<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21982
DIAMETRICS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1663185
(State or other jurisdiction
of incorporation or organization) (IRS Employer Identification Number)
2658 Patton Road
Roseville, Minnesota 55113
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (651) 639-8035
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
From 10-K or any amendment to this Form 10-K. [_]
As of February 29, 2000, 25,957,396 shares of Common Stock were
outstanding, and the aggregate market value of the common shares (based upon the
closing price on said date on The Nasdaq National Market) of DIAMETRICS MEDICAL,
INC. held by non-affiliates was approximately $279,042,007.
Documents Incorporated by Reference
Parts of the Registrant's Annual Report to Shareholders for the year ended
December 31, 1999 are incorporated by reference in Part II hereof.
Parts of the Registrant's definitive Proxy Statement for the 2000 Annual Meeting
of Shareholders to be held on May 17, 2000 are incorporated by reference in Part
III hereof.
<PAGE>
PART I
Unless the context otherwise indicates, all references to the "Registrant,"
the "Company," or "Diametrics" in this Annual Report on Form 10-K are to
Diametrics Medical, Inc., a Minnesota corporation, incorporated in January 1990,
and where the context requires, its subsidiary, Diametrics Medical, Ltd.
("DML").
The following federally registered trademarks of the Company are used in
this Annual Report on Form 10-K: Diametrics Medical, Inc.(R), IRMA(R)SL,
IDMS(R), Paratrend 7(R), Neotrend(TM), Neurotrend(TM) and Trendcare(R).
SureStep(R)Pro is a registered trademark of LifeScan, a Johnson & Johnson
company.
Item 1. Business
Overview
The Company develops, manufactures and commercializes blood and tissue
analysis systems that provide immediate or continuous diagnostic results at the
point-of-patient care. Since its commencement of operations in 1990, the Company
has transitioned from a development stage company to a full-scale development,
manufacturing and sales organization. The Company's goal is to be the world
leader in critical care blood and tissue analysis systems.
Blood and tissue analysis is an integral part of patient diagnosis and
treatment, and access to timely and accurate results is critical to effective
patient care. The Company believes that its blood and tissue analysis systems
will result in more timely therapeutic interventions by providing accurate,
precise and immediate or continuous test results, thereby allowing faster
patient transfers out of expensive critical care settings and reducing patient
length of stay. In addition, point-of-care testing can save money for hospitals
by reducing the numerous steps, paperwork and personnel involved in collecting,
transporting, documenting and processing blood and tissue samples. Moreover,
point-of-care blood and tissue analysis could ultimately eliminate the need for
hospitals to maintain expensive and capital intensive stat laboratories.
The Company's primary product focus since its inception in 1990 has been
the development, manufacturing and marketing of the IRMA ("Immediate Response
Mobile Analysis") System, an electrochemical-based blood analysis system that
provides rapid and accurate diagnostic results at the point-of-patient care. The
IRMA SL System consists of a portable, microprocessor-based analyzer that
employs single-use, disposable cartridges to perform simultaneously several of
the most frequently ordered blood tests in a simple 90-second procedure.
The Company's first disposable electrochemical cartridge, introduced in
May 1994, performs three of the most frequently ordered blood tests for critical
care patients--the measurement of oxygen, carbon dioxide and acidity (the "blood
gases"). In June 1995, the Company expanded the IRMA System test menu with the
introduction of its electrolyte cartridge which measures inorganic compounds
including sodium, potassium and ionized calcium. The Company further expanded
its critical or "stat" test menu during the third quarter of 1996 with the
release of the second-generation system, IRMA SL, and the addition of the
measurement of hematocrit (i.e., the concentration of red blood cells in whole
blood) to its electrolyte cartridge. With the addition of hematocrit, the IRMA
SL System is able to perform the majority 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 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) SureStepPro glucose strip testing module into the
analyzer. Also under development in 1998 and 1999 were two additional blood
tests, blood urea nitrogen ("BUN") and chloride, currently undergoing beta
clinical trials, and a reusable version of the single use disposable cartridge,
called IRMA-M.
2
<PAGE>
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 intermittent testing platform. This
product line includes indwelling continuous monitoring systems, consisting of a
monitor, calibration system and intravascular disposable sensors. Primary
products include the Trendcare monitoring system, consisting of Paratrend 7,
which provides direct continuous monitoring of blood gases and temperature in
critically ill adult and pediatric patients, and Neotrend, which provides direct
continuous monitoring of blood gases and temperature in critically ill newborn
babies; and the Neurotrend monitoring system, which measures oxygen, carbon
dioxide, acidity and temperature in brain tissue and fluids as an indication of
cerebral ischemia (i.e., deficient blood supply to the brain) and hypoxia (i.e.,
inadequate oxygenation of the blood) in patients with severe head injury and in
patients undergoing surgical intervention in the brain.
The Company has obtained clearances under Section 510(k) of the Food
Drug and Cosmetic Act (the "FDC Act") to market the IRMA SL System to test blood
gases, electrolytes, glucose, BUN and hematocrit in whole blood in hospital
laboratories and at the point-of-care, and the Paratrend 7 and Neotrend to
monitor blood gases and temperature. Additionally, in the first quarter of 1998,
the Company received clearance from the United States Food and Drug
Administration (the "FDA") to market the new IRMA-M multi-use cartridge for its
IRMA SL System. In November 1999, the Company received clearance from the FDA to
market the Neurotrend monitoring system.
In October 1998, the Company entered into an exclusive distribution
agreement with CODMAN, a Johnson & Johnson company, for worldwide market
development and distribution of the Company's Neurotrend monitoring system. The
term of the agreement is for six years and is renewable for two years. If
minimum sales levels and marketing expenditure levels are not achieved by
CODMAN, certain payments will be due to the Company. Also, CODMAN has the right
of first refusal to market new continuous monitoring products developed for the
neuro market. In addition, Johnson & Johnson Development Corporation ("JJDC")
committed to purchase up to $5 million of the Company's Common Stock at the
Company's option over the twelve-month period ended September 30, 1999 at the
then current market value. 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.
On June 7, 1999, the Company and Hewlett Packard Company ("HP")
announced that HP had signed an exclusive worldwide distribution agreement to
market, sell and distribute the Company's Trendcare continuous blood-gas
monitoring systems and the IRMA SL point-of-care blood analysis system. Under
the terms of the distribution agreement, the Company transferred full
responsibility for marketing, sales and distribution of these products to HP.
The initial term of the distribution agreement is three and a half years, with
the option for extensions. Concurrently with the execution of the distribution
agreement, HP agreed to acquire $9.5 million of the Company's Common Stock at
$7.00 per share, with a warrant to purchase 452,381 shares of Common Stock at
$8.40 per share. The sale of shares of Common Stock to HP for $9.5 million was
completed on June 28, 1999. In addition to HP's equity investment, the
distribution agreement also provides for minimum purchase commitments, market
development commitments, research and development funding and royalty payments
over the initial term of the agreement, as well as funding of sales and
marketing costs during a sales transition period. In November 1999, HP assigned
the distribution agreement, with all its related rights and obligations, and its
equity investment with the Company to Agilent Technologies, Inc. ("Agilent"), a
leading provider of test and measurement solutions and communications
components. Agilent was formed as a new company and subsidiary of HP in November
1999. HP plans to spin-off its ownership in Agilent to HP shareholders during
2000.
The Company's principal executive office is located at 2658 Patton Road,
Roseville, Minnesota 55113, and its telephone number is (651) 639-8035.
Principal Products
Additional information regarding the Company's principal products is
provided below:
3
<PAGE>
IRMA SL Series 2000 Blood Analysis System. The IRMA SL Series 2000
("IRMA SL System"), the third generation IRMA analysis system, was released in
the third quarter 1997, and provides the necessary foundation for current and
future product enhancements. The IRMA SL System is comprised of the IRMA SL
analyzer and a variety of electrochemical-based disposable cartridges which
simultaneously perform select combinations of the most frequently ordered
critical care diagnostic tests of blood gases, electrolytes and hematocrit in a
simple 90-second procedure. The IRMA SL System also features electronic quality
control, as an alternative to aqueous quality control measures, which eliminates
the need for this costly and time-consuming process for many customers.
The IRMA SL analyzer is a battery or AC operated, portable,
microprocessor-based instrument weighing approximately four pounds, and includes
an on-board printer. The analyzer can be easily linked for data downloading
purposes to a hospital's laboratory or information system.
In conjunction with a marketing alliance reached in 1997 with LifeScan,
the Company incorporated blood glucose monitoring into the IRMA platform by
integrating LifeScan's SureStepPro Glucose Module into the IRMA SL System. The
Company began marketing the new integrated workstation during the first half of
1998.
IDMS - The IRMA Data Management System. Released in the third quarter of
1996, IDMS, an advanced data management software program, provides a
comprehensive data management system for point-of-care testing technologies.
Developed initially for the IRMA SL System, IDMS is network compatible and
features an open architecture design that provides for the integration of IDMS
data with other laboratory or clinical information systems.
Capillary Collection Device. The Capillary Collection Device was
introduced in the third quarter of 1996 as a feature for use on the IRMA SL
System, which provides the capability to collect and test a capillary blood
sample. The Capillary Collection Device is used with the IRMA SL System's single
use cartridges to perform blood gas, electrolyte, and hematocrit testing. The
capillary collection capability of the IRMA SL System is useful in such patient
areas as neonatal and pediatric intensive care, and in other situations where a
capillary sample is preferred over an arterial or venous sample.
AVOXimeter 4000. Under a distribution agreement initiated in the third
quarter of 1996 with A-VOX Systems, Inc., the Company exclusively distributes
the AVOXimeter 4000 in the United States. The AVOXimeter 4000 is a battery-
operated and easily portable system which provides an accurate and timely
assessment of the levels of hemoglobin and calculated oxygen content in a
patient's blood. The Company has exclusive distribution rights for the
AVOXimeter 4000 through April 2000.
Trendcare Continuous Blood Gas Monitoring System. The Trendcare
Continuous Blood Gas Monitoring System ("Trendcare"), consists of a monitor,
patient data module and calibration system which provides the platform for the
Paratrend 7 and Neotrend intravascular disposable sensors (described below). The
Trendcare monitor displays trended patient data which allows constant
surveillance of the patient's condition, while the patient data module stores
critical calibration and patient information which moves with the patient during
transfers.
Paratrend 7. Paratrend 7 is the Company's second generation
sensor for its continuous monitoring products, and is the only multi-
parameter sensor for direct continuous monitoring of blood gases
(oxygen, carbon dioxide and acidity) and temperature in critically ill
adult and pediatric patients. Inserted via an arterial catheter, the
sensor provides constant, precise measurement of vital blood gas
parameters. The new technology uses a fluorescent optical sensor for
monitoring oxygen, replacing the electrochemical version of its
predecessor.
Neotrend. Based upon the new fluorescent optical sensor
technology introduced with the Paratrend 7, Neotrend is the only multi-
parameter system for direct continuous monitoring of blood gases
(oxygen, carbon dioxide and acidity) and temperature in critically ill
newborn babies. Neotrend was introduced in the United Kingdom in
November 1997 and
4
<PAGE>
the Company received FDA clearance to market Neotrend in the United
States in December 1997.
Neurotrend Cerebral Tissue Monitoring System. The Neurotrend Cerebral
Tissue Monitoring System ("Neurotrend") is designed for direct continuous
monitoring of oxygen, carbon dioxide, acidity and temperature in brain tissue
and fluids as an indication of cerebral ischemia and hypoxia in patients with
severe head injury, and also for use during surgical intervention in the brain.
Neurotrend continuously measures these parameters through a small fiberoptic
sensor placed directly into the brain tissue or fluids. CE Mark approval was
received in the second quarter 1998, allowing the system to be marketed in
Europe, and the Company received clearance from the FDA in November 1999,
allowing the system to be marketed in the United States.
Regulatory Status
Human diagnostic products are subject, prior to clearance for marketing,
to rigorous pre-clinical and clinical testing mandated by the FDA and comparable
agencies in other countries and, to a lesser extent, by state regulatory
authorities. The Company and its products are regulated by the FDA under a
number of statutes including the FDC Act. The FDC Act provides two basic review
procedures for medical devices. Certain products may qualify for a submission
authorized by Section 510(k) of the FDC Act, wherein the manufacturer gives the
FDA a pre-market notification of the manufacturer's intention to commence
marketing the product. The manufacturer must, among other things, establish that
the product to be marketed is substantially equivalent to another legally
marketed product. Marketing may commence when the FDA issues a letter finding
substantial equivalence. If a medical device does not qualify for the 510(k)
procedure, the manufacturer must file a pre-market approval ("PMA") application.
This procedure requires more extensive prefiling testing than the 510(k)
procedure and involves a significantly longer FDA review process.
The Company has obtained clearances under Section 510(k) of the FDC
Act to market the IRMA SL System to test blood gases, electrolytes, hematocrit,
glucose and BUN in whole blood in hospital laboratories and at the point-of-
patient care. The IRMA-M cartridge, which allows multiple test panels to be
performed on a single cartridge, received clearance during 1998. Continuous
monitoring products which have been cleared under Section 510(k) include the
monitoring systems used with the Paratrend 7 sensor for direct continuous
monitoring of blood gases and temperature in adults and pediatric patients, the
Neotrend sensor for monitoring of blood gases and temperature in critically ill
newborn babies, and the Neurotrend sensor designed for direct continuous
monitoring of oxygen, carbon dioxide, acidity and temperature in brain tissue or
fluids as an indication of cerebral ischemia and hypoxia in patients with severe
head injury and also for use during surgical intervention in the brain.
A 510(k) clearance is subject to continual review, and later discovery
of previously unknown problems may result in restrictions on the product's
marketing or withdrawal of the product from the market. The Company's long-term
business strategy includes development of cartridges and sensors for performing
additional blood and tissue chemistry tests, and any such additional tests will
be subject to the same regulatory process. No assurance can be given that the
Company will be able to develop such additional products or uses on a timely
basis, if at all, or that the necessary clearances for such products and uses
will be obtained by the Company on a timely basis or at all, or that the Company
will not be subjected to a more extensive prefiling testing and FDA approval
process. The Company also markets its products in several foreign markets.
Requirements vary widely from country to country, ranging from simple product
registrations to detailed submissions such as those required by the FDA.
Manufacturing facilities are also subject to FDA inspection on a periodic basis
and the Company and its contract manufacturers must demonstrate compliance with
current Good Manufacturing Practices promulgated by the FDA.
The Company's intermittent testing products are affected by the Clinical
Laboratory Improvement Act of 1988 ("CLIA") which has been implemented by the
FDA. This law is intended to assure the quality and reliability of all medical
testing in the United States regardless of where tests are performed. The
regulations require laboratories performing blood chemistry tests to meet
specified
5
<PAGE>
standards in the areas of personnel qualification, administration, participation
in proficiency testing, patient test management, quality control, quality
assurance and inspections. The regulations have established three levels of
regulatory control based on test complexity; "waived," "moderate complexity" and
"high complexity." The tests performed by the Company's IRMA SL System have been
categorized under CLIA as "moderate complexity" tests by the FDA, which places
this system in the same category as most other commercially available blood gas
and blood chemistry testing instruments. The glucose test is categorized as a
"waived" test, which places this test in the same category as most other
commercially available point-of-care glucose testing systems. The Company's
continuous monitoring products are not affected by CLIA.
Research and Development
The Company owns two complementary technology platforms; an
electrochemical platform, on which IRMA intermittent testing products are based,
and a fiberoptic platform, on which the Paratrend 7, Neotrend and Neurotrend
continuous monitoring products are primarily based. The Company is pursuing
product line extensions from both of these core technology platforms.
The Company intends to continue to expand its cartridge and test menus
available on the IRMA SL System. Currently undergoing beta clinical trials is
the H4 cartridge which tests sodium, potassium, hematocrit, chloride and BUN
using one single-use cartridge. Commercial release of the H4 cartridge is
scheduled for 2000. In addition to the single-use cartridge, the Company is
developing a multi-use cartridge that will incorporate the Company's current
sensor and calibration technologies into products that can perform multiple
blood test panels over a period of days before disposal. A multi-use system will
serve the needs of high volume critical care centers where rapid patient
throughput and a low cost per test panel are required. The multi-use module was
initially scheduled for commercial release in 1999; however, feedback from
customer focus groups has lead to further enhancements to its design, with
commercial release scheduled for the last half of 2000. The Company is also in
the design stages for new additions to the IRMA SL's cartridge blood test menu,
including glucose, lactate and creatinine. The Company believes that the IRMA SL
System and related core technologies provide a flexible platform which, with a
limited amount of additional development, will be capable of performing an even
wider variety of blood chemistry tests.
The Company plans to continually improve the IRMA SL System through
software upgrades, manufacturing process improvements and equipment redesign,
based on the results of ongoing marketing studies and field experience.
Development activities for the continuous monitoring platform are
currently focused on improving the access for the Paratrend 7 with a non-kinking
catheter, providing compatibility of the Neotrend system with a standard
umbilical artery catheter and improving the bolt access and insertion devices
for Neurotrend. Studies are also underway to apply the continuous monitoring
technology to new neurological and tissue applications. The Company's future
development plans also include further expansion of the blood and tissue
analysis test menu available on the continuous monitoring platform.
Another new application initiative under development is the integration
of the Company's point-of-care intermittent testing and continuous monitoring
product lines into Agilent's patient monitoring platforms. The integration of
these technologies will create a communications interface that facilitates
monitor display of both biochemical and physiological information at the
patient's bedside.
The Company has incurred research and development expenses of
approximately $4,847,000, $6,466,000 and $7,232,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
6
<PAGE>
Sales and Marketing
The Company markets and distributes its products primarily through two
global partnerships with CODMAN and Agilent, and on an interim basis, certain
third-party distributors where pre-existing contracts apply until the
distribution rights are transitioned to Agilent. The Company also continues to
sell direct to end-users in the veterinary market which is not subject to an
exclusive distribution agreement. Additionally, the Company's marketing strategy
is to pursue partnerships with market leaders who will help identify and promote
future applications in continuous monitoring.
Effective October 1, 1998, the Company entered into an exclusive
distribution agreement with CODMAN for worldwide market development and
distribution of the Company's Neurotrend monitoring system. Additionally, on
June 7, 1999, the Company entered into an exclusive distribution agreement with
Agilent for worldwide market development and distribution of the Company's
Trendcare continuous blood gas monitoring systems and the IRMA SL blood analysis
system. Information concerning the Company's export sales is contained in the
financial section of the Company's Annual Report to Shareholders for the year
ended December 31, 1999, under note 16 of Notes to Consolidated Financial
Statements, and is incorporated herein by reference.
Prior to entering into the exclusive distribution agreements described
above, the Company's marketing efforts for its blood analysis systems focused on
acute care hospitals. Under the Company's new distribution agreements, near term
end-user sales of the Company's products are expected to continue to come from
hospital critical care departments where blood tests are frequently requested on
a stat basis. The Company's distributors' objectives will also include
penetration of smaller hospitals and alternate-site markets, such as emergency
medical facilities, home healthcare agencies, outpatient clinics, skilled
nursing homes and doctors' offices or clinics. The Company believes that the
advantages of its blood analysis and monitoring systems will help overcome the
possible reluctance of acute care hospitals to change standard operating
procedures for performing blood testing or incur additional capital expenses.
