrees that if it uses water in its Demised Premises for any use
other than for toilets and lavatories in number comparable to typical
office/showroom/warehouse tenants, it will allow Landlord to submeter its water
usage and bill Tenant directly therefor.
7. CARE AND REPAIR OF DEMISED PREMISES. Tenant shall, at all times
throughout the terms of this Lease, including renewals
RBCIV4/94
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<PAGE>
and extensions, and at its sole expense, keep and maintain the Demised Premises
in a clean, safe, sanitary and first-class condition, and in compliance with all
applicable laws, codes, ordinances, rules and regulations. Tenant's obligations
hereunder shall include but not be limited to the maintenance, repair and
replacement, if necessary, of all lighting and plumbing fixtures and equipment,
HVAC equipment serving the Demised Premises and other equipment, fixtures,
motors and machinery, all interior walls, partitions, doors and windows,
including the regular painting thereof, all exterior entrances, windows, doors,
and docks and the replacement of all broken glass. When used in this provision,
the term "repairs" shall include replacements or renewals when necessary, and
all such repairs made by Tenant shall keep and maintain all portions of the
Demised Premises and the sidewalks and areas adjoining the same in a clean and
orderly condition, free of accumulation of dirt, rubbish and snow.
If Tenant fails, refuses or neglects to maintain or repair the Demised
Premises as required in this Lease after notice shall have been given to Tenant,
Landlord may make such repairs without liability to Tenant for any loss or
damage that may accrue to Tenant's merchandise, fixtures or other property or to
Tenant's business by reason thereof, and upon completion thereof, Tenant shall
pay to Landlord all costs plus fifteen percent (15%) for overhead incurred by
landlord in making such repairs upon presentation to Tenant of bill therefor.
Landlord shall keep the foundation, exterior walls (except plate glass or glass
or other breakable materials used in structural portions) and roof in good
repair and, if necessary or required by proper governmental authority, make
modifications or replacements thereof, except that Landlord shall not be
required to make any such repairs, modifications or replacements which become
necessary or desirable by reason of the negligence of Tenant, its agents,
servants or employees, or by reason of anyone illegally entering in or upon the
Premises.
Landlord shall manage all outside maintenance of the Project, including
grounds and parking areas. The cost of such maintenance shall be prorated in
accordance with Section 4 of this Lease. All such maintenance which is provided
by Landlord shall be provided as reasonably necessary for the comfortable use
and occupancy of Demised Premises during business hours, except Saturdays,
Sundays, and holidays, upon the condition that Landlord shall not be liable for
damages for failure to do so due to causes beyond its control.
8. CONSTRUCTION OF DEMISED PREMISES. Landlord agrees to construct
Tenant's space in accordance with the attached Exhibit B using building standard
materials and finishes, at no cost to Tenant. Tenant may make changes or
alterations to the attached floor plan prior to construction provided such
changes or alterations do not substantially change the construction costs of the
Demised Premises. Should such changes substantially increase the construction
costs in the opinion of Landlord, such costs shall be borne by Tenant.
9. OBLIGATIONS OF TENANT. Tenant agrees that it shall:
a. Observe such rules and regulations as from time to time may
be put in effect by Landlord for the general safety, comfort and
convenience of Landlord, occupants and tenants of said Building.
b. Give Landlord access to the Demised Premises at all
reasonable times, without charge or diminution of rent, to enable
Landlord to examine the same and to make such repairs, additions and
alterations as Landlord may deem advisable.
RBCIV4/94
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<PAGE>
c. Keep the Demised Premises in good order and condition and
replace all glass broken by Tenant with glass of the same quality as
that broken, save only glass broken by fire and extended coverage type
risks, and commit no waste on the Demised Premises.
d. Pay for all electric lamps, starters and ballasts as
replaced in the Demised Premises.
e. Upon the termination of this Lease in any manner
whatsoever, remove Tenant's goods and effects and those of any other
person claiming under Tenant, and quit and deliver up the Demised
Premises to Landlord peaceably and quietly in as good order and
condition as the same are now in or hereafter may be put in by Landlord
or Tenant, reasonable use and wear thereof and repairs which are
Landlord's obligation excepted. Goods and effects not removed by Tenant
at the termination of this Lease, however terminated, shall be
considered abandoned and Landlord may dispose of the same as it deems
expedient.
f. Not either voluntarily or by operation of law, assign,
transfer, mortgage, pledge, hypothecate or encumber this Lease or any
interest therein, and shall not sublet the Demised Premises or any part
thereof, or any right or privilege appurtenant thereto, or suffer any
other person (the employees, agents, servants and invitees of Tenant
excepted) to occupy or use the Demised Premises or any portion thereof,
without the prior written consent of Landlord. Notwithstanding the
foregoing, any subtenant or assignee must have at least the financial
strength of the original Tenant. Consent to one assignment, subletting,
occupation or use by any other person shall not be deemed to be a
consent to any subsequent assignment, subletting, occupation or use by
another person. Any such assignment or subletting without such consent
shall be void, and shall, at the option of Landlord, constitute a
default under this Lease. Regardless of Landlord's consent, no
subletting or assignment shall release Tenant of Tenant's obligation to
pay the rent and perform all other obligations to be performed by
Tenant hereunder for the term of this Lease. The acceptance of rent by
Landlord from any other person shall not be deemed to be a waiver by
Landlord of any provision hereof or any right hereunder. Any subrent
charged to subtenant by Tenant which is in excess of the rent charged
by Landlord to Tenant shall be passed on in full to Landlord. Any such
subrent, in no event, may be based on net income.
g. Not place signs on or about the Demised Premises without
first obtaining Landlord's written consent thereto. Tenant's signs on
exterior of Building shall conform to sign criteria attached hereto as
Exhibit C.
h. Not overload, damage or deface the Demised Premises or do
any act which may make void or voidable any insurance on the Demised
Premises or the Building or which may render an increased or extra
premium payable for insurance.
i. Not make any alteration of or addition to the Demised
Premises without the written approval of the Landlord, and all
alterations, additions or improvements which may be made by either of
the parties hereto upon the Demised Premises, except movable office
furnishings, shall be the property of the Landlord, and shall remain
upon and be surrendered with the Demised Premises, as a part thereof,
at the termination of this Lease or any extension thereof.
j. Keep the Demised Premises and the property in which the
Demised Premises are situated free from any liens arising out of any
work performed, materials furnished or obligations incurred
RBCIV4/94
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<PAGE>
by Tenant. Landlord may require, at Landlord's sole option, that Tenant
shall provide to Landlord, at Tenant's sole cost and expense, a lien
and completion bond in an amount equal to one and one-half (1-1/2)
times any and all estimated costs of any improvements, additions, or
alterations in the Demised Premises, to insure Landlord against any
liability for mechanics' and materialmen's liens and to insure
completion of the work.
k. Cause to be performed by a competent service company,
preventative maintenance of all rooftop HVAC units and warehouse unit
heaters serving the Demised Premises, as recommended by the equipment
manufacturer, unless performed by Landlord at Landlord's option.
1. Not place any additional locks on any of Tenant's doors
without the written consent of Landlord. Landlord shall have the right
to keep pass keys to the Demised Premises.
m. Tenant agrees and acknowledges that it shall be the sole
responsibility of the Tenant to comply with any and all provisions of
the Americans with Disabilities Act of 1990 thereinafter "ADA"), as
such compliance may be required to operate the Demised Premises. The
Tenant further agrees to indemnify and hold the Landlord harmless
against any claims which may arise out of Tenant's failure to comply
with the ADA. Such indemnification shall include, but not necessarily
be limited to reasonable attorney's fees, court costs and judgments as
a result of said claims.
Tenant's obligations under this Section 9 to do or not to do a
specified act shall extend to and include Tenant's obligations to see to it that
Tenant's employees, agents and invitees shall do or shall not do such acts, as
the case may be.
10. PARKING AND DRIVES. Tenant, its employees, and invitees shall have
the non-exclusive right to use the common driveways and parking lots along with
the other tenants and customers of the Building. The use of such driveways and
parking facilities are subject to such reasonable rules and regulations as
Landlord may impose. Tenant further agrees not to use, or permit the use by its
employees, the parking areas for the overnight storage of automobiles or other
vehicles without the written consent of Landlord.
11. CASUALTY LOSS. In case of damage to the Demised Premises or the
Building by fire or other casualty, Tenant shall give immediate notice to
Landlord who shall thereupon cause the damage to be repaired with reasonable
speed at the expense of the Landlord, subject to delays which may arise by
reason of adjustment of loss under insurance policies and for delays beyond the
reasonable control of Landlord, and to the extent that the Demised Premises are
rendered untenantable, the rent shall proportionately abate, except in the event
such damage resulted from or was contributed to by the act, fault or neglect of
Tenant, Tenant's employees or agents, in which event there shall be no abatement
of rent. In the event the damage shall he so extensive that the Landlord, in its
sole discretion, shall decide not to repair or rebuild, this Lease shall, at the
option of Landlord, be terminated as of the date of such damage by written
notice from the Landlord to the Tenant, and the rent shall be adjusted to the
date of such damage and Tenant shall thereupon promptly vacate the Demised
Premises.
12. INDEMNITY AND INSURANCE. Tenant agrees to indemnify and save
harmless Landlord from and against all claims of whatever nature arising from
any act, omission or negligence of Tenant, or Tenant's officers, agents,
servants, licensees or contractors, or arising from any accident, injury or
damage whatsoever caused to
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any person or to the property of any person during the term hereof in or about
the Demised Premises. This indemnity and hold harmless agreement shall include
indemnity against all costs, expenses, and liabilities incurred in connection
with any such claim or proceeding brought thereon and the defense thereof.
Tenant agrees to use and occupy the Demised Premises and further agrees
that Landlord shall have no responsibility or liability for any loss or damage
to fixtures, equipment, merchandise or other personal property of Tenant.
Tenant shall not carry any stock of goods or do anything in or about
said Demised Premises which will in any way tend to increase insurance rates on
said Demised Premises or the Building in which the same are located. If Landlord
shall consent to such use, Tenant agrees to pay as additional rental any
increase in premiums for insurance against loss by fire or extended coverage
risks resulting from the business carried on in the Demised Premises by Tenant.
If Tenant installs any electrical equipment that overloads the power lines to
the Building or if any insurance company insuring the Building or the Demised
Premises makes any safety recommendations regarding the Demised Premises, Tenant
shall at its own expense, make whatever changes are necessary to comply with the
requirements of insurance underwriters, insurance rating bureaus, loss control
specialists or governmental authorities having jurisdiction.
Tenant agrees to procure and maintain a policy or policies of
insurance, at its own cost and expense, insuring Landlord and Tenant from all
claims, demands, or actions made by or on behalf of any person or persons, firm,
or corporation arising from, related to, or connected with the conduct and
operation of Tenant's business in the Demised Premises for injury to or death of
one or more persons and for damage to property in the combined single limit of
not less than $1,000,000 each occurrence. Tenant shall carry like coverage
against loss or damage by boiler or internal explosion by boilers, if there is a
boiler in the Demised Premises. Said insurance shall not be subject to
cancellation except after at least thirty (30) days' prior written notice to
Landlord, and the policy or policies, or duly executed certificate or
certificates for the same, together with satisfactory evidence of the payment of
premium thereon, shall be deposited with Landlord at the commencement of the
term and renewals thereof no less than thirty (30) days prior to the expiration
of the term of such coverage. If Tenant fails to comply with such requirement,
Landlord may obtain such insurance and keep the same in effect, and Tenant shall
pay Landlord the premium cost thereof upon demand.
Landlord shall procure at its own expense during the term of this Lease
fire, windstorm, extended coverage, such other insurance as Landlord may obtain,
and rental loss insurance on the Project provided, however, Tenant shall
reimburse Landlord for its share of the actual net cost and expense to Landlord
of such fire, windstorm, extended coverage, and rental loss insurance.
Tenant shall procure at its own expense from the time Tenant takes
possession until the end of the Lease Term, fire, extended coverage, vandalism,
and sprinkler leakage insurance on the Demised Premises. This property insurance
shall include floor coverings and/or any improvements and fixtures and signs
installed by Landlord.
Each of Landlord and Tenant hereby releases the other from any and all
liability or responsibility (to the other or anyone claiming through or under
them by way of subrogation or otherwise) for any loss or damage to property
caused by fire or any other insured peril, even if such fire or other casualty
shall have been caused by the fault or negligence of the other party or anyone
for
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whom such party may be responsible. Tenant also agrees to obtain a waiver of
subrogation from its insurer, subject to availability.
13. EMINENT DOMAIN. If the entire Demised Premises are taken by eminent
domain, this Lease shall automatically terminate as of the date of taking. If a
portion of the Demised Premises is taken by eminent domain, Landlord shall have
the right to terminate this Lease as of the date of taking by giving written
notice thereof to Tenant within ninety (90) days after such date of taking. If
Landlord does not elect to terminate this Lease, it shall, at its expense,
restore the Demised Premises, exclusive of any improvements or other changes
made therein by Tenant, to as near the condition which existed immediately prior
to the date of taking as reasonably possible, and to the extent that the Demised
Premises are rendered untenantable, the rent shall proportionately abate. All
damages awarded for a taking under the power of eminent domain shall belong to
and be the exclusive property of Landlord, whether such damages be awarded as
compensation for diminution in value of the leasehold estate hereby created, or
to the fee of the Demised Premises provided, however, that Landlord shall not be
entitled to any separate award made to Tenant for the value and cost of removal
of its personal property and fixtures.
14. DEFAULT. Tenant hereby agrees that in case Tenant shall default in
making its payments hereunder or in performing any of the other agreements,
terms and conditions of this Lease then, in any such event, Landlord, in
addition to all other rights and remedies available to Landlord, by law or by
other provisions hereof, may without process re-enter immediately into the
Demised Premises and remove all persons and property therefrom and, at
Landlord's option, annul and cancel this Lease as to all future rights of
Tenant, and Tenant hereby expressly waives the service of any notice in writing
of intention to re-enter as aforesaid. Landlord, in addition to the foregoing,
may also accelerate rent due and owing for the remainder of the term. Tenant
further agrees that in case of any such termination, Tenant will indemnify the
Landlord against all loss of rents and other damage which Landlord may incur by
reason of such termination including, but not limited to, costs of restoring and
repairing the Demised Premises and putting the same in rentable condition, costs
of renting the Demised Premises to another tenant, loss or diminution of rents
and other damage which Landlord may incur by reason of such termination, and all
reasonable attorney's fees and expenses incurred in enforcing any of the terms
of this Lease. Neither acceptance of rent by Landlord, with or without knowledge
of breach, nor failure of Landlord to take action on account of any breach
hereof or to enforce its rights hereunder, shall be deemed a waiver of any
breach, and absent written notice or consent, said breach shall be a continuing
one.
Tenant further agrees that if (i) Tenant is declared bankrupt or
insolvent, (ii) Tenant petitions for, or consents to, the appointment of a
receiver of all or substantially all of Tenant's assets, (iii) Tenant petitions
or consents to be declared a bankrupt or an insolvent, or (iv) a petition if
filed by a third person to have Tenant declared bankrupt or insolvent or to have
a receiver appointed with respect to all or substantially all of Tenant's assets
and such petition is not discharged within sixty (60) days after service thereof
is made on Tenant, then, at Landlord's option, without limiting Landlord's other
rights and remedies to which Landlord is entitled under law and/or equity by
reason of any of the aforesaid occurrences and without relieving Tenant of
Tenant's obligations under this Lease, Landlord may terminate this Lease and,
whether or not this Lease is terminated, may re-enter the Demised Premises and
remove all persons therefrom, all as set forth in the foregoing paragraph of
this Section 14.
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15. NOTICES. All bills, statements, notices or communications which
Landlord may desire or be required to give to Tenant shall be deemed
sufficiently given or rendered if in writing and either delivered to Tenant
personally or sent by registered or certified mail addressed to Tenant at the
Building, and the time of rendition thereof or the giving of such notice or
communication shall be deemed to be the time when the same is delivered to
Tenant or deposited in the mail as herein provided. Any notice by Tenant to
Landlord must be served by registered or certified mail addressed to Landlord at
the address where the last previous rental hereunder was payable, or in case of
subsequent change upon notice given, to the latest address furnished.
16. HOLDING OVER. Should Tenant continue to occupy the Demised Premises
after expiration of said Lease Term or any renewal or renewals thereof, or after
a forfeiture incurred, such tenancy shall be from month-to-month, and in no
event from year-to-year or for any longer term. The monthly base rent during
such month-to-month tenancy shall be one and a half (1.5) times the amount of
the monthly base rent set forth in Paragraph 3 of this Lease.
17. SUBORDINATION. The rights of Tenant shall be subordinate to the
lien of any first mortgage now or hereafter in force against the real estate on
or in which the Demised Premises are located, and Tenant shall execute such
further instruments subordinating this Lease to the lien or liens of any such
mortgage or mortgages as shall be requested by Landlord. Notwithstanding the
foregoing provisions, Tenant agrees that any First Mortgagee shall have the
right at any time to subordinate any rights of such First Mortgagee to the
rights of Tenant under this Lease on such terms and subject to such conditions
as such First Mortgagee deems appropriate.
18. ESTOPPEL CERTIFICATE. Tenant shall at any time and from time to
time upon not less than ten (10) days' prior written notice from Landlord,
execute, acknowledge and deliver to Landlord a statement in writing certifying
(i) that this Lease is unmodified and in full force and effect (or, if modified,
stating the nature of such modification and certifying that this Lease as so
modified, is in full force and effect); (ii) the date of commencement of the
term of this Lease; (iii) that rent is paid currently without any offset or
defense thereto; (iv) the amount of rent, if any, paid in advance; and (v) that
there are no uncured defaults by Landlord or stating those claimed by Tenant,
provided that, in fact, such facts are accurate and ascertainable. Any such
statement may be relied upon by any prospective purchaser or encumbrancer of all
or any portion of the real property of which the Demised Premises are a part.
Failure to sign the statement or failure to specify any default claimed shall be
deemed approval of the statement submitted to Tenant by Landlord.
19. MORTGAGEE PROTECTION. Tenant agrees to give any mortgagees and/or
trust deed holders, by registered mail, a copy of any notice of default served
upon Landlord, provided that prior to such notice Tenant has been notified, in
writing (by way of Notice of Assignment of Rents and Leases, or otherwise) of
the address of such mortgagees and/or trust deed holders. Tenant agrees to send
such notices to Teachers Insurance and Annuity Association, 730 Third Avenue,
New York, New York 10017, Attention Senior Vice President, Mortgage Department.
Tenant further agrees that if Landlord shall have failed to cure such default
within the term provided for in this Lease, then the mortgagees and/or trust
deed holders shall have an additional thirty (30) days within which to cure such
default or, if such default cannot be cured within that time, then such
additional time as may be necessary, if within such thirty (30) days any
mortgagee and/or trust deed holder has commenced and is diligently pursuing the
remedies necessary to cure such default (including, but not limited to
commencement of foreclosure proceedings, if necessary to effect such cure), in
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which event this Lease shall not be terminated while such remedies are being so
diligently pursued.
