-----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, WWyu5doS10IGNyhuzfVKat4cz/xzAcFszpcW8Mw7EV/W0uNLWSWH887Fc4+ZsjxF TqigGOc//nNN2bnF6R+NeA== 0000950123-02-003275.txt : 20020415 0000950123-02-003275.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950123-02-003275 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 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: 1934 Act SEC FILE NUMBER: 000-19841 FILM NUMBER: 02597135 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 y58910e10-k.txt I-STAT CORPORATION AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 1, 2002 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, 2001 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 incorporation or organization) (I.R.S. Employer Identification No.)
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 $0.15 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 1, 2002: 20,079,216 The aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant as of March 1, 2002 is approximately $69,235,147. 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 2002 Annual Meeting of Stockholders. Table of Contents
ITEM PAGE - ---- ---- PART I 1. Business.............................................................................................1-11 2. Properties.............................................................................................11 3. Legal Proceedings......................................................................................11 4. Submission of Matters to a Vote of Security Holders....................................................12 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters.........................................................................14-15 6. Selected Consolidated Financial Data...................................................................16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................................................17-26 7(a). Quantitative and Qualitative Disclosures about Market Risk.............................................27 8. Financial Statements and Supplementary Data (a) Financial Statements...............................................................................27 (b) Selected Quarterly Financial Data..................................................................53 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................................................27 PART III 10. Directors and Executive Officers of the Registrant.................................................13, 27 11. Executive Compensation.................................................................................27 12. Security Ownership of Certain Beneficial Owners and Management.........................................................................................27 13. Certain Relationships and Related Transactions.........................................................27 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................................................28-55
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"), which was incorporated in Delaware in 1983, 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. Its principal offices are located in East Windsor, New Jersey. The Company has one subsidiary, i-STAT Canada Limited ("i-STAT Canada"), which is wholly-owned and located in Kanata, Ontario. (All references in this Report to the Company include i-STAT Canada unless otherwise specified.) 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, 2001, i-STAT had one primary customer, Abbott Laboratories ("Abbott"). 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 that perform tests for pH, ionized calcium and bicarbonate. In 1995, the Company introduced cartridges that measure arterial blood gases (pH, PCO2 and PO2). In 1998, the Company added a creatinine test. In 1999, the Company added a lactate test, and in 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 (see "Research and Development"). 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 2001, approximately 84% of the Company's total net revenues were derived from Abbott. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". 1 I-STAT SYSTEM COMPONENTS The i-STAT System is composed of a battery-operated, rechargeable 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, which are less than two square inches in size, 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, PCO2 and PO2), and bicarbonate and to derive certain other values, such as total carbon dioxide, base excess, anion gap, hemoglobin and O2 saturation, by calculation from the tests performed. The Company currently sells the following single-use, disposable cartridges that are configured to perform the following commonly ordered blood measurements: CARTRIDGE: TESTS PERFORMED o ACT: Celite(R)ACT o G: Glucose o CREA: Creatinine o E3+: Sodium, Potassium, Hematocrit, Hemoglobin* o G3+: pH, PCO2, PO2, Bicarbonate*, Total Carbon Dioxide*, Base Excess*, O2 Saturation* o EC4+: Sodium, Potassium, Glucose, Hematocrit, Hemoglobin* o CG4+: pH, PCO2, PO2, Lactate, Bicarbonate*, Total Carbon Dioxide*, Base Excess*, O2 Saturation* o 6+: Sodium, Potassium, Chloride, Urea Nitrogen, Glucose, Hematocrit, Hemoglobin* o EG6+: Sodium, Potassium, pH, PCO2, PO2, Hematocrit, Bicarbonate*, Total Carbon Dioxide*, Base Excess*, O2 Saturation*, Hemoglobin* o EC6+: Sodium, Potassium, Glucose, Ionized Calcium, pH, Hematocrit, Hemoglobin* o EG7+: Sodium, Potassium, Ionized Calcium, pH, PCO2, PO2, Hematocrit, Bicarbonate*, Total Carbon Dioxide*, Base Excess*, O2 Saturation*, Hemoglobin* o EC8+: Sodium, Potassium, Chloride, Urea Nitrogen, Glucose, pH, PCO2, Hematocrit, Bicarbonate*, Total Carbon Dioxide*, Base Excess*, Anion Gap*, Hemoglobin* o CG8+: pH, PCO2, PO2, Sodium, Potassium, Hematocrit, Ionized Calcium, Glucose, Bicarbonate*, Total Carbon Dioxide*, Base Excess*, O2 Saturation*, Hemoglobin* * Denotes calculated results 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 the i-STAT(R)1 Analyzer. The i-STAT 1 Analyzer, which weighs approximately 22 ounces, permits a customer to run all i-STAT cartridges as well as Abbott MediSense(R) glucose strips on one integrated hand-held device. The i-STAT 1 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 central data management system developed by the Company, enhances the customers' ability to centrally manage a widely distributed point-of-care testing program. The i-STAT 1 Analyzer provides a visual readout of results, offers the ability to print results via infrared means and it can store up to 5,000 patient records. 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 that 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 that products based on other existing technologies cannot achieve performance characteristics or product design features of the type described above. 2 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 is also marketed to hospitals in Japan, Europe, Canada, South America, Mexico, Latin America, South Africa, Hong Kong, People's Republic of China and other countries in 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 Hewlett-Packard Company ("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 84% of the Company's total net revenues for 2001. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In August 1988, the Company entered into product commercialization and distribution agreements with JCR Pharmaceuticals Inc. ("JCR") and FUSO Pharmaceutical Industries Ltd. ("FUSO"), 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. Under certain circumstances, the Company has the right to extend FUSO's non-exclusive rights in Japan for a one-year period. The Company understands that JCR has assigned to FUSO all distribution rights under these agreements. Sales to FUSO represented approximately 10% of the Company's total net revenues for 2001. The Company also markets its products to veterinarians' offices in the United States and selected other countries through a distribution agreement with Heska Corporation ("Heska"), which was signed in February 1999. The contract automatically renews each calendar year unless the Company provides notice nine months prior to renewal. Sales to Heska represented approximately 6% of the Company's total net revenues for 2001. Although the Company has marketing and distribution agreements with several third parties, the Company still performs many traditional sales, marketing and distribution activities. For example, the Company distributes its products within the United States by shipping cartridges, analyzers and other peripheral equipment directly to the end-user hospitals. The Company maintains a technical services staff, which handles product-related technical matters directly with end-users, and a team of implementation coordinators who install the i-STAT System and train end-users. And, the Company employs several individuals who act as sales consultants by working with Abbott to help sell its products to customers and by servicing existing accounts. 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 in general test for fewer analytes than the i-STAT System. 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. 3 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. The Company's cartridge manufacturing and assembly is conducted in two adjoining facilities totaling 96,856 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 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 "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 multiple shifts of labor and partially utilizing four cartridge assembly lines. The Company could have the capacity to manufacture over 40,000,000 cartridges annually 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 manufactures and assembles its portable, hand-held analyzers and other peripheral equipment at its principal offices in East Windsor, New Jersey utilizing a single shift of labor. 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 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. However, 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 March 2000, the Company commenced shipments of its first coagulation test, the Celite(R) ACT (activated clotting time) cartridge. 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 the i-STAT 1 Analyzer, which 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. The Company is currently developing three additional tests for the measurement of coagulation: kaolin ACT, prothrombin time ("PT") and activated partial thromboplastin time ("aPTT"). In February 2002, the Company submitted a 510(K) application for the PT coagulation test. The Company expects to submit a 510(K) application for the kaolin ACT test during 2002. Assuming timely regulatory approvals, the Company expects to begin commercial introduction of the kaolin ACT and PT tests during the second half of 2002. The Company also is conducting research and development on tests for markers of cardiac damage based upon immunoassay techniques. 