-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VKmHxkZunU8c4fujUlQC1zXrdHtxWhJ2L+Eq/wFLVNdA0fahKLbklchhXaHlzqYg YHMepmMozciThlHre6WKDg== 0000950123-01-500453.txt : 20010409 0000950123-01-500453.hdr.sgml : 20010409 ACCESSION NUMBER: 0000950123-01-500453 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: I STAT CORPORATION /DE/ CENTRAL INDEX KEY: 0000882365 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 222542664 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19841 FILM NUMBER: 1588378 BUSINESS ADDRESS: STREET 1: 104 WINDSOR CENTER DRIVE CITY: EAST WINDSOR STATE: NJ ZIP: 08520 BUSINESS PHONE: 6094439300 MAIL ADDRESS: STREET 1: 104 WINDSOR CENTER DRIVE CITY: EAST WINDSOR STATE: NJ ZIP: 08520 10-K 1 y47242e10-k.txt I-STAT CORPORATION 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________to_________ COMMISSION FILE NUMBER 0-19841 i-STAT CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 22-2542664 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 104 WINDSOR CENTER DRIVE, EAST WINDSOR, NJ 08520 (Address of principal executive offices) (Zip code) (609) 443-9300 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.15 PER SHARE SERIES A PREFERRED STOCK PURCHASE RIGHTS 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 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. [ ] Number of shares of Common Stock outstanding as of March 20, 2001: 18,504,944 The aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant as of March 20, 2001 is approximately $189,053,351. Shares of voting stock held by each executive officer and director and by each person who owns 5% or more of any voting stock have been excluded in that such persons may be deemed affiliates of the Registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes. DOCUMENTS INCORPORATED BY REFERENCE (To The Extent Indicated Herein) Part III incorporates certain information by reference to the Registrant's Proxy Statement for its 2001 Annual Meeting of Stockholders. 2 TABLE OF CONTENTS ITEM PAGE PART I 1. Business................................................................1 2. Properties..............................................................9 3. Legal Proceedings.......................................................9 4. Submission of Matters to a Vote of Security Holders....................10 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................................12 6. Selected Consolidated Financial Data...................................13 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................14 7(a). Quantitative and Qualitative Disclosures about Market Risk.............19 8. Financial Statements and Supplementary Data (a) Financial Statements...............................................19 (b) Selected Quarterly Financial Data..................................44 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................19 PART III 10. Directors and Executive Officers of the Registrant.................11, 20 11. Executive Compensation.................................................20 12. Security Ownership of Certain Beneficial Owners and Management..................................................20 13. Certain Relationships and Related Transactions.........................20 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................20 3 SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K, UNDER THE SECTIONS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS" AND ELSEWHERE RELATE TO FUTURE EVENTS AND EXPECTATIONS AND AS SUCH CONSTITUTE "FORWARD-LOOKING STATEMENTS," WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE WORDS "BELIEVES," "ANTICIPATES," "PLANS," "EXPECTS," AND SIMILAR EXPRESSIONS IN THIS REPORT ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS AND TO VARY SIGNIFICANTLY FROM REPORTING PERIOD TO REPORTING PERIOD. SUCH FACTORS INCLUDE, AMONG OTHERS, THOSE LISTED IN "FACTORS THAT MAY AFFECT FUTURE RESULTS" UNDER ITEM 1 BELOW AND OTHER FACTORS DETAILED FROM TIME TO TIME IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. PART 1 ITEM 1. BUSINESS i-STAT Corporation ("i-STAT" or the "Company"), was incorporated in Delaware in 1983, and develops, manufactures and markets medical diagnostic products for blood analysis that provide health care professionals with immediate and accurate critical diagnostic information at the point of patient care. The Company's current products, known as the i-STAT(R) System, consist of portable, hand-held analyzers and single-use, disposable cartridges, each of which simultaneously performs different combinations of commonly ordered blood tests in approximately two minutes. The i-STAT System uses a simple, one-step procedure, the results of which can be easily linked by infrared transmission to a health care provider's information system. As of December 31, 2000, i-STAT had one primary customer, Abbott Laboratories ("Abbott") as well as customers in the United States, Japan, Europe, Canada, South America and Asia. The Company intends for the i-STAT System to become the standard of care for blood analysis at the patient's side, enabling rapid clinical intervention, improved patient outcomes, and lower operational costs. The i-STAT System provides accurate and reliable blood test results more quickly and more simply than the most advanced clinical laboratory equipment. Blood analysis performed at the point of patient care with the i-STAT System permits more timely diagnosis and therapeutic intervention and reduces the occurrence of common testing errors. The Company believes these attributes of the i-STAT System result in improved patient care and lower overall health care costs. In addition, the Company believes that the i-STAT System reduces or eliminates the need for expensive capital equipment, specialized labor force, equipment maintenance and space required for traditional testing laboratories. The original i-STAT System, introduced in September 1992, was capable of performing six of the most commonly ordered blood tests, which are tests for sodium, potassium, chloride, glucose, urea nitrogen and hematocrit. In 1994, the Company expanded the testing capabilities of the i-STAT System through the introduction of cartridges which perform tests for pH, ionized calcium and bicarbonate. In 1995, the Company introduced cartridges which measure arterial blood gases (pH, PCO(2) and PO(2)). In 1998, the Company added a creatinine test. In 1999, the Company added a lactate test, and in early 2000, the Company added a Celite(R) ACT (activated clotting time) test. The Company believes that 95% of the approximately 200 million blood tests (electrolyte and blood gas) performed on a "stat" basis in the United States each year now can be performed using the i-STAT System. The Company believes that because the i-STAT System can now perform the vast majority of the tests required on a "stat" basis, it is substantially more attractive as a total replacement for hospital "stat" laboratories. The Company has additional tests under development. By virtue of a strategic technology and marketing alliance concluded in mid-1995 between the Company and Hewlett-Packard Company ("HP"), the i-STAT System was introduced and marketed in Europe by HP in 1996. In addition, i-STAT and HP jointly developed a blood analysis device (the "Integrated Analyzer"), based on the i-STAT System, for integration into HP's customer installed base of patient monitoring systems. This device was introduced in 1997. (By virtue of a spinoff of its measurement systems business in 1999, HP assigned its rights and obligations under its agreements with the Company to Agilent Technologies, Inc. ("Agilent").) In order to accelerate and increase sales of the i-STAT System, in September 1998 the Company entered into a long-term global product marketing and product development alliance with Abbott. During 2000, approximately 83.5% of the Company's revenues were derived from Abbott. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Alliance with Abbott Laboratories". 1 4 i-STAT SYSTEM COMPONENTS The i-STAT System is composed of an analyzer, which is a hand-held, portable instrument, and various single-use, disposable cartridges, which contain the electrochemical biosensors necessary to perform the desired blood tests. The Company's single-use, disposable cartridges currently allow the i-STAT System to perform blood tests for sodium, potassium, chloride, glucose, creatinine, urea nitrogen, hematocrit, ionized calcium, lactate, Celite(R) ACT (activated clotting time), arterial blood gases, (pH, PCO(2) and PO(2)), and bicarbonate and to derive certain other values, such as total carbon dioxide, base excess, anion gap, hemoglobin and O(2) saturation, by calculation from the tests performed. The i-STAT System also includes peripheral components that enable the results of tests to be transmitted by infrared means to both a proprietary information system for managing the user's point-of-care testing program and to the user's information systems for billing and archiving. In the fourth quarter of 2000, the Company introduced an analyzer and associated peripheral equipment which, in addition to having the measurement capabilities possessed by the i-STAT System, incorporates the glucose measurement capabilities of an Abbott product. The new i-STAT(R) 1 Analyzer permits a customer to run all i-STAT cartridges as well as Abbott MediSense(R) glucose strips on one integrated hand-held device. The new analyzer also incorporates a number of enhancements, including a bar code reader, an improved user interface, and an enhanced data management system which, in conjunction with a new central data management system, enhances the customers' ability to centrally manage a widely distributed point-of-care testing program. i-STAT believes its proprietary thin-film, biosensor technology provides the Company with significant competitive advantages over other technologies. As a result of the Company's proprietary know-how and the attributes of its thin-film biosensors, the i-STAT System produces accurate results in approximately two minutes in an easy, single step procedure, is small enough to be hand-held and to be carried from patient to patient, operates with only two to three drops of blood and is virtually maintenance free. The Company's thin-film technology uses micro-fabrication techniques which permit dimensionally small product features resulting in faster reactions than larger configurations such as those used in thick-film technology. Thin-film technology permits i-STAT's biosensors to "wet-up" quickly with small amounts of calibrant and blood samples, thereby enabling the Company to package its biosensors in a dry state while retaining the ability to produce results in approximately two minutes. The Company believes that packaging its biosensors in a dry state facilitates extended shelf life and simplifies the calibration process. The Company's disposable cartridges have a shelf life ranging from a minimum of six months to a maximum of twelve months. In addition, the Company's thin-film biosensor technology permits the cartridges in the i-STAT System to be configured to perform multiple tests and combinations of tests. The Company believes products based on other existing technologies cannot achieve performance characteristics or product design features of the type described above. MARKETING AND DISTRIBUTION The i-STAT System is currently marketed primarily to the critical care departments of hospitals in the United States, where the highest volume of blood tests are performed on a "stat" basis. The i-STAT System also is marketed to hospitals in Japan, Europe, Canada, South America and Asia. Prior to November 1998, the Company marketed and distributed the i-STAT System in the United States and Canada principally through its own direct sales and marketing organization, in Europe through HP, in Japan through Japanese marketing partners and in South America and Asia through selected distribution channels. Since November 1998, Abbott has become, subject to the then existing rights of the Company's other international distributors, the exclusive worldwide distributor of the Company's hand-held blood analyzer products (including cartridges) and any new products the Company may develop for use in the professionally attended human healthcare delivery market. Revenues from Abbott represented approximately 83.5% of the Company's worldwide revenues for 2000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Alliance with Abbott Laboratories." In July 1995, the Company entered into license and distribution agreements with HP. The Company's distribution agreement with HP was terminated in November 1999. The Company's license agreement with HP, since assigned to Agilent, provides for the grant by the Company to Agilent of a perpetual, worldwide license under certain of the Company's intellectual property to develop and distribute the Integrated Analyzer to professionally attended human healthcare institutions. The license does not include the right to make, use or sell the Company's cartridges and provides for the payment of royalties to the Company. If the Company grants to any third party a license to make and distribute Integrated Analyzers on royalty terms more favorable to the third party than under the Agilent license agreement, then Agilent's royalty obligations generally will be adjusted to such third party's rates. The license agreement is scheduled to expire generally at the time of expiration of the Company's last-to-expire patent covering the licensed technology. In August of 1997, the Company signed an agreement with HP (which also was subsequently assigned to Agilent) to supply electromechanical components to HP for use in the Integrated Analyzer. This electromechanical mechanism is substantially equivalent to the mechanism used in the Company's portable hand-held analyzers. The agreement is subject to yearly extensions. Revenues from Agilent represented approximately 1.1% of the Company's worldwide revenues for 2000. 2 5 In August 1988, the Company entered into product commercialization and distribution agreements with JCR Pharmaceuticals Inc. and FUSO Inc., two Japanese pharmaceutical and medical device companies. Pursuant to such agreements, i-STAT granted product distribution rights covering Japan, South Korea and Taiwan for an initial exclusive period which expired, and a non-exclusive period from December 1997 to December 2002 which covers only Japan. The Company understands that JCR has assigned to FUSO all distribution rights under these agreements. Sales to FUSO represented approximately 9.5% of the Company's worldwide revenues for 2000. The Company also markets its products to veterinarians' offices in the United States and selected other countries through a three year distribution agreement with Heska Corporation ("Heska"), signed in February 1999. Sales to Heska represented approximately 5.9% of the Company's worldwide revenues for 2000. See "Government Regulation" for a description of the regulatory framework impacting the marketing of the Company's products in certain geographical areas and alternate site markets. COMPETITION The Company competes principally with manufacturers of traditional blood analysis equipment used by clinical laboratories. Historically, most clinical testing has been performed in the hospital or in a commercial laboratory setting. These clinical laboratories provide analyses similar to those conducted by the i-STAT System and have traditionally been effective at processing large panels of tests with the use of skilled technicians and complex equipment. While i-STAT cannot provide the same range of tests, the Company believes that its products offer several advantages over clinical laboratories, including lower costs, faster results and reduced opportunity for error. In addition, the i-STAT System's testing capabilities currently are sufficiently broad to enable larger health care facilities to close "stat" laboratories and replace them wholly with the i-STAT System. Other companies may introduce products performing the same or similar functions as the i-STAT System. In such case, the Company may not be able to compete effectively with these products, or these products may render the Company's products obsolete. The Company is aware of products that have been developed and are being marketed for point-of-care analysis of some or all of the analytes measured by the i-STAT System. The Company believes that these products are more difficult to use, less efficient and test for fewer analytes than the i-STAT System, and otherwise do not offer the same features and benefits. To the extent that the i-STAT System achieves penetration into non-hospital markets such as veterinarians' offices, doctors' offices, nursing homes and outpatient clinics, it may face competition from commercial laboratories and from established pharmaceutical and medical device companies which have developed multitest blood analyzers specifically for use in these markets. The Company believes that its products are capable of competing favorably with these other products on the basis of ease-of-use, speed, the ability to conduct tests without a skilled technician, variety of test menu, cost-effectiveness and accuracy of results. MANUFACTURING The Company's products are manufactured by the Company with various components being supplied by outside vendors. The Company manufactures its biosensors in order to protect the proprietary nature of the Company's products and to control the development and enhancement of its proprietary technology. Other cartridge components are manufactured to the Company's specifications by outside vendors. Final assembly, quality testing and inspection of cartridges are performed by the Company. All components of the analyzers as well as peripheral components, such as the infrared data communication link, are either custom fabricated by outside suppliers or purchased by the Company from outside sources. Most product manufacturing and cartridge assembly by the Company is conducted in two adjoining facilities totaling 96,256 square feet located in Kanata, Ontario, Canada. These leased facilities include 18,925 square feet of Class 1,000 and Class 10,000 cleanrooms. In addition, the Company assembles analyzers at its principal offices in East Windsor, New Jersey. In mid-1998, the Company commenced the transfer of its New Jersey cartridge assembly and inspection operations to the Kanata facility and completed that transfer in April 1999. See "Properties" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Company is currently manufacturing its cartridges at a rate of over 12,000,000 per year, utilizing four cartridge assembly lines. The Company has the capacity to manufacture over 30,000,000 cartridges at full factory utilization using the current generation of its biosensor chips and taking into account planned yield and productivity improvements and the addition of three cartridge assembly lines within the existing facilities. 