The Company's established arrangements with hospital systems, healthcare
facilities and other influential healthcare buying groups which established the
Company as a sole, preferred or dual source supplier of its blood analysis
systems are now administered by Agilent. These organizations include Columbia
HCA, Vencor, Inc., Health Services Corporation of America and University
Healthsystem Consortium (now part of Novation). The Company expects its
distribution partners to continue to enter into arrangements with other buying
groups and customers with respect to purchases of its blood and tissue analysis
systems.
Manufacturing
The Company's manufacturing facilities support its intermittent testing
and continuous monitoring platforms and are located in Roseville, Minnesota and
High Wycombe, United Kingdom, respectively. The Company manufactures its IRMA
electrochemical thick-film sensors in its Roseville, Minnesota facility.
Components for the Company's continuous monitoring sensors used in the Paratrend
7, Neotrend and Neurotrend products are sourced from a variety of outside
vendors, but the unique assembly and testing of the sensing elements is
performed in the Company's High Wycombe facility. The sub-assembly of external
plastic assemblies is sub-contracted to outside vendors. The Company uses
external manufacturers to produce a range of hardware items, including the
Trendcare and Neurotrend monitors. The Company assembles in-house the IRMA SL
analyzer and the continuous monitoring calibrator at the Roseville and High
Wycombe facilities, respectively. These devices could be manufactured by a
number of microelectronics assembly companies, using primarily off-the-shelf
components. Software for the IRMA SL analyzer is developed and maintained by the
Company, and software for the continuous monitoring products is jointly
developed with an external source, with acceptance and validation performed by
the Company.
The majority of the raw materials and purchased components used to
manufacture the Company's products are readily available. Most of the Company's
raw materials are or may be obtained
7
<PAGE>
from more than one source. A small number of these materials, however, are
unique in their nature, and are therefore single sourced. Plans are ongoing to
add additional second sourcing where appropriate.
The Company's manufacturing facilities include four clean rooms in
Roseville which range from Class 1,000 to Class 100,000, and two clean rooms in
High Wycombe, both rated as Class 10,000. The Company believes its current
facilities can support production of required cartridges and sensors for the
foreseeable future.
The Company maintains a comprehensive quality assurance and quality
control program, which includes complete documentation of all material
specifications, operating procedures, maintenance and equipment calibration
procedures, training programs and quality control test methods. To control the
quality of its finished product, the Company utilizes ongoing statistical
process control systems during the manufacturing process and comprehensive
performance testing of finished goods.
The Company continues to successfully undergo required inspections of
its manufacturing facilities by the FDA (most recently in October 1998 and
October 1999 for Roseville and High Wycombe facilities, respectively), and by
the British Standards Institution for the High Wycombe facility (most recently
in August 1999). As a result of these inspections, the Company's manufacturing
facilities and documentation and quality control systems are deemed satisfactory
and in compliance with Good Manufacturing Practices.
Patents and Proprietary Rights
The Company has implemented a strategy of pursuing patent applications
to provide both design freedom and protection from competitors. This strategy
includes evaluating and seeking patent protection both for inventions most
likely to be used in its blood and tissue analysis systems and for those
inventions most likely to be used by others as competing alternatives.
For its intermittent testing platform, the Company currently maintains
three patents issued for its calibration technology, three patents related to
its sensor technology and three for companion technology. In addition, two
patents have been issued and maintained covering the IRMA SL analyzer and
disposable cartridge designs. Additionally, the Company has submitted patent
applications pertaining to an enzymatic sensor, coagulation measurement
technology and an analyzer with multiple test modules. Overseas, the Company has
foreign patent applications pending, filed under the Patent Cooperation Treaty,
designating various jurisdictions, including Canada, the major European
countries, Brazil, Australia and Japan, corresponding to one or more U.S.
applications. The Company maintains 15 foreign patents; two issued in the United
Kingdom, two in Germany, two in France, five in Canada and four in Japan.
As it relates to its continuous monitoring platform, the Company
currently maintains nine U.S. patents associated with the design and manufacture
of its sensor technology platforms, and has filed two patent applications. These
patents are at various patent process stages in the major European countries and
Japan.
Material patents have expirations ranging from the year 2006 to 2017.
The Company is not currently a party to any patent litigation.
The Company has federally registered the trademarks "IRMA SL,"
"Diametrics Medical, Inc.," "IRMA Data Management System (IDMS)," "Neocath,"
"Paratrend," "Tissutrak," "Paratrend 7+," "Neotrend," "Trendcare," "Neurotrend,"
"CAL-POD," "TOM 2000" and claims trademark rights in "When Stat Isn't Fast
Enough."
Competition
The Company believes that potential purchasers of point-of-care blood
and tissue analysis systems will base their purchase decision upon a combination
of factors, including the product's test menu, ease of use, accuracy, price and
ability to manage the data collected. The Company is aware of one company, i-
STAT, that is marketing a portable point-of-care blood analysis system. The
Company believes
8
<PAGE>
that the IRMA SL System possesses distinct competitive advantages over i-STAT's
products including ease of use, closed instead of open handling of blood samples
and room temperature instead of refrigerated storage of reagents.
The Company also competes with companies that market near-patient multi-
use blood analysis systems. These companies include AVL Scientific Corporation,
Radiometer, Inc., Instrumentation Laboratories and Bayer (with their acquisition
of Chiron Diagnostics). However, the Company believes that to be successful in
the point-of-care market, a device must not only be able to perform a variety of
commonly ordered blood chemistry tests, but also be very portable to facilitate
ease of use at the patient's bedside.
The Company's blood analysis systems also compete with manufacturers
providing traditional blood analysis systems to central and stat laboratories of
hospitals. Although these laboratory-based instruments provide the same tests
available with the Company's products, they are complex, expensive and require
the use of skilled technicians. The Company believes that its blood analysis
systems offer several advantages over these laboratory-based instruments
including immediate or continuous results, ease-of-use, reduced opportunity for
error and cost effectiveness. The Company believes that its multi-parameter
continuous arterial blood gas and tissue monitoring systems are currently the
only products of its kind commercially available.
The Company's products are competitively priced with other point-of-care
product offerings. While competitive cost data is not easily attainable, the
high volume, centralized testing labs can provide testing at a lower cost per
test, but do not provide the convenience and fast turnaround time for test
results that point-of-care products offer. Their costs are also highly dependent
on volume, given the large investment required for facilities, equipment and
trained personnel.
Many of the companies in the medical technology industry have
substantially greater capital resources, research and development staffs and
facilities than the Company. Such entities may be developing or could in the
future attempt to develop additional products competitive with the Company's
blood and tissue analysis systems. Many of these companies also have
substantially greater experience than the Company in research and development,
obtaining regulatory approvals, manufacturing and marketing, and may therefore
represent significant competition for the Company. There can be no assurance
that the Company's competitors will not succeed in developing or marketing
technologies and products that will be more effective or less expensive than
those being sold by the Company or that would render the Company's technology
and products obsolete or noncompetitive.
Executive Officers
Name Age Position
---- --- --------
David T. Giddings 56 President, Chief Executive Officer and
Chairman
Roy S. Johnson 47 Executive Vice President and
President and Managing Director of
Diametrics Medical, Ltd.
Laurence L. Betterley 46 Senior Vice President and
Chief Financial Officer
James R. Miller 46 Senior Vice President of Sales and
Marketing and Commercial Development
Mr. Giddings was appointed Chairman of the Board of Directors,
President and Chief Executive Officer of the Company in April 1996. Mr. Giddings
was formerly President and Chief Operating Officer of the United States
operations of Boehringer Mannheim Corporation ("BMC"), a U.S.
9
<PAGE>
subsidiary of Corange Ltd., a private global healthcare corporation. He joined
BMC in 1992 after a 26-year career with Eastman Kodak Company, where he held a
number of senior management positions, including General Manager and Vice
President of Marketing and Sales, clinical products division. He also served as
Vice President and General Manager of Kodak's imaging information system group
and of its printing and publishing division.
Mr. Johnson joined the Company in November 1996 as an Executive Vice
President, and the President and Managing Director of DML, a subsidiary of the
Company established in conjunction with the acquisition in November 1996 of BSL.
DML markets a line of indwelling monitoring systems for continuous blood and
tissue assessment of critically ill patients. Beginning in 1977, Mr. Johnson
served in a number of management positions for the predecessors of the BSL
business, most recently as President and Chief Executive Officer while it was a
subsidiary of Orange Medical Instruments, Inc. and later when it was an
operating unit of Pfizer Inc. Mr. Johnson started his career in 1974 with
Burroughs Wellcome in pharmaceutical production management and was the head of
manufacturing in Burroughs' Sydney, Australia subsidiary.
Mr. Betterley has been Senior Vice President of the Company since
October 1996 and Chief Financial Officer since August 1996. Prior to this, he
was with Cray Research, Inc. in various management and financial positions
including Chief Financial Officer from 1994 to 1996, Vice President of Finance
from 1993 to 1994 and Corporate Controller from 1989 to 1993. Cray Research
develops, manufactures and sells high performance computing systems used for
computational research.
Mr. Miller joined the Company in March 1995 as Vice President of Sales
and Marketing, was Senior Vice President of Commercial and Business Development
since July 1996, and Senior Vice President of Sales and Marketing and Commercial
Development since January 1998. From 1991 to early 1995, Mr. Miller was Vice
President of Sales and Marketing at IMED Corporation, where he had global sales
and marketing responsibility for infusion and monitoring products for hospital
and alternate site markets.
Employees
As of December 31, 1999, the Company had a total of 146 full-time
employees, including 43 persons engaged in research and development activities.
None of the Company's employees are covered by a collective bargaining
agreement, and Diametrics believes it maintains good relations with its
employees.
Forward-Looking Statements
This Form 10-K Annual Report and the Company's financial statements,
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" in Item 7 and other documents incorporated by reference contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements represent our expectations or
beliefs, including, but not limited to, our current assumptions about future
financial performance, anticipated problems, and our plans for future
operations, which are subject to various risks and uncertainties. When used in
this Form 10-K and in future filings by the Company with the Securities and
Exchange Commission, in our 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. However, any statements
contained in this Form 10-K that are not statements of historical fact may be
deemed to be forward-looking statements. We caution that these statements by
their nature involve risks and uncertainties, certain of which are beyond our
control, and actual results may differ materially depending upon a variety of
important factors, including those described in Exhibit 99 to this Form 10-K.
10
<PAGE>
Item 2. Properties
The Company's principal properties are as follows:
<TABLE>
<CAPTION>
Location of Use of Approximate Lease
Property Facility Square Footage Expiration Date
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Roseville, Minnesota Manufacturing, research 43,300 February 2004
and development, sales,
marketing and administration
Malvern, Pennsylvania Research and development 2,000 March 2002
High Wycombe, Manufacturing, process 14,500 September 2005
United Kingdom engineering, purchasing
and distribution
High Wycombe, Sales, marketing and 5,500 January 2015 (1)
United Kingdom administration
High Wycombe, Research and development 6,000 April 2004 (2)
United Kingdom
</TABLE>
(1) Lease can be terminated without penalty at the Company's sole
discretion in July 2002 and January 2005.
(2) Lease can be terminated without penalty at the Company's sole
discretion in April of 2001, 2002 and 2003.
The Company believes that its facilities are sufficient for its projected needs
through 2001.
Item 3. Legal Proceedings
The Company is currently not subject to any material pending or
threatened legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock, $.01 par value, trades on The Nasdaq
National Market under the symbol "DMED." The information contained under the
heading "Stock Information" on page 35 in the Company's Annual Report to
Shareholders for the year ended December 31, 1999 (the "Annual Report to
Shareholders"), is incorporated herein by reference.
11
<PAGE>
Item 6. Selected Financial Data
The information contained under the heading "Selected Five-Year
Financial Data" on page 13 in the Annual Report to Shareholders is incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The information contained under the heading "Management's Discussion
and Analysis of Results of Operations and Financial Condition" on pages 13
through 18 in the Annual Report to Shareholders is incorporated herein by
reference.
Item 7.a. Quantitative and Qualitative Disclosures About Market Risk
The information contained under the heading "Market Risk" on page 17
in the Annual Report to Shareholders is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The information contained under the headings "Consolidated Statements
of Operations," "Consolidated Balance Sheets," "Consolidated Statements of
Shareholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to
Consolidated Financial Statements" on pages 19 through 32 and "Report of
Independent Auditors" on page 33 in the Annual Report to Shareholders is
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors of the Registrant
The information contained under the heading "Election of Directors" in
the Company's definitive Proxy Statement for its 2000 Annual Meeting of
Shareholders to be held on May 17, 2000, which definitive Proxy Statement will
be filed within 120 days after the close of the fiscal year ended December 31,
1999 (the "Proxy Statement"), is incorporated herein by reference.
Executive Officers of the Registrant
See Part I, Item 1 of this Report for information on Executive Officers
of the Company.
The information contained under the heading "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Proxy Statement is
incorporated herein by reference.
Item 11. Executive Compensation
The information contained under the heading "Executive Compensation" in
the Proxy Statement is incorporated herein by reference, except that, pursuant
to Item 402(a)(8) of Regulation S-K, the subsections under "Executive
Compensation" entitled "Report of Compensation Committee on Executive
Compensation" and "Comparative Stock Performance" provided in response to
paragraphs (k) and (l) of Item 402 are not incorporated by reference herein.
12
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions
The information contained under the heading "Certain Transactions" in the
Proxy Statement is incorporated by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The following consolidated financial statements of Diametrics Medical,
Inc., which are included in the Annual Report to Shareholders, are incorporated
by reference in Item 8 hereof:
Report of Independent Auditors
Consolidated Statements of Operations for each of the years in the three
year period ended December 31, 1999
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Shareholders' Equity for each of the years in
the three year period ended December 31, 1999
Consolidated Statements of Cash Flows for each of the years in the three
year period ended December 31, 1999
Notes to Consolidated Financial Statements
Except for the financial statements listed above and the items specifically
incorporated by reference in Items 5, 6, 7, 7.a. and 8 hereof, the Annual Report
to Shareholders is not deemed to be filed as part of this Annual Report on Form
10-K.
2. Financial Statement Schedules
All schedules have been omitted because they are not applicable or not
required, or because the required information is included in the financial
statements or the notes thereto.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<C> <S> <C>
3.1 Articles of Incorporation of the Company (as amended) (7)
3.2 Bylaws of the Company (as amended) Filed herewith
4.1 Form of Certificate for Common Stock (1)
4.2 Form of Registration Rights Agreement between the
Company and certain of its shareholders and
warrant holders (1)
4.3 Form of Registration Rights Agreement dated as of February 3, 1995
between the Company and certain of its shareholders (3)
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
4.4 Registration Rights Agreement, dated as of January 30, 1997,
by and between the Company and purchasers of Series I Junior
Participating Preferred Stock (5)
4.5 Registration Rights Agreement, dated as of June 10, 1997,
by and between the Company and the Purchasers (8)
4.6 Form of Certificate for Series I Junior Participating Preferred Stock (5)
4.7 Form of Stock Purchase Warrant, dated as of January 30, 1997 (5)
4.8 Form of Stock Purchase Warrant, dated as of June 10, 1997 (8)
10.1 Real Property Lease Agreements dated July 31, 1996, between
Commers-Klodt, a Minnesota General Partnership, and the Company (12)
10.2 Amendments, dated June 15, 1999, to Real Property Lease Agreements
dated July 31, 1996, between Commers-Klodt, a Minnesota General
Partnership, and the Company Filed herewith
10.3 Master Equipment Lease Agreement dated as of June 15, 1993,
between the Company and Phoenix Growth Capitol Corp., as
amended by Amendment No. 1 dated June 8, 1994 (including
form of warrant issued in connection therewith) (1)
10.4* 1990 Stock Option Plan (as amended and restated), including
form of option agreement (10)
10.5* 1993 Directors' Stock Option Plan, as amended and restated (10)
10.6* 1995 Equalizing Director Stock Option Plan (4)
10.7 1995 Employee Stock Purchase Plan (as revised and restated) (6)
10.8 Agreement dated January 1, 1995 between the Company and
Vencor, Inc. (3)
10.9 Letter agreement dated as of February 1, 1995 among
the Company, Allstate Venture Capital and Frazier
and Company L.P. (2)
10.10 Stock Purchase Agreement, dated as of January 30, 1997,
between the Company and the Purchasers named therein (5)
10.11 Stock Purchase Agreement dated as of June 10, 1997,
between the Company and the Purchasers named therein (8)
10.12 Loan and Security Agreement, dated March 31, 1998, between
DVI Business Credit and the Company (9)
10.13 Common Stock Purchase Agreement, dated June 30, 1998, between
the Company and the Purchasers named therein (10)
10.14 Form of Stock Purchase Warrant, dated August 4, 1998 (10)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
10.15 Note Purchase Agreement, dated August 4, 1998, between the
Company and the Purchasers named therein (10)
10.16 Form of Convertible Senior Secured Fixed Rate Note due August 4, 2003 (10)
10.17 Distribution Agreement, dated October 1, 1998, between the Company
and Johnson & Johnson Professional, Inc. (11)
10.18 Put Option and Stock Purchase Agreement, dated October 1, 1998,
between the Company and Johnson & Johnson Development Corporation (11)
10.19 Severance Pay Agreement (in the event of Change of Control) dated
July 31, 1998, between the Company and David T. Giddings (11)
10.20 Form of Severance Pay Agreement (in the event of Change of Control)
dated July 31, 1998, between the Company and its executive officers (11)
10.21 Form of Severance Pay Agreement (in the event of Termination Without
Cause) dated July 31, 1998, between the Company and its executive
officers (11)
10.22 Distribution Agreement, dated June 6, 1999, between the Company
and Hewlett-Packard Company (13)
10.23 Common Stock Purchase Agreement, dated June 6, 1999, between the
Company and Hewlett-Packard Company (13)
10.24 Stock Purchase Warrant, dated effective as of June 28, 1999 (13)
13 Portions of the Company's Annual Report to Shareholders
for the year ended December 31, 1999 incorporated by reference
in this Form 10-K Filed herewith
21 List of Subsidiaries Filed herewith
23 Consent of KPMG LLP Filed herewith
24 Powers of Attorney (included in signature page of Report) Filed herewith
27 Financial Data Schedule (electronic filing only) Filed herewith
99 Cautionary Statements Under the Private Securities Litigation
Reform Act Filed herewith
</TABLE>
___________________
* Management compensatory plan filed pursuant to Item 601(b)(10)(iii)(A)
of Regulation S-K.
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration Number 33-78518) (the "Registration
Statement").
(2) Incorporated by reference to the Company's 1994 Annual Report on Form
10-K.
(3) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration Number 33-94442).
(4) Incorporated by reference to the Company's 1995 Annual Report on Form
10-K.
15
<PAGE>
(5) Incorporated by reference to the Company's Current Report on Form 8-K filed
March 25, 1997.
(6) Incorporated by reference to the Company's 1996 Annual Report on Form 10-K.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter ended March 31, 1997.
(8) Incorporated by reference to the Company's Current Report on Form 8-K filed
June 26, 1997.
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter ended March 31, 1998.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter ended June 30, 1998.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter ended September 30, 1998.
(12) Incorporated by reference to the Company's 1998 Annual Report on Form 10-K.