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 is not currently funding any of the Company's research and development programs. See "Management's Discussion and Analysis of Financial 4 Condition and Results of Operations" for a discussion of research and development costs during 1999, 2000 and 2001. 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 32 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. 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 that 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 that might be violations, those conditions must be corrected or 5 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 (most recently in September 1999) and, as of the date of those inspections, the inspectors reported that there were no observed conditions resulting 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. 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 will likely require additional electronic security and privacy measures to be put in place. At this time, the Company has not yet determined 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. Beginning on December 7, 2003 all devices sold in the countries of the European Union ("EU") will have to be compliant with the EU In Vitro Device Directive. The Company currently is working to ensure that it will be in compliance with this directive. 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. 6 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 that physicians and hospitals are able to charge patients for such services and consequently the price the Company or its distributors can charge for its products. In addition, in Japan, the price the Company receives for cartridges from one of its distribution partners is directly based upon the local government reimbursement amount for each particular test and will thus vary accordingly. EMPLOYEES As of December 31, 2001, the Company employed 682 persons on a full-time basis; 546 persons were employed in Canada and 136 persons were employed in the United States, and there were 545 manufacturing employees, 64 employees in research and development, 49 sales and marketing employees (including sales consultants, implementation coordinators, and technical services, clinical affairs, marketing, data management, international marketing, and business development personnel) and 24 general and administrative employees (including finance, information technology, regulatory affairs, quality assurance, human resources and administration personnel). In addition, as of December 31, 2001, the Company employed 26 persons on a part-time, on-call or temporary basis. There are no i-STAT employees 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 $2 million and excess liability insurance policies in the aggregate amount of $25 million for all occurrences 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. The Company maintains terrorism insurance coverage for its New Jersey facility. The Company is exploring obtaining such coverage for its facility in Kanata, Ontario, including assessing whether the costs of such coverage are commensurate with the risks to be covered. 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. 7 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. Under our product distribution agreement with Abbott, Abbott became the exclusive distributor of the i-STAT System in most parts of the world. As a result of this alliance, our revenues are significantly affected by sales made through Abbott, which accounted for approximately 84% of our total net revenues in 2001. While our product distribution agreement with Abbott remains in effect, our profitability will depend heavily upon Abbott's success in selling our products. 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 product distribution agreement with Abbott may be terminated by either party at the end of 2003. Currently, we are evaluating whether continuation of this agreement after 2003 is in the best interest of our business. If this agreement is terminated we will also resume primary responsibility for marketing and selling our products. This entails substantial risk and expense. For example, we will have to hire and train additional marketing and sales personnel and/or enter into new product distribution agreements with other parties. We cannot guarantee that we would be successful in marketing and selling our products without the benefit of a strong strategic partner, or that we would be able to find such a partner if we felt this best served our interests. In addition, if we elect not to continue the agreement after 2003, we will be obligated to pay Abbott a substantial termination fee and royalties based on our product sales for a period after the agreement's end. These amounts will materially impact our cash flows and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Alliance with Abbott Laboratories." OUR MANUFACTURING IS SUBJECT TO CERTAIN RISKS. We have faced unexpected technical problems in trying to transfer product ideas from the development stage to the manufacturing stage. 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. These technical problems could recur, could result (and in the past they have resulted) in a high level of product scrap and could delay our plans for new product releases, all with attendant consequences to our financial results. 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, which could affect our relationships with customers, or we may have too much product inventory at times, which hurts our profitability and negatively affects our working capital. In order to be profitable, we must manufacture greater quantities of products than we have to date and at the same time consistently deliver high production efficiencies. 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 very negatively impact our business. 8 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 foreseeable future. However, numerous factors may change this expectation, including manufacturing difficulties, arbitration and litigation outcomes, and the continuation or termination of the Abbott alliance. In the long-term, it is possible 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. Affiliates of Cerberus Capital Management, L.P. (collectively, "Cerberus"), which hold all of the Company's Series D Redeemable Convertible Preferred Stock (the "Series D Stock"), have a right of first refusal with respect to certain future financings. This right of first refusal may inhibit our ability to obtain needed financing from third parties or negatively affect the financing terms available (see "Management's Discussion and Analysis of Financial Condition and Results of Operations"). 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 settled the patent infringement lawsuit brought against us by Nova Biomedical Corporation, but agreed to continue to pay royalties to it for as long as our product continues to use the technology covered by its patent. We believe that our products no longer utilize the covered technology; however, Nova Biomedical Corporation disagrees and has filed for an arbitration in order to determine whether we continue to owe such royalties. We may not be successful in that arbitration. 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 that 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. THERE ARE VARIOUS OPERATIONAL AND FINANCIAL 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 9 collecting accounts receivable, reimbursement 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. However, price reductions may be limited 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. In addition, our cartridge manufacturing takes place at our wholly-owned subsidiary in Kanata, Ontario. Most of the expenses associated with producing the cartridges are incurred in Canadian Dollars. If there is a significant change in the exchange rate between the Canadian Dollar and the U.S. Dollar, it could have a material impact on our cost of products sold, our results of operations, and our cash flows from operations. DUE TO ANTITAKEOVER PROVISIONS THERE MAY BE ISSUES ASSOCIATED WITH THE MARKETABILITY OF THE COMPANY'S COMMON STOCK. Our Certificate of Incorporation and Bylaws, Stockholder Rights Plan, and our agreements with Abbott and Cerberus 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 STOCKHOLDERS CAN EXERCISE INFLUENCE OVER THE COMPANY. As of March 1, 2002, directors, executive officers and principal stockholders of the Company beneficially owned approximately 48% of our outstanding voting securities. In addition, Cerberus is entitled to appoint one person to the Company's Board of Directors for so long as it holds 10% of the outstanding securities of the Company on a fully diluted basis. As a result, these stockholders, individually and/or acting together may be able to influence the outcome of stockholder votes. Examples of stockholder 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. Cerberus also has the right to approve certain of these transactions. 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 product distribution arrangement with Abbott 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. A significant percentage of our Common Stock is held by institutional investors. Among others, our strategic partner Abbott owns approximately 10.0% of our outstanding voting securities, and in 2001 we completed two financings that resulted in John Hancock Advisers Inc. and Cerberus increasing their beneficial ownership to 13.1% and 14.99% of our outstanding voting securities, respectively. Absent current restrictions barring certain conversions and exercises by Cerberus described in "Management's Discussion and Analysis of Financial Condition and Results of Operations", Cerberus' current holdings would represent 26.7% of our outstanding voting securities. The lifting of these restrictions is not entirely within the control of the Company. 