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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission file number 0-21982
Diametrics Medical, Inc.
Incorporated pursuant to the Laws of Minnesota
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Internal Revenue Service -- Employer Identification No. 41-1663185
2658 Patton Road, Roseville, Minnesota 55113
(651) 639-8035
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The total number of shares of the registrant's Common Stock, $.01 par value,
outstanding on April 30, 1999, was 24,175,205.
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Diametrics Medical, Inc.
Page
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Part I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Statements of Operations:
Three Months Ended March 31, 1999 and 1998.......................3
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998..............................................4
Consolidated Statements of Cash Flows:
Three Months Ended March 31, 1999 and 1998.......................5
Notes to Consolidated Financial Statements..........................6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition.............................................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........12
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings..................................................13
Item 2. Changes in Securities..............................................13
Item 3. Defaults Upon Senior Securities....................................13
Item 4. Submission of Matters to a Vote of Security Holders................13
Item 5. Other Information..................................................13
Item 6. Exhibits and Reports on Form 8-K...................................14
Signatures.................................................................15
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DIAMETRICS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
1999 1998
------------ ------------
Net sales $ 4,243,187 $ 2,416,703
Cost of sales 3,516,906 2,402,690
------------ ------------
Gross profit 726,281 14,013
------------ ------------
Operating expenses:
Research and development 1,535,643 1,566,335
Sales and marketing 2,030,114 1,723,797
General and administrative 896,766 845,830
------------ ------------
Total operating expenses 4,462,523 4,135,962
------------ ------------
Operating loss (3,736,242) (4,121,949)
Other expense, net (171,500) (181,244)
------------ ------------
Net loss $(3,907,742) $(4,303,193)
============ ============
Basic and diluted net loss per common share $ (0.17) $ (0.21)
============ ============
Weighted average number of
common shares outstanding 23,434,552 20,906,421
============ ============
See accompanying notes to consolidated financial statements.
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DIAMETRICS MEDICAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,659,421 $ 3,432,614
Marketable securities - 2,976,443
Accounts receivable 6,275,828 5,420,092
Inventories 4,821,500 4,767,537
Prepaid expenses and other current assets 516,386 454,291
------------- -------------
Total current assets 16,273,135 17,050,977
------------- -------------
Property and equipment 18,845,370 20,077,383
Less accumulated depreciation and amortization (13,002,568) (13,154,590)
------------- -------------
5,842,802 6,922,793
------------- -------------
Other assets 1,253,852 1,372,544
------------- -------------
$23,369,789 $25,346,314
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,779,426 $ 2,535,343
Accrued expenses 1,967,322 1,855,004
Short-term borrowings and current portion of
long-term liabilities 360,374 1,245,332
------------- -------------
Total current liabilities 4,107,122 5,635,679
------------- -------------
Long-term liabilities:
Long-term liabilities, excluding current portion 8,079,355 8,163,307
Other liabilities, excluding current portion 180,315 181,764
------------- -------------
Total liabilities 12,366,792 13,980,750
------------- -------------
Shareholders' equity:
Common stock, $.01 par value: 35,000,000 authorized
24,174,030 and 23,391,597 shares issued and outstanding 241,740 233,916
Additional paid-in capital 134,279,438 130,477,220
Accumulated other comprehensive loss (490,032) (225,165)
Accumulated deficit (123,028,149) (119,120,407)
------------- -------------
Total shareholders' equity 11,002,997 11,365,564
------------- -------------
$23,369,789 $25,346,314
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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DIAMETRICS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,907,742) $(4,303,193)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 578,479 825,873
Common stock and options issued in lieu of cash compensation 3,150 3,150
Gain on disposal of property and equipment - (1,556)
Changes in operating assets and liabilities:
Receivables, net (855,736) (3,802)
Inventories (53,963) (541,154)
Prepaid expenses and other current assets (62,095) 78,152
Accounts payable and accrued expenses (643,599) (1,053,867)
------------ ------------
Net cash used in operating activities (4,941,506) (4,996,397)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (151,648) (412,805)
Sale of evaluation and demonstration instruments 640,302 -
Proceeds from maturities of marketable securities 2,976,443 8,401,642
Other assets - 5,735
------------ ------------
Net cash provided by investing activities 3,465,097 7,994,572
------------ ------------
Cash flows from financing activities:
Principal payments on borrowings (904,369) (53,702)
Net proceeds from the issuance of common stock 3,806,893 554,899
Principal payments on capital lease obligations (64,541) (281,659)
------------ ------------
Net cash provided by financing activities 2,837,983 219,538
------------ ------------
Effect of subsidiary's year-end change on cash and cash equivalents - (664,819)
Effect of exchange rate changes on cash and cash equivalents (134,767) (30,884)
------------ ------------
Net increase in cash and cash equivalents 1,226,807 2,522,010
Cash and cash equivalents at beginning of period 3,432,614 3,358,684
------------ ------------
Cash and cash equivalents at end of period $ 4,659,421 $ 5,880,694
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 165,413 $ 794,277
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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DIAMETRICS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
(1) Unaudited Financial Statements
The interim consolidated financial statements of Diametrics Medical, Inc.