20. SERVICE CHARGE. Tenant agrees to pay a service charge equal to
twelve percent (12%) per annum on any portion thereof of any payment of monthly
base rent or additional charge payable by Tenant hereunder which is not paid
within ten (10) days from the date due, or $25.00 per month or portion thereof,
whichever is greater.
21. SECURITY DEPOSIT. Tenant has deposited with Landlord the total sum
of Five thousand 00/100 Dollars ($5,000.00) on May 11, 1990, check #002, of
which two thousand five hundred and 00/100 Dollars ($2,500.00) shall be held for
security/damage to the above referenced demised premises. Upon expiration of the
lease agreement dated July 31, 1996 for the demised premises commonly described
as 2654-2664 Patton Road, any remaining security deposit shall transfer to the
demised premises herein and be held as additional security deposit by Landlord.
Said sum shall be held by Landlord as security for the faithful performance by
Tenant of all the terms, covenants, and conditions of this Lease to be kept and
performed by Tenant during the term hereof. If Tenant defaults with respect to
any provisions of this Lease including, but not limited to, the provisions
relating to the payment of rent, Landlord may (but shall not be required to)
use, apply or retain all or any part of this security deposit for the payment of
any amount which Landlord may spend or become obligated to spend by reason of
Tenant's default, or to compensate Landlord for any other loss or damage which
Landlord may suffer by reason of Tenant's default. If any portion of said
security deposit is so used or applied, Tenant shall within five (5) days after
written demand therefor, deposit cash with Landlord in an amount sufficient to
restore the security deposit to its original amount, and Tenant's failure to do
so shall be a material breach of this Lease. Landlord shall not be required to
keep this security deposit separate from its general funds, and Tenant shall not
be entitled to interest on such deposit. If Tenant shall fully and faithfully
perform every provision of this Lease to be performed by it, the security
deposit or any balance thereof shall be returned to Tenant (or, at Landlord's
option, to the last assignee of Tenant's interest hereunder) at the expiration
of the Lease Term. In the event of termination of Landlord's interest in this
Lease, Landlord shall transfer said deposit to Landlord's successor in interest.
22. PROPERTY TAXES. Tenant shall pay, or cause to be paid, before
delinquency, any and all taxes levied or assessed and which become payable
during the term hereof upon all Tenant's leasehold improvements, equipment,
furniture, fixtures and personal property located in the Demised Premises except
that which has been paid for by Landlord and is the standard of the Building. In
the event any or all of the Tenant's leasehold improvements, equipment,
furniture, fixtures and personal property shall be assessed and taxed with the
Building, Tenant shall pay to Landlord its share of such taxes within ten (10)
days after delivery to Tenant by Landlord of a statement in writing setting
forth the amount of such taxes applicable to Tenant's property.
23. NOVATION IN EVENT OF SALE OR TRANSFER. In the event of the sale of
the Building or the transfer of the title thereto, Landlord shall be relieved of
all of the covenants and obligations created by this Lease, except as to
breaches thereof occurring prior to such sale or transfer, and such sale or
transfer shall automatically result in the purchaser or transferee assuming and
agreeing to carry out all of the covenants and obligations of Landlord herein
from and after such sale or transfer.
24. DISPLAYS. Tenant shall not display or suffer to be
displayed on the outside of the Demised Premises, on the outside of
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the Building or on the sidewalks, driveways, or parking areas adjoining the
Building, any goods or merchandise whatsoever, except with Landlord's written
consent.
25. INTERRUPTION OF SERVICES. No liability shall attach to Landlord for
any inconvenience, loss, or damage sustained by Tenant or any other person, or
to the property of Tenant or such other person, due to interruption of electric
power, water, or gas to the Building or to the Demised Premises or by reason of
the failure of any piping, wiring, or apparatus in the Building or for any
inconvenience, loss, or damage sustained by Tenant as a result of any of the
causes set forth in Section 12 or caused by any act or thing done or suffered to
be done by any other tenant of the Building or any servant, employee, agent,
invitee, or customer of Tenant. However, Landlord shall make all reasonable
effort to remedy such interruption of services.
26. ZONING. Tenant covenants that it has satisfied itself prior to
execution of this Lease that the Demised Premises are properly zoned to permit
Tenant's intended use of the Demised Premises. Any changes with respect to the
interior finishing of the premises in order to comply with any local or
municipal by-laws shall be at the sole expense of Tenant.
27. QUIET ENJOYMENT. Conditional upon the faithful performance of the
terms, covenants and provisions herein contained by Tenant, Landlord covenants
that Tenant shall quietly have, hold and enjoy the Demised Premises for the term
hereof except or otherwise herein provided.
28. JANITORIAL SERVICES. Tenant shall provide all janitorial
and, at the option of Landlord, all refuse removal services for the
Demised Premises, at the expense of Tenant.
29. HAZARDOUS MATERIALS. Tenant shall not (either with or without
negligence) cause or permit the escape, disposal or release of any biologically
or chemically active or other hazardous substances, or materials. Tenant shall
not allow the storage or use of such substances or materials in any manner not
sanctioned by law or by the highest standards prevailing in the industry for the
storage and use of such substances or materials, nor allow to be brought into
the Project any such materials or substances except to use in the ordinary
course of Tenant's business, and then only after written notice is given to
Landlord of the identity of such substances or materials. Without limitation,
hazardous substances and materials shall include those described in the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery
Act, as amended, 42 U.S.C. Section 6901 et seq., any applicable state or local
laws and the regulations adopted under these acts. If any lender or governmental
agency shall ever require testing to ascertain whether or not there has been any
release of hazardous materials, then the reasonable costs thereof shall be
reimbursed by Tenant to Landlord upon demand as additional charges if such
requirement applies to the Premises. In addition, Tenant shall execute
affidavits, representations and the like from time to time at Landlord's request
concerning Tenant's best knowledge and belief regarding the presence of
hazardous substances or materials on the Premises. In all events, Tenant shall
indemnify Landlord from any release of hazardous materials on the
Premises-occurring while Tenant is in possession or elsewhere if caused by
Tenant or persons acting under Tenant. The within covenants shall survive the
expiration or earlier termination of the lease term.
30. MEMORANDUM. Upon the request of either Landlord or Tenant, the
parties shall enter into a memorandum, in recordable form, setting forth a
summary of the terms hereof relating only to
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the description of the Demised Premises, the term hereof, and the
conditions of assignment or subletting.
31. GENERAL. This Lease does not create the relationship of principal
and agent or of partnership or of joint venture or of any association between
Landlord and Tenant, the sole relationship between Landlord and Tenant being
that of lessor and lessee. No waiver of any default of Tenant hereunder shall be
implied from any omission by Landlord to take any action on account of such
default if such default persists or is repeated, and no express waiver shall
affect any default other than the default specified in the express waiver and
that only for the time and to the extent therein stated. Each term and each
provision of this Lease performable by Tenant shall be construed to be both a
covenant and a condition. The topical headings of the several paragraphs and
clauses are for convenience only and do not define, limit or construe the
contents of such paragraphs or clauses.
All preliminary negotiations are merged into and incorporated in this
Lease. This Lease can only be modified or amended by an Agreement in writing
signed by the parties hereto. All provisions hereof shall be binding upon the
heirs, successors and assigns of each party hereto.
32. BASE RENT ADJUSTMENT. During years three through five of the lease
term (year five being August 1, 2000-September 30, 2001), Tenant covenants and
agrees to pay to Landlord as Base Rent during each of such lease years an amount
equal to the product obtained by multiplying two hundred twenty-nine thousand
four hundred sixty and 90/100 Dollars ($229,460.90) by a fraction, the numerator
of which is the "Consumer Price Index - Seasonally Adjusted U.S. City Average
For All Items For All Urban Consumers (1982-84=100, 1996 Definition)" published
monthly in the "Monthly Labor Review" of the Bureau of Labor Statistics of the
United States Department of Labor ("CPI-U"), for the first calendar month of the
lease year, and the denominator of which is the CPI-U for the first full
calendar month of the first lease year.
In any event, the annual base rent increase will be a minimum of three
percent (3%).
If the CPI-U is discontinued, the "Consumer Price Index Seasonally
Adjusted U.S. city Average For All Urban Wage Earners and Clerical Workers
(1982-84=100, 1996 Definition)" published monthly in the "Monthly Labor Review"
by the Bureau of Labor Statistics of the United States Department of Labor
("CPI-W"), shall be used for making the computation above. If the CPI-W is
discontinued, comparable statistics on the purchasing power of the consumer
dollar published by the Bureau of Labor Statistics of the United States
Department of Labor shall be used for making the computation above. If the
Bureau of Labor Statistics shall no longer maintain statistics on the purchasing
power of the consumer dollar, comparable statistics published by a responsible
financial periodical or recognized authority selected by Lessor shall be used
for making the computation above. If the base year "(1982=100)" or other base
year used in computing the CPI-U is changed, the figures used in making the
adjustment above shall be changed accordingly so that all increases in the CPI-U
are taken into account notwithstanding any such change in the base year for
calculation of Base Rent.
33. IMPROVEMENTS. Landlord, at its sole cost and expense,
shall replace carpets in areas mutually agreeable between Landlord
and Tenant.
34. PRIOR LEASE AGREEMENTS. Landlord and Tenant's rights and
obligations under prior lease agreements dated May 3, 1990, July 2, 1991,
December 13, 1991, December 30, 1992, May 10, 1993 and
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September, 1994 and any lease addendum, amendment or renewal pertaining to the
above-referenced lease agreements and any agreement dated prior to July 23,
1996, shall be null and void upon the execution of this lease agreement.
35. ENTIRE AGREEMENT. This Lease Agreement, as well as Exhibit(s) A
contain the entire understanding of the parties hereto with respect to the
transaction contemplated thereby and supersedes all prior agreements and
understandings between the parties with respect to the subject matter. NO
representations, warranties, undertakings or promises, whether oral, implied,
written or otherwise, have been made by either party hereto to the other unless
expressly stated in this Lease or unless mutually agreed to in writing between
the parties hereto and after the date hereof, and neither party has relied on
any verbal representation, agreements, or understandings not expressly set forth
herein.
In Witness Whereof, the parties hereto have executed this Lease the day
and year first above written.
LANDLORD: Roseville Properties
Management Company, Inc.
as agent for COMMERS-
KLODT, a Minnesota
general partnership
BY: /s/ Daniel P. Commers
ITS: President
TENANT Diametrics Medical Inc.,
a Minnesota Corporation,
BY: /s/ David T. Giddings
ITS: Chief Executive Officer
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LEASE AGREEMENT
This Lease Agreement, made this 31st day of July, 1996, between
Roseville Properties Management Company, Inc., as agent for COMMERS-KLODT, a
Minnesota general partnership (hereinafter called "Landlord"), and Diametrics
Medical, Inc., a Minnesota Corporation (hereinafter called "Tenant");
Witnesseth, That:
1. DEMISED PREMISES. Landlord, subject to the terms and conditions
hereof, hereby leases to Tenant the premises (hereinafter referred to as the
"Demised Premises") shown outlined in red on the floor plan attached hereto as
Exhibit A and comprising approximately 14,693 square feet of Office and 3,639
square feet of Warehouse, for a total of 18,332 square feet in the building
known as Roseville Business Commons II, located at 2654- 2664 Patton Road,
Roseville, Minnesota, 55113 (hereinafter referred to as the "Building"), to be
used by Tenant for general office, showroom, light manufacturing and/or
warehouse uses and purposes and for no other use or purpose, together with a
right of access over and across all common areas of the Project. The parcel or
parcels of land on which they are built, and all improvements thereon, are
hereinafter referred to as the "Project".
2. TERM. Tenant takes the Demised Premises from Landlord, upon the
terms and conditions herein contained, to have and to hold the same for the term
("Lease Term") of Three (3) years and two (2) months commencing on the first day
of August , 1996, and ending on the thirtieth day of September, 1999, unless
sooner terminated as herein provided.
a. If the Landlord, for any reason whatsoever, cannot deliver
possession of the said Demised Premises to the Tenant at the commencement of the
Lease Term hereof, this Lease shall not be void or voidable, nor shall Landlord
be liable to Tenant for any loss or damage resulting therefrom, nor shall the
expiration date of the above Lease Term be in any way extended, but in that
event, all rent shall be abated during the period between the commencement of
said Lease Term and the time when Landlord delivers possession.
b. In the event that Landlord shall permit Tenant to occupy the Demised
Premises prior to the commencement date of the Lease Term, such occupancy shall
be subject to all the provisions of this Lease. Said early possession shall not
advance the termination date hereinabove provided.
3. BASE RENT. For the initial year of the lease term, Tenant shall pay
to Landlord base rent in equal monthly installments of twelve thousand two
hundred ninety-seven and 72/100 dollars ($12,297.72) payable on or before the
first day of each month in advance at the office of Landlord at 2575 Fairview
Avenue North. Suite 250. Roseville, Minnesota, 55113, or at such other place as
may from time to time be designated by Landlord.
4. OPERATING COSTS. Tenant shall, for the entire Lease Term, pay to
Landlord as additional rent, without any set-off or deduction therefrom,
Tenant's share of all costs which Landlord may incur in owning, maintaining and
operating the Project for each calendar year during the Lease Term. Said costs
are referred to herein as "Operating Costs" and are hereby defined to include,
but shall not be limited to, all real estate taxes and annual installments of
special assessments payable with respect to the Project, maintenance, repair,
replacement and care of all heating, lighting, plumbing and air conditioning
fixtures, equipment and
<PAGE>
systems serving the common areas, parking and landscape areas, signs, snow
removal, non-structural repair and maintenance of the exterior of the Building
(including the costs of equipment purchased and used for such purposes),
management fees, insurance premiums, utility costs, costs of wages, services,
equipment and supplies, and all other costs of any nature whatsoever which for
federal tax purposes may be expensed rather than capitalized, but exclusive only
of leasing commissions, depreciation, costs of tenant improvements, and payments
of principal and interest on any mortgages covering the Project. Operating Costs
shall also include any expenses or the yearly amortization of capital costs
incurred by Landlord for improvements or structural repairs to the Project
required to comply with any change in the laws, rules or regulations of any
governmental authority having jurisdiction, or for purpose of reducing Operating
Costs, which costs shall be amortized over the useful life of such improvements
or repairs, as reasonably estimated by Landlord. Tenant's proportionate share of
operating expenses shall be that fraction, the numerator of which is the area of
Tenant's Demised Premises and the denominator of which is the total area of the
Building.
As soon as reasonably practicable prior to the commencement of each
calendar year during the Lease Term, Landlord shall furnish to Tenant an
estimate of Tenant's share of Operating Costs for the ensuing calendar year, and
Tenant shall pay, as additional rent hereunder together with each installment of
monthly base rent, one-twelfth (l/12th) of its estimated annual share of such
Operating Costs. As soon as reasonably practicable after the end of each
calendar year during the Lease Term, Landlord shall furnish to Tenant a
statement of the actual Operating Costs for the previous calendar year,
including Tenant's share of such amount, and within thirty (30) days thereafter,
Tenant shall pay to Landlord, or Landlord to Tenant as the case may be, the
difference between such actual and estimated excess Operating Costs paid by
Tenant. Tenant's share of such excess Operating Costs for the years in which
this Lease commences and terminates, and shall be prorated based upon the dates
of commencement and termination of the Lease Term.
5. ADDITIONAL TAXES. Tenant shall pay as additional rent to Landlord,
together with each installment of monthly base rent, the amount of any gross
receipts tax, sales tax or similar tax (but excluding therefrom any income tax)
payable, or which will be payable, by Landlord, by reason of the receipt of the
monthly base rent and adjustments thereto.
6. UTILITIES. Landlord shall provide mains and conduits to supply
water, gas, electricity and sanitary sewer service to the Demised Premises.
Tenant shall pay, when due, either directly to the utility company if billed
individually, or to Landlord if billed as an operating expense, all charges for
sewer usage or rental, garbage disposal, refuse removal, water, electricity,
gas, telephone and/or other utility services or energy source furnished to the
Demised Premises during the term of this Lease, or any renewal or extension
thereof. Landlord shall not exceed the rate Tenant would be required to pay to a
utility company or service company furnishing any of the foregoing utilities or
services. The charges thereof shall be deemed operating costs in accordance with
Section 4 if the charges are not billed directly to Tenant by the utility
company.
Tenant agrees that if it uses water in its Demised Premises for any use
other than for toilets and lavatories in number comparable to typical
office/showroom/warehouse tenants, it will allow Landlord to submeter its water
usage and bill Tenant directly therefor.
7. CARE AND REPAIR OF DEMISED PRENISES. Tenant shall, at all times
throughout the terms of this Lease, including renewals
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and extensions, and at its sole expense, keep and maintain the Demised Premises
in a clean, safe, sanitary and first-class condition, and in compliance with all
applicable laws, codes, ordinances, rules and regulations. Tenant's obligations
hereunder shall include but not be limited to the maintenance, repair and
replacement, if necessary, of all lighting and plumbing fixtures and equipment,
HVAC equipment serving the Demised Premises and other equipment, fixtures,
motors and machinery, all interior walls, partitions, doors and windows,
including the regular painting thereof, all exterior entrances, windows, doors,
and docks and the replacement of all broken glass. When used in this provision,
the term ""repairs"" shall include replacements or renewals when necessary, and
all such repairs made by Tenant shall keep and maintain all portions of the
Demised Premises and the sidewalks and areas adjoining the same in a clean and
orderly condition, free of accumulation of dirt, rubbish and snow.
If Tenant fails, refuses or neglects to maintain or repair the Demised
Premises as required in this Lease after notice shall have been given to Tenant,
Landlord may make such repairs without liability to Tenant for any loss or
damage that may accrue to Tenant's merchandise, fixtures or other property or to
Tenant's business by reason thereof, and upon completion thereof, Tenant shall
pay to Landlord all costs plus fifteen percent (15%) for overhead incurred by
landlord in making such repairs upon presentation to Tenant of bill therefor.
Landlord shall keep the foundation, exterior walls (except plate glass or glass
or other breakable materials used in structural portions) and roof in good
repair and, if necessary or required by proper governmental authority, make
modifications or replacements thereof, except that Landlord shall not be
required to make any such repairs, modifications or replacements which become
necessary or desirable by reason of the negligence of Tenant, its agents,
servants or employees, or by reason of anyone illegally entering in or upon the
Premises .
Landlord shall manage all outside maintenance of the Project, including
grounds and parking areas. The cost of such maintenance shall be prorated in
accordance with Section 4 of this Lease. All such maintenance which is provided
by Landlord shall be provided as reasonably necessary for the comfortable use
and occupancy of Demised Premises during business hours, except Saturdays,
Sundays, and holidays, upon the condition that Landlord shall not be liable for
damages for failure to do so due to causes beyond its control.