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 products, the Company utilizes statistical process control systems during the manufacturing process and comprehensive performance testing of 3 6 finished goods. The Company believes that it operates in accordance with all applicable regulations including the Food and Drug Administration (the "FDA") Good Manufacturing Practices. The Company has received ISO 9001 and EN 46001 certification of its Quality Assurance System. ISO 9001 comprises a set of standards covering the quality of design, development, production, installation, and servicing of products and systems. EN 46001 is the European quality standard for the manufacture of medical devices. Compliance with these standards is increasingly required by European buyers of manufactured products. The majority of the raw materials and purchased components used to manufacture the Company's products are readily available from more than one source. The Company is also developing alternative sources for some of the raw materials it presently obtains from a single source. Some of the components of the i-STAT System are custom manufactured by a limited number of outside vendors. RESEARCH AND DEVELOPMENT From commencement of the Company's operations in 1984 until 1992, most of its financial resources were dedicated to the development of the core technology that has resulted in the i-STAT System. The Company continues to engage in research and development in order to improve its existing products and develop new products based on the i-STAT System technology. In the fourth quarter of 1999, the Company commenced shipments of its new lactate test incorporated into a cartridge that also tests for blood gases. In early 2000, the Company received FDA clearance to market its first coagulation test, the Celite(R) ACT (activated clotting time), and commenced shipments in March 2000. The Company is pursuing the development of three other coagulation tests, kaolin ACT, prothrombin time ("PT") and activated partial thromboplastin time ("aPTT"). The Company is also studying the development of cartridges that will incorporate tests for markers of cardiac damage based upon immunoassay techniques. In 2000, the Company also introduced a cartridge that combines its glucose test onto its combination blood gas/electrolyte cartridge and an expanded measurement range for its glucose measurements. In the fourth quarter of 2000, the Company introduced a new analyzer (the i-STAT(R)1 Analyzer) that combines the measurement capabilities of the i-STAT System with the measurement capabilities of an Abbott point-of-care glucose testing system and incorporates additional advanced features along with a range of peripheral components including an advanced data management system. In connection with their strategic alliance, the Company and Abbott entered into a Research Agreement pursuant to which certain of the Company's research and development may be funded by Abbott. Abbott currently is not funding any of the Company's research and development programs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Alliance with Abbott Laboratories". See also "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of research and development costs during 1998, 1999 and 2000. PATENTS AND PROPRIETARY RIGHTS i-STAT pursues a policy of seeking patent protection, both in the United States and abroad, for each of the areas of invention embodied in the i-STAT System. The Company holds 31 United States utility patents related to the i-STAT System, the earliest of which was issued on September 5, 1989, which on average have over 11 years remaining on their patent terms, and two United States design patents related to the i-STAT System. These patents relate to the unique functional features and fabrication of the electrode technology contained in the i-STAT cartridges, operation of the cartridges, the technologies used in the i-STAT analyzers, in-house quality control instrumentation and matters related to other potential uses of the i-STAT System. The Company has five pending United States utility patent applications. The Company has received patents in Japan, Europe, Canada and Taiwan corresponding to certain of the patents issued in the United States and has filed or plans to file for patent protection in certain countries which represent a significant segment of the intended market for its products. There can be no assurance that additional patents for i-STAT's products will be obtained, or that issued patents will provide substantial protection or be of commercial benefit to i-STAT. In addition to its patent position, i-STAT also relies upon trade secrets, know-how and continuing technological innovation to maintain its competitive advantages. The Company maintains a policy requiring all employees and consultants to sign confidentiality agreements under which they agree not to use or disclose i-STAT's confidential information as long as that information remains proprietary or, in some cases, for fixed time periods. There can be no assurance, however, that such proprietary technology will not be independently developed or that secrecy will not be breached. Under Company policy, all technical employees are required to assign to the Company all rights to any inventions made during their employment or relating to the Company's activities and not to engage in activities similar to the Company's for any other person or entity during the term of their employment or for at least six months thereafter. 4 7 GOVERNMENT REGULATION The i-STAT System comprises several In Vitro Diagnostic (IVD) medical devices subject to the provisions of the Food, Drug and Cosmetic Act (the "FDC Act") and implementing regulations. The 1976 Medical Device Amendments and the Safe Medical Device Amendments of 1990 to the FDC Act provide comprehensive regulation of all stages of development, manufacture, distribution and promotion of medical devices. There are two regulatory routes by which to bring a medical diagnostic device to market: the Pre-market Approval Application ("PMA") and the Pre-market Notification ("510(k) Notification"). The PMA requires a comprehensive review of specified pre-clinical and clinical data, prior to an FDA finding that a device is safe and effective for its designated indicated use. The 510(k) Notification permits marketing upon a demonstration to the FDA's satisfaction that a device is substantially equivalent to a device already in commercial distribution. The clearance process can require extended periods of testing, both prior to and after submissions are made. Review of submissions can take protracted periods of time and involve significant resource expenditure. There is no certainty that the FDA will clear any given device for marketing. All of the Company's current IVD devices have received clearance to market for use by health care professionals pursuant to 510(k) Notifications. Any change or modification of an analyzer or a cartridge that could significantly affect the safety or efficacy of the device would require the filing of a new 510(k) Notification, and the Company would not be able to market the i-STAT System as modified until FDA clearance is received. The FDA may not concur in any such modification, and any such concurrence may be subject to delay and require significant resources to provide the FDA with needed data. FDA regulations classify medical devices into three classes that determine the degree of regulatory control to which the manufacturer of the device is subject. The FDA classified the i-STAT System (as currently configured) in Class II, meaning that the device may at some time in the future also have to comply with mandatory performance standards or other "special controls" if it is to remain in commercial distribution. The Company cannot predict whether such additional standards or controls will ever be enacted, nor what impact the enactment of such standards or controls might have on its ability to produce and sell its products. Such standards or controls may relate to any aspect of product performance which must be controlled to minimize any risk associated with use of the device. All devices, including those manufactured in Canada, must be manufactured in accordance with Good Manufacturing Practices specified in implementing regulations under the FDC Act. These practices control every phase of production from the design control and incoming receipt of raw materials, components and subassemblies to the labeling, tracing of consignees after distribution and follow-up and reporting of complaint information. The FDA has the authority to conduct unannounced inspections of all facilities where devices are manufactured or assembled, and, if the investigator observes conditions which might be violations, those conditions must be corrected or satisfactorily explained, or the manufacturer could face regulatory action that might include physical removal of the product from the marketplace. The Company's New Jersey facilities have been inspected on four occasions by the FDA and, as of the date of those inspections, there were no observed conditions which might result in violations. The FDA also regulates labeling and advertising for devices restricted to use by health care professionals, such as the i-STAT System. Recently, the FDA has pursued a more rigorous enforcement program to ensure that regulated firms, such as the Company, comply with the provisions of the FDC Act. A firm not in compliance may face a variety of regulatory actions, ranging from warning letters, product detention, device alerts and mandatory recalls or field corrections, to seizures, injunction actions, civil penalties and criminal prosecutions of the firm or responsible individuals, employees, officers or directors. The commencement of any action against the Company of the type described above could seriously impact the Company's ability to conduct business. The Company's products are also affected by the Clinical Laboratory Improvement Act of 1988 ("CLIA"). This law is intended to assure the quality and reliability of all medical testing in the United States regardless of where tests are performed. The regulations require laboratories performing blood chemistry tests to meet specified standards in the areas of personnel qualification, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The regulations have established three levels of regulatory control based on test complexity "waived," "moderate complexity" and "high complexity." The Company's products have been designated as "moderate complexity." Subsequent categorization of the Company's products as "high complexity" tests could hinder the Company's ability to market its products. Expansion into alternate site markets, particularly doctors' offices, may be limited by the regulatory burden imposed by the classification of the i-STAT System as a moderately complex test under CLIA. There can be no assurance that CLIA regulations or future administrative interpretations of CLIA will not have an adverse impact on the Company. 5 8 In addition, certain aspects of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") may affect how the Company handles, stores and transmits patient data, and may require additional electronic security and privacy measures to be put in place. Because we cannot yet determine the cost of any additional measures required under HIPAA, these new regulatory requirements may adversely impact the Company's ability to do business. The Company and its products are also subject to a variety of state laws and regulations in those states where its products are marketed, sold or used. Certain states currently restrict or control, to varying degrees, the use of medical devices such as the i-STAT System outside the clinical laboratory by persons other than doctors or authorized technologists. These restrictions have hindered the marketing of the Company's products in these locations. The Company is seeking interpretations, rulings or changes in relevant laws and regulations that will remove or ameliorate these restrictions. Although the Company has been successful in gaining favorable rulings and changes in certain relevant laws and regulations, there can be no assurance that the Company will be successful in its efforts to remove or ameliorate all these legal restrictions. The i-STAT System is currently distributed outside the United States in Japan, Europe, Canada, South America and Asia and the Company expects the i-STAT System to be distributed in other foreign countries under the terms of the Distribution Agreement with Abbott. The i-STAT System is and will be subject to a wide variety of laws and regulations in these markets, ranging from simple product registration in certain countries to complex clearance and production controls in others. Speaking generally, the extent and complexity of regulation of medical devices is increasing worldwide, with regulation in some countries already as comprehensive as that in the United States. The Company anticipates that this trend will continue and that the cost and time required to obtain approval to market in any given country will increase, with no assurance that such approval will be given. Because some of the Company's production facilities currently are located in Canada, sales of the Company's products in the United States are subject to U.S. laws regulating international trade practices. The Company does not believe that these laws will materially and adversely affect its marketing strategy or operations generally, although such laws are subject to change and the Company cannot accurately predict the impact on the Company of any future changes. Federal, state and foreign regulations regarding the sale of medical devices are subject to change. The Company cannot predict what impact, if any, such changes may have on its business. REIMBURSEMENT Third party payors can indirectly affect the pricing or the relative attractiveness of the Company's products by regulating the maximum amount of reimbursement provided for blood testing services. If the reimbursement amounts for blood testing services are decreased in the future, it may decrease the amount which physicians and hospitals are able to charge patients for such services and consequently the price the Company can charge for its products. EMPLOYEES As of December 31, 2000, the Company employed 683 persons on a full-time basis. None of i-STAT's employees are covered by a collective bargaining agreement. i-STAT believes that its relationship with its employees is good and that its success is dependent on, among other things, achieving and retaining scientific and technological superiority and being capably managed. INSURANCE The Company maintains a product liability insurance policy in the amount of $1 million, and an excess liability insurance policy in the amount of $25 million, which are the maximum payouts for all claims that could be made during a calendar year. If the Company does not or cannot maintain its existing or comparable product liability insurance, its ability to market its products may be significantly impaired. The amount and scope of any insurance coverage upon which the Company relies may not be adequate to protect the Company in the event a successful product liability claim is made against the Company. No product liability insurance claim has ever been made against the Company. The Company also maintains general liability and business interruption liability insurance policies. 6 9 BACKLOG Customers generally place orders on an as needed basis and the Company ships against those orders. Consequently, backlog is not a material factor in the Company's operations. SEASONALITY The Company's operating results may fluctuate from quarter to quarter due to many factors. Sales may be slower in the traditional vacation months, may be accelerated in the fourth calendar quarter by customers whose annual budgets are about to expire (especially affecting analyzer purchases), may be distorted by unusually large analyzer shipments from time to time, or may be affected by the timing of customer cartridge ordering patterns. (For example, a customer might order two quarterly cartridge shipments in one quarter, perhaps at the beginning and the end of the quarter, and none in the next quarter.) GEOGRAPHIC SEGMENT DATA Information regarding geographic segment data is provided in Note 16 to Notes to Consolidated Financial Statements. FACTORS THAT MAY AFFECT FUTURE RESULTS WE ARE NOT PROFITABLE; WE MUST INCREASE SALES OF OUR PRODUCTS TO BE PROFITABLE. We were formed in 1983, and we have not yet made an operating profit. We cannot guarantee that we will ever be profitable. Furthermore, we may incur additional losses. We can give no assurances that we will be able to market our products at prices and in quantities that will generate a profit. We can give no assurances that we can avoid potential delays and expenses in developing new products, problems with production and marketing or other unexpected difficulties. OUR SUCCESS DEPENDS ON GREATER COMMERCIAL ACCEPTANCE; WE ARE NOT ABLE TO PREDICT FUTURE COMMERCIAL ACCEPTANCE. Our future depends on the success of the i-STAT System, which depends primarily on its acceptance by an increasing number of hospitals as a reliable, accurate and cost-effective replacement for traditional blood measurement methods. The i-STAT System is known as a "point-of-care" blood testing device, which is a relatively new way to analyze blood. Currently, central and "stat" laboratories within hospitals or independent commercial laboratories perform critical or "stat" blood testing. Although the market is increasingly accepting point-of-care blood testing, most acute care hospitals already use expensive blood testing instruments in their central and "stat" laboratories and many are reluctant to change their current procedures for performing blood analysis. In addition, the i-STAT System currently does not measure a large enough number or range of analytes for some hospitals to consider broadly adopting it. Although we continue to develop additional tests to respond to hospitals' needs, we cannot guarantee that we will be able to develop enough additional tests quickly enough or in a way that is cost-effective or at all. WE RELY ON ABBOTT LABORATORIES FOR THE MARKETING AND SALES OF OUR PRODUCTS. In September 1998, the Company and Abbott signed agreements which provide for a long-term sales, marketing and research alliance. We signed a product distribution agreement with Abbott, under which Abbott became the exclusive distributor of the i-STAT System in most parts of the world and any new products we develop for use in the professionally attended human healthcare market. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Alliance with Abbott Laboratories." As a result of this alliance, our revenues are significantly affected by sales made through Abbott. We expect to face significant marketing challenges in the future, and while our agreements with Abbott remain in effect our profitability will depend heavily upon Abbott's success in selling our products. If Abbott is unsuccessful in marketing the i-STAT System or our agreements with Abbott are terminated, we will have to hire and train additional marketing and sales personnel and/or enter into new product distribution agreements with another party. We cannot guarantee that we would be able to enter into new product distribution agreements or find a company that could provide a level of distribution or competent marketing and sales personnel equivalent to Abbott's, or that we could accomplish this in a short period of time. Moreover, our agreement with Abbott gives Abbott sole discretion to set the prices for our products, which can have a big effect on our revenues, margins and profits. OUR MANUFACTURING IS SUBJECT TO CERTAIN RISKS. We may face unexpected technical problems in trying to transfer product ideas from the development stage to the manufacturing stage. These technical problems could delay our plans for new product releases. In addition, our manufacturing operations use highly technical processes involving unique, proprietary biosensor microfabrication techniques which our manufacturing personnel must continuously monitor and update, especially as we develop more products. Also, we may not be able to predict or satisfy changing customer demands for certain products and it could take longer than expected for us to change the manufacturing processes to respond to these demands. As a result, we may not have sufficient inventory to meet customer demands or we may have too much product inventory at times, which could affect our relationships with customers and 7 10 negatively affect our working capital. In order to be profitable, we must manufacture greater quantities of products than we have to date and we must do this more efficiently than we have. We cannot guarantee that we will be able to do so. Some of the components of the i-STAT System are custom-made by only a few outside vendors. We may not be able to meet the demand for our products if one or more of these vendors could not supply us with the needed components or components which meet our specifications. We have experienced manufacturing problems because of vendor or component issues. Our Kanata, Ontario facility is the only cartridge manufacturing facility, and our East Windsor, New Jersey facility is the only facility where our hand-held analyzers are manufactured. If either facility were damaged or closed due to fire or other causes, it would negatively impact our business. WE MAY NEED ADDITIONAL FUNDING IN THE FUTURE AND THESE FUNDS MAY NOT BE AVAILABLE TO US. We expect our existing funds to be sufficient to meet our obligations and our liquidity and capital requirements for the near term. However, numerous factors may change this expectation. In the long term, we anticipate that we will need additional financing before our operations are profitable enough to enable us to fund additional product development and increase manufacturing capacity to meet anticipated product demand. We have no commitments for any additional financing and we cannot assure investors that any such commitment could be obtained on favorable terms, if at all. Any additional equity financing may cause dilution of our current stockholders, and any debt financing may require restrictions on our right to declare dividends or on other aspects of our business. WE MAY NOT BE SUCCESSFUL IN DEFENDING OUR PROPRIETARY RIGHTS OR PROPRIETARY RIGHTS CLAIMS MADE BY OTHERS. Our commercial success depends partly upon our trade secrets, know-how, trademarks, patents and other proprietary rights. We actively seek patent protection for our proprietary technology in the United States and internationally, but we cannot guarantee that third parties will not challenge our patents or that they will not be invalidated or designed around or that they will provide a commercially significant level of protection. We cannot guarantee that any pending patent applications or applications filed in the future will result in a patent being issued to us. Furthermore, once issued, a patent is not always valid or enforceable, and a patent holder may still infringe the patent rights of others. If our key patents are invalidated or expire, this could lead to increased competition and would adversely affect our business. In addition, we may be found to have infringed the proprietary rights of others or may be required to respond to patent infringement claims and may have to litigate to determine the priority of inventions. We are in the middle of such litigation at this time. Litigation may be necessary to enforce our patents, trade secrets or know-how, or to determine the enforceability, scope and validity of the proprietary rights of others. The defense or prosecution of intellectual property proceedings is costly and a diversion of our management resources. A determination against us could be very costly and/or require us to seek licenses from third parties which may not be available on commercially reasonable terms, if at all. Furthermore, we can provide no assurances that we will be able to maintain the confidentiality of our trade secrets or know-how or that others may not develop or acquire trade secrets or know-how that are similar to ours. WE COMPETE AGAINST LARGER, STRONGER ENTITIES THAT SELL MORE ESTABLISHED BLOOD ANALYSIS