(13) Incorporated by reference to the Company's Current Report on Form 8-K filed
July 23, 1999.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the Company during the fourth
quarter of the year ended December 31, 1999.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Roseville, State of Minnesota, on March 30, 2000.
DIAMETRICS MEDICAL, INC.
By /s/ David T. Giddings
----------------------
David T. Giddings
President, Chief Executive
Officer and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on March 30, 2000.
KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby constitute
and appoint David T. Giddings and Laurence L. Betterley, and each of them, each
with full power to act without the other, his true and lawful attorneys-in-fact
and agents, each with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments to the Annual Report on Form 10-K for the year ended December 31,
1999 of Diametrics Medical, Inc. , and to file the same, with any and all
exhibits thereto, and all other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all of
each of said attorneys-in-fact and agents or any of them may lawfully do or
cause to be done by virtue thereof.
Name Title
---- -----
/s/ David T. Giddings President, Chief Executive Officer and
- --------------------------------
David T. Giddings Chairman (Principal Executive Officer)
/s/ Laurence L. Betterley Senior Vice President and Chief Financial
- --------------------------------
Laurence L. Betterley Officer (Principal Financial Officer)
/s/ Jill M. Nussbaum Corporate Controller
- --------------------------------
Jill M. Nussbaum (Principal Accounting Officer)
/s/ Andre de Bruin Director
- --------------------------------
Andre de Bruin
/s/ Gerald L. Cohn Director
- --------------------------------
Gerald L. Cohn
/s/ Hans-Guenter Hohmann Director
- --------------------------------
Hans-Guenter Hohmann
/s/ Roy S. Johnson Director
- --------------------------------
Roy S. Johnson
/s/ Mark B. Knudson Director
- --------------------------------
Mark B. Knudson, Ph.D.
/s/ David V. Milligan Director
- --------------------------------
David V. Milligan, Ph.D.
17
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
3.2 Bylaws of the Company (as amended)
10.2 Amendments, dated June 15, 1999, to Real Property Lease Agreements
dated July 31, 1996, between Commers-Klodt, a Minnesota General
Partnership, and the Company
13 Portions of the Company's Annual Report to Shareholders
for the year ended December 31, 1999 incorporated by reference
in this Form 10-K
21 List of Subsidiaries
23 Consent of KPMG LLP
24 Powers of Attorney (included in signature page of Report)
27 Financial Data Schedule (electronic filing only)
99 Cautionary Statements Under the Private Securities Litigation Reform
Act
<PAGE>
Exhibit 3.2
BYLAWS OF
DIAMETRICS MEDICAL, INC.
(as amended through February 17, 2000)
ARTICLE I.
OFFICES, CORPORATE SEAL
Section 1.01. Registered Office. The registered office of the
-----------------
corporation in Minnesota shall be that set forth in the articles of
incorporation or in the most recent amendment of the articles of incorporation
or resolution of the directors filed with the secretary of state of Minnesota
changing the registered office.
Section 1.02. Other Offices. The corporation may have such other
-------------
offices, within or without the state of Minnesota, as the directors shall, from
time to time, determine.
Section 1.03. Corporate Seal. The corporation shall have no seal.
--------------
ARTICLE II.
MEETINGS OF SHAREHOLDERS
Section 2.01. Place and Time of Meetings. Except as provided
--------------------------
otherwise by the Minnesota Business Corporation Act, meetings of the
shareholders may be held at any place, within or without the state of Minnesota,
as may from time to time be designated by the directors.
Section 2.02. Regular Meetings.
----------------
(a) A regular meeting of the shareholders shall be held on such date as
the board of directors shall by resolution establish.
(b) At a regular meeting, the shareholders, voting as provided in the
articles of incorporation and these bylaws, shall elect qualified successors for
directors who serve for an indefinite term or whose terms have expired or are
due to expire within six months after the date of the meeting and shall transact
such other business as may properly come before them.
(c) To be properly brought before a regular meeting of shareholders,
business must be either (1) specified in the notice of the meeting, (2) directed
to be brought before the meeting by the board of directors or (3) proposed by a
shareholder who (i) was a shareholder of record at the time of giving of notice
provided for in these bylaws,
1
<PAGE>
(ii) is entitled to vote at the meeting and (iii) gives prior notice of the
matter, which must otherwise be a proper matter for shareholder action, in the
manner herein provided. For business to be properly brought before a regular
meeting by a shareholder, the shareholder must give written notice of such
shareholder's intent to bring a matter before the regular meeting, either by
personal delivery or by United States mail, postage prepaid, to the Secretary of
the corporation no later than ninety days prior to the anniversary date of the
immediately preceding regular meeting. Such notice shall set forth (1) a brief
description of the business desired to be brought before the regular meeting and
the reasons for conducting such business, (2) the name and record address of the
shareholder, (3) the class and number of shares of the corporation owned by the
shareholder, (4) such other information regarding the business proposed by such
shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission, and (5)
any material interest of the shareholder in such business. The chair of the
meeting may refuse to acknowledge any proposed business not made in compliance
with the foregoing procedure.
Section 2.03. Special Meetings. Special meetings of the shareholders
----------------
may be held at any time and for any purpose and may be called by the Chief
Executive Officer, the Chief Financial Officer, two or more directors or by a
shareholder or shareholders holding 10% or more of the voting power of all
shares entitled to vote, except that a special meeting for the purpose of
considering any action to directly or indirectly facilitate or affect a business
combination, including any action to change or otherwise affect the composition
of the board of directors for that purpose, must be called by 25% or more of the
voting power of all shares entitled to vote. A shareholder or shareholders
holding the requisite percentage of the voting power of all shares entitled to
vote may demand a special meeting of the shareholders by written notice of
demand given to the Chief Executive Officer or Chief Financial Officer of the
corporation and containing the purposes of the meeting. Within 30 days after
receipt of demand by one of those officers, the board of directors shall cause a
special meeting of shareholders to be called and held on notice no later than 90
days after receipt of the demand, at the expense of the corporation. Special
meetings shall be held on the date and at the time and place fixed by the Chief
Executive Officer or the board of directors, except that a special meeting
called by or at demand of a shareholder or shareholders shall be held in the
county where the principal executive office is located. The business transacted
at a special meeting shall be limited to the purposes as stated in the notice of
the meeting.
Section 2.04. Quorum, Adjourned Meetings. The holders of a majority
--------------------------
of the shares entitled to vote shall constitute a quorum for the transaction of
business at any regular or special meeting. In case a quorum shall not be
present at a meeting, the meeting may be adjourned from time to time without
notice other than announcement at the time of adjournment of the date, time and
place of the adjourned meeting. If a quorum is present, a meeting may be
adjourned from time to time without notice other
2
<PAGE>
than announcement at the time of adjournment of the date, time and place of the
adjourned meeting. At adjourned meetings at which a quorum is present, any
business may be transacted which might have been transacted at the meeting as
originally noticed. If a quorum is present when a meeting is convened, the
shareholders present may continue to transact business until adjournment
notwithstanding the withdrawal of enough shareholders originally present to
leave less than a quorum.
Section 2.05. Voting. At each meeting of the shareholders, every
------
shareholder having the right to vote shall be entitled to vote either in person
or by proxy. Each shareholder, unless the articles of incorporation or statutes
provide otherwise, shall have one vote for each share having voting power
registered in such shareholder's name on the books of the corporation. Jointly
owned shares may be voted by any joint owner unless the corporation receives
written notice from any one of them denying the authority of that person to vote
those shares. Upon the demand of any shareholder, the vote upon any question
before the meeting shall be by ballot. All questions shall be decided by a
majority vote of the number of shares entitled to vote and represented at the
meeting at the time of the vote except if otherwise required by statute, the
articles of incorporation, or these bylaws.
Section 2.06. Record Date. The board of directors may fix a date,
-----------
not exceeding 60 days preceding the date of any meeting of shareholders, as a
record date for the determination of the shareholders entitled to notice of, and
to vote at, such meeting, notwithstanding any transfer of shares on the books of
the corporation after any record date so fixed. If the board of directors fails
to fix a record date for determination of the shareholders entitled to notice
of, and to vote at, any meeting of shareholders, the record date shall be the
20th day preceding the date of such meeting.
Section 2.07. Notice of Meetings. There shall be mailed to each
------------------
shareholder, shown by the books of the corporation to be a holder of record of
voting shares, at his address as shown by the books of the corporation, a notice
setting out the date, time and place of each regular meeting and each special
meeting, except where the meeting is an adjourned meeting and the date, time and
place of the meeting were announced at the time of adjournment, which notice
shall be mailed at least five days prior thereto. Every notice of any special
meeting called pursuant to section 2.03 hereof shall state the purpose or
purposes for which the meeting has been called, and the business transacted at
all special meetings shall be confined to the purposes stated in the notice.
Section 2.08. Waiver of Notice. Notice of any regular or special
----------------
meeting may be waived by any shareholder either before, at or after such meeting
orally or in writing signed by such shareholder or a representative entitled to
vote the shares of such shareholder. A shareholder, by his attendance at any
meeting of shareholders, shall be deemed to have waived notice of such meeting,
except where the shareholder objects at the beginning of the meeting to the
transaction of business because the
3
<PAGE>
meeting is not lawfully called or convened, or objects before a vote on an item
of business because the item may not lawfully be considered at that meeting and
does not participate in the consideration of the item at that meeting.
Section 2.09. Conduct of Meetings. The presiding officer at each
-------------------
meeting of shareholders shall conclusively determine the order of business, all
matters of procedure and whether or not a proposal is proper business to be
transacted at the meeting and has been properly brought before the meeting.
Following completion of the business of the meeting as determined by the
presiding officer, the presiding officer shall have the exclusive authority and
power to adjourn the meeting.
Section 2.10. Nomination of Directors. Only persons nominated
------------------------
in accordance with the following procedures shall be eligible for election by
shareholders as directors. Nominations of persons for election as directors may
be made at a meeting of shareholders called for the purpose of electing
directors (a) by or at the direction of the board of directors or (b) by any
shareholder who (1) was a shareholder of record at the time of giving of notice
provided for in these Bylaws, (2) is entitled to vote at the meeting and (3)
gives prior notice of the nomination or nominations in the manner herein
provided. For a nomination to be properly made by a shareholder, the shareholder
must give written notice of such shareholder's intent to make such nomination or
nominations, either by personal delivery or by United States mail, postage
prepaid, to the Secretary of the corporation not later than (i), with respect to
an election to be held at a regular meeting of shareholders, ninety days prior
to the anniversary date of the immediately preceding regular meeting, and (ii),
with respect to the election to be held at a special meeting of shareholders for
the election of directors, the close of business on the tenth day following the
date on which notice of such meeting is first given to shareholders. Such notice
shall set forth (a) as to the shareholder giving the notice: (1) the name and
record address of the shareholder, (2) the class and number of shares of the
corporation owned by the shareholder, (3) a representation that the shareholder
is a holder of record of stock of the corporation entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice, and (4) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder; and (b) as to each
person the shareholder proposes to nominate: (1) the name, age, business address
and residence address of the person, (2) the principal occupation or employment
of the person, (3) such other information regarding each nominee proposed by
such shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission, and (4)
the consent of each nominee to serve as a director of the corporation if so
elected. The chair of the meeting may refuse to acknowledge the nomination of
any person not made in compliance with the foregoing procedure.
4
<PAGE>
ARTICLE III.
DIRECTORS
Section 3.01. General Powers. The business and affairs of the
--------------
corporation shall be managed by or under the authority of the board of
directors, except as otherwise permitted by statute.
Section 3.02. Number, Qualification and Term of Office. The number of
----------------------------------------
directors shall be no less than three nor more than twenty and shall be
established by resolution of the Board of Directors. Directors need not be
shareholders. The number of directors may be increased or decreased from time to
time by a resolution adopted by the affirmative vote of the holders of at least
80% of the outstanding shares of common stock, par value $.01 per share (the
"Common Stock"), of the corporation entitled to vote. The directors shall be
divided into three classes, as equal in number as possible. At the 1999 regular
meeting of the shareholders:
(i) directors in the first class (currently three directors) shall
be elected to serve until the 2000 regular meeting of shareholders,
(ii) directors in the second class (currently two directors) shall be
elected to serve until the 2001 regular meeting of the shareholders, and
(iii) directors in the third class (currently two directors) shall be
elected to serve until the 2002 regular meeting of the shareholders;
or until their successors shall be duly elected and qualified. At each regular
meeting of the shareholders following the 1996 regular shareholders' meeting,
each director elected to succeed a director whose term has expired shall hold
office until the third succeeding regular meeting of the shareholders after such
director's election and until such director's successor has been duly elected
and qualified, or until the earlier death, resignation, removal or
disqualification of such director. In case of any increase or decrease in the
number of directors, the increase or decrease shall be distributed among the
several classes as equally as possible as shall be determined by the Board of
Directors or by the affirmative vote of the holders of at least 80% of the
outstanding shares of Common Stock entitled to vote.
Section 3.03. Board Meetings. Meetings of the board of directors may
--------------
be held from time to time at such time and place within or without the state of
Minnesota as may be designated in the notice of such meeting.
Section 3.04. Calling Meetings; Notice. Meetings of the board of
------------------------
directors
5
<PAGE>
may be called by the Chairman of the Board and/or the Chief Executive Officer by
giving at least twenty-four hours' notice, or by any other director by giving at
least five days' notice, of the date, time and place thereof to each director by
mail, telephone, telegram or in person. If the day or date, time and place of a
meeting of the board of directors has been announced at a previous meeting of
the board, no notice is required. Notice of an adjourned meeting of the board of
directors need not be given other than by announcement at the meeting at which
adjournment is taken.
Section 3.05. Waiver of Notice. Notice of any meeting of the board
----------------
of directors may be waived by any director either before, at, or after such
meeting orally or in a writing signed by such director. A director, by his
attendance at any meeting of the board of directors, shall be deemed to have
waived notice of such meeting, except where the director objects at the
beginning of the meeting to the transaction of business because the meeting is
not lawfully called or convened and does not participate thereafter in the
meeting.
Section 3.06. Quorum. A majority of the directors holding office
------
immediately prior to a meeting of the board of directors shall constitute a
quorum for the transaction of business at such meeting.
Section 3.07. Absent Directors. A director may give advance written
----------------
consent or opposition to a proposal to be acted on at a meeting of the board of
directors. If such director is not present at the meeting, consent or opposition
to a proposal does not constitute presence for purposes of determining the
existence of a quorum, but consent or opposition shall be counted as a vote in
favor of or against the proposal and shall be entered in the minutes or other
record of action at the meeting, if the proposal acted on at the meeting is
substantially the same or has substantially the same effect as the proposal to
which the director has consented or objected.
Section 3.08. Conference Communications. Any or all directors may
-------------------------
participate in any meeting of the board of directors, or of any duly constituted
committee thereof, by any means of communication through which the directors may
simultaneously hear each other during such meeting. For the purposes of
establishing a quorum and taking any action at the meeting, such directors
participating pursuant to this section 3.08 shall be deemed present in person at
the meeting; and the place of the meeting shall be the place of origination of
the conference telephone conversation or other comparable communication
technique.
Section 3.09. Vacancies; Newly Created Directorships. Vacancies in
--------------------------------------
the Board of Directors of this corporation occurring by reason of death,
resignation, removal or disqualification shall be filled for the unexpired term
by a majority of the remaining directors, even though less than a quorum.
Vacancies resulting from an increase in the number of directors may be filled by
a majority vote of the remaining directors. Each director elected to fill a
vacancy shall hold office, subject to the
6
<PAGE>
provisions of these Bylaws, until a qualified successor is elected by the
shareholders at a regular or special meeting. The shareholders shall elect a
director to fill the remainder of any unexpired term for which a director has
been elected to fill a vacancy by the Board of Directors at their next regular
or special meeting.
Section 3.10. Removal. The affirmative vote of the shareholders
-------
holding at least 80% of the outstanding shares of Common Stock entitled to vote
at an election of directors may remove any or all of the directors from office
at any time, with or without cause. In the event that the Board of Directors or
any one or more directors be so removed, new directors shall be elected at the
same meeting.
A director named by the Board of Directors to fill a vacancy may be removed from
office at any time, with or without cause, by the affirmative vote of the
remaining directors if the shareholders have not elected directors in the
interim between the time of the appointment to fill such vacancy and the time of
the removal.
Section 3.11. Committees. A resolution approved by the affirmative
----------
vote of a majority of the board of directors may establish committees having the
authority of the board in the management of the business of the corporation to
the extent provided in the resolution. A committee shall consist of one or more
persons, who need not be directors, appointed by affirmative vote of a majority
of the directors present. Committees are subject to the direction and control
of, and vacancies in the membership thereof shall be filled by, the board of
directors. A majority of the members of the committee present at a meeting is a
quorum for the transaction of business.
Section 3.12. Written Action. Any action which might be taken at a
--------------
meeting of the board of directors, or any duly constituted committee thereof,
may be taken without a meeting if done in writing and signed by all of the
directors or committee members, unless the articles provide otherwise and the
action need not be approved by the shareholders.
Section 3.13. Compensation. Directors who are not salaried officers
------------
of this corporation shall receive such fixed sum per meeting attended or such
fixed annual sum as shall be determined, from time to time, by resolution of the
board of directors. The board of directors may, by resolution, provide that all
directors shall receive their expenses, if any, of attendance at meetings of the
board of directors or any committee thereof. Nothing herein contained shall be
construed to preclude any director from serving this corporation in any other
capacity and receiving proper compensation therefor.
7
<PAGE>
ARTICLE IV.
OFFICERS
Section 4.01. Number and Designation. The corporation shall have one
----------------------
or more natural persons exercising the functions of the offices of Chief
Executive Officer and Chief Financial Officer. The board of directors may elect
or appoint such other officers or agents as it deems necessary for the operation
and management of the corporation, with such powers, rights, duties, and
responsibilities as may be determined by the board of directors, including,
without limitation, Chairman of the Board, a President, one or more Vice
Presidents, a Secretary, a Treasurer and such assistant officers or other
officers as may from time to time be elected or appointed by the board of
directors. Each such officer shall have the powers, rights, duties and
responsibilities set forth in these bylaws unless otherwise determined by the
board of directors. Any number of offices may be held by the same person.
Section 4.02. Chief Executive Officer. Unless provided otherwise by
-----------------------
a resolution adopted by the board of directors, the Chief Executive Officer: (a)
shall have general active management of the business of the corporation; (b)
shall, when present, preside at all meetings of the shareholders; (c) shall see
that all orders and resolutions of the board of directors are carried into
effect; (d) shall sign and deliver in the name of the corporation any deeds,
mortgages, bonds, contracts or other instruments pertaining to the business of
the corporation, except in cases in which the authority to sign and deliver is
required by law to be exercised by another person or is expressly delegated by
these bylaws or the board of directors to some other officer or agent of the
corporation; and (e) shall perform such other duties as from time to time may be
assigned by the board of directors.
Section 4.03. Chief Financial Officer. Unless provided otherwise by
-----------------------
a resolution adopted by the board of directors, the Chief Financial Officer: (a)
shall cause to be kept accurate financial records for the corporation; (b) shall
cause to be deposited all monies, drafts and checks in the name of and to the
credit of the corporation in such banks and depositories as the board of
directors shall designate from time to time; (c) shall cause to be endorsed for
deposit all notes, checks and drafts received by the corporation as ordered by
the board of directors, making proper vouchers therefor; (d) shall cause to be
disbursed corporate funds and shall cause to be issued checks and drafts in the
name of the corporation, as ordered by the board of directors; (e) shall render
to the Chief Executive Officer and the board of directors, whenever requested,
an account of all the transactions as Chief Financial Officer and of the
financial condition of the corporation; and (f) shall perform such other duties
as may be prescribed by the board of directors or the Chief Executive Officer
from time to time.