8. CONSTRUCTION OF DEMISED PREMISES. Landlord agrees to construct
Tenant's space in accordance with the attached Exhibit B using building standard
materials and finishes, at no cost to Tenant. Tenant may make changes or
alterations to the attached floor plan prior to construction provided such
changes or alterations do not substantially change the construction costs of the
Demised Premises. Should such changes substantially increase the construction
costs in the opinion of Landlord, such costs shall be borne by Tenant.
9. OBLIGATIONS OF TENANT. Tenant agrees that it shall:
a. Observe such rules and regulations as from time to time may
be put in effect by Landlord for the general safety, comfort and
convenience of Landlord, occupants and tenants of said Building.
b. Give Landlord access to the Demised Premises at all
reasonable times, without charge or diminution of rent to enable
Landlord to examine the same and to make such repairs; additions and
alterations as Landlord may deem advisable.
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c. Keep the Demised Premises in good order and condition and
replace all glass broken by Tenant with glass of the same quality as
that broken, save only glass broken by fire and extended coverage type
risks, and commit no waste on the Demised Premises.
d. Pay for all electric lamps, starters and ballasts as
replaced in the Demised Premises.
e. Upon the termination of this Lease in any manner
whatsoever, remove Tenant's goods and effects and those of any other
person claiming under Tenant, and quit and deliver up the Demised
Premises to Landlord peaceably and quietly in as good order and
condition as the same are now in or hereafter may be put in by Landlord
or Tenant, reasonable use and wear thereof and repairs which are
Landlord's obligation excepted. Goods and effects not removed by Tenant
at the termination of this Lease, however terminated, shall be
considered abandoned and Landlord may dispose of the same as it deems
expedient.
f. Not either voluntarily or by operation of law, assign,
transfer, mortgage, pledge, hypothecate or encumber this Lease or any
interest therein, and shall not sublet the Demised Premises or any part
thereof, or any right or privilege appurtenant thereto, or suffer any
other person (the employees, agents, servants and invitees of Tenant
excepted) to occupy or use the Demised Premises or any portion thereof,
without the prior written consent of Landlord. Notwithstanding the
foregoing, any subtenant or assignee must have at least the financial
strength of the original Tenant. Consent to one assignment, subletting,
occupation or use by any other person shall not be deemed to be a
consent to any subsequent assignment, subletting, occupation or use by
another person. Any such assignment or subletting without such consent
shall be void, and shall, at the option of Landlord, constitute a
default under this Lease. Regardless of Landlord's consent, no
subletting or assignment shall release Tenant of Tenant's obligation to
pay the rent and perform all other obligations to be performed by
Tenant hereunder for the term of this Lease. The acceptance of rent by
Landlord from any other person shall not be deemed to be a waiver by
Landlord of any provision hereof or any right hereunder. Any subrent
charged to subtenant by Tenant which is in excess of the rent charged
by Landlord to Tenant shall be passed on in full to Landlord. Any such
subrent, in no event, may be based on net income.
g. Not place signs on or about the Demised Premises without
first obtaining Landlord's written consent thereto. Tenant's signs on
exterior of Building shall conform to sign criteria attached hereto as
Exhibit C.
h. Not overload, damage or deface the Demised Premises or do
any act which may make void or voidable any insurance on the Demised
Premises or the Building or which may render an increased or extra
premium payable for insurance.
i. Not make any alteration of or addition to the Demised
Premises without the written approval of the Landlord, and all
alterations, additions or improvements which may be made by either of
the parties hereto upon the Demised Premises, except movable office
furnishings, shall be the property of the Landlord, and shall remain
upon and be surrendered with the Demised Premises, as a part thereof,
at the termination of this Lease or any extension thereof.
j. Keep the Demised Premises and the property in which the
Demised Premises are situated free from any liens arising out of any
work performed, materials furnished or obligations incurred
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by Tenant. Landlord may require, at Landlord's sole option, that Tenant
shall provide to Landlord, at Tenant's sole cost and expense, a lien
and completion bond in an amount equal to one and one-half (1-1/2)
times any and all estimated costs of any improvements, additions, or
alterations in the Demised Premises, to insure Landlord against any
liability for mechanics' and materialmen's liens and to insure
completion of the work.
k. Cause to be performed by a competent service company,
preventative maintenance of all rooftop HVAC units and warehouse unit
heaters serving the Demised Premises, as recommended by the equipment
manufacturer, unless performed by Landlord at Landlord's option.
1. Not place any additional locks on any of Tenant's doors
without the written consent of Landlord. Landlord shall have the right
to keep pass keys to the Demised Premises.
m. Tenant agrees and acknowledges that it shall be the sole
responsibility of the Tenant to comply with any and all provisions of
the Americans with Disabilities Act of 1990 (hereinafter "ADA"), as
such compliance may be required to operate the Demised Premises. The
Tenant further agrees to indemnify and hold the Landlord harmless
against any claims which may arise out of Tenant's failure to comply
with the ADA. Such indemnification shall include, but not necessarily
be limited to reasonable attorney's fees, court costs and judgments as
a result of said claims.
Tenant's obligations under this Section 9 to do or not to do a
specified act shall extend to and include Tenant's obligations to see to it that
Tenant's employees, agents and invitees shall do or shall not do such acts, as
the case may be.
10. PARKING AND DRIVES. Tenant, its employees, and invitees shall have
the non-exclusive right to use the common driveways and parking lots along with
the other tenants and customers of the Building. The use of such driveways and
parking facilities are subject to such reasonable rules and regulations as
Landlord may impose. Tenant further agrees not to use, or permit the use by its
employees, the parking areas for the overnight storage of automobiles or other
vehicles without the written consent of Landlord.
11. CASUALTY LOSS. In case of damage to the Demised Premises or the
Building by fire or other casualty, Tenant shall give immediate notice to
Landlord who shall thereupon cause the damage to be repaired with reasonable
speed at the expense of the Landlord, subject to delays which may arise by
reason of adjustment of loss under insurance policies and for delays beyond the
reasonable control of Landlord, and to the extent that the Demised Premises are
rendered untenantable, the rent shall proportionately abate, except in the event
such damage resulted from or was contributed to by the act, fault or neglect of
Tenant, Tenant's employees or agents, in which event there shall be no abatement
of rent. In the event the damage shall be so extensive that the Landlord, in its
sole discretion, shall decide not to repair or rebuild, this Lease shall, at the
option of Landlord, be terminated as of the date of such damage by written
notice from the Landlord to the Tenant, and the rent shall be adjusted to the
date of such damage and Tenant shall thereupon promptly vacate the Demised
Premises.
12. INDEMNITY AND INSURANCE. Tenant agrees to indemnify and save
harmless Landlord from and against all claims of whatever nature arising from
any act, omission or negligence of Tenant, or Tenant's officers, agents,
servants, licensees or contractors, or arising from any accident, injury or
damage whatsoever caused to
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any person or to the property of any person during the term hereof in or about
the Demised Premises. This indemnity and hold harmless agreement shall include
indemnity against all costs, expenses, and liabilities incurred in connection
with any such claim or proceeding brought thereon and the defense thereof.
Tenant agrees to use and occupy the Demised Premises and further agrees
that Landlord shall have no responsibility or liability for any loss or damage
to fixtures, equipment, merchandise or other personal property of Tenant.
Tenant shall not carry any stock of goods or do anything in or about
said Demised Premises which will in any way tend to increase insurance rates on
said Demised Premises or the Building in which the same are located. If Landlord
shall consent to such use, Tenant agrees to pay as additional rental any
increase in premiums for insurance against loss by fire or extended coverage
risks resulting from the business carried on in the Demised Premises by Tenant.
If Tenant installs any electrical equipment that overloads the power lines to
the Building or if any insurance company insuring the Building or the Demised
Premises makes any safety recommendations regarding the Demised Premises, Tenant
shall at its own expense, make whatever changes are necessary to comply with the
requirements of insurance underwriters, insurance rating bureaus, loss control
specialists or governmental authorities having jurisdiction.
Tenant agrees to procure and maintain a policy or policies of
insurance, at its own cost and expense, insuring Landlord and Tenant from all
claims, demands, or actions made by or on behalf of any person or persons, firm,
or corporation arising from, related to, or connected with the conduct and
operation of Tenant's business in the Demised Premises for injury to or death of
one or more persons and for damage to property in the combined single limit of
not less than $1,000,000 each occurrence. Tenant shall carry like coverage
against loss or damage by boiler or internal explosion by boilers, if there is a
boiler in the Demised Premises. Said insurance shall not be subject to
cancellation except after at least thirty (30) days' prior written notice to
Landlord, and the policy or policies, or duly executed certificate or
certificates for the same, together with satisfactory evidence of the payment of
premium thereon, shall be deposited with Landlord at the commencement of the
term and renewals thereof no less than thirty (30) days prior to the expiration
of the term of such coverage. If Tenant fails to comply with such requirement,
Landlord may obtain such insurance and keep the same in effect, and Tenant shall
pay landlord the premium cost thereof upon demand.
Landlord shall procure at its own expense during the term of this Lease
fire, windstorm, extended coverage, such other insurance as Landlord may obtain,
and rental loss insurance on the Project provided, however, Tenant shall
reimburse Landlord for its share of the actual net cost and expense to Landlord
of such fire, windstorm, extended coverage, and rental loss insurance.
Tenant shall procure at its own expense from the time Tenant takes
possession until the end of the Lease Term, fire, extended coverage, vandalism,
and sprinkler leakage insurance on the Demised Premises. This property insurance
shall include floor coverings and/or any improvements and fixtures and signs
installed by Landlord.
Each of Landlord and Tenant hereby releases the other from any and all
liability or responsibility (to the other or anyone claiming through or under
them by way of subrogation or otherwise) for any loss or damage to property
caused by fire or any other insured peril, even if such fire or other casualty
shall have been caused by the fault or negligence of the other party or anyone
for
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whom such party may be responsible. Tenant also agrees to obtain a waiver of
subrogation from its insurer, subject to availability.
13. EMINENT DOMAIN. If the entire Demised Premises are taken by eminent
domain, this Lease shall automatically terminate as of the date of taking. If a
portion of the Demised Premises is taken by eminent domain, Landlord shall have
the right to terminate this Lease as of the date of taking by giving written
notice thereof to Tenant within ninety (90) days after such date of taking. If
Landlord does not elect to terminate this Lease, it shall, at its expense,
restore the Demised Premises, exclusive of any improvements or other changes
made therein by Tenant, to as near the condition which existed immediately prior
to the date of taking as reasonably possible, and to the extent that the Demised
Premises are rendered untenantable, the rent shall proportionately abate. All
damages awarded for a taking under the power of eminent domain shall belong to
and be the exclusive property of Landlord, whether such damages be awarded as
compensation for diminution in value of the leasehold estate hereby created, or
to the fee of the Demised Premises provided, however, that Landlord shall not be
entitled to any separate award made to Tenant for the value and cost of removal
of its personal property and fixtures.
14. DEFAULT. Tenant hereby agrees that in case Tenant shall default in
making its payments hereunder or in performing any of the other agreements,
terms and conditions of this Lease then, in any such event, Landlord, in
addition to all other rights and remedies available to Landlord, by law or by
other provisions hereof, may without process re-enter immediately into the
Demised Premises and remove all persons and property therefrom and, at
Landlord's option, annul and cancel this Lease as to all future rights of
Tenant, and Tenant hereby expressly waives the service of any notice in writing
of intention to re-enter as aforesaid. Landlord, in addition to the foregoing,
may also accelerate rent due and owing for the remainder of the term. Tenant
further agrees that in case of any such termination, Tenant will indemnify the
Landlord against all loss of rents and other damage which Landlord may incur by
reason of such termination including, but not limited to, costs of restoring and
repairing the Demised Premises and putting the same in rentable condition, costs
of renting the Demised Premises to another tenant, loss or diminution of rents
and other damage which Landlord may incur by reason of such termination, and all
reasonable attorney's fees and expenses incurred in enforcing any of the terms
of this Lease. Neither acceptance of rent by Landlord, with or without knowledge
of breach, nor failure of Landlord to take action on account of any breach
hereof or to enforce its rights hereunder, shall be deemed a waiver of any
breach, and absent written notice or consent, said breach shall be a continuing
one.
Tenant further agrees that if (i) Tenant is declared bankrupt or
insolvent, (ii) Tenant petitions for, or consents to, the appointment of a
receiver of all or substantially all of Tenant's assets, (iii) Tenant petitions
or consents to be declared a bankrupt or an insolvent, or (iv) a petition if
filed by a third person to have Tenant declared bankrupt or insolvent or to have
a receiver appointed with respect to all or substantially all of Tenant's assets
and such petition is not discharged within sixty (60) days after service thereof
is made on Tenant, then, at Landlord's option, without limiting Landlord's other
rights and remedies to which Landlord is entitled under law and/or equity by
reason of any of the aforesaid occurrences and without relieving Tenant of
Tenant's obligations under this Lease, Landlord may terminate this Lease and,
whether or not this Lease is terminated, may re-enter the Demised Premises and
remove all persons therefrom, all as set forth in the foregoing paragraph of
this Section 14.
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15. NOTICES. All bills, statements, notices or communications which
Landlord may desire or be required to give to Tenant shall be deemed
sufficiently given or rendered if in writing and either delivered to Tenant
personally or sent by registered or certified mail addressed to Tenant at the
Building, and the time of rendition thereof or the giving of such notice or
communication shall be deemed to be the time when the same is delivered to
Tenant or deposited in the mail as herein provided. Any notice by Tenant to
Landlord must be served by registered or certified mail addressed to Landlord at
the address where the last previous rental hereunder was payable, or in case of
subsequent change upon notice given, to the latest address furnished.
16. HOLDING OVER. Should Tenant continue to occupy the Demised Premises
after expiration of said Lease Term or any renewal or renewals thereof, or after
a forfeiture incurred, such tenancy shall be from month-to-month, and in no
event from year-to-year or for any longer term. The monthly base rent during
such month-to-month tenancy shall be one and a half (1.5) times the amount of
the monthly base rent set forth in Paragraph 3 of this Lease.
17. SUBORDINATION. The rights of Tenant shall be subordinate to the
lien of any first mortgage now or hereafter in force against the real estate on
or in which the Demised Premises are located, and Tenant shall execute such
further instruments subordinating this Lease to the lien or liens of any such
mortgage or mortgages as shall be requested by Landlord. Notwithstanding the
foregoing provisions, Tenant agrees that any First Mortgagee shall have the
right at any time to subordinate any rights of such First Mortgagee to the
rights of Tenant under this Lease on such terms and subject to such conditions
as such First Mortgagee deems appropriate.
18. ESTOPPEL CERTIFICATE. Tenant shall at any time and from time to
time upon not less than ten (10) days' prior written notice from Landlord,
execute, acknowledge and deliver to Landlord a statement in writing certifying
(i) that this Lease is unmodified and in full force and effect (or, if modified,
stating the nature of such modification and certifying that this Lease as so
modified, is in full force and effect); (ii) the date of commencement of the
term of this Lease; (iii) that rent is paid currently without any offset or
defense thereto; (iv) the amount of rent, if any, paid in advance; and (v) that
there are no uncured defaults by Landlord or stating those claimed by Tenant,
provided that, in fact, such facts are accurate and ascertainable. Any such
statement may be relied upon by any prospective purchaser or encumbrancer of all
or any portion of the real property of which the Demised Premises are a part.
Failure to sign the statement or failure to specify any default claimed shall be
deemed approval of the statement submitted to Tenant by Landlord.
19. MORTGAGEE PROTECTION. Tenant agrees to give any mortgagees and/or
trust deed holders, by registered mail, a copy of any notice of default served
upon Landlord, provided that prior to such notice Tenant has been notified, in
writing (by way of Notice of Assignment of Rents and Leases, or otherwise) of
the address of such mortgagees and/or trust deed holders. Tenant agrees to send
such notices to Teachers Insurance and Annuity Association, 730 Third Avenue,
New York, New York 10017, Attention Senior Vice President, Mortgage Department.
Tenant further agrees that if Landlord shall have failed to cure such default
within the term provided for in this Lease, then the mortgagees and/or trust
deed holders shall have an additional thirty (30) days within which to cure such
default or, if such default cannot be cured within that time, then such
additional time as may be necessary, if within such thirty (30) days any
mortgagee and/or trust deed holder has commenced and is diligently pursuing the
remedies necessary to cure such default (including, but not limited to
commencement of foreclosure proceedings, if necessary to effect such cure), in
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which event this Lease shall not be terminated while such remedies are being so
diligently pursued.
20. SERVICE CHARGE. Tenant agrees to pay a service charge equal to
twelve percent (12%) per annum on any portion thereof of any payment of monthly
base rent or additional charge payable by Tenant hereunder which is not paid
within ten (10) days from the date due, or $25.00 per month or portion thereof,
whichever is greater.
21. SECURITY DEPOSIT. Tenant has deposited with Landlord the total sum
of Five thousand 00/100 Dollars ($5,000.00) on May 11, 1990, check #002, of
which two thousand five hundred and 00/100 Dollars ($2,500.00) shall be held for
security/damage to the above referenced demised premises. Upon expiration of
this lease agreement, any remaining security deposit shall transfer to the
demised premises commonly described in the lease agreement dated July 31, 1996
as 2640-2652 Patton Road, Roseville, Minnesota, and be held as additional
security deposit by Landlord for said demised premises. Said sum shall be held
by Landlord as security for the faithful performance by Tenant of all the terms,
covenants, and conditions of this Lease to be kept and performed by Tenant
during the term hereof. If Tenant defaults with respect to any provisions of
this Lease including, but not limited to, the provisions relating to the payment
of rent, Landlord may (but shall not be required to) use, apply or retain all or
any part of this security deposit for the payment of any amount which Landlord
may spend or become obligated to spend by reason of Tenant's default, or to
compensate Landlord for any other loss or damage which Landlord may suffer by
reason of Tenant's default. If any portion of said security deposit is so used
or applied, Tenant shall within five (5) days after written demand therefor,
deposit cash with Landlord in an amount sufficient to restore the security
deposit to its original amount, and Tenant's failure to do so shall be a
material breach of this Lease. Landlord shall not be required to keep this
security deposit separate from its general funds, and Tenant shall not be
entitled to interest on such deposit. If Tenant shall fully and faithfully
perform every provision of this Lease to be performed by it, the security
deposit or any balance thereof shall be returned to Tenant (or, at Landlord's
option, to he last assignee of Tenant's interest hereunder) at the expiration of
the Lease Term. In the event of termination of Landlord's interest in this
Lease, Landlord shall transfer said deposit to Landlord's successor in interest.
