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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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
(IRS Employer
(State or other jurisdiction of Identification Number)
incorporation or organization)
2658 Patton Road
Roseville, Minnesota 55113
(Zip Code)
(Address of principal executive
offices)
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 Form 10-K or any amendment to this Form 10-K. [_]
As of February 28, 2002, 26,804,862 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 $112,600,000.
Documents Incorporated by Reference
Parts of the Registrant's definitive Proxy Statement for the 2002 Annual
Meeting of Shareholders to be held on May 22, 2002 are incorporated by
reference in Part III hereof.
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PART I
Unless the context otherwise indicates, all references to the "Registrant,"
the "Company," or "Diametrics" in this Annual Report on Form 10-K are to
Diametrics Medical, Inc., a Minnesota corporation, incorporated in January
1990, and where the context requires, its subsidiary, Diametrics Medical, Ltd.
("DML").
The following federally registered trademarks of the Company are used in
this Annual Report on Form 10-K: Diametrics Medical, Inc.(R), IRMA(R)SL,
Paratrend(R) 7, Neotrend(R), Neurotrend(R) and Trendcare(R). SureStep(R)Pro is
a registered trademark of LifeScan, a Johnson & Johnson company. Argyle(R) is
a registered trademark of Tyco Ludlow.
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 marketing organization (primarily through
distributors). The Company's goal is to be the world leader in critical care
blood and tissue analysis systems. The Company markets and distributes its
products primarily through two global distribution partnerships with Philips
Medical Systems ("Philips"), a division of Royal Philips Electronics, and
Codman & Shurtleff, Inc., a Johnson & Johnson company ("Codman").
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 systems could ultimately
eliminate the need for hospitals to maintain expensive and capital intensive
stat laboratories.
The Company has two primary product platforms. The first platform includes
intermittent blood testing products based primarily on electrochemical
biosensor technology (the IRMA SL blood analysis system and the Blood Analysis
Portal measurement module). The second platform includes continuous monitoring
products based upon fiberoptic biosensor technology (the Trendcare continuous
blood gas monitoring systems and the Neurotrend cerebral tissue monitoring
system).
Since its inception in 1990, the Company has developed, manufactured and
marketed 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 these measurements and associated calculated
values, 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.
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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 "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. In 2000, the Company introduced its H4 single-use cartridge, which
adds both chloride and blood urea nitrogen ("BUN") to a test panel of sodium,
potassium and hematocrit.
During the first quarter of 2002, the Company released its Blood Analysis
Portal measurement module, which was co-developed with Philips and provides
the analyte measurement capability of Philips' new Blood Analysis Portal
System. The Blood Analysis Portal System incorporates the technology of the
IRMA SL System and plugs directly into Philips' monitoring systems to allow
for an integration of blood test and physiological measurements at the
patient's bedside. Also scheduled for market release in the second quarter of
2002 is a new single-use cartridge which panels glucose with sodium, potassium
and chloride electrolytes ("GL"). Under development are additional blood tests
for lactate and creatinine, and a reusable version of the single-use
disposable cartridge which the Company plans to integrate into its next
generation analyzer.
In the fourth quarter of 1996, the Company established its second product
platform 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 biosensor technology
platform, which complements the Company's existing intermittent testing
electrochemical biosensor platform. This product line includes continuous
monitoring systems, consisting of a monitor, calibrator and intravascular
disposable sensors. Primary products include the Trendcare continuous blood
gas monitoring systems, 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 cerebral tissue 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 in hospital laboratories and at the
point-of-patient care the IRMA SL System to test blood gases, electrolytes,
glucose, lactate, BUN and hematocrit in whole blood, the Paratrend 7 and
Neotrend to monitor blood gases and temperature, and the Neurotrend system to
monitor oxygen, carbon dioxide, acidity and temperature in the brain.
Additionally, in the first quarter of 1998, the Company received clearance
from the United States Food and Drug Administration (the "FDA") to market the
multi-use cartridge for its IRMA SL System. The multi-use cartridge is planned
to be available on the Company's next generation analyzer, currently under
development. The Company has also gained CE Mark approval under the applicable
directives for the IRMA SL System and the Paratrend 7, Neotrend and Neurotrend
continuous monitoring products, allowing these products to be marketed in
Europe.
In October 1998, the Company entered into an exclusive distribution
agreement with Codman 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.
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
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products to HP. The initial term of the distribution agreement is three and a
half years, with the option for extensions. The distribution agreement also
provides for minimum purchase commitments of the Company's products, market
development commitments, research and development funding and royalty
payments. In November 1999, HP assigned the distribution agreement, with all
its related rights and obligations, 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 spun-off its ownership in Agilent to HP shareholders during
2000. In August 2001, Agilent completed the sale of its healthcare business to
Royal Philips Electronics, including its equity investment in the Company.
Also as part of this transaction, the distribution agreement between the
Company and Agilent was assigned to Philips Medical Systems, a division of
Royal Philips Electronics. The initial term of the distribution agreement ends
on October 31, 2002, with the option for three three-year extensions. The
Company is discussing various options for the possible continuation of a
relationship with Philips following the end of the initial term, which could
include a continuation of the distribution relationship with Philips under
modified terms yet to be determined.
The Company's principal executive office is located at 2658 Patton Road,
Roseville, Minnesota 55113, and its telephone number is (651) 639-8035.
Principal Products
Additional information regarding the Company's principal products is
provided below:
IRMA SL Series 2000 Blood Analysis System. The IRMA SL Series 2000 ("IRMA
SL System"), the third generation IRMA blood analysis system, was released in
the third quarter 1997. The IRMA SL System is comprised of the IRMA SL
analyzer and a variety of electrochemical-based disposable cartridges which
perform select combinations of the most frequently ordered critical care
diagnostic tests of blood gases, electrolytes, hematocrit and BUN 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. The Company also plans to release to the market in the second quarter
2002 a new single-use cartridge for use with the IRMA SL System which panels
glucose with existing electrolytes, called the GL cartridge.
Blood Analysis Portal Measurement Module. The Blood Analysis Portal
measurement module ("Portal measurement module"), released in the first
quarter of 2002, was co-developed with Philips and provides the analyte
measurement capability of Philips' new Blood Analysis Portal System ("Portal
System"). The Portal System incorporates the technology of the IRMA SL System
and is designed for use with Philips' monitoring systems, enabling similar
benefits available with the IRMA SL System, and additionally providing for an
integration of blood test and physiological measurements at the patient's
bedside. The Portal System utilizes the same electrochemical-based disposable
cartridges available with the IRMA SL System and delivers results in
approximately 90 seconds for blood gases, electrolytes, hematocrit,
chemistries and other calculated values. The Portal System also features
electronic quality control, and requires aqueous quality control only before a
new cartridge lot is put into use. The Portal System is designed for use with
Philips' monitors in adult, pediatric, and neonatal intensive care, as well as
operating room, post-anesthesia and emergency care settings.
The Integrated Data Management System--("idms"). Initially released in
1996, the Integrated Data Management System (formerly referred to as "IDMS")
is an advanced software application specially designed
4
to receive, manage and transmit data captured from point-of-care diagnostics
instruments. The Integrated Data Management System integrates point-of-care
test results and information from multiple devices, and provides convenient
sorting, viewing and analysis capabilities for trending, reporting, and
archiving data. An enhanced version, released in the second quarter of 2001,
provides point-of-care program management tools to track operators and devices
for quality control and regulatory purposes, and is language-enabled. The
Integrated Data Management System was further enhanced with a new release in
the first quarter 2002 that accommodates the device settings and information
management needs of the new Blood Analysis Portal System, in addition to the
IRMA SL System and other point-of-care diagnostic instruments. The Integrated
Data Management System also seamlessly transfers point-of-care results to
other laboratory, hospital, or clinical information systems.
Capillary Collection Device. The Capillary Collection Device was initially
introduced in 1996 and was enhanced in the third quarter of 2000 with a new
design. The Capillary Collection Device is a disposable component of the IRMA
SL System and provides the capability to collect and inject a capillary blood
sample. It is used with the IRMA SL System's single use cartridges to perform
blood gas, electrolyte, hematocrit and BUN testing. The capillary collection
device has applications in neonatal and pediatric intensive care units, and in
other situations where a capillary sample is preferred over an arterial or
venous sample.
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. The real-time patient information delivered by Trendcare can signal
the onset of adverse events and immediately identifies the impact of
ventilator and resuscitation therapy.
- Paratrend 7. Paratrend 7 is the Company's second generation sensor for
its continuous monitoring products, and is the only multi-parameter sensor
for in-vivo direct continuous monitoring of blood gases and temperature in
critically ill adult and pediatric patients. Inserted via an arterial
catheter, the sensor provides constant, precise measurement of vital blood
gas parameters. The new technology uses a fluorescent optical sensor for
monitoring oxygen, replacing the electrochemical version of its
predecessor. The Company received FDA clearance in October 1997 to market
the Paratrend 7 in the United States, and received CE Mark approval in May
1998, allowing the system to be marketed in Europe. During 2000, the
Company released a modified version of this sensor, Paratrend 7+, which
provides a dial-in introducer system as an alternative to the telescopic
introducer of Paratrend 7. The dial-in introducer allows single-handed
advancement of the sensor into an arterial line, facilitating ease of use.
- Neotrend. Based upon the fluorescent optical sensor technology
introduced with the Paratrend 7, Neotrend is the only multi-parameter
system for direct continuous monitoring of blood gases and temperature in
critically ill newborn babies, delivering real-time respiratory and
metabolic information at the point-of-care. The Company received FDA
clearance in December 1997 to market Neotrend in the United States, and
received CE Mark approval in May 1998, allowing the product to be marketed
in Europe. In early 2001, the Company released a modified version of this
sensor, Neotrend L, which is compatible with Argyle 3.7-Fr. and 5.0-Fr.
umbilical artery catheters, offering the convenience of use with this
widely accepted and utilized catheter brand. The Neotrend L will replace
the former version of this sensor during 2002.
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.
5
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. 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. 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, lactate and BUN in whole blood in hospital laboratories and at the
point-of-patient care. The multi-use cartridge, which allows multiple test
panels to be performed on a single cartridge, received clearance during 1998.
The multi-use cartridge is planned to be available on the Company's next
generation analyzer, currently under development. 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.
Prior to clearance for marketing in Europe, the Company's products must
also meet regulatory standards outlined in several directives administered by
the European Union. Compliance with applicable directives and achievement of
CE Mark approval is based upon conformity assessment to the essential
requirements stated in the directive. In order for manufacturers to affix CE
Mark to their products, allowing the products to be marketed in Europe, they
must follow the conformity assessment procedures applicable to the
classification of the product, and prepare a declaration of conformity. Once
gained, the CE Mark requires updating when significant changes are made to the
product, and the Company's full quality system is subject to annual audit by
its notified body in the United Kingdom and in the United States.
The Company has gained CE Mark approval under the applicable directives for
all of its marketed products that currently require it, including the
Paratrend 7, Neotrend and Neurotrend continuous monitoring products, and the
IRMA SL System.
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 Quality System
Regulations promulgated by the FDA.