Section 4.04. Chairman of the Board. The Chairman of the Board, if
---------------------
one is elected, shall preside at all meetings of the directors and shall have
such other duties as may be prescribed, from time to time, by the board of
directors.
8
<PAGE>
Section 4.05. President. Unless otherwise determined by the board of
---------
directors, the President shall be the Chief Executive Officer of the
corporation. If an officer other than the President is designated Chief
Executive Officer, the President shall perform such duties as may from time to
time be assigned by the board of directors.
Section 4.06. Vice President. Each Vice President shall perform such
--------------
duties as may be prescribed from time to time by these bylaws or by the board of
directors.
Section 4.07. Secretary. Unless provided otherwise by a resolution
---------
adopted by the board of directors, the Secretary: (a) shall attend all meetings
of the shareholders and board of directors, and shall record all the proceedings
of such meetings in the minute book of the corporation; (b) shall give proper
notice of meetings of shareholders and board of directors and other notices
required by law or these bylaws; and (c) shall perform such other duties as from
time to time may be assigned by the board of directors.
Section 4.08. Treasurer. Unless otherwise determined by the board of
---------
directors, the Treasurer shall be the Chief Financial Officer of the
corporation. If an officer other than the Treasurer is designated Chief
Financial Officer, the Treasurer shall perform such duties as may from time to
time be assigned by the board of directors.
Section 4.09. Authority and Duties. In addition to the foregoing
--------------------
authority and duties, all officers of the corporation shall respectively have
such authority and perform such duties in the management of the business of the
corporation as may be determined from time to time by the board of directors.
Unless prohibited by a resolution of the board of directors, an officer elected
or appointed by the board of directors may, without specific approval of the
board of directors, delegate some or all of the duties and powers of an office
to other persons.
Section 4.10. Removal and Vacancies. The board of directors may
---------------------
remove any officer from office at any time, with or without cause, by a
resolution approved by the affirmative vote of a majority of the directors
present. Such removal, however, shall be without prejudice to the contract
rights of the person so removed. A vacancy in an office of the corporation by
reason of death, resignation, removal, disqualification, or otherwise may, or in
the case of a vacancy in the office of the Chief Executive Officer or Chief
Financial Officer shall, be filled for the unexpired term by the board of
directors.
Section 4.11. Compensation. The officers of this corporation shall
------------
receive such compensation for their services as may be determined by or in
accordance with resolutions of the board of directors or by one or more
committees to the extent so authorized from time to time by the board of
directors.
9
<PAGE>
ARTICLE V.
SHARES AND THEIR TRANSFER
Section 5.01. Certificates for Shares. All shares of the corporation
-----------------------
shall be certificated shares. Each holder of shares of the corporation shall be
entitled to a certificate for shares in such form as the board of directors may,
from time to time, approve. Certificates shall be signed by an authorized
representative of the corporation's transfer agent. A certificate representing
shares of this corporation shall contain on its face the information required by
the Minnesota Business Corporation Act, section 302A.417. A certificate
representing shares issued by this corporation shall set forth upon the face or
back of the certificate, or shall state that the corporation will furnish to any
shareholder upon request and without charge, a full statement of the
designations, preferences, limitations and relative rights of the shares of each
class or series authorized to be issued, so far as they have been determined,
and the authority of the board to determine relative rights and preferences of
subsequent classes or series.
Section 5.02. Issuance of Shares. The board of directors is
------------------
authorized to cause to be issued shares of the corporation up to the full amount
authorized by the articles of incorporation in such amounts as may be determined
by the board of directors and as may be permitted by law. Shares may be issued
for any consideration, including, without limitation, in consideration of cash
or other property, tangible or intangible, received or to be received by the
corporation under a written agreement or of services rendered or to be rendered
to the corporation under a written agreement. At the time of approval of the
issuance of shares, the board of directors shall state, by resolution, its
determination of the fair value to the corporation in monetary terms of any
consideration other than cash for which shares are to be issued.
Section 5.03. Transfer of Shares. Transfer of shares on the books of
------------------
the corporation may be authorized only by the shareholder named in the
certificate, or the shareholder's legal representative, or the shareholder's
duly authorized attorney-in-fact, and upon surrender of the certificate or the
certificates for such shares. The corporation may treat as the absolute owner of
shares of the corporation, the person or persons in whose name shares are
registered on the books of the corporation.
Section 5.04. Loss of Certificates. Except as otherwise provided by
--------------------
the Minnesota Business Corporation Act, section 302A.419, any shareholder
claiming a certificate for shares to be lost, stolen, or destroyed shall make an
affidavit of that fact in such form as the board of directors and/or the
corporation's transfer agent shall require and shall, if the board of directors
and/or the corporation's transfer agent so requires, give the corporation and/or
the corporation's transfer agent a bond of indemnity in form, in an amount, and
with one or more sureties satisfactory to the board of directors and/or the
corporation's transfer agent, to indemnify the corporation and/or the
corporation's transfer agent against any claim which may be made against it on
account of the reissue of such certificate, whereupon a new certificate may be
issued in the same
10
<PAGE>
tenor and for the same number of shares as the one alleged to have been lost,
stolen or destroyed.
ARTICLE VI.
DISTRIBUTIONS, RECORD DATE
Section 6.01. Distributions. Subject to the provisions of the
-------------
articles of incorporation, of these bylaws, and of law, the board of directors
may authorize and cause the corporation to make distributions whenever, and in
such amounts or forms as, in its opinion, are deemed advisable.
Section 6.02. Record Date. Subject to any provisions of the articles
-----------
of incorporation, the board of directors may fix a date not exceeding 120 days
preceding the date fixed for the payment of any distribution as the record date
for the determination of the shareholders entitled to receive payment of the
distribution and, in such case, only shareholders of record on the date so fixed
shall be entitled to receive payment of such distribution notwithstanding any
transfer of shares on the books of the corporation after the record date.
ARTICLE VII.
BOOKS AND RECORDS, FISCAL YEAR
Section 7.01. Share Register. The board of directors of the
--------------
corporation shall cause to be kept at its principal executive office, or at
another place or places within the United States determined by the board:
(1) a share register not more than one year old, containing the
names and addresses of the shareholders and the number and
classes of shares held by each shareholder; and
(2) a record of the dates on which certificates or transaction
statements representing shares were issued.
Section 7.02. Other Books and Records. The board of directors shall
-----------------------
cause to be kept at its principal executive office, or, if its principal
executive office is not in Minnesota, shall make available at its Minnesota
registered office within ten days after receipt by an officer of the corporation
of a written demand for them made by a shareholder or other person authorized by
the Minnesota Business Corporation Act, section 302A.461, originals or copies
of:
(1) records of all proceedings of shareholders for the last three
years;
(2) records of all proceedings of the board for the last three
years;
11
<PAGE>
(3) its articles and all amendments currently in effect;
(4) its bylaws and all amendments currently in effect;
(5) financial statements required by the Minnesota Business
Corporation Act, section 302A.463 and the financial
statements for the most recent interim period prepared
in the course of the operation of the corporation for
distribution to the shareholders or to a governmental
agency as a matter of public record;
(6) reports made to shareholders generally within the last three
years;
(7) a statement of the names and usual business addresses of its
directors and principal officers; and
(8) any shareholder voting or control agreements of which the
corporation is aware.
Section 7.03. Fiscal Year. The fiscal year of the corporation shall
-----------
be determined by the board of directors.
ARTICLE VIII.
LOANS, GUARANTEES, SURETYSHIP
Section 8.01. The corporation may lend money to, guarantee an
obligation of, become a surety for, or otherwise financially assist a person if
the transaction, or a class of transactions to which the transaction belongs, is
approved by the affirmative vote of a majority of the directors present, and:
(1) is in the usual and regular course of business of the
corporation;
(2) is with, or for the benefit of, a related corporation,
an organization in which the corporation has a
financial interest, an organization with which the
corporation has a business relationship, or an
organization to which the corporation has the power to
make donations;
(3) is with, or for the benefit of, an officer or other
employee of the corporation or a subsidiary, including
an officer or employee who is a director of the
corporation or a subsidiary, and may reasonably be
expected, in the judgment of the board, to benefit the
corporation; or
12
<PAGE>
(4) has been approved by (a) the holders of two-thirds of the
voting power of the shares entitled to vote which are
owned by persons other than the interested person or
persons, or (b) the unanimous affirmative vote of the
holders of all outstanding shares whether or not
entitled to vote.
Such loan, guarantee, surety contract or other financial assistance may be with
or without interest, and may be unsecured, or may be secured in the manner as a
majority of the directors present approve, including, without limitation, a
pledge of or other security interest in shares of the corporation. Nothing in
this section shall be deemed to deny, limit or restrict the powers of guaranty,
surety or warranty of the corporation at common law or under a statute of the
state of Minnesota.
ARTICLE IX.
INDEMNIFICATION OF CERTAIN PERSONS
Section 9.01. The corporation shall indemnify all officers and
directors of the corporation, for such expenses and liabilities, including the
advancement of reimbursement of expenses, in such manner, under such
circumstances and to such extent as permitted by Minnesota Business Corporation
Act section 302A.521, as now enacted or hereafter amended. Unless otherwise
approved by the board of directors, the corporation shall not indemnify any
employee of the corporation who is not otherwise entitled to indemnification
pursuant to the prior sentence of this section 9.01.
ARTICLE X.
AMENDMENTS
Section 10.01. These bylaws may be amended or altered by a vote of
the majority of the whole board of directors at any meeting. Such authority of
the board of directors is subject to the power of the shareholders, exercisable
in the manner provided in the Minnesota Business Corporation Act, section
302A.181, subd. 3, to adopt, amend, or repeal bylaws adopted, amended, or
repealed by the board of directors. The board of directors shall not in any case
adopt, amend or repeal a bylaw fixing a quorum for meetings of shareholders,
prescribing procedures for removing directors or filling vacancies in the board
of directors, or fixing the number of directors or their classifications,
qualifications or terms of office, but the board of directors may adopt or amend
a bylaw to increase the number of directors.
ARTICLE XI.
SECURITIES OF OTHER CORPORATIONS
Section 11.01. Voting Securities Held by the Corporation. Unless
-----------------------------------------
otherwise ordered by the board of directors, the Chief Executive Officer shall
have full
13
<PAGE>
power and authority on behalf of the corporation (a) to attend any meeting of
security holders of other corporations in which the corporation may hold
securities and to vote such securities on behalf of this corporation; (b) to
execute any proxy for such meeting on behalf of the corporation; or (c) to
execute a written action in lieu of a meeting of such other corporation on
behalf of this corporation. At such meeting, the Chief Executive Officer shall
possess and may exercise any and all rights and powers incident to the ownership
of such securities that the corporation possesses. The board of directors may,
from time to time, grant such power and authority to one or more other persons
and may remove such power and authority from the Chief Executive Officer or any
other person or persons.
Section 11.02. Purchase and Sale of Securities. Unless otherwise
-------------------------------
ordered by the board of directors, the Chief Executive Officer shall have full
power and authority on behalf of the corporation to purchase, sell, transfer or
encumber any and all securities of any other corporation owned by the
corporation, and may execute and deliver such documents as may be necessary to
effectuate such purchase, sale, transfer or encumbrance. The board of directors
may, from time to time, confer like powers upon any other person or persons.
14
<PAGE>
EXHIBIT 10.2
SECOND AMENDMENT TO THE LEASE
Commers-Klodt, a Minnesota General Partnership, Landlord, and Diametrics
Medical, Inc., a Minnesota Corporation, Tenant, entered into a Commercial Lease
(Lease) dated July 31, 1996, for the leased premises containing 31,433 square
feet of space located at 2640-2652 Patton Road, Roseville, Minnesota.
Both parties wish to amend this Lease as follows;
1. TERM
The term of this lease shall be extended by two (2) years and five (5)
months commencing October 1, 2001, and terminate on February 28, 2004.
2. RENT
Beginning October 1, 2001, monthly Base Rent shall be amended as
follows:
Term Monthly Base Rent
October 1, 2001 - February 28, 2003 $19,121.74
March 1, 2003 - February 28, 2004 $19,695.39
3. IMPROVEMENTS
Tenant shall submit to Landlord paid invoices and lien waivers for
reimbursement up to $50,607.13 for improvements to the Demised
Premises. Any costs incurred in excess of $50,607.13 shall be paid by
Tenant.
All other terms, conditions and obligations outlined in the Lease remain in full
force and effect.
As agreed by:
LANDLORD:
COMMERS-KLODT, a Minnesota General Partnership,
Signature: /s/ Daniel P. Commers
- ----------------------------------------------------------------------------
Name: Daniel P. Commers
- ----------------------------------------------------------------------------
Title: Managing Partner Dated: 6/15/99
- ----------------------------------------------------------------------------
TENANT:
DIAMETRICS MEDICAL, INC. a Minnesota Corporation,
- ----------------------------------------------------------------------------
Signature: /s/ Laurence L. Betterley
- ----------------------------------------------------------------------------
Name: Laurence L. Betterley
- ----------------------------------------------------------------------------
Title: Chief Financial Officer Dated: 6/7/99
- ----------------------------------------------------------------------------
<PAGE>
SECOND AMENDMENT TO THE LEASE
Commers-Klodt, a Minnesota General Partnership, Landlord, and Diametrics
Medical, Inc., a Minnesota Corporation, Tenant, entered into a Commercial Lease
(Lease) dated July 31, 1996, for the leased premises containing 15,091 square
feet of space located at 2654-2662 Patton Road, Roseville, Minnesota.
Both parties wish to amend this Lease as follows;
1. TERM
The term of this lease shall be extended by four (4) years and five (5)
months commencing October 1, 1999, and terminate on February 28, 2004.
2. DEMISED PREMISES
The Demised premises shall be reduced by 3,257 square feet (Bay 2662).
The adjusted total for the Demised Premises shall be 11,834 square
feet. Tenant shall vacate the reduction space not later than September
30, 1999.
3. RENT
Beginning October 1, 1999, monthly Base Rent shall be amended as
follows:
Term Monthly Base Rent
October 1, 1999 - February 28, 2002 $8,313.39
March 1, 2002 - February 28, 2003 $8,562.79
March 1, 2003 - February 28, 2004 $8,819.67
4. IMPROVEMENTS
Tenant shall submit to Landlord paid invoices and lien waivers for
reimbursement up to $19,052.74 for improvements to the Demised
Premises. Any costs incurred in excess of $19,052.74 shall be paid by
Tenant.
All other terms, conditions and obligations outlined in the Lease remain in full
force and effect.
As agreed by:
LANDLORD:
COMMERS-KLODT, a Minnesota General Partnership,
Signature: /s/ Daniel P. Commers
- ----------------------------------------------------------------------------
Name: Daniel P. Commers
- ----------------------------------------------------------------------------
Title: Managing Partner Dated: 6/15/99
- ----------------------------------------------------------------------------
TENANT:
DIAMETRICS MEDICAL, INC. a Minnesota Corporation,
Signature: /s/ Laurence L. Betterley
- ----------------------------------------------------------------------------
Name: Laurence L. Betterley
- ----------------------------------------------------------------------------
Title: Chief Financial Officer Dated: 6/7/99
- ----------------------------------------------------------------------------
<PAGE>
SELECTED FIVE-YEAR FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands, except share and per share amounts) Years ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:(3)
Net sales $ 18,687 $ 12,156 $ 10,434 $ 3,797 $ 1,607
Operating loss (10,044) (17,175) (20,737) (23,831) (23,469)
Net loss (10,244) (17,388) (21,037) (23,575) (23,046)
Net loss per share (1), (2) (0.41) (0.79) (1.13) (1.56) (1.82)
Weighted average shares outstanding 24,719,038 21,996,382 18,665,837 15,088,493 12,640,212
Balance Sheet Data:
Working capital $ 15,009 $ 11,415 $ 12,509 $ 6,649 $ 27,123
Total assets (3) 31,972 25,346 28,662 24,059 36,620
Long-term liabilities 7,823 8,345 8,969 8,582 1,851
Shareholders' equity 13,841 11,366 12,773 8,674 31,194
</TABLE>
(1) The Company has not paid any dividends since inception.
(2) Basic and diluted net loss per share amounts are identical as the effect of
potential common shares is antidilutive.
(3) On November 6, 1996 the Company acquired all of the outstanding capital
stock of Biomedical Sensors, Ltd. and certain assets of Howmedica, Inc. The
Company accounted for the acquisition using the purchase method of accounting
and, accordingly, the results of operations of the acquired entities have been
included in the Company's consolidated financial statements from November 6,
1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
SUMMARY
Diametrics Medical, Inc., which began operations in 1990, is engaged in the
development, manufacturing and commercialization of critical care blood and
tissue analysis systems which provide immediate or continuous diagnostic
results at the point-of-patient care.
Since its commencement of operations in 1990, the Company has transitioned
from a development stage company to a full-scale development, manufacturing
and sales organization. As of December 31, 1999, the primary funding for
the operations of the Company has been approximately $144 million raised
through public and private sales of its equity securities and issuance of
convertible promissory notes.
The Company's trend of achieving successive improvements in annual
operating results continued in 1999, with annual sales growth of 54%;
continued growth in gross profit, increasing 254% over 1998; and further
reductions in operating expenses, declining 28% from 1998; all resulting in
a 41% improvement in annual operating loss. The implementation of two key
distribution partnerships in late 1998 and mid 1999 contributed
significantly to the favorable financial trend in 1999, with further
improvements expected in 2000 and future years.
The Company's partnering strategy for distribution and commercialization of
its products includes Agilent Technologies, Inc. (Agilent), the exclusive
global distributor of the Company's leading critical care blood monitoring
products, the IRMA(R)SL blood analysis system and the Trendcare(R)
continuous blood gas monitoring systems, including Paratrend(R) and
Neotrend(TM); and CODMAN, a Johnson & Johnson company, who is the
exclusive worldwide distributor of the Neurotrend(TM) Cerebral Tissue
Monitoring System. Neurotrend, which was cleared for marketing by the
U.S. Food and Drug Administration in November 1999, is a multiparameter
fiber optic system which continuously monitors oxygen, carbon dioxide,
acidity and temperature in the brain, providing critical information to
guide clinicians and surgeons in treating patients with severe head
trauma or those requiring surgical intervention in the brain.
The CODMAN distribution agreement was initiated in October 1998, has a term
of six years and is renewable for two years. If minimum sales levels and
marketing expenditure levels are not achieved by CODMAN, certain payments
will be due to the Company. Also, CODMAN has the right of first refusal to
market new continuous monitoring products developed for the neuro market.
In addition, Johnson & Johnson Development Corporation (JJDC) committed to
purchase up to $5 million of the Company's Common Stock at the Company's
option over the twelve-month period ended September 30, 1999 at the then
current market value. The Company exercised approximately $4 million of
the available Put Option during 1999.