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 of 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. WE ARE SUBJECT TO INTENSE GOVERNMENT REGULATION. Our industry is highly regulated. The governments of the United States and other countries extensively regulate the manufacture and sale of medical diagnostic devices intended for commercial use. For example, United States commercial sales of medical diagnostic devices require FDA clearance before selling may commence. Obtaining FDA and other required regulatory clearances can be time-consuming, expensive and uncertain. After any clearances, we remain subject to pervasive regulation and inspection for compliance with regulatory requirements. We may also need to obtain FDA clearance for any other new products we 10 are able to develop or acquire, and we cannot guarantee that we will be able to do so. In addition, the FDA could change the classification regarding our existing products and we may at some time in the future also have to comply with mandatory performance standards or other "special controls" to keep our products in commercial distribution. We cannot predict whether such additional standards or controls will ever be enacted, or what impact the enactment of such standards or controls might have on our ability to produce and sell our products. If we do not obtain all necessary regulatory clearances for any new products, or maintain clearance on our current products, our ability to generate sales will materially suffer. ITEM 2. PROPERTIES The Company's principal cartridge manufacturing facilities are located in Kanata, Ontario, Canada, where it leases a 53,802 square foot building for a term expiring in December 2010. The Company also leases 43,054 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 leases executive offices and instrument manufacturing space 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. The Company also leases 5,950 square feet of warehouse space in Jamesburg, New Jersey. The Jamesburg lease expires in October 2003. ITEM 3. LEGAL PROCEEDINGS The Company was 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, alleged infringement by the Company of Nova Biomedical Corporation's ("Nova") U.S. Patent No. 4,686,479 (the "Patent"). 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. The Federal Circuit affirmed two of the grounds of the dismissal (proper interpretation of the Patent and 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 scheduled for July 2001. Management concluded that the uncertainty inherent in any jury trial as well as the drain on the Company's resources merited a resolution of this lawsuit. Accordingly, on July 26, 2001 the Company entered into a license agreement and a settlement agreement under which the Company agreed to pay Nova $10.5 million, which was recorded as a charge in the second quarter of 2001. Pursuant to the agreements, $6.5 million was paid on July 26, 2001, a retroactive royalty of $0.5 million was paid on August 14, 2001 for the period of January 1, 2001 through June 30, 2001, and $3.5 million plus interest was due to be paid over one year in equal quarterly installments, pursuant to a secured promissory note. The promissory note was prepaid on August 3, 2001. The license agreement provides for the payment to Nova of a royalty equal to 4% of the invoice price of products sold in the United States after January 1, 2001, which products determine hematocrit levels according to any method used by the Company prior to December 31, 2000, as well as any method covered by the Patent. The royalties are payable through the life of the Patent (July 22, 2005). The Company has commercialized products that determine hematocrit levels using a method that was not used by the Company prior to December 31, 2000 and which the Company believes is not covered by the Patent. Consequently, the Company does not believe that it owes any additional royalties to Nova. On February 28, 2002, Nova filed a demand for arbitration claiming that the method by which the Company's products determine hematocrit are covered under the Patent and the license agreement. Nova is seeking royalties from July 1, 2001 to date. If the Company is unsuccessful in defending its position in the arbitration and does not develop new methods that do not utilize the covered technology, it may be forced to continue to pay royalties to Nova through the life of the Patent and approximately $0.6 million in respect of products sold through December 31, 2001. The Company plans to defend this matter vigorously. 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. 11 ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS Not applicable. 12 EXECUTIVE OFFICERS The executive officers of the Company and their respective ages and positions with the Company are as follows: WILLIAM P. MOFFITT Age 55. 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. Mr. Moffitt is a director of a private company called Genomic Profiling Systems ("GPS"). GPS develops and commercializes proprietary technologies for detecting cellular, viral and molecular targets in order to address existing needs in industrial microbiology and point-of-care diagnostics. NOAH J. KROLOFF Age 39. 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 53. 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 41. 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. 13 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 ("Nasdaq") under the symbol "STAT". The following table sets forth for the periods indicated the range of high and low trading prices for the Company's Common Stock as reported on Nasdaq.
2001 High Low - ------------------------------------------------------------------------ First Quarter...................................... $ 26.44 $16.56 Second Quarter..................................... $ 19.75 $12.90 Third Quarter...................................... $ 14.74 $ 5.17 Fourth Quarter..................................... $ 9.35 $ 5.25
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
HOLDERS There were approximately 360 registered holders of the Company's Common Stock of record as of March 1, 2002. 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. In addition, as a result of the Series D Stock financing described in greater detail under "Management's Discussion and Analysis of Financial Condition and Results of Operations", the Company must have the consent of the holders of the Series D Stock before any dividend can be declared on the Common Stock. In addition, the holders of the Series D Stock are entitled to receive a cumulative dividend equal to 8% of the Series D Stock's liquidation preference, payable quarterly. The liquidation preference is equal to the Series D Stock stated value of $30.0 million plus any accrued and unpaid dividends. The dividends may be paid in cash, or they may be accrued and added to the liquidation preference, becoming payable in cash upon redemption or payable in Common Stock upon conversion of the Series D Stock. During the periods that the Common Stock trades at or above $15.00 per share for 45 consecutive trading days, the dividend rate will be reduced to 2%, and if during subsequent periods the Common Stock trades below $10.00 per share for 45 consecutive trading days, the dividend rate will adjust back to 14 8%. A dividend of approximately $0.1 million for the period of time the Series D Stock was outstanding in December 2001 has been accrued and is shown on the face of the Consolidated Statement of Operations below the "Net loss". SALES OF UNREGISTERED SECURITIES On December 12, 2001, the Company completed the private placement of Series D Stock and related Warrants to purchase Common Stock to institutional investors, which is described under "Liquidity and Capital Resources" in "Management's Discussion and Analysis of Financial Condition and Results of Operations". The resale of the shares of Common Stock underlying the Series D Stock and Warrants issued in this transaction, were registered with the Securities and Exchange Commission on Form S-3 (File No. 333-76934), which was declared effective on February 4, 2002. 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, 2001 and 2000 and for each of the years in the three-year period ended December 31, 2001, 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 Years Ended December 31, - ------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 Statement of Operations Data: Net revenues.......................... $58,832 $ 55,037 $45,225 $39,101 $37,840 Cost of products sold................. 48,108 40,951 36,401 30,664 30,962 Research and development.............. 8,040 7,944 7,506 7,281 6,721 General and administrative............ 7,182 6,983 7,264 7,152 5,761 Sales and marketing................... 9,043 7,784 8,293 12,956 13,020 Litigation settlements................ 10,491 1,500 -- -- -- Write-down of certain fixed assets.... 1,124 -- -- -- -- Consolidation of operations........... -- -- 70 1,115 -- Operating loss........................ (25,156) (10,125) (14,309) (20,067) (18,624) Other income, net..................... 795 1,763 1,507 1,672 1,651 Loss before income taxes.............. (24,361) (8,362) (12,802) (18,395) (16,973) Income tax benefit.................... (1,141) (867) -- -- -- Net loss.............................. (23,220) (7,495) (12,802) (18,395) (16,973) Accretion of Preferred Stock.......... (1,734) -- -- -- -- Dividends of Preferred Stock.......... (133) -- -- -- -- Net loss available to Common Stockholders.......................... (25,087) (7,495) (12,802) (18,395) (16,973) Basic and diluted net loss per share available to Common Stockholders...... ($1.33) ($0.43) ($0.83) ($1.32) ($1.38) Shares used in computing basic and diluted net loss per share available to Common Stockholders................... 18,920,956 17,512,083 15,475,893 13,912,175 12,358,828
IN THOUSANDS OF DOLLARS As of December 31, - ------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 Balance Sheet Data: Cash and cash equivalents ............ $43,112 $19,536 $25,575 $38,390 $32,914 Working capital....................... 48,082 21,521 31,958 44,605 38,697 Total assets.......................... 75,889 59,934 58,124 68,906 59,170 Accumulated deficit................... (220,185) (196,965) (189,470) (176,668) (158,273) Total stockholders' equity............ $34,604 $41,052 $44,663 $54,660 $53,045