The Company's intermittent testing products are affected by the Clinical
Laboratory Improvement Act of 1988 ("CLIA") which is regulated by the Centers
for Medicare and Medicaid Services. This law is intended to
6
assure the quality and reliability of all medical testing in the United States
regardless of where tests are performed. The regulations require laboratories
performing blood chemistry tests to meet specified standards in the areas of
personnel qualification, administration, participation in proficiency testing,
patient test management, quality control, quality assurance and inspections.
The regulations have established three levels of regulatory control based on
test complexity; "waived," "moderate complexity" and "high complexity." The
tests performed by the Company's IRMA SL System have been categorized under
CLIA as "moderately complex," which places this system in the same category as
most other commercially available blood gas and blood chemistry testing
instruments. The glucose strip 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 biosensor technology platforms; an
electrochemical platform, on which the IRMA and Portal 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 and Blood Analysis Portal System. The GL
single-use cartridge, which panels glucose with sodium, potassium and chloride
electrolytes, is planned for market release in the second quarter 2002. The GL
cartridge is intended for use by critical care centers to screen diabetic
patients and patients undergoing surgical procedures. Additionally, a lactate
cartridge is in development. In the critical care setting, lactate testing is
used to detect, treat and monitor decreased tissue oxygenation, primarily
associated with shock, hypovolemia, and heart failure; and to monitor certain
metabolic conditions. Development also continues on a creatinine test, with
plans to integrate this test into a panel configuration compatible with a next
generation analyzer currently under development and expected to be released to
the market in the 2004-2005 timeframe. The Company's multi-use cartridge,
which incorporates the Company's sensor and calibration technologies into
products that can perform multiple blood test panels on different patients
over a period of days before disposal, is also expected to be available on the
Company's next generation analyzer. The Company believes that the IRMA SL
System and related core technologies provide a flexible platform which are
capable of performing an even wider variety of blood chemistry tests.
Development efforts also include further enhancements to the Company's
Integrated Data Management System. The Integrated Data Management System is an
advanced data management software application that provides a comprehensive
data management system for point-of-care technologies. The new version of the
Integrated Data Management System, released in the first quarter of 2002,
supports the device settings and information management needs of the Portal
System and the IRMA SL System.
The Company plans to continually improve the IRMA SL System, and in
collaboration with Philips, the Blood Analysis Portal System, through software
upgrades, manufacturing process improvements and equipment design
enhancements, based on the results of ongoing marketing studies and field
experience.
Under joint development by the Company and Philips is the integration of
the Company's continuous monitoring product line technology into Philips'
patient monitoring platforms. The resulting product will miniaturize and
consolidate certain functionalities and the technology of the Trendcare
monitor and patient data module into one device which plugs directly into
Philips' monitoring systems. This system will provide an integration of
technologies which will create a communications interface that facilitates
monitor display of both continuous biochemical and physiological information
at the patient's bedside. In conjunction with this project, the Company is
redesigning the Trendcare satellite monitor and calibrator systems, which will
be compatible with the new patient data module. Market release for these
products is scheduled for 2003.
Additionally, studies are underway to apply 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.
7
The Company has incurred research and development expenses of approximately
$5,138,000, $4,962,000 and $4,847,000, net of funding from Philips of $2.2
million, $2 million and $1.2 million for the years ended December 31, 2001,
2000 and 1999, respectively.
Sales and Marketing
The Company markets and distributes its products primarily through two
global distribution partnerships with Codman and Philips. The Company also
continues to sell direct to end-users and through regional distributors 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 tissue 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 cerebral tissue monitoring system.
The Company's exclusive distribution agreement with Philips, initially entered
into with Hewlett Packard Company on June 7, 1999, provides for worldwide
market development and distribution of the Company's Trendcare continuous
blood gas monitoring systems and intermittent blood testing products.
Information concerning the Company's export sales is contained in note 15 to
the consolidated financial statements included in Part II, Item 8 of this Form
10-K.
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 and tissue analysis or incur
additional capital expenses.
The Company's established arrangements with hospital systems, healthcare
facilities and other influential healthcare buying groups that established the
Company as a sole, preferred or dual source supplier of its blood analysis
systems are now administered by Philips. The Company expects its distribution
partners to continue to enter into arrangements with 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
electrochemical thick-film cartridges used with the IRMA and Portal Systems 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 and patient
data module. The Company assembles in-house the IRMA SL analyzer and the
Portal measurement module at its Roseville facility, and the continuous
monitoring calibrator at its High Wycombe facility. These devices could be
manufactured by a number of microelectronics assembly companies, using
primarily off-the-shelf components. Software for the intermittent testing
products 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.
8
The majority of the raw materials and purchased components used to
manufacture the Company's products are readily available. Most of the
Company's raw materials are or may be obtained from more than one source. Some
components are manufactured to the Company's specifications and supplied by a
single source. Plans are ongoing to add additional second sourcing where
appropriate. Components used to manufacture the Company's hardware products
are subject to obsolescence. The Company monitors on an ongoing basis the need
to make product design changes to accommodate new replacement components for
obsolete parts and to transition its materials procurement to the replacement
components as necessary.
The Company's manufacturing facilities include three 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, with ongoing additional investments in production equipment to
increase automation and capacity, 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 May 2001 and October
1999 for Roseville and High Wycombe facilities, respectively), and by the
British Standards Institution for the High Wycombe facility (most recently in
October 2001). Additionally, the Roseville facility's quality systems have
been ISO 9001 certified since 1997 by the Management Service division of TUV
America Inc. ("TUV"), a technical inspection association which provides
testing and certification services. The Company successfully completed its
most recent TUV audit in February 2002. As a result of these inspections, the
Company's manufacturing facilities and documentation and quality control
systems are deemed satisfactory and in compliance with the related quality
regulations issued by these agencies.
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 four
patents issued for its calibration technology, four patents related to its
sensor technology and four for companion technology. In addition, two patents
have been issued and maintained covering the IRMA SL analyzer and disposable
cartridge designs. 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 26 foreign patents; three issued in the United Kingdom,
three in Germany, three in France, eight in Canada, five in Japan and one each
in Italy, the Netherlands, Spain and Australia.
As it relates to its continuous monitoring platform, the Company currently
maintains four U.S. patents associated with the design and manufacture of its
sensor technology platforms, and has filed six 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 2018. The
Company is not currently a party to any patent litigation.
The Company has federally registered the trademarks "IRMA," "Diametrics
Medical, Inc.," "Diametrics Medical, Incorporated," "IRMA Data Management
System (IDMS)," "Neocath," "Paratrend," "Tissutrak," "Paratrend 7,"
"Neotrend," "Neurotrend" and "Trendcare."
9
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 other
company, i-STAT, that is marketing a bedside point-of-care blood analysis
system. The Company believes that its intermittent blood analysis systems
possess 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 Roche/AVL Scientific
Corporation, Radiometer, Inc., Instrumentation Laboratories and Bayer.
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 their kind commercially available.
The Company's products are competitively priced with other point-of-care
product offerings and are lower in price than centralized testing labs when
the full cost of implementation is considered (i.e., equipment, maintenance,
facilities and trained lab personnel). Centralized testing labs also do not
provide the convenience and fast turnaround time for test results that point-
of-care products offer.
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........... 58 President and Chief Executive Officer
Roy S. Johnson.............. 49 Executive Vice President and President and
Managing Director of Diametrics Medical,
Ltd.
Senior Vice President and Chief Financial
Laurence L. Betterley....... 48 Officer
Mr. Giddings has been President, Chief Executive Officer and a director of
the Company since April 1996, and Chairman of the Board from April 1996 to
December 2001. Mr. Giddings was formerly President and Chief Operating Officer
of the United States operations of Boehringer Mannheim Corporation ("BMC"), a
U.S. subsidiary of Corange Ltd., a private global healthcare corporation. He
joined BMC in 1992 after a 26-year career with Eastman Kodak Company, where he
held a number of senior management positions, including
10
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 Diametrics Medical, Ltd.
("DML"), a subsidiary of the Company established in conjunction with the
acquisition in November 1996 of Biomedical Sensors, Ltd. ("BSL"). DML
develops, manufactures and markets the Company's continuous blood and tissue
monitoring systems. 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 developed,
manufactured and sold high performance computing systems used for
computational research.
Employees
As of December 31, 2001, the Company had a total of 166 full-time
employees, including 51 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 Annual Report on Form 10-K 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.
11
Item 2. Properties
The Company's principal properties are as follows:
Approximate
Location Square Lease
of Property Use of Facility Footage Expiration Date
--------------------- ------------------------ ----------- ---------------
Roseville, Minnesota Manufacturing, research 43,300 February 2004
and development, sales
support, marketing and
administration
Malvern, Pennsylvania Research and development 2,700 March 2007
High Wycombe, Manufacturing, process 14,500 September 2005
United Kingdom engineering,
purchasing and
distribution
High Wycombe, Sales support, marketing 5,500 January 2015(1)
United Kingdom and administration
High Wycombe, Research and Development 6,000 April 2004(2)
United Kingdom
- --------
(1)Lease can be terminated without penalty at the Company's sole discretion in
January 2005.
(2) Lease can be terminated without penalty at the Company's sole discretion
in April of 2003.
The Company believes that its facilities are sufficient for its projected
needs through 2003.
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, 2001.
12
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 following table sets forth, for the
periods indicated, the high and low quarterly closing prices for the Common
Stock as quoted on The Nasdaq National Market:
2001
-------------
High Low
---- ---
First Quarter............................................. $ 7 1/2 $3 7/8
Second Quarter............................................ 4 24/25 2 2/5
Third Quarter............................................. 4 11/20 3 13/20
Fourth Quarter............................................ 5 9/10 3 7/20
2000
-------------
High Low
---- ---
First Quarter............................................. $12 5/8 $7 5/8
Second Quarter............................................ 10 3/8 5 21/32
Third Quarter............................................. 8 1/4 6 1/8
Fourth Quarter............................................ 9 1/4 5 3/8
There were 359 common shareholders of record and the Company estimates
approximately 5,500 shareholders holding stock in "street name" accounts as of
December 31, 2001. 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.
Item 6. Selected Financial Data
SELECTED FIVE-YEAR FINANCIAL DATA
Years ended December 31,
----------------------------------------------------------
(in thousands, except
share and per share 2001 2000 1999 1998 1997
amounts) ---------- ---------- ---------- ---------- ----------
Statement of Operations
Data:
Net sales............. $ 24,489 $ 25,258 $ 18,687 $ 12,156 $ 10,434
Operating loss........ (3,578) (2,743) (10,044) (17,175) (20,737)
Net loss.............. (3,876) (2,648) (10,244) (17,388) (21,037)
Net loss per share
(1), (2)............. (0.14) (0.10) (0.41) (0.79) (1.13)
Weighted average
shares outstanding... 26,762,684 26,490,826 24,719,038 21,996,382 18,665,837
Balance Sheet Data:
Working capital....... $ 11,876 $ 14,334 $ 15,009 $ 11,415 $ 12,509
Total assets.......... 23,461 27,811 31,972 25,346 28,662
Long-term liabili-
ties................. 8,533 7,886 7,823 8,345 8,969
Shareholders' equity.. 9,529 14,185 13,841 11,366 12,773
- --------
(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.
13
Item 7. 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, manufacture 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 marketing organization (primarily through distributors). As of December
31, 2001, the primary funding for the operations of the Company has been
approximately $148 million raised through public and private sales of its
equity securities and issuance of convertible promissory notes.