(the "Company") are unaudited and have been prepared by the Company in
accordance with generally accepted accounting principles for interim
financial information, pursuant to the rules and regulations of the
Securities and Exchange Commission. Pursuant to such rules and regulations,
certain financial information and footnote disclosures normally included in
the financial statements have been condensed or omitted. However, in the
opinion of management, the financial statements include all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation
of the interim periods presented. Operating results for these interim
periods are not necessarily indicative of results to be expected for the
entire year, due to seasonal, operating and other factors.
These statements should be read in conjunction with the financial
statements and related notes which are incorporated by reference in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
(2) COMPREHENSIVE LOSS
The following table sets forth the computation of comprehensive loss:
Three Months Ended
March 31,
1999 1998
------------- -------------
Net loss $ (3,907,742) $ (4,303,193)
Change in cumulative translation adjustment (264,867) (29,577)
------------- -------------
Comprehensive loss $ (4,172,609) $ (4,332,770)
============= =============
(3) Inventories
Inventories are summarized as follows:
March 31, December 31,
1999 1998
------------ ------------
Raw materials $ 916,635 $ 974,886
Work-in-process 1,038,116 741,719
Finished goods 2,866,749 3,050,932
------------ ------------
$ 4,821,500 $ 4,767,537
============ ============
(4) SHAREHOLDERS' EQUITY
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
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per share price of $5.17. 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 balance of the Put Option, totaling approximately $1,000,000,
through September 30, 1999.
(5) RELATED PARTY TRANSACTIONS
One of the Company's directors is also a director of DVI, Inc., a health
care finance company with which the Company has a credit line and notes
payable. As of March 31, 1999, there were no outstanding advances against
the $1,000,000 receivable backed credit line and the outstanding balance of
the notes payable totaled $1,102,275.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
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 Exhibit 99 to the Company's Form 10-K filed
with the U.S. Securities and Exchange Commission, with respect to the
Company's fiscal year ended December 31, 1998. When used in the Form 10-Q,
and in future filings by the Company with the Securities and Exchange
Commission, in the Company's press releases, presentations to securities
analysts or investors, in oral statements made by or with the approval of
an executive officer of the Company, the words or phrases "believes,"
"may," "will," "expects," "should," "continue," "anticipates," "intends,"
"will likely result," "estimates," "projects," or similar expressions and
variations thereof are intended to identify such forward-looking
statements.
Summary
Diametrics Medical, Inc. (the "Company"), 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 March 31, 1999, the primary funding for the
operations of the Company has been approximately $134 million raised
through public and private sales of its equity securities and issuance of
convertible promissory notes.
Results of Operations
Sales. Sales of the Company's products were $4,243,187 for the three months
ended March 31, 1999, compared to $2,416,703 for the same period last year,
an increase of 76%. The increase in sales over the prior year's first
quarter reflects an increase in instrument sales of 142%, and an increase
in disposable cartridge and sensor sales of 23%. The significant increase
in instrument sales between quarters was impacted primarily by increased
sales to an expanded number of distributors of these products.
Sales to international customers accounted for 57% of total sales for the
three months ended March 31, 1999, compared to international sales of 56%
for the same period in 1998.
Intermittent testing products represented 34% of total sales for the three
months ended March 31, 1999, compared to 59% for the same period in 1998.
Continuous monitoring products comprised the remaining sales in each
period.