PRODUCTS. Our success depends on our ability to establish and maintain a competitive position in the blood analysis market. We expect that manufacturers of conventional blood analysis products used in clinical laboratories will compete intensely to maintain their markets and revenues. Some of these manufacturers currently offer products which many perceive to be less expensive to operate and which include a broader range of tests than the products we offer and expect to offer. We can provide no assurances that competitive pressures will not result in price reductions of our products, which could adversely affect our profitability. In addition, health care providers may choose to maintain their current method of blood testing. We also face competition from manufacturers of other blood analyzers intended for point-of-care use. Many of our competitors have substantially greater capital resources, research and development staffs and facilities than ours. Our products may become obsolete or non-competitive if rapid technological changes or developments occur. We need to continue to make substantial investments in and commit significant resources to product improvement and development in order to stay competitive and successfully introduce new products. We can provide no assurances that we will have the resources necessary to make such investments. If we do have the required resources, we can provide no assurances that we will be able to respond adequately to technological or market changes. WE DEPEND ON KEY MEMBERS OF OUR STAFF AND MUST RETAIN AND RECRUIT QUALIFIED INDIVIDUALS IF WE ARE TO BE COMPETITIVE. Our success depends on our ability to attract and retain certain scientific, technical, regulatory and managerial personnel. If we lose key personnel, it could have a materially adverse effect on our business. Competition for qualified personnel is intense and we cannot guarantee investors that we will be successful in recruiting or retaining such personnel in the future. RISKS ASSOCIATED WITH OUR INTERNATIONAL BUSINESS. In recent years, we have experienced substantial sales growth in international markets and expect to continue to expand our product distribution internationally. We may face difficulties and risks in our international business, including changing economic or political conditions, export restrictions, currency risks, export controls relating to technology, compliance with existing and changing regulatory requirements, tariffs and other trade barriers, longer payment cycles, problems in collecting accounts receivable, reimbursement 8 11 levels, and potentially adverse tax consequences. In addition, it may be difficult for us to enforce and collect receivables through a foreign country's legal system and to protect our intellectual property in foreign countries. International sales are invoiced and settled in U.S. dollars. However, the cartridge price received from international partners, including Abbott, may be affected by changes in the value of the U.S. dollar relative to local currencies. This is because the international cartridge price is based on the price paid by customers in local currencies. When the values of foreign currencies change with respect to the U.S. dollar, the price changes due to the foreign exchange conversion of local currency prices. Price reductions are limited, however, by guaranteed minimum prices established for each cartridge. We cannot assure investors that one or more of these factors will not have a material and adverse effect on our international business opportunities. ANTITAKEOVER PROVISIONS. Our Certificate of Incorporation and Bylaws, Stockholder Rights Plan, and our agreements with Abbott contain provisions which may have the effect of delaying, deferring or preventing a change in control of the Company without further action by our stockholders. In addition, certain of these provisions may discourage bids for the Common Stock, may adversely affect the market price of the Common Stock, and may affect the voting and other rights of holders of Common Stock and may discourage takeover attempts not first approved by the Board of Directors (including takeovers which certain stockholders may deem to be in their best interests). We will be subject to Section 203 of the Delaware General Corporate Law which generally imposes restrictions upon certain acquirers and their affiliates and associates of 15% or more of our Common Stock. MANAGEMENT AND SIGNIFICANT SHAREHOLDERS CAN EXERCISE INFLUENCE OVER THE COMPANY. As of March 20, 2001, directors, executive officers and principal shareholders of the Company beneficially owned approximately 45% of our outstanding voting securities. As a result, these shareholders, individually and/or acting together may be able to influence the outcome of shareholder votes. Examples of shareholder votes include those for the election of directors, changes in our Certificate of Incorporation and Bylaws and approving certain mergers or other similar transactions, such as a sale of all or substantially all of our assets. In addition, if we receive certain information relating to an offer for our voting securities of all or substantially all of our assets, we must provide notice to Abbott. Furthermore, our exclusive distribution arrangement with Abbott and our licensing arrangement with HP could discourage a third party from making any such offer. THE COMPANY'S STOCK PRICE IS VOLATILE AND INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. The market price of our Common Stock has fluctuated significantly and as a result, it has been described as "volatile." Future announcements concerning the Company or its competitors, including operating results, technological innovations or new commercial products, government regulations, developments concerning proprietary rights, or litigation could have a significant impact on the market price of our Common Stock. We believe that a significant percentage of our Common Stock is held by institutional investors, and Abbott owns 2,000,000 shares of our Common Stock. The decision by any of these investors to sell all or a substantial portion of their holdings could have an adverse impact on the market price for our Common Stock. Furthermore, the stock market has from time to time experienced extreme price and volume fluctuations, which may adversely affect the market price of our Common Stock. Some of these fluctuations have particularly affected high technology companies and they have often been unrelated to the operating performance of such companies. In addition, general economic, political and market conditions may also adversely affect the market price of our Common Stock. We cannot provide any assurances that the trading price of our Common Stock will remain at or near its current level. ITEM 2. PROPERTIES The Company's principal manufacturing facilities are located in Kanata, Ontario, Canada, where it leases a 53,802 square foot building for a term expiring in February 2004. The Company also leases 42,454 square feet in an adjoining building for a term expiring in February 2004, subject to, at the Company's option, renewal for one five-year term. The Company also leases executive offices in East Windsor, New Jersey, where it occupies a 37,474 square-foot facility. The East Windsor lease expires in September 2003, subject to, at the Company's option, renewal for one five-year term. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in a case entitled Nova Biomedical Corporation, Plaintiff v. i-STAT Corporation, Defendant. The Complaint, which was filed in the United States District Court for the District of Massachusetts on June 27,1995, alleges infringement by i-STAT of Nova's U.S. Patent No. 4,686,479. In February 1998, the Court entered summary judgment in favor of the Company on the issue of patent infringement. The plaintiff appealed the dismissal to the Federal Circuit which affirmed two of the grounds of the dismissal (proper interpretation of the Patent and the fact that the Company does not literally infringe), but remanded the case to the District Court with instructions to reconsider whether the Company's device performs a certain measurement in a substantially equivalent way to a method covered by the Patent, and therefore infringes under the "doctrine of equivalents." A jury trial was 9 12 initially scheduled to commence on November 6, 2000, but was postponed in order to allow the Company to present argument that certain evidence pertaining to the plaintiff's interpretation of the Patent should serve as the basis for dismissal of the case. On February 23, 2001, the District Court decided not to dismiss the case and accordingly, the case is expected to be tried in late Spring or early Summer 2001. Should the plaintiff prevail in this case, it could have a material and adverse impact on the financial position, results of operations and cash flows of the Company. The Company was a defendant in a case entitled Customedix Corporation, Plaintiff v. i-STAT Corporation, Defendant. The complaint, which was filed in the United States District Court for the District of Connecticut on December 26, 1996, alleged infringement by i-STAT of Customedix's U.S. Patent No. 4,342,964. The plaintiff sought injunctive relief and an accounting for i-STAT's profits and the damages to Customedix from such alleged infringement. The Company was prepared to contest the case vigorously, did not believe that it had infringed the Customedix patent and had obtained an opinion from recognized patent counsel to the effect that no infringement had occurred. However, management concluded that the uncertainty inherent in any litigation as well as the drain on management's time and the Company's resources merited an out of court resolution of this lawsuit. Accordingly, on June 14, 2000, the Company entered into a settlement agreement under which the Company paid the plaintiff $1.5 million and the plaintiff agreed to permanently withdraw the complaint and to release the Company from any and all claims of whatsoever nature that the plaintiff may have had against the Company, whether under the referenced Patent or otherwise. A charge in the amount of $1.5 million was recorded in the second quarter of 2000 in connection with the settlement of this litigation. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS Not applicable. 10 13 EXECUTIVE OFFICERS The executive officers of the Company and their respective ages and positions with the Company are as follows: WILLIAM P. MOFFITT Age 54. Mr. Moffitt is the President and Chief Executive Officer of the Company. He has held various offices since he joined the Company as Executive Vice President in July 1989. He has served as Chief Executive Officer of the Company since February 1993, as President since November 1991 and as a director since May 1990. From 1985 to 1989, Mr. Moffitt was President of the Physician Diagnostics Division of Baxter Healthcare Corp., a diversified health care company. Mr. Moffitt holds a B.S. from Duke University. NOAH J. KROLOFF Age 38. Mr. Kroloff is the Vice President of International Sales and Marketing and Corporate Development. He joined the Company in May 1994. From September 1990 to May 1994, he was a manager at McKinsey & Company, a leading management consulting firm, where he specialized in international alliances among medical products companies. Prior to joining McKinsey, he served in consulting and business development roles for several biotechnology companies and for Merck & Co., Inc. Mr. Kroloff holds an M.B.A. in finance and marketing from the MIT Sloan School of Management and a B.A. in general science from Brandeis University. ROGER J. MASON Age 52. Mr. Mason has served as Vice President of Finance, Treasurer and Chief Financial Officer since he joined the Company in July 1996. From October 1994 to June 1996, he was Vice President, Finance and Treasurer, and Chief Financial Officer at Concurrent Computer Corporation, a publicly held, leading worldwide supplier of networked and distributed, high performance, real time, fault-tolerant computing systems. From April 1991 to October 1994, Mr. Mason served as Chief Financial Officer and Treasurer at Integral Peripherals Inc., a disk drive manufacturer. From 1981 to 1991, he held senior executive positions at Maxtor Corporation, a publicly held disk drive manufacturer, MiniScribe Corporation, a publicly held disk drive manufacturer whose assets were acquired by Maxtor Corporation, and Ironstone Group, Inc., a publicly held holding company. His experience also includes public accounting with Coopers & Lybrand and Honey, Perriam & Company. He is a fellow of the Institute of Chartered Accountants in England and Wales. MICHAEL P. ZELIN Age 40. Mr. Zelin is the Executive Vice President and Chief Technology Officer of the Company. He served as Senior Vice President, Research and Development, from February 1999 to January 2001. From March 1992 to January 1999, he served as Vice President of Systems Development. Since joining the Company in February 1986 he has held various technical positions including Manager and Director of Systems Engineering, and has contributed to nine of the Company's U.S. patents or patents pending. Executive officers of the Company are elected by the Board of Directors of the Company. 11 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's Common Stock is traded on the NASDAQ National Market System under the symbol "STAT". The following table sets forth for the periods indicated the range of high and low prices for the Company's Common Stock as reported on NASDAQ.
2000 High Low - -------------------------------------------------------------------------------- First Quarter...................................... $19.38 $11.63 Second Quarter..................................... $18.69 $10.13 Third Quarter...................................... $23.31 $16.63 Fourth Quarter..................................... $26.50 $17.50
1999 High Low - -------------------------------------------------------------------------------- First Quarter...................................... $12.25 $ 7.25 Second Quarter..................................... $11.25 $ 8.13 Third Quarter...................................... $13.13 $ 7.69 Fourth Quarter..................................... $16.63 $11.31
HOLDERS There were approximately 377 registered holders of the Company's Common Stock of record as of March 20, 2001. RIGHTS On June 29, 1995, the Company declared a dividend distribution of rights (each, a "Right") to purchase a certain number of units at a price of $104.00, subject to adjustment. The Rights are deemed to attach to and trade together with the Common Stock. Each unit is equal to one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company. Rights are distributed in connection with issuances of shares of Common Stock. The Rights are not exercisable until the occurrence of certain events enumerated in the Stockholder Protection Agreement between the Company and First Union National Bank, the Company's rights agent. Until a Right is exercised, no holder of Rights will have rights as a stockholder of the Company other than rights resulting from such holder's ownership of Common Stock, including, without limitation, the right to vote or to receive dividends. A description of the Rights is hereby incorporated by reference from the Company's Current Report on Form 8-K dated July 10, 1995, as amended. DIVIDENDS Except for the Rights, the Company has not declared or paid dividends on its Common Stock to date and intends to retain future earnings, if any, for use in its business for the foreseeable future. 12 15 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below has been derived from the audited financial statements of the Company. The consolidated financial statements of the Company as of December 31, 2000 and 1999 and for each of the years in the three-year period ended December 31, 2000, together with the notes thereto and the related report of PricewaterhouseCoopers LLP, independent accountants, are included elsewhere in this Report. The selected consolidated financial data set forth below should be read in conjunction with the consolidated financial statements, related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Report.
In thousands of dollars, except share and per share data Year Ended December 31, - -------------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 Statement of Operations Data: Net revenues ......................... $ 55,037 $ 45,225 $ 39,101 $ 37,840 $ 30,330 Cost of products sold ................ 40,951 36,401 30,664 30,962 26,291 Research and development ............. 7,944 7,506 7,281 6,721 5,780 General and administrative ........... 6,983 7,264 7,152 5,761 5,778 Sales and marketing .................. 7,784 8,293 12,956 13,020 11,991 Litigation settlement ................ 1,500 -- -- -- -- Consolidation of operations .......... -- 70 1,115 -- -- Other income, net .................... 1,763 1,507 1,672 1,651 2,054 Loss before provision (benefit) for income taxes ......................... (8,362) (12,802) (18,395) (16,973) (17,456) Provision (benefit) for income taxes . (867) -- -- -- -- Net loss ............................. (7,495) (12,802) (18,395) (16,973) (17,456) Basic and diluted net loss per share . ($0.42) ($0.73) ($1.15) ($1.17) ($1.31) Shares used in computing basic and diluted net loss per share ........... 17,973,715 17,614,595 16,050,877 14,497,530 13,321,603
In thousands of dollars As of December 31, - -------------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 Balance Sheet Data: Cash, cash equivalents and short-term investments $ 19,536 $ 25,575 $ 38,390 $ 32,914 $ 28,417 Working capital ...................... 21,521 31,958 44,605 38,697 33,056 Total assets ......................... 59,934 58,124 68,906 59,170 55,365 Accumulated deficit .................. (196,965) (189,470) (176,668) (158,273) (141,300) Total stockholders' equity ........... $ 41,052 $ 44,663 $ 54,660 $ 53,045 $ 46,834
13 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND AND OVERVIEW The Company was incorporated in Delaware in 1983 and develops, manufactures and markets medical diagnostic products for blood analysis that provide health care professionals with immediate and accurate critical, diagnostic information at the point of patient care. The Company's current products, known as the i-STAT(R) System, consist of portable, hand-held analyzers and single-use disposable cartridges, each of which simultaneously performs different combinations of commonly ordered blood tests in approximately two minutes. The i-STAT System also includes peripheral components that enable the results of tests to be transmitted by infrared means to both a proprietary information system for managing the user's point-of-care testing program and to the user's information systems for billing and archiving. The i-STAT System currently performs blood tests for sodium, potassium, chloride, glucose, creatinine, urea nitrogen, hematocrit, ionized calcium, lactate, Celite(R) ACT (activated clotting time), arterial blood gases, and bicarbonate, and derives certain other values, such as total carbon dioxide, base excess, anion gap, hemoglobin and O(2) saturation, by calculation from the tests performed. The Company continues to engage in research and development in order to improve its existing products and develop new products based on the i-STAT System technology. The Company currently is developing three additional tests for the measurement of coagulation: kaolin ACT, partial thromboplastin time ("aPTT"), and prothombin time ("PT"). The Company is also studying the development of cardiac marker tests. In the fourth quarter of 2000, the Company introduced an analyzer and associated peripheral equipment, which, in addition to having the measurement capabilities possessed by the i-STAT System, incorporates the glucose measurement capabilities of an Abbott Laboratories ("Abbott") product. The new i-STAT(R) 1 Analyzer permits a customer to run all i-STAT cartridges as well as Abbott MediSense(R) glucose strips on one integrated hand-held device. The new analyzer also incorporates a number of enhancements, including a bar code reader, an improved user interface, and an enhanced data management system which, in conjunction with a new central data management system, enhances the customer's ability to centrally manage a widely distributed point-of-care testing program. Prior to November 1, 1998, the Company marketed and distributed its products in the United States and Canada principally through its own direct sales and marketing organization, in Japan through Japanese marketing partners, in Europe through Hewlett-Packard Company ("HP") and in Mexico, South America, China, Australia, and certain other Asian and Pacific Rim countries, through selected distribution channels. Pursuant to a technology collaboration between the Company and HP, in November 1997 HP commenced selling a patient monitoring system (the "Integrated Analyzer"), which integrates all of the blood diagnostics capabilities of the i-STAT System. (As part of a spinoff of its measurement systems business in 1999, HP assigned its rights and obligations under its agreements with the Company to Agilent Technologies, Inc. ("Agilent").) On September 2, 1998, the Company entered into a long-term sales, marketing and research alliance with Abbott, which, among other things, has altered significantly the manner in which the Company markets and sells its products worldwide. The majority of the Company's revenues are now derived from Abbott. Please see "Alliance with Abbott Laboratories" for a description of the Company's agreements with Abbott. RESULTS OF OPERATIONS The Company