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Filed Pursuant to Rule 424(b)(3)
Registration Number 333-63689
PROSPECTUS
DIAMETRICS MEDICAL, INC.
3,726,192 SHARES
OF
COMMON STOCK
($.01 PAR VALUE)
This Prospectus relates to an aggregate of 3,726,192 shares (the
"Shares") of Common Stock, par value $.01 per share (the "Common Stock"), of
Diametrics Medical, Inc., a Minnesota corporation ("Diametrics" or the
"Company"), that may be sold from time to time by the shareholders named herein
(the "Selling Shareholders"). See "Selling Shareholders." The Company will not
receive any proceeds from the sale of the Shares. The Company has agreed to pay
the expenses of registration of the Shares, including legal and accounting fees.
The Shares offered hereby were acquired by the Selling Shareholders in a
private transaction in August 1998. The Shares are "restricted securities" under
the Securities Act of 1933, as amended (the "Securities Act"), prior to their
sale hereunder. This Prospectus has been prepared for the purpose of registering
the Shares under the Securities Act to allow for future sale by the Selling
Shareholders to the public without restriction. To the knowledge of the Company,
the Selling Shareholders have made no arrangement with any brokerage firm for
the sale of the Shares. Any or all of the Shares may be offered from time to
time in transactions on the Nasdaq National Market at market prices prevailing
at the time of sale or at prices related to the then current market price, or in
transactions at negotiated prices. See "Plan of Distribution."
The Shares offered hereby have not been registered under the blue sky or
securities laws of any jurisdiction, and any broker or dealer should assure the
existence of an exemption from registration or effectuate such registration in
connection with the offer and sale of the Shares.
The Common Stock is traded on the Nasdaq National Market under the symbol
"DMED." On January 28, 1999, the closing price of the Common Stock as reported
on the Nasdaq National Market was $5.00 per share.
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FOR INFORMATION CONCERNING CERTAIN RISKS RELATED TO THIS OFFERING,
SEE "RISK FACTORS" BEGINNING ON PAGE 3
OF THIS PROSPECTUS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY, ANY SECURITIES OFFERED HEREBY IN ANY JURISDICTION IN WHICH
IT IS NOT LAWFUL OR TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
The date of this Prospectus is February 1, 1999
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices at 7
World Trade Center, Suite 1300, New York, New York 10048 and CitiCorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains a World Wide Web site which provides on-line access to
registration statements, reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at the address "http://www.sec.gov." This Prospectus does not contain all the
information set forth in the Registration Statement and exhibits thereto which
the Company has filed with the Commission under the Securities Act, and to which
reference is hereby made.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents of the Company which have been filed with the
Commission are hereby incorporated by reference in this Prospectus:
(a) the Annual Report on Form 10-K for the year ended
December 31, 1997;
(b) the Quarterly Reports on Form 10-Q for the periods
ended March 31, 1998, June 30, 1998 and September 30,
1998;
(c) the Proxy Statement for the annual meeting of
shareholders held May 13, 1998; and
(d) the description of the Common Stock contained in the
Company's registration statement on Form 8-A filed
May 4, 1994, including any amendment or report filed
for the purpose of updating such description filed
subsequent to the date of this Prospectus and prior
to the termination of the offering described herein.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Prospectus shall be
deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the respective dates of filing of such documents. Any statement
contained herein or in a document all or part of which is incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to any person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the foregoing documents incorporated herein by reference (other
than certain exhibits to such documents). Requests for such copies should be
directed to Laurence L. Betterley, Senior Vice President and Chief Financial
Officer, Diametrics Medical, Inc., 2658 Patton Road, Roseville, Minnesota 55113,
telephone (651) 639-8035.