13
<PAGE>
The Agilent distribution agreement was completed in June 1999, initially as
an agreement between the Company and Hewlett Packard Company (HP). Under
the terms of the distribution agreement, the Company transferred full
responsibility for marketing, sales and distribution of the blood
monitoring products described above to HP. The initial term of the
agreement is three and a half years, with the option for extensions.
Concurrently with the execution of the agreement, HP made a $9.5 million
equity investment in the Company. In addition to HP's equity investment,
the agreement also provides for minimum purchase commitments, market
development commitments, research and development funding and royalty
payments over the initial term of the agreement, as well as funding of
sales and marketing costs during the sales transition period in 1999. In
late 1999, HP assigned the distribution agreement and its equity investment
with the Company to Agilent, a leading provider of test and measurement
solutions and communications components, which was formed as a new company
and subsidiary of HP, expected to be spun-off as an independent company in
2000.
The Company's partnerships with these market leaders were instrumental in
driving the significant sales growth and operating expense reductions
achieved in 1999. Also contributing to improved financial performance was a
significant improvement in IRMA cartridge yields, resulting in lower unit
manufacturing costs and improved margins. In mid 1999, the Company
implemented a fully automated manufacturing line for assembly of its new
snap-fit cartridge format, which helped facilitate the improvement in
cartridge yields, while increasing plant capacity. Further automation of
the Company's manufacturing processes is planned for 2000, with expected
continued improvements in production yields and unit manufacturing costs.
RESULTS OF OPERATIONS
Sales Sales of the Company's products were $18,687,184 for 1999, compared
to $12,155,526 for 1998 and $10,434,366 for 1997. The 16% increase in sales
from 1997 to 1998 reflects a 15% growth in sales of instruments and a 19%
increase in disposable cartridge and sensor sales. Sales grew 54% in 1999
from 1998, reflecting a 99% increase in sales of instruments and a slight
increase in disposable cartridge and sensor sales. The significant
increase in instrument sales between 1998 and 1999 was impacted primarily
by sales to the Company's new distribution partners, Agilent and CODMAN,
partially offset by the impact of sales returns from distributors that were
displaced as a result of the new exclusive distribution agreements. While
unit sales of disposable cartridges and sensors grew 25% between 1998 and
1999, related revenues were relatively flat due to the impact of lower
average sales prices under the Agilent and CODMAN distribution agreements.
The Company's direct sales to Agilent and CODMAN comprised approximately 3%
and 69% of total sales in 1998 and 1999, respectively, and are expected to
increase as a percentage of total sales in 2000. Intermittent testing
products represented 39%, 63% and 59% of sales in 1999, 1998 and 1997,
respectively, with continuous monitoring products comprising the remaining
sales in each year.
For the year ended December 31, 1999, intermittent blood testing products
revenue was comprised of 56% instrument related revenue and 44% disposable
cartridge related revenue. Continuous monitoring products revenue was
comprised of 77% instrument related revenue and 23% disposable sensor
revenue. The high concentration of instrument related revenue in 1999 was
largely impacted by sales to CODMAN and Agilent.
The Company's revenues are affected principally by the number of
instruments, both monitors and IRMA analyzers, placed with customers and
the rate at which disposable sensors and cartridges are used in connection
with these products. As of December 31, 1999, the Company has sold
approximately 5,000 instruments. Unit sales of instruments in 1999
increased approximately 105% from 1998, while disposable sensor and
cartridge unit sales increased approximately 25%. As the Company grows, it
is expected that the growing end-user customer base will increase the rate
of usage of disposable products, with the result that overall disposable
product sales will exceed that of instrument sales.
The Company has targeted continued revenue growth in 2000, as a result of
further planned expansion of its blood and tissue analysis product lines
and continued commercialization of these products by market leading
distribution partners.
Cost of Sales Cost of sales totaled $15,779,694 for 1999, compared to
$11,334,721 for 1998 and $11,666,142 for 1997. Cost of sales as a
percentage of revenue was 84% in 1999, 93% in 1998 and 112% in 1997. The
year-to-year improvement in the Company's cost of sales as a percentage of
revenue reflects increased sales volumes, improved cartridge yields, and
the impact of cost controls and manufacturing process changes. Also
favorably affecting gross profit in 1999 was a higher mix of instrument
sales, including the sale to Agilent of a pool of used or refurbished
instruments. This pool carried a lower cost value than new instrument
inventory due to the impact of depreciation being recorded since initially
being placed into service. These improvements were partially offset by the
impact of lower average sales prices under the Agilent distribution
agreement and the impact of sales returns from distributors that were
displaced as a result of the Company's new exclusive distribution
agreements. The Company is targeting continued improvements in gross profit
during 2000 as a result of expected continued improvements in manufacturing
yields and higher unit volumes.
Operating Expenses Total operating expenses decreased by $5 million or
28% from 1998 to 1999, following a decrease of $1.5 million or 8% from 1997
to 1998. On a pre-restructure
14
<PAGE>
charge basis, 1998 operating expenses decreased $1 million or 5% relative
to 1997, primarily the result of work force reductions in 1997, which
reduced average headcount between years by 13% in the Company's U.S.
operations. The significant decline in operating expenses from 1998 to 1999
is primarily the result of research and development funding received from
Agilent as part of the distribution agreement and the transfer of the
Company's sales and marketing functions to Agilent.
Research and development expenses totaled $4,847,463 in 1999, compared to
$6,466,154 in 1998 and $7,231,669 in 1997. The 11% reduction in expenses
between 1997 and 1998 is primarily the result of work force reductions
during 1997, with average headcount declining 16% between years. The 25%
decline in expenses from 1998 to 1999 is primarily due to the recognition
in 1999 of research and development funding received from Agilent as part
of the distribution agreement. The Company is targeting 2000 expenses at
levels comparable to 1999, due to the impact of the expected recognition in
2000 of a full year of research and development funding, offset by
additional investments to support new research and development projects.
Sales and marketing expenses totaled $4,352,859 in 1999, compared to
$8,268,824 in 1998 and $8,120,529 in 1997. The 2% increase in expenses
from 1997 to 1998 is primarily impacted by higher commissions on increased
direct sales and increased sales support costs for placement of the
Company's products with new customers. The 47% reduction in expenses from
1998 to 1999 is primarily due to the recognition in 1999 of sales and
marketing funding received from Agilent to cover costs during a sales
transition period. Further contributing to the decline was a reduction in
marketing activities in anticipation of the transition of significant
portions of the Company's sales and marketing functions to Agilent. This
transition was completed in late 1999, and as a result, sales and marketing
expenses in 2000 are expected to decrease significantly from 1999.
General and administrative expenses totaled $3,750,967 in 1999, compared to
$3,261,098 in 1998 and $3,689,036 in 1997. The 12% decline in expenses from
1997 to 1998 is primarily the result of work force reductions during 1997.
The 15% increase in expenses from 1998 to 1999 is primarily due to
additional costs incurred in completing the Agilent transaction and
increased compensation costs due to improved performance against Company
objectives.
Restructuring and other charges totaled $463,816 in 1997, and no charges
were recorded in 1998 and 1999. Charges in 1997 consisted of severance
costs of approximately $319,000 associated with work force reductions,
primarily in the Company's U.S. manufacturing, research and development and
general and administrative areas, and $145,000 for the write-down of excess
and obsolete equipment resulting from the work force reductions and process
changes.
Other Income (Expense) Net other expense in 1999 was $199,748, compared to
$212,391 in 1998 and $299,717 in 1997. The Company realized interest
income of $528,787 in 1999, compared to $422,441 in 1998 and $658,625 in
1997. The year-to-year fluctuations reflect the impact of the timing of
the Company's financing activities between 1996 and 1999 on average cash
and investment balances during each year.
Interest expense totaled $630,459 in 1999, compared to $807,411 in 1998 and
$1,017,657 in 1997. The year-to-year decline in expense primarily reflects
lower average debt balances each successive year and a reduction in the
amount of higher interest bearing capital lease debt relative to total debt
outstanding.
Net Loss Net loss for the year ended December 31, 1999 was $10,243,547,
compared to $17,387,662 in 1998 and $21,036,543 in 1997. The year-to-year
improvement in net loss reflects revenue growth; improved margins,
influenced by higher unit volumes, changes in product mix and improved
manufacturing yields; and reduced operating expenses due primarily to
research and development funding received from Agilent and the transfer of
the Company's sales and marketing functions to Agilent, partially offset by
costs incurred to complete the Agilent transaction. The Company is
targeting continued significant improvement in net loss in 2000 relative to
1999.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had working capital of approximately $15
million, an increase of $3.6 million from the working capital of $11.4
million reported at December 31, 1998. The net increase primarily reflects
the impact of the amount and timing of proceeds from private equity
placements in 1998 and 1999, and an improvement in net cash used in
operating activities for the year ended December 31, 1999. Through
December 31, 1999, the Company raised approximately $144 million through
the public and private sales of its equity securities and the issuance of
convertible promissory notes.
Net cash used in operating activities totaled $3 million for the year ended
December 31, 1999, compared to $18.8 million and $16.6 million for the same
periods in 1998 and 1997, respectively. This was the result of net losses
of $10.2 million, $17.4 million and $21 million for these same periods in
1999, 1998 and 1997, respectively, adjusted by changes in key operating
assets and liabilities, primarily accounts receivable, inventories,
accounts payable, accrued expenses and deferred credits and revenue.
As discussed in note 19 of Notes to Consolidated Financial Statements,
effective January 1, 1998, the Company changed the year-end of its wholly-
owned subsidiary, Diametrics Medical, Ltd. (DML), to December 31 from
November 30 to produce a consistent reporting period for the consolidated
entity. As a result of this change in year-end, DML's net results of
operations for the
15
<PAGE>
month of December 1997 were closed to beginning accumulated deficit as of
January 1, 1998. Additionally, the changes in DML's operating assets and
liabilities during the month of December 1997 are included in the
Consolidated Statement of Cash Flows for the year ended December 31, 1998.
The discussion below of changes in accounts receivable, inventories,
accounts payable and accrued expenses includes the impact of the DML year-
end change on these balances.
Net accounts receivable increased $1.4 million for the year ended December
31, 1999, compared to $1.7 million in 1998 and $1.2 million in 1997. The
increases are primarily due to increased sales in each year. The reduced
growth in accounts receivable in 1999 relative to 1998 on a significantly
larger increase in sales between years is primarily due to an improvement
in days sales outstanding and the timing of sales.
Inventories decreased $651,000 for the year ended December 31, 1999, after
an increase of $1.3 million in 1998 and a decrease of $876,000 in 1997.
The decrease in 1999 primarily reflects a decrease in finished goods
inventory due to significant sales to the Company's distributors, partially
offset by an increase in raw material inventory to meet anticipated
production requirements in the first quarter 2000. The overall net decline
in 1999 inventory levels is also impacted by an improvement in inventory
turnover during the year, stemming from improved inventory management. The
increase in 1998 was due to increased inventory levels needed to begin
internal assembly of the Company's IRMA SL analyzers and to meet an
expected increase in demand.
Accounts payable and accrued expenses increased $405,000 for the year ended
December 31, 1999, after a decrease of $1.5 million in 1998 and an increase
of $418,000 in 1997. The increase in 1999 is primarily due to increased
accruals for costs to complete committed product upgrades, and employee
bonuses. The decrease in 1998 was affected primarily by a reduction in
accrued interest payable, due to the timing of interest payments, and
reductions in product upgrade accruals as upgrades were completed from a
prior upgrade program, combined with timing of payments to vendors and
employees. The increase in 1997 was primarily the result of the timing of
vendor payments.
Deferred credits and revenue increased $5.1 million during 1999,
representing the remaining balance of prepaid funding of $9.5 million
received from Agilent under the distribution agreement. The prepayment
provided partial funding of current and future research and development
expenses, sales and marketing costs during a sales transition period, and
royalty payments.
Net cash used in investing activities totaled $9.1 million for the year
ended December 31, 1999, following net cash provided by investing
activities of $3.2 million in 1998 and a net use of cash in 1997 of $7.8
million. These year-to-year changes were primarily affected by the amounts
and timing of private equity placements, which affected the amount of cash
available for the purchase of marketable securities. Purchases of property
and equipment also affected net cash provided by or used in investing
activities, and totaled $1.7 million for the year ended December 31, 1999,
$2.3 million in 1998 and $3 million in 1997. Capital additions in each
year consisted primarily of investments in development and production
equipment and instruments for internal use in research and development and
sales. In 2000, the Company expects total capital expenditures and new
lease commitments to approximate $3 million for the year, primarily
reflecting investments to support new product development and production.
Net cash provided by financing activities totaled $11.8 million for the
year ended December 31, 1999, compared to $16.4 million in 1998 and $25.3
million in 1997. The year-to-year changes were due primarily to the amounts
and timing of private equity placements in each of these years.
In late 1996 and throughout 1997, the Company entered into long-term debt
obligations of approximately $8.9 million. The original debt consisted of
a $7.3 million senior secured fixed rate loan note issued to Pfizer Inc. in
connection with the Company's acquisition of DML and approximately $1.6
million in notes payable for equipment financing. Proceeds from the
issuance in August 1998 of $7.3 million of Convertible Senior Secured Fixed
Rate Notes, issued in conjunction with a private equity placement, were
simultaneously used to retire the $7.3 million Pfizer note. The Company's
long-term debt obligations require principal and interest repayments of
approximately $900,000 in each of years 2000 and 2001, $600,000 in 2002 and
$7.6 million in 2003.
Effective March 31, 1998, the Company secured a $1 million receivable
backed line of credit. The loan agreement requires the Company's accounts
receivable collections be applied to reduce the loan balance, including
advances, interest and fees. At December 31, 1999, no advances were
outstanding under the line of credit.
At December 31, 1999, the Company had U.S. net operating loss and research
and development tax credit carryforwards for income tax purposes of
approximately $112.8 million and $1.2 million, respectively. Pursuant to
the Tax Reform Act of 1986, use of a portion of the Company's net operating
loss carryforwards are limited due to a "change in ownership." (See note 13
of Notes to Consolidated Financial Statements for further discussion).
As part of an exclusive distribution agreement initiated on October 1,
1998, the Company entered into a $5 million Put
16
<PAGE>
Option and Stock Purchase Agreement with JJDC who committed to purchase up
to $5 million of the Company's Common Stock at the Company's option over
the twelve month period ended 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. As part of an exclusive Distribution
Agreement and Common Stock Purchase Agreement with HP completed in June
1999, the Company issued 1,357,143 shares of Common Stock to HP at a price
of $7.00 per share, for aggregate proceeds of $9.5 million. HP also
received a warrant to purchase 452,381 shares of Common Stock at $8.40 per
share, providing additional funding potential of $3.8 million. In addition,
HP agreed to minimum purchase commitments, market development commitments,
research and development funding and royalty payments over the initial term
of the agreement. In late 1999, HP assigned the distribution agreement and
its equity investment with the Company to Agilent, which was formed as a
new company and subsidiary of HP. The Company believes proceeds from the
funding agreements with Agilent, currently available funds and cash
generated from projected revenues, supplemented by proceeds from employee
stock plans, warrant exercises and asset based credit will meet the
Company's working capital needs. 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 Company's business, 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
During 1999, the Company completed the process of assessing and preparing
for the Year 2000 date change. This process involved the review and
remediation, where applicable, of date recognition issues in its products;
its internal financial, manufacturing and other process control systems;
and its interface with major customers and suppliers.
As a result of its efforts in addressing Year 2000 concerns, the Company to
date has not experienced any significant difficulties attributed to Year
2000 issues, nor has it received notice from its customers of any material
incidents or difficulties related to its products or services as a result
of the Year 2000 event. The incremental costs required to address the
Company's Year 2000 compliance approximated $150,000, including the cost of
software and hardware upgrades. The majority of this cost was incurred in
1999.
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 position and operating results of the Company's U.K. subsidiary,
DML, are translated into U.S. dollars for consolidation. The Company's
exposure to foreign exchange rate fluctuations also arises from
transferring funds to its U.K. subsidiary in British pounds sterling.
Effective November 1, 1999, most of the Company's sales are made to
distributors and denominated in U.S. dollars, thereby significantly
mitigating the risk of exchange rate fluctuations on trade receivables.
November 1, 1999 marked the completion of a sales transition period with
Agilent, the Company's exclusive global distributor of the IRMA SL blood
analysis system and the Trendcare continuous blood monitoring products,
which followed the completion of a distribution agreement in the fourth
quarter 1998 with CODMAN, who is the exclusive global distributor of
Neurotrend, a continuous cerebral tissue monitoring product.
The effect of foreign exchange rate fluctuations on the Company's financial
results for the years ended December 31, 1999, 1998 and 1997 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 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 million 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 million and are generally
repaid within a few months, the Company's exposure is not believed to be
material. All other existing debt agreements of the Company bear interest
at fixed rates, and are therefore not subject to exposure from fluctuating
interest rates.
EURO CONVERSION
Effective January 1, 1999, 11 of the 15 member countries of the European
Union (EU) adopted the euro as their common legal currency. On that date,
the participating countries established fixed euro conversion rates between
their existing local currencies and the euro. During the three-and-a-half
year transition period following its introduction, participating countries
will be allowed to transact business both in the euro and in their local
currencies. On July 1, 2002, the euro will be the sole official currency
in participating EU countries.
17
<PAGE>
As noted under "Market Risk", the Company sells and distributes most of its
products globally through distributors, with sales denominated in U.S.
dollars. The Company's subsidiary, DML, conducts its operations from the
U.K. 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.
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 has made required changes in tandem with required Year
2000 related upgrades.
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.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," (as amended by SFAS No. 137 with respect to the effective
date) will be effective for the Company in January 2001. SFAS No. 133
requires all derivatives to be recognized as assets or liabilities on the
balance sheet and measured at fair value on a mark-to-market basis. This
applies whether the derivatives are stand-alone instruments, such as
forward currency exchange contracts and interest rate swaps or collars, or
embedded derivatives, such as call options contained in convertible debt
investments. Along with the derivatives, the underlying hedged items are
also to be marked-to-market on an ongoing basis. These market value
adjustments are to be included either in net earnings or loss in the
statement of operations or in other comprehensive income (and accumulated
in stockholders' equity), depending on the nature of the transaction. The
Company is currently evaluating SFAS No. 133, but does not expect that it
will have a material effect on its financial statements.
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). SAB 101
summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB
101 will be effective for the Company in the first quarter of 2000. The
Company believes that its revenue recognition policies are in compliance
with SAB 101, and does not expect it to have a material impact on its
financial condition or results of operations.
The Company's discussion and analysis of results of operations and
financial condition, including statements regarding the Company's
expectations about new and existing products, future financial performance,
Year 2000 compliance, market risk exposure and other forward looking
statements are subject to various risks and uncertainties, including,
without limitation, demand and acceptance of new and existing products,
technological advances and product obsolescence, competitive factors,
stability of domestic and international financial markets and the
availability of capital to finance growth. These and other risks are
discussed in greater detail in an exhibit in the Company's Form 10-K filed
with the U.S. Securities and Exchange Commission.