16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND AND OVERVIEW The Company, which was incorporated in Delaware in 1983, together with its wholly-owned subsidiary, i-STAT Canada Limited, 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 O2 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 is currently developing three additional tests for the measurement of coagulation: kaolin ACT, partial thromboplastin time ("aPTT"), and prothrombin time ("PT"). Assuming timely regulatory approvals, the Company expects to begin commercial introduction of the kaolin ACT and PT tests during the second half of 2002. The Company also is conducting research and development on cardiac marker tests. In the fourth quarter of 2000, the Company introduced the i-STAT(R) 1 Analyzer. The i-STAT 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 i-STAT 1 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 central data management system developed by the Company, 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. On September 2, 1998, the Company entered into a long-term sales, marketing and research alliance with Abbott Laboratories ("Abbott"), which, among other things, since November 1, 1998, 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. See "Alliance with Abbott Laboratories", below, for a description of the Company's agreements with Abbott. RESULTS OF OPERATIONS The Company generated total net revenues of approximately $58.8 million, $55.0 million and $45.2 million in 2001, 2000 and 1999, including international revenues (as a percentage of worldwide revenues) of $14.6 million (24.9%), $15.1 million (27.5%) and $13.8 million (30.5%), respectively. Total net revenues from Abbott represented approximately 84.3%, 83.5% and 78.5% of the Company's worldwide total net revenues for 2001, 2000 and 1999, respectively. The $3.8 million (6.9%) increase in total net revenues from 2000 to 2001 was primarily due to the increased sales volume of the Company's cartridges and sales of the i-STAT 1 Analyzer which was introduced in December 2000, partially offset by the elimination of research and development reimbursements from Abbott during 2001. Cartridge sales volume increased 20.4% to 11,835,075 units in 2001 from 9,829,225 units in 2000. Increased cartridge revenue from the increase in sales volume was partially offset by a decrease in worldwide average selling prices per cartridge from $3.69 in 2000 to $3.38 in 2001. The decrease in worldwide average selling prices is primarily a function of the pricing arrangements under the strategic alliance with Abbott, which produces lower average selling prices as volume increases, and the impact of discounting by Abbott to its customers in the United States. 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".) Worldwide analyzer sales volume increased 1.4% to 4,371 units in 2001 from 4,311 units in 2000. Worldwide analyzer revenue increased 19.9% in 2001 primarily because of sales of the new, higher priced i-STAT 1 Analyzer. 17 During 2001, the Company did not receive any research and development reimbursements from Abbott. The Company had received approximately $2.7 million of research and development reimbursements from Abbott in 2000. The $9.8 million (21.7%) increase in total net 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 in the same periods. Total net revenues in 2000 and 1999 also include approximately $3.6 million ($2.7 million of research and development reimbursements and $0.9 million of sales and marketing reimbursements) and $2.4 million ($1.7 million of research and development reimbursements and $0.7 million of sales and marketing reimbursements), respectively, from Abbott. The manufacturing costs (as a percentage of product sales) associated with product sales in 2001, 2000 and 1999 were approximately $48.1 million (83.7%), $41.0 million (79.7%) and $36.4 million (85.0%), 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. However, despite an increase in shipment volume, cost of products sold as a percentage of product sales were higher 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 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 manufacturing problem in the fourth quarter of 1999, also caused by defective material from the same 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 during 2000 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. In 2001, despite an increase in shipment volume, manufacturing costs as a percentage of product sales increased primarily as a result of lower average selling prices per unit and a charge of $1.7 million recorded in the fourth quarter of 2001, which was related to the write-off of certain cartridges in inventory and the replacement of certain cartridges in the field that exhibited a higher than usual quality check rejection rate. Although this matter has been resolved, the Company does expect to incur an additional charge of approximately $1.6 million in the first quarter of 2002 for product that was produced in 2002. The Company incurred research and development expenses (as a percentage of total net revenues) of approximately $8.0 million (13.7%), $7.9 million (14.4%) and $7.5 million (16.6%) in 2001, 2000 and 1999, respectively. Research and development expenses consist 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 and $1.8 million for research and development activities are included in net revenues in 2000 and 1999, respectively. There were no research and development revenues from Abbott in 2001 and 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 total net revenues) of approximately $7.2 million (12.2%), $7.0 million (12.7%) and $7.3 million (16.1%) in 2001, 2000 and 1999, respectively. General and administrative expenses consist 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 total net revenues) of approximately $9.0 million (15.4%), $7.8 million (14.1%) and $8.3 million (18.3%) in 2001, 2000 and 1999, respectively. Sales and marketing expenses consist primarily of salaries, commissions, benefits, travel, business development and similar expenditures for sales representatives, implementation coordinators and international marketing support, as well as order entry, product distribution, technical services, clinical affairs, product literature, market research, and other sales infrastructure costs. The increase in 2001 is primarily related to an increase in sales and marketing personnel. Included in revenues are amounts reimbursed by Abbott for services performed by the implementation coordinators, approximating $0.9 million, $0.9 million and $0.7 million in 2001, 2000 and 1999, respectively. Each of the Company 18 and Abbott have the right to terminate the alliance at the end of 2003, if either party gives twelve months notice at the end of 2002. The alliance may be extended, as described below (see "Alliance with Abbott Laboratories"). The Company is currently evaluating Abbott's performance, and may not continue the alliance after 2003. Consequently, sales and marketing expenses may increase significantly in 2002 and 2003 as the Company begins to rebuild the infrastructure necessary to assume primary responsibility for sales and marketing activities. Investment income was approximately $0.9 million, $1.6 million and $1.5 million in 2001, 2000 and 1999, respectively. The changes in investment income primarily reflect changes in the level of cash and cash equivalent balances and interest rates. In the fourth quarter of 2001, the Company incurred a charge of $1,124,000 related to the write-down of certain fixed assets located at the Company's Canadian facility, which were associated with certain projects that had not been completed. The write-down is a result of the Company's decision not to pursue certain projects as lower cost alternative methods were found. The carrying values of the assets have been reduced to their net realizable values, which is based on their estimated sales price less any selling costs. In 2001 and 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 quarters of 2001 and 2000, the Company recognized $1,141,000 and $867,000, respectively, from the sale of these tax benefits. 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. There is no guarantee that the Company will qualify for this Program in the future or that the Program will not be terminated by the State of New Jersey. At December 31, 2001, the Company had net operating loss carryforwards of approximately $102,510,000 for New Jersey income tax purposes, which expire in varying amounts through 2008. In 2001, the Company recorded accretion of Preferred Stock of approximately $1,734,000 and dividends on Preferred Stock of approximately $133,000. The accretion of Preferred Stock relates to the issuance by the Company of Series C Redeemable Convertible Preferred Stock (the "Series C Stock") in August 2001, which was subsequently redeemed in December 2001, and the issuance of Series D Redeemable Convertible Preferred Stock (the "Series D Stock") in December 2001. Both the Series C Stock and the Series D Stock were initially recorded at their relative fair values and net of allocated issuance expenses. The accretion recorded by the Company reflects the amortization of the difference between the net fair value and the redemption (or stated) value of such stock. The Company recorded the Series C Stock, related Warrants and Common Stock issued in the transaction at their net relative fair values of $18.8 million, $3.0 million and $11.0 million, respectively, which were determined by an independent, third party appraisal firm and were net of aggregate issuance expenses of $1.3 million. The Series C Stock was accreted from its net relative fair value on the date of issuance of approximately $18.8 million to its redemption value on November 29, 2001 of approximately $20.5 million. The resulting accretion of approximately $1.7 million is shown as Accretion of Preferred Stock below the net loss in the Company's 2001 Consolidated Statements of Operations. The Company recorded the Series D Stock and the Warrants to purchase Common Stock (the "Series D Warrants") issued in the transaction at their net relative fair values of $25.2 million and $2.5 million, respectively, which were determined by an independent, third party appraisal firm and were net of aggregate issuance expenses of $2.3 million. The Series D Stock is being accreted over a period of ten years from its net relative fair value on the date of issuance of approximately $25.2 million to its stated value of $30.0 million. The resulting accretion of $0.036 million is shown below net loss in the Company's 2001 Consolidated Statements of Operations. In addition, the Series D Stock carries a dividend. The Company recorded a dividend at its fair value of approximately $133,000 for the period the Series D Stock was outstanding during December 2001. The dividend was not paid in cash, but was accrued and added to the liquidation preference of the Series D Stock. The dividend is either accrued or payable in cash quarterly, at the option of the Company. Also included in the accretion of Preferred Stock is a $3.7 million charge recorded in the third and fourth quarters of 2001 relating to the beneficial conversion feature associated with the Series C Stock. This $3.7 million charge was subsequently reversed in December 2001 as a result of the Company's redemption of the Series C Stock on December 6, 2001. 