22. PROPERTY TAXES. Tenant shall pay, or cause to be paid, before
delinquency, any and all taxes levied or assessed and which become payable
during the term hereof upon all Tenant's leasehold improvements, equipment,
furniture, fixtures and personal property located in the Demised Premises except
that which has been paid for by Landlord and is the standard of the Building. In
the event any or all of the Tenant's leasehold improvements, equipment,
furniture, fixtures and personal property shall be assessed and taxed with the
Building, Tenant shall pay to Landlord its share of such taxes within ten (10)
days after delivery to Tenant by Landlord of a statement in writing setting
forth the amount of such taxes applicable to Tenant's property.
23. NOVATION IN EVENT OF SALE OR TRANSFER. In the event of the sale of
the Building or the transfer of the title thereto, Landlord shall be relieved of
all of the covenants and obligations created by this Lease, except as to
breaches thereof occurring prior to such sale or transfer, and such sale or
transfer shall automatically result in the purchaser or transferee assuming and
agreeing to carry out all of the covenants and obligations of Landlord herein
from and after such sale or transfer.
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24. DISPLAYS. Tenant shall not display or suffer to be displayed on the
outside of the Demised Premises, on the outside of the Building or on the
sidewalks, driveways, or parking areas adjoining the Building, any goods or
merchandise whatsoever, except with Landlord's written consent
25. INTERRUPTION OF SERVICES. No liability shall attach to Landlord for
any inconvenience, loss, or damage sustained by Tenant or any other person, or
to the property of Tenant or such other person, due to interruption of electric
power, water, or gas to the Building or to the Demised Premises or by reason of
the failure of any piping, wiring, or apparatus in the Building or for any
inconvenience, loss, or damage sustained by Tenant as a result of any of the
causes set forth in Section 12 or caused by any act or thing done or suffered to
be done by any other tenant of the Building or any servant, employee, agent,
invitee, or customer of Tenant. However, Landlord shall make all reasonable
effort to remedy such interruption of services.
26. ZONING. Tenant covenants that it has satisfied itself prior to
execution of this Lease that the Demised Premises are properly zoned to permit
Tenant's intended use of the Demised Premises. Any changes with respect to the
interior finishing of the premises in order to comply with any local or
municipal by-laws shall be at the sole expense of Tenant.
27. QUIET ENJOYMENT. Conditional upon the faithful performance of the
terms, covenants and provisions herein contained by Tenant, Landlord covenants
that Tenant shall quietly have, hold and enjoy the Demised Premises for the term
hereof except or otherwise herein provided.
28. JANITORIAL SERVICES. Tenant shall provide all janitorial
and, at the option of Landlord, all refuse removal services for the
Demised Premises, at the expense of Tenant.
29. HAZARDOUS MATERIALS. Tenant shall not (either with or without
negligence) cause or permit the escape, disposal or release of any biologically
or chemically active or other hazardous substances, or materials. Tenant shall
not allow the storage or use of such substances or materials in any manner not
sanctioned by law or by the highest standards prevailing in the industry for the
storage and use of such substances or materials, nor allow to be brought into
the Project any such materials or substances except to use in the ordinary
course of Tenant's business, and then only after written notice is given to
Landlord of the identity of such substances or materials. Without limitation,
hazardous substances and materials shall include those described in the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery
Act, as amended, 42 U.S.C. Section 6901 et seq., any applicable state or local
laws and the regulations adopted under these acts. If any lender or governmental
agency shall ever require testing to ascertain whether or not there has been any
release of hazardous materials, then the reasonable costs thereof shall be
reimbursed by Tenant to Landlord upon demand as additional charges if such
requirement applies to the Premises. In addition, Tenant shall execute
affidavits, representations and the like from time to time at Landlord's request
concerning Tenant's best knowledge and belief regarding the presence of
hazardous substances or materials on the Premises. In all events, Tenant shall
indemnify Landlord from any release of hazardous materials on the Premises
occurring while Tenant is in possession or elsewhere if caused by Tenant or
persons acting under Tenant. The within covenants shall survive the expiration
or earlier termination of the lease term.
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30. MEMORANDUM. Upon the request of either Landlord or Tenant, the
parties shall enter into a memorandum, in recordable form, setting forth a
summary of the terms hereof relating only to the description of the Demised
Premises, the term hereof, and the conditions of assignment or subletting.
31. GENERAL. This Lease does not create the relationship of principal
and agent or of partnership or of joint venture or of any association between
Landlord and Tenant, the sole relationship between Landlord and Tenant being
that of lessor and lessee. No waiver of any default of Tenant hereunder shall be
implied from any omission by Landlord to take any action on account of such
default if such default persists or is repeated, and no express waiver shall
affect any default other than the default specified in the express waiver and
that only for the time and to the extent therein stated. Each term and each
provision of this Lease performable by Tenant shall be construed to be both a
covenant and a condition. The topical headings of the several paragraphs and
clauses are for convenience only and do not define, limit or construe the
contents of such paragraphs or clauses.
All preliminary negotiations are merged into and incorporated in this
Lease. This Lease can only be modified or amended by an Agreement in writing
signed by the parties hereto. All provisions hereof shall be binding upon the
heirs, successors and assigns of each party hereto.
32. BASE RENT ADJUSTMENT. During years two and three of the lease term
(year three being August 1, 1998-September 30, 1999), Tenant covenants and
agrees to pay to Landlord as Base Rent during each of such lease years an amount
equal to the product obtained by multiplying one hundred forty-seven thousand
five hundred seventy-two and 60/lO0 Dollars ($147,572.60) by a fraction, the
numerator of which is the "Consumer Price Index - Seasonally Adjusted U.S. City
Average For All Items For All Urban Consumers (1982-84=100, 1996 Definition)"
published monthly in the "Monthly Labor Review" of the Bureau of Labor
Statistics of the United States Department of Labor ("CPI-U"), for the first
calendar month of the lease year, and the denominator of which is the CPI-U for
the first full calendar month of the first lease year.
In any event, the annual base rent increase will be a minimum of three
percent (3%).
If the CPI-U is discontinued, the "Consumer Price Index Seasonally
Adjusted U.S. City Average For All Urban Wage Earners and Clerical Workers
(1982-84=100, 1996 Definition)" published monthly in the "Monthly Labor Review"
by the Bureau of Labor Statistics of the United States Department of Labor
("CPI-W"), shall be used for making the computation above. If the CPI-W is
discontinued, comparable statistics on the purchasing power of the consumer
dollar published by the Bureau of Labor Statistics of the United States
Department of Labor shall be used for making the computation above. If the
Bureau of Labor Statistics shall no longer maintain statistics on the purchasing
power of the consumer dollar, comparable statistics published by a responsible
financial periodical or recognized authority selected by Lessor shall be used
for making the computation above. If the base year "(1982=100)" or other base
year used in computing the CPI-U is changed, the figures used in making the
adjustment above shall be changed accordingly so that all increases in the CPI-U
are taken into account notwithstanding any such change in the base year for
calculation of Base Rent.
33. IMPROVEMENTS. Landlord, at its sole cost and expense, shall provide
the following improvements:
1. Replace carpets in areas mutually agreeable between Landlord
and Tenant,
RBCIV4/94
- 11 -
<PAGE>
2. Repair and reline entire parking lot,
3. Provide Tenant with new signage that is mutually agreeable to
Landlord and Tenant and complies with all building aesthetics
and city zoning codes and ordinances .
34. PRIOR LEASE AGREEMENTS. Landlord and Tenant's rights and
obligations under prior lease agreements dated May 3, 1990, July 2, 1991,
December 13, 1991, December 30, 1992, May 10, 1993 and September, 1994 and any
lease addendum, amendment or renewal pertaining to the above-referenced lease
agreements and any agreement dated prior to July 23, 1996, shall be null and
void upon the execution of this lease agreement and the lease agreement for the
demised premises commonly described as 2640-2652 Patton Road dated July 31,
1996."
35. ENTIRE AGREEMENT. This Lease Agreement, as well as Exhibit(s) A
contain the entire understanding of the parties hereto with respect to the
transaction contemplated thereby and supersedes all prior agreements and
understandings between the parties with respect to the subject matter. No
representations, warranties, undertakings or promises, whether oral, implied,
written or otherwise, have been made by either party hereto to the other unless
expressly stated in this Lease or unless mutually agreed to in writing between
the parties hereto and after the date hereof, and neither party has relied on
any verbal representation, agreements, or understandings not expressly set forth
herein.
In Witness Whereof, the parties hereto have executed this Lease the day
and year first above written.
LANDLORD: Roseville Properties
Management Company, Inc.
as agent for COMMERS-
KLODT, a Minnesota
general partnership
BY: /s/ Daniel P. Commers
ITS: President
TENANT Diametrics Medical Inc.,
a Minnesota Corporation,
BY: /s/ David T. Giddings
ITS: Chief Executive Officer
RBCIV4/94
- 12 -
<PAGE>
EXHIBIT 13
SELECTED FIVE-YEAR FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands, except share and per share amounts) Years ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:(3)
Net sales $ 12,156 $ 10,434 $ 3,797 $ 1,607 $ 331
Operating loss (16,916) (20,510) (23,782) (23,387) (12,733)
Net loss (17,388) (21,037) (23,575) (23,046) (12,455)
Net loss per share (1), (2) (0.79) (1.13) (1.56) (1.82) (1.50)
Weighted average shares outstanding 21,996,382 18,665,837 15,088,493 12,640,212 8,323,894
Balance Sheet Data:
Working capital $ 11,415 $ 12,509 $ 6,649 $ 27,123 $ 7,413
Total assets (3) 25,346 28,662 24,059 36,620 17,393
Long-term liabilities 8,345 8,969 8,582 1,851 1,759
Shareholders' equity 11,366 12,773 8,674 31,194 11,157
</TABLE>
(1) The Company has not paid any dividends since inception.
(2) Basic and diluted net loss per share amounts are identical as the effect of
potential common shares is antidilutive.
(3) On November 6, 1996 the Company acquired all of the outstanding capital
stock of Biomedical Sensors, Ltd. and certain assets of Howmedica, Inc. The
Company accounted for the acquisition using the purchase method of accounting
and, accordingly, the results of operations of the acquired entities have been
included in the Company's consolidated financial statements from November 6,
1996. Further detail on the acquisition is provided in note 18 of Notes to
Consolidated Financial Statements.
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 and tissue
analysis systems which provide immediate or continuous diagnostic results at the
point-of-patient care.
Since its commencement of operations in 1990, the Company has transitioned from
a development stage company to a full-scale development, manufacturing and sales
organization. As of December 31, 1998, the primary funding for the operations of
the Company has been approximately $130 million raised through public and
private sales of its equity securities and issuance of convertible promissory
notes.
During 1998, the Company continued to achieve significant improvements in its
operating results, including annual sales growth of 16%, the first positive
annual gross margin with an improvement of 167% over 1997, containment of
operating expenses and a reduction of the annual operating loss of approximately
18%. The achievement of several product and partnering milestones during the
year positively impacted 1998 operating results, and are expected to have a
greater impact in 1999 and future years.
Sales growth in 1998 was positively impacted by the commencement of global
commercialization of Neotrend, designed specifically to provide continuous
monitoring of blood gases and temperature in critically ill premature babies.
The Company received FDA clearance to market Neotrend in the U.S. in
late 1997 and received CE Mark in the second quarter 1998, allowing Neotrend to
be marketed in Europe. Over 30 customer evaluations of Neotrend are currently in
process, with approximately 80 evaluations pending placement at neonatal
intensive care unit sites. Also contributing to 1998 sales growth was the
commercialization of another continuous monitoring product, Neurotrend.
Neurotrend allows clinicians to monitor oxygen, carbon dioxide, acidity and
temperature in the brain of a patient who is undergoing surgery or has
experienced severe head injury. CE Mark was received in the second quarter 1998
and FDA clearance in the U.S. is pending. In October 1998, the Company entered
into an exclusive Distribution Agreement with CODMAN, a Johnson & Johnson
company, for worldwide market development and distribution of the Neurotrend
system.
In 1998, the Company completed the transition from its first generation
cartridge format to the full-scale production of the new snapfit combination
cartridge introduced in 1997 for use with the IRMA(R)SL Blood Analysis System.
Nearly all existing customers were converted to the new format by the end of
1998. The combination cartridge gives clini-
13
<PAGE>
cians the ability to perform all critical blood gas, electrolyte and hematocrit
tests using one small blood sample on a single-use cartridge. The combination
cartridge extends the system's application to all critical care areas in the
hospital including the operating room, and provides lower unit manufacturing
costs and improved gross margins.
Another significant achievement in 1998 which positively impacted operating
results was the integration of the LifeScan SureStep(R)Pro Glucose Module with
the IRMA SL Blood Analysis System and the commercialization of this new
integrated workstation in the first half of 1998. Through a partnership with
LifeScan, a Johnson & Johnson company, the IRMA SL integrates inexpensive blood
glucose strip testing on its platform, offering an expanded blood test panel.
Since FDA clearance in first quarter 1998, the Company has shipped over 350 IRMA
SL systems with the glucose modules.
The Company also continued to pursue agreements with hospital systems and
influential buying groups which establish the Company as a sole or preferred
supplier of its blood analysis systems. Accomplishments in 1998 included a sole
source agreement with Columbia Healthcare Corporation, the largest owned
hospital system in the U.S., and a three-year preferred supplier agreement with
Health Services Corporation of America, a leading national organization
providing purchasing agreements for more than 800 acute care hospitals. Such
agreements have helped open new markets to the Company's blood analysis systems,
and have increased market penetration in existing markets.
RESULTS OF OPERATIONS
SALES Sales of the Company's products were $12,155,526 for 1998, compared to
$10,434,366 for 1997 and $3,796,816 for 1996. The 175% increase in sales from
1996 to 1997 was affected by the inclusion in 1997 of the first full year of
sales from the operations of the Company's subsidiary, Diametrics Medical, Ltd.
(DML), acquired in November 1996. This contributed approximately $3.9 million to
the increase in sales between periods, with the remaining increase of $2.7
million reflecting growth in sales of the Company's intermittent blood testing
products. Sales increased 16% in 1998 from 1997, reflecting a 15% growth in
sales of instruments and a 19% increase in disposable cartridge and sensor
sales. Sales to international customers accounted for 60% of 1998 sales,
compared to 62% in 1997 and 39% in 1996. Intermittent testing products
represented 63%, 59% and 91% of sales in 1998, 1997 and 1996, respectively, with
continuous monitoring products comprising the remaining sales in each year.
For the year ended December 31, 1998, intermittent blood testing products
revenue was comprised of 59% instrument related revenue and 41% disposable
cartridge related revenue. Continuous monitoring products revenue was comprised
of 41% instrument related revenue and 59% disposable sensor revenue.
The Company's revenues are affected principally by the number of instruments,
both monitors and IRMA analyzers, placed with customers and the rate at which
disposable sensors and cartridges are used in connection with these products. As
of December 31, 1998, the Company has sold over 3,000 instruments. Unit sales of
instruments in 1998 increased approximately 11% from 1997, while disposable
sensor and cartridge unit sales increased approximately 48%. As the Company
grows, it is expected that the Company's growing customer base will increase its
rate of usage of disposable products, with the result that overall disposable
product sales will exceed that of instrument sales.
The Company has targeted 1999 revenues to grow at a rate in excess of the growth
rate experienced during 1998, as a result of further planned expansion of the
blood and tissue analysis product lines and continued market penetration of
existing products.
COST OF SALES Cost of sales totaled $11,334,721 for 1998, compared to
$11,666,142 for 1997 and $9,860,259 for 1996. Cost of sales as a percentage of
revenue was 93% in 1998, 112% in 1997 and 260% in 1996. The significant year-to-
year improvement in the Company's cost of sales as a percentage of revenue
reflects increased cartridge sales volumes and the impact of cost controls and
manufacturing process changes. These improvements resulted in the achievement in
1998 of the Company's first positive annual gross margin at $820,805, a $2
million or 167% improvement from 1997. The Company is targeting continued
improvements in gross margin during 1999 as a result of new product
introductions and further reductions in unit product costs, stemming from
increased sales volumes; further expected improvements in manufacturing yields;
and in-house (vs. third party vendor) assembly of IRMA analyzers and components
of the monitors.
OPERATING EXPENSES Total operating expenses decreased by $1.5 million or 8%
from 1997 to 1998, following an increase of $1.6 million or 9% from 1996 to
1997. The increase in 1997 was due primarily to the inclusion of a full year of
expenses from the operations of the Company's subsidiary, DML, adding
approximately $5.3 million to 1997 expenses. This was partially offset by a
reduction of $870,845 in restructuring charges and a $2.9 million reduction in
operating expenses in the Company's U.S. operations, stemming from work force
reductions during 1996 and 1997 which reduced average headcount in the U.S.
operations by 28% between years. On a pre-restructure charge basis, 1998
operating expenses decreased $1.1 mil-
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<PAGE>
lion or 6% relative to 1997, primarily the result of the 1997 work force
reductions, reducing average headcount between years by 13% in the Company's
U.S. operations.
Research and development expenses totaled $6,466,154 in 1998, compared to
$7,231,669 in 1997 and $6,359,844 in 1996. The 14% increase from 1996 to 1997 is
due to the incremental impact of DML expenses ($2.9 million), partially offset
by $2 million of expense reductions in the Company's U.S. operations, primarily
the result of average headcount reductions of 40% between years and
implementation of cost and process improvements. The 11% reduction in expenses
between 1997 and 1998 is primarily the result of further work force reductions
during 1997, with average headcount declining 16% between years.
Sales and marketing expenses totaled $8,009,318 in 1998, compared to $7,893,284
in 1997 and $6,781,943 in 1996. The 16% increase in expenses from 1996 to 1997
is primarily due to the incremental impact of a full year of DML expenses ($1.4
million), partially offset by reduced expenses in the Company's U.S. operations
due to organizational efficiencies and improved deployment of resources. The 1%
increase in expenses from 1997 to 1998 is primarily impacted by higher
commissions on increased direct sales and increased sales support costs for
placement of the Company's products with new customers.
General and administrative expenses totaled $3,261,098 in 1998, compared to
$3,689,036 in 1997 and $3,242,320 in 1996. The 14% increase in expenses from
1996 to 1997 is due to the impact of the inclusion of a full year of DML
expenses ($854,000), partially offset by reduced expenses in the Company's U.S.
operations, stemming primarily from work force reductions which reduced average
headcount between years by 28%. The 12% decline in expenses from 1997 to 1998 is
primarily the result of further work force reductions during 1997.
Restructuring and other charges totaled $0 in 1998, $463,816 in 1997 and
$1,334,661 in 1996. Charges in 1996 consisted of approximately $584,000 for
severance costs related to restructuring of the management team in early 1996
and a work force reduction, $464,000 for the write-off of purchased in-process
research and development created from the DML acquisition, and $287,000 for the
write-down of excess and obsolete equipment, resulting from the work force
reductions and process changes. Charges in 1997 consisted of severance costs of
approximately $319,000 associated with work force reductions, primarily in the
Company's U.S. manufacturing, research and development and general and
administrative areas, and $145,000 for the write-down of excess and obsolete
equipment resulting from the work force reductions and further process changes.