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RISK FACTORS
THE STATEMENTS CONTAINED IN THIS PROSPECTUS INCLUDE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 (THE "PSLRA"). WHEN USED IN THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENTS,
IN FILINGS BY THE COMPANY WITH THE COMMISSION, IN THE COMPANY'S PRESS RELEASES,
PRESENTATIONS TO SECURITIES ANALYSTS AND INVESTORS, AND IN ORAL STATEMENTS MADE
BY OR WITH THE APPROVAL OF AN EXECUTIVE OFFICER OF THE COMPANY, THE WORDS OR
PHRASES "EXPECTS," "BELIEVES," "ANTICIPATES," "INTENDS," "WILL LIKELY RESULT,"
"ESTIMATES," "PROJECTS" OR SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. ANY OF THESE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
THE FOLLOWING DISCUSSION CONTAINS CERTAIN CAUTIONARY STATEMENTS
REGARDING THE COMPANY'S BUSINESS AND RESULTS OF OPERATIONS THAT INVESTORS AND
OTHERS SHOULD CONSIDER. THESE STATEMENTS DISCUSS MATTERS WHICH MAY IN PART BE
DISCUSSED ELSEWHERE IN THIS PROSPECTUS AND WHICH MAY HAVE BEEN DISCUSSED IN
OTHER DOCUMENTS PREPARED BY THE COMPANY PURSUANT TO FEDERAL OR STATE SECURITIES
LAWS. THIS DISCUSSION IS INTENDED TO TAKE ADVANTAGE OF THE "SAFE HARBOR"
PROVISIONS OF THE PSLRA.
EARLY STAGE OF COMMERCIALIZATION; LIMITED RELEVANT OPERATING HISTORY
The Company was founded in 1990 and until 1995 was engaged primarily in
the research, development and testing of, and the development of manufacturing
capabilities for, the IRMA(R) (Immediate Response Mobile Analysis) System and
the Paratrend(R) 7. Marketing efforts began for both products during 1994. The
Company has limited operating history upon which an evaluation of its prospects
can be made. Such prospects must be considered in light of the risks, expenses
and difficulties frequently encountered in establishing a new business in the
evolving, heavily-regulated medical device industry, which is characterized by
an increasing number of entrants, intense competition and a high failure rate.
ABSENCE OF PROFITABILITY; ANTICIPATED FUTURE LOSSES
The Company has only recently begun to generate revenues and has
incurred net operating losses since its inception. Net losses for the years
ended December 31, 1997, 1996 and 1995 were approximately $21,037,000,
$23,575,000 and $23,046,000, respectively. The Company had an accumulated
deficit of approximately $115,155,000 at September 30, 1998. The Company expects
to incur substantial net operating losses at least through 1999. There is no
assurance that the Company will ever generate substantial revenues or achieve
profitability.
NEW TECHNOLOGY; UNCERTAIN MARKET ACCEPTANCE
The Company's success is dependent upon acceptance of its products by
the medical community as reliable, accurate and cost-effective. Because the
products are point of care blood testing and monitoring devices, they represent
a new practice in the analysis of blood analytes. Critical or stat blood testing
is currently performed primarily by central and stat laboratories of hospitals
or by independent commercial laboratories, rather than at the point of care.
Although professional awareness of point of care blood testing is increasing,
most acute care hospitals have already installed costly benchtop blood testing
instruments for use in their central and stat laboratories and may be reluctant
to change standard operating procedures for performing blood analysis or incur
additional capital expenditures for new blood analysis equipment. In addition,
the limited number of analytes that can be analyzed on the products may cause
certain hospitals not to consider them. The Company is unable to predict how
quickly, if at all, the products will be accepted by members of the medical
community or, if accepted, what the utilization of disposable cartridges and
sensors may be. Therefore, the Company is unable to provide any assurance as to
sales volume of the products or the related disposable cartridges and sensors.
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FUTURE ADDITIONAL CAPITAL REQUIREMENTS
The Company expects that its existing capital resources, future
proceeds of up to $5 million at the Company's option from a Put Option and Stock
Purchase Agreement with Johnson & Johnson Development Corporation, and the
Company's $1 million receivable based credit line, supplemented with warrant and
stock option exercises, capital equipment financing of approximately $1 million
per year, and funding from additional potential corporate alliances should
enable the Company to maintain its current and planned operations through 1999.
Nonetheless, the Company's capital requirements depend on numerous factors,
including the rate of market acceptance of the Company's products, the level of
resources devoted to expanding the Company's marketing organization and
manufacturing capabilities, the Company's research and development activities,
the availability of financing for capital acquisitions and other factors. The
timing and amount of such capital requirements cannot accurately be predicted.