Distribution and commercialization of the Company's products primarily
occurs through Philips Medical Systems ("Philips") and Codman & Shurtleff, a
Johnson & Johnson company ("Codman"). Philips is the exclusive global
distributor of the Company's 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). Philips also is
the exclusive global distributor of the Blood Analysis Portal System, co-
developed by the Company and Philips. Codman is the exclusive worldwide
distributor of the Neurotrend(TM) cerebral tissue monitoring system.
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 has an equity investment
of approximately $4 million in the Company's Common Stock.
The distribution agreement with Philips was signed 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 of the Company's products, market development
commitments, research and development funding and royalty payments, as well as
funding of sales and marketing costs during a sales transition period in 1999.
In late 1999, HP assigned the distribution agreement and its equity investment
with the Company to Agilent Technologies, Inc. ("Agilent"), a leading provider
of test and measurement solutions and communications components, which was
formed as a new company and subsidiary of HP. HP spun off its ownership in
Agilent to HP shareholders during 2000. In August 2001, Agilent completed the
sale of its healthcare business to Royal Philips Electronics, including its
equity investment in the Company. Also as part of this transaction, the
distribution agreement between the Company and Agilent was assigned to Philips
Medical Systems, a division of Royal Philips Electronics. The initial three-
and-a half year term of the Company's distribution agreement with Philips ends
on October 31, 2002, with the option for three three-year extensions. The
Company is discussing various options for the possible continuation of a
relationship with Philips following the end of the initial term, which could
include a continuation of the distribution relationship with Philips under
modified terms yet to be determined. The Company's sales to Philips in 2001
represented 90% of total sales, and the Company recognized in 2001
approximately $2 million of funding from Philips as a reduction in research
and development expenses. Sales to Philips include product purchases by
Philips to meet sales demand of its end-user customers and to fulfill its
internal product requirements associated with the sales process, as well as
contractual purchase commitments and royalties under the distribution
agreement. As a result, the level of the Company's sales to Philips during any
period is not indicative of Philips' sales to its end-user customers during
that period, which are estimated to be substantially less than the Company's
sales to Philips in each of the last three years.
The Company's historical trend of achieving successive improvements in
annual operating results was suspended in 2001 primarily due to the
realization of uncertainties affecting revenues described in the
14
Company's 2000 Annual Report, including: 1) delayed sales due to the
transition of the Company's distribution channel as a result of the sale of
Agilent's healthcare business to Royal Philips Electronics, 2) the impact of
new product introductions on hardware sales of the Company's existing product
lines, and 3) the impact on sales of reduced capital spending in the
healthcare sector after hospitals made investments to address Year 2000 date
change requirements. Total revenues for the year were down 3% from the prior
year. Revenue from product sales, which excludes non-product revenue such as
royalties, grew 4% for the year. Gross profit was 27% of sales in 2001, a
three percentage point reduction from the prior year, while operating expenses
declined 2% year over year. The resulting net loss for the year increased 46%
from the previous year. The decline in gross profit and increase in net loss
were driven by a $1.7 million reduction in non-product revenue, primarily
royalties.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the U.S., which require the
Company to make estimates and assumptions in certain circumstances that affect
amounts reported. In preparing these financial statements, management has made
its best estimates and judgments of certain amounts, giving due consideration
to materiality. The Company believes that of its significant accounting
policies (more fully described in note 1 to the consolidated financial
statements), the following are particularly important to the portrayal of the
Company's results of operations and financial position and may require the
application of a higher level of judgment by the Company's management, and as
a result are subject to an inherent degree of uncertainty.
Revenue Recognition and Accounts Receivable. The Securities and Exchange
Commission's Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition"
provides guidance on the application of generally accepted accounting
principles to selected revenue recognition issues, and the Company's revenue
recognition policies are in compliance with SAB 101. The Company markets and
distributes its products primarily through two global distribution
partnerships with Philips and Codman. The Company also continues to sell
direct to end-users and through regional distributors for a small volume of
products and transactions that are not subject to the exclusive distribution
agreements. The Company recognizes revenue upon shipment of product to its
distributors and direct customers or, in the case of trial instruments and
monitors placed directly with end-user customers, upon the customer's
acceptance of the product. The Company's sales terms to its distributors and
customers provide no right of return outside of the Company's standard
warranty policy (see Note 1), and payment terms consistent with industry
standards apply. Sales terms and pricing extended to the Company's
distributors are governed by the respective distribution agreements, together
with binding purchase orders for each transaction. Most of the Company's sales
since 1999 (after the inception of the Company's distribution partnerships
with Philips and Codman) have been to its distribution partners, totaling 94%
of total sales in 2001, and 90% and 70% in 2000 and 1999, respectively. The
Company's distribution partners purchase the Company's products to meet sales
demand of their end-user customers as well as to fulfill their internal
requirements associated with the sales process and contractual purchase
requirements under the respective distribution agreements. Internal and other
requirements include purchases of products by Philips (and to a lesser extent,
Codman) for training, demonstration and evaluation purposes, clinical
evaluations, product support, establishing inventories, meeting minimum
purchase commitments, and for royalties primarily in 2000. As a result, the
level of the Company's revenue during any period is not indicative of its
distributors' sales to end-user customers during that period, which are
estimated to be substantially less than the Company's sales to those
distributors in each of the last three years. While this does not affect the
Company's recognition of revenue for direct sales to its distributors or the
collectibility of its receivables, the Company's future revenue growth may be
impacted by its distributors' level of inventories of the Company's products,
their sales to end-user customers and their internal product requirements.
As sales to the Company's two global distribution partners comprise most of
the Company's revenues, the Company's accounts receivable balance at any point
in time likewise reflects a concentration of amounts due from these parties.
The Company maintains allowances for doubtful accounts for estimated losses
from the inability of its customers to make required payments. While the
Company believes that the quality of its
15
receivables from its distribution partners is high, if the financial condition
of the Company's distribution partners were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Inventories. Inventories are stated at the lower of cost or market using
the first-in, first-out method. Reserves for slow moving and obsolete
inventories are provided based upon current and expected future product sales
and the expected impact of product transitions or modifications. While the
Company expects its distributors' sales to grow, a reduction in its
distributors' sales could reduce the demand for the Company's products, and
additional inventory reserves may be required.
Recognition of Research and Development Funding. Research and development
funds earned by the Company under the Philips distribution agreement are
recorded as a reduction of the development costs incurred, and have totaled
approximately $2 million annually.
Foreign Currency Translation/Transactions. The financial position and
results of operations of the Company's foreign subsidiary, DML, are measured
using local currency as the functional currency. The financial statements of
the Company's foreign subsidiary are translated in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 52.
Accordingly, assets and liabilities are translated using period-end exchange
rates and statements of operations items are translated using average exchange
rates for the period, with the resulting translation adjustments recorded as a
separate component of shareholders' equity. Also recorded as translation
adjustments in shareholders' equity are transaction gains and losses on
intercompany balances for which settlement is not planned or anticipated in
the foreseeable future. Other foreign currency transaction gains and losses
are credited or charged against earnings. The Company's subsidiary has had
negative cash flows since its acquisition by the Company in late 1996, and is
expected to continue to have negative cash flows and require funding from the
Company for the foreseeable future. As a result, settlement of the Company's
net intercompany receivable balance with its subsidiary is not expected in the
foreseeable future. As such, the Company records transaction gains or losses
on intercompany balances in shareholders' equity in accordance with SFAS No.
52. The Company will continue to evaluate the potential for future settlement
of intercompany balances. Settlement of intercompany balances on a near-term
basis would require the Company to include transaction gains or losses on
intercompany balances as credits or charges to current income (vs.
shareholders' equity), potentially resulting in an increase in the volatility
of the Company's Statements of Operations.
Impairment of Long-Lived Assets. Long-lived assets at December 31, 2001
consist of property and equipment and purchased software. The Company reviews
its long-lived assets for impairment whenever events or business circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
RESULTS OF OPERATIONS
Sales
Sales of the Company's products were $24,488,928 for 2001, compared to
$25,258,407 for 2000, and $18,687,184 for 1999. The 35% increase in sales from
1999 to 2000 reflects a 32% growth in sales of instruments and a 9% increase
in disposable cartridge and sensor sales. Unit sales in 2000 grew at a higher
rate than the related revenues, at 42% for instruments and 28% for disposable
cartridges and sensors. The reduced rate of revenue growth relative to units
resulted from the impact of lower average sales prices under the Philips and
Codman distribution agreements. The impact of reduced pricing was partially
mitigated in 2000 by the recognition of royalty revenue under the Philips
distribution agreement of $2,260,000. Sales declined 3% in 2001 from 2000,
driven by a reduction in non-product revenue, primarily royalties. Product
revenues increased 4% during 2001, with a 10% increase in disposable cartridge
and sensor sales and a 1% increase in instrument sales. Unit sales in 2001
also grew at a higher rate than the related revenues, at 20% for both
instruments and
16
disposable cartridges and sensors. The favorable revenue impact of unit sales
growth in 2001 was partially offset by lower average cartridge sales prices to
Philips, resulting from volume price reductions, and a higher ratio of IRMA
analyzer instrument sales, which have lower average sales prices, relative to
total instrument sales. The Company's sales to Philips and Codman comprised
approximately 94%, 90% and 70% of total sales in 2001, 2000 and 1999,
respectively, and are expected to approximate 2001 levels as a percentage of
total sales in 2002. Due to the significant purchases of the Company's
products by its distributors for their internal use in the sales process and
to meet minimum purchase commitments, the distributors' sales to their end-
user customers over the last three years are estimated to be approximately 40%
of the Company's product sales related to those distributors over that period.
While expected to remain below the level of the Company's sales to the
distributors in 2002, the distributors' sales to their end-user customers in
2002 are expected to increase as a percentage of the Company's product sales
to those distributors compared to the last three years.
For the year ended December 31, 2001, both intermittent blood testing
products revenue and continuous monitoring products revenue were comprised of
71% instrument related revenue and 29% disposable cartridge and sensor related
revenue. Intermittent testing products represented 57%, 44% and 39% of sales
in 2001, 2000 and 1999, respectively, with continuous monitoring products
comprising the remaining sales in each year. The Company's revenues are
affected principally by the number of instruments, both monitors and IRMA
analyzers, sold to distributors, the extent to which the distributors sell
these instruments to end-user customers, and the rate at which disposable
sensors and cartridges are used in connection with these products. As of
December 31, 2001, the Company has sold approximately 10,800 instruments. Unit
sales in 2001 of both instruments and disposable sensors and cartridges
increased approximately 20% from 2000. As the Company grows, it is expected
that the growing end-user customer base will increase the usage and rate of
usage of disposable products, with the result that overall disposable product
sales will exceed that of instrument sales.