OTHER INCOME (EXPENSE) Net other expense in 1998 was $471,897, compared to
$526,962 in 1997 and net other income of $207,117 in 1996. The Company realized
interest income of $422,441 in 1998, compared to $658,625 in 1997 and $929,603
in 1996. The year-to-year decline reflects the impact of lower average cash
balances due to the timing of the Company's financing activities between 1995
and 1998, and also due to a net use of cash in operations for each period.
Interest expense totaled $807,411 in 1998, compared to $1,017,657 in 1997 and
$607,342 in 1996. The increase in expense between 1996 and 1997 primarily
reflects interest accrued on a long-term note payable issued in connection with
the Company's acquisition of DML in November 1996. The decline in expense
between 1997 and 1998 primarily reflects a reduction in the amount of higher
interest bearing capital lease debt relative to total debt outstanding.
NET LOSS Net loss for the year ended December 31, 1998 was $17,387,662,
compared to $21,036,543 in 1997 and $23,575,094 in 1996. The year-to-year
improvement in net loss reflects revenue growth, coupled with the impact of work
force reductions implemented during 1996 and 1997, cost controls, increased
production volumes and manufacturing process improvements. The Company is
targeting continued improvement in net loss in 1999.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had working capital of approximately $11.4
million, a decrease of $1.1 million from the working capital of $12.5 million
reported at December 31, 1997. The net decrease primarily reflects the impact of
the amount and timing of proceeds from private equity placements in 1997 and
1998, and net cash used in operating activities for the year ended December 31,
1998. Through December 31, 1998, the Company raised approximately $130 million
through the public and private sales of its equity securities and the issuance
of convertible promissory notes.
Net cash used in operating activities totaled $18.8 million for the year ended
December 31, 1998, compared to $16.6 million and $20.3 million for the same
periods in 1997 and 1996, respectively. This was the result of net losses of
$17.4 million, $21 million and $23.6 million for these same periods in 1998,
1997 and 1996, respectively, adjusted by changes in key operating assets and
liabilities, primarily accounts receivable, inventories and accounts payable and
accrued expenses.
As discussed in note 19 of Notes to Consolidated Financial Statements, effective
January 1, 1998, the Company changed the year-end of its wholly-owned
subsidiary, DML, to December 31 from November 30 to produce a consis-
15
<PAGE>
tent reporting period for the consolidated entity. As a result of this change in
year-end, DML's net results of operations for the month of December 1997 were
closed to beginning accumulated deficit as of January 1, 1998. Additionally, the
changes in DML's operating assets and liabilities during the month of December
1997 are included in the Consolidated Statement of Cash Flows for the year
ended December 31, 1998. The discussion below of changes in accounts receivable,
inventories, accounts payable and accrued expenses includes the impact of the
DML year-end change on these balances.
Net accounts receivable increased $1.7 million for the year ended December 31,
1998, compared to $1.2 million in 1997 and $581,000 in 1996. The year-to-year
increases are primarily due to increased sales in each year and the timing of
sales and related customer payments.
Inventories increased $1.3 million for the year ended December 31, 1998, after a
decrease of $876,000 in 1997 and an increase of $633,000 in 1996. The increase
in 1998 is due to increased inventory levels needed to begin internal assembly
of the Company's IRMA SL analyzers and to meet an expected increase in demand.
The prior year decrease was due primarily to an improvement in inventory
turnover during the year, stemming from improved inventory management.
Accounts payable and accrued expenses decreased $1.5 million for the year ended
December 31, 1998, after an increase of $418,000 and $348,000 in 1997 and 1996,
respectively. The decrease in 1998 is affected primarily by a reduction in
accrued interest payable, due to the timing of interest payments and reductions
in product upgrade accruals as upgrades are completed, combined with timing of
payments to vendors and employees. Increases in 1997 and 1996 were primarily the
result of the timing of vendor payments.
Net cash provided by investing activities totaled $3.2 million for the year
ended December 31, 1998, following a net use of cash in 1997 of $7.8 million and
net cash provided by investing activities of $19.8 million in 1996. These year-
to-year changes were primarily affected by the amounts and timing of private
equity placements, which affected the amount of cash available for the purchase
of marketable securities. Purchases of property and equipment also affected net
cash provided by or used in investing activities, and totaled $2.3 million for
the year ended December 31, 1998, $3 million in 1997 and $1.6 million in 1996.
Capital additions in each year consisted primarily of investments in development
and production equipment and instruments for internal use in R&D and sales. In
1999, the Company expects total capital expenditures and new lease commitments
to approximate $2.4 million for the year, primarily reflecting investments to
support new product development and production.
Net cash provided by financing activities totaled $16.4 million for the year
ended December 31, 1998, compared to $25.3 million in 1997 and $278,000 in 1996.
The year-to-year changes were due primarily to the amounts and timing of private
equity placements in 1997 and 1998.
In late 1996 and throughout 1997, the Company entered into long-term debt
obligations of approximately $8.9 million. The original debt consisted of a $7.3
million senior secured fixed rate loan note issued to Pfizer Inc. in connection
with the Company's acquisition of DML and approximately $1.6 million in notes
payable for equipment financing. Proceeds from the issuance in August 1998 of
$7.3 million of Convertible Senior Secured Fixed Rate Notes, issued in
conjunction with a private equity placement, were simultaneously used to retire
the $7.3 million Pfizer note. The Company's long-term debt and capital lease
obligations require principal and interest repayments of approximately $1
million in 1999, $900,000 in each of years 2000 and 2001, $600,000 in 2002 and
$7.6 million in 2003.
Effective March 31, 1998, the Company secured a $1,000,000 receivable backed
line of credit. The loan agreement requires the Company's accounts receivable
collections to be applied to reduce the loan balance, including advances,
interest and fees. At December 31, 1998, the Company had an outstanding balance
owed of $828,823 under the line of credit.
At December 31, 1998, the Company had U.S. net operating loss and research and
development tax credit carryforwards for income tax purposes of approximately
$103.8 million and $939,000, 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 note 12 of Notes to Consolidated Financial
Statements for further discussion).
In August 1998, the Company completed a private equity placement of 2,142,858
shares of Common Stock which generated aggregate proceeds to the Company of
$15,000,006. Also, as part of an exclusive Distribution Agreement initiated on
October 1, 1998, the Company entered into a $5,000,000 Put Option and Stock
Purchase Agreement with Johnson & Johnson Development Corporation who committed
to purchase up to $5,000,000 of the Company's Common Stock at the Company's
option over the twelve month period ending September 30, 1999. The Company
believes proceeds from the $5,000,000 Put Option & Stock Purchase Agreement
along with currently available funds and cash generated from projected operating
revenues, supplemented by proceeds from employee stock plans, warrant exercises,
asset based credit and corporate alliances, will meet the Company's working
capital needs through 1999. If the amount or timing of funding from these
sources or cash requirements
16
<PAGE>
vary materially from those currently planned, the Company could require
additional capital. The Company's long-term capital requirements will depend
upon numerous factors, including the rate of market acceptance of the Company's
products and the level of resources devoted to expanding the sales and marketing
organization, manufacturing capabilities and research and development
activities. While there can be no assurance that adequate funds will be
available when needed or on acceptable terms, management believes that the
Company will be able to raise adequate funding if needed.
YEAR 2000 COMPLIANCE
The Company is addressing the issues associated with computing difficulties that
may affect existing computer systems as a result of programming code malfunction
in distinguishing 21st century dates from 20th century dates (the "Year 2000"
issue). The Year 2000 issue is a pervasive problem affecting many information
technology systems and embedded technologies in all industries. The Company has
identified teams of internal staff to review its products; its internal
financial, manufacturing and other process control systems; and its interface
with major customers and suppliers in order to assess and remediate Year 2000
concerns.
The Company's information technology (IT) systems consist of computer hardware
systems and software supplied by third parties. IT systems in the Company's U.S.
operations are Year 2000 compliant. The Company has identified necessary
software and hardware upgrades to achieve compliance for IT systems in its U.K.
operations, with completion scheduled for mid 1999, allowing adequate time for
testing and training.
The Company's assessment of internal systems includes a review of non IT systems
(systems that contain embedded technology in manufacturing or process control
equipment containing microprocessors or other similar circuitry). This
assessment includes a review of the Company's internal manufacturing equipment
and facilities (including building maintenance, security, electrical, lighting,
fire protection, telephone, heating and cooling systems). Based upon this
review, the Company believes that its manufacturing processes and equipment and
internal process control equipment are Year 2000 compliant company wide.
The Company has assessed Year 2000 compliance of its products offered for sale
to customers, and believes that all are currently compliant. Contacts are being
made with the Company's customers regarding test procedures they can apply to
verify compliance of the Company's products.
The Company has identified third parties with which it has material
relationships, including suppliers of components for its products and providers
of critical utility services. The majority of the raw materials and purchased
components used to manufacture the Company's products are readily available.
Most of the 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. The Company has contacted all major U.S. third party
suppliers and has received representations that if not currently compliant, each
has plans in place to ensure that products purchased by the Company from such
suppliers will function properly in the Year 2000 and that such suppliers'
internal systems will be Year 2000 compliant no later than June 1999. The
Company is in the process of contacting all major international suppliers to
assess their status of compliance, and expects to complete that process by June
30, 1999. The Company is also currently evaluating alternative supplier sources,
where appropriate, in cases where it is single sourced. These actions are
intended to help mitigate the possible external impact of the Year 2000 problem.
Even assuming that all material third parties confirm that they are or expect to
be Year 2000 compliant by December 31, 1999, it is not possible to state with
certainty that such parties will be so compliant. It is impossible to fully
assess the potential consequences in the event service interruptions from
component suppliers occur or in the event that there are disruptions in such
infrastructure areas as utilities, communications, transportation, banking and
government.
The total estimated incremental cost required to address the Company's Year 2000
compliance is approximately $150,000, including the cost of software and
hardware upgrades. The majority of this cost will be incurred in 1999. The
actual cost, however, could exceed this estimate. These costs are not expected
to have a material effect on the Company's financial position, results of
operations or cash flows.
Based upon its assessments to date, the Company believes it will not experience
any material disruption in its operations as a result of Year 2000 problems in
its products, in its internal financial, manufacturing and other process control
systems, or in its interface with major customers and suppliers. However, if
major suppliers, including those providing component parts, electricity,
communications and transportation services, experience difficulties resulting in
disruption of critical supplies or services to the Company, a shutdown of the
Company's operations could occur for the duration of the disruption. As
previously noted, the Company is working on minimizing the component supply risk
by evaluating alternative suppliers, where appropriate, in cases where it is
single-sourced, with completion of this evaluation expected by June 1999. The
Company has not yet developed a contingency plan to provide for continuity of
normal business operations in the event the other described problem scenarios
arise, but it will assess the need to develop such a plan based upon the outcome
of
17
<PAGE>
compliance areas currently under review, and the results of remaining survey
feedback from its major suppliers. Assuming no major disruption in service from
critical third party providers, the Company believes that it will be able to
manage the Year 2000 transition without any material effect on the Company's
results of operations or financial position. There can be no assurance, however,
that unexpected difficulties will not arise and, if so, that the Company will be
able to timely develop and implement a contingency plan.
MARKET RISK
The Company's primary market risk exposure is foreign exchange rate fluctuations
of the British pound sterling to the U.S. dollar as the financial results of the
Company's U.K. subsidiary, DML, are translated into U.S. dollars in
consolidation. The Company's exposure to foreign exchange rate fluctuations also
arises from certain intercompany payable or receivable balances which are
expected to be settled in the foreseeable future under the terms of the
Company's intercompany agreement. Additionally, the Company has a small exposure
to currency risk arising from German deutschemark denominated sales from DML to
German customers. DML sells continuous monitoring products to customers and
distributors located outside of North America. The Company also sells
intermittent testing products from its U.S. operations to distributors located
throughout the world. All sales from the Company's U.S. operations are
denominated in U.S. dollars, and, with the exception of sales to customers in
Germany, all sales made from DML are denominated in British pounds sterling. As
sales to German customers have historically comprised only 5% of consolidated
sales, the Company's method of minimizing exposure to currency risk due to
fluctuations between the exchange rates for the British pound sterling and the
German deutschemark has been to offset deutschemark denominated payment
obligations with deutschemark denominated receipts to the full extent possible.
Remaining exposure due to German deutschemark denominated sales is not expected
to be material.
The effect of foreign exchange rate fluctuations on the Company's financial
results for the years ended December 31, 1998, 1997 and 1996 was not material.
The Company does not currently use derivative financial instruments to hedge
against exchange rate risk. Because foreign exchange exposure to these rate
fluctuations increases as sales and intercompany balances grow, the Company will
continue to evaluate the need to initiate hedging programs to mitigate the
impact on intercompany balances of changes in the exchange rate of the British
pound sterling to the U.S. dollar.
The Company's exposure to interest rate risk is limited to short-term borrowings
under its $1,000,000 receivable backed credit line. Any advances under the line
of credit bear interest on the unpaid principal amount at a fluctuating rate
tied to the Prime Rate. The Company does not use derivative financial
instruments to manage interest rate risk. As borrowings at any one time are
limited to $1,000,000 and are generally repaid within a few months, the
Company's exposure is not believed to be material. All other existing debt
agreements of the Company bear interest at fixed rates, and are therefore not
subject to exposure from fluctuating interest rates.
EURO CONVERSION
Effective January 1, 1999, 11 of the 15 member countries of the European Union
(EU) adopted the euro as their common legal currency. On that date, the
participating countries established fixed euro conversion rates between their
existing local currencies and the euro. During the three-and-a-half year
transition period following its introduction, participating countries will be
allowed to transact business both in the euro and in their local currencies. On
July 1, 2002, the euro will be the sole official currency in participating EU
countries.
The Company sells and distributes its products globally, with significant sales
in Europe. Additionally, as noted under "Market Risk", the Company's
subsidiary, DML, conducts its operations from the U.K. All sales from the
Company's U.S. operations are denominated in U.S. dollars and the majority of
sales from the Company's U.K. operations are denominated in British pounds
sterling. The U.K. is one of the four countries of the EU that did not adopt the
euro as its legal currency effective January 1, 1999; however, the U.K. may
convert to the euro at a later date. The conversion to the euro by the
participating countries of the EU is not expected to result in large-scale
changes to the denominations or pricing of the Company's sales contracts, unless
the U.K. were to adopt the euro as its official currency, in which case all
sales from the Company's U.K. operations would be denominated in euros.
The Company has assessed the potential impact of the euro conversion on business
processes, information technology systems and fixed assets in its U.K.
operations, and is making required changes in tandem with required Year 2000
related upgrades.
The Company is in the process of addressing these and other issues raised by the
conversion to the euro. The Company does not presently expect that the
conversion to the euro will result in any material increase in costs to the
Company. While the Company will continue to evaluate the impact of the euro
conversion over time, based upon currently available information, management
does not believe that the conversion to the euro currency will have a material
impact on the Company's financial condition or overall trends in results of
operations.
18
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. The statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company plans to adopt
the new standard in 1999. The Company is currently evaluating SFAS No. 133, but
does not expect that it will have a material effect on its financial statements.
In 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use. SOP 98-1 provides guidance on accounting for the
costs of computer software developed or obtained for internal use and does not
require additional disclosures. The Company intends to adopt SOP 98-1 in 1999.
Costs incurred prior to the initial application of the SOP will not be adjusted
to conform with SOP 98-1. The adoption is not expected to have a material impact
on the Company's financial position or results of operations.
The Company's discussion and analysis of results of operations and financial
condition, including statements regarding the Company's expectations about new
and existing products, future financial performance, Year 2000 compliance,
market risk exposure and other forward looking statements are subject to various
risks and uncertainties, including, without limitation, demand and acceptance of
new and existing products, technological advances and product obsolescence,
competitive factors, stability of domestic and international financial markets
and the availability of capital to finance growth. These and other risks are
discussed in greater detail in an exhibit in the Company's Form 10-K filed with
the U.S. Securities and Exchange Commission.