If capital requirements vary materially from those currently planned, the
Company will require additional capital. The Company has no commitments for any
additional financing, and no assurance exists that any such commitments can be
obtained on favorable terms, if at all. Any additional equity financings may be
dilutive to shareholders, and debt financing, if available, may involve
restrictive covenants. The Company is also pursuing additional corporate
strategic alliances. Such alliances may require the Company to relinquish rights
to certain of its technologies, products or marketing territories.
HIGHLY COMPETITIVE MARKETS; RISK OF TECHNOLOGICAL OBSOLESCENCE
The medical technology industry is characterized by rapidly evolving
technology and intense competition. The Company is aware of one other
commercially available hand-held point of care blood analysis system, which is
manufactured and marketed by i-STAT Corporation. The Company expects that
manufacturers of central and stat laboratory testing equipment will also compete
to maintain their revenues and market share. Many of the companies in the
medical technology industry and manufacturers of central and stat laboratory
equipment have substantially greater capital resources, research and development
staffs and facilities than the Company. Such entities have developed, may be
developing or could in the future attempt to develop additional products
competitive with the Company's. Many of these companies also have substantially
greater experience than the Company in research and development, obtaining
regulatory approvals, manufacturing, and sales and marketing, and may therefore
represent significant competition. There can be no assurance that the Company's
competitors will not succeed in developing or marketing technologies and
products that are more effective or less expensive than those developed or
marketed by the Company or that would render the Company's technology and
products obsolete or noncompetitive. Although the Company believes that its
products may offer certain technological advantages over its competitors'
currently-marketed products, earlier entrants in the market in a therapeutic
area often obtain and maintain significant market share relative to later
entrants. The Company's 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, which lack the
convenience and turnaround time of point of care testing. In the future, the
Company may experience competitive pricing pressures that may adversely affect
unit prices and sales levels.
LIMITED MANUFACTURING EXPERIENCE
The Company must manufacture its products in compliance with regulatory
requirements, in sufficient quantities and on a timely basis, while maintaining
product quality and acceptable manufacturing costs. The products consist of two
principal components: portable, microprocessor-based instruments and disposable
sensors. The Company has limited experience producing in large commercial
quantities. Although the Company believes that, based on its manufacturing
experience to date, it will be able to achieve and maintain product accuracy and
reliability when producing in the quantities required for profitable operations,
on a timely basis and at an acceptable cost, there can be no assurance that it
will be able to do so. The Company has experienced manufacturing challenges in
the past related to increased production quantities in the areas of chemical and
calibration gel dispensing, air quality control, packaging and process
modifications from product design changes. None of these challenges were
individually material and all have been satisfactorily resolved. However,
product design changes, equipment failures, manufacturing process changes and
employee turnover may disrupt existing operations and impact sales in the
future. The instruments are manufactured for the Company by outside vendors, and
there can be no assurance that such vendors will be able to provide the Company
with a sufficient quantity to meet the Company's needs.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend in part on its ability to obtain
patent protection for products and processes, to preserve its trade secrets and
to operate without infringing the proprietary rights of third parties. The
validity and breadth of claims covered in medical technology patents involves
complex legal and factual questions and, therefore, may be highly uncertain. No
assurance can be given that any patents under pending patent applications or any
future patent applications will be issued, that the scope of any patent
protection will exclude competitors or provide competitive advantages to the
Company, that any of the Company's patents will be held valid if subsequently
challenged or that others will not claim rights in or ownership to the patents
and other proprietary rights held by the Company. Furthermore, there can be no
assurance that others have not developed or will not develop similar products,
duplicate
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any of the Company's products or, if patents are issued to the Company, design
around such patents. In addition, whether or not the Company's patents are
issued, others may hold or receive patents which contain claims having a scope
that covers products developed by the Company. The Company also relies upon
unpatented trade secrets to protect its proprietary technology, and no assurance
can be given that others will not independently develop or otherwise acquire
substantially equivalent techniques or otherwise gain access to the Company's
proprietary technology or disclose such technology or that the Company can
ultimately protect meaningful rights to such unpatented proprietary technology.
RISK OF PATENT LITIGATION
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Litigation, which
could result in substantial cost to and diversion of effort by the Company, may
be necessary to enforce patents issued to the Company, to protect trade secrets
or know-how owned by the Company, to defend the Company against claimed
infringement of the rights of others or to determine the ownership, scope or
validity of the proprietary rights of the Company and others. An adverse
determination in any such litigation could subject the Company to significant
liabilities to third parties, could require the Company to seek licenses from
third parties and could prevent the Company from manufacturing, selling or using
its products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company is not
currently a party to any patent litigation.
DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL
The success of the Company and of its business strategy is dependent in
large part on the ability of the Company to attract and retain key management
and operating personnel (i.e., Company officers; manufacturing, research
and development, sales, marketing and administrative management; scientists and
engineers; and sales professionals). Such individuals are in high demand and are
often subject to competing offers. In addition, the Company will have an ongoing
need to expand its personnel. The loss of the services of key employees or the
inability to hire additional personnel as needed may have an adverse effect on
the Company. The Company maintains employment agreements with senior management
and life insurance coverage on its Chief Executive Officer.
UNCERTAINTY OF GOVERNMENT HEALTH CARE POLICY AND FUTURE REIMBURSEMENT
The willingness of hospitals to purchase the Company's products may
depend on the extent to which hospitals limit capital expenditures due to cost
reimbursement regulations, including regulations promulgated by the Health Care
Financing Administration, and general uncertainty relating to government health
care policy. In addition, sales volumes and prices of the Company's products in
certain markets will be dependent in part on the level of availability of
reimbursement to hospitals for blood analysis from third-party payors, such as
government and private insurance plans, health maintenance organizations and
preferred provider organizations. There can be no assurance that current
reimbursement amounts, if any, will not be decreased in the future, and that any
such decrease will not reduce the demand for or the price of the Company's
products. Any health care reform measures adopted by the federal government
could adversely affect the price of medical devices in the United States or the
amount of reimbursement available, and consequently could be adverse to the
Company. No prediction can be made as to the outcome of any reform initiatives
or their impact on the Company.
GOVERNMENT REGULATION AND NEW PRODUCT DEVELOPMENT
Human diagnostic products are subject, prior to clearance for
marketing, to rigorous pre-clinical and clinical testing mandated by the United
States Food and Drug Administration (the "FDA") and comparable agencies in other
countries and, to a lesser extent, by state regulatory authorities. The Company
has obtained pre-market notification clearances under Section 510(k) ("Section
501(k)") of the Food, Drug and Cosmetic Act (the "FDC Act") to market the IRMA
SL System to test blood gases, electrolytes (i.e. inorganic compounds including
sodium, potassium, chloride and ionized calcium), blood urea nitrogen ("BUN")
and hematocrit (i.e. ratio of red blood cells) in whole blood in hospital
laboratories and at the point of care and the Paratrend 7 and Paratrend 7+ to
monitor blood gases and temperature. In early 1998 additional pre-market
notifications were obtained for the addition of glucose testing capability to
the IRMA SL System, and Neotrend for blood gas monitoring of critically ill
neonates. 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
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to develop such additional products or uses on a timely basis, if at all, or
that the necessary clearances for such products and uses will be obtained by the
Company on a timely basis or at all, or that the Company will not be subjected
to a more extensive prefiling testing and FDA approval process. The Company also
plans to market its products in several foreign markets. Requirements vary
widely from country to country, ranging from simple product registrations to
detailed submissions such as those required by the FDA. Manufacturing facilities
are also subject to FDA inspection on a periodic basis and the Company and its
contract manufacturers must demonstrate compliance with current Good
Manufacturing Practices promulgated by the FDA. The Company will be required to
expend time, resources and effort in the areas of production and quality control
to ensure full technical compliance. If violations of the applicable regulations
are noted during FDA inspections of the Company's manufacturing facilities or
the manufacturing facilities of its contract manufacturers, the continued
marketing of the Company's products may be adversely affected.
EFFECT OF CLINICAL LABORATORY IMPROVEMENT ACT OF 1988
The Company's products are affected by the Clinical Laboratory
Improvement Amendment of 1988 ("CLIA") which has been implemented by the FDA.