Cost of Sales
Cost of sales totaled $17,984,341 for 2001, compared to $17,738,103 for
2000 and $15,779,694 for 1999. Cost of sales as a percentage of revenue was
73% in 2001, 70% in 2000 and 84% in 1999. The three percentage point increase
in 2001 relative to 2000 was primarily caused by lower non-product revenue,
primarily royalties. Excluding the impact of non-product revenues, cost of
sales as a percentage of revenue improved by four percentage points from 2000
to 2001. The year-to-year improvements in the Company's cost of sales as a
percentage of revenue, excluding the impact of non-product revenue, reflect
lower disposable unit manufacturing costs resulting from increased unit sales
volumes and improved cartridge and sensor yields, a reduction in instrument
material costs, and the impact of operational efficiencies and process
improvements. Partially offsetting the improvement in 2001 was the impact of
lower average cartridge sales prices, resulting from volume price reductions.
Improvements in 2000 and 1999 were partially offset by the impact of generally
lower average sales prices resulting from the initiation in mid 1999 of the
distribution agreement with Philips. Sales returns in 1999 from distributors
that were displaced as a result of the Company's exclusive distribution
agreement with Philips also partially offset the improvement in that year. The
Company introduced a new intermittent testing hardware product in the first
quarter of 2002, which will supplement but not replace the Company's existing
hardware product line. It is not expected that the introduction of the new
hardware product will increase obsolescence of existing hardware inventories.
Operating Expenses
Total operating expenses decreased $181,000 or 2% from 2000 to 2001,
following a decrease of $2.7 million or 21% from 1999 to 2000. The significant
decline in operating expenses from 1999 to 2000 is primarily the result of the
transfer during 1999 of the Company's sales and marketing functions to Philips
and the recognition in 2000 of a full year of research and development funding
received from Philips as part of the distribution agreement.
Research and development expenses totaled $5,137,974 for 2001, compared to
$4,962,348 in 2000 and $4,847,463 in 1999. The year-to-year increases in
expenses of 2% and 4% in 2000 and 2001, respectively, were
17
primarily due to increased investments to support new research and development
projects, partially offset by the recognition of funding from Philips in the
amounts of $2.2 million in 2001, $2 million in 2000 and $1.2 million in 1999.
Selling, general and administrative expenses totaled $4,944,599 for 2001,
compared to $5,300,918 in 2000 and $8,103,826 in 1999. The significant
decrease in expenses from 1999 to 2000 was primarily impacted by the transfer
during 1999 of most of the Company's sales and marketing functions to Philips.
The decrease in expenses from 2000 to 2001 was primarily due to a reduction in
personnel.
Interest and Other Expense
The Company realized interest income of $323,490 in 2001, compared to
$787,396 in 2000 and $528,787 in 1999. The improvement in interest income from
1999 to 2000 reflects the impact of higher average cash and investment
balances, primarily affected by the timing of the Company's financing
activities, funding received from Philips and improved cash flows from
operations. The decline in interest income from 2000 to 2001 reflects the
impact of lower average cash and investment balances and lower average
interest rates.
Interest expense totaled $572,618 in 2001, compared to $586,616 in 2000 and
$630,459 in 1999. The decline in expense from 1999 to 2000 primarily reflects
the impact of lower average debt balances, while the decline from 2000 to 2001
reflects the impact of slightly lower average interest rates on comparable
average debt balances.
Net other expense totaled $48,785 in 2001, compared to $105,435 in 2000 and
$98,076 in 1999. The change in net amounts from 2000 to 2001 was primarily due
to a decrease in foreign currency transaction losses. Foreign currency
transaction gains and losses were not material in any of the years presented.
Net loss
Net loss for the year ended December 31, 2001 was $3,875,899, compared to
$2,647,617 in 2000 and $10,243,547 in 1999. The improvement in net loss from
1999 to 2000 reflects revenue growth; improved margins, influenced by higher
unit volumes, changes in product mix, royalty revenue and improved
manufacturing yields; and reduced operating expenses due primarily to research
and development funding received from Philips and the transfer of the
Company's sales and marketing functions to Philips. The net loss in 2001
increased from 2000 primarily as a result of a reduction in non-product
revenue, changes in product mix and lower interest income.
The Company anticipates that commercial success of its distribution
partners should result in growth in disposable sensor and cartridge revenue in
2002. This growth is likely to be offset initially by a decline in instrument
revenue due to the impact of a new hardware product introduction on average
hardware sales prices and sales of existing hardware product lines as
distributors reduce inventories of these products. Revenue and gross profit
levels in 2002 will depend on the impact of the new product line introduction,
revenue mix, and sales performance of the Company's distributors. As a result,
the Company's financial performance for 2002 may not improve from or may be
less favorable than that of 2001. If sales growth does occur in 2002, it is
expected to be delayed to the later part of the year due to these factors.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, the Company had working capital of approximately
$11.9 million, a decrease of approximately $2.4 million from the working
capital of $14.3 million reported at December 31, 2000. The net decrease
primarily reflects the impact of the increase in net loss between years of
$1.2 million and a $3.6 million decrease in proceeds from warrant exercises
and employee stock plans, partially offset by a $2.3 million reduction in
purchases of property and equipment. Through December 31, 2001, the Company
raised approximately $148 million through the public and private sales of its
equity securities and the issuance of convertible promissory notes.
18
Net cash provided by operating activities totaled $1 million for the year
ended December 31, 2001, compared to net cash used in operating activities of
$5.4 million and $3 million for the same periods in 2000 and 1999,
respectively. This was the result of net losses of $3.9 million, $2.6 million
and $10.2 million in 2001, 2000 and 1999, respectively, adjusted by changes in
operating assets and liabilities, primarily accounts receivable, inventories,
accounts payable, accrued expenses and deferred credits and revenue, discussed
below.
Net accounts receivable decreased $2.1 million for the year ended December
31, 2001, compared to a decrease of $109,000 in 2000 and an increase of $1.4
million in 1999. In spite of a significant increase in sales between 1999 and
2000, the accounts receivable balance decreased in 2000 primarily due to an
improvement in days sales outstanding, impacted by the Company's distribution
partnerships, and the timing of sales. The larger decline in accounts
receivable during 2001 was primarily due to the timing of sales and an
improvement in days sales outstanding.
Inventories decreased $213,000 for the year ended December 31, 2001, after
an increase of $164,000 in 2000 and a decrease of $651,000 in 1999. The
decrease in 1999 and small increase in 2000 reflect a decrease in finished
goods inventories in both years. The decline in finished goods inventory in
2000 was offset by an increase in work-in-process inventory to meet
anticipated production and sales requirements in the first quarter of 2001.
The decrease in 2001 reflects a decrease in continuous monitoring inventories
of $628,000 due to the production and shipment of products to the Company's
distributors, partially offset by an increase in intermittent testing hardware
inventories in preparation for shipment in the first quarter 2002 of initial
sales of a new hardware product line as well as sales of existing hardware
products. Each year's average inventory balance was positively impacted by
successive improvements in inventory turnover, stemming from improved
inventory management.
Accounts payable and accrued expenses decreased $954,000 on a combined
basis for the year ended December 31, 2001, after a decrease of $647,000 in
2000 and an increase of $405,000 in 1999. The increase in 1999 is primarily
due to increased accruals for employee bonuses and costs to complete committed
product upgrades. The declines in 2000 and 2001 were affected primarily by the
timing of vendor payments and reductions in product upgrade accruals as
upgrades were completed during 2000 and 2001 from the upgrade program which
began in 1999.
Deferred credits and revenue increased $750,000 during 2001, after a $4.1
million decrease during 2000 and a $5.1 million increase in 1999. The increase
in 1999 primarily reflects the receipt of $9.5 million of prepaid funding from
Philips under the terms of the distribution agreement, partially offset by the
recognition of approximately $4.4 million of the funding as a reduction of
1999 expenses and royalty revenue. The decrease in 2000 represents the
recognition of funding from Philips for research and development and royalties
of $4.3 million, partially offset by customer advance payments. The increase
in 2001 primarily reflects the receipt of $3 million of research and
development funding from Philips, partially offset by the recognition of
approximately $2.2 million of the funding as a reduction of 2001 expenses.
Net cash provided by investing activities totaled $4.4 million for the year
ended December 31, 2001, following net cash provided by investing activities
of $1.6 million in 2000 and net cash used in investing activities of $9.1
million in 1999. These year-to-year changes were primarily affected by the
amounts and timing of equity funding, funding received from Philips and
operating cash flow requirements, which all 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 $1.1 million for the year ended December 31, 2001, $3.4 million in
2000 and $1.7 million in 1999. Capital additions in each year consisted
primarily of investments in production and development equipment, software and
instruments for internal use in research and development. In 2002, the Company
expects total capital expenditures and new lease commitments to approximate
$1.2 million for the year, primarily reflecting investments to support new
product development and production.
19
Net cash provided by financing activities totaled $191,000 for the year
ended December 31, 2001, compared to $3.6 million in 2000 and $11.8 million in
1999. The year-to-year changes were due primarily to the amounts and timing of
equity funding and the amount of proceeds from employee stock plans and
warrant exercises 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. Repayments on the Company's
contractual obligations, consisting of debt, capital leases and operating
leases, are summarized below:
Year ending December 31
--------------------------------------------
2002 2003 Thereafter Total
---------- ---------- ---------- -----------
Long-term debt (1)............ $ 678,587 $7,610,978 $ -- $ 8,289,565
Capital leases (1)............ 159,511 159,511 166,675 485,697
Operating leases.............. 760,762 695,249 557,660 2,013,671
---------- ---------- -------- -----------
Total contractual obliga-
tions...................... $1,598,860 $8,465,738 $724,335 $10,788,933
========== ========== ======== ===========
--------
(1) Amounts include principal and interest.
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 to be applied to reduce the loan balance, including
advances, interest and fees. At December 31, 2001, no advances were
outstanding under the line of credit. The existing line of credit agreement
will not be renewed upon its expiration in mid 2002; however, the Company
plans to re-establish a line of credit agreement with an alternative source in
2002.
At December 31, 2001, the Company had U.S. net operating loss and research
and development tax credit carryforwards for income tax purposes of
approximately $120.8 million and $1.4 million, respectively. (See note 13 of
Notes to Consolidated Financial Statements for further discussion).
The full principal balance of the Company's $7.3 million Convertible Senior
Fixed Rate Notes becomes due August 4, 2003, unless the note holders elect
prior to that date to convert the notes into shares of the Company's Common
Stock at a conversion price of $8.40 per share. If the note holders do not
exercise the conversion option or do not elect to extend the due date, the
Company plans to refinance the notes with debt or equity to the extent cash
flows from operations or partnering activities are not sufficient to retire
the notes. There is no assurance that the Company will be able to refinance
the notes or be able to refinance under favorable terms. The Company believes,
however, that excluding the impact of retiring or refinancing the notes,
currently available funds and cash generated from projected operating
revenues, supplemented by proceeds from employee stock plans, warrant
exercises, asset based credit and partnering activities will meet the
Company's working capital and capital expenditure requirements. 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,
the level of resources devoted to expanding the Company's business and
manufacturing capabilities, and the level of 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.
20
EURO CONVERSION
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
three countries of the European Union ("EU") that has not adopted the euro as
its legal currency; however, the U.K. may convert to the euro at a later date.
The euro will be the sole official currency in participating EU countries on
July 1, 2002.