generated revenues of approximately $55.0 million, $45.2 million and $39.1 million in 2000, 1999 and 1998, including international revenues (as a percentage of worldwide revenues) of $15.1 million (27.5%), $13.8 million (30.5%) and $9.8 million (25.1%), respectively. Revenues from Abbott represented approximately 83.5%, 78.5% and 11.7% of the Company's worldwide revenues for 2000, 1999 and 1998, respectively. The $9.8 million (21.7%) increase in revenues from 1999 to 2000 was primarily due to increased shipment volume of the Company's cartridges, reflecting higher cartridge consumption by existing hospital users and the addition of new hospital users. Cartridge shipments increased 23.8% to 9,829,225 units in 2000 from 7,941,115 units in 1999. Revenues from the increased cartridge shipments were partially offset by lower worldwide average selling prices per cartridge, which declined from approximately $3.84 to $3.69 per cartridge in the same periods. For the foreseeable future, cartridge average selling prices are expected to continue to decline because of the product pricing arrangements applicable under the strategic alliance between the Company and Abbott. See "Alliance with Abbott Laboratories". The increase in revenues in 2000 also includes approximately $3.6 million from Abbott to fund certain research and development and marketing expenses. The $6.1 million (15.7%) increase in revenues from 1998 to 1999 14 17 was primarily due to increased shipment volume of the Company's cartridges, reflecting higher cartridge consumption by existing hospital users and the addition of new hospital users. Cartridge shipments increased 31.3% to 7,941,115 units from 6,046,825 units for the twelve months ended December 31, 1999 and 1998, respectively. Revenues from the increased cartridge shipments were partially offset by lower average selling prices per cartridge, which declined from approximately $4.66 to $3.84 per cartridge in the same periods. The increase in revenues in the 1999 period also includes approximately $2.4 million from Abbott to fund certain research and development and marketing expenses. The manufacturing costs (as a percentage of product sales) associated with product sales in 2000, 1999 and 1998 were approximately $40.9 million (79.7%), $36.4 million (85.0%), and $30.7 million (78.6%), respectively. Cost of products sold, as a percentage of product sales, generally decreases with increased shipment volume of the Company's cartridges and improvements in manufacturing productivity and yields. Cost of products sold, as a percentage of product sales, increased in 1999 due to manufacturing process problems. The Company took a charge in the second and third quarters of 1999 totaling $2.1 million to write-off inventory caused by quality problems with tape gasket material supplied by a vendor. The Company generated higher than normal manufacturing efficiency gains in the third quarter of 1999 in rebuilding its inventory, which had a favorable, and partially offsetting impact on cost of products sold, as a percentage of product sales. The Company experienced a second problem in the fourth quarter of 1999, also caused by defective tape from its tape supplier, which resulted in a write-off of approximately $0.9 million of work-in-process inventory and a reduced level of production. Reduced levels of production and higher than normal scrap levels continued into the first quarter of 2000. Cost of products sold, as a percentage of product sales, subsequently improved due to the rebuilding of cartridge inventories, which caused fixed manufacturing costs to be spread over a larger number of product units and improvements in cartridge production yields. With the completion of the rebuilding of cartridge inventories, production volumes are expected to return to more normal levels in the first quarter of 2001. The Company incurred research and development costs (as a percentage of net revenues) of approximately $7.9 million (14.4%), $7.5 million (16.6%) and $7.3 million (18.6%) in 2000, 1999 and 1998, respectively, consisting of costs associated with the personnel, material, equipment and facilities necessary to conduct new product development. Research and development expenditures may increase over the next three years. The amount and timing of such increase will depend upon numerous factors including the level of activity at any point in time, the breadth of the Company's development objectives and the success of its development programs. Revenues from Abbott of approximately $2.7 million, $1.8 million and $0.1 million for research and development activities are included in net revenues in 2000, 1999 and 1998, respectively. Abbott currently is not funding any of the Company's research and development programs. The Company incurred general and administrative expenses (as a percentage of net revenues) of approximately $7.0 million (12.7%), $7.3 million (16.1%) and $7.2 million (18.3%) in 2000, 1999 and 1998, respectively. General and administrative expenses consisted primarily of salaries and benefits of personnel, office costs, legal and other professional fees and other costs necessary to support the Company's infrastructure. The Company incurred sales and marketing expenses (as a percentage of net revenues) of approximately $7.8 million (14.1%), $8.3 million (18.3%) and $13.0 million (33.1%) in 2000, 1999 and 1998, respectively, consisting primarily of salaries, commissions, benefits, travel and other expenditures for sales representatives, implementation coordinators, international marketing support, order entry, distribution, technical services, clinical affairs, product literature, market research, and other sales infrastructure costs. Sales and marketing expenses in 1998 include approximately $483,000 for severance and retention bonus amounts payable to the Company's sales representatives and sales management personnel. The employment of the majority of the Company's sales representatives was terminated on December 31, 1998, in connection with the assumption by Abbott of principal responsibility for distribution of the Company's products. As a result, sales and marketing expenses decreased in 1999. Included in revenues are amounts billed to Abbott for services performed by the implementation coordinators, approximating $0.9 million, $0.7 million and $0.0 million in 2000, 1999 and 1998, respectively. See "Alliance with Abbott Laboratories". 15 18 The Company was a defendant in a case entitled Customedix Corporation, Plaintiff v. i-STAT Corporation, Defendant. The complaint, which was filed in the United States District Court for the District of Connecticut on December 26, 1996, alleged infringement by i-STAT of Customedix's U.S. Patent No. 4,342,964. The plaintiff sought injunctive relief and an accounting for i-STAT's profits and the damages to Customedix from such alleged infringement. The Company was prepared to contest the case vigorously, did not believe that it had infringed the Customedix patent and had obtained an opinion from recognized patent counsel to the effect that no infringement had occurred. However, management concluded that the uncertainty inherent in any litigation as well as the drain on management's time and the Company's resources merited an out of court resolution of this lawsuit. Accordingly, on June 14, 2000, the Company entered into a settlement agreement under which the Company paid the plaintiff $1.5 million and the plaintiff agreed to permanently withdraw the complaint and to release the Company from any and all claims of whatsoever nature that the plaintiff may have had against the Company, whether under the referenced Patent of otherwise. A charge in the amount of $1.5 million was recorded in the second quarter of 2000 in connection with the settlement of this litigation. In January 1998, the Company decided to consolidate all its cartridge assembly operations in its manufacturing facility in Ontario, Canada. In order to facilitate this move, the Company relocated its cartridge assembly operation from Plainsboro, New Jersey, to its manufacturing facility in Ontario, Canada. The relocation of cartridge assembly commenced in June 1998 and was completed in April 1999. As a result of this consolidation of operations, 66 employees in the cartridge assembly operations were notified during the first quarter of 1998 that their employment would be terminated. In addition, the Company's lease for its instrument operations, engineering, customer support, selected research and development, marketing and administrative facility in Princeton, New Jersey, expired in September 1998. The Company relocated these activities to a 37,474 square foot leased facility in East Windsor, New Jersey. The product distribution operations formerly located in the Company's Plainsboro, New Jersey facility were relocated to the Company's East Windsor, New Jersey facility in early 1999. The charge to earnings in 1998 for these relocations, including severance and retention payments to affected employees of $1.0 million, for the physical move of equipment, rent and utilities on the unoccupied Plainsboro facility until that lease expired in February 1999, and for miscellaneous costs was approximately $1.1 million. An additional charge to earnings of approximately $0.1 million occurred in 1999. Retention payments are charged to expense over the retention period. Investment income was approximately $1.6 million, $1.5 million and $1.7 million in 2000, 1999 and 1998, respectively. The changes in investment income primarily reflect changes in the level of cash and cash equivalent balances and interest rates. Interest income is expected to decline in the near future as cash and cash equivalent balances decline. In November 2000, the New Jersey Economic Development Authority approved the Company's application to sell New Jersey State income tax benefits under the New Jersey Technology Tax Transfer Program (the "Program"). During the fourth quarter of 2000, the Company received $867,000 from the sale of State of New Jersey income tax benefits expiring in 2000. The Program requires that the Company maintain certain employment levels in New Jersey and that the proceeds from the sale of the tax benefits be spent in New Jersey. The Company recognized the sale of this tax benefit in 2000 as all conditions stipulated in the Program have been met. Net loss in 2000 decreased to approximately $7.5 million or $0.42 per share, from $12.8 million or $0.73 per share in 1999, and $18.4 million or $1.15 per share in 1998. The weighted average number of shares used in computing basic and diluted net loss per share was 17.97 million, 17.61 million and 16.05 million in 2000, 1999 and 1998, respectively. The increases in the weighted average number of shares primarily reflect the issuance of 2 million shares of Common Stock to Abbott in September 1998 and the exercise of employee stock options in each year. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, the Company had cash and cash equivalents of approximately $19.5 million, a decrease of approximately $6.1 million from the December 31, 1999 balance of approximately $25.6 million. The decrease primarily reflects approximately $13.0 million of cash used in operating activities (partially offset by the receipt of $10.8 million from Abbott in January 2000), equipment purchases of approximately $7.0 million and the receipt of approximately $3.6 million, net, from the proceeds of stock option exercises. The $10.8 million received from Abbott represents the third installment of prepayments for guaranteed future incremental cartridge sales (as defined in the Distribution Agreement with Abbott). (The fourth and final installment of Abbott prepayments of $5.2 million was received in January 2001.) Working capital decreased by approximately $10.5 million from $32.0 million to $21.5 million during 2000. Changes in working capital during the year primarily reflect the decrease in cash and cash 16 19 equivalents, an increase of approximately $6.5 million in inventories, an increase of approximately $1.2 million in accounts payable and accrued expenses and an increase in deferred revenue of approximately $9.3 million. The increase in inventories reflects the build-up of cartridge inventories to meet increased sales demand and rebuild inventory from the production problems arising in 1999, and an increase in analyzer inventories in preparation for the launch of the new i-STAT(R) 1 Analyzer. The deferred revenue reflects the receipt of the $10.8 million prepayment from Abbott, along with the reclassification of the first Abbott prepayment of $5.0 million from deferred revenue-long term to deferred revenue-current, partially offset by the amortization of such prepayments to income as incremental cartridge sales (as defined in the Distribution Agreement with Abbott) are generated. The Company expects its existing cash and cash equivalents to be sufficient to meet its obligations and its liquidity and capital requirements for the near term. The Company regularly monitors capital raising alternatives in order to take advantage of opportunities to supplement its current working capital upon favorable terms, including joint ventures, strategic corporate partnerships or other alliances and the sale of equity and/or debt securities. The Company's need, if any, to raise additional funds to meet its working capital and capital requirements will depend upon numerous factors, including the results of its marketing and sales activities, its new product development efforts, manufacturing efficiencies and manufacturing plant expansion plans, the outcome of ongoing litigation and competitive conditions. The Company currently anticipates that it will need to raise a significant amount of capital in order to fund long-term product development programs and manufacturing capacity needs. On March 16, 2000, Agilent converted and sold its holding of 2,138,702 shares of Series B Preferred Stock (formerly held by HP) into 2,138,702 shares of Common Stock and accordingly, is no longer a related party for financial statement purposes. At December 31, 2000, the Company had available for Federal income tax purposes net operating loss carry forwards of approximately $160 million, which expire in varying amounts through 2020. The timing and manner in which the operating loss carry forwards may be utilized in any year by the Company will be limited by Section 382 of the Internal Revenue Code. International sales are invoiced and settled in U.S. dollars. However, the cartridge price received from international partners, including Abbott, may be affected by changes in the value of the U.S. dollar relative to local currencies. This is because the international cartridge price is set based on the price paid by customers in local currencies. When the value of foreign currencies changes with respect to the U.S. dollar, the price changes due to the foreign exchange conversion of local currency prices. Price reductions are limited, however, by guaranteed minimum prices established for each cartridge. The Company's cartridge production is conducted through a wholly-owned subsidiary in Canada. Most manufacturing labor and overhead costs of this subsidiary are incurred in Canadian currency funded by U.S. dollar transfers from the United States each week, while most raw material purchases are in U.S. dollars. In 2000, the accumulated other comprehensive loss related to foreign currency translation increased by approximately ($0.6) million to approximately ($1.3) million, and reflects the adjustment to translate the Canadian subsidiary's balance sheet to U.S. dollars at the December 31, 2000 exchange rate. The impact of inflation on the Company's business has been minimal and is expected to be minimal for the near-term. ALLIANCE WITH ABBOTT LABORATORIES On September 2, 1998, the Company and Abbott entered into agreements (the "Alliance Agreements") providing for a long-term sales, marketing and research alliance. The Alliance Agreements comprise a Distribution Agreement, a Research Agreement, a Stock Purchase Agreement, a Standstill Agreement and a Registration Rights Agreement. The primary objective of the Abbott alliance is to strengthen the Company's product marketing and distribution capability and accelerate the development of new products. Under the Distribution Agreement, Abbott has become, subject to the then existing rights of the Company's other international distributors, the exclusive worldwide distributor of the Company's hand-held blood analyzer products (including cartridges) and any new products the Company may develop for use in the professionally attended human healthcare delivery market. Abbott has assumed the Company's product sales to U.S. customers that were in place as of the inception of the Distribution Agreement (the "Base Business") at no profit to Abbott, and the Company and Abbott share in the incremental profits derived from product sales beyond the Base Business. Abbott agreed to 17 20 prepay to the Company a total of $25,000,000 during the first three years of the Distribution Agreement as guaranteed future incremental product sales. Such prepayments are amortized to revenue as incremental cartridges are sold to Abbott over the first three years of the Agreement. Prepayments in amounts of $5,000,000, $4,000,000 and $10,800,000 were received in September 1998, January 1999 and January 2000, respectively. Unamortized revenue relating to these prepayments in the amounts of $10,606,000 and $1,012,000 are included in deferred revenues-current at December 31, 2000 and 1999, respectively, and $5,000,000 is included in deferred revenues from related party, non-current at December 31, 1999. The final prepayment of $5,200,000 was received in January 2001. Distribution under the Distribution Agreement commenced in the United States on November 1, 1998. A subsequent international rollout commenced in various countries during the second half of 1999. As a result of the Distribution Agreement, the majority of the Company's revenues are now derived from Abbott. The Distribution Agreement expires on December 31, 2003, subject to automatic extensions for additional one-year periods unless either party provides the other with at least 12 months prior written notice, except that the Company may terminate the Distribution Agreement after December 31, 2001 if Abbott fails to achieve a three-year milestone minimum growth rate in sales of the Company's products covered by the Distribution Agreement. If the Distribution Agreement is terminated, other than (i) by the Company for cause or for Abbott's failure to achieve the minimum growth rate; or (ii) by Abbott, if Abbott delivers the requisite notice terminating the Distribution Agreement after the initial term, then, the Company will be obligated to pay to Abbott a one-time termination fee calculated to compensate Abbott for a portion of its costs in undertaking the distribution relationship, and residual payments for five years following termination based on a percentage of Abbott's net sales of the Company's products during the final twelve months of the Distribution Agreement. In the event that such termination occurs within the first three years of the Distribution Agreement, the Company also must refund to Abbott any prepayments made and not yet credited to Abbott at the time of such termination. Under the terms of the Research Agreement, the Company will conduct research and will develop products primarily to be commercialized by Abbott. Such research and development will be funded by Abbott and Abbott will have exclusive worldwide commercialization rights to the products developed under the Research Agreement subject to certain limitations. The Company and Abbott will jointly own the intellectual property which is developed during the course of work performed under the Research Agreement. In connection with this agreement, revenues from Abbott of $2,697,000, $1,762,000 and $110,000 are included in net revenues in 2000, 1999 and 1998, respectively. Abbott currently is not funding any of the Company's research and development programs. The Research Agreement terminates upon expiration or termination of the Distribution Agreement, unless earlier terminated as provided therein. Upon such expiration or earlier termination, both the Company and Abbott will be permitted to distribute the products developed under the Research Agreement in the territory covered by the Distribution Agreement. Under the Stock Purchase Agreement, Abbott purchased 2,000,000 shares (the "Purchased Shares") of the Company's Common Stock, at a price of $11.35 per share, resulting in net proceeds of $20,641,000. The Stock Purchase Agreement, together with the Registration Rights Agreement, contains certain terms and conditions pertaining to the voting and transfer of the Purchased Shares. The Standstill Agreement provides for limitations on Abbott's ability to purchase the Company's Common Stock, or to propose any merger or business combination with the Company or purchase of a material portion of the Company's assets. THE FOREGOING DESCRIPTION OF THE ALLIANCE AGREEMENTS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ACTUAL TEXT OF SUCH AGREEMENTS, COPIES OF WHICH WERE FILED WITH THE COMMISSION AS EXHIBITS TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998. 18 21 RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133, as amended, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company presently does not have any derivative instruments or hedging activities and, consequently, the adoption of SFAS No. 133 will not have an impact on the Company's consolidated results of operations, financial position or cash flows. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101") which addresses the staff's views on the application of United States generally accepted accounting principles for revenue recognition. The Company adopted the guidance of this bulletin in the fourth quarter of 2000 with no impact on its financial condition or results of operations. ALL STATEMENTS CONTAINED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OTHER THAN STATEMENTS OF HISTORICAL FINANCIAL INFORMATION, ARE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS CONCERNING PLANS, OBJECTIVES, GOALS, STRATEGIES, FUTURE EVENTS OR PERFORMANCE AND UNDERLYING ASSUMPTIONS AND OTHER STATEMENTS WHICH ARE OTHER THAN HISTORICAL FACTS. ALTHOUGH THE COMPANY BELIEVES THAT ITS EXPECTATIONS ARE BASED ON REASONABLE ASSUMPTIONS, THE COMPANY OPERATES IN A HIGH TECHNOLOGY, EMERGING MARKET ENVIRONMENT THAT INVOLVES SIGNIFICANT RISKS AND UNCERTAINTIES WHICH MAY CAUSE ACTUAL RESULTS TO VARY FROM SUCH FORWARD-LOOKING STATEMENTS AND TO VARY SIGNIFICANTLY FROM REPORTING PERIOD TO REPORTING PERIOD. THESE RISKS INCLUDE, AMONG OTHERS, THOSE LISTED IN "FACTORS THAT MAY AFFECT FUTURE RESULTS", IN ITEM 1 OF THIS ANNUAL REPORT ON FORM 10-K, AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY DOES NOT UNDERTAKE TO UPDATE THE RESULTS DISCUSSED HEREIN AS A RESULT OF CHANGES IN RISKS OR OPERATING RESULTS. ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14 for an Index to Financial Statements and Financial Statement Schedules. Such Financial Statements and Schedules are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 19 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning directors and executive officers of the Company and compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is included under the caption "Election of Directors" of the Proxy Statement for the 2001 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is included under the caption "Executive Compensation" of the Proxy Statement for the 2001 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning security ownership of certain beneficial owners and management is included under the captions "Principal Stockholders" and "Election of Directors" of the Proxy Statement for the 2001 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning transactions and other relationships, if any, between the Company and its directors, officers or principal stockholders is included under the caption "Certain Transactions" of the Proxy Statement for the 2001 Annual Meeting of Stockholders and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules (1) FINANCIAL STATEMENTS -- THE FOLLOWING ARE INCLUDED IN ITEM 8: PAGE Report of Independent Accountants............................................25 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2000............................26 Consolidated Balance Sheets at December 31, 2000 and 1999....................27 Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 2000............28 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2000............................29 Notes to Consolidated Financial Statements...................................30 (2) FINANCIAL STATEMENT SCHEDULES -- THE FOLLOWING ARE INCLUDED IN ITEM 14(d): Report of Independent Accountants............................................45 Schedule II -- Valuation and Qualifying Accounts.............................46 Consolidated financial statement schedules not included in this Annual Report on Form 10-K have been omitted either because they are not applicable, not required or the equivalent information has been included in the consolidated financial statements and notes thereto or elsewhere herein. 20 23 (3) EXHIBITS: EXHIBIT NO. DESCRIPTION (3.1) Restated Certificate of Incorporation (Form S-8/S-3 Registration Statement, File No. 33-48889)* (3.2) By-laws (Form 10-K for fiscal year ended December 31, 1996)* (3.3) Certificate of Designation, Preferences and Rights of Series A Preferred Stock (Form 8-K, dated July 10, 1995 and amended on September 11, 1995)* (4.1) Stockholder Protection Agreement, dated as of June 26, 1995, between Registrant and First Fidelity Bank, National Association (Form 8-K, dated July 10, 1995 and amended on September 11, 1995)* (10.4.2)** Form of Incentive Stock Option Agreement under 1985 Stock Option Plan (U.S. Resident Affiliate) (Form 10-K for fiscal year ended December 31, 1992)* (10.4.4)** Form of Non-Statutory Stock Option Agreement under 1985 Stock Option Plan (U.S. Resident Affiliate) (Form 10-Q for quarter ended September 30, 1996)* (10.4.6)** Form of Non-Statutory Stock Option Agreement under 1985 Stock Option Plan (Ontario Resident Affiliate) (Form 10-Q for quarter ended September 30, 1996)* (10.11) Letter Agreement between the Registrant and Japanese corporate entities, dated August 23, 1988 (Form S-1 Registration Statement, File No. 33-44800)* (10.12) Letter Agreement between the Registrant and Japanese corporate entities, dated August 23, 1988 (Form S-1 Registration Statement, File No. 33-44800)* (10.13) Distribution Agreement between the Registrant and Japanese corporate entities, dated August 23, 1988 (Form S-1 Registration Statement, File No. 33-44800)* (10.15) Development Agreement between the Registrant and Japanese corporate entities, dated August 23, 1988 (Form S-1 Registration Statement, File No. 33-44800)* (10.21) Lease Agreement, dated December 23, 1991, between William S. Burnside (Canada) Limited, "In Trust" and the Registrant (Form 10-K for fiscal year ended December 31, 1993)* (10.25)** Letter Agreement, dated April 15, 1994, between Registrant and Noah Kroloff (Form 10-Q for quarter ended June 30, 1994)* (10.30) License Agreement between the Registrant and Hewlett-Packard Company (Form 8-K, dated July 10, 1995 and amended on September 11, 1995)* (10.33) Amendment, dated March 28, 1995 to Lease Agreement dated December 23, 1991, between William S. Burnside (Canada) Limited, "In Trust" and the Registrant (Form 10-Q for quarter ended March 31, 1996)* (10.34)** Letter Agreement, dated June 6, 1996 between the Registrant and Roger J. Mason (Form 10-Q for quarter ended June 30, 1996)* EXHIBIT NO. DESCRIPTION * These items are hereby incorporated by reference from the exhibits of the filing or report indicated (except where noted, Commission File No. 0-19841) and are hereby made a part of this Report. ** This exhibit is a management contract or compensatory plan required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c). 21 24 (10.35) Form of Officer Indemnification Agreement (Form 10-K for fiscal year ended December 31, 1996)* (10.36) Form of Director Indemnification Agreement (Form 10-K for fiscal year ended December 31, 1996)* (10.38)** 1985 Stock Option Plan, as amended (Form 10-K for fiscal year ended December 31, 1997)* (10.39)** Employment Agreement, dated January 23, 1998, between the Registrant and William P. Moffitt (Form 10-K for fiscal year ended December 31, 1997)* (10.40)** Non-Statutory Stock Option Agreement, dated January 23, 1998, between the Registrant and William P. Moffitt (Form 10-K for fiscal year ended December 31, 1997)* (10.41) Lease Agreement, dated July 16, 1998, between Brandywine Operating Partnership L.P. and Registration (Form 10-Q for fiscal quarter ended June 30, 1998)* (10.42) Common Stock Purchase Agreement, dated as of August 3, 1998, between Registrant and Abbott Laboratories (Form 10-Q for fiscal quarter ended June 30, 1998)* (10.43) Standstill Agreement, dated as of August 3, 1998, between Registrant and Abbott Laboratories (Form 10-Q for fiscal quarter ended June 30, 1998)* (10.44) Form of Registration Rights Agreement entered into by Registrant and Abbott Laboratories on September 2, 1998 (Form 10-Q for fiscal quarter ended June 30, 1998)* (10.45) Marketing and Distribution Agreement, dated as of August 3, 1998, between Registrant and Abbott Laboratories (Form 10-Q for fiscal quarter ended June 30, 1998)* (10.46) Funded Research & Development and License Agreement, dated as of August 3, 1998, between Registrant and Abbott Laboratories (Form 10-Q for fiscal quarter ended June 30, 1998)* (10.48)** Form of Director Non-Statutory Stock Option Agreement* (10.49) Lease Agreement dated August 27, 1998, between Urigold Holdings Ltd. and the Registrant (Form 10-K for the fiscal year ended December 31, 1998)* (10.50)** i-STAT Corporation Equity Incentive Plan, as amended* (10.51)** Form of Executive Officer Restricted Share Agreement under Equity Incentive Plan (Form 10-Q for fiscal quarter ended March 31, 1999)* (10.52)** Form of Restricted Share Award Agreement with President and Chief Executive Officer (Form 10-Q for fiscal quarter ended March 31, 1999)* (10.54)** Form of Director Restricted Share Award Agreement* (10.55) Form of Agreement Relating to State of New Jersey Technology Business Tax Certificate Program * These items are hereby incorporated by reference from the exhibits of the filing or report indicated (except where noted, Commission File No. 0-19841) and are hereby made a part of this Report. ** This exhibit is a management contract or compensatory plan required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c). 22 25 EXHIBIT NO. DESCRIPTION (21) Subsidiaries of the Registrant (Form S-1 Registration Statement, File No. 33-44800)* (23) Consent of PricewaterhouseCoopers LLP, Independent Accountants (24) Powers of Attorney, executed by certain officers of the Registrant and the individual members of the Board of Directors, authorizing such officers of the Registrant to file amendments to this Report, are located on the signature page of this Report. * These items are hereby incorporated by reference from the exhibits of the filing or report indicated (except where noted, Commission File No. 0-19841) and are hereby made a part of this Report. 23 26 i-STAT CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS DESCRIPTION PAGE Report of Independent Accountants............................................25 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2000............................26 Consolidated Balance Sheets as of December 31, 2000 and 1999.................27 Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 2000............28 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2000............................29 Notes to Consolidated Financial Statements...................................30 24 27 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF i-STAT CORPORATION: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of i-STAT Corporation and its subsidiary (the "Company") at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Florham Park, New Jersey February 6, 2001 25 28 i-STAT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands of dollars, except share and per share data For the Years Ended December 31, - ---------------------------------------------------------------------------------------------------------- 2000 1999 1998 Net revenues: Related party product sales ...................... $ 42,419 $ 35,456 $ 7,617 Third party product sales ........................ 8,972 7,351 31,374 Other related party revenues ..................... 3,646 2,418 110 ------------------------------------------------ Total net revenues ............................ 55,037 45,225 39,101 ------------------------------------------------ Cost of products sold .............................. 40,951 36,401 30,664 Research and development ........................... 7,944 7,506 7,281 General and administrative ......................... 6,983 7,264 7,152 Sales and marketing ................................ 7,784 8,293 12,956 Litigation settlement .............................. 1,500 -- -- Consolidation of operations ........................ -- 70 1,115 ------------------------------------------------ Total operating cost and expenses ............. 65,162 59,534 59,168 ------------------------------------------------ Operating loss .......................... (10,125) (14,309) (20,067) Other income (expense): Investment income ................................ 1,636 1,507 1,694 Other ............................................ 127 -- (22) ------------------------------------------------ Other income (expense), net ................... 1,763 1,507 1,672 Loss before provision (benefit) for income taxes (8,362) (12,802) (18,395) Provision (benefit) for income taxes ............. (867) -- -- ------------------------------------------------ Net loss ........................................... ($7,495) ($12,802) ( 18,395) ================================================ Basic and diluted net loss per share ............... ($ 0.42) ($0.73) ($1.15) ================================================ Shares used in computing basic and diluted net loss per share ......................... 17,973,715 17,614,595 16,050,877 ================================================
The accompanying notes are an integral part of these consolidated financial statements. 26 29 i-STAT CORPORATION CONSOLIDATED BALANCE SHEETS
In thousands of dollars, except share and per share data December 31, - ------------------------------------------------------------------------------------------------------------- 2000 1999 Assets Current assets: Cash and cash equivalents ................................................. $ 19,536 $ 25,575 Accounts receivable, net of reserve for doubtful accounts of $28 in 2000 and $128 in 1999 ............................................... 868 413 Accounts receivable from related parties .................................. 3,607 4,185 Inventories (Note 2) ...................................................... 15,402 8,886 Prepaid expenses and other current assets ................................. 884 1,185 ------------------------- Total current assets ................................................... 40,297 40,244 Plant and equipment, net (Note 3) ........................................... 17,766 15,936 Intangible assets, net (Note 4) ............................................. 1,627 1,501 Other assets ................................................................ 244 443 ------------------------- Total assets ........................................................... $ 59,934 $ 58,124 ========================= Liabilities and Stockholders' Equity Current liabilities: Accounts payable .......................................................... $ 3,464 $ 2,269 Accrued expenses (Note 5) ................................................. 4,488 4,453 Deferred revenue (inclusive of related party deferred revenue of $10,675 in 2000 and $1,545 in 1999) .................................... 10,824 1,564 ------------------------- Total current liabilities .............................................. 18,776 8,286 ------------------------- Deferred revenue from related party, non-current ............................ 106 5,175 ------------------------- Total liabilities ...................................................... 18,882 13,461 ------------------------- Commitments and Contingencies Stockholders' Equity: Preferred Stock, $.10 par value, shares authorized 7,000,000: Series A Junior Participating Preferred Stock, $.10 par value 1,500,000 shares authorized; none issued at December 31, 2000 and December 31, 1999 ............................................. -- -- Series B Preferred Stock, $.10 par value, shares authorized, 2,138,702 shares issued and outstanding -0- at December 31, 2000 and 2,138,702 at December 31, 1999 ................................ -- 214 Common Stock, $.15 par value, shares authorized 25,000,000: shares issued 18,436,654 at December 31, 2000 and 15,761,630 at December 31, 1999 .................................. 2,766 2,364 Treasury Stock, at cost, 40,817 shares at December 31, 2000 and -0- shares at December 31, 1999 ...................................... (750) -- Additional paid-in capital .............................................. 238,814 234,487 Unearned compensation ................................................... (764) (1,547) Loan to officer, net .................................................... (717) (716) Accumulated deficit ..................................................... (196,965) (189,470) Accumulated other comprehensive loss .................................... (1,332) (669) ------------------------- Total stockholders' equity ........................................... 41,052 44,663 ------------------------- Total liabilities and stockholders' equity ........................... $ 59,934 $ 58,124 =========================
The accompanying notes are an integral part of these consolidated financial statements. 27 30 i-STAT CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Stock Common Stock --------- -------------------------------------------------------- Additional In thousands of dollars, Par Number of Par Paid-in Treasury Unearned except share and per share data Value Shares Value Capital Stock Compensation - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 .............. $ 214 13,203,527 $1,981 $209,594 ($13) ($181) Net loss for 1998 ....................... Other comprehensive loss on foreign currency translation adjustments....... Total comprehensive loss ........... Shares issued at $1.50 to $12.625 per share under the 1985 Stock Option Plan (Note 8) .................. 90,260 13 149 Private placement of Common Stock ....... 2,000,000 300 20,341 Restricted Stock issued at $15.938 per share ..................... 750 12 (12) Restricted Stock issued at $16.438 per share ..................... 3,000 49 (49) Restricted Stock issued at $16.50 per share ...................... 12,000 2 196 (198) Amortization of unearned compensation related to Restricted Stock ........... 271 Retirement of Treasury Stock ............ (542) (13) 13 ------------------------------------------------------------------------------------ Balance, December 31, 1998 .............. 214 15,308,995 2,296 230,328 -- (169) Net loss for 1999 ....................... Other comprehensive gain on foreign currency translation adjustments ...... Total comprehensive loss ........... Shares issued at $1.50 to $10.50 per share under the 1985 Stock Option Plan (Note 8) ....... 125,132 19 857 Restricted Stock issued at $8.875 per share ...................... 310,000 47 2,704 (2,751) Restricted Stock issued at $9.25 per share ....................... 14,412 2 131 (133) Restricted Stock issued at $9.75 per share ....................... 3,091 30 (30) Compensation related to options issued .. 437 (479) Amortization of unearned compensation related to Restricted Stock ........... 2,015 Loan to Officer ......................... ------------------------------------------------------------------------------------ Balance, December 31, 1999 .............. 214 15,761,630 2,364 234,487 -- (1,547) Net loss for 2000 ....................... Other comprehensive loss on foreign currency translation adjustments ...... Total comprehensive loss ........... Shares issued at $1.50 to $16.75 per share under the 1985 Stock Option Plan and the Equity Incentive Plan (Note 8) .... 526,066 79 4,303 Restricted Stock issued at $13.00 per share ...................... 10,256 2 131 (133) Conversion of Series B Preferred Stock to Common Stock ...................... (214) 2,138,702 321 (107) Amortization of unearned compensation related to Restricted Stock .......... 916 Purchase of Treasury Stock .............. (750) Loan to Officer ......................... Forgiveness of Loan to Officer .......... ------------------------------------------------------------------------------------ Balance, December 31, 2000 .............. $ -- 18,436,654 $2,766 $238,814 ($750) ($764) ====================================================================================
Accumulated Other Total In thousands of dollars, Loan to Comprehensive Accumulated Stockholders' except share and per share data Officer Loss Deficit Equity - --------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 .............. $ -- ($277) ($158,273) $ 53,045 Net loss for 1998........................ (18,395) Other comprehensive loss on foreign currency translation adjustments ...... (1,064) ----------------------------- Total comprehensive loss ........... . (19,459) Shares issued at $1.50 to $12.625 per share under the 1985 Stock Option Plan (Note 8) .................. 162 Private placement of Common Stock ....... 20,641 Restricted Stock issued at $15.938 per share ..................... Restricted Stock issued at $16.438 per share ..................... Restricted Stock issued at $16.50 per share ...................... Amortization of unearned compensation related to Restricted Stock ............ 271 Retirement of Treasury Stock ............ ---------------------------------------------------------------- Balance, December 31, 1998 .............. -- (1,341) (176,668) 54,660 Net loss for 1999 ....................... (12,802) Other comprehensive gain on foreign ..... currency translation adjustments ...... 672 ----------------------------- Total comprehensive loss ........... (12,130) Shares issued at $1.50 to $10.50 per share under the 1985 Stock Option Plan (Note 8) ....... 876 Restricted Stock issued at $8.875 per share ...................... Restricted Stock issued at $9.25 per share ....................... Restricted Stock issued at $9.75 per share ....................... Compensation related to options issued .. (42) Amortization of unearned compensation related to Restricted Stock .......... 2,015 Loan to Officer ......................... (716) ---------------------------------------------------------------- Balance, December 31, 1999 .............. (716) (669) (189,470) 44,663 Net loss for 2000 ....................... (7,495) Other comprehensive loss on foreign currency translation adjustments ..... (663) ------------------------------ Total comprehensive loss ........... (8,158) Shares issued at $1.50 to $16.75 per share under the 1985 Stock Option Plan and the Equity Incentive Plan (Note 8) ... 4,382 Restricted Stock issued at $13.00 per share ...................... -- Conversion of Series B Preferred Stock to Common Stock ...................... -- Amortization of unearned compensation related to Restricted Stock ........... 916 Purchase of Treasury Stock .............. (750) Loan to Officer ......................... (257) (257) Forgiveness of Loan to Officer .......... 256 256 ---------------------------------------------------------------- Balance, December 31, 2000 .............. ($717) ($1,332) ($196,965) $ 41,052 ================================================================