This law is intended to assure the quality and reliability of all medical
testing in the United States regardless of where tests are performed. The
regulations require laboratories performing blood chemistry tests to meet
specified standards in the areas of personnel qualification, administration,
participation in proficiency testing, patient test management, quality control,
quality assurance and inspections. The regulations have established three levels
of regulatory control based on test complexity - "waived," "moderate complexity"
and "high complexity." Although the tests performed by the products have been
categorized as moderate complexity tests, there can be no assurance that they
will continue to be so categorized. Personnel standards for high complexity
tests are more rigorous than those for moderate complexity tests, requiring that
testing personnel have more education and experience than personnel conducting
moderate complexity tests. Any recategorization of the tests performed by the
Company's products as high complexity tests could affect the Company's ability
to successfully market them. As a result of the CLIA requirements, hospitals may
be discouraged from expanding point of care analysis and previously unregulated
testing markets, including physician office laboratories and small volume test
sites, and may be dissuaded from initiating, continuing or expanding patient
testing. There can be no assurance that the CLIA regulations or future
administrative interpretations of CLIA or various state regulations requiring
licensed technicians to operate point of care devices will not have a material
adverse effect on the Company.
PRODUCT LIABILITY RISK; NO ASSURANCE INSURANCE IS ADEQUATE
The Company faces an inherent business risk of exposure to product
liability claims in the event that the use of its products is alleged to have
resulted in adverse effects to a patient. Although the Company has not
experienced any product liability claims to date, any such claims could have an
adverse impact on the Company. The Company maintains a general insurance policy
which includes coverage for product liability claims. The policy is limited to a
maximum of $1,000,000 per product liability claim and an annual aggregate policy
limit of $2,000,000. The Company also carries umbrella liability insurance which
provides coverage up to $10,000,000. There can be no assurance that liability
claims will not exceed the coverage limits of such policies or that such
insurance will continue to be available on commercially reasonable terms or at
all. Consequently, a product liability claim or other claim with respect to
uninsured liabilities or in excess of insured liabilities could have a material
adverse effect on the Company.
DEPENDENCE ON CONTRACT MANUFACTURERS AND SUPPLIERS
The Company's instruments, both monitors and IRMA analyzers, are
manufactured for the Company by single vendors, generally from off-the-shelf
components. A few components are supplied by a single source and manufactured to
the Company's specifications. Although the Company believes that it could find
alternative vendors, any interruption in supply could have a material adverse
effect on the Company. Although the Company believes that alternative sources
for key components are available, any interruption in supply of these components
could have a material adverse effect on the Company's ability to manufacture its
products.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Approximately 60% of the Company's sales are international. Doing
business outside of the United States is subject to various risks. Changes in
overseas economic and political conditions, currency exchange rate fluctuations,
foreign tax laws or tariffs or other trade regulations could have a material
adverse effect on the Company's ability to market its products internationally
and therefore on its business, financial condition and results of operations.
The Company's business is also expected to subject it and its representatives,
agents and distributors to laws and regulations of the foreign jurisdictions in
which they operate or the Company's products are sold. The Company may depend on
foreign distributors and agents for compliance and adherence to foreign laws and
regulations. The regulation of medical devices in a number of such
jurisdictions, particularly in the European Union, continues to develop and
there can be no assurance that new laws or regulations will not have an adverse
effect on the Company's business, financial condition and results of operations.
In addition, the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States. The Company has no control over most of these risks and may be unable to
anticipate changes in international economic and political conditions and,
therefore, may be unable to alter its business practices in time to avoid the
adverse effect of any such changes.
The Company markets a majority of its products through distributors in
international markets, subject to receipt of required foreign regulatory
approvals. There can be no assurance that international distributors for the
Company's products will devote adequate resources to selling its products.
CONTROL BY EXISTING SHAREHOLDERS
As of September 30, 1998, directors, executive officers and principal
shareholders of the Company, and certain of their affiliates, owned beneficially
approximately 43% of the Company's outstanding Common Stock, assuming all vested
stock options, stock purchase warrants and convertible debt held by this group
are exercised or converted in accordance with the terms thereof. Accordingly,
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these shareholders, individually and as a group, may be able to influence the
outcome of shareholder votes, including votes concerning the election of
directors, adopting or amending provisions in the Company's Articles of
Incorporation and Bylaws and approving certain mergers or other similar
transactions, such as sales of substantially all of the Company's assets. Such
control by existing shareholders could have the effect of delaying, deferring or
preventing a change in control of the Company.