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
In July 2001, The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations," and SFAS No. 142 "Goodwill and Other Intangible Assets," which
change the accounting for business combinations and goodwill. SFAS No. 141
requires that the purchase method of accounting be used for business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method is prohibited. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will therefore
cease upon adoption of the Statement, which for the Company will be January 1,
2002. The Company has evaluated SFAS No. 141 and SFAS No. 142, and has
concluded that they do not have a material effect on its financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of," and addresses significant issues related to
the implementation of SFAS No. 121. SFAS No. 144 establishes a single
accounting method under which long-lived assets to be disposed of by sale are
measured, which is the lower of book value or fair value less costs to sell.
Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations and cash flows that (1)
can be distinguished from the rest of the entity and (2) will be eliminated
from the ongoing operations of the entity in a disposal transaction. SFAS No.
144 is effective January 1, 2002 and its provisions are to be applied
prospectively. The Company has evaluated SFAS No. 144 and has concluded that
it does not have a material effect on its financial statements.
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, 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 economies, the performance of the Company's distributors and the
availability of capital to finance growth. These and other risks are discussed
in greater detail in Exhibit 99 to this Form 10-K.
Item 7.a. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposure is foreign exchange rate
fluctuations of the British pound sterling to the U.S. dollar as the financial
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 Philips, 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.
21
The effect of foreign exchange rate fluctuations on the Company's financial
results for the years ended December 31, 2001, 2000 and 1999 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 borrowings under
a $1 million receivable backed credit line and a bank loan. Any advances under
the line of credit bear interest on the unpaid principal amount at a
fluctuating rate tied to the Prime Rate, while amounts outstanding under the
bank loan bear interest at a fluctuating rate tied to the bank's base rate.
The Company does not use derivative financial instruments to manage interest
rate risk. Borrowings under the line of credit are limited to $1 million and
are generally repaid within a few months. The outstanding balance under the
bank loan is less than $50,000. Given the above, the Company's exposure to
interest rate risk 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.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements Page
------------------------------------------ ----
Financial Statements:
Independent Auditors' Report........................................ 23
Consolidated Statements of Operations............................... 24
Consolidated Balance Sheets......................................... 25
Consolidated Statements of Shareholders' Equity and Comprehensive
Loss............................................................... 26
Consolidated Statements of Cash Flows............................... 27
Notes to Consolidated Financial Statements.......................... 28
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts...................... 45
All other schedules have been omitted because they are not applicable or
not required, or because the required information is included in the
consolidated financial statements or the notes thereto.
22
Independent Auditors' Report
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, 2001 and 2000, and the related
consolidated statements of operations, shareholders' equity and comprehensive
loss and cash flows for each of the years in the three-year period ended
December 31, 2001. 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 auditing standards generally
accepted in the United States of America. 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, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Minneapolis, Minnesota
January 29, 2002
23
DIAMETRICS MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
-----------------------------------------
2001 2000 1999
------------ ------------ -------------
Net sales.......................... $ 24,488,928 $ 25,258,407 $ 18,687,184
Cost of sales...................... 17,984,341 17,738,103 15,779,694
------------ ------------ -------------
Gross profit..................... 6,504,587 7,520,304 2,907,490
Operating expenses:
Research and development......... 5,137,974 4,962,348 4,847,463
Selling, general and administra-
tive............................ 4,944,599 5,300,918 8,103,826
------------ ------------ -------------
10,082,573 10,263,266 12,951,289
------------ ------------ -------------
Operating loss................. (3,577,986) (2,742,962) (10,043,799)
Interest income.................... 323,490 787,396 528,787
Interest expense................... (572,618) (586,616) (630,459)
Other expense, net................. (48,785) (105,435) (98,076)
------------ ------------ -------------
Net loss....................... $ (3,875,899) $ (2,647,617) $ (10,243,547)
============ ============ =============
Basic and diluted net loss per
common share...................... $ (0.14) $ (0.10) $ (0.41)
============ ============ =============
Weighted average common shares
outstanding....................... 26,762,684 26,490,826 24,719,038
============ ============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
24
DIAMETRICS MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2001 2000
------------- -------------
Assets
Current assets:
Cash and cash equivalents...................... $ 7,654,845 $ 2,431,704
Marketable securities.......................... 749,141 6,281,761
Accounts receivable, net of allowance for
doubtful accounts of
$93,820 in 2001 and $153,750 in 2000.......... 4,556,865 6,682,129
Inventories.................................... 4,066,964 4,280,234
Prepaid expenses and other current assets...... 247,286 397,406
------------- -------------
Total current assets......................... 17,275,101 20,073,234
------------- -------------
Property and equipment, net...................... 6,178,805 7,336,283
Other assets, net................................ 6,700 401,240
------------- -------------
$ 23,460,606 $ 27,810,757
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable............................... $ 1,562,569 $ 2,398,987
Accrued expenses............................... 1,796,390 1,914,409
Deferred credits and revenue................... 1,750,000 1,000,365
Current portion of long-term liabilities....... 289,686 425,775
------------- -------------
Total current liabilities.................... 5,398,645 5,739,536
------------- -------------
Long-term liabilities:
Long-term liabilities, excluding current por-
tion.......................................... 7,572,752 7,472,215
Other liabilities.............................. 960,300 414,115
------------- -------------
Total liabilities............................ 13,931,697 13,625,866
------------- -------------
Shareholders' equity:
Preferred stock, $.01 par value: 5,000,000
shares authorized, none issued................ -- --
Common stock, $.01 par value: 45,000,000 shares
authorized, 26,802,687 and 26,713,166 shares
issued and outstanding at December 31, 2001
and 2000, respectively........................ 268,027 267,132
Additional paid-in capital..................... 147,517,078 147,291,259
Accumulated deficit............................ (135,887,470) (132,011,571)
Accumulated other comprehensive loss........... (2,368,726) (1,361,929)
------------- -------------
Total shareholders' equity................... 9,528,909 14,184,891
------------- -------------
Commitments and contingencies (notes 9, 16, and
17)
$ 23,460,606 $ 27,810,757
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
25
DIAMETRICS MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
Accumulated
other
Additional comprehensive Total Total
Common paid-in Accumulated income shareholders' comprehensive
Stock capital deficit (loss) equity income (loss)
-------- ------------ ------------- ------------- ------------- -------------
Balance, December 31,
1998................. $233,916 $130,477,220 $(119,120,407) $ (225,165) $ 11,365,564
======== ============ ============= =========== ============
Net loss................ -- -- (10,243,547) -- (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............... -- -- (10,243,547) (291,342) -- $(10,534,889)
============
Issued common stock..... 21,303 11,849,017 -- -- 11,870,320
Issued common stock
under employee stock
purchase plan.......... 329 146,284 -- -- 146,613
Exercise of options to
common stock........... 2,237 976,708 -- -- 978,945
Issued stock options in
lieu of cash
compensation........... -- 14,103 -- -- 14,103
-------- ------------ ------------- ----------- ------------
Balance, December 31,
1999................. 257,785 143,463,332 (129,363,954) (516,507) 13,840,656
======== ============ ============= =========== ============
Net loss................ -- -- (2,647,617) -- (2,647,617) $ (2,647,617)
Foreign currency
translation
adjustment............. -- -- -- (333,522) (333,522) (333,522)
Minimum pension
liability.............. -- -- -- (511,900) (511,900) (511,900)
-------- ------------ ------------- ----------- ------------ ------------
Comprehensive loss for
the year ended December
31, 2000............... -- -- (2,647,617) (845,422) -- $ (3,493,039)
============
Issued common stock
under employee stock
purchase plan.......... 190 107,743 -- -- 107,933
Exercise of options to
common stock........... 3,134 1,332,694 -- -- 1,335,828
Exercise of warrants to
common stock........... 6,023 2,387,490 -- -- 2,393,513
-------- ------------ ------------- ----------- ------------
Balance, December 31,
2000................. 267,132 147,291,259 (132,011,571) (1,361,929) 14,184,891
======== ============ ============= =========== ============
Net loss................ -- -- (3,875,899) -- (3,875,899) $ (3,875,899)
Foreign currency
translation
adjustment............. -- -- -- (385,522) (385,522) (385,522)
Minimum pension
liability.............. -- -- -- (621,275) (621,275) (621,275)
-------- ------------ ------------- ----------- ------------ ------------
Comprehensive loss for
the year ended December
31, 2001............... -- -- (3,875,899) (1,006,797) -- $ (4,882,696)
============
Issued common stock
under employee stock
purchase plan.......... 360 106,575 -- -- 106,935
Exercise of options to
common stock........... 535 119,244 -- -- 119,779
-------- ------------ ------------- ----------- ------------
Balance, December 31,
2001................. $268,027 $147,517,078 $(135,887,470) $(2,368,726) $ 9,528,909
======== ============ ============= =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
26
DIAMETRICS MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net loss............................ $ (3,875,899) $ (2,647,617) $(10,243,547)
Adjustments to reconcile net loss to
net cash provided
by (used in) operating activities:
Depreciation and amortization...... 2,408,285 2,157,034 2,224,519
Other.............................. 196,506 (102) 12,988
Changes in operating assets and
liabilities:
Receivables, net.................. 2,125,264 108,544 (1,370,581)
Inventories....................... 213,270 (163,886) 651,189
Prepaid expenses and other current
assets........................... 150,120 (112,070) 168,955
Accounts payable.................. (836,418) (39,563) (96,793)
Accrued expenses.................. (118,019) (607,845) 501,842
Deferred credits and revenue...... 749,635 (4,104,849) 5,105,214
------------ ------------ ------------
Net cash provided by (used in)
operating activities............ 1,012,744 (5,410,354) (3,046,214)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and
equipment.......................... (1,124,411) (3,437,775) (1,689,372)
Sale of evaluation and demonstration
instruments........................ -- -- 944,737
Purchases of marketable securities.. (4,319,091) (18,230,499) (16,026,009)
Proceeds from maturities of
marketable securities.............. 9,851,711 23,287,747 7,663,443
Other............................... (1,100) 4,261 25,819
------------ ------------ ------------
Net cash provided by (used in)
investing activities............ 4,407,109 1,623,734 (9,081,382)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on borrowings and
capital lease obligations.......... (522,862) (370,679) (1,245,332)
Proceeds from borrowings............ 487,310 115,846 --
Net proceeds from issuance of common
stock.............................. 226,714 3,837,274 12,995,878
------------ ------------ ------------
Net cash provided by financing
activities...................... 191,162 3,582,441 11,750,546
------------ ------------ ------------
Effect of exchange rate changes on
cash and cash equivalents........... (387,874) (150,279) (269,402)
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents............ 5,223,141 (354,458) (646,452)
Cash and cash equivalents at
beginning of year................... 2,431,704 2,786,162 3,432,614
------------ ------------ ------------
Cash and cash equivalents at end of
year................................ $ 7,654,845 $ 2,431,704 $ 2,786,162
============ ============ ============
Supplemental disclosures of cash flow
information:
Cash paid during the year for
interest........................... $ 572,618 $ 586,616 $ 630,459
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
27
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 partnerships with Philips Medical Systems ("Philips") and
Codman & Shurtleff, Inc., a Johnson & Johnson company ("Codman"), who have
exclusive global distribution rights for the products they distribute. The
Company also continues to sell direct to end-users and through regional
distributors 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. ("DML"), its wholly-owned subsidiary. All material intercompany
accounts and transactions have been eliminated.