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Intermittent blood testing products revenue was comprised of 38% instrument
related revenue and 62% disposable cartridge related revenue for the three
months ended March 31, 1999. Continuous monitoring products revenue was
comprised of 74% instrument related revenue and 26% disposable sensor
revenue for the three months ended March 31, 1999. The high concentration
in the first quarter 1999 of instrument related revenue for continuous
monitoring products was impacted primarily by increased sales to an
expanded number of distributors of these products.
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 March 31, 1999, the Company has sold
approximately 3,200 instruments. Unit sales of instruments for the three
months ended March 31, 1999, increased approximately 77% over unit sales
for the same period in 1998, while disposable sensor and cartridge unit
sales increased 34%. 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 full year revenue growth 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 $3,516,906, or 83% of revenue for the
three months ended March 31, 1999, compared to $2,402,690 or 99% of revenue
for the same period last year. The significant quarter-to-quarter
improvement in the Company's cost of sales as a percentage of revenue
reflects increased cartridge sales volumes, improved cartridge yields, and
the impact of cost controls and manufacturing process changes. Also
favorably affecting gross profit in the first quarter 1999 was a higher mix
of continuous monitoring instrument sales. These improvements resulted in
the achievement in the first quarter of 1999 of the sixth consecutive
positive quarterly gross margin. 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. Research and development expenditures totaled
$1,535,643 and $1,566,335 for the three months ended March 31, 1999 and
1998, respectively. Research and development expenditures remained
relatively flat primarily due to consistent headcount levels between
periods.
Sales and marketing expenses totaled $2,030,114 and $1,723,797 for the
three months ended March 31, 1999 and 1998, respectively. The 18% increase
in expenses between quarters was primarily impacted by higher commissions
and travel costs associated with an increase in direct sales and increased
sales support costs for placement of the Company's products with new
customers.
General and administrative expenses totaled $896,766 and $845,830 for the
three months ended March 31, 1999 and 1998, respectively. The 6%
period-to-period increase primarily reflects costs associated with
increased travel and an increase in headcount between periods.
Operating expense run rates for the remaining three quarters of 1999 are
targeted to approximate or moderately exceed first quarter levels.
Other Expense. Net other expense totaled $171,500 and $181,244 for the
three months ended March 31, 1999 and 1998, respectively. The Company
realized interest income of $42,314 for the three months ended March 31,
1999, compared to $110,870 for the same period in 1998. The period-to-
period decrease reflects the impact of lower average cash balances,
primarily due to the timing of the Company's financing activities.
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Interest expense totaled $165,414 and $225,701 for the three months ended
March 31, 1999 and 1998, respectively. The period-to-period decrease
reflects the impact of lower average debt balances and a reduction in the
amount of higher interest bearing capital lease debt relative to total debt
outstanding.
Net Loss. The net loss for the three months ended March 31, 1999 and 1998
was $3,907,742 and $4,303,193, respectively. The 9% reduction in net loss
between periods reflects the revenue growth previously discussed, coupled
with 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 March 31, 1999, the Company had working capital of $12,166,013, an
increase of $750,715 from the working capital reported at December 31,
1998. The increase is impacted primarily by an increase in accounts
receivable, resulting from increased sales in the first quarter of 1999 and
the timing of those sales. Proceeds of approximately $4 million from the
Company's exercise in the first quarter of a Put Option under a Put Option
and Stock Purchase Agreement with Johnson & Johnson Development Corporation
("JJDC") partially offset the net use of cash in operations of
approximately $4.9 million during the quarter.
Net cash used in operating activities totaled $4,941,506 for the three
months ended March 31, 1999, compared to $4,996,397 for the same period in
1998. This was the result of net losses of $3,907,742 and $4,303,193 for
these same periods in 1999 and 1998, respectively, adjusted by changes in
key operating assets and liabilities, primarily accounts receivable,
inventories and accounts payable and accrued expenses.
Net accounts receivable increased $855,736 for the three months ended March
31, 1999, compared to $3,802 for the same period in 1998. The larger
increase in the current period was primarily due to increased sales in the
first three months of 1999 compared to the same period in the prior year
and the timing of sales and related customer payments.
Inventories increased $53,963 and $541,154 for the three months ended March
31, 1999 and 1998, respectively. The increase in 1998 was primarily due to
an increase in IRMA instrument and cartridge inventory after a depletion of
the inventory for these products at year-end 1997 to accommodate fourth
quarter 1997 sales activity. The increase in 1999 was primarily impacted by
increased production of newly released continuous monitoring instrument
inventory to fulfill expected demand in the second quarter of 1999.