The accompanying notes are an integral part of these consolidated financial statements. 28 31 i-STAT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands of dollars, except share and per share data For the Years Ended December 31, - -------------------------------------------------------------------------------------------------------------- 2000 1999 1998 Cash flows from operating activities: Net loss .................................................... ($7,495) ($12,802) ($18,395) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization ............................ 4,790 4,362 4,591 Accounts receivable provision ............................ -- -- 103 Gains on disposal of equipment ........................... (86) (4) -- Amortization of deferred revenue ......................... (6,887) (4,013) (218) Expense related to restricted stock ...................... 1,172 2,015 271 Change in assets and liabilities: Accounts receivable ......................................... (455) 2,436 1,875 Accounts receivable from related parties .................... 578 (1,342) (2,464) Inventories ................................................. (6,679) (325) (2,596) Prepaid expenses and other current assets ................... 292 98 (660) Accounts payable ............................................ 1,245 (486) 568 Accrued expenses ............................................ 78 (1,648) 2,321 Restricted cash, letter of credit ........................... 199 147 (219) Deferred revenue ............................................ 11,077 5,193 5,559 ---------------------------------------- Net cash used in operating activities .................... (2,171) (6,369) (9,264) ---------------------------------------- Cash flows from investing activities: Purchase of equipment ....................................... (6,973) (6,250) (5,925) Cost of intangible assets ................................... (261) (294) (193) Proceeds from sale of equipment ............................. 99 20 -- ---------------------------------------- Net cash used in investing activities .................... (7,135) (6,524) (6,118) ---------------------------------------- Cash flows from financing activities: Proceeds from issuance of Common Stock ...................... 4,382 834 162 Net proceeds from private placement of Common Stock ......... -- -- 20,641 Retirement (purchase) of Treasury Stock ..................... (750) -- 13 Loan to officer ............................................. (257) (716) -- Other ....................................................... -- -- 29 ---------------------------------------- Net cash provided by financing activities ................ 3,375 118 20,845 ---------------------------------------- Effect of currency exchange rate changes on cash ................ (108) (40) 13 ---------------------------------------- Net increase (decrease) in cash and cash equivalents ........ (6,039) (12,815) 5,476 Cash and cash equivalents at beginning of year .............. 25,575 38,390 32,914 ---------------------------------------- Cash and cash equivalents at end of year .................... $ 19,536 $ 25,575 $ 38,390 ======================================== Supplemental disclosure of cash flow information: Cash paid for income taxes .................................. $ -- $ -- $ -- ======================================== Supplemental disclosures of cash flow information and non cash investing and financing activities: Equipment purchases included in accounts payable at year end ................................................ $ 143 $ 276 $ 181 ======================================== Conversion of Preferred Stock to Common Stock ............... $ (214) $ -- $ -- ========================================
The accompanying notes are an integral part of these consolidated financial statements. 29 32 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS The accompanying consolidated financial statements include the accounts of i-STAT Corporation and i-STAT Canada Limited, collectively known as i-STAT or the Company. All significant inter-company accounts and transactions have been eliminated in consolidation. The Company develops, manufactures and markets medical diagnostic products for blood analysis that provide health care professionals with immediate and accurate critical diagnostic information at the point of patient care. Since November 1998, the Company's products are marketed and distributed principally to hospitals by Abbott Laboratories ("Abbott") in connection with the Company's alliance with Abbott (see Note 11). The Company operates in a high technology, emerging market environment that involves significant risks and uncertainties which may cause results to vary significantly from reporting period to reporting period. These risks include, but are not limited to, among others, competition from existing manufacturers and marketers of blood analysis products who have greater resources than the Company, the uncertainty of new product development initiatives, difficulties in transferring new technology to the manufacturing stage, market resistance to new products and point-of-care blood diagnosis, domestic and international regulatory constraints, uncertainties of international trade, pending and potential disputes concerning ownership of intellectual property and dependence upon strategic corporate partners for assistance in development of new markets. CASH AND CASH EQUIVALENTS Cash and cash equivalents include investments with original maturities of three months or less. FOREIGN CURRENCY TRANSLATION/TRANSACTIONS Consolidated Balance Sheet amounts have been translated using exchange rates in effect at the balance sheet dates and the translation adjustments have been included in the accumulated other comprehensive loss as a separate component of Consolidated Stockholders' Equity. The Consolidated Statements of Operations has been translated using the average exchange rates in effect each year. The transaction gains and losses, which are not material, have been included in other income. INVENTORIES Inventories are carried at the lower of actual cost or market and cost is accounted for on the first-in first-out (FIFO) basis. PLANT AND EQUIPMENT Plant and equipment are stated at cost and are depreciated on a straight-line basis over their useful lives which are estimated to be three to five years. Leasehold improvements are amortized over five years or the term of the lease, whichever is less. The cost of major additions and betterments are capitalized; maintenance and repairs which do not improve or extend the life of the respective assets are charged to expenses as incurred. When depreciable assets are retired or sold the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the Consolidated Statements of Operations. PATENTS, LICENSES AND TRADEMARKS Costs to obtain and maintain patents, licenses and trademarks are capitalized and amortized on a straight-line basis over their estimated useful lives or a period of 17 years, whichever is shorter. The Company reviews these items on a regular basis for realization. VALUATION OF LONG-LIVED ASSETS In accordance with the Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company periodically evaluates the carrying value of long-lived assets to be held and used, including intangible assets. The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flows are less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of long-lived assets. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. 30 33 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) UNEARNED COMPENSATION Unearned compensation related to stock options and Restricted Stock awards is amortized over the period during which the options vest or Restricted Stock awards are earned. INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), which requires an asset and liability approach for financial accounting and reporting of income taxes. In addition, deferred income taxes are adjusted for changes in income tax rates. SFAS No. 109 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. REVENUE RECOGNITION Revenues are recorded at the time of shipment of products and when title and risk of loss transfers or upon performance of services. Revenues from service contracts are recognized in earnings over the term of the contract. BASIC AND DILUTED LOSS PER SHARE Basic and diluted net loss per share is calculated using the weighted average number of common shares and preferred shares outstanding for all periods presented. Outstanding preferred shares have been included in the calculations since their date of issuance as they are convertible into common shares on a 1:1 basis and have substantially the same characteristics as common stock. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The Company has not included potential common shares in the diluted per-share computation as the result is antidilutive. Options to purchase 2,580,686 shares of Common Stock at $1.50 - $32.58 per share, which expire on various dates from March 2001 to November 2010, were outstanding at December 31, 2000. These shares were not included in the computation of diluted EPS because the effect would be antidilutive due to the net loss. COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income", requires foreign currency translation adjustments, which prior to adoption were reported separately in stockholders' equity, to be included in other comprehensive earnings. The only components of accumulated other comprehensive loss for the Company are foreign currency translation adjustments.
IN THOUSANDS OF DOLLARS 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------- Net loss................................................ ($7,495) ($12,802) ($18,395) Other comprehensive income (loss): Foreign currency translation......................... (663) 672 (1,064) ---------------------------------------- Comprehensive loss...................................... ($8,158) ($12,130) ($19,459) ========================================
ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK The Company's significant concentrations of credit risk are with its cash and cash equivalents and accounts receivable. Substantially all the Company's cash and cash equivalents at December 31, 2000 were invested in the securities of a single U.S. Government Agency. Accounts receivable are generally with distributors such as Abbott, Hewlett-Packard Company ("HP"), FUSO, Inc., and Heska. The Company provides credit to its customers on an unsecured basis after evaluating their credit status. 31 34 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEGMENT INFORMATION The Company operates within one business segment comprising the i-STAT(R) System. The i-STAT System consists of a portable handheld analyzer and single-use, disposable cartridges, which are interdependent on one another in the functionality of the system. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133, as amended, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company presently does not have any derivative instruments or hedging activities and, consequently, the adoption of SFAS No. 133 will not have an impact on the Company's consolidated results of operations, financial position or cash flow. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101") which addresses the staff's views on the application of United States generally accepted accounting principles for revenue recognition. The Company adopted the guidance of this bulletin in the fourth quarter of 2000 with no impact on its financial condition or results of operations. 2. INVENTORIES Inventories consist of the following:
IN THOUSANDS OF DOLLARS December 31, - ---------------------------------------------------------------------------------------------------- 2000 1999 Raw materials..................................................... $ 5,696 $3,402 Work in process................................................... 3,700 2,764 Finished goods.................................................... 6,006 2,720 ----------------------------- $15,402 $8,886 =============================
3. PLANT AND EQUIPMENT Plant and equipment, net, consists of the following:
IN THOUSANDS OF DOLLARS December 31, - ---------------------------------------------------------------------------------------------------- 2000 1999 Equipment loaned to customers..................................... $ 2,052 $ 2,418 Manufacturing equipment........................................... 37,364 33,100 Furniture and fixtures............................................ 1,318 1,092 Leasehold improvements............................................ 4,378 4,087 ------------------------------ 45,112 40,697 Less accumulated depreciation and amortization.................... (27,346) (24,761) ------------------------------ $ 17,766 $ 15,936 ==============================
Depreciation expense was approximately $4,644,000, $4,224,000 and $4,412,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Accumulated depreciation and amortization includes accumulated depreciation on loaned equipment of approximately $1,947,000 and $2,033,000 for the years ended December 31, 2000 and 1999, respectively. Maintenance and repairs expense for the years ended December 31, 2000, 1999 and 1998 was approximately $1,026,000, $938,000 and $865,000, respectively. 32 35 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. INTANGIBLE ASSETS Intangible assets, net, consist of the following:
IN THOUSANDS OF DOLLARS December 31, - -------------------------------------------------------------------------------- 2000 1999 Patents, licenses and trademarks.................. $2,448 $2,187 Less accumulated amortization..................... (821) (686) -------------------------- $1,627 $1,501 ==========================
Amortization expense was approximately $135,000, $138,000 and $179,000 for the years ended December 31, 2000, 1999 and 1998, respectively. 5. ACCRUED EXPENSES Accrued expenses consist of the following:
IN THOUSANDS OF DOLLARS December 31, - -------------------------------------------------------------------------------- 2000 1999 Accrued employee incentive awards................ $ 861 $ 601 Payroll and withholding taxes.................... 1,038 880 Professional fees................................ 484 383 Accrued commissions.............................. 273 276 Other............................................ 1,832 2,313 --------------------------- $4,488 $4,453 ===========================
6. LEASING TRANSACTIONS The Company's leases for its manufacturing facilities in Ontario, Canada expire in February 2004, subject to, at the Company's option, renewal for one five-year term in the lease of 42,454 square feet of space. Rent expense for these facilities was approximately $667,000, $456,000 and $368,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The Company's lease for its administrative, marketing and selected research and development facility in Princeton, New Jersey, expired on September 30, 1998. Rent expense for this facility was approximately $379,000 for the year ended December 31, 1998. The Company relocated these activities to a 37,474 square foot leased facility in East Windsor, New Jersey. The lease expires on September 30, 2003, subject, at the Company's option, to one five-year option to renew. Rent expense for this facility was approximately $708,000, $656,000 and $164,000 for 2000, 1999 and 1998, respectively. At December 31, 2000, other assets include $187,000 in restricted cash which acts as collateral for the leasehold improvements made in the facility. The Company's lease for its assembly facility in Plainsboro, New Jersey expired in February 1999 (the assembly operation was relocated to the Ontario, Canada, location). Rent expense for this facility was approximately $56,000 and $492,000 for the years ended December 31, 1999 and 1998, respectively. As of December 31, 2000, future minimum lease payments are as follows:
Year Ending December 31: IN THOUSANDS OF DOLLARS Operating Leases - ------------------------------------------------------------------------------------------- 2001................................................................... $1,580 2002................................................................... 1,543 2003................................................................... 1,342 2004................................................................... 129 Thereafter............................................................. -- ------ Total minimum lease payments........................................... $4,594 ======
33 36 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. PREFERRED STOCK The Company has authorized 7,000,000 shares of Preferred Stock. The rights, preferences, qualifications, and voting powers are determined by the Board of Directors at the time of issuance. In June 1995 the Board designated 1,500,000 shares as Series A Junior Participating Preferred Stock that may be issued in the future in connection with certain shareholder protection measures. Also in June 1995 the Board designated 2,138,702 shares as Series B Preferred Stock (the "Series B Stock"). The Series B Stock was issued to HP at $28.50 per share in July 1995 for net proceeds of approximately $59.2 million. There were 2,138,702 shares of Series B Stock issued and outstanding at December 31, 1999. During 1999, HP transferred its holding of Series B Stock to its then subsidiary, Agilent Technologies, Inc. ("Agilent"). On March 16, 2000, Agilent converted its holding of 2,138,702 shares of Series B Preferred Stock into 2,138,702 shares of Common Stock, and sold its holdings. On June 29, 1995, the Company declared a dividend distribution of rights (each, a "Right") to purchase a certain number of units at a price of $104.00, subject to adjustment. The Rights are deemed to attach to and trade together with the Common Stock. Each unit is equal to one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company. Rights are distributed in connection with issuances of shares of Common Stock. The Rights are not exercisable until the occurrence of certain events enumerated in the Stockholder Protection Agreement between the Company and First Union National Bank, the Company's rights agent. Until a Right is exercised no holder of Rights will have rights as a stockholder of the Company (other than rights resulting from such holder's ownership of Common Stock), including, without limitation, the right to vote or to receive dividends. 34 37 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. STOCK OPTIONS AND RESTRICTED STOCK As incentives to Company personnel and others, the Board of Directors from time to time grants options to purchase shares of the Company's Common Stock. Most options are granted under the 1985 Stock Option Plan or Equity Incentive Plan ("the Plans"). The maximum number of issuable shares of Common Stock is 5,300,000 of which 1,279,489 are available for grant at December 31, 2000. Options under the 1985 Stock Option Plan can be issued until November 26, 2005, and options under the Equity Incentive Plan can be issued until March 31, 2008. The option price generally is based upon the fair market value of the Company's Common Stock at the time of the grant. Unexercised options issued under the Plans expire five to ten years from the date of grant or three months following termination of the optionee's employment, whichever occurs first. On December 14, 1998, upon unanimous consent of the Board of Directors, 824,277 previously issued and outstanding stock options with an exercise price greater than $6.125 were cancelled, except for outstanding options held by outside Board members, the Medical Advisory Board and executive officers of the Company. Stock options were reissued to the holders of the cancelled options to purchase 824,277 shares at $6.125, the market value on the date of grant. The table below is a summary of stock option activity for the years 1998, 1999, and 2000:
Weighted Average Weighted Options Exercise Average Options Granted and Price per Fair Value Exercisable Exercisable Share per Option - --------------------------------------------------------------------------------------------------------------------- Balance December 31, 1997...................... 937,322 $14.69 Balance December 31, 1997...................... 1,637,704 $16.10 Options granted................................ 778,559 $15.44 $15.27 Options exercised.............................. (90,260) $ 1.75 Options forfeited.............................. (184,138) $17.91 Options cancelled.............................. (824,277) $16.57 Options granted................................ 824,277 $ 6.12 ---------------------------------------------------------- Balance December 31, 1998...................... 1,087,030 $12.71 Balance December 31, 1998...................... 2,141,865 $12.30 Options granted................................ 1,070,063 $ 9.30 $ 9.21 Options exercised.............................. (125,132) $ 6.99 Options forfeited.............................. (227,299) $11.77 ---------------------------------------------------------- Balance December 31, 1999...................... 1,349,002 $12.19 Balance December 31, 1999...................... 2,859,497 $11.45 Options granted................................ 474,047 $13.16 $13.28 Options exercised.............................. (526,066) $ 8.33 Options forfeited.............................. (226,792) $14.29 ---------------------------------------------------------- Balance December 31, 2000...................... 1,167,008 $12.49 Balance December 31, 2000...................... 2,580,686 $12.15 ==========================================================