18
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------------
DIAMETRICS MEDICAL, INC. AND SUBSIDIARY 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 18,687,184 $ 12,155,526 $ 10,434,366
Cost of sales 15,779,694 11,334,721 11,666,142
-------------------------------------------------------------
Gross profit (loss) 2,907,490 820,805 (1,231,776)
Operating expenses:
Research and development 4,847,463 6,466,154 7,231,669
Sales and marketing 4,352,859 8,268,824 8,120,529
General and administrative 3,750,967 3,261,098 3,689,036
Restructuring and other charges - - 463,816
-------------------------------------------------------------
12,951,289 17,996,076 19,505,050
-------------------------------------------------------------
Operating loss (10,043,799) (17,175,271) (20,736,826)
Interest income 528,787 422,441 658,625
Interest expense (630,459) (807,411) (1,017,657)
Other income (expense), net (98,076) 172,579 59,315
--------------------------------------------------------------
Net loss $(10,243,547) $(17,387,662) $(21,036,543)
==============================================================
Basic and diluted net loss per common share $ (0.41) $ (0.79) $ (1.13)
==============================================================
Weighted average common shares outstanding 24,719,038 21,996,382 18,665,837
==============================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------------------
Diametrics Medical, Inc. and Subsidiary 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,786,162 $ 3,432,614
Marketable securities 11,339,009 2,976,443
Accounts receivable, net of allowance for doubtful accounts of
$200,000 in 1999 and $280,000 in 1998 6,790,673 5,420,092
Inventories 4,116,348 4,767,537
Prepaid expenses and other current assets 285,336 454,291
---------------------------------
Total current assets 25,317,528 17,050,977
---------------------------------
Property and equipment, net 5,774,497 6,922,793
Other assets, net 880,171 1,372,544
---------------------------------
$31,972,196 $25,346,314
---------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 2,438,550 $ 2,535,343
Accrued expenses 2,414,785 1,855,004
Deferred credits and revenue 5,105,214 -
Short-term borrowings - 828,823
Current portion of long-term liabilities 349,511 416,509
---------------------------------
Total current liabilities 10,308,060 5,635,679
---------------------------------
Long-term liabilities:
Long-term liabilities, excluding current portion 7,813,796 8,163,307
Other liabilities 9,684 181,764
---------------------------------
Total liabilities 18,131,540 13,980,750
---------------------------------
Shareholders' equity:
Preferred stock, $.01 par value: 5,000,000 shares
authorized, none issued - -
Common stock, $.01 par value: 35,000,000 shares authorized, 25,778,499
and 23,391,597 shares issued and outstanding at December 31, 1999
and 1998, respectively 257,785 233,916
Additional paid-in capital 143,463,332 130,477,220
Accumulated other comprehensive loss (516,507) (225,165)
Accumulated deficit (129,363,954) (119,120,407)
---------------------------------
Total shareholders' equity 13,840,656 11,365,564
---------------------------------
Commitments and contingencies (notes 8, 17, and 18)
$31,972,196 $25,346,314
---------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
Additional
Preferred Common paid-in Accumulated
Diametrics Medical, Inc. and Subsidiary stock stock capital deficit
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ - $152,095 $ 88,451,972 $ (80,019,137)
------------------------------------------------------------
Net loss - - - (21,036,543)
Foreign currency translation adjustment - - - -
Minimum pension liability - - - -
------------------------------------------------------------
Comprehensive loss for the year ended
December 31, 1997 - - - (21,036,543)
Issued preferred stock 7,500 - 11,857,799 -
Conversion of preferred stock to common stock (7,500) 30,000 (22,500) -
Issued common stock - 14,933 7,840,236 -
Issued common stock under
employee stock purchase plan - 554 205,574 -
Exercise of options to common stock - 2,291 1,057,733 -
Exercise of warrants to common stock - 9,026 4,551,025 -
Issued stock options in lieu of cash
compensation - - 28,408 -
------------------------------------------------------------
Balance, December 31, 1997 - 208,899 113,970,247 (101,055,680)
------------------------------------------------------------
Net loss - - - (17,387,662)
Foreign currency translation adjustment - - - -
Minimum pension liability - - - -
------------------------------------------------------------
Comprehensive loss for the year ended
December 31, 1998 - - - (17,387,662)
Issued common stock - 21,582 14,792,052 -
Issued common stock under
employee stock purchase plan - 450 209,646 -
Exercise of options to common stock - 2,441 1,183,531 -
Exercise of warrants to common stock - 544 309,144 -
Issued stock options in lieu of cash
compensation - - 12,600 -
Effect of subsidiary's year-end change - - - (677,065)
------------------------------------------------------------
Balance, December 31, 1998 - 233,916 130,477,220 (119,120,407)
------------------------------------------------------------
Net loss - - - (10,243,547)
Foreign currency translation adjustment - - - -
Minimum pension liability - - - -
------------------------------------------------------------
Comprehensive loss for the year ended
December 31, 1999 - - - (10,243,547)
Issued common stock - 21,303 11,849,017 -
Issued common stock under
employee stock purchase plan - 329 146,284 -
Exercise of options to common stock - 2,237 976,708 -
Issued stock options in lieu of cash
compensation - - 14,103 -
------------------------------------------------------------
Balance, December 31, 1999 $ - $257,785 $143,463,332 $(129,363,954)
------------------------------------------------------------
<CAPTION>
Accumulated other Total Total
comprehensive shareholders' comprehensive
Diametrics Medical, Inc. and Subsidiary income (loss) equity income (loss)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1996 $ 89,309 $ 8,674,239
-----------------------------------------
Net loss - (21,036,543) $(21,036,543)
Foreign currency translation adjustment (69,725) (69,725) (69,725)
Minimum pension liability (369,773) (369,773) (369,773)
-------------------------------------------------------------
Comprehensive loss for the year ended
December 31, 1997 (439,498) - $(21,476,041)
------------
Issued preferred stock - 11,865,299
Conversion of preferred stock to common stock - -
Issued common stock - 7,855,169
Issued common stock under
employee stock purchase plan - 206,128
Exercise of options to common stock - 1,060,024
Exercise of warrants to common stock - 4,560,051
Issued stock options in lieu of cash
compensation - 28,408
-----------------------------------------
Balance, December 31, 1997 (350,189) 12,773,277
-----------------------------------------
Net loss - (17,387,662) $(17,387,662)
Foreign currency translation adjustment (98,328) (98,328) (98,328)
Minimum pension liability 223,352 223,352 223,352
-------------------------------------------------------------
Comprehensive loss for the year ended
December 31, 1998 125,024 - $(17,262,638)
------------
Issued common stock - 14,813,634
Issued common stock under
employee stock purchase plan - 210,096
Exercise of options to common stock - 1,185,972
Exercise of warrants to common stock - 309,688
Issued stock options in lieu of cash
compensation - 12,600
Effect of subsidiary's year-end change - (677,065)
-----------------------------------------
Balance, December 31, 1998 (225,165) 11,365,564
-----------------------------------------
Net loss - (10,243,547) $(10,243,547)
Foreign currency translation adjustment (405,483) (405,483) (405,483)
Minimum pension liability 114,141 114,141 114,141
-------------------------------------------------------------
Comprehensive loss for the year ended
December 31, 1999 (291,342) - $(10,534,889)
------------
Issued common stock - 11,870,320
Issued common stock under
employee stock purchase plan - 146,613
Exercise of options to common stock - 978,945
Issued stock options in lieu of cash
compensation - 14,103
-----------------------------------------
Balance, December 31, 1999 $(516,507) $ 13,840,656
-----------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
Diametrics Medical, Inc. and Subsidiary 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(10,243,547) $ (17,387,662) $ (21,036,543)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,224,519 3,147,460 4,162,997
Other 12,988 13,252 (52,513)
Changes in operating assets and liabilities
Receivables, net (1,370,581) (1,652,185) (1,178,760)
Inventories 651,189 (1,325,613) 875,881
Prepaid expenses and other current assets 168,955 (44,360) 232,582
Accounts payable (96,793) 393,253 649,432
Accrued expenses 501,842 (1,899,428) (231,365)
Deferred credits and revenue 5,105,214 - -
-------------------------------------------
Net cash used in operating activities (3,046,214) (18,755,283) (16,578,289)
-------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (1,689,372) (2,252,544) (2,957,958)
Sale of evaluation and demonstration instruments 944,737 - -
Purchases of marketable securities (16,026,009) (6,558,430) (26,208,044)
Proceeds from maturities of marketable securities 7,663,443 11,983,629 21,209,000
Other 25,819 11,891 199,954
-------------------------------------------
Net cash provided by (used in) investing activities (9,081,382) 3,184,546 (7,757,048)
-------------------------------------------
Cash flows from financing activities:
Principal payments on borrowings (1,143,337) (1,306,067) (129,714)
Proceeds from borrowings - 1,818,823 1,058,626
Net proceeds from issuance of preferred stock - - 11,865,299
Net proceeds from issuance of common stock 12,995,878 16,519,390 13,681,372
Principal payments on capital lease obligations (101,995) (611,809) (1,165,522)
-------------------------------------------
Net cash provided by financing activities 11,750,546 16,420,337 25,310,061
-------------------------------------------
Effect of subsidiary's year-end change on cash and cash equivalents - (664,819) -
Effect of exchange rate changes on cash and cash equivalents (269,402) (110,851) (68,033)
Net increase (decrease) in cash and cash equivalents (646,452) 73,930 906,691
Cash and cash equivalents at beginning of year 3,432,614 3,358,684 2,451,993
-------------------------------------------
Cash and cash equivalents at end of year $ 2,786,162 $ 3,432,614 $ 3,358,684
-------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 630,459 $ 1,544,161 $ 377,849
===========================================
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
On August 4, 1998, the Company entered into a convertible senior secured fixed
rate note of $7,300,000 in connection with a private equity placement and
used the proceeds to retire another note.
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS Diametrics Medical, Inc. along with its
subsidiary (the Company), is a medical device company engaged in the
development, manufacture and commercialization of critical care blood and
tissue analysis systems which provide immediate or continuous diagnostic
results at the point-of-patient care.
The Company markets its products to health care organizations primarily
through distribution partners with exclusive global distribution rights,
and on an interim basis, certain third-party distributors where pre-
existing contracts with the Company apply until the distribution rights are
transitioned to the Company's exclusive distributors. The Company also
continues to sell direct to end-users for a small volume of products and
transactions that are not subject to the exclusive distribution agreements.
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial
statements include the accounts of Diametrics Medical, Inc. and Diametrics
Medical, Ltd., its wholly-owned subsidiary (the Company). All material
intercompany accounts and transactions have been eliminated.
TRANSLATION OF FOREIGN CURRENCIES The financial statements of the
Company's foreign subsidiary are translated into U.S. dollars for
consolidation. All assets and liabilities are translated using period-end
exchange rates and statements of operations items are translated using
average exchange rates for the period. The resulting translation
adjustments are recorded as a separate component of shareholders' equity.
Foreign currency transaction gains and losses are included in determining
net income, but have not been material in any of the years presented.
CASH AND CASH EQUIVALENTS The Company considers highly liquid debt
instruments purchased with an original maturity of three months or less to
be cash equivalents. At December 31, 1999, cash and cash equivalents
consist mainly of U.S. government money market funds.
MARKETABLE SECURITIES Investments in marketable debt securities are
classified as held to maturity and are stated at amortized cost, which
approximates estimated fair value. At December 31, 1999, marketable
securities consist mainly of investment grade commercial paper, with
original maturities ranging from five to nine months. These securities are
classified as held-to-maturity because of the Company's intent and ability
to hold its investments to maturity.
CONCENTRATION OF CREDIT RISK Financial instruments that may subject the
Company to significant concentrations of credit risk consist primarily of
trade receivables. The Company has two major distribution partners in the
medical diagnostic device industry who market and sell the Company's
products globally under exclusive distribution agreements. As of December
31, 1999, outstanding accounts receivable for one of these distributors
represented 80% of total outstanding accounts receivable, and sales to this
distributor represented 62% of sales for the year ended December 31, 1999.
Customer creditworthiness is routinely monitored and collateral is not
required.
INVENTORIES Inventories are stated at the lower of cost or market using
the first in, first out method.
PROPERTY AND EQUIPMENT Leasehold improvements are recorded at cost and
amortized over the term of the underlying lease. Furniture and equipment
are recorded at cost and depreciated on a straight-line basis over their
estimated useful lives of 2 to 7 years. Maintenance and repairs are
expensed as incurred.
OTHER ASSETS Other assets consist principally of intangible assets
representing purchased completed technology and other intangible assets
resulting from the excess of the cost of a purchased business over the fair
value of the net assets acquired. The intangible assets are amortized
using the straight-line method over five years. The recoverability of the
purchased completed technology and other intangible assets is assessed
quarterly based upon an analysis of undiscounted cash flows projected to be
generated by the acquired business.
REVENUE RECOGNITION The Company recognizes revenue upon shipment of
product to its distributors or customers or, in the case of trial
instruments and monitors placed directly with end-user customers, upon the
customer's acceptance of the product.
NET LOSS PER COMMON SHARE Basic earnings per share (EPS) is calculated by
dividing net loss by the weighted average common shares outstanding during
the period. Diluted EPS reflects the potential dilution to basic EPS that
could occur upon conversion or exercise of securities, options, or other
such items, to common shares using the treasury stock method based upon the
weighted average fair value of the Company's common shares during the
period. For each period presented, basic and diluted loss per share amounts
are identical, as the effect of potential common shares is antidilutive.
PRODUCT WARRANTY The Company, in general, warrants its new hardware and
operating system software products to be free from defects in material and
workmanship under normal use and service for a period of eighteen months
after date of shipment in the case of distributors, and one year after date
of sale in the case of end-user customers. The Company warrants its
disposable products to be free from defects in material and workmanship
under normal use until its stated expiration date. Provisions are made for
the estimated cost of maintaining product warranties for the hardware,
software and disposable products at the time the products are sold.
23
<PAGE>
INCOME TAXES Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Due to historical net losses of the Company, a valuation allowance is
established to offset the net deferred tax asset.
USE OF ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
STOCK BASED COMPENSATION The Company applies the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," to account for the issuance of stock
incentives to employees and directors and, accordingly, no compensation
expense related to employees' and directors' stock incentives has been
recognized in the financial statements.
IMPAIRMENT OF LONG-LIVED ASSETS The Company utilizes the undiscounted cash
flows alternative to detect impairment in long-lived assets.
RECLASSIFICATIONS Certain 1998 and 1997 amounts have been reclassified
from prior reported balances to conform to the 1999 presentation.
(2) LIQUIDITY
The Company incurred a net loss of $10,243,547 for the year ended December
31, 1999. In addition, the Company has incurred net losses and has had
negative cash flows from operating activities since inception. During 1999,
the Company received proceeds totaling approximately $13.5 million from
equity investments made under Common Stock Purchase Agreements with the
Company's exclusive global distributors, CODMAN and Agilent. Additionally,
the Agilent distribution agreement provides for minimum purchase
commitments, market development commitments, research and development
funding and royalty payments over the initial term of the agreement. The
Company believes proceeds from the funding agreements with Agilent,
currently available funds and cash generated from projected revenues,
supplemented by proceeds from employee stock plans, warrant exercises and
asset based credit, will meet the Company's working capital needs.
(3) INVENTORIES
December 31,
1999 1998
----------------------------
Raw materials $2,260,586 $1,989,953
Work-in-process 658,983 741,719
Finished goods 1,196,779 2,035,865
----------------------------
$4,116,348 $4,767,537
----------------------------
(4) PROPERTY AND EQUIPMENT
December 31,
1999 1998
----------------------------
Manufacturing equipment $ 6,412,203 $ 5,653,623
Laboratory fixtures and equipment 1,874,789 1,970,294
Office furniture and equipment 3,494,892 3,421,541
Leasehold improvements 3,338,370 3,388,445
Tooling 2,071,556 2,069,438
Demonstration instruments 1,300,443 2,513,659
Equipment-in-progress 963,045 1,060,383
----------------------------
19,455,298 20,077,383
Less accumulated depreciation
& amortization (13,680,801) (13,154,590)
----------------------------
$ 5,774,497 $ 6,922,793
----------------------------
(5) OTHER ASSETS
December 31,
1999 1998
------------------------------
Purchased completed technology, net $722,442 $1,122,569
Acquired customer base and
other intangible assets, net 147,970 222,615
Other 9,759 27,360
------------------------------
$880,171 $1,372,544
------------------------------
Amortization charged to expense for intangible assets was $474,772, $474,772 and
$507,981 in 1999, 1998 and 1997, respectively.
(6) ACCRUED EXPENSES
December 31,
1999 1998
--------------------------------
Employee compensation $1,236,319 $1,015,850
Product upgrades 292,746 73,629
Customer advance payments 167,501 174,662
Distributor reserve 93,091 -
Other 625,128 590,863
--------------------------------
$2,414,785 $1,855,004
--------------------------------
24
<PAGE>
(7) DEFERRED CREDITS AND REVENUE
December 31,
1999 1998
------------------------
Deferred research and development funding $2,833,334 $ -
Deferred royalty payments 2,271,880 -
------------------------
$5,105,214 $ -
------------------------
The Company's distribution agreement with Agilent provides for prepaid
funding of research and development costs and royalty payments over the
initial term of the agreement. These prepayments will be recognized over
the periods benefited.
(8) BORROWINGS
December 31,
1999 1998
------------------------
Long-term debt:
Convertible senior secured fixed
rate notes $7,300,000 $7,300,000
Notes payable 863,307 1,177,821
------------------------
8,163,307 8,477,821
Less current portion of long-term debt (349,511) (314,514)
------------------------
$7,813,796 $8,163,307
------------------------
Short-term borrowings:
Credit line $ - $ 828,823
------------------------
The aggregate maturities of outstanding long-term debt are:
Year ending December 31:
2000 $ 349,511
2001 388,400
2002 125,396
2003 7,300,000
----------
$8,163,307
==========
On August 4, 1998, the Company issued Convertible Senior Secured Fixed Rate
Notes with proceeds aggregating $7,300,000. Interest on the Convertible
Senior Secured Fixed Rate Notes is payable quarterly in arrears, at 7.00%
per annum. The full principal balance is due August 4, 2003. The notes
are secured by the issued and outstanding shares of DML, 100% of which are
owned by the Company.
The Convertible Senior Secured Fixed Rate Note agreements contain
provisions, which in the event of a change in control of the Company,
allow the note holders to require the Company to repurchase all or a
portion of the holder's notes at a purchase price of 100% of the principal
amount plus accrued and unpaid interest. In addition, the note agreements
contain provisions under which the note holders may convert the notes into
shares of Common Stock of the Company at a conversion price of $8.40 per
share, subject to adjustment for the impact of certain transactions
initiated by the Company that result in dilution of the note holders
investment in the Company.
The notes payable balance requires principal and interest payments in
monthly installments at varying amounts through September 2002, at annual
interest rates ranging from 10.1% to 10.95%. Maturity dates of the notes
range from December 1, 2001 to September 25, 2002, and all notes are
secured by equipment. See also note 15.
The Company has a $1,000,000 receivable backed credit line. The loan
agreement requires the Company's accounts receivable collections be applied
to reduce the loan balance, including advances, interest and fees. All
advances under the line of credit bear interest on the unpaid principal
amount at a fluctuating rate equal to the Prime Rate plus three percent.
Interest is payable monthly in arrears. The loan agreement requires the
monthly payment of an annualized unutilized loan fee equal to one half of
one percent (.5%) of the difference between the committed available loan
amount and the average outstanding loan balance. The full $1,000,000
available under the line of credit was unused at December 31, 1999. See
also note 15.