POSSIBLE VOLATILITY OF STOCK PRICE IN THE PUBLIC MARKET
The securities markets have from time to time experienced significant
price and volume fluctuations that may be unrelated to the operating performance
of particular companies. The market prices of the common stock of many publicly
traded medical device companies have in the past been, and can in the future be
expected to be, especially volatile. Announcements of technological innovations
or new products by the Company or its competitors, developments or disputes
concerning patents or proprietary rights, regulatory developments and economic
and other external factors, as well as period-to-period fluctuations in the
Company's financial results, may have a significant impact on the market price
of the Common Stock. Sales of Common Stock in the public market could adversely
affect prevailing market prices.
POSSIBLE ISSUANCES OF PREFERRED STOCK; ANTI-TAKEOVER EFFECT OF MINNESOTA LAW
The Board of Directors has authority to issue up to 5,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the shareholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock could
have the effect of delaying, deferring or preventing a change in control of the
Company. In addition, certain provisions of Minnesota law applicable to the
Company could have the effect of discouraging certain attempts to acquire the
Company which could deprive the Company's shareholders of opportunities to sell
their shares of Common Stock at prices higher than prevailing market prices.
NO DIVIDENDS
The Company has never paid or declared a dividend on its capital stock
and does not anticipate doing so for the foreseeable future.
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 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.
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. 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. The Company is working on minimizing the component supply risk
by evaluating alternative suppliers 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 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.
THE COMPANY
Diametrics Medical, Inc. 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(R) (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(R) 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 sodium, potassium and
ionized calcium. The Company further expanded its
7
<PAGE>
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. ratio of red blood cells) 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(R)Pro glucose
strip testing module into the analyzer. Also under development in 1998 are 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 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 and tissue monitoring systems, consisting of a
monitor, calibration system and intravascular disposable sensors. Primary
products include Paratrend 7+(TM), which provides direct continuous monitoring
of blood gases and temperature in critically ill adult and pediatric patients,
Neotrend(TM), 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 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 FDA clearance
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. See "Risk Factors" for
additional information regarding governmental regulation of the Company's
products.
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 Johnson & Johnson Professional, Inc. 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
Johnson & Johnson, certain payments will be due to the Company. Also, Johnson &
Johnson 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.
8
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
ownership of the Company's Common Stock by the Selling Shareholders as of August
14, 1998, and as adjusted to reflect the sale of the Shares pursuant to this
Prospectus.
<TABLE>
<CAPTION>
MAXIMUM
NUMBER OF
NUMBER OF SHARES TO BE SHARES OWNED
SHARES SOLD PURSUANT AFTER OFFERING (2)
OWNED PRIOR TO THIS ------------------
NAME TO OFFERING PROSPECTUS (1) NUMBER PERCENT
- ----------------------------------- ----------- -------------- ------------------
<S> <C> <C> <C> <C>
BCC Acquisition II LLC 3,400,541(3) 3,400,541 0 *
Banca del Gottardo 64,921(4) 64,921 0 *
Banca della Svizzera Italiana 404,030(5) 64,920 339,110 1.5%
Hannah S. and Samuel A. Cohn 78,238(6) 65,238 13,000 *
Memorial Foundation
AEOW 96, LLC 91,042(7) 30,953 60,089 *
Cynthia J. Cohn Revocable Trust 16,000(8) 16,000 0 *
Cynthia J. Cohn Descendant 13,333(9) 13,333 0 *
Irrevocable Trust
Shelly Cohn Schmidt Descendant 13,333(10) 13,333 0 *
Irrevocable Trust
Gerald L. Cohn Irrevocable Trust 2,667(11) 2,667 0 *
F/B/O Blake M. Schmidt
Gerald L. Cohn Irrevocable Trust 4,000(12) 4,000 0 *
F/B/O Clayton H. Schmidt
Florence Cohn 3,667(13) 2,667 1,000 *
Gerald L. Cohn Revocable Trust, c/o 174,518(14) 47,619 126,899 *
Gerald L. Cohn, Trustee
</TABLE>
- --------------------
* Less than 1%.