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 19 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 were charged to expense over the retention period. Net loss available to Common Stockholders in 2001 increased to approximately $25.1 million, or $1.33 per share, from approximately $7.5 million, or $0.43 per share in 2000. Net loss in 2000 decreased to approximately $7.5 million or $0.43 per share, from approximately $12.8 million or $0.83 per share in 1999. The weighted average number of shares used in computing basic and diluted net loss per share was 18.92 million, 17.51 million and 15.48 million in 2001, 2000 and 1999, respectively. The increases in the weighted average number of shares primarily reflect the conversion of 2,138,702 shares of Series B Preferred Stock into 2,138,702 shares of Common Stock in March 2000, the issuance of 1,480,000 shares of Common Stock in August 2001, and the exercise of employee stock options in each year. The weighted average shares used in computing the basic losses per share do not include any potentially dilutive instruments, such as options, warrants or Convertible Preferred Stock, as such inclusion would be anti-dilutive (i.e., decrease the net loss per share). The principal factors contributing to the large increase in net loss from 2000 to 2001 were the absence of Abbott research and development reimbursements discussed previously (a $2.7 million difference); the decrease in average selling prices for cartridges sold through Abbott; increases in manufacturing costs (also discussed previously); and $10.5 million in payments made by the Company in settlement of the intellectual property litigation discussed below. CONTINGENCIES The Company was 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, alleged infringement by the Company of Nova Biomedical Corporation's ("Nova") U.S. Patent No. 4,686,479 (the "Patent"). 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. The Federal Circuit affirmed two of the grounds of the dismissal (proper interpretation of the Patent and 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 scheduled for July 2001. Management concluded that the uncertainty inherent in any jury trial as well as the drain on the Company's resources merited a resolution of this lawsuit. Accordingly, on July 26, 2001 the Company entered into a license agreement and a settlement agreement under which the Company agreed to pay Nova approximately $10.5 million, which was recorded as a charge in the second quarter of 2001. Pursuant to the agreements, $6.5 million was paid on July 26, 2001, a retroactive royalty of $0.5 million was paid on August 14, 2001 for the period of January 1, 2001 through June 30, 2001, and $3.5 million plus interest was due to be paid over one year in equal quarterly installments, pursuant to a secured promissory note. The promissory note was prepaid on August 3, 2001. The license agreement provides for the payment to Nova of a royalty equal to 4% of the invoice price of products sold in the United States after January 1, 2001, which products determine hematocrit levels according to any method used by the Company prior to December 31, 2000, as well as any method covered by the Patent. The royalties are payable through the life of the Patent (July 22, 2005). The Company has commercialized products that determine hematocrit levels using a method that was not used by the 20 Company prior to December 31, 2000 and which the Company believes is not covered by the Patent. Consequently, the Company does not believe that it owes any additional royalties to Nova. On February 28, 2002, Nova filed a demand for arbitration claiming that the method by which the Company's products determine hematocrit are covered under the Patent and the license agreement. Nova is seeking royalties from July 1, 2001 to date. If the Company is unsuccessful in defending its position in the arbitration and does not develop new methods that do not utilize the covered technology, it may be forced to continue to pay royalties to Nova through the life of the Patent and $0.6 million in respect of products sold through December 31, 2001. The Company plans to defend this matter vigorously. 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. The Company and Abbott are in disagreement over the amount of money Abbott is entitled to for the sharing of certain cartridge production cost savings resulting from an increase in sales volume. This disputed item relates to different interpretations of certain terms of the Distribution Agreement between Abbott and the Company. If this disagreement is not resolved amicably, under the Distribution Agreement between the Company and Abbott it must be resolved through binding arbitration. Management of the Company believes that Abbott's position on this issue in dispute is without merit and that, in the event that this issue is resolved through arbitration, the Company will not incur any additional liability to Abbott. The disagreement regarding the sharing of certain cartridge production cost savings resulting from an increase in sales volume over the past three years is approximately $1.0 million at December 31, 2001, and if this matter is resolved in favor of Abbott, which management of the Company believes is unlikely, the Company's cost of goods sold would increase by up to the amount in dispute. Such adjustment would be made when, and if, it is determined that an unfavorable outcome to the Company is probable. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2001, the Company had cash and cash equivalents of approximately $43.1 million, an increase of approximately $23.6 million from the December 31, 2000 balance of approximately $19.5 million. The increase primarily reflects the receipt of approximately $42.1 million, net, from several financing activities, including the private placement of 1,480,000 shares of Common Stock and 30,000 shares of Series D Stock; and from employee stock option exercises. In January 2001, the Company also received $5.2 million from Abbott representing the fourth and final installment of prepayments against future incremental cartridge sales (as defined in the Distribution Agreement with Abbott). The increase in cash from financing activities was offset by approximately $13.7 million of cash used in operating activities (net of the receipt of $5.2 million from Abbott in January 2001) and equipment purchases of approximately $4.5 million. Working capital increased by approximately $26.6 million from $21.5 million to $48.1 million during 2001. Changes in working capital during the year primarily reflect the increase in cash and cash equivalents of $23.6 million, a reduction of approximately $2.0 million in inventories, an increase of $1.1 million in other current assets due to the timing of the receipt of cash related to the sale of New Jersey State income tax benefits under the Program, and a decrease in current deferred revenue of $10.1 million related to the incremental cartridge sales prepayment earned by Abbott in 2001, offset by an increase of approximately $6.5 million in the net amount of related party accounts payable and accounts receivable. During the first quarter of each year under the Abbott Distribution Agreement, the Company and Abbott conduct a reconciliation of the annual prepayments made by Abbott against future incremental cartridge sales. The reconciliation for 2001 resulted in a credit due to Abbott of approximately $10.2 million. As a result of this credit due to Abbott at December 31, 2001, the net balance is a liability in the amount of $2.7 million (comprised of gross receivables of $7.5 million offset by a credit balance owed to Abbott of $10.2 million) and is classified as "Accounts 21 payable to related party" within short-term liabilities. The Company expects its existing cash and cash equivalents to be sufficient to meet its obligations and its liquidity and capital requirements for the foreseeable future. However, numerous factors may change this expectation, including the results of its marketing and sales activities, its new product development efforts, manufacturing difficulties, manufacturing efficiencies and plant expansion plans, competitive conditions and long-term strategic decisions (including the continuation or termination of the Abbott alliance). 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 does not have any debt or capital leases. On March 16, 2000, Agilent Technologies, Inc. converted and sold its holding of 2,138,702 shares of the Company's Series B Preferred Stock (formerly held by Hewlett-Packard Company) into 2,138,702 shares of Common Stock and accordingly, is no longer a related party for financial statement purposes. At December 31, 2001, the Company had available for Federal income tax purposes net operating loss carryforwards of approximately $184.3 million, which expire in varying amounts through 2021. The timing and manner in which the operating loss carryforwards are utilized in any year by the Company may be limited by Section 382 of the Internal Revenue Code. Given that significant uncertainty exists regarding the realizability of the Company's deferred tax assets, a full valuation allowance is recorded. International sales are invoiced and paid 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 because the price paid by customers to the Company's partners is set in local currencies. When the value of foreign currencies changes with respect to the U.S. dollar, the price paid by the Company's partners to the Company changes due to the foreign exchange conversion of local currency prices. However, price reductions may be limited by guaranteed U.S. dollar minimum prices established for each cartridge. The Company's cartridge manufacturing is conducted through i-STAT Canada. Most manufacturing labor and overhead costs of this subsidiary are incurred in Canadian dollars, while some raw material purchases are made in U.S. dollars. The Canadian operation is primarily funded by payments in U.S. dollars made by the U.S. parent Company for cartridges purchased for resale to its customers. In 2001, the accumulated other comprehensive loss related to foreign currency translation increased by approximately $1.1 million to approximately $2.4 million, and reflects the adjustment to translate the Canadian subsidiary's balance sheet to U.S. dollars at the December 31, 2001 exchange rate. Since most of the cartridge manufacturing