(9) LEASES
At December 31, 1999 the Company had no outstanding obligations under
capital leases. The gross amount included in property and equipment and
related accumulated amortization relating to capital leases at December 31,
1998 was as follows:
1998
---------
Manufacturing equipment $ 144,370
Laboratory fixtures and equipment 40,202
Office furniture and equipment 345,090
---------
529,662
Less accumulated amortization (524,667)
---------
$ 4,995
---------
25
<PAGE>
(10) STOCK OPTIONS AND WARRANTS
Under the terms of the 1990 Stock Option Plan, incentive stock options and
non-qualified stock options to purchase up to 3,750,000 shares of common
stock may be granted to Company employees and consultants.
Additionally, the 1993 Directors' Stock Option Plan provides grants to non-
employee directors of the Company of non-qualified stock options to
purchase up to an aggregate of 367,500 shares of common stock.
Under the plans, the option price is equal to the fair value on the date of
grant. Under the 1990 Stock Option Plan, options become exercisable over
varying periods and terminate up to ten years from the date of grant.
Under the 1993 Directors' Stock Option Plan, initial grants of options to
new directors become exercisable over a three-year period and terminate ten
years from the date of grant. Subsequent annual grants to directors vest
six months after the date of grant. At December 31, 1999, 529,818 and
129,588 additional shares were available for grant under the 1990 Stock
Option Plan and 1993 Directors' Stock Option Plan, respectively.
The following tables reflect the per share weighted-average fair value of
stock options granted during 1999, 1998 and 1997 under each of the plans on
the date of grant using the Black Scholes option-pricing model with the
following assumptions: annualized volatility of 76.93%, 84.42% and 74.15%
for 1999, 1998 and 1997, respectively; risk-free interest rate of 5.6% in
1999, 5.0% in 1998 and 5.7% in 1997; and for each year, an expected life of
five and three years for the 1990 Stock Option Plan and 1993 Directors'
Stock Option Plan, respectively.
Summarized below is the status of the Company's stock option plans as of
December 31, 1999, 1998 and 1997 and changes during those years:
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ------------------------------------
Weighted Weighted
average average
1990 Stock Option Plan Shares exercise price Shares exercise price
------------- ------------------- ------------- -------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,388,425 $5.43 2,387,797 $ 5.26
Granted 444,550 6.03 317,265 6.61
Exercised (223,723) 4.38 (236,062) 4.87
Expired (324,580) 6.46 (80,575) 6.63
------------- -------------
Outstanding at end of year 2,284,672 5.50 2,388,425 5.43
------------- -------------
Options exercisable at year-end 1,421,954 5.22 1,420,403 5.05
Weighted-average fair value of
options granted during the year $ 4.00 $4.59
1993 Directors' Stock Option Plan
Outstanding at beginning of year 160,131 $6.12 114,375 $ 5.89
Granted 44,031 6.38 64,631 7.32
Exercised - - (8,000) 4.63
Expired - - (10,875) 12.00
------------- -------------
Outstanding at end of year 204,162 6.17 160,131 6.12
------------- -------------
Options exercisable at year-end 195,162 6.13 131,256 6.08
Weighted-average fair value of
options granted during the year $ 3.42 $4.45
<CAPTION>
1997
------------------------------------
Weighted
average
1990 Stock Option Plan Shares exercise price
------------- -------------------
<S> <C> <C>
Outstanding at beginning of year 2,290,395 $5.15
Granted 452,415 5.94
Exercised (210,621) 4.63
Expired (144,392) 6.57
-------------
Outstanding at end of year 2,387,797 5.26
-------------
Options exercisable at year-end 1,258,262 4.85
Weighted-average fair value of
options granted during the year $3.84
1993 Directors' Stock Option Plan
Outstanding at beginning of year 170,000 $6.16
Granted 40,000 6.00
Exercised (18,500) 4.63
Expired (77,125) 6.84
-------------
Outstanding at end of year 114,375 5.89
-------------
Options exercisable at year-end 76,625 5.81
Weighted-average fair value of
options granted during the year $3.13
</TABLE>
26
<PAGE>
The following table summarizes information concerning stock options outstanding
and exercisable options at December 31, 1999 for the above plans:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------------ -----------------------------------
Weighted Weighted Weighted
average average average
Range of Number remaining exercise Number exercise
exercise outstanding life price exercisable price
prices
------------------------------------------------------------------------------ --------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.72 - 1.72 130,910 1.0 $1.72 130,910 $1.72
3.25 - 3.88 89,175 3.9 3.57 86,175 3.57
4.13 - 4.94 588,193 6.3 4.64 428,943 4.66
5.00 - 5.94 644,966 7.2 5.55 269,399 5.27
6.00 - 6.88 695,858 5.9 6.14 507,733 6.14
7.00 - 7.95 128,960 7.3 7.36 70,360 7.30
8.00 - 12.00 210,772 6.9 8.31 123,596 8.44
--------------- ----------- ----------- --------------- ----------
2,488,834 6.2 5.56 1,617,116 5.33
--------------- ---------------
</TABLE>
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its plans.
Accordingly, no compensation expense has been recognized for its stock-
based compensation plans as they relate to employees and directors. Had
the Company determined compensation cost based upon the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss
and net loss per share would have increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Net loss as reported $(10,243,547) $(17,387,662) $(21,036,543)
Net loss pro forma $(12,045,839) $(19,284,933) $(23,331,303)
Net loss per share as reported $ (0.41) $ (0.79) $ (1.13)
Net loss per share pro forma $ (0.49) $ (0.88) $ (1.25)
</TABLE>
27
<PAGE>
In connection with certain financing and marketing arrangements entered
into since the Company's inception, the Company has granted stock purchase
warrants for the purchase of common stock. The stock purchase warrants
become exercisable over varying periods and expire up to ten years from
the date of grant. At December 31, 1999, stock purchase warrants
representing 2,112,880 shares were exercisable with an additional
8,337 shares becoming exercisable over the first four months of 2000.
Stock warrants outstanding under these arrangements are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------- ----------------------------------
Exercise Exercise
price price
Shares per share Shares per share
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,713,086 $ 1.72 - 8.40 1,028,160 $ 1.72 - 6.75
Granted 452,381 8.40 739,286 5.19 - 8.40
Exercised - - (54,360) 5.19 - 6.13
Expired (44,250) 6.00 - -
-------------- --------------
Outstanding at end of year 2,121,217 1.72 - 8.40 1,713,086 1.72 - 8.40
-------------- --------------
Warrants exercisable at year-end 2,112,880 1.72 - 8.40 1,671,753 1.72 - 8.40
<CAPTION>
1997
----------------------------------
Exercise
price
Shares per share
--------------- --------------
<S> <C> <C>
Outstanding at beginning of year 786,814 $ 1.72 - 6.13
Granted 1,328,334 4.53 - 6.75
Exercised (902,617) 4.77 - 6.75
Expired (184,371) 4.77 - 5.06
---------------
Outstanding at end of year 1,028,160 1.72 - 6.75
---------------
Warrants exercisable at year-end 961,827 1.72 - 6.75
</TABLE>
(11) EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an employee stock purchase plan (the "Plan")
effective July 3, 1995, under which 300,000 shares of common stock are
available for sale to employees. The Plan enables all employees, after a
90-day waiting period, to contribute up to 10 percent of their wages toward
the purchase of the Company's common stock at 85 percent of the lower of
fair market value for such shares on the first business day of each quarter
or the last business day of each quarter.
Participant elections resulted in the issuance of 32,852 shares at an
average price per share of $4.46 in 1999, 45,012 shares at an average price
per share of $4.67 in 1998 and 55,394 shares at an average price per share
of $3.72 in 1997.
(12) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan for its U.S. employees. U.S.
employees of the Company who meet certain age and service requirements may
contribute up to 20 percent of their salaries to the plan on a pre-tax
basis. The Company has the discretion to match employee contributions up
to 6 percent of compensation. As of December 31, 1999, the Company has not
made any contributions to the plan.
As part of its acquisition of DML in November 1996, the Company assumed
sponsorship of the subsidiary's contributory defined benefit retirement
plan (the "Retirement Plan"), covering the majority of the subsidiary's
employees. The Retirement Plan provides benefits based upon final
pensionable salary and years of credited service. The Company's funding
policy for the Retirement Plan is to contribute into a trust fund at a rate
that is intended to remain at a level percentage of total pensionable
payroll. The assets of the Retirement Plan are held separately from those
of the Company and invested in the London and Manchester Secure Growth
Fund, Balanced Fund and a small holding in the Performance Fund. A portion
of the Retirement Plan assets are also invested in the Scottish Equitable
Funds.
28
<PAGE>
Contributions to the Retirement Plan are charged to expense so as to spread
the cost of the pensions over the employees' working lives with the
Company. The contributions are determined by a qualified actuary on the
basis of a valuation using the "attained age" valuation method.
The following provides a reconciliation of the projected benefit
obligation, plan assets and funded status of the Retirement Plan at
December 31, along with the components of net periodic pension cost for
each year presented:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------
<S> <C> <C>
Change in Projected Benefit Obligation
Projected benefit obligation at beginning of year $4,924,458 $3,954,675
Service cost 373,689 344,864
Interest cost 279,862 268,596
Plan participants' contributions 94,316 95,537
Actuarial (gain) loss (16,021) 265,965
Benefits paid (10,352) (38,192)
Foreign currency exchange rate changes (203,544) 33,013
-----------------------------------
Projected benefit obligation at end of year $5,442,408 $4,924,458
===================================
Change in Plan Assets
Fair value of plan assets at beginning of year $3,970,197 $3,234,425
Actual return on plan assets 830,259 368,134
Employer contribution 292,580 284,145
Plan participants' contributions 94,316 95,537
Benefits paid (10,352) (38,192)
Foreign currency exchange rate changes (165,530) 26,148
--------------------------------------
Fair value of plan assets at end of year $5,011,470 $3,970,197
======================================
Funded status $ (430,938) $ (954,261)
Unrecognized actuarial loss 453,534 918,918
--------------------------------------
Net amount recognized $ 22,596 $ (35,343)
======================================
Amounts recognized in the balance sheet consist of:
Accrued benefit liability $ (9,684) $ (181,764)
Minimum pension liability 32,280 146,421
--------=-----------------------------
Net amount recognized $ 22,596 $ (35,343)
======================================
Rate assumptions:
Discount rate 5.75% 6.00%
Rate of salary progression 3.50% 3.75%
Long-term rate of return on assets 9.50% 7.75%
<CAPTION>
Years ended December 31,
Components of Net Periodic Benefit Cost 1999 1998
--------------------------------------
Service cost $ 373,689 $ 344,864
Interest cost 279,862 268,596
Expected return on plan assets (310,598) (271,912)
Recognized net actuarial loss 21,030 13,264
--------------------------------------
$ 363,983 $ 354,812
======================================
</TABLE>
29
<PAGE>
(13) INCOME TAXES
The Company has incurred net operating losses since inception. The Company
has not reflected any benefit of such net operating loss carryforwards in
the accompanying financial statements.
As of December 31, 1999 the Company had U.S. tax net operating loss and
research and development tax credit carryforwards of approximately
$112,842,000 and $1,181,000, respectively. Use of the Company's net
operating loss carryforwards may be limited if a cumulative "change in
ownership" of more than 50 percent occurs within a three-year period. In
connection with prior sales by the Company of its securities in private and
public offerings, the Company has experienced a "change in ownership". As a
result, the utilization of the Company's net operating loss and certain
credit carryforwards incurred prior to these changes are subject to annual
limitations. The Company estimates that as of December 31, 1999, U.S. net
operating loss carryforwards of $2,900,000 are not available due to these
annual limitations. Net operating losses incurred since August 4, 1995 are
not currently subject to the "change in ownership" limitations. If not
used, these net operating loss carryforwards begin to expire in 2005.
The Company's foreign subsidiary also has a net operating loss carryforward
of approximately $46,693,000 which can be carried forward indefinitely.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows at December 31:
<TABLE>
<CAPTION>
1999 1998
-----------------------------------
<S> <C> <C>
Tax credits $ 1,181,000 $ 939,000
Federal net operating loss carryforward 41,752,000 38,424,000
Foreign net operating loss carryforward 15,409,000 15,089,000
Fixed asset depreciation 705,000 895,000
Amortization of goodwill 371,000 254,000
Accrued expenses 163,000 195,000
Other differences 100,000 141,000
Valuation allowance (59,681,000) (55,937,000)
----------------------------------
Net deferred tax asset $ - $ -
----------------------------------
</TABLE>
The provision for income taxes differs from the expected tax expense,
computed by applying the federal corporate rate of 34% to earnings before
income taxes as follows:
<TABLE>
<S> <C> <C> <C>
Expected federal benefit $ (3,483,000) $ (5,912,000) $ (7,152,000)
State tax, net of federal benefit (293,000) (522,000) (493,000)
Other 32,000 (70,000) (88,000)
Increase in valuation allowance 3,744,000 6,504,000 7,733,000
-------------------------------------------------------
$ - $ - $ -
-------------------------------------------------------
</TABLE>
(14) RESTRUCTURING AND OTHER CHARGES
During 1997, the Company continued to make operational changes initiated
in 1996 which were intended to better align its resources with its evolving
strategy, improve its efficiency, and achieve a more competitive cost
structure. Restructuring and other charges totaled $463,816 in 1997.
Charges consisted of severance costs of approximately $319,000 associated
with work force reductions, primarily in the Company's U.S. manufacturing,
research and development and general and administrative areas, and $145,000
for the write-down of excess and obsolete equipment resulting from the work
force reductions and process changes. These restructuring activities were
completed before or shortly after the end of the quarter in which charges
were incurred, and the Company does not have any material future cash
obligations relative to the described restructuring activities. The impact
of work force reductions on future operating results and cash flows is not
expected to be material in future periods, as savings achieved in these
areas have been and will continue to be reinvested in other areas of the
Company, including the Company's international operations.
30
<PAGE>
(15) RELATED PARTY TRANSACTIONS
In August 1998, the Company completed the sale in a private placement of
2,142,858 shares of Common Stock at a price of $7.00 per share as part of a
Common Stock Purchase Agreement, resulting in aggregate proceeds to the
Company of $15,000,006. The purchasers also received five-year warrants to
purchase 714,286 shares of Common Stock at $8.40 per share. In addition,
the Company issued Convertible Senior Secured Fixed Rate Notes, with
proceeds aggregating $7,300,000, which were used to retire other debt of
the Company. The investor group in both transactions was lead by BCC
Acquisition II LLC.
Two of the directors of the Company are affiliated with BCC Acquisition II
LLC, and one of these directors participated in the Common Stock Purchase
Agreement and the related sale of Convertible Senior Secured Fixed Rate
Notes. This director is also a director of DVI, Inc., a health care finance
company with which the Company has outstanding notes payable as of December
31, 1999 and an available receivable backed credit line. See note 8 for
further detail on the credit line, notes payable and Convertible Senior
Secured Fixed Rate Notes.
The Company's exclusive distributors, CODMAN and Agilent, are shareholders
of the Company. Sales to these parties were approximately $12.8 million
for the year ended December 31, 1999.
(16) BUSINESS SEGMENT INFORMATION
The Company develops, manufactures and markets blood and tissue analysis
systems that provide immediate or continuous diagnostic results at the
point-of-patient care. The Company's blood and tissue analysis systems
consist of two technology platforms. The first platform includes
intermittent blood testing products based on electrochemical and optical
technology, and the second platform includes continuous monitoring products
based on fiberoptic technology. Effective November 1, 1999, the Company's
products are sold primarily to acute care hospitals via third party
distribution channels including corporate partners strategically positioned
to access foreign markets. Prior to this, sales in the U.S., United Kingdom
and Germany were made through the Company's direct sales force. The
Company's disposable cartridges and sensors for the intermittent and
continuous monitoring technology platforms, respectively, are manufactured
at the Company's facilities. Hardware components of both technology
platforms are sub-contracted to outside vendors with portions of the
hardware assembly performed internally at the Company's facilities. Both
technology platforms are subject to similar regulatory monitoring by the
United States Food and Drug Administration and comparable agencies in other
countries. The Company's long term outlook for the two technology platforms
is that with increased sales volumes, they will exhibit similar financial
performance in terms of sales trends and gross margins. Based upon the
above, the Company has identified one reportable operating segment
consisting of medical diagnostic products which provide blood and tissue
analysis at the point-of-patient care.
Information regarding the Company's operations in different geographies for
the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------
<S> <C> <C> <C>
Sales to unaffiliated customers
United States $10,281,646 $ 4,879,367 $ 3,947,287
Germany 6,250,366 150,101 596,000
Japan 968,118 1,215,037 2,222,610
All other foreign countries 1,187,054 5,911,021 3,668,469
------------------------------------------------------------
$18,687,184 $12,155,526 $10,434,366
------------------------------------------------------------
Long-lived assets
United States $ 3,301,162 $ 3,682,879 $ 4,053,383
United Kingdom 2,473,335 3,239,914 3,332,589
------------------------------------------------------------
$ 5,774,497 $ 6,922,793 $ 7,385,972
------------------------------------------------------------
</TABLE>
Sales attributed to geographic areas are based upon customer location.
Long-lived assets consist of property and equipment located at the
Company's facilities in the United States and the United Kingdom.
Sales to major customers that exceeded 10% of total net sales for the years
ended December 31 were as follows:
1999 1998 1997
-----------------------------
Customer A 62% - -
Customer B - 14% 22%
The customers for which the above sales were generated are distributors of
the Company operating in the medical diagnostic device industry.
31
<PAGE>
(17) COMMITMENTS
The Company leases its facilities and some of its equipment under non-
cancelable operating lease arrangements. The rental payments under these
leases are charged to expense as incurred. Rent expense included in the
accompanying consolidated statements of operations was $873,687, $940,027
and $829,106 for the years ended December 31, 1999, 1998 and 1997,
respectively.
The following is a schedule of future minimum rental payments, excluding
property taxes and other operating expenses, required under all non-
cancelable operating leases:
Year ending December 31:
2000 $ 847,639
2001 757,519
2002 618,918
2003 548,558
2004 231,444
Thereafter 127,103
-----------
Total minimum lease payments $ 3,131,181
-----------
(18) LEGAL PROCEEDINGS
There are no legal proceedings pending, threatened against or involving the
Company, which, in the opinion of management, will have a material adverse
effect upon consolidated results of operations or financial condition.
(19) CHANGE IN YEAR-END OF SUBSIDIARY
Effective January 1, 1998, the Company changed the year-end of its wholly-
owned subsidiary, DML, to December 31 from November 30 to produce a
consistent reporting period for the consolidated entity. As a result of
this change in year-end, DML's net results of operations for the month of
December 1997 were closed to beginning accumulated deficit on the balance
sheet as of January 1, 1998. The impact of this change was an increase in
the beginning accumulated deficit of approximately $677,000.