Foreign Currency Translation/Transactions. 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. Also recorded as
translation adjustments in shareholders' equity are transaction gains and
losses on intercompany balances for which settlement is not planned or
anticipated in the foreseeable future. Other 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 90-days or less to be cash
equivalents. At December 31, 2001, cash and cash equivalents consist mainly of
U.S. government money market funds and investment grade commercial paper.
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, 2001, marketable securities
consist mainly of investment grade commercial paper, with an original maturity
of approximately three 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, 2001 and
2000, outstanding accounts receivable for one of these distributors
represented 95% and 85%, respectively, of total outstanding accounts
receivable, and sales to this distributor represented 90%, 82% and 63% of
sales for the years ended December 31, 2001, 2000 and 1999, respectively.
Customer creditworthiness is routinely monitored and collateral is not
required.
Sources of Supply. The majority of the raw materials and purchased
components used to manufacture the Company's products are readily available.
Many of these raw materials and components are purchased from single sources
due to technology, price, quality or other considerations. Some of these
single-sourced components are manufactured to the Company's design and
specifications. Most of these items, however, may be sourced from other
suppliers, often after a requalification process. Sourcing from alternative
suppliers in some cases may require product design or software changes to
accommodate variations from the original components. In the event that the
Company's supply of critical raw materials or components was interrupted due
to the time required to requalify materials or components or modify product
designs, the Company's ability to manufacture the related
28
product in desired quantities and in a timely manner could be adversely
affected. The Company attempts to mitigate these risks by working closely with
key suppliers to coordinate product plans and the transition to replacement
components for obsolete parts.
Inventories. Inventories are stated at the lower of cost or market using
the first in, first out method.
Property and Equipment. Property and equipment and purchased software are
recorded at cost. Depreciation and amortization are computed using the
straight-line method over estimated useful lives of 2 to 7 years for equipment
and furniture and the term of the underlying lease for leasehold improvements.
Costs of computer software to be sold are accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed," and
are amortized over a three-year estimated product life pro-ratably with
projected sales over that period. 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. As of December 31, 2001, the purchased completed technology
and other intangible assets were fully amortized.
Revenue Recognition. The Company recognizes revenue upon its shipment of
product to its distributors or end-user customers or, in the case of trial
instruments and monitors placed directly with end-user customers, upon the
customer's acceptance of the product. The Company's sales terms to its
distributors and end-user customers provide no right of return outside of the
Company's standard warranty policy discussed below under "Product Warranty,"
and payment terms consistent with industry standards apply. Sales terms and
pricing extended to the Company's distributors are governed by the respective
distribution agreements, together with binding purchase orders for each
transaction. Most of the Company's sales since 1999 (after the inception of
the Company's distribution partnerships with Philips and Codman) have been to
its distribution partners, totaling 94% of total sales in 2001, and 90% and
70% in 2000 and 1999, respectively. The Company's distribution partners
purchase the Company's products to meet sales demand of their end-user
customers as well as to fulfill their internal requirements associated with
the sales process and contractual purchase commitments under the respective
distribution agreements. Internal and other requirements include purchases of
products by Philips (and to a lesser extent, Codman) for training,
demonstration and evaluation purposes, clinical evaluations, product support,
establishing inventories and for meeting minimum purchase requirements. As a
result, the level of the Company's revenue during any period is not indicative
of its distributors' sales to end-user customers during that period, which are
estimated to be substantially less than the Company's sales to those
distributors in each of the last three years.
Research and Development. Research and development costs relate to hardware
and software development and enhancements to existing products. All such costs
are expensed as incurred, with the exception of software costs incurred after
the technological feasibility of a software product to be sold has been
established. Such software costs are capitalized and amortized in accordance
with SFAS 86, discussed under "Property and Equipment" above. Research and
development funds earned by the Company under the Philips distribution
agreement are recorded as a reduction of the development costs incurred.
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.
29
The following is a summary of outstanding securities which have been
excluded from the calculation of diluted EPS because the effect on net loss
per common share would have been antidilutive:
December 31,
-----------------------------
2001 2000 1999
--------- --------- ---------
Common stock options.......................... 2,556,518 2,422,141 2,496,241
Common stock warrants......................... 1,406,667 1,414,667 2,121,217
Convertible senior secured fixed rate notes... 869,047 869,047 869,047
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.
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 deferred tax asset.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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. The Company's
significant estimates primarily relate to the assessment of required accounts
receivable and inventory valuation allowances, the fair value of long-lived
assets, and accounting for foreign currency translation and transactions.
Actual results could differ from those estimates.
Stock Based Compensation. The Company applies the intrinsic-value method
prescribed in Accounting Principles Board ("APB") 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 reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
Reclassifications. Certain 1999 amounts have been reclassified from prior
reported balances to conform to the 2001 presentation.
New Accounting Pronouncements. In July 2001, The Financial Accounting
Standards Board ("FASB") issued SFAS No. 141 "Business Combinations," and SFAS
No. 142 "Goodwill and Other Intangible Assets," which change the accounting
for business combinations and goodwill. SFAS No. 141 requires that the
purchase method of accounting be used for business combinations initiated
after June 30, 2001. Use of the pooling-of-
30
interests method is prohibited. SFAS No. 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach.
Amortization of goodwill, including goodwill recorded in past business
combinations, will therefore cease upon adoption of the Statement, which for
the Company will be January 1, 2002. The Company has evaluated SFAS No. 141
and SFAS No. 142, and has concluded that they do not have a material effect on
its financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of," and addresses significant issues related to
the implementation of SFAS No. 121. SFAS No. 144 establishes a single
accounting method under which long-lived assets to be disposed of by sale are
measured, which is the lower of book value or fair value less costs to sell.
Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations and cash flows that (1)
can be distinguished from the rest of the entity and (2) will be eliminated
from the ongoing operations of the entity in a disposal transaction. SFAS No.
144 is effective January 1, 2002 and its provisions are to be applied
prospectively. The Company has evaluated SFAS No. 144 and has concluded that
it does not have a material effect on its financial statements.
(2) LIQUIDITY
The Company incurred a net loss of $3,875,899 for the year ended December
31, 2001 and has incurred net losses since inception. The full principal
balance of the Company's $7.3 million Convertible Senior Fixed Rate Notes
becomes due August 4, 2003, unless the note holders elect prior to that date
to convert the notes into shares of the Company's Common Stock at a conversion
price of $8.40 per share. If the note holders do not exercise the conversion
option or do not elect to extend the due date, the Company plans to refinance
the notes with debt or equity to the extent cash flows from operations or
partnering activities are not sufficient to retire the notes. There is no
assurance that the Company will be able to refinance the notes or be able to
refinance under favorable terms. The Company believes, however, that excluding
the impact of retiring or refinancing the notes, currently available funds and
cash generated from projected operating revenues, supplemented by proceeds
from employee stock plans, warrant exercises, asset based credit and
partnering activities, will meet the Company's currently anticipated working
capital needs and capital expenditure requirements. 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. 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.
(3) INVENTORIES
2001 2000
---------- ----------
Raw materials.......................................... $1,739,134 $1,735,460
Work-in-process........................................ 1,130,307 1,320,521
Finished goods......................................... 1,197,523 1,224,253
---------- ----------
$4,066,964 $4,280,234
========== ==========
31
(4) PROPERTY AND EQUIPMENT
December 31,
--------------------------
2001 2000
------------ ------------
Manufacturing equipment........................ $ 7,725,234 $ 7,417,492
Laboratory fixtures and equipment.............. 1,897,190 1,870,254
Data equipment and furniture................... 3,680,745 3,678,089
Leasehold improvements......................... 3,338,138 3,352,540
Purchased software............................. 1,212,593 1,022,330
Tooling........................................ 2,586,469 2,601,734
Demonstration instruments...................... 1,612,885 1,765,246
Equipment-in-progress.......................... 847,196 766,562
------------ ------------
22,900,450 22,474,247
Less accumulated depreciation and
amortization.................................. (16,721,645) (15,137,964)
------------ ------------
$ 6,178,805 $ 7,336,283
============ ============
(5) OTHER ASSETS
December 31,
--------------------------
2001 2000
------------ ------------
Purchased completed technology, net............ $ -- $ 328,381
Acquired customer base and other intangible
assets, net................................... -- 67,259
Other.......................................... 6,700 5,600
------------ ------------
$ 6,700 $ 401,240
============ ============
Amortization charged to expense for intangible assets was $395,640 in 2001
and $474,772 in both 2000 and 1999.
(6) ACCRUED EXPENSES
December 31,
--------------------------
2001 2000
------------ ------------
Employee compensation.......................... $ 1,338,895 $ 1,195,974
Product upgrades............................... -- 171,577
Other.......................................... 457,495 546,858
------------ ------------
$ 1,796,390 $ 1,914,409
============ ============
(7) DEFERRED CREDITS AND REVENUE
December 31,
--------------------------
2001 2000
------------ ------------
Deferred research and development funding...... $ 1,666,667 $ 833,334
Other deferred................................. 83,333 167,031
------------ ------------
$ 1,750,000 $ 1,000,365
============ ============
The Company's distribution agreement with Philips provides for prepaid
funding of research and development costs over the initial term of the
agreement. These prepayments are being recognized ratably over the periods
earned.
32
(8) BORROWINGS
December 31,
----------------------
2001 2000
---------- ----------
Long-term debt:
Convertible senior secured fixed rate notes........ $7,300,000 $7,300,000
Notes payable and bank loan........................ 171,688 597,990
---------- ----------
7,471,688 7,897,990
Less current portion of long-term debt............. (161,771) (425,775)
---------- ----------
$7,309,917 $7,472,215
========== ==========
The aggregate maturities of outstanding long-term debt are:
Year ending December 31:
2002............................................................ $ 161,771
2003............................................................ 7,309,917
----------
$7,471,688
==========
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% 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
holders' 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.
Amounts outstanding under notes payable are financed with DVI, Inc. and
total $125,396 and $513,796 at December 31, 2001 and 2000, respectively, and
require principal and interest payments in monthly installments at varying
amounts through September 2002. The annual interest rates for the notes range
from 10.1% to 10.95%. The amount outstanding under the bank loan totals
$46,292 and $84,194 at December 31, 2001 and 2000, respectively, and bears
interest at a fluctuating rate equal to the bank's base rate plus 2.25%.
Maturity dates of the notes and loan range from May 25, 2002 to September 25,
2003, and all related borrowings are secured by equipment. See also note 14.
The Company has a $1,000,000 receivable backed credit line with DVI, Inc.
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, 2001. The line of credit agreement will not
be renewed upon its expiration on June 29, 2002; however, the Company plans to
re-establish a line of credit agreement with another source in 2002. See also
note 14.
33
(9) LEASES
The Company is obligated under equipment capital leases that expire at
various dates during the next four years. The lease agreements are secured by
the related equipment and require principal and interest payments in monthly
installments through January 2005, at annual rates ranging from 9.67% to 12%.