expenses are incurred in Canadian dollars, the cost of products sold and therefore, the Company's consolidated results of operations and cash flows can be impacted by a change in exchange rates between the Canadian dollar and the U.S. dollar. The impact of inflation on the Company's business has been minimal and is expected to be minimal for the near-term. FINANCINGS CONCLUDED IN 2001 In August 2001, the Company closed a $34.1 million private placement with several institutional investors. In this financing the Company issued 1,480,000 shares of Common Stock at $9.218 per share, 20,464 shares of Series C Stock at $1,000 per share, and six year warrants to purchase up to 1,295,000 shares of Common Stock at $10.139 per share (the "Series C Warrants"). The Series C Warrants are callable by the Company if the closing price of the Company's Common Stock is greater than $16.50 for ten consecutive business days. If the Company calls the Series C Warrants, then the Company must issue replacement warrants of equal quantity at a strike price of $19.25 and with a term equal to the remaining term on the initial Series C Warrants. At the time of issuance the Series C Stock was deemed to have a "beneficial conversion feature" because the conversion price of the Series C Stock would reflect a twelve percent discount to the fair market value of the Common Stock. The beneficial conversion feature was calculated on August 3, 2001, the commitment date, and was approximately $3.7 million. The beneficial conversion feature was accreted into the Series C Stock from the date of issuance through November 29, 2001. In December 2001, the Company elected to redeem all outstanding shares of Series C Stock at their face value, thus leaving no Series C Stock outstanding. As a result of the redemption of the Series C Stock, approximately $20.5 22 million was returned to the holders and Series C Warrants representing 555,000 shares of Common Stock were cancelled. As a result of the redemption of the Series C Stock, the accretion related to the "beneficial conversion feature" of $3.7 million was reversed. Thus, the Company's 2001 Consolidated Statements of Operations does not include any accretion related to the "beneficial conversion feature" of the Series C Stock. In December 2001, as a result of the issuance of the Series D Stock (see below), and pursuant to applicable anti-dilution provisions, the Series C Warrants were adjusted from 740,000 shares of Common Stock at a strike price of $10.139 per share, to 937,857.5 shares at a strike price of $8.00 per share. In December 2001, the Company closed a $30.0 million private placement with affiliates of Cerberus Capital Management, L.P. (collectively, "Cerberus"). In this financing, the Company issued 30,000 shares of Series D Stock with a stated value of $1,000 per share and an 8% preferential dividend and six-year warrants to purchase up to 937,500 shares of Common Stock at $8.00 per share (the "Series D Warrants"). The Series D Stock is mandatorily redeemable in December 2011 and may be redeemed by the Company any time after December 2007 (at a price equal to the stated value plus accrued and unpaid dividends). The Series D Stock may be converted into Common Stock at the holders' option at a conversion price of $8.00 per share of Common Stock, subject to certain ownership level restrictions described below and subject to customary anti-dilution protection adjustments. At the closing of the issuance of Series D Stock, such shares were convertible into 3.75 million shares of the Company's Common Stock without giving effect to the ownership level restrictions. This number increases to the extent that the Company elects to accrue the dividend. No holder of the Series D Stock and Series D Warrants may convert or exercise its securities into shares of the Company's Common Stock if after the conversion, such holder, together with any of its affiliates, would beneficially own over the ownership limitation percentage set by the Company, initially 14.99%. Under certain circumstances, the restrictions for Cerberus may be eased so that it will be entitled to convert or exercise its securities into shares of Common Stock if after the conversion it does not beneficially own in excess of 34% of the outstanding shares of the Company's Common Stock. These restrictions are eased as certain restrictions on Abbott's ownership levels ease or terminate. Absent these limitations, Cerberus' current ownership would represent the right to acquire approximately 26.7% of the outstanding voting securities of the Company at December 31, 2001. These limitations do not prevent the holders from acquiring and selling shares of the Company's Common Stock within these limitations. Cerberus is entitled to appoint one person to the Company's Board of Directors for so long as it holds 10% of the outstanding securities of the Company on a fully diluted basis. Holders of the Series D Stock have a right of first refusal to participate in certain financings proposed to be consummated by the Company for so long as such holders hold at least 15% of the fully diluted securities of the Company outstanding immediately after the closing of the Series D financing. Holders of the Series D Stock are entitled to receive a cumulative dividend of 8% of the liquidation preference, payable quarterly. The dividends may be paid in cash, or accrue and be added to the liquidation preference, becoming payable in cash upon redemption or payable in Common Stock upon conversion. During the periods that the Common Stock trades at or above $15.00 per share for 45 consecutive trading days, the dividend rate will be reduced to 2%, and if during subsequent periods the Common Stock trades below $10.00 per share for 45 consecutive trading days, the dividend rate will adjust back to 8%. At December 31, 2001, the liquidation preference amount of the Series D Stock is $30.1 million, comprised of the stated value of $30.0 million plus accrued and unpaid dividends of approximately $0.1 million, and the Series D Stock is convertible into approximately 3.767 million shares of Common Stock at a conversion price of $8.00 per share of Common Stock. 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. 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 primary objective of the Abbott alliance was to strengthen the Company's product marketing and distribution capability and 23 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 against 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, $10,800,000 and $5,200,000 were received in September 1998, January 1999, January 2000 and January 2001, respectively. Unamortized revenue relating to these prepayments in the amounts of $603,000 and $10,606,000 are included in deferred revenues, current at December 31, 2001 and 2000, respectively, and $4,991,000 is included in deferred revenues from related party, non-current at December 31, 2001. The $4,991,000 will be recognized in the Company's income if Abbott unilaterally terminates the Distribution Agreement. If the Company unilaterally terminates the Distribution Agreement without cause (as defined), the Company will be obligated to repay the $4,991,000 to Abbott upon termination of the Distribution Agreement. 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 in the U.S. covered by the Distribution Agreement. Abbott has advised the Company that it has reached the minimum three-year growth rate milestone and the Company agrees that the milestone has been met. If the Distribution Agreement is terminated, other than (i) by the Company for cause; 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) a one-time termination fee calculated to compensate Abbott for a portion of its costs in undertaking the distribution relationship, (b) an additional $4,991,000 of unamortized revenue related to the $25,000,000 in prepayments made by Abbott against incremental product sales, and (c) residual payments for five years following termination based on a declining percentage of Abbott's net sales of the Company's products during the final twelve months of the Distribution Agreement. The Company expects that such payments would have a material impact on its cash flows and results of operations. The Company currently is evaluating whether or not to seek an extension of the Distribution Agreement after 2003. If the Distribution Agreement is terminated, the Company must take steps that it deems appropriate or necessary to resume primary responsibility for the marketing and sales of its products. This includes hiring additional marketing and sales personnel and allocating resources to this endeavor. Under the terms of the Research Agreement, the Company is required to conduct research and develop products primarily to be commercialized by Abbott. Such research and development is to 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 that is developed during the course of work performed under the Research Agreement. In connection with this agreement, reimbursements from Abbott of $2,697,000 and $1,762,000 are included in net revenues in 2000 and 1999, respectively. There were no research and development reimbursements from Abbott in 2001 and Abbott is not currently 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 for a period of one year following the termination of the initial term of the Distribution Agreement. 