The weighted average remaining contractual lives of outstanding options at December 31, 2000 was approximately 6.53 years. 35 38 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company applies the provisions of Opinion 25 ("APB 25") and related Interpretations in accounting for its stock based compensation plans. Accordingly, compensation expense has been recognized in the financial statements in respect to the above plans to the extent required by APB 25. Had compensation costs for the above plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, "Accounting for Stock Based Compensation", the Company's net loss and net loss per share would have been increased to the pro forma amounts below:
IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA 2000 1999 1998 - --------------------------------------------------------------------------------------------------------- Pro forma net loss................................... ($11,914) ($17,125) ($22,035) Pro forma basic and diluted net loss per share....... ($0.66) ($0.97) ($1.37)
As options vest over a varying number of years, and awards are generally made each year, the pro forma impacts shown here may not be representative of future pro forma expense amounts due to the annual grant of options by the Company. The pro forma additional compensation expense of approximately $4,419,000, $4,323,000 and $3,640,000 for 2000, 1999 and 1998, respectively, was calculated based on the fair value of each option grant using the Black-Scholes model with the following weighted average assumptions used for grants:
2000 1999 1998 - --------------------------------------------------------------------------------------------------------- Dividend yield....................................... 0% 0% 0% Expected volatility.................................. 71.29 62.00 60.00 Risk free interest rate.............................. 6.71% 5.44% 5.49% Expected option lives................................ 5 years 5 years 5 years
The following table summarizes information about stock options outstanding at December 31, 2000.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE Range of Number Outstanding Weighted Average Weighted Average Number Exercisable Weighted Average Exercise Price at 12/31/00 Remaining Life Exercise Price at 12/31/00 Exercise Price - ------------------------------------------------------------------------------------------------------------------------ $ 1.50 - $ 2.25 1,000 0.20 $ 1.50 1,000 $ 1.50 $ 6.13 - $ 9.06 743,523 6.60 $ 7.22 411,146 $ 6.88 $ 9.25 - $ 13.00 1,132,165 7.11 $11.18 365,301 $10.48 $14.10 - $ 21.00 509,127 5.84 $16.62 210,690 $16.28 $22.56 - $ 32.58 194,871 4.68 $24.97 178,871 $25.09 - ------------------------------------------------------------------------------------------------------------------------ $ 1.50 - $ 32.58 2,580,686 6.53 $12.15 1,167,008 $12.49 - ------------------------------------------------------------------------------------------------------------------------
36 39 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On February 5, 1999, the board of directors awarded 310,000 shares of restricted Common Stock to four executive officers of the Company. The restricted Common Stock had a fair value at the date of grant of approximately $2,751,250. One executive officer was awarded 250,000 shares of restricted Common Stock, 50,000 shares of which immediately vested on February 5, 1999, and the remaining 200,000 shares cliff vest on February 5, 2002. The 60,000 shares awarded to the other three executive officers vest over a three year period. In connection with the award of 250,000 shares to one executive officer, on June 30, 1999, the Company loaned the executive officer approximately $716,000 to pay withholding taxes. The promissory note for the withholding tax amount carries an interest rate of 5.37%, payable annually, and the principal amount of the loan is repayable three years from the date of the execution of a second promissory note for the remaining taxes. The second promissory note, executed in April 2000 of approximately $257,000 carries an interest rate of 6.36%, payable annually. One third of the principal amount of these loans will be forgiven on each anniversary date of the loan for the remaining taxes if the executive officer remains in the employment of the Company. The Company will also make a "tax gross-up" payment to the executive officer in connection with any taxes that may be due as result of the forgiveness of these loans. Compensation expense in the amount of approximately $1,180,000 and $1,379,000 was recorded in connection with these awards, the loan forgiveness and the associated tax gross-up payment during the years ended December 31, 2000 and 1999 respectively. During 2000, 10,256 shares of restricted Common Stock were awarded to outside directors of the Board of Directors as part of their annual compensation. The restricted Common Stock had a fair value of $133,000 at the date of grant, which was recorded as compensation expense in 2000. During 1999, 17,503 shares of restricted Common Stock were awarded to outside directors of the Board of Directors as part of their annual compensation. The restricted Common Stock had a fair value of $163,000 at the date of grant, which was recorded as compensation expense in 1999. The Company has a restricted stock plan whereby the Company can award shares of Common Stock to employees, other than its executive officers. The sale or transfer of the shares is limited during the restricted period, not exceeding four years. For the year ended December 31, 2000 and 1999, no shares of restricted Common Stock were awarded. For the year ended December 31, 1998, the Company awarded 15,750 shares of restricted Common Stock which had a fair value at the date of grant of approximately $259,000. Compensation under the plan is charged to earnings over the restriction period and amounted to approximately $22,000, $141,000, and $271,000 in 2000, 1999, and 1998, respectively. 9. DEVELOPMENT, DISTRIBUTION AND MANUFACTURING RIGHTS AGREEMENTS In August 1988, the Company entered into development, distribution and instrument manufacturing license agreements with two Japanese companies. Total sales under these agreements were $5,243,000, $3,900,000 and $3,794,000 for the years ended December 31, 2000, 1999 and 1998, respectively, including deferred revenue of $129,000, $0 and $0, respectively. The Company also has other license and distribution agreements, including agreements with HP and Abbott (see Notes 10 & 11). 37 40 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. RELATED PARTY TRANSACTIONS One director of the Company has provided consulting services to the Company. Consulting fees incurred totaled approximately $0, $15,000 and $30,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The Company had the following activity with Abbott and HP, primarily related to license and distribution agreements.
ABBOTT LABORATORIES IN THOUSANDS OF DOLLARS 2000 1999 1998 - ----------------------------------------------------------------------------------------------------- Revenues............................................... $45,927 $35,499 $4,515 Receivable at year end................................. $ 3,607 $ 4,069 $2,439 Deferred revenue at year end........................... $10,781 $ 6,474 $5,407
HEWLETT-PACKARD COMPANY IN THOUSANDS OF DOLLARS 2000 1999 1998 - ----------------------------------------------------------------------------------------------------- Revenues............................................... $ 138 $2,375 $3,212 Purchases.............................................. $ 41 $ 816 $ 728 Receivable at year end................................. $ -- $ 116 $ 404
HP has assigned its license agreement with the Company and its holding of Series B Stock to Agilent. On March 16, 2000, Agilent converted its holding of 2,138,702 shares of Series B Stock into 2,138,702 shares of Common Stock and sold its holding to two financial institutions and is no longer a related party. 11. ALLIANCE WITH ABBOTT LABORATORIES On September 2, 1998, the Company and Abbott entered into agreements (the "Alliance Agreements") providing for a long-term sales, marketing and research alliance. The Alliance Agreements comprise a Distribution Agreement, a Research Agreement, a Stock Purchase Agreement, a Standstill Agreement and a Registration Rights Agreement. The primary objective of the Abbott alliance is to strengthen the Company's product marketing and distribution capability and accelerate the development of new products. Under the Distribution Agreement, Abbott has become, subject to the then existing rights of the Company's other international distributors, the exclusive worldwide distributor of the Company's hand-held blood analyzer products (including cartridges) and any new products the Company may develop for use in the professionally attended human healthcare delivery market. Abbott has assumed the Company's product sales to U.S. customers that were in place as of the inception of the Distribution Agreement (the "Base Business") at no profit to Abbott, and the Company and Abbott share in the incremental profits derived from product sales beyond the Base Business. Abbott agreed to prepay to the Company a total of $25,000,000 during the first three years of the Distribution Agreement as guaranteed future incremental product sales. Such prepayments are amortized to revenue as incremental cartridges are sold to Abbott over the first three years of the Agreement. Prepayments in amounts of $5,000,000, $4,000,000 and $10,800,000 were received in September 1998, January 1999 and January 2000, respectively. Unamortized revenue relating to these prepayments in the amounts of $10,606,000 and $1,012,000 are included in deferred revenue-current at December 31, 2000 and 1999, respectively, and $5,000,000 is included in deferred revenues from related party, non-current at December 31, 1999. The final prepayment of $5,200,000 was received in January 2001. Distribution under the Distribution Agreement commenced in the United States on November 1, 1998. A subsequent international rollout commenced in various countries during the second half of 1999. As a result of the Distribution Agreement, the majority of the Company's revenues are now derived from Abbott. 38 41 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Distribution Agreement expires on December 31, 2003, subject to automatic extensions for additional one-year periods unless either party provides the other with at least 12 months prior written notice, except that the Company may terminate the Distribution Agreement after December 31, 2001 if Abbott fails to achieve a three-year milestone minimum growth rate in sales of the Company's products covered by the Distribution Agreement. If the Distribution Agreement is terminated, other than (i) by the Company for cause or for Abbott's failure to achieve the minimum growth rate; or (ii) by Abbott, if Abbott delivers the requisite notice terminating the Distribution Agreement after the initial term, then, the Company will be obligated to pay to Abbott a one-time termination fee calculated to compensate Abbott for a portion of its costs in undertaking the distribution relationship, and residual payments for five years following termination based on a percentage of Abbott's net sales of the Company's products during the final twelve months of the Distribution Agreement. In the event that such termination occurs within the first three years of the Distribution Agreement, the Company also must refund to Abbott any prepayments made and not yet credited to Abbott at the time of such termination. Under the terms of the Research Agreement, the Company will conduct research and will develop products primarily to be commercialized by Abbott. Such research and development will be funded by Abbott and Abbott will have exclusive worldwide commercialization rights to the products developed under the Research Agreement subject to certain limitations. The Company and Abbott will jointly own the intellectual property which is developed during the course of work performed under the Research Agreement. In connection with this agreement, revenues from Abbott of $2,697,000, $1,762,000 and $110,000 are included in net revenues in 2000, 1999 and 1998, respectively. Abbott currently is not funding any of the Company's research and development programs. The Research Agreement terminates upon expiration or termination of the Distribution Agreement, unless earlier terminated as provided therein. Upon such expiration or earlier termination, both the Company and Abbott will be permitted to distribute the products developed under the Research Agreement in the territory covered by the Distribution Agreement. Under the Stock Purchase Agreement, Abbott purchased 2,000,000 shares (the "Purchased Shares") of the Company's Common Stock, at a price of $11.35 per share, resulting in net proceeds of $20,641,000. The Stock Purchase Agreement, together with the Registration Rights Agreement, contains certain terms and conditions pertaining to the voting and transfer of the Purchased Shares. The Standstill Agreement provides for limitations on Abbott's ability to purchase the Company's Common Stock, or to propose any merger or business combination with the Company or purchase of a material portion of the Company's assets. THE FOREGOING DESCRIPTION OF THE ALLIANCE AGREEMENTS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ACTUAL TEXT OF SUCH AGREEMENTS, COPIES OF WHICH WERE FILED WITH THE COMMISSION AS EXHIBITS TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998. 39 42 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. INCOME TAXES The difference between income tax expense and the expected tax which would result from the use of the Federal Statutory income tax rate is as follows:
2000 1999 1998 - -------------------------------------------------------------------------------------------------- Computed tax at statutory Federal rate............... (34.0%) (34.0%) (34.0%) State income taxes, net of Federal benefits.......... (6.8%) 0.0% 0.0% Foreign (income)/loss not subject to United States tax................................. (4.5%) 8.1% 5.9% Change in valuation allowance........................ 32.1% 24.6% 27.8% Other................................................ 2.9% 1.3% 0.3% ---------------------------------- Income tax (benefit)/expense......................... (10.3%) 0.0% 0.0% ==================================
In November 2000, the New Jersey Economic Development Authority approved the Company's application to sell New Jersey State income tax benefits under the New Jersey Technology Tax Transfer Program (the "Program"). During the fourth quarter of 2000, the Company received $867,000 from the sale of State of New Jersey income tax benefits expiring in 2000. The Program requires that the Company maintain certain employment levels in New Jersey and that the proceeds from the sale of the tax benefits be spent in New Jersey. The Company recognized the sale of this tax benefit in 2000 as all conditions stipulated in the Program have been met. At December 31, 2000, the Company had a net operating loss carry forward of approximately $159,611,000 for United States Federal income tax purposes which expires in varying amounts through 2020. The Company also has unused research and development tax credits of approximately $1,463,000 for United States Federal income tax purposes which expire in varying amounts through 2020. The timing and manner in which the United States Federal operating loss carry forwards and credits may be utilized in any year by the Company will be limited by Internal Revenue Code Section 382. The Company has unused Canadian net operating loss carry forward of approximately $14,320,000 which expire in varying amounts through 2004. Additionally, the Company has unused Canadian investment tax credits of approximately $2,529,000 which expire in varying amounts through 2010. The Company accounts for income taxes in accordance with the provisions of SFAS No. 109. SFAS No. 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company provides a valuation allowance against the net deferred tax assets due to the uncertainty of realization. The increase in the valuation allowance for the years ended December 31, 2000 and 1999 was approximately $4,303,000 and $3,544,000 respectively. 40 43 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Temporary differences and carry forwards, which give rise to the deferred tax assets and liabilities at December 31, 2000 and 1999, are as follows:
2000 1999 Deferred Tax Deferred Tax IN THOUSANDS OF DOLLARS Assets (Liabilities) Assets (Liabilities) - ------------------------------------------------------------------------------------------------------ Net Operating Loss -- United States................ $ 54,268 $ 51,498 Net Operating Loss -- Canada....................... 3,168 4,113 Net Operating Loss -- Province (Canada)............ 1,737 2,232 State Taxes........................................ 10,787 8,225 Deferred Revenue................................... 3,740 2,291 Tax Credits -- United States....................... 1,463 1,414 Tax Credits -- Canada.............................. 2,529 3,594 Intangibles........................................ (58) (405) Depreciation -- United States...................... (276) (495) Depreciation -- Canada............................. 158 602 Depreciation -- Province (Canada).................. 218 816 Other.............................................. 2,000 1,546 -------------------------------- 79,734 75,431 -------------------------------- Valuation Allowance -- United States............... (61,137) (55,849) Valuation Allowance -- Canada...................... (5,855) (8,309) Valuation Allowance -- Province (Canada)........... (1,955) (3,048) Valuation Allowance -- State....................... (10,787) (8,225) -------------------------------- Total Net Deferred Taxes........................... $ -- $ -- ================================