The capital lease for the manufacturing equipment is with DVI, Inc. See also
note 14. The gross amount included in property and equipment and related
accumulated amortization relating to capital leases is as follows:
December 31,
-----------------
2001 2000
-------- -------
Manufacturing equipment................................... $481,542 $ --
Laboratory fixtures and equipment......................... 20,520 --
-------- -------
502,062 --
Less accumulated amortization............................. (40,715) --
-------- -------
$461,347 $ --
======== =======
The present value of future minimum capital lease payments is as follows:
Year ending December 31:
2002............................................................ $ 159,511
2003............................................................ 159,511
2004............................................................ 154,554
2005............................................................ 12,121
---------
Total minimum lease payments...................................... 485,697
Less amount representing interest................................. (94,947)
---------
Present value of minimum capital lease payments................... 390,750
Less current portion of capital lease obligations................. (127,915)
---------
Capital lease obligations, excluding current portion.............. $ 262,835
=========
(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 4,450,000 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 467,500 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, 2001, 924,479 and 100,338 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 2001, 2000 and 1999 under each of the plans on
the date of grant using the Black Scholes option-pricing model with the
following assumptions: annualized volatility of 85.20%, 77.94% and 76.93% for
2001, 2000 and 1999, respectively; risk-free interest rate of 4.56% in 2001,
5.9% in 2000 and 5.6% in 1999; 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.
34
Summarized below is the status of the Company's stock option plans as of
December 31, 2001, 2000 and 1999 and changes during those years:
2001 2000 1999
------------------- ------------------- -------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------- -------- --------- -------- --------- --------
1990 Stock Option Plan
Outstanding at beginning
of year ............... 2,212,568 $6.45 2,292,079 $ 5.50 2,392,714 $5.43
Granted................. 324,000 4.22 284,000 11.80 447,668 6.02
Exercised............... (53,550) 2.35 (280,236) 4.14 (223,723) 4.38
Expired................. (226,793) 6.85 (83,275) 6.23 (324,580) 6.46
--------- --------- ---------
Outstanding at end of
year................... 2,256,225 6.19 2,212,568 6.45 2,292,079 5.50
========= ========= =========
Options exercisable at
year-end............... 1,576,100 5.92 1,572,067 5.57 1,422,129 5.22
Weighted-average fair
value of options
granted during the
year................... $ 2.94 $ 7.03 $ 4.00
1993 Directors' Stock
Option Plan
Outstanding at beginning
of year................ 209,573 $6.88 204,162 $ 6.17 160,131 $6.12
Granted................. 124,000 4.92 57,334 8.80 44,031 6.38
Exercised............... -- -- (33,119) 5.34 -- --
Expired................. (33,280) 7.36 (18,804) 7.78 -- --
--------- --------- ---------
Outstanding at end of
year................... 300,293 6.02 209,573 6.88 204,162 6.17
========= ========= =========
Options exercisable at
year-end............... 191,293 6.26 191,573 6.77 195,162 6.13
Weighted-average fair
value of options
granted during the
year................... $ 2.81 $ 4.79 $ 3.42
The following table summarizes information concerning stock options
outstanding and exercisable options at December 31, 2001 for the above plans:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -----------------------
Weighted Weighted Weighted
Range of average average average
exercise Number remaining exercise Number exercise
prices outstanding life price exercisable price
-------- ----------- --------- -------- ----------- --------
$ 1.72 - 3.88 70,725 5.7 $ 3.36 68,225 $ 3.38
4.22 - 4.94 837,512 6.4 4.49 514,262 4.65
5.00 - 5.94 573,744 7.0 5.55 336,044 5.48
6.00 - 6.88 554,404 4.4 6.15 550,279 6.15
7.00 - 7.94 76,354 6.2 7.43 58,929 7.41
8.00 - 9.75 199,115 6.4 8.46 177,240 8.49
11.25 - 12.63 244,664 8.2 12.00 62,414 11.99
--------- ---------
2,556,518 6.3 6.17 1,767,393 5.96
========= =========
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
35
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:
2001 2000 1999
----------- ----------- ------------
Net loss as reported................ $(3,875,899) $(2,647,617) $(10,243,547)
Net loss pro forma.................. $(5,470,925) $(4,699,675) $(12,045,839)
Net loss per share as reported...... $ (0.14) $ (0.10) $ (0.41)
Net loss per share pro forma........ $ (0.20) $ (0.18) $ (0.49)
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. Warrant holders exercised warrants for the purchase of 686,550 shares
during 2000, which exceeded the number of related shares of common stock
issued by the Company by 84,283 shares. This occurred due to cashless exercise
provisions in certain of the warrant agreements that allowed the warrant
holders to purchase shares of the Company's common stock by surrendering
warrants valued at the then current market value of the common stock. At
December 31, 2001, stock purchase warrants representing 1,406,667 shares were
exercisable. Stock warrants outstanding under these arrangements are
summarized as follows:
2001 2000 1999
----------------------- ----------------------- -----------------------
Exercise Exercise Exercise
price per price per price per
Shares share Shares share Shares share
--------- ------------ --------- ------------ --------- ------------
Outstanding at beginning
of year................ 1,414,667 $4.53 - 8.40 2,121,217 $1.72 - 8.40 1,713,086 $1.72 - 8.40
Granted................. -- -- -- -- 452,381 8.40
Exercised............... -- -- (686,550) 1.72 - 6.75 -- --
Expired................. (8,000) 5.00 (20,000) 5.25 (44,250) 6.00
--------- --------- ---------
Outstanding at end of
year................... 1,406,667 4.53 - 8.40 1,414,667 4.53 - 8.40 2,121,217 1.72 - 8.40
========= ========= =========
Warrants exercisable at
year-end............... 1,406,667 4.53 - 8.40 1,414,667 4.53 - 8.40 2,112,880 1.72 - 8.40
(11) EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an employee stock purchase plan (the "Plan") effective
July 3, 1995, under which 400,000 shares of common stock are available for
sale to employees. The Plan enables all employees, after an initial 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 or last business day of each
quarter.
Participant elections resulted in the issuance of 35,971 shares at an
average price per share of $2.97 in 2001, 19,044 shares at an average price
per share of $5.67 in 2000 and 32,852 shares at an average price per share of
$4.46 in 1999.
(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 $.50 for each
$1.00 contributed by an employee up to a maximum company contribution of
$1,000 per year. The matching contributions in 2001, 2000 and 1999 totaled
$55,714, $51,390 and $0, respectively.
36
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.
Contributions to the Retirement Plan are charged to expense so as to
provide for 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:
2001 2000
------------ ----------
Change in Projected Benefit Obligation
Projected benefit obligation at beginning of
year.......................................... $ 5,873,855 $5,442,408
Service cost................................... 426,240 404,320
Interest cost.................................. 319,680 290,320
Plan participants' contributions............... 99,500 143,201
Actuarial (gain) loss.......................... (506,694) 35,266
Benefits paid.................................. (96,805) (26,466)
Foreign currency exchange rate changes......... (154,641) (415,194)
------------ ----------
Projected benefit obligation at end of year.... $ 5,961,135 $5,873,855
============ ==========
Change in Plan Assets
Fair value of plan assets at beginning of
year.......................................... $ 4,912,570 $5,011,470
Actual loss on plan assets..................... (573,777) (150,062)
Employer contribution.......................... 391,082 308,448
Plan participants' contributions............... 99,500 143,201
Benefits paid.................................. (96,805) (26,466)
Foreign currency exchange rate changes......... (133,315) (374,021)
------------ ----------
Fair value of plan assets at end of year....... $ 4,599,255 $4,912,570
============ ==========
Funded status.................................. $ (1,361,880) $ (961,285)
Unrecognized actuarial loss.................... 1,567,035 1,091,350
------------ ----------
Net amount recognized.......................... $ 205,155 $ 130,065
============ ==========
Amounts recognized in the balance sheet consist
of:
Accrued benefit liability.................... $ (960,300) $ (414,115)
Minimum pension liability.................... 1,165,455 544,180
------------ ----------
Net amount recognized.......................... $ 205,155 $ 130,065
============ ==========
Rate assumptions:
Discount rate.................................. 5.75% 5.75%
Rate of salary progression..................... 3.50% 3.75%
Long-term rate of return on assets............. 8.00% 8.00%
37
Years ended December 31,
-------------------------------
2001 2000 1999
--------- --------- ---------
Components of Net Periodic Benefit Cost
Service cost.............................. $ 426,240 $ 404,320 $ 373,689
Interest cost............................. 319,680 290,320 279,862
Expected return on plan assets............ (371,520) (389,120) (310,598)
Recognized net actuarial loss............. 57,600 -- 21,030
--------- --------- ---------
$ 432,000 $ 305,520 $ 363,983
========= ========= =========
(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, 2001 the Company had U.S. tax net operating loss and
research and development tax credit carryforwards of approximately
$120,838,000 and $1,386,000, respectively. Should a cumulative "change in
ownership" occur within a three-year period, use of the Company's net
operating loss carryforwards may be limited. If not used, net operating loss
carryforwards begin to expire in 2005 at the following amounts each year:
Year ending December 31:
2005......................................................... $ 500,000
2010......................................................... 1,900,000
2011......................................................... 4,300,000
2012......................................................... 13,600,000
2013......................................................... 11,800,000
Thereafter through 2021...................................... 88,700,000
------------
Total net operating loss carryforwards..................... $120,800,000
============
The Company's foreign subsidiary also has a net operating loss carryforward
of approximately $47,044,000 which can be carried forward indefinitely,
subject to review by the governmental taxing authority.
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:
2001 2000
------------ ------------
Tax credits...................................... $ 1,386,000 $ 1,307,000
Federal net operating loss carryforward.......... 44,710,000 43,477,000
Foreign net operating loss carryforward.......... 15,525,000 15,275,000
Deferred revenue................................. 401,000 313,000
Fixed asset depreciation......................... 321,000 524,000
Amortization of goodwill......................... 576,000 488,000
Accrued expenses................................. 173,000 163,000
Other differences................................ 97,000 124,000
Valuation allowance.............................. (63,189,000) (61,671,000)
------------ ------------
Net deferred tax asset........................... $ -- $ --
============ ============
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:
38
2001 2000 1999
----------- ---------- -----------
Expected federal benefit............. $(1,318,000) $ (900,000) $(3,483,000)
State tax, net of federal benefit.... (93,000) (104,000) (293,000)
Compensation expense for tax purposes
in excess of amounts recognized for
financial reporting
purposes ........................... (4,000) (238,000) --
Other, net........................... (103,000) (241,000) (259,000)
Increase in valuation allowance...... 1,518,000 1,483,000 4,035,000
----------- ---------- -----------
$ -- $ -- $ --
=========== ========== ===========
(14) RELATED PARTY TRANSACTIONS
In August 1998, the Company completed the sale in a private placement of
2,142,858 shares of Common Stock at a price of $7.00 per share as part of a
Common Stock Purchase Agreement, resulting in aggregate proceeds to the
Company of $15,000,006. The purchasers also received five-year warrants to
purchase 714,286 shares of Common Stock at $8.40 per share. In addition, the
Company issued Convertible Senior Secured Fixed Rate Notes, with proceeds
aggregating $7,300,000, which were used to retire other debt of the Company.
The investor group in both transactions was 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 an available receivable backed credit line (that
expires on June 29, 2002), outstanding notes payable and a capital lease. See
notes 8 and 9 for further detail on the credit line, notes payable, capital
lease and Convertible Senior Secured Fixed Rate Notes.