24 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. CRITICAL ACCOUNTING POLICIES AND ESTIMATES i-STAT's discussion and analysis of its financial condition and results of operations are based upon i-STAT's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires i-STAT to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, i-STAT evaluates its estimates, including those related to bad debts, inventories, intangible assets, income taxes, warranty obligations, contingencies and litigation. i-STAT bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. i-STAT believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Revenues from the sale of products are recorded when the product is shipped, title and risk of loss have transferred to the purchaser and payment terms are fixed or determinable. Revenues from service contracts are recognized when performance of the service is complete or over the term of the contract. i-STAT values its inventory at the lower of cost or market. i-STAT reviews its inventory for quantities in excess of production requirements, obsolescence and for compliance with the Company's quality specifications. Any adjustments to inventory would be equal to the difference between the cost of inventory and the estimated net market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory adjustments may be required. i-STAT records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While i-STAT has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event i-STAT were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. The Company establishes liabilities for litigation and contingencies when the matters become probable and the amount of the potential liability is reasonably estimable. The Company generally will consult with its outside legal counsel, assess the merits of the claim, evaluate the likelihood of an unfavorable outcome and consider the range of potential losses in reaching its conclusion. RECENT ACCOUNTING PRONOUNCEMENTS On June 20, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No. 141 is effective for all business combinations initiated after June 30, 2001. This Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combinations", and SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations within the scope of this Statement are to be accounted for using one method, the purchase method. On June 20, 2001, FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 for all goodwill and other intangible assets recognized in an entity's statement of financial position at the beginning of that fiscal year, regardless of when those previously recognized assets were initially recognized. This Statement supersedes APB Opinion No. 17, "Intangible Assets." It addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in the financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The Company will adopt SFAS No. 142 in the first quarter of 2002, as required. The Company is in the process of evaluating the useful lives of its existing intangible assets and anticipates that any changes in the useful lives will not have a material impact on its financial position or the results of operations. The Company has never engaged in a business combination and as a result the Company has no goodwill in its Consolidated Balance Sheets. On August 15, 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. This Statement requires that the fair value of a liability for an 25 asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. In addition, the associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset's useful life. The Company does not expect that the adoption of this Statement will have a material impact on its financial position or results of operations. On October 4, 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This Statement requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions. The Company adopted this Statement in 2001. The adoption of this Statement did not have an impact on the Company's financial position 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. 26 ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk exposure relates to foreign currency exchange risk (see discussion within "Liquidity and Capital Resources" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations"). 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. 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 2002 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 2002 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 2002 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 2002 Annual Meeting of Stockholders and is incorporated herein by reference. 27 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.............................................................................33 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2001...................................................................34 Consolidated Balance Sheets at December 31, 2001 and 2000.....................................................35 Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 2001.............................................36 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001...................................................................37 Notes to Consolidated Financial Statements.................................................................38-53 (2) FINANCIAL STATEMENT SCHEDULES--THE FOLLOWING ARE INCLUDED IN ITEM 14(d): Report of Independent Accountants.............................................................................54 Schedule II--Valuation and Qualifying Accounts................................................................55
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. (b) Reports on Form 8-K On December 7 and December 12, 2001, the Company filed current Reports on Form 8-K with regard to the Series D Convertible Preferred Stock financing. On April 1, 2002, the Company filed a current Report on Form 8-K with regard to adjustments to previously announced 2001 financial results contained in this Form 10-K and the acknowledgement by the Company that Abbott Laboratories had met the minimum three-year growth milestone. 28 (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)* (3.5) Certificate of Designation, Preferences and Rights of Series C Preferred Stock (Form 10-Q for the quarterly period ended September 30, 2001)* (3.6) Certificate of Amendment to the Restated Certificate of Incorporation (Form 10-Q for the quarterly period ended September 30, 2001)* (3.7) Certificate of Designation, Preferences and Rights of Series D Convertible Preferred Stock (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)*
* 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). 29
EXHIBIT NO. DESCRIPTION - ----------- ----------- (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)* (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*
* 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). 30
EXHIBIT NO. DESCRIPTION - ----------- ----------- (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* (10.56) Form of Settlement Agreement dated as of July 26, 2001 between the Company and Nova Biomedical Corporation (Form 8-K dated July 27, 2001)* (10.57) Registration Rights Agreement, dated as of August 2, 2001, between Registrant and the Purchasers named therein (Form 8-K dated August 3, 2001)* (10.58) Form of Warrant, issued as of August 2, 2001, to purchase shares of Common Stock of Registrant (Form 8-K dated August 3, 2001)* (10.59) Securities Purchase Agreement, dated as of August 2, 2001, between the Registrant and the Purchasers named therein (Form 8-K dated August 3, 2001)* (10.60) Securities Purchase Agreement, dated as of December 6, 2001, between the Registrant and the Purchasers named therein (Form 8-K dated December 7, 2001)* (10.61) Form of Registration Rights Agreement between Registrant and the Purchasers named therein (Form 8-K dated December 7, 2001)* (10.62) Form of Warrant issued to each of the Series D Stock investors to purchase Common Stock of Registrant (Form 8-K dated December 7, 2001)* (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. ** 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). 31 i-STAT CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DESCRIPTION PAGE - ----------- ---- Report of Independent Accountants.............................................................................33 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2001.............................................................34 Consolidated Balance Sheets as of December 31, 2001 and 2000..................................................35 Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 2001.............................................36 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001.............................................................37 Notes to Consolidated Financial Statements.................................................................38-53
32 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 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 March 26, 2002 33 i-STAT Corporation Consolidated Statements of Operations
In thousands of dollars, except share and per share data For the Years Ended December 31, - -------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 Net revenues: Related party product sales........................ $ 48,650 $ 42,419 $ 35,456 Third party product sales.......................... 8,828 8,972 7,351 Other revenues..................................... 1,354 3,646 2,418 ------------- ------------ ----------- Total net revenues.............................. 58,832 55,037 45,225 ------------- ------------ ----------- Cost of products sold.................................. 48,108 40,951 36,401 Research and development............................... 8,040 7,944 7,506 General and administrative............................. 7,182 6,983 7,264 Sales and marketing.................................... 9,043 7,784 8,293 Litigation settlement.................................. 10,491 1,500 -- Write-down of certain fixed assets..................... 1,124 -- -- Consolidation of operations............................ -- -- 70 ------------- ------------ ----------- Total operating costs and expenses.............. 83,988 65,162 59,534 ------------- ------------ ----------- Operating loss............................. (25,156) (10,125) (14,309) Other income (expense): Investment income.................................. 890 1,636 1,507 Other.............................................. (95) 127 -- ------------- ------------ ----------- Other income, net............................... 795 1,763 1,507 Loss before income taxes........................... (24,361) (8,362) (12,802) Income tax benefit................................. (1,141) (867) -- ------------- ------------ ----------- Net loss............................................... (23,220) ($7,495) ($12,802) Accretion of Preferred Stock........................... (1,734) -- -- Dividends on Preferred Stock........................... (133) -- -- ------------- ------------ ----------- Net loss available to Common Stockholders.............. ($25,087) ($7,495) ($12,802) ============= ============ =========== Basic and diluted net loss per share available to Common Stockholders....................... ($1.33) ($0.43) ($0.83) ============= ============ =========== Shares used in computing basic and diluted net loss per share available to Common Stockholders............. 18,920,956 17,512,083 15,475,893 ============= ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. 34 i-STAT CORPORATION CONSOLIDATED BALANCE SHEETS