19
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------
DIAMETRICS MEDICAL, INC. AND SUBSIDIARY 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 12,155,526 $ 10,434,366 $ 3,796,816
Cost of sales 11,334,721 11,666,142 9,860,259
--------------------------------------------------------------
Gross profit (loss) 820,805 (1,231,776) (6,063,443)
Operating expenses:
Research and development 6,466,154 7,231,669 6,359,844
Sales and marketing 8,009,318 7,893,284 6,781,943
General and administrative 3,261,098 3,689,036 3,242,320
Restructuring and other charges - 463,816 1,334,661
--------------------------------------------------------------
17,736,570 19,277,805 17,718,768
--------------------------------------------------------------
Operating loss (16,915,765) (20,509,581) (23,782,211)
Interest income 422,441 658,625 929,603
Interest expense (807,411) (1,017,657) (607,342)
Other expense, net (86,927) (167,930) (115,144)
--------------------------------------------------------------
Net loss $ (17,387,662) $ (21,036,543) $ (23,575,094)
==============================================================
Basic and diluted net loss per common share $ (0.79) $ (1.13) $ (1.56)
==============================================================
Weighted average common shares outstanding 21,996,382 18,665,837 15,088,493
==============================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------------------------
DIAMETRICS MEDICAL, INC. AND SUBSIDIARY 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,432,614 $ 3,358,684
Marketable securities 2,976,443 8,401,642
Accounts receivable, net of allowance for doubtful accounts of
$280,000 in 1998 and $188,599 in 1997 5,420,092 3,768,528
Inventories 4,767,537 3,588,218
Prepaid expenses and other current assets 454,291 311,173
---------------------------------------
Total current assets 17,050,977 19,428,245
---------------------------------------
PROPERTY AND EQUIPMENT, NET 6,922,793 7,385,972
OTHER ASSETS, NET 1,372,544 1,847,316
---------------------------------------
$ 25,346,314 $ 28,661,533
=======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,535,343 $ 2,261,822
Accrued expenses 1,855,004 3,687,597
Short-term borrowings 828,823 -
Current portion of long-term liabilities 416,509 969,950
---------------------------------------
Total current liabilities 5,635,679 6,919,369
---------------------------------------
LONG-TERM LIABILITIES:
Long-term liabilities, excluding current portion 8,163,307 8,537,742
Other liabilities 181,764 431,145
---------------------------------------
Total liabilities 13,980,750 15,888,256
---------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value: 5,000,000 shares
authorized, none issued -- -
Common stock, $.01 par value: 35,000,000 shares authorized, 23,391,597
and 20,889,945 shares issued and outstanding at December 31, 1998
and 1997, respectively 233,916 208,899
Additional paid-in capital 130,477,220 113,970,247
Accumulated other comprehensive loss (225,165) (350,189)
Accumulated deficit (119,120,407) (101,055,680)
---------------------------------------
Total shareholders' equity 11,365,564 12,773,277
---------------------------------------
Commitments and contingencies (notes 7, 8, 16, and 17)
$ 25,346,314 $ 28,661,533
=======================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated
Additional other
Preferred Common paid-in Accumulated comprehensive
DIAMETRICS MEDICAL, INC. AND SUBSIDIARY stock stock capital deficit income (loss)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ - $ 149,001 $ 87,489,392 $ (56,444,043) $ -
-----------------------------------------------------------------------------
Net loss - - - (23,575,094) -
Foreign currency translation adjustment - - - - 89,309
-----------------------------------------------------------------------------
Comprehensive loss for the year ended
December 31, 1996 - - - (23,575,094) 89,309
Issued common stock under
employee stock purchase plan - 741 300,140 - -
Exercise of options to common stock - 2,353 662,440 - -
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 - 152,095 88,451,972 (80,019,137) 89,309
-----------------------------------------------------------------------------
Net loss - - - (21,036,543) -
Foreign currency translation adjustment - - - - (69,725)
Minimum pension liability - - - - (369,773)
-----------------------------------------------------------------------------
Comprehensive loss for the year ended
December 31, 1997 - - - (21,036,543) (439,498)
Issued preferred stock
on January 30, 1997 7,500 - 11,857,799 - -
Conversion of preferred stock
to common stock on April 10, 1997 (7,500) 30,000 (22,500) - -
Issued common stock
on June 10, 1997 - 14,933 7,840,236 - -
Issued common stock under
employee stock purchase plan - 554 205,574 - -
Exercise of options to common stock - 2,291 1,057,733 - -
Exercise of warrants to common stock - 9,026 4,551,025 - -
Issued stock options in lieu of
cash compensation - - 28,408 - -
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 - 208,899 113,970,247 (101,055,680) (350,189)
-----------------------------------------------------------------------------
Net loss - - - (17,387,662) -
Foreign currency translation adjustment - - - - (98,328)
Minimum pension liability - - - - 223,352
-----------------------------------------------------------------------------
Comprehensive loss for the year ended
December 31, 1998 - - - (17,387,662) 125,024
Issued common stock
on August 4, 1998 - 21,582 14,792,052 - -
Issued common stock under
employee stock purchase plan - 450 209,646 - -
Exercise of options to common stock - 2,441 1,183,531 - -
Exercise of warrants to common stock - 544 309,144 - -
Issued stock options in lieu of
cash compensation - - 12,600 - -
Effect of subsidiary's year-end change - - - (677,065) -
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ - $ 233,916 $ 130,477,220 $(119,120,407) $ (225,165)
=============================================================================
<CAPTION>
Total Total
shareholders' comprehensive
DIAMETRICS MEDICAL, INC. AND SUBSIDIARY equity income (loss)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 31,194,350
--------------------------------------------
Net loss (23,575,094) $ (23,575,094)
Foreign currency translation adjustment 89,309 89,309
--------------------------------------------
Comprehensive loss for the year ended
December 31, 1996 - $ (23,485,785)
Issued common stock under
employee stock purchase plan 300,881
Exercise of options to common stock 664,793
--------------------------------------------
BALANCE, DECEMBER 31, 1996 8,674,239
--------------------------------------------
Net loss (21,036,543) $ (21,036,543)
Foreign currency translation adjustment (69,725) (69,725)
Minimum pension liability (369,773) (369,773)
--------------------------------------------
Comprehensive loss for the year ended
December 31, 1997 - $ (21,476,041)
Issued preferred stock
on January 30, 1997 11,865,299
Conversion of preferred stock
to common stock on April 10, 1997 -
Issued common stock
on June 10, 1997 7,855,169
Issued common stock under
employee stock purchase plan 206,128
Exercise of options to common stock 1,060,024
Exercise of warrants to common stock 4,560,051
Issued stock options in lieu of
cash compensation 28,408
--------------------------------------------
BALANCE, DECEMBER 31, 1997 12,773,277
--------------------------------------------
Net loss (17,387,662) $ (17,387,662)
Foreign currency translation adjustment (98,328) (98,328)
Minimum pension liability 223,352 223,352
--------------------------------------------
Comprehensive loss for the year ended
December 31, 1998 - $ (17,262,638)
Issued common stock
on August 4, 1998 14,813,634
Issued common stock under
employee stock purchase plan 210,096
Exercise of options to common stock 1,185,972
Exercise of warrants to common stock 309,688
Issued stock options in lieu of
cash compensation 12,600
Effect of subsidiary's year-end change (677,065)
--------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 11,365,564
============================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------
DIAMETRICS MEDICAL, INC. AND SUBSIDIARY 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (17,387,662) $ (21,036,543) $ (23,575,094)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,147,460 4,162,997 3,114,293
Write-off of acquired in-process technology - - 464,460
Common stock and options issued in lieu of cash compensation 12,600 28,408 -
(Gain) loss on disposal of property and equipment 652 (80,921) (1,686)
Changes in operating assets and liabilities
(net of effects of acquisition in 1996):
Receivables, net (1,652,185) (1,178,760) (580,891)
Inventories (1,325,613) 875,881 (632,551)
Prepaid expenses and other current assets (44,360) 232,582 523,050
Accounts payable 393,253 649,432 (97,319)
Accrued expenses (1,899,428) (231,365) 445,619
-----------------------------------------------------------
Net cash used in operating activities (18,755,283) (16,578,289) (20,340,119)
-----------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,252,544) (2,957,958) (1,597,218)
Purchases of marketable securities (6,558,430) (26,208,044) (8,343,433)
Proceeds from maturities of marketable securities 11,983,629 21,209,000 30,730,100
Acquisition of DML, net of cash received - - (1,067,848)
Other assets 11,891 199,954 65,694
-----------------------------------------------------------
Net cash provided by (used in) investing activities 3,184,546 (7,757,048) 19,787,295
-----------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings (1,306,067) (129,714) (108,477)
Proceeds from borrowings 1,818,823 1,058,626 500,000
Net proceeds from issuance of preferred stock - 11,865,299 -
Net proceeds from issuance of common stock 16,519,390 13,681,372 965,674
Principal payments on capital lease obligations (611,809) (1,165,522) (1,078,802)
-----------------------------------------------------------
Net cash provided by financing activities 16,420,337 25,310,061 278,395
-----------------------------------------------------------
EFFECT OF SUBSIDIARY'S YEAR-END CHANGE ON CASH AND CASH EQUIVALENTS (664,819) - -
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (110,851) (68,033) 24,190
Net increase (decrease) in cash and cash equivalents 73,930 906,691 (250,239)
Cash and cash equivalents at beginning of year 3,358,684 2,451,993 2,702,232
-----------------------------------------------------------
Cash and cash equivalents at end of year $ 3,432,614 $ 3,358,684 $ 2,451,993
===========================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 1,544,161 $ 377,849 $ 510,399
===========================================================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
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 DML. On August 4,
1998, the Company entered into a convertible senior secured fixed rate note of
$7,300,000 in connection with a private equity placement and used the proceeds
to retire the 1996 note.
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS Diametrics Medical, Inc. along with its
subsidiary (the Company), is a medical device company engaged in the
development, manufacture and commercialization of critical care blood and
tissue analysis systems which provide immediate or continuous diagnostic
results at the point-of-patient care.
The Company markets its products 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.
TRANSLATION OF FOREIGN CURRENCIES The financial statements of the Company's
foreign subsidiary are translated in accordance with the provisions of
Statement of Financial Accounting Standards ("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, 1998, cash and cash equivalents
consist mainly of U.S. government money market funds and investment grade
commercial paper.
MARKETABLE SECURITIES In accordance with the provisions of SFAS No. 115,
Investment in Certain Instruments in Debt and Equity Securities,
investments in marketable debt securities are classified as held to
maturity and are stated at amortized cost, which approximates estimated
fair value. At December 31, 1998, marketable securities consist mainly of
investment grade commercial paper, with original maturities ranging from
three to eight 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.
OTHER ASSETS Other assets consist principally of intangible assets
representing purchased completed technology and other intangible assets
resulting from the excess of the cost of a purchased business over the fair
value of the net assets acquired. The intangible assets are amortized using
the straight-line method over five years. The recoverability of the
purchased completed technology and other intangible assets is assessed
quarterly based upon an analysis of undiscounted cash flows projected to be
generated by the acquired business.
REVENUE RECOGNITION The Company recognizes revenue upon shipment of product
to customers or, in the case of trial instruments and monitors, upon the
customer's acceptance of the product.
NET LOSS PER COMMON SHARE In accordance with SFAS No. 128, Earnings per
Share, basic EPS is calculated by dividing net earnings (loss) by the
weighted average common shares outstanding during the period. Diluted EPS
reflects the potential dilution to basic EPS that could occur upon
conversion or exercise of securities, options, or other such items, to
common shares using the treasury stock method based upon the weighted
average fair value of the Company's common shares during the period. For
each period presented, basic and diluted loss per share amounts are
identical, as the effect of potential common shares is antidilutive.
PRODUCT WARRANTY The Company, in general, warrants its new hardware and
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 defects in material and workmanship under normal use until its
stated expiration date. Provisions are made for the estimated cost of
maintaining product warranties for the hardware, software and disposable
products at the time the products are sold.
INCOME TAXES Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes
24
<PAGE>
the enactment date. Due to historical net losses of the Company, a
valuation allowance is established to offset the net deferred tax asset.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
STOCK BASED COMPENSATION The Company applies the intrinsic value method
prescribed in APB Opinion No. 25 to account for the issuance of stock
incentives to employees and directors and, accordingly, no compensation
expense related to employees' and directors' stock incentives has been
recognized in the financial statements. Effective January 1, 1996, in
accordance with SFAS No. 123, Accounting for Stock Based Compensation, pro
forma information reflecting compensation cost for such issuances is
presented in note 9.
IMPAIRMENT OF LONG-LIVED ASSETS The Company utilizes the undiscounted cash
flows alternative to detect impairment in long-lived assets.
COMPREHENSIVE INCOME In the current year, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income" which establishes new rules for the
reporting and display of comprehensive income and its components.
RECLASSIFICATIONS Certain 1997 and 1996 amounts have been reclassified from
prior reported balances to conform to the 1998 presentation.
(2) LIQUIDITY
As reflected in the accompanying consolidated financial statements, the
Company incurred a net loss of $17,387,662 for the year ended December 31,
1998. In addition, the Company has incurred net losses and has had negative
cash flows from operating activities since inception. In August 1998, the
Company completed a private equity placement of 2,142,858 shares of Common
Stock which generated aggregate proceeds to the Company of $15,000,006.
Also, as part of an exclusive Distribution Agreement initiated on October
1, 1998, the Company entered into a $5,000,000 Put Option and Stock
Purchase Agreement with Johnson & Johnson Development Corporation who
committed to purchase up to $5,000,000 of the Company's Common Stock at the
Company's option over the twelve month period ending September 30, 1999.
The Company believes proceeds from the $5,000,000 Put Option & Stock
Purchase Agreement along with currently available funds and cash generated
from projected operating revenues, supplemented by proceeds from employee
stock plans, warrant exercises, asset based credit and corporate alliances,
will meet the Company's working capital needs through 1999. If the amount
or timing of funding from these sources or cash requirements vary
materially from those currently planned, the Company could require
additional capital. The Company's long-term capital requirements will
depend upon numerous factors, including the rate of market acceptance of
the Company's products and the level of resources devoted to expanding the
sales and marketing organization, manufacturing capabilities and research
and development activities. While there can be no assurance that adequate
funds will be available when needed or on acceptable terms, management
believes the Company will be able to raise adequate funding if needed.
(3) INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
--------------------------
<S> <C> <C>
Raw materials $ 974,886 $ 957,049
Works-in-process 741,719 442,527
Finished goods 3,050,932 2,188,642
--------------------------
$ 4,767,537 $ 3,588,218
==========================
</TABLE>
25
<PAGE>
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------------------------------
<S> <C> <C>
Manufacturing equipment $ 5,653,623 $ 4,649,831
Laboratory fixtures and equipment 1,970,294 1,956,841
Office furniture and equipment 3,421,541 3,409,351
Leasehold improvements 3,388,445 3,359,680
Tooling 2,069,438 1,870,755
Demonstration instruments 2,513,659 1,864,042
Capital-in-progress 1,060,383 949,627
---------------------------------
20,077,383 18,060,127
Less accumulated depreciation
& amortization (13,154,590) (10,674,155)
---------------------------------
$ 6,922,793 $ 7,385,972
=================================
</TABLE>
(5) OTHER ASSETS
Other assets consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
----------------------------------
<S> <C> <C>
Purchased completed technology, net $ 1,122,569 $ 1,516,630
Acquired customer base and
other intangible assets, net 222,615 303,326
Other 27,360 27,360
----------------------------------
$ 1,372,544 $ 1,847,316
=================================
</TABLE>
Amortization charged to expense for intangible assets was $474,772,
$507,981 and $45,925 in 1998, 1997 and 1996, respectively.
(6) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
----------------------------------
<S> <C> <C>
Employee compensation $ 1,015,850 $ 1,171,572
Product upgrades 73,629 711,168
Deferred revenue 174,662 -
Interest payable - 736,750
Other 590,863 1,068,107
----------------------------------
$ 1,855,004 $ 3,687,597
==================================
</TABLE>
(7) BORROWINGS
Borrowings consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------
<S> <C> <C>
Long-term debt:
Convertible senior secured fixed
rate notes $ 7,300,000 $ -
Senior secured fixed rate loan note - 7,300,000
Notes payable 1,177,821 1,460,846
-------------------------------------
8,477,821 8,760,846
Less current portion of long-term debt (314,514) (283,025)
-------------------------------------
$ 8,163,307 $ 8,477,821
=====================================
Short-term borrowings:
Credit line $ 828,823 $ -
=====================================
</TABLE>
The aggregate maturities of outstanding long-term debt are:
<TABLE>
<S> <C>
Year ending December 31:
1999 $ 314,514
2000 349,511
2001 388,400
2002 125,396
2003 7,300,000
--------------
$ 8,477,821
==============
</TABLE>
On August 4, 1998, the Company issued Convertible Senior Secured Fixed Rate
Notes to an investor group, with proceeds aggregating $7,300,000. Proceeds
of the notes were paid by the investor group directly to Pfizer Inc. to
retire a $7,300,000 senior secured fixed rate loan note issued to Pfizer in
connection with the Company's acquisition of DML in November 1996. Interest
on the Convertible Senior Secured Fixed Rate Notes is payable on December
31, 1998 and quarterly in arrears thereafter, at 7.00% per annum. The full
principal balance is due August 4, 2003. The notes are secured by the
issued and outstanding shares of Diametrics Medical, Ltd., 100% of which
are owned by the Company.
The Convertible Senior Secured Fixed Rate Note agreements contain
provisions, which in the event of a change in control of the Company, allow
the note holders to require the Company to repurchase all or a portion of
the holder's notes at a purchase price of 100% of the principal amount plus
accrued and unpaid interest. In addition, the note agreements contain
provisions under which the note holders may convert the notes into shares
of Common Stock of the Company at a conversion price of $8.40 per share,
subject to adjustment for the impact of certain transactions initiated by
the Company that result in dilution of the note holders investment in the
Company.
The notes payable balance requires principal and interest payments in
monthly installments at varying amounts
26
<PAGE>
through September 2002, at annual interest rates ranging from 10.1% to
10.95%. Maturity dates of the notes range from December 1, 2001 to
September 25, 2002, and all notes are secured by equipment. See also note
14.
The Company has a $1,000,000 receivable backed credit line. The loan
agreement requires the Company's accounts receivable collections be applied
to reduce the loan balance, including advances, interest and fees. All
advances under the line of credit bear interest on the unpaid principal
amount at a fluctuating rate equal to the Prime Rate plus three percent.
Interest is payable monthly in arrears. The loan agreement requires the
monthly payment of an annualized unutilized loan fee equal to one half of
one percent (.5%) of the difference between the committed available loan
amount and the average outstanding loan balance. The unused portion of the
line of credit at December 31, 1998 was $171,177. See also note 14.
(8) LEASES
The Company is obligated under various capital leases for furniture and
equipment that expire at various dates in 1999. The gross amount included
in property and equipment and related accumulated amortization relating to
capital leases is as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
Manufacturing equipment $ 144,370 $ 1,415,465
Laboratory fixtures and equipment 40,202 377,019
Office furniture and equipment 345,090 1,180,893
Leasehold improvements - 16,668
Tooling - 7,030
-------------------------------
529,662 2,997,075
Less accumulated amortization (524,667) (2,733,165)
-------------------------------
$ 4,995 $ 263,910
===============================
</TABLE>
The present value of future minimum capital lease payments is as follows:
<TABLE>
<S> <C>
Total minimum lease payments year ending
December 31, 1999 $ 103,217
Less amount representing interest (1,222)
----------
Present value of minimum capital lease payments $ 101,995
==========
</TABLE>
(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 3,750,000 shares of common
stock may be granted to Company employees and consultants.
Additionally, the 1993 Directors' Stock Option Plan provides grants to non-
employee directors of the Company of non-qualified stock options to
purchase up to an aggregate of 367,500 shares of common stock.
Under the plans, the option price is equal to the fair value on the date of
grant. Under the 1990 Stock Option Plan, options become exercisable over
varying periods and terminate up to ten years from the date of grant.
Under the 1993 Directors' Stock Option Plan, initial grants of options to
new directors become exercisable over a three year period and terminate ten
years from the date of grant. Subsequent annual grants to directors vest
six months after the date of grant. At December 31, 1998, 632,913 and
166,284 additional shares were available for grant under the 1990 Stock
Option Plan and 1993 Directors' Stock Option Plan, respectively.
The following tables reflect the per share weighted-average fair value of
stock options granted during 1998, 1997 and 1996 under each of the plans on
the date of grant using the Black Scholes option-pricing model with the
following assumptions: annualized volatility of 84.42%, 74.15% and 70.81%
for 1998, 1997 and 1996, respectively; risk-free interest rate of 5.0% in
1998, 5.7% in 1997 and 5.5% in 1996; and for each year, an expected life of
five and three years for the 1990 Stock Option Plan and 1993 Directors'
Stock Option Plan, respectively.