(1) The Shares offered pursuant to this Prospectus consist of certain
shares of Common Stock presently owned, shares of Common Stock to be
issued upon the exercise of certain Common Stock warrants (the
"Warrants"), and shares of Common Stock to be issued upon conversion of
certain Convertible Senior Secured Fixed Rate Notes (the "Notes"). The
Shares of Common Stock, related Warrants and the Notes were issued in a
private placement by the Company on August 4, 1998 (the "Private
Placement"). The Warrants issued in the Private Placement are currently
exercisable, expire five years from the date of issuance, and have an
exercise price of $8.40 per share. The Notes are due August 4, 2003,
and are currently convertible at a conversion price of $8.40 per share.
(2) Assumes the sale of all Shares covered by this Prospectus and that all
warrants to acquire shares of Common Stock are exercised.
(3) Includes 1,952,191 Shares presently owned and acquired through the
Private Placement, 650,731 Shares issuable upon exercise of Warrants,
and 797,619 Shares issuable upon conversion of Notes. Subsequent to the
date of this Prospectus, the shares held by BCC Acquisition II LLC, a
Delaware limited liability company, may be distributed to its two
members: The Bay City Capital Fund I, L.P., a Delaware limited
partnership and the managing member of BBC Acquisition II LLC, and Bay
Investment Group, L.L.C., also a Delaware limited liability company.
The general partner of The Bay City Capital Fund I, L.P. is Bay City
Capital Management LLC, a Delaware limited liability company with two
members: The Craves Group LLC and BCC Amalgamated, LLC. The managers of
Bay City Capital Management LLC include Fred B. Craves, John D.
Diekman, Roger H. Salquist, Thomas J. Pritzker, Jay A. Pritzker and
Gerald L. Cohn. Pursuant to the Private Placement, BCC Acquisition II
LLC had the right to name two directors of the Company, effective
immediately after the closing of the Private Placement. BCC Acquisition
II LLC chose to name David V. Milligan and Gerald L. Cohn as such
directors. Gerald L. Cohn had already been a director of the Company
since June 1996.
9
<PAGE>
(4) Includes 48,691 Shares presently owned and acquired through the Private
Placement, and 16,230 Shares issuable upon exercise of Warrants.
(5) Includes 244,888 shares of Common Stock and 94,222 shares of Common
Stock issuable upon the exercise of warrants, in each case presently
owned and acquired prior to the Private Placement, 48,690 Shares
presently owned and acquired through the Private Placement, and 16,230
Shares issuable upon exercise of Warrants.
(6) Includes 13,000 shares of Common Stock presently owned and acquired
prior to the Private Placement, 40,000 Shares presently owned and
acquired through the Private Placement, 13,333 Shares issuable upon
exercise of Warrants, and 11,905 Shares issuable upon conversion of
Notes.
(7) Includes 60,089 shares of Common Stock presently owned and acquired
prior to the Private Placement, 14,286 Shares presently owned and
acquired through the Private Placement, 4,762 Shares issuable upon
exercise of Warrants, and 11,905 shares issuable upon conversion of
Notes.
(8) Includes 12,000 Shares presently owned and acquired through the Private
Placement, and 4,000 Shares issuable upon exercise of Warrants.
(9) Includes 10,000 Shares presently owned and acquired through the Private
Placement, and 3,333 Shares issuable upon exercise of Warrants.
(10) Includes 10,000 Shares presently owned and acquired through the Private
Placement, and 3,333 Shares issuable upon exercise of Warrants.
(11) Includes 2,000 Shares presently owned and acquired through the Private
Placement, and 667 Shares issuable upon exercise of Warrants.
(12) Includes 3,000 Shares presently owned and acquired through the Private
Placement, and 1,000 Shares issuable upon exercise of Warrants.
(13) Includes 1,000 shares of Common Stock presently owned and acquired
prior to the Private Placement, 2,000 Shares presently owned and
acquired through the Private Placement, and 667 Shares issuable upon
exercise of Warrants.
(14) Includes 126,899 Shares presently owned and acquired prior to the
Private Placement, and 47,619 Shares issuable upon conversion of Notes.
Gerald L. Cohn has been a director of the Company since June 1996.
PLAN OF DISTRIBUTION
The Shares will be offered and sold by the Selling Shareholders for
their own accounts. The Company will not receive any proceeds from the sale of
the Shares pursuant to this Prospectus. The Company has agreed to pay the
expenses of registration of the Shares, including legal and accounting fees, but
the registration of the Shares does not necessarily mean that any of the Shares
will be offered or sold by the Selling Shareholders.