(20) QUARTERLY RESULTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Net sales $ 4,243,187 $ 4,639,746 $ 4,694,294 $ 5,109,957
Gross profit 726,281 723,373 603,890 853,946
Operating loss (3,736,242) (2,718,719) (1,983,824) (1,605,014)
Net loss (3,907,742) (2,782,173) (1,981,187) (1,572,445)
Net loss per common share (0.17) (0.11) (0.08) (0.06)
1998
Net sales $ 2,416,703 $ 3,052,048 $ 3,102,430 $ 3,584,345
Gross profit 14,013 241,980 155,952 408,860
Operating loss (4,240,007) (4,094,835) (4,710,851) (4,129,578)
Net loss (4,303,193) (4,326,440) (4,792,354) (3,965,675)
Net loss per common share (0.21) (0.20) (0.21) (0.17)
</TABLE>
32
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Diametrics Medical, Inc.:
We have audited the accompanying consolidated balance sheets of Diametrics
Medical, Inc. and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Diametrics Medical,
Inc. and subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Minneapolis, Minnesota
January 27, 2000
33
<PAGE>
CORPORATE AND SHAREHOLDER INFORMATION
EXECUTIVE OFFICERS
David T. Giddings
President, Chief Executive Officer and Chairman of the Board
Roy S. Johnson
Executive Vice President and
President and Managing Director of
Diametrics Medical, Ltd.
Laurence L. Betterley
Senior Vice President and Chief Financial Officer
James R. Miller
Senior Vice President
Sales and Marketing and Commercial Development
DIRECTORS
Andre de Bruin (2)
President and Chief Executive Officer
QUIDEL Corporation
Gerald L. Cohn (1) (2)
Consultant and Private Investor
David T. Giddings
Hans-Guenter Hohmann (1)
Managing Director,
Agilent Technologies, GmbH and
General Manager, Point-of-Care Diagnostics Division, Agilent Technologies
Roy S. Johnson
Mark B. Knudson, Ph.D. (1)
Chairman and CEO
Venturi Group, LLC and
Chairman and Founder
HeartStent
David V. Milligan, Ph.D. (2)
Vice President
Bay City Capital
(1) Member of the Compensation Committee of the Board of Directors
(2) Member of the Audit Committee of the Board of Directors
34
<PAGE>
SHAREHOLDER INFORMATION
STOCK LISTING
The Company's common stock is traded on The Nasdaq National Market under
the symbol DMED.
STOCK TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Phone: (800) 937-5449
FORM 10-K
A copy of the Company's annual report on Form 10-K as filed with the
Securities and Exchange Commission is available to stockholders free of
charge by writing to Diametrics Medical, Inc.
ANNUAL MEETING
The annual meeting of Diametrics Medical, Inc. shareholders will be held
May 17, 2000, at 3:30 p.m. at the Minneapolis Marriott City Center, 30
South Seventh Street, Minneapolis, Minnesota. All shareholders and other
interested parties are invited to attend.
INVESTOR INQUIRIES
Please direct all inquiries to Laurence L. Betterley, Senior Vice President
and Chief Financial Officer, at the Company's corporate offices.
STOCK INFORMATION
High and low quarterly closing prices for Diametrics Medical, Inc., common
stock as quoted on The Nasdaq National Market were:
<TABLE>
<CAPTION>
1999
High Low
---------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter $ 8 9/16 $ 4 1/32
Second Quarter 6 3/4 4 13/16
Third Quarter 7 1/2 5 5/16
Fourth Quarter 6 13/16 3 3/4
1998
High Low
---------------------------------------------------------------------------------------
First Quarter $ 8 1/4 $ 5 1/4
Second Quarter 8 7/8 6 5/8
Third Quarter 7 15/16 3 5/8
Fourth Quarter 5 1/2 2 3/4
</TABLE>
There were 463 common shareholders of record and the Company estimates
approximately 7,100 shareholders holding stock in "street name" accounts as
of December 31, 1999. The Company has not paid any stock dividends on its
common stock since its inception, and management does not anticipate paying
cash dividends in the foreseeable future.
CORPORATE ADDRESS INTERNATIONAL SUBSIDIARY
Diametrics Medical, Inc. Diametrics Medical, Ltd.
2658 Patton Road 5 Manor Court Yard, Hughenden Ave.
St. Paul, Minnesota 55113 High Wycombe, Bucks. HP13 5RE
Phone: (651) 639-8035 England
Website: www.diametrics.com Phone: +44(0)1494 446651
35
<PAGE>
Exhibit 21
SUBSIDIARIES OF DIAMETRICS MEDICAL, INC.
The Company's consolidated subsidiaries are shown below, together with the
percentage of voting securities owned and the state or jurisdiction of each
subsidiary:
Percentage of
Outstanding Voting
Subsidiaries Securities Owned
- ------------ ----------------
Diametrics Medical, Ltd. 100%
(United Kingdom)
<PAGE>
EXHIBIT 23
Independent Auditor's Consent
The Board of Directors and Shareholders
Diametrics Medical, Inc.
We consent to the incorporation by reference in the Registration Statement (Nos.
333-63689, 333-63687, 333-51951, 333-33257, 333-24169, 333-24167, 333-24079 and
33-83572) on Forms S-3 and S-8 of Diametrics Medical, Inc., of our report dated
January 27, 2000, relating to the consolidated balance sheets of Diametrics
Medical, Inc. and Subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1999, which report
is incorporated by reference in the Annual Report on Form 10-K of Diametrics
Medical, Inc.
/s/ KPMG LLP
Minneapolis, Minnesota
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,786,162
<SECURITIES> 11,339,009
<RECEIVABLES> 6,990,673
<ALLOWANCES> 200,000
<INVENTORY> 4,116,348
<CURRENT-ASSETS> 25,317,528
<PP&E> 19,455,298
<DEPRECIATION> 13,680,801
<TOTAL-ASSETS> 31,972,196
<CURRENT-LIABILITIES> 10,308,060
<BONDS> 7,813,796
0
0
<COMMON> 257,785
<OTHER-SE> 13,582,871
<TOTAL-LIABILITY-AND-EQUITY> 31,972,196
<SALES> 18,687,184
<TOTAL-REVENUES> 18,687,184
<CGS> 15,779,694
<TOTAL-COSTS> 12,631,671
<OTHER-EXPENSES> (430,711)
<LOSS-PROVISION> 319,618
<INTEREST-EXPENSE> 630,459
<INCOME-PRETAX> (10,243,547)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,243,547)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,243,547)
<EPS-BASIC> (.41)
<EPS-DILUTED> (.41)
</TABLE>
<PAGE>
Exhibit 99
CAUTIONARY STATEMENT
Forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "PSLRA") are included in our Form 10-K. The
words or phrases "believes," "may," "will," "expects," "should," "continue,"
"anticipates," "intends," "will likely result," "estimates," "projects" or
similar expressions identify forward-looking statements in our Form 10-K and in
our future filings with the Securities and Exchange Commission, in our press
releases, in our presentations to securities analysts or investors, and in oral
statements made by or approved by an executive officer of Diametrics Medical,
Inc. Forward-looking statements involve risks and uncertainties that may
materially and adversely affect our business, results of operations, financial
condition or prospects, and may cause our actual results to differ materially
from historical results or the results discussed in the forward-looking
statements.
You should consider carefully the following cautionary statements if you
own our common stock or are planning to buy our common stock. We intend to take
advantage of the "safe harbor" provisions of the PSLRA by providing this
discussion. We are not undertaking to address or update each factor in future
filings or communications regarding our business or results except to the extent
required by law.
We are at an early stage of commercialization with limited operating history
Founded in 1990, we were engaged primarily in the research, development and
testing of, and the development of manufacturing capabilities for, the IRMA(R)
(Immediate Response Mobile Analysis) System and the Paratrend(R) 7 until 1995.
Since then, we have developed and are marketing product line extensions from
both of these core technology platforms, primarily an expansion of the blood
analysis test menu available on the IRMA System, and the extension of the
continuous monitoring technology available on the Paratrend 7 to two new
continuous monitoring products, Neotrend(TM) and Neurotrend(TM). We have limited
operating history upon which an evaluation of our prospects can be made. Our
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered in establishing a new business in the evolving, heavily
regulated medical device industry, which is characterized by an increasing
number of entrants, intense competition and a high failure rate.
We have a history of operating losses
We have only recently begun to generate revenues and have incurred net
operating losses since our inception. We expect to incur net operating losses at
least through the first half 2000. We cannot assure you that we will ever
generate substantial revenues or achieve profitability.
Our success depends upon market acceptance of new technology
Our success depends upon acceptance of our products by the medical
community as reliable, accurate and cost-effective. Our point-of-care blood
testing and monitoring devices represent a new practice in critical or stat
blood testing, which is currently performed primarily by central and stat
laboratories of hospitals or by independent commercial laboratories. Although
professional awareness of point-of-care blood testing is increasing, most acute
care hospitals have already installed expensive blood testing instruments for
use in their central and stat laboratories and may be reluctant to change
standard operating procedures or incur additional capital expenditures for new
blood analysis equipment. In addition, the limited number of blood analytes that
can be analyzed on our products may cause certain hospitals not to consider
them. We are unable to predict how quickly, if at all, our products will be
accepted by the medical community or, if accepted, predict the volume of our
products or the related disposable cartridges and sensors we can expect to sell.
1
<PAGE>
We face significant industry competition and risk of product obsolescence
The medical technology industry is characterized by rapidly evolving
technology and intense competition. We are aware of one other commercially
available hand-held point-of-care blood analysis system, which is manufactured
and marketed by i-STAT Corporation, but we expect that manufacturers of central
and stat laboratory testing equipment will also develop new products to maintain
their revenues and market share. Many of our competitors have substantially
greater capital resources, research and development staffs, and facilities than
we do, and many of these companies also have greater experience in research and
development, obtaining regulatory approvals, manufacturing, and sales and
marketing. We cannot assure you that our competitors will not succeed in
developing or marketing technologies and products that are more effective or
less expensive than ours that could render our products obsolete or
noncompetitive. Although we believe that our products may offer certain
technological advantages over our competitors' current products, earlier
entrants in the market in a therapeutic area often obtain and maintain
significant market share. Our product pricing is competitive with other
point-of-care suppliers and is, in general, slightly higher than prices of
existing high volume central and near patient labs operating near capacity, but
which lack the convenience and turnaround time of point-of-care testing. In the
future, we may experience competitive pricing pressures that may cause a
decrease in unit prices and sales levels.
We have limited manufacturing experience
We must manufacture our products in compliance with regulatory
requirements, in sufficient quantities and on a timely basis, and still maintain
product quality and acceptable manufacturing costs. Our products consist of two
principal components: portable, microprocessor-based instruments and disposable
sensors. We have limited experience producing our products in large commercial
quantities. Although we believe that we will be able to achieve and maintain
product accuracy and reliability when producing in large quantities, on a timely
basis and at an acceptable cost, we cannot assure you that we will be able to do
so. Also, product design changes, equipment failures and manufacturing process
changes may disrupt our existing operations and impact sales.
We depend on patents and proprietary technology, which we may not be able to
protect
Our success will depend in part on our ability to obtain patent protection
for our products and processes, to preserve our trade secrets and to operate
without infringing the intellectual property rights of others. The patent
positions of medical device companies are uncertain and involve complex and
evolving legal and factual questions. We cannot assure you that any of our
pending or future patent applications will result in issued patents, that any
current or future patents will not be challenged, invalidated or circumvented,
that the scope of any of our patents will exclude competitors or that the patent
rights granted to us will provide us any competitive advantage. In addition, we
cannot assure you that our competitors will not seek to apply for and obtain
patents that will prevent, limit or interfere with our ability to make, use or
sell our products either in the United States or in international markets.
Further, the laws of certain foreign countries may not protect our intellectual
property rights to the same extent as do the laws of the United States.
In addition to patents, we rely on trade secrets and proprietary knowledge
that we seek to protect, in part, through confidentiality agreements with
employees, consultants and others. We cannot assure you that our proprietary
information or confidentiality agreements will not be breached, that we will
have adequate remedies for any breach, or that our trade secrets will not
otherwise become known to or independently developed by competitors.
2
<PAGE>
We may face intellectual property infringement claims which would be costly to
resolve
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry and our competitors
may resort to intellectual property litigation as a means of competition.
Intellectual property litigation is complex and expensive and the outcome is
difficult to predict. We cannot assure you that we will not become subject to
patent infringement claims or litigation. Litigation or regulatory proceedings
may also be necessary to enforce our patents or other intellectual property
rights. We may not always have the financial resources to assert patent
infringement suits or to defend ourselves from claims. An adverse result in any
litigation could subject us to liabilities to, or require us to seek licenses
from or pay royalties to, others that may be substantial. Furthermore, we cannot
assure you that the necessary licenses would be available to us on satisfactory
terms, if at all.
Our success may depend in part on uncertain government health care policies and
reimbursement by third parties
The willingness of hospitals to purchase our products may depend on the
extent to which hospitals limit their own capital expenditures due to existing
or future cost reimbursement regulations. In addition, sales volumes and prices
of our products in certain markets will depend in part on the level of
reimbursement to hospitals for blood analysis from third-party payors, such as
government and private insurance plans, health maintenance organizations and
preferred provider organizations. Third-party payors are increasingly
challenging the pricing of medical procedures they consider unnecessary,
inappropriate or not cost-effective. We cannot assure you that current
reimbursement amounts, if any, will not be decreased in the future, and that any
decrease will not reduce the demand for or the price of our products. Any
federal or state health care reform measures could adversely affect the price of
medical devices in the United States, including our products, or the amount of
reimbursement available. We cannot predict whether any reform measures will be
adopted or what impact they may have on us.
We must obtain regulatory approval for new products we develop
Human diagnostic products are subject to rigorous pre-clinical and clinical
testing mandated by the United States Food and Drug Administration (the "FDA")
and comparable agencies in other countries and, to a lesser extent, by state
regulatory authorities. We have obtained pre-market notification clearances
under Section 510(k) of the Food, Drug and Cosmetic Act (the "FDC Act") to
market our IRMA SL System to test blood gases, electrolytes (i.e., inorganic
compounds including sodium, potassium, chloride and ionized calcium), blood urea
nitrogen and hematocrit (i.e., concentration of red blood cells) in whole blood
in hospital laboratories and at the point-of-care, and to market the Paratrend 7
to monitor blood gases and temperature. Additional pre-market notification
clearances were obtained in late 1997 to market Neotrend for blood gas
monitoring of critically ill babies, and in early 1998 for the addition of
glucose testing capability to the IRMA SL System. In November 1999, we obtained
510(k) clearance to market Neurotrend, designed for direct continuous monitoring
of oxygen, carbon dioxide, acidity and temperature in the brain. A Section
510(k) clearance is subject to continual review, and later discovery of
previously unknown problems may result in restrictions on marketing or
withdrawal of the product from the market. Our long-term business strategy
includes development of cartridges and sensors for performing additional blood
and tissue chemistry tests, and any new tests will be subject to the same
regulatory process. We cannot assure you that we will be able to develop
additional products or uses or that we will obtain the necessary clearances for
new products and uses on a timely basis or at all.
We also market our products in several foreign markets. Requirements vary
widely from country to country, ranging from simple product registrations to
detailed submissions such as those required by the FDA. Our manufacturing
facilities are also subject to FDA inspection on a periodic basis and we and our
contract manufacturers must demonstrate compliance with current Good
Manufacturing Practices promulgated by the FDA. Violations of the applicable
regulations at our manufacturing facilities or the manufacturing facilities of
our contract manufacturers may prevent us from marketing of our products.
3
<PAGE>
Our products and the technicians authorized to use them may be restricted by the
Clinical Laboratory Improvement Act of 1988
Our products are affected by the Clinical Laboratory Improvement Act of
1988 ("CLIA") which has been implemented by the FDA. This law is intended to
assure the quality and reliability of all medical testing in the United States
regardless of where tests are performed. The regulations require laboratories
performing blood chemistry tests to meet specified standards in the areas of:
. 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 our products have been categorized as moderate
complexity tests, we cannot assure you that our products will not be placed in a
more restrictive category. Personnel standards for high complexity tests are
more rigorous than those for moderate complexity tests, requiring more education
and experience. If our products are recategorized as high complexity tests, our
ability to successfully market them to hospitals or other potential buyers may
suffer. We cannot assure you that the CLIA regulations or various state
licensing requirements for technicians will not have a material adverse effect
on our financial condition or results of operation.
Our products may expose us to costly litigation
We may be exposed to product liability claims if a patient is adversely
affected by our products. We maintain a general insurance policy which includes
coverage for product liability claims. The policy is limited to a maximum of
$1,000,000 per product liability claim and an annual aggregate policy limit of
$2,000,000. We also carry umbrella liability insurance which provides coverage
up to $10,000,000. We cannot assure you that our existing insurance coverage
limits are adequate to cover any liabilities we might incur or that insurance
will continue to be available on commercially reasonable terms, if at all.
We depend on contract manufacturers and suppliers for key components of our
products
Our monitors and IRMA analyzers are manufactured for us by single vendors,
generally from off-the-shelf components. A few components are supplied by a
single source and manufactured to our specifications. Although we believe that
we could find alternative vendors, any interruption in supply could have a
material and adverse effect on our ability to manufacture our products, and our
financial condition and results of operations.
4
<PAGE>
We depend on distribution partners to sell, market and distribute most of our
products
We currently market most of our products through two global distribution
partners, who have exclusive distribution rights for these products. Although we
believe our distribution partners will successfully perform under the terms of
their respective distribution agreements, any significant failure to do so, or a
significant failure on our part to meet requirements under the distribution
agreements, may result in early termination of the agreement(s). The time and
cost required to re-establish distribution channels with other partners or on
our own may be prohibitive, and could have a material and adverse effect on our
ability to commercialize our products, and on our financial condition and
results of operations.
International operations will expose us to additional risks
We currently market most of our products through two global distribution
partners whose distribution channels include international markets, subject to
receipt of required foreign regulatory approvals. We cannot assure you that our
distribution partners will devote adequate resources to selling our products
internationally. Doing business outside of the United States also exposes us to
various risks that could have a material and adverse effect on our ability to
market our products internationally, including:
. changes in overseas economic and political conditions,
. currency exchange rate fluctuations,
. foreign tax laws, or
. tariffs or other trade regulations.
Our business is also expected to subject us and our representatives, agents
and distributors to laws and regulations of the foreign jurisdictions in which
they operate or our products are sold. We may depend on foreign distributors and
agents for compliance and adherence to foreign laws and regulations. We have no
control over most of these risks and may be unable to anticipate changes in
international economic and political conditions, and may be unable to alter our
business practices in time to avoid any adverse effects.
Concentration of ownership may give some shareholders substantial influence and
may prevent or delay a change in control
As of December 31, 1999, directors, executive officers and principal
shareholders, and certain of their affiliates, owned beneficially approximately
44.5% of our outstanding common stock, assuming all vested stock options, stock
purchase warrants and convertible debt held by them are exercised or converted.
These shareholders may be able to exercise substantial influence over all
matters requiring shareholder approval, including the election of directors, and
approval of significant corporate transactions. This concentration of ownership
could also have the effect of delaying, deferring or preventing a change in
control of Diametrics Medical, Inc.
We may be unable to meet our future capital requirements
We expect that our existing capital resources and proceeds from funding
agreements with our distribution partners should enable us to maintain our
current and planned operations. Nonetheless, our capital requirements depend on
many factors, including the rate of market acceptance of our products, the level
of resources we devote to expanding our business and manufacturing capabilities,
our research and development activities, the availability of financing for
capital acquisitions and other factors. We cannot accurately predict the timing
and amount of our capital needs. If capital requirements vary materially from
those currently planned, we will require additional capital. Issuing additional
shares of capital stock may be dilutive to our shareholders, and debt financing,
if available, may involve restrictive covenants.
5