27
<PAGE>
Summarized below is the status of the Company's stock option plans as of
December 31, 1998, 1997 and 1996 and changes during those years:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------- --------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
1990 Stock Option Plan SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------------- -------------------- -------------- ---------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,387,797 $ 5.26 2,290,395 $ 5.15
Granted 317,140 6.61 452,415 5.94
Exercised (236,062) 4.87 (210,621) 4.63
Expired (63,575) 6.12 (144,392) 6.57
-------------- --------------
Outstanding at end of year 2,405,300 5.45 2,387,797 5.26
============== ==============
Options exercisable at year-end 1,422,903 5.06 1,258,262 4.85
Weighted-average fair value of
options granted during the year $ 4.59 $ 3.84
1993 DIRECTORS' STOCK OPTION PLAN
Outstanding at beginning of year 122,000 $ 6.13 170,000 $ 6.16
Granted 53,466 7.82 40,000 6.00
Exercised (8,000) 4.63 (18,500) 4.63
Expired - - (69,500) 6.53
-------------- --------------
Outstanding at end of year 167,466 6.74 122,000 6.13
============== ==============
Options exercisable at year-end 138,591 6.83 76,625 5.81
Weighted-average fair value of
options granted during the year $ 4.45 $ 3.13
<CAPTION>
1996
----------------------------------------
WEIGHTED
AVERAGE
1990 STOCK OPTION PLAN SHARES EXERCISE PRICE
-------------- --------------------
<S> <C> <C>
Outstanding at beginning of year 1,450,188 $ 4.66
Granted 1,322,400 5.47
Exercised (235,244) 2.83
Expired (246,949) 6.25
--------------
Outstanding at end of year 2,290,395 5.15
==============
Options exercisable at year-end 1,172,405 4.70
Weighted-average fair value of
options granted during the year $ 3.44
1993 DIRECTORS' STOCK OPTION PLAN
Outstanding at beginning of year 126,500 $ 6.89
Granted 55,500 4.95
Exercised - -
Expired (12,000) 8.27
--------------
Outstanding at end of year 170,000 6.16
==============
Options exercisable at year-end 112,000 6.08
Weighted-average fair value of
options granted during the year $ 2.50
</TABLE>
The following table summarizes information concerning stock options
outstanding and exercisable options at December 31, 1998 for the above
plans:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------------- --------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.72 - 1.72 160,910 2.0 $ 1.72 160,910 $ 1.72
3.25 - 3.88 161,675 3.2 3.52 155,675 3.51
4.13 - 4.88 613,075 7.6 4.63 338,825 4.65
5.00 - 5.94 482,200 8.0 5.32 284,991 5.31
6.00 - 6.88 726,100 6.7 6.15 440,375 6.15
7.00 - 7.95 99,210 8.2 7.30 70,360 7.32
8.00 - 12.00 329,596 8.7 8.50 110,358 9.10
---------- ------- ------- ------------- ---------
2,572,766 7.0 5.53 1,561,494 5.21
========== =============
</TABLE>
28
<PAGE>
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its plans.
Accordingly, no compensation expense has been recognized for its stock-
based compensation plans as they relate to employees and directors. Had the
Company determined compensation cost based upon the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net loss and
net loss per share would have increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------
<S> <C> <C> <C>
Net loss as reported $(17,387,662) $(21,036,543) $(23,575,094)
Net loss pro forma $(19,284,933) $(23,365,049) $(26,017,576)
Net loss per share as reported $ (0.79) $ (1.13) $ (1.56)
Net loss per share pro forma $ (0.88) $ (1.25) $ (1.72)
</TABLE>
Pro forma net loss reflects only options granted in 1998, 1997, 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 3,044,680
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, 1998, stock purchase warrants representing 1,671,753 shares
were exercisable with an additional 33,333 shares becoming exercisable on a
monthly basis over 16 months and an additional 8,000 shares becoming
exercisable upon achieving certain purchasing levels of the Company's
products. Stock warrants outstanding under these arrangements are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ------------------------ ---------------------------
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 1,028,160 $ 1.72 - 6.75 786,814 $ 1.72 - 6.13 843,314 $ 1.72 - 6.13
Granted 739,286 5.19 - 8.40 1,328,334 4.53 - 6.75 16,000 5.00
Exercised (54,360) 5.19 - 6.13 (902,617) 4.77 - 6.75 - -
Expired - - (184,371) 4.77 - 5.06 (72,500) -
---------- ------------- --------- ------------- -------- -------------
Outstanding at end of year 1,713,086 1.72 - 8.40 1,028,160 1.72 - 6.75 786,814 1.72 - 6.13
========== ========= ========
Warrants exercisable at year-end 1,671,753 1.72 - 8.40 961,827 1.72 - 6.75 706,314 1.72 - 6.13
</TABLE>
(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 45,012 shares at an
average price per share of $4.67 in 1998, 55,394 shares at an average price
per share of $3.72 in 1997 and 74,096 shares at an average price per share
of $4.06 in 1996.
(11) EMPLOYEE BENEFIT PLANS
In the current year, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" which
standardizes employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of these
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 DML in November 1996, the Company assumed
sponsorship of the subsidiary's contributory defined benefit retirement
plan (the "Retirement Plan"), covering the majority of the subsidiary's
employees. The Retirement Plan provides benefits based upon final
pensionable salary and years of credited service. The Company's funding
policy for the Retirement Plan is to contribute into a trust fund at a rate
that is intended to remain at a level percentage of total pensionable
payroll.
29
<PAGE>
The assets of the Retirement Plan are held separately from those of the
Company and invested in the London and Manchester Secure Growth Fund,
Balanced Fund and a small holding in the Performance Fund. A portion of the
Retirement Plan assets are also invested in the Scottish Equitable Funds.
Contributions to the Retirement Plan are charged to expense so as to spread
the cost of the pensions over the employees' working lives with the
Company. The contributions are determined by a qualified actuary on the
basis of a valuation using the "attained age" valuation method.
The Company's Statement of Operations for the year ended December 31, 1996
includes approximately one month of activity for DML, and pension expense
charged to operations during that period was minimal. The following
provides a reconciliation of the projected benefit obligation, plan assets
and funded status of the Retirement Plan at December 31, along with the
components of net periodic pension cost for each year presented:
<TABLE>
<CAPTION>
1998 1997
============================
<S> <C> <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year $ 3,954,675 $ 2,762,245
Service cost 344,864 296,062
Interest cost 268,596 216,988
Plan participants' contributions 95,537 86,327
Actuarial (gain) loss 363,268 736,104
Benefits paid (135,495) (126,450)
Foreign currency exchange rate changes 33,013 (16,601)
----------------------------
Projected benefit obligation at end of year $ 4,924,458 $ 3,954,675
============================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 3,234,425 $ 2,660,923
Actual return on plan assets 465,437 405,314
Employer contribution 284,145 220,525
Plan participants' contributions 95,537 86,327
Benefits paid (135,495) (126,450)
Foreign currency exchange rate changes 26,148 (12,214)
----------------------------
Fair value of plan assets at end of year $ 3,970,197 $ 3,234,425
============================
Funded status $ (954,261) $ (720,250)
Unrecognized actuarial loss 918,918 658,878
----------------------------
Net amount recognized $ (35,343) $ (61,372)
============================
Amounts recognized in the balance sheet consist of:
Accrued benefit liability $ (181,764) $ (431,145)
Minimum pension liability 146,421 369,773
-------------------------------
Net amount recognized $ (35,343) $ (61,372)
===============================
RATE ASSUMPTIONS:
Discount rate 6.00% 7.00%
Rate of salary progression 3.75% 5.00%
Long-term rate of return on assets 7.75% 7.50%
<CAPTION>
Years ended December 31,
COMPONENTS OF NET PERIODIC BENEFIT COST 1998 1997
===============================
<S> <C> <C>
Service cost $ 344,864 $ 296,062
Interest cost 268,596 216,988
Expected return on plan assets (271,912) (246,156)
Recognized net actuarial loss 13,264 -
-------------------------------
$ 354,812 $ 266,894
===============================
</TABLE>
30
<PAGE>
(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 SFAS No. 109.
As of December 31, 1998 the Company had U.S. tax net operating loss and
research and development tax credit carryforwards of approximately
$103,800,000 and $939,000, respectively. Use of the Company's net operating
loss carryforwards may be limited if a cumulative "change in ownership" of
more than 50 percent occurs within a three-year period. In connection with
prior sales by the Company of its securities in private and public
offerings, the Company has experienced a "change in ownership". As a
result, the utilization of the Company's net operating loss and certain
credit carryforwards incurred prior to these changes are subject to annual
limitations. The Company estimates that the use of the U.S. net operating
losses incurred prior to August 4, 1995 are subject to annual limitations
of approximately $9.8 million per year. Net operating losses incurred since
August 4, 1995 are not currently subject to the "change in ownership"
limitations. If not used, these net operating loss carryforwards begin to
expire in 2005.
The Company's foreign subsidiary also has a net operating loss carryforward
of approximately $45,700,000 which can be carried forward indefinitely.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows at December 31:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------
<S> <C> <C>
Tax credits $ 939,000 $ 889,000
Federal net operating loss carryforward 38,424,000 33,643,000
Foreign net operating loss carryforward 15,089,000 13,428,000
Fixed asset depreciation 895,000 910,000
Amortization of goodwill 254,000 137,000
Vacation accrual 167,000 125,000
Inventory reserve 17,000 34,000
Product upgrade accrual 11,000 153,000
Other differences 141,000 114,000
Valuation allowance (55,937,000) (49,433,000)
---------------------------------------
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>
1998 1997 1996
----------------------------------------------------------------
<S> <C> <C> <C>
Expected federal benefit $ (5,912,000) $ (7,152,000) $ (8,016,000)
State tax, net of federal benefit (522,000) (493,000) (699,000)
Other (70,000) (88,000) (28,000)
Increase in valuation allowance 6,504,000 7,733,000 20,571,000
Decrease in valuation allowance of
acquired foreign subsidiary - - (11,828,000)
----------------------------------------------------------------
$ - $ - $ -
================================================================
</TABLE>
31
<PAGE>
(13) RESTRUCTURING AND OTHER CHARGES
Throughout 1996 and 1997, 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 $463,816 in 1997 and $1,334,661 in 1996. Charges
in 1996 consisted of approximately $584,000 for severance costs related to
restructuring of the management team in early 1996 and a work force
reduction in November, $464,000 for the write-off of purchased in-process
research and development created from the DML acquisition, and $287,000 for
the write-down of excess and obsolete equipment, resulting from the work
force reductions and process changes. Charges in 1997 consisted of
severance costs of approximately $319,000 associated with work force
reductions, primarily in the Company's U.S. manufacturing, research and
development and general and administrative areas, and $145,000 for the
write-down of excess and obsolete equipment resulting from the work force
reductions and further process changes. These restructuring activities were
completed before or shortly after the end of the quarter of the years in
which charges were incurred, and the Company does not have any material
future cash obligations relative to the described restructuring activities.
The impact of work force reductions on future operating results and cash
flows is not expected to be material in future periods, as savings achieved
in these areas have been and will continue to be reinvested in other areas
of the Company, including the Company's international operations.
(14) RELATED PARTY TRANSACTIONS
In August 1998, the Company completed the sale in a private placement of
2,142,858 shares of Common Stock at a price of $7.00 per share as part of a
Common Stock Purchase Agreement, resulting in aggregate proceeds to the
Company of $15,000,006. The purchasers also received five-year warrants to
purchase 714,286 shares of Common Stock at $8.40 per share. In addition,
the Company issued Convertible Senior Secured Fixed Rate Notes, with
proceeds aggregating $7,300,000, which were used to retire other debt of
the Company. The investor group in both transactions was led by BCC
Acquisition II LLC.
Two of the directors of the Company are affiliated with BCC Acquisition II
LLC, and one of these directors participated in the Common Stock Purchase
Agreement and the related sale of Convertible Senior Secured Fixed Rate
Notes. This director is also a director of DVI, Inc., a health care finance
company with which the Company has an outstanding credit line and notes
payable as of December 31, 1998. See note 7 for further detail on the
credit line, notes payable and Convertible Senior Secured Fixed Rate Notes.
(15) BUSINESS SEGMENT INFORMATION
In the current year, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which establishes
standards for disclosure about operating segments, products, geography and
major customers.
The Company develops, manufactures and markets blood and tissue analysis
systems that provide immediate or continuous diagnostic results at the
point-of-patient care. The Company's blood and tissue analysis systems
consist of two technology platforms. The first platform includes
intermittent blood testing products based on electrochemical and optical
technology, and the second platform includes continuous monitoring products
based on fiberoptic technology. The Company's products are sold primarily
to acute care hospitals via direct sales (primarily in the United States,
United Kingdom and Germany) or third party distribution channels including
corporate partners strategically positioned to access foreign markets. The
Company's disposable cartridges and sensors for the intermittent and
continuous monitoring technology platforms, respectively, are manufactured
at the Company's facilities. Hardware components of both technology
platforms are sub-contracted to outside vendors with portions of the
hardware assembly performed internally at the Company's facilities. Both
technology platforms are subject to similar regulatory monitoring by the
United States Food and Drug Administration and comparable agencies in other
countries. The Company's long term outlook for the two technology platforms
is that with increased sales volumes, they will exhibit similar financial
performance in terms of sales trends and gross margins. Based upon the
above, the Company has identified one reportable operating segment
consisting of medical diagnostic products which provide blood and tissue
analysis at the point-of-patient care.
Information regarding the Company's operations in different geographies for
the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------
<S> <C> <C> <C>
Sales to unaffiliated customers
United States $ 4,879,367 $ 3,947,287 $ 2,318,038
Japan 1,215,037 2,222,610 465,770
All other foreign countries 6,061,122 4,264,469 1,013,008
--------------------------------------------------------
$ 12,155,526 $ 10,434,366 $ 3,796,816
========================================================
Long-lived assets
United States $ 3,682,879 $ 4,053,383 $ 4,908,408
United Kingdom 3,239,914 3,332,589 3,379,344
--------------------------------------------------------
$ 6,922,793 $ 7,385,972 $ 8,287,752
========================================================
</TABLE>
32
<PAGE>
Sales attributed to geographic areas are based upon customer location.
Long-lived assets consist of property and equipment located at the
Company's facilities in the United States and the United Kingdom.
Sales to one major customer exceeded 10% of total net sales for the years
ended December 31, 1998 and 1997 and resulted in sales of approximately
$1,675,000 and $2,284,000, respectively. The customer for which the sales
were generated is a distributor of the Company operating in the medical
diagnostic device industry. No single customer comprised 10% of total net
sales in 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 $940,027, $829,106
and $412,295 for the years ended December 31, 1998, 1997 and 1996,
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:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999 $ 848,542
2000 613,162
2001 458,348
2002 199,757
2003 173,250
Thereafter 476,438
-------------
Total minimum lease payments $ 2,769,497
=============
</TABLE>
(17) LEGAL PROCEEDINGS
There are no legal proceedings pending, threatened against or involving the
Company, which, in the opinion of management, will have a material adverse
effect upon consolidated results of operations or financial condition.
(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 note 7). In the purchase of BSL (now
known as Diametrics Medical, Ltd.), the Company acquired fiberoptic and
electrochemical technology for monitoring blood gases on a continual basis
via sensors that dwell inside arterial lines. Core technology was also
purchased for future product derivatives under development.
The Company accounted for the acquisition using the purchase method. As
such, the excess of the purchase price over the fair value of the
identifiable tangible assets acquired was allocated to purchased completed
technology (70%), purchased in-process technology (16%), and the value of
the acquired customer base and other unidentifiable intangible assets or
goodwill (14%), totaling $2,770,359. The in-process technology ($464,460)
was written off to operating expenses, leaving $2,305,899 of intangible
assets and goodwill on the balance sheet at the acquisition date. Due to
the rapid pace of technological change in the medical device industry, the
completed technology has an estimated useful life of five years. The
customer base has an estimated useful life of three years and other
unidentifiable assets, seven years. This results in a weighted average
amortization period of five years for the intangible assets not immediately
written off.
The unaudited pro forma consolidated condensed results of operations for
the Company for fiscal year 1996, had the acquisition occurred at the
beginning of that year, are as follows:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Net sales $ 7,021,000
Net loss (33,586,000)
Net loss per common share (2.23)
</TABLE>
Included in total revenue and net loss for 1996 are revenues and net loss
from DML's operations of $326,000 and $(421,000), respectively.
33
<PAGE>
(19) CHANGE IN YEAR-END OF SUBSIDIARY
Effective January 1, 1998, the Company changed the year-end of its wholly-
owned subsidiary, DML, to December 31 from November 30 to produce a
consistent reporting period for the consolidated entity. As a result of
this change in year-end, DML's net results of operations for the month of
December 1997 were closed to beginning accumulated deficit on the balance
sheet as of January 1, 1998. The impact of this change was an increase in
the beginning accumulated deficit of approximately $677,000.
(20) SUBSEQUENT EVENT (UNAUDITED)
As part of an exclusive Distribution Agreement initiated on October 1,
1998, the Company entered into a $5,000,000 Put Option and Stock Purchase
Agreement with Johnson & Johnson Development Corporation (JJDC) who
committed to purchase up to $5,000,000 of the Company's Common Stock at the
Company's option over the twelve month period ending September 30, 1999.
Effective March 26, 1999, the Company exercised approximately $4 million of
the available Put Option, resulting in the issuance of 773,184 shares of
the Company's Common Stock to JJDC at a per share price of $5.1734.
Proceeds to the Company of approximately $4 million will be used for
product development, sales and marketing and other general corporate
purposes. The Company may exercise the remaining available $1,000,000
balance of the Put Option through September 30, 1999.
(21) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Net sales $ 2,416,703 $ 3,052,048 $ 3,102,430 $ 3,584,345
Gross profit 14,013 241,980 155,952 408,860
Operating loss (4,121,949) (4,089,871) (4,705,886) (3,998,059)
Net loss (4,303,193) (4,326,440) (4,792,354) (3,965,675)
Net loss per common share (0.21) (0.20) (0.21) (0.17)
1997
Net sales $ 1,954,966 $ 2,607,679 $ 2,829,279 $ 3,042,442
Gross profit (loss) (872,980) (213,895) (189,668) 44,767
Operating loss (5,602,223) (5,090,759) (4,960,888) (4,855,711)
Net loss (5,772,013) (5,254,034) (5,153,267) (4,857,229)
Net loss per common share (0.38) (0.29) (0.25) (0.23)
</TABLE>
34
<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, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Diametrics Medical,
Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 8, 1999
35
<PAGE>
CORPORATE AND SHAREHOLDER INFORMATION
EXECUTIVE OFFICERS
David T. Giddings
President, Chief Executive Officer and
Chairman of the Board
Roy S. Johnson
Executive Vice President
President and Managing Director of
Diametrics Medical, Ltd.
Laurence L. Betterley
Senior Vice President and Chief Financial
Officer
James R. Miller
Senior Vice President
Sales and Marketing and Commercial
Development
DIRECTORS
Andre de Bruin (2)
President and Chief Executive Officer
QUIDEL Corporation
Gerald L. Cohn (1)(2)
Consultant and Private Investor
David T. Giddings
Roy S. Johnson
Mark B. Knudson, Ph.D. (1)
Chairman and Founder
HeartStent
David V. Milligan, Ph.D.
Vice President
Bay City Capital
Richard A. Norling (1) (2)
Chief Executive Officer
Premier, Inc.
(1) Member of the Compensation Committee of the Board of Directors
(2) Member of the Audit Committee of the Board of Directors
SHAREHOLDER INFORMATION
STOCK LISTING
The Company's common stock is traded on The Nasdaq National Market under
the symbol DMED.