The Selling Shareholders, or their pledgees, donees, transferees or
other successors in interest, may offer and sell the Shares from time to time in
one or more types of transactions on the Nasdaq National Market at market prices
prevailing at the time of sale or at prices related to the then current market
price, or in transactions at negotiated prices. The Shares may be sold by one or
more of the following methods: (a) a block trade in which the broker or dealer
so engaged will attempt to sell the Shares as agent, but may position and resell
a portion of the block as principal to facilitate the transaction; (b) purchases
by a broker or dealer as principal and resale by such broker or dealer for its
own account pursuant to this Prospectus; (c) an over-the-counter distribution in
accordance with the rules of the Nasdaq National Market; (d) ordinary brokerage
transactions and transactions in which the broker solicits purchasers; and (e)
in privately negotiated transactions. In addition, any securities covered by
this Prospectus which qualify for sale pursuant to Rule 144 may be sold under
Rule
10
<PAGE>
144 rather than pursuant to this Prospectus. There is no assurance that the
Selling Shareholders will sell any or all of the Shares offered by them.
Sales may be made to or through brokers or dealers who may receive
compensation in the form of discounts, concessions or commissions from the
Selling Shareholders or the purchasers of Shares for whom such brokers or
dealers may act as agent or to whom they may sell as principal, or both. As of
the date of this Prospectus, the Company is not aware of any agreement,
arrangement or understanding between any broker or dealer and the Selling
Shareholders.
The Selling Shareholders and any brokers or dealers acting in
connection with the sale of the Shares hereunder may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by them and any profit realized by them on the resale
of Shares as principals may be deemed underwriting compensation under the
Securities Act. In addition, and without limiting the foregoing, the Selling
Shareholders will be subject to applicable provisions of the Exchange Act, the
rules and regulations thereunder, including, without limitation, Regulation M,
which provisions may limit the timing of purchase and sales of shares of the
Company's Common Stock by the Selling Shareholders.
Whenever a particular offering of Shares is to be made pursuant to this
Prospectus, to the extent required, this Prospectus will be updated to reflect
the name of the Selling Shareholders for whose account Shares are to be so
offered, the number of Shares so offered for such Selling Shareholders' account
and, if such offering is to be made by or through underwriters or dealers, the
names of such underwriters or dealers and the principal terms of the
arrangements between the underwriters or dealers and those Selling Shareholders
for whose account such offering is being made. In addition, upon the Company
being notified by a Selling Shareholder that a donee or pledgee intends to sell
more than 500 shares, a supplement to this prospectus will be filed.
EXPERTS
The financial statements incorporated herein and in the registration
statement by reference to the Annual Report on Form 10-K of the Company have
been audited by KPMG Peat Marwick LLP, independent certified public accountants,
and have been so incorporated in reliance on the report of KPMG Peat Marwick LLP
and upon the authority of said firm as experts in accounting and auditing.
VALIDITY OF SHARES
The validity of the Shares offered hereby has been passed upon for the
Company by Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402. Members of Dorsey & Whitney LLP beneficially own 18,738 shares of the
Company's common stock.
11
<PAGE>
====================================================================
No dealer, salesperson or any other person
has been authorized to give any information or to
make any representations other than those contained
in this Prospectus, and, if given or made, such
information or representations must not be relied
upon as having been authorized by the Company, the
Selling Shareholders or any other person. This
Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy to any person in any
jurisdiction in which such offer or solicitation
would be unlawful or to any person to whom it is
unlawful. Neither the delivery of this Prospectus nor
any offer or sale made hereunder shall, under any
circumstances, create any implication that there has
been no change in the affairs of the Company or that
the information contained herein is correct as of any
time subsequent to the date hereof.
----------
TABLE OF CONTENTS
Page
----
Available Information.......................... 2
Incorporation of Certain Documents by
Reference.................................... 2
Risk Factors................................... 3
The Company.................................... 7
Selling Shareholders........................... 9
Plan of Distribution........................... 10
Experts........................................ 11
Validity of Shares............................. 11
====================================================================
3,726,192 Shares
DIAMETRICS MEDICAL, INC.
Common Stock
------------
PROSPECTUS
------------
February 1, 1999
====================================================================