Accounts payable and accrued expenses decreased $643,599 and $1,053,867 for
the three months ended March 31, 1999 and 1998, respectively. The decrease
in 1999 was primarily due to the timing of payments to vendors. The
decrease in 1998 was primarily due to a reduction in accrued interest
payable, due to the timing of interest payments, combined with timing of
payments to vendors and employees.
Net cash provided by investing activities totaled $3,465,097 for the three
months ended March 31, 1999, compared to $7,994,572 for the same period in
1998. This change was affected primarily by the amounts and timing of
private equity placements, which affected the amount of proceeds from
maturities of marketable securities. Purchases of property and equipment,
totaling $151,648 in 1999 and $412,805 in 1998, also affected net cash used
in investing activities in each period. In 1999, the Company expects
capital expenditures and new lease commitments to approximate $2.4 million,
primarily reflecting investments to support new product development and
production.
Net cash provided by financing activities totaled $2,837,983 for the three
months ended March 31, 1999, compared to $219,538 for the same period in
1998. In 1999, net cash provided by financing activities consisted
primarily of proceeds of approximately $4 million from the issuance of
common stock as a result of the exercise of a Put Option under a Put Option
and Stock Purchase Agreement
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with JJDC described below, partially offset by principal payments on
borrowings and capital lease obligations. Net cash provided by financing
activities in 1998 was primarily due to proceeds from employee stock plans
and warrant exercises, partially offset by principal payments on borrowings
and capital lease obligations.
At March 31, 1999, the Company had U.S. net operating loss and research and
development tax credit carryforwards for income tax purposes of
approximately $107,000,000 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". 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 net operating loss carryforwards
of approximately $46,000,000 which can be carried forward indefinitely.
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 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 $5.17. The Company believes proceeds from the remaining $1
million available under the 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 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 and is implementing necessary software and hardware upgrades to
achieve compliance for IT systems in its U.K. operations, with completion
scheduled for August 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
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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 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.
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
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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 below, the Company's subsidiary,
Diametrics Medical, Ltd. ("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. There have been no material changes in the
anticipated impact of euro conversion issues faced by the Company from
those previously reported in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
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. SFAS 133
is effective for fiscal years beginning after June 15, 1999. The Company is
currently evaluating SFAS No. 133, but does not expect that it will have a
material effect on its financial statements.
Item 3. Quantitative and Qualitative Disclosure About 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.
12
<PAGE>
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. There have been no material changes in market risk faced by
the Company from what had been previously reported in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
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 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 $5.17. Proceeds to the Company of approximately $4 million
were used for product development, sales and marketing and other general
corporate purposes.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit Method
No. Description of Filing
--- ----------- ---------
27 Financial Data Schedule Filed herewith
b. Reports on Form 8-K.
None
14
<PAGE>
DIAMETRICS MEDICAL, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIAMETRICS MEDICAL, INC.
By: /s/ Laurence L. Betterley
--------------------------------
Laurence L. Betterley
Senior Vice President
and Chief Financial Officer
(and Duly Authorized Officer)
Dated: May 14, 1999
15
<PAGE>
DIAMETRICS MEDICAL, INC.
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,659,421
<SECURITIES> 0
<RECEIVABLES> 6,555,828
<ALLOWANCES> 280,000
<INVENTORY> 4,821,500
<CURRENT-ASSETS> 16,273,135
<PP&E> 18,845,370
<DEPRECIATION> 13,002,568
<TOTAL-ASSETS> 23,369,789
<CURRENT-LIABILITIES> 4,107,122
<BONDS> 8,079,355
0
0
<COMMON> 241,740
<OTHER-SE> 10,761,257
<TOTAL-LIABILITY-AND-EQUITY> 23,369,789
<SALES> 4,243,187
<TOTAL-REVENUES> 4,243,187
<CGS> 3,516,906
<TOTAL-COSTS> 4,462,523
<OTHER-EXPENSES> 1,182
<LOSS-PROVISION> 4,904
<INTEREST-EXPENSE> 165,414
<INCOME-PRETAX> (3,907,742)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,907,742)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,907,742)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