STOCK TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Phone: (800) 937-5449
FORM 10-K
A copy of the Company's annual report on Form 10-K as filed with the
Securities and Exchange Commission is available to stockholders free of
charge by writing to Diametrics Medical, Inc.
ANNUAL MEETING
The annual meeting of Diametrics Medical, Inc. shareholders will be held
May 12, 1999, at 3:30 p.m. at the Minneapolis Marriott City Center, 30
South Seventh Street, Minneapolis, Minnesota. All shareholders and other
interested parties are invited to attend.
INVESTOR INQUIRIES
Please direct all inquiries to Laurence L. Betterley, Senior Vice President
and Chief Financial Officer, at the Company's corporate offices.
STOCK INFORMATION
High and low quarterly closing prices for Diametrics Medical, Inc., common
stock as quoted on The Nasdaq National Market were:
<TABLE>
<CAPTION>
1998
High Low
----------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter $ 8 1/4 $ 5 1/4
Second Quarter 8 7/8 6 5/8
Third Quarter 7 15/16 3 5/8
Fourth Quarter 5 1/2 2 3/4
1997
High Low
----------------------------------------------------------------------------------------
First Quarter $ 5 3/4 $3 1/2
Second Quarter 9 1/4 3
Third Quarter 9 15/16 6 9/16
Fourth Quarter 10 1/8 4 5/8
</TABLE>
There were 521 common shareholders of record and the Company estimates
approximately 5,800 shareholders holding stock in "street name" accounts as
of December 31, 1998. The Company has not paid any stock dividends on its
common stock since its inception, and management does not anticipate paying
cash dividends in the foreseeable future.
CORPORATE ADDRESS INTERNATIONAL SUBSIDIARY
Diametrics Medical, Inc. Diametrics Medical, Ltd.
2658 Patton Road 5 Manor Court Yard, Hughenden Ave.
St. Paul, Minnesota 55113 High Wycombe, Bucks. HP13 5RE
Phone: (651) 639-8035 England
Website: www.diametrics.com Phone: +44(0)1494 446651
36
<PAGE>
Exhibit 21
SUBSIDIARIES OF DIAMETRICS MEDICAL, INC.
The Company's consolidated subsidiaries are shown below,
together with the percentage of voting securities owned and the state
or jurisdiction of each subsidiary:
Percentage of
Outstanding Voting
Subsidiaries Securities Owned
- ------------ ----------------
Diametrics Medical, Ltd. 100%
(United Kingdom)
<PAGE>
EXHIBIT 23
Independent Auditor's Consent
The Board of Directors and Shareholders
Diametrics Medical, Inc.
We consent to the incorporation by reference in the Registration Statement (Nos.
333-63689, 333-63687, 333-51951, 333-33257, 333-24169, 333-24167, 333-24079 and
33-83572) on Forms S-3 and S-8 of Diametrics Medical, Inc., of our report dated
February 8, 1999, relating to the consolidated balance sheets of Diametrics
Medical, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1998, 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 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,432,614
<SECURITIES> 2,976,443
<RECEIVABLES> 5,700,092
<ALLOWANCES> 280,000
<INVENTORY> 4,767,537
<CURRENT-ASSETS> 17,050,977
<PP&E> 20,077,383
<DEPRECIATION> 13,154,590
<TOTAL-ASSETS> 25,346,314
<CURRENT-LIABILITIES> 5,635,679
<BONDS> 8,163,307
0
0
<COMMON> 233,916
<OTHER-SE> 11,131,648
<TOTAL-LIABILITY-AND-EQUITY> 25,346,314
<SALES> 12,155,526
<TOTAL-REVENUES> 12,155,526
<CGS> 11,334,721
<TOTAL-COSTS> 17,736,570
<OTHER-EXPENSES> 471,897
<LOSS-PROVISION> 259,506
<INTEREST-EXPENSE> 807,411
<INCOME-PRETAX> (17,387,662)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,387,662)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,387,662)
<EPS-PRIMARY> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
<PAGE>
Exhibit 99
CAUTIONARY STATEMENT
Forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "PSLRA") are included in our Form 10-K. The
words or phrases "believes," "may," "will," "expects," "should," "continue,"
"anticipates," "intends," "will likely result," "estimates," "projects" or
similar expressions identify forward-looking statements in our Form 10-K and in
our future filings with the Securities and Exchange Commission, in our press
releases, in our presentations to securities analysts or investors, and in oral
statements made by or approved by an executive officer of Diametrics Medical,
Inc. Forward-looking statements involve risks and uncertainties that may
materially and adversely affect our business, results of operations, financial
condition or prospects, and may cause our actual results to differ materially
from historical results or the results discussed in the forward-looking
statements.
You should consider carefully the following cautionary statements if
you own our common stock or are planning to buy our common stock. We intend to
take advantage of the "safe harbor" provisions of the PSLRA by providing this
discussion. We are not undertaking to address or update each factor in future
filings or communications regarding our business or results except to the extent
required by law.
WE ARE AT AN EARLY STAGE OF COMMERCIALIZATION WITH LIMITED OPERATING HISTORY
Founded in 1990, we were engaged primarily in the research, development
and testing of, and the development of manufacturing capabilities for, the
IRMA(R) (Immediate Response Mobile Analysis) System and the Paratrend(R) 7 until
1995. Our marketing efforts began for both products during 1994. We have limited
operating history upon which an evaluation of our prospects can be made. Our
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered in establishing a new business in the evolving,
heavily-regulated medical device industry, which is characterized by an
increasing number of entrants, intense competition and a high failure rate.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT FUTURE LOSSES
We have only recently begun to generate revenues and have incurred net
operating losses since our inception. We expect to incur substantial net
operating losses at least through 1999. We cannot assure you that we will ever
generate substantial revenues or achieve profitability.
OUR SUCCESS DEPENDS UPON MARKET ACCEPTANCE OF NEW TECHNOLOGY
Our success depends upon acceptance of our products by the medical
community as reliable, accurate and cost-effective. Our point-of-care blood
testing and monitoring devices represent a new practice in critical or stat
blood testing, which is currently performed primarily by central and stat
laboratories of hospitals or by independent commercial laboratories. Although
professional awareness of point-of-care blood testing is increasing, most acute
care hospitals have already installed expensive blood testing instruments for
use in their central and stat laboratories and may be reluctant to change
standard operating procedures or incur additional capital expenditures for new
blood analysis equipment. In addition, the limited number of blood analytes that
can be analyzed on our products may cause certain hospitals not to consider
them. We are unable to predict how quickly, if at all, our products will be
accepted by the medical community or, if accepted, predict the volume of our
products or the related disposable cartridges and sensors we can expect to sell.
WE FACE SIGNIFICANT INDUSTRY COMPETITION AND RISK OF PRODUCT OBSOLESCENCE
The medical technology industry is characterized by rapidly evolving
technology and intense competition. We are aware of one other commercially
available hand-held point-of-care blood analysis system, which is
1
<PAGE>
manufactured and marketed by i-STAT Corporation, but we expect that
manufacturers of central and stat laboratory testing equipment will also develop
new products to maintain their revenues and market share. Many of our
competitors have substantially greater capital resources, research and
development staffs, and facilities than we do, and many of these companies also
have greater experience in research and development, obtaining regulatory
approvals, manufacturing, and sales and marketing. We cannot assure you that our
competitors will not succeed in developing or marketing technologies and
products that are more effective or less expensive than ours that could render
our products obsolete or noncompetitive. Although we believe that our products
may offer certain technological advantages over our competitors' current
products, earlier entrants in the market in a therapeutic area often obtain and
maintain significant market share. Our product pricing is competitive with other
point of care suppliers and is, in general, slightly higher than prices of
existing high volume central and near patient labs operating near capacity, but
which lack the convenience and turnaround time of point-of-care testing. In the
future, we may experience competitive pricing pressures that may cause a
decrease in unit prices and sales levels.
WE HAVE LIMITED MANUFACTURING EXPERIENCE
We must manufacture our products in compliance with regulatory
requirements, in sufficient quantities and on a timely basis, and still maintain
product quality and acceptable manufacturing costs. Our products consist of two
principal components: portable, microprocessor-based instruments and disposable
sensors. We have limited experience producing our products in large commercial
quantities. Although we believe that we will be able to achieve and maintain
product accuracy and reliability when producing in large quantities, on a timely
basis and at an acceptable cost, we cannot assure you that we will be able to do
so. Also, product design changes, equipment failures and manufacturing process
changes may disrupt our existing operations and impact sales.
WE DEPEND ON PATENTS AND PROPRIETARY TECHNOLOGY, WHICH WE MAY NOT BE ABLE TO
PROTECT
Our success will depend in part on our ability to obtain patent
protection for our products and processes, to preserve our trade secrets and to
operate without infringing the intellectual property rights of others. The
patent positions of medical device companies are uncertain and involve complex
and evolving legal and factual questions. We cannot assure you that any of our
pending or future patent applications will result in issued patents, that any
current or future patents will not be challenged, invalidated or circumvented,
that the scope of any of our patents will exclude competitors or that the patent
rights granted to us will provide us any competitive advantage. In addition, we
cannot assure you that our competitors will not seek to apply for and obtain
patents that will prevent, limit or interfere with our ability to make, use or
sell our products either in the United States or in international markets.
Further, the laws of certain foreign countries may not protect our intellectual
property rights to the same extent as do the laws of the United States.
In addition to patents, we rely on trade secrets and proprietary
knowledge that we seek to protect, in part, through confidentiality agreements
with employees, consultants and others. We cannot assure you that our
proprietary information or confidentiality agreements will not be breached, that
we will have adequate remedies for any breach, or that our trade secrets will
not otherwise become known to or independently developed by competitors.
WE MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS WHICH WOULD BE COSTLY TO
RESOLVE
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry and our competitors
may resort to intellectual property litigation as a means of competition.
Intellectual property litigation is complex and expensive and the outcome is
difficult to predict. We cannot assure you that we will not become subject to
patent infringement claims or litigation. Litigation or regulatory proceedings
may also be necessary to enforce our patents or other intellectual property
rights. We may not always have the financial resources to assert patent
infringement suits or to defend ourselves from claims. An adverse result in any
litigation could subject us to liabilities to, or require us to seek licenses
from or pay royalties to, others that may be
2
<PAGE>
substantial. Furthermore, we cannot assure you that the necessary licenses would
be available to us on satisfactory terms, if at all.
OUR SUCCESS MAY DEPEND IN PART ON UNCERTAIN GOVERNMENT HEALTH CARE POLICIES AND
REIMBURSEMENT BY THIRD PARTIES
The willingness of hospitals to purchase our products may depend on the
extent to which hospitals limit their own capital expenditures due to existing
or future cost reimbursement regulations. In addition, sales volumes and prices
of our products in certain markets will depend in part on the level of
reimbursement to hospitals for blood analysis from third-party payors, such as
government and private insurance plans, health maintenance organizations and
preferred provider organizations. Third-party payors are increasingly
challenging the pricing of medical procedures they consider unnecessary,
inappropriate or not cost-effective. We cannot assure you that current
reimbursement amounts, if any, will not be decreased in the future, and that any
decrease will not reduce the demand for or the price of our products. Any
federal or state health care reform measures could adversely affect the price of
medical devices in the United States, including our products, or the amount of
reimbursement available. We cannot predict whether any reform measures will be
adopted or what impact they may have on us.
WE MUST OBTAIN REGULATORY APPROVAL FOR NEW PRODUCTS WE DEVELOP
Human diagnostic products are subject to rigorous pre-clinical and
clinical testing mandated by the United States Food and Drug Administration (the
"FDA") and comparable agencies in other countries and, to a lesser extent, by
state regulatory authorities. We have obtained pre-market notification
clearances under Section 510(k) of the Food, Drug and Cosmetic Act (the "FDC
Act") to market our IRMA SL System to test blood gases, electrolytes (i.e.,
inorganic compounds including sodium, potassium, chloride and ionized calcium),
blood urea nitrogen and hematocrit (i.e., the concentration of red blood cells)
in whole blood in hospital laboratories and at the point of care, and to market
the Paratrend 7 and Paratrend 7+ to monitor blood gases and temperature.
Additional pre-market notification clearances were obtained in late 1997 to
market Neotrend for blood gas monitoring of critically ill babies, and in early
1998 for the addition of glucose testing capability to the IRMA SL system. A
Section 510(k) clearance is subject to continual review, and later discovery of
previously unknown problems may result in restrictions on marketing or
withdrawal of the product from the market. Our long-term business strategy
includes development of cartridges and sensors for performing additional blood
and tissue chemistry tests, and any new tests will be subject to the same
regulatory process. We cannot assure you that we will be able to develop
additional products or uses or that we will obtain the necessary clearances for
new products and uses on a timely basis or at all.
We also market our products in several foreign markets. Requirements
vary widely from country to country, ranging from simple product registrations
to detailed submissions such as those required by the FDA. Our manufacturing
facilities are also subject to FDA inspection on a periodic basis and we and our
contract manufacturers must demonstrate compliance with current Good
Manufacturing Practices promulgated by the FDA. Violations of the applicable
regulations at our manufacturing facilities or the manufacturing facilities of
our contract manufacturers may prevent us from marketing of our products.
OUR PRODUCTS AND THE TECHNICIANS AUTHORIZED TO USE THEM MAY BE RESTRICTED BY THE
CLINICAL LABORATORY IMPROVEMENT ACT OF 1988
Our products are affected by the Clinical Laboratory Improvement Act of
1988 ("CLIA") which has been implemented by the FDA. This law is intended to
assure the quality and reliability of all medical testing in the United States
regardless of where tests are performed. The regulations require laboratories
performing blood chemistry tests to meet specified standards in the areas of:
o personnel qualification,
o administration,
o participation in proficiency testing,
3
<PAGE>
o patient test management,
o quality control,
o quality assurance, and
o inspections.
The regulations have established three levels of regulatory control
based on test complexity - "waived," "moderate complexity" and "high
complexity." Although the tests performed by our products have been categorized
as moderate complexity tests, we cannot assure you that our products will not be
placed in a more restrictive category. Personnel standards for high complexity
tests are more rigorous than those for moderate complexity tests, requiring more
education and experience. If our products are recategorized as high complexity
tests, our ability to successfully market them to hospitals or other potential
buyers may suffer. We cannot assure you that the CLIA regulations or various
state licensing requirements for technicians will not have a material adverse
effect on our financial condition or results of operation.
OUR PRODUCTS MAY EXPOSE US TO COSTLY LITIGATION
We may be exposed to product liability claims if a patient is adversely
affected by our products. We maintain a general insurance policy which includes
coverage for product liability claims. The policy is limited to a maximum of
$1,000,000 per product liability claim and an annual aggregate policy limit of
$2,000,000. We also carry umbrella liability insurance which provides coverage
up to $10,000,000. We cannot assure you that our existing insurance coverage
limits are adequate to cover any liabilities we might incur or that insurance
will continue to be available on commercially reasonable terms, if at all.
WE DEPEND ON CONTRACT MANUFACTURERS AND SUPPLIERS FOR KEY COMPONENTS OF OUR
PRODUCTS
Our monitors and IRMA analyzers are manufactured for us by single
vendors, generally from off-the-shelf components. A few components are supplied
by a single source and manufactured to our specifications. Although we believe
that we could find alternative vendors, any interruption in supply could have a
material and adverse effect on our ability to manufacture our products, and our
financial condition and results of operations.
INTERNATIONAL OPERATIONS WILL EXPOSE US TO ADDITIONAL RISKS
We market a majority of our products through distributors in
international markets, subject to receipt of required foreign regulatory
approvals. We cannot assure you that international distributors for our products
will devote adequate resources to selling our products. Doing business outside
of the United States also exposes us to various risks that could have a material
and adverse effect on our ability to market our products internationally,
including:
o changes in overseas economic and political conditions,
o currency exchange rate fluctuations,
o foreign tax laws, or
o tariffs or other trade regulations.
Our business is also expected to subject us and our representatives,
agents and distributors to laws and regulations of the foreign jurisdictions in
which they operate or our products are sold. We may depend on foreign
distributors and agents for compliance and adherence to foreign laws and
regulations. We have no control over most of these risks and may be unable to
anticipate changes in international economic and political conditions, and may
be unable to alter our business practices in time to avoid any adverse effects.
4
<PAGE>
CONCENTRATION OF OWNERSHIP MAY GIVE SOME SHAREHOLDERS SUBSTANTIAL INFLUENCE AND
MAY PREVENT OR DELAY A CHANGE IN CONTROL
As of December 31, 1998, directors, executive officers and principal
shareholders, and certain of their affiliates, owned beneficially approximately
43% of our outstanding common stock, assuming all vested stock options, stock
purchase warrants and convertible debt held by them are exercised or converted.
These shareholders, may be able to exercise substantial influence over all
matters requiring shareholder approval, including the election of directors, and
approval of significant corporate transactions. This concentration of ownership
could also have the effect of delaying, deferring or preventing a change in
control of Diametrics Medical, Inc.
OUR CHARTER DOCUMENTS AND MINNESOTA LAW MAY DISCOURAGE AN ACQUISITION OF
DIAMETRICS MEDICAL, INC.
Provisions of our articles of incorporation, including our ability to
issue up to 5,000,000 shares of preferred stock without any further vote or
action by the shareholders, our bylaws and Minnesota law could make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our shareholders.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS
We expect that our existing capital resources should enable us to
maintain our current and planned operations through 1999. Nonetheless, our
capital requirements depend on many factors, including the rate of market
acceptance of our products, the level of resources we devote to expanding our
marketing organization and manufacturing capabilities, our research and
development activities, the availability of financing for capital acquisitions
and other factors. We cannot accurately predict the timing and amount of our
capital needs. If capital requirements vary materially from those currently
planned, we will require additional capital. Issuing additional shares of
capital stock may be dilutive to our shareholders, and debt financing, if
available, may involve restrictive covenants.
OUR PRODUCTS AND SYSTEMS MAY BE SUBJECT TO YEAR 2000 PROBLEMS
We have identified teams to review our products, our internal
financial, manufacturing and other process control systems, and our interface
with major customers and suppliers in order to assess and remediate Year 2000
issues. Based upon our assessments to date, we believe we will not experience
any material disruption in our operations as a result of Year 2000 problems.
However, if major suppliers, including those providing component parts,
electricity, communications and transportation services, experience difficulties
resulting in disruption of critical supplies or services to us, a shutdown of
our operations could occur for the duration of the disruption. We are working on
minimizing component supply risk by evaluating alternative suppliers in cases
where we are single-sourced, with completion of our evaluation expected by June
1999. We have not yet developed a contingency plan in the event the other
described problem scenarios arise, but we will assess the need to develop a plan
based upon the outcome of compliance areas currently under review, and the
results of remaining survey feedback from our major suppliers. Assuming no major
disruption in service from critical third party providers, we believe that we
will be able to manage the Year 2000 transition without any material effect on
our results of operations or financial position.
5