The Company's exclusive distributors, Philips and Codman, are shareholders
of the Company. Additionally, the agreements with both distribution partners
provide for minimum annual purchase amounts and market development
commitments, and the Philips agreement provides for research and development
funding. Sales to these parties were approximately $23.1 million, $22.7
million and $13.1 million for the years ended December 31, 2001, 2000 and
1999, respectively. Outstanding accounts receivable for these distributors
represented 98% and 89% of total outstanding accounts receivable as of
December 31, 2001 and 2000, respectively.
(15) 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 biosensor technology, and the second
platform includes continuous monitoring products based on fiberoptic biosensor
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 worldwide
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.
39
Information regarding the Company's operations in different geographies for
the years ended December 31 is as follows:
2001 2000 1999
----------- ----------- -----------
Sales to unaffiliated customers
Germany............................... $18,517,416 $17,338,465 $ 6,250,366
United States......................... 5,212,462 6,219,310 10,281,646
Japan................................. 262,895 883,299 968,118
All other foreign countries........... 496,155 817,333 1,187,054
----------- ----------- -----------
$24,488,928 $25,258,407 $18,687,184
=========== =========== ===========
Long-lived assets
United States......................... $ 3,963,314 $ 4,770,092 $ 3,301,162
United Kingdom........................ 2,215,491 2,566,191 2,473,335
----------- ----------- -----------
$ 6,178,805 $ 7,336,283 $ 5,774,497
=========== =========== ===========
Sales attributed to geographic areas are based upon customer location.
Long-lived assets consist of property and equipment located at the Company's
facilities in the United States and the United Kingdom.
Sales to one major customer represented 90%, 82% and 63% of total net sales
for the years ended December 31, 2001, 2000 and 1999, respectively. The
customer for which the above sales were generated is a distributor of the
Company operating in the medical diagnostic device industry.
(16) COMMITMENTS
The Company leases its facilities and some of its equipment under non-
cancelable operating lease arrangements. The rental payments under these
leases are charged to expense as incurred. Rent expense included in the
accompanying consolidated statements of operations was $863,828, $896,526 and
$873,687 for the years ended December 31, 2001, 2000 and 1999, 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:
2002.......................................................... $ 760,762
2003.......................................................... 695,249
2004.......................................................... 350,465
2005.......................................................... 160,080
2006.......................................................... 37,631
Thereafter.................................................... 9,484
-----------
Total minimum lease payments................................ $ 2,013,671
===========
(17) LEGAL PROCEEDINGS
There are no legal proceedings pending, threatened against or involving the
Company, which, in the opinion of management, will have a material adverse
effect upon consolidated results of operations or financial condition.
40
(18)QUARTERLY RESULTS OF OPERATIONS (unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ---------- ---------- ----------
2001
Net sales............... $ 5,715,894 $6,127,674 $6,262,823 $6,382,537
Gross profit............ 1,314,741 1,674,814 1,705,822 1,809,210
Operating loss.......... (1,091,893) (945,337) (841,612) (699,144)
Net loss................ (1,127,900) (1,026,951) (924,591) (796,457)
Net loss per common
share.................. (0.04) (0.04) (0.03) (0.03)
2000
Net sales............... $ 5,670,894 $6,090,343 $6,580,956 $6,916,214
Gross profit............ 1,400,937 1,648,834 1,987,875 2,482,658
Operating loss.......... (1,179,930) (949,379) (534,240) (79,413)
Net loss................ (1,143,409) (892,620) (487,271) (124,317)
Net loss per common
share.................. (0.04) (0.03) (0.02) 0.00
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 2002 Annual Meeting of
Shareholders to be held on May 22, 2002, which definitive Proxy Statement will
be filed within 120 days after the close of the fiscal year ended December 31,
2001 (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.
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.
41
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.
and Independent Auditors' Report are filed as part of this Report on pages 23
through 41.
Independent Auditors' Report
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 2001
Consolidated Balance Sheets at December 31, 2001 and 2000
Consolidated Statements of Shareholders' Equity and Comprehensive Loss
for each of the years in the three-year period ended December 31, 2001
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2001
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following consolidated financial statement schedule of Diametrics
Medical, Inc. is filed as part of this Report and should be read in
conjunction with the consolidated financial statements of Diametrics Medical,
Inc.
Schedule II--Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable or
not required, or because the required information is included in the
consolidated financial statements or the notes thereto.
3. Exhibits
Exhibit Method
No. Description of Filing
------- ----------- ---------
3.1 Articles of Incorporation of the Company (as amended) (12)
3.2 Bylaws of the Company (as amended) (11)
4.1 Form of Certificate for Common Stock (1)
4.2 Form of Registration Rights Agreement between the Company (1)
and certain of its shareholders and warrant holders
4.3 Form of Registration Rights Agreement dated as of February (2)
3, 1995 between the Company and certain of its
shareholders
4.4 Registration Rights Agreement, dated as of January 30, (4)
1997, by and between the Company and purchasers of Series
I Junior Participating Preferred Stock
4.5 Registration Rights Agreement, dated as of June 10, 1997, (5)
by and between the Company and the Purchasers
4.6 Form of Certificate for Series I Junior Participating (4)
Preferred Stock
4.7 Form of Stock Purchase Warrant, dated as of January 30, (4)
1997
4.8 Form of Stock Purchase Warrant, dated as of June 10, 1997 (5)
10.1 Real Property Lease Agreements dated July 31, 1996, (9)
between Commers-Klodt, a Minnesota General Partnership,
and the Company
10.2 Amendments, dated June 15, 1999, to Real Property Lease (11)
Agreements dated July 31, 1996, between Commers-Klodt, a
Minnesota General Partnership, and the Company
42
Exhibit Method
No. Description of Filing
------- ----------- --------------
10.3 Master Equipment Lease Agreement dated as of June 15, (1)
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)
10.4* 1990 Stock Option Plan (as amended and restated), (12)
including form of option agreement
10.5* 1993 Directors' Stock Option Plan (as amended and (12)
restated)
10.6* 1995 Equalizing Director Stock Option Plan (3)
10.7 1995 Employee Stock Purchase Plan (as revised and (12)
restated)
10.8 Stock Purchase Agreement, dated as of January 30, (4)
1997, between the Company and the Purchasers named
therein
10.9 Stock Purchase Agreement dated as of June 10, 1997, (5)
between the Company and the Purchasers named therein
10.10 Loan and Security Agreement, dated March 31, 1998, (6)
between DVI Business Credit and the Company
10.11 Common Stock Purchase Agreement, dated June 30, 1998, (7)
between the Company and the Purchasers named therein
10.12 Form of Stock Purchase Warrant, dated August 4, 1998 (7)
10.13 Note Purchase Agreement, dated August 4, 1998, (7)
between the Company and the Purchasers named therein
10.14 Form of Convertible Senior Secured Fixed Rate Note (7)
due August 4, 2003
10.15 Distribution Agreement, dated October 1, 1998, (8)
between the Company and Johnson & Johnson
Professional, Inc.
10.16 Put Option and Stock Purchase Agreement, dated (8)
October 1, 1998, between the Company and Johnson &
Johnson Development Corporation
10.17 Severance Pay Agreement (in the event of Change of (8)
Control) dated July 31, 1998, between the Company and
David T. Giddings
10.18 Form of Severance Pay Agreement (in the event of (8)
Change of Control) dated July 31, 1998, between the
Company and its executive officers
10.19 Form of Severance Pay Agreement (in the event of (8)
Termination Without Cause) dated July 31, 1998,
between the Company and its executive officers
10.20 Distribution Agreement, dated June 6, 1999, between (10)
the Company and Hewlett-Packard Company
10.21 Common Stock Purchase Agreement, dated June 6, 1999, (10)
between the Company and Hewlett-Packard Company
10.22 Stock Purchase Warrant, dated effective as of June (10)
28, 1999
21 List of Subsidiaries Filed herewith
23 Consent of KPMG LLP Filed herewith
24 Powers of Attorney (included in signature page of Filed herewith
Report)
99 Cautionary Statements Under the Private Securities Filed herewith
Litigation Reform Act
- --------
* 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").
43
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration Number 33-94442).
(3) Incorporated by reference to the Company's 1995 Annual Report on Form 10-
K.
(4) Incorporated by reference to the Company's Current Report on Form 8-K
filed March 25, 1997.
(5) Incorporated by reference to the Company's Current Report on Form 8-K
filed June 26, 1997.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter ended March 31, 1998.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter ended June 30, 1998.
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter ended September 30, 1998.
(9) Incorporated by reference to the Company's 1998 Annual Report on Form 10-
K.
(10) Incorporated by reference to the Company's Current Report on Form 8-K
filed July 23, 1999.
(11) Incorporated by reference to the Company's 1999 Annual Report on Form 10-
K.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter ended June 30, 2001.
(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, 2001.
(c) See Item 14(a)(3) above.
(d)See Item 14(a)(2) above.
44
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors and Shareholders
Diametrics Medical, Inc.
Under date of January 29, 2002, we reported on the consolidated balance
sheets of Diametrics Medical, Inc. and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of operations, shareholders'
equity and comprehensive loss, and cash flows for each of the years in the
three-year period ended December 31, 2001, which are included in the Annual
Report on Form 10-K. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule as listed in the accompanying index. The financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Minneapolis, Minnesota
January 29, 2002
Schedule II--Valuation and Qualifying Accounts
Balance
at Charged to Charged Balance at
Beginning Costs and to Other End of
of Period Expenses Accounts Deductions Period
--------- ---------- -------- ---------- ----------
Allowance for doubtful
accounts:
2001.................. $153,750 $ -- $ -- $ (59,930)* $ 93,820
2000.................. 200,000 15,000 -- (61,250)* 153,750
1999.................. 280,000 301,836 -- (381,836)* 200,000
Inventory reserve:
2001.................. $134,818 $ 55,729 $ -- $ (61,475)** $129,072
2000.................. 70,125 64,693 -- -- 134,818
1999.................. 45,135 24,990 -- -- 70,125
- --------
* Trade accounts receivable written off against the allowance for doubtful
accounts.
** Excess, slow moving or obsolete inventory written off against the
inventory reserve.
45
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 27, 2002.
DIAMETRICS MEDICAL, INC.
/s/ David T. Giddings
By __________________________________
David T. Giddings
President and Chief Executive
Officer
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 27, 2002.
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, 2001 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 Director (Principal
Executive Officer)
David T. Giddings
/s/ Laurence L. Betterley Senior Vice President and Chief
------------------------------------------- Financial Officer (Principal
Financial Officer)
Laurence L. Betterley
/s/ Jill M. Nussbaum Corporate Controller
------------------------------------------- (Principal Accounting Officer)
Jill M. Nussbaum
/s/ Andre de Bruin Director and Chairman of the
------------------------------------------- Board
Andre de Bruin
/s/ Gerald L. Cohn Director
-------------------------------------------
Gerald L. Cohn
/s/ Carl S. Goldfischer Director
-------------------------------------------
Carl S. Goldfischer, M.D.
/s/ Roy S. Johnson Director
-------------------------------------------
Roy S. Johnson
/s/ Mark B. Knudson Director
-------------------------------------------
Mark B. Knudson, Ph.D.
46
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
21 List of Subsidiaries
23 Consent of KPMG LLP
24 Powers of Attorney (included in signature page of Report)
Cautionary Statements Under the Private Securities Litigation Reform
99 Act
47