Given that significant uncertainty exists regarding the realizability of the Company's deferred tax assets, a full valuation allowance is recorded. 13. SAVINGS AND INVESTMENT RETIREMENT PLAN The Company has a defined contribution savings and investment retirement plan under section 401(k) of the Internal Revenue Code, as amended, whereby substantially all U.S. employees are eligible to participate, ("U.S. Plan"), and a deferred profit sharing plan for substantially all Canadian employees. In June 1999 the Company started to make matching contributions to these plans, and compensation expense in the amount of approximately $103,000 and $101,000 was recorded for the years ended December 31, 2000 and 1999, respectively. The trustee for the U.S. Plan is Fidelity Management Trust Company, which is affiliated with a stockholder of the Company. 14. COMMITMENTS AND CONTINGENCIES The Company is a defendant in a case entitled Nova Biomedical Corporation, Plaintiff v. i-STAT Corporation, Defendant. The Complaint, which was filed in the United States District Court for the District of Massachusetts on June 27,1995, alleges infringement by i-STAT of Nova's U.S. Patent No. 4,686,479. In February 1998, the Court entered summary judgment in favor of the Company on the issue of patent infringement. The plaintiff appealed the dismissal to the Federal Circuit which affirmed two of the grounds of the dismissal (proper interpretation of the Patent and the fact that the Company does not literally infringe), but remanded the case to the District Court with instructions to reconsider whether the Company's device performs a certain measurement in a substantially equivalent way to a method covered by the Patent, and therefore infringes under the "doctrine of equivalents." A jury trial was initially scheduled to commence on November 6, 2000, but was postponed in order to allow the Company to present argument that certain evidence pertaining to the plaintiff's interpretation of the Patent should serve as the basis for dismissal of the case. On February 23, 2001, the District Court decided not to dismiss the case and accordingly, the case is expected to be tried in late Spring or early Summer 2001. Should the plaintiff prevail in this case, it could have a material and adverse impact on the financial position, results of operations and cash flows of the Company. 41 44 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company was a defendant in a case entitled Customedix Corporation, Plaintiff v. i-STAT Corporation, Defendant. The complaint, which was filed in the United States District Court for the District of Connecticut on December 26, 1996, alleged infringement by i-STAT of Customedix's U.S. Patent No. 4,342,964. The plaintiff sought injunctive relief and an accounting for i-STAT's profits and the damages to Customedix from such alleged infringement. The Company was prepared to contest the case vigorously, did not believe that it had infringed the Customedix patent and had obtained an opinion from recognized patent counsel to the effect that no infringement had occurred. However, management concluded that the uncertainty inherent in any litigation as well as the drain on management's time and the Company's resources merited an out of court resolution of this lawsuit. Accordingly, on June 14, 2000, the Company entered into a settlement agreement under which the Company paid the plaintiff $1.5 million and the plaintiff agreed to permanently withdraw the complaint and to release the Company from any and all claims of whatsoever nature that the plaintiff may have had against the Company, whether under the referenced Patent of otherwise. A charge in the amount of $1.5 million was recorded in the second quarter of 2000 in connection with the settlement of this litigation. 15. CONSOLIDATION OF OPERATIONS In January 1998, the Company decided to consolidate all its cartridge assembly operations in its manufacturing facility in Ontario, Canada. In order to facilitate this move, the Company relocated its cartridge assembly operation from Plainsboro, New Jersey to its manufacturing facility in Ontario, Canada. The relocation of cartridge assembly commenced in June 1998, with the transfer of one assembly line to Canada, and the Company completed the relocation by April 1999. As a result of this consolidation of operations, 66 employees in the cartridge assembly operations were notified during the first quarter of 1998 that their employment would be terminated. The Company's lease for its instrument operations, engineering, customer support, selected research and development, marketing and administrative facility in Princeton, New Jersey, expired in September 1998. The Company relocated these activities to a 37,474 square foot leased facility in East Windsor, New Jersey. The product distribution operations formerly located in the Company's Plainsboro, New Jersey facility were relocated to the Company's East Windsor, New Jersey facility in early 1999. The charge to earnings in 1999 was $70,000. The charge to earnings in 1998 for these relocations, including severance and retention payments to affected employees, the physical move of equipment, rent and utilities on the unoccupied Plainsboro facility until that lease expired in February 1999, and miscellaneous costs was approximately $1.1 million. The charge to earnings in 1998 comprises approximately $1.0 million for severance and retention payments, and approximately $0.1 million for lease costs in respect to the unoccupied Plainsboro facility and other expenses associated with the move to the East Windsor facility. Retention payments are charged to expense over the retention period. 42 45 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 16. GEOGRAPHIC SEGMENT DATA The Company is engaged in the development, manufacturing and marketing of its proprietary blood analysis products in the health care sector. The Company's operations are classified into the following geographic areas:
IN THOUSANDS OF DOLLARS Year Ended December 31, - ---------------------------------------------------------------------------------------- 2000 1999 1998 Net revenues: Domestic..................................... $39,973 $31,437 $29,270 Canada....................................... 302 271 344 Japan........................................ 6,621 4,610 3,794 Other International.......................... 8,141 8,907 5,693 --------------------------------------- Total........................................ $55,037 $45,225 $39,101 =======================================
IN THOUSANDS OF DOLLARS Year Ended December 31, - ------------------------------------------------------------------------- 2000 1999 Long-lived assets: Domestic..................................... $ 3,991 $ 3,839 Canada....................................... 15,646 14,041 ------------------------ Total........................................ $19,637 $17,880 ========================
The Company's net revenues from Abbott were approximately $45,927,000, $35,499,000 and $4,515,000 for the years ended December 31, 2000, 1999 and 1998, respectively. 43 46 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2000 First Second Third Fourth In thousands of dollars, except share and per share data Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------- Net revenues..................................... $ 11,154 $ 14,809 $ 13,453 $ 15,621 Operating loss................................... ($5,175) ($3,930) ($575) ($445) Net income (loss)................................ ($4,669) ($3,491) ($114) $779 Basic and diluted net income (loss) per share.... ($0.26) ($0.19) ($0.01) $0.04 Weighted average shares used in computing basic net income (loss) per share............ 17,765,224 18,004,095 18,060,265 18,104,346 Weighted average shares used in computing diluted net income (loss) per share............. 17,765,224 18,004,095 18,060,265 19,305,728
1999 First Second Third Fourth In thousands of dollars, except share and per share data Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------------------------------- Net revenues..................................... $ 10,337 $ 11,426 $ 11,377 $ 12,085 Operating loss................................... ($4,937) ($4,860) ($1,836) ($2,676) Net loss......................................... ($4,491) ($4,492) ($1,478) ($2,341) Basic and diluted net loss per share............. ($0.26) ($0.26) ($0.08) ($0.13) Weighted average shares used in computing basic and diluted net loss per share......... 17,473,965 17,518,028 17,566,063 17,617,105
Basic and diluted net loss per common share amounts are calculated independently for each of the quarters presented. The sum of the quarters may not equal the full year basic and diluted net loss per common share amounts. 44 47 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE TO THE BOARD OF DIRECTORS OF i-STAT CORPORATION: Our audits of the consolidated financial statements referred to in our report dated February 6, 2001 appearing in this 2000 Annual Report on Form 10-K also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Florham Park, New Jersey February 6, 2001 45 48 SCHEDULE II i-STAT CORPORATION VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance at In thousands of dollars, except share Beginning Costs and Other end of and per share data of Period Expenses Accounts Deductions Period - --------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 2000: Reserve for Doubtful Accounts................... $ 128 $ -- $-- ($100)* $ 28 =================================================================== For the year ended December 31, 1999: Reserve for Doubtful Accounts................... $ 190 $ -- $-- ($62)* $ 128 =================================================================== For the year ended December 31, 1998: Reserve for Doubtful Accounts................... $ 109 $ 103 $-- ($22)* $ 190 =================================================================== For the year ended December 31, 2000: Tax Valuation Reserve........................... $75,431 $4,303 $-- -- $79,734 =================================================================== For the year ended December 31, 1999: Tax Valuation Reserve........................... $71,887 $3,544 $-- $ -- $75,431 =================================================================== For the year ended December 31, 1998: Tax Valuation Reserve........................... $63,982 $7,905 $-- $ -- $71,887 ===================================================================
* Trade accounts receivable written off against the reserve for doubtful accounts. 46 49 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 New Jersey on the 30th day of March, 2001. i-STAT CORPORATION By: /s/ William P. Moffitt ------------------------ William P. Moffitt President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William P. Moffitt and Roger J. Mason, or either of them, his attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue thereof. 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 the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ William P. Moffitt President, Chief Executive Officer and Director March 30, 2001 - ------------------------ (Principal Executive Officer) William P. Moffitt /s/ Roger J. Mason Vice President of Finance, Treasurer and Chief March 30, 2001 - ------------------------ Financial Officer (Principal Financial and Roger J. Mason Accounting Officer) /s/ J. Robert Buchanan Chairman of the Board March 30, 2001 - ------------------------ J. Robert Buchanan /s/ Stephen D. Chubb Director March 30, 2001 - ------------------------ Stephen D. Chubb /s/ Lionel N. Sterling Director March 30, 2001 - ------------------------ Lionel N. Sterling /s/ Anne M. VanLent Director March 30, 2001 - ------------------------ Anne M. VanLent
47 50 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 10.55 Technology Business Tax Certificate Program Agreement EX-10.55 2 y47242ex10-55.txt FORM OF AGREEMENT RE: NJ TECH BUSINESS TAX CERT PR 1 11/9/00 AGREEMENT TECHNOLOGY BUSINESS TAX CERTIFICATE PROGRAM This Agreement (hereinafter "Agreement"), made as of _____ day of ____________,20 ____, by and between ____________________________, ("Selling Company"), a company organized under the laws of the state of ____________, having its principal offices at ________________________________________________ and _______________________________________________________________ ("Buying Company"), a company organized under the laws of the State of _____________, having its principal offices at ________________________________________________ the above entities being hereinafter referred to as the "Parties." WITNESSETH: WHEREAS, in order for society to appreciate the anticipated potential rewards from emerging technology and biotechnology research, private industry must have access to sufficient financial resources to conduct research and transfer research discoveries into viable commercial products; WHEREAS, pursuant to P.L. 1997, c.334 as amended, the State of New Jersey created a tax benefit transfer program for emerging technology and biotechnology companies in order to provide additional funds to said companies by allowing new or expanding emerging technology and biotechnology companies with unused NOL Carryover and/or Unused R & D Credits to surrender those tax benefits for use by other corporation business taxpayers in exchange for private financial assistance; 2 WHEREAS, the Division of Taxation has established the amount of tax benefits that Selling Company can transfer over State Fiscal Year ______ to be $_______; NOW, therefore, in consideration of the mutual premises and covenants made herein, the Parties agree as follows: ARTICLE I 1.01 Definitions: "NJEDA" means the New Jersey Economic Development Authority established pursuant to section 4 of P.L. 1974, c. 80 (C.34:1B-4), as amended and supplemented; "Affiliated Business" means an entity which directly or indirectly owns or controls 5% or more of the voting rights of any kind or 5% or more of the value of all classes of both the taxpayer receiving the benefits and a corporation surrendering the benefits. "Biotechnology" means the continually expanding body of fundamental knowledge about the functioning of biological systems from the macro level to the molecular and sub-atomic levels, as well as products, services, technologies and sub-technologies developed as a result of insights gained from research advances which add to that body of fundamental knowledge; "Biotechnology company" means an emerging corporation that has a headquarters or base of operations located in New Jersey and that is engaged in the research, development, production, or provision of biotechnology for the purpose of developing or providing products or processes for specific commercial or public purposes, including but not limited to, medical, pharmaceutical, nutritional, and other health-related purposes, agricultural purposes, and environmental purposes, or a corporation that has a headquarters or base of operations located in 2 3 New Jersey and that is engaged in providing services or products necessary for such research, development, production, or provision; "Certificate" means the certificate issued by the Division relating to the Unused NOL Carryover and/or Unused R & D Credits of the Selling Company; "Division" means the Division of Taxation. "Technology company" means an emerging corporation that has a headquarters or base of operations located in New Jersey, and who employs some combination of the following: highly educated or trained managers and workers, or both, employed in New Jersey who use sophisticated scientific research service or production equipment, processes or knowledge to discover, develop, test, transfer or manufacture a product or service; "Unused NOL Carryover" means Unused Net Operating Loss Carryover, pursuant to N.J.S.A. 54:10A-4(k)(6)(B), of the Selling Company. "Unused R & D Credits" means unused amounts of research and development tax credits, pursuant to N.J.S.A. 54:10A-5.24(1)(b), of the Selling Company. ARTICLE II Section 2.01 Compensation. Subject to the conditions set forth in Section 2.02 hereof, within 10 days of Selling Company's notifying Buying Company of its receipt of the Certificate from the Division, Buying Company agrees to purchase the Certificate for a purchase price in the aggregate amount of $_______ for the transfer of tax benefits in the amount of $________ for the years and amounts more fully set forth in the Selling Business Tax Benefit Identification Form, attached. 3 4 Section 2.02 Conditions to Purchase. Buying Company's obligation to purchase is conditioned upon: a) the approval by NJEDA of Selling Company's Application for transfer of tax benefits for private financial assistance; b) the approval of this Agreement by the NJEDA and the Division; c) a final determination by the Division that the amount of the Certificate is equal to $________; d) the selling business named in this agreement agrees not to sell any tax benefit certificate in connection with the Technology Business Tax Certificate Program, to an affiliated business. ARTICLE III Section 3.01 Covenants of the Selling Company. The Selling Company covenants: a) it shall maintain a headquarters or a base of operations in the State through the next calendar year following the signature date of this agreement. b) the Selling Company shall expend the proceeds of this purchase in connection with the operation of the Selling Company in the State of New Jersey including but not limited to the expenses of fixed assets, such as the construction, acquisition and development of real estate, materials, start-up, tenant fit-out, working capital, salaries, research and development expenditures and any other expenses determined by the NJEDA to be necessary to carry out the purposes of the New Jersey Emerging Technology and Biotechnology Financial Assistance Program and any other expenses determined by the New Jersey Emerging Technology and Biotechnology Financial Assistance Program. 4 5 Section 3.02 Covenants of the Buying Company. The Buying Company covenants: a) it shall not assign, sell or transfer the Certificate to any Affiliated Business of Selling Company. b) if any representation made by Buying Company in this Agreement is willfully false or materially misleading or if Buying Company breaches the covenant set forth in Paragraph 3.02(a), the transfer of tax benefits contemplated by this Agreement shall be null and void. Section 3.03 Representation by Selling Company. The Selling Company represents to Buying Company, NJEDA and the Division that Selling Company is not an Affiliated Business of Buying Company. Section 3.04 Representation by Buying Company. The Buying Company represents to Selling Company, NJEDA and the Division that Buying Company is not an Affiliated Business of Selling Company. ARTICLE IV Section 4.01 Non-assignability. The Buying Company may not assign or transfer the Certificate in any manner. ARTICLE V Section 5.01 Third Party Beneficiary. The NJEDA shall be a third party beneficiary to this agreement, with the authority to enforce the provisions hereof and to declare a default hereunder. ARTICLE VI Section 6.01 Default. Failure by the Selling Company to comply with any covenant set forth under this agreement shall constitute an event of default. 5 6 Section 6.02 Remedies upon Default. Upon the existence of any events of default, the Buying Party or the NJEDA, as third party beneficiary to the agreement may take any action legally available to it. Section 6.03 Forbearance Not a Waiver. No act of forbearance of failure to insist on the prompt performance of the obligations pursuant to this Agreement, either expressed or implied, shall be construed as a waiver of any of its rights hereunder. In the event that any provision of this Agreement should be breached and the breach may thereafter be waived, such waiver shall be limited to the particular breach waived and shall not be deemed to waive any other breach. ARTICLE VII Section 7.01 Indemnification. Selling Company covenants and agrees to indemnify and hold harmless, the NJEDA and the State of New Jersey and their respective members, agents, officers, employees and servants from all losses, claims, damages, liabilities, and costs whatsoever (including all costs, expenses and reasonable counsel fees incurred in investigating and defending such losses and claims, etc.), brought by any person or entity, and caused by, related to, arising or purportedly arising out of, or from any loss, damage or injury resulting from the expenditure of the proceeds received pursuant to this Agreement or from the performance by the parties hereto of the obligations set forth herein. The provisions of this Paragraph shall survive termination of this Agreement. ARTICLE VIII Section 8.01 Governing Law. This Agreement shall be governed by the laws of the State of New Jersey. 6 7 Section 8.02 Forum and Venue. All actions related to the matters which are the subject of this Agreement shall be forumed and venued in the court of competent jurisdiction in the County of Mercer, State of New Jersey. Section 8.03 Entire Agreement. This Agreement and its exhibits, the application forms of the Selling Company and Buying Company and any documents referred to herein constitute the complete understanding of the Parties and merge and supersede any and all other discussions, agreements and understandings, (other than the aforementioned applications) authorization or written, between the Parties with respect to the subject matter of this Agreement. Section 8.04 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid pursuant to applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provisions shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions of this Agreement, unless Buying Party shall in its sole and absolute discretion deem the invalidated provision essential to the accomplishment of the public purposes served by this Agreement, in which case Buying Party has the right to terminate this Agreement and all benefits provided to Selling Party hereunder upon the giving of sixty (60) days prior notice as set forth in Paragraph 9.05 hereof. Section 8.05 Notices. All notices, consents, demands, requests and other communications which may be or are required to be given pursuant to any term of this Agreement shall be in writing and shall be deemed duly given or personally delivered or sent by United States mail, registered or certified, return receipt requested, postage prepaid, to the addresses set forth 7 8 hereunder or to such other address as each party to this Agreement may hereafter designate in a written notice to the other party transmitted in accordance with this provision. Selling Company Address: -------------------------- -------------------------- -------------------------- Buying Company Address: -------------------------- -------------------------- -------------------------- Section 8.06 Amendments or Modifications. This Agreement may only be amended or modified in a writing executed by both Parties, for good cause shown. Such amendments or modifications shall become effective only upon execution of same by both Parties and submission of the amendment or modification to the NJEDA and the Division for approval. Section 8.07 Headings. Section headings contained in this Agreement are inserted for convenience only and shall not be deemed to be a part of this Agreement. Section 8.08 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Section 8.09 Successors and Assigns. This Agreement shall be binding upon the successors and assigns of the parties hereto. 8 9 IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed by their respective officers duly authorized as of the date and year first set forth above. ATTEST: SELLING COMPANY: By: By: ----------------------- ----------------------- NAME: NAME: --------------------- --------------------- TITLE: TITLE: -------------------- -------------------- ATTEST: BUYING COMPANY: By: By: ----------------------- ----------------------- NAME: NAME: --------------------- --------------------- TITLE: TITLE: -------------------- -------------------- 9 EX-23 3 y47242ex23.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 [PRICEWATERHOUSECOOPERS LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3/S-8 (File No. 33-48889), Form S-8 (Files No. 33-67456, 33-86152 and 33-96114), Form S-3 (File No. 33-92796) and Form S-8 (File No. 33-65357) of i-STAT Corporation of our report dated February 6, 2001 relating to the consolidated financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Florham Park, New Jersey March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----