In thousands of dollars, except share and per share data December 31, - --------------------------------------------------------------------------------------------------------- 2001 2000 Assets Current assets: Cash and cash equivalents.............................................. $ 43,112 $ 19,536 Accounts receivable, net of reserve for doubtful accounts of $28 in 2001 and 2000................................................ 546 868 Accounts receivable from related party, net............................ -- 3,607 Inventories (Note 2)................................................... 13,393 15,402 Prepaid expenses and other current assets.............................. 1,924 884 ---------- --------- Total current assets................................................ 58,975 40,297 Plant and equipment, net (Note 3).......................................... 14,964 17,766 Intangible assets, net (Note 4)............................................ 1,782 1,627 Other assets............................................................... 168 244 ---------- --------- Total assets........................................................ $ 75,889 $ 59,934 ========== ========= Liabilities and Stockholders' Equity Current liabilities: Accounts payable....................................................... $ 2,662 $ 3,464 Accounts payable to related party, net................................. 2,673 -- Accrued expenses (Note 5).............................................. 4,896 4,488 Deferred revenue (inclusive of related party deferred revenue of $662 in 2001 and $10,675 in 2000)................................... 662 10,824 ---------- --------- Total current liabilities........................................... 10,893 18,776 Deferred revenue from related party, non-current........................... 5,058 106 ---------- --------- Total liabilities................................................... 15,951 18,882 ---------- --------- Series D Redeemable Convertible Preferred Stock, liquidation value $30,133 (Note 7)..................................... 25,334 -- Commitments and Contingencies (Note 14) Stockholders' Equity: Preferred Stock, $0.10 par value, shares authorized 7,000,000: Series A Junior Participating Preferred Stock, $0.10 par value, 1,500,000 shares authorized; none issued......................... -- -- Series B Preferred Stock, $0.10 par value, -0- and 2,138,702 shares authorized in 2001 and 2000, respectively; none issued.......... -- -- Series C Convertible Preferred Stock, $0.10 par value, 25,000 and -0- shares authorized in 2001 and 2000; none issued.................. -- -- Common Stock, $0.15 par value, 50,000,000 and 25,000,000 shares authorized; 20,107,483 and 18,436,654 shares issued; and 20,066,666 and 18,395,837 shares outstanding in 2001 and 2000, respectively.... 3,016 2,766 Treasury Stock, at cost, 40,817 shares................................. (750) (750) Additional paid-in capital............................................. 255,442 238,814 Unearned compensation.................................................. (55) (764) Loan to officer, net................................................... (417) (717) Accumulated deficit.................................................... (220,185) (196,965) Accumulated other comprehensive loss................................... (2,447) (1,332) ---------- --------- Total stockholders' equity.......................................... 34,604 41,052 ---------- --------- Total liabilities and stockholders' equity.......................... $ 75,889 $ 59,934 ========== =========
The accompanying notes are an integral part of these consolidated financial statements. 35 i-STAT CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Stock Common Stock -------- ------------------------------------------- Accumulated Number of Additional Loan Other In thousands of dollars, Par Shares Par Paid-in Treasury Unearned to Comprehensive except share and per share data Value Issued Value Capital Stock Compensation Officer Loss - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998....... $ 214 15,308,995 $2,296 $ 230,328 $-- $(169) $-- $(1,341) Net loss for 1999................ Other comprehensive gain on foreign currency translation adjustments................... 672 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.................. (716) ---------------------------------------------------------------------------------------------- Balance, December 31, 1999....... 214 15,761,630 2,364 234,487 -- (1,547) (716) (669) Net loss for 2000................ Other comprehensive loss on foreign currency translation adjustments................... (663) 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.................. (257) Forgiveness of Loan to Officer... 256 ---------------------------------------------------------------------------------------------- Balance, December 31, 2000....... -- 18,436,654 2,766 238,814 (750) (764) (717) (1,332) Net loss for 2001................ Other comprehensive loss on foreign currency translation adjustments................... (1,115) Total comprehensive loss.... ------- Shares issued at $1.50 to $18.50 per share under the 1985 Stock Option Plan and the Equity Incentive Plan (Note 8)...................... 181,728 27 2,037 Restricted Stock issued at $6.02 per share............... 2,791 -- 17 (17) Restricted Stock issued at $16.75 per share.............. 7,960 1 132 (133) Cancellation of Restricted Stock. (1,650) -- -- Amortization of unearned compensation related to Restricted Stock.............. 859 Forgiveness of Loan to Officer... 300 Private Placement of Common Stock (Note 7)................ 1,480,000 222 10,817 Issuance of Series C Warrant (Note 7)...................... 2,976 Accretion of Series C Redeemable Convertible Preferred Stock (Note 7)...................... (1,698) Issuance of Series D Warrant (Note 7)...................... 2,516 Dividend on Series D Redeemable Convertible Preferred Stock (Note 7)...................... (133) Accretion of Series D Redeemable Convertible Preferred Stock (Note 7)...................... (36) ---------------------------------------------------------------------------------------------- Balance, December 31, 2001....... $-- 20,107,483 $ 3,016 $ 255,442 $(750) $(55) $(417) $(2,447) ==============================================================================================
(table continued from above)
Total In thousands of dollars, Accumulated Stockholders' except share and per share data Deficit Equity - --------------------------------------------------------------------- Balance, December 31, 1998....... $(176,668) $54,660 Net loss for 1999................ (12,802) Other comprehensive gain on foreign currency translation adjustments................... -------------------------------- 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....... (189,470) 44,663 Net loss for 2000................ (7,495) Other comprehensive loss on foreign currency translation adjustments................... -------------------------------- 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) Forgiveness of Loan to Officer... 256 -------------------------------- Balance, December 31, 2000....... (196,965) 41,052 Net loss for 2001................ (23,220) Other comprehensive loss on foreign currency translation adjustments................... -------------------------------- Total comprehensive loss.... (24,335) Shares issued at $1.50 to $18.50 per share under the 1985 Stock Option Plan and the Equity Incentive Plan (Note 8)...................... 2,064 Restricted Stock issued at $6.02 per share............... Restricted Stock issued at $16.75 per share.............. Cancellation of Restricted Stock. Amortization of unearned compensation related to Restricted Stock.............. 859 Forgiveness of Loan to Officer... 300 Private Placement of Common Stock (Note 7)................ 11,039 Issuance of Series C Warrant (Note 7)...................... 2,976 Accretion of Series C Redeemable Convertible Preferred Stock (Note 7)...................... (1,698) Issuance of Series D Warrant (Note 7)...................... 2,516 Dividend on Series D Redeemable Convertible Preferred Stock (Note 7)...................... (133) Accretion of Series D Redeemable Convertible Preferred Stock (Note 7)...................... (36) -------------------------------- Balance, December 31, 2001....... $(220,185) $ 34,604 ================================
The accompanying notes are an integral part of these consolidated financial statements. 36 i-STAT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands of dollars, except share and per share data For the Years Ended December 31, - ----------------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 Cash flows from operating activities: Net loss..................................................... $(23,220) $(7,495) $(12,802) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................. 5,367 4,790 4,362 Gains on disposal of equipment............................ (13) (86) (4) Amortization of deferred revenue.......................... (10,409) (6,887) (4,013) Expense related to restricted stock....................... 1,159 1,172 2,015 Loss on write-down of fixed assets........................ 1,124 -- -- Change in assets and liabilities: Accounts receivable.......................................... 322 (455) 2,436 Accounts receivable from related parties..................... 3,607 578 (1,342) Accounts payable to related party............................ 2,673 -- -- Inventories.................................................. 1,679 (6,679) (325) Prepaid expenses and other current assets.................... (1,074) 292 98 Accounts payable............................................. (700) 1,245 (486) Accrued expenses............................................. 496 78 (1,648) Restricted cash, letter of credit............................ 89 199 147 Deferred revenue............................................. 5,200 11,077 5,193 -------- ------- -------- Net cash used in operating activities..................... (13,700) (2,171) (6,369) -------- ------- -------- Cash flows from investing activities: Purchase of equipment........................................ (4,453) (6,973) (6,250) Cost of intangible assets.................................... (309) (261) (294) Proceeds from sale of equipment.............................. 13 99 20 -------- ------- -------- Net cash used in investing activities..................... (4,749) (7,135) (6,524) -------- ------- -------- Cash flows from financing activities: Proceeds from issuance of Common Stock....................... 2,064 4,382 834 Net proceeds from private placement of Common Stock.......... 13,195 -- -- Net proceeds from issuance of Series C Redeemable Convertible Preferred Stock and Warrants................... 19,586 -- -- Redemption of Series C Convertible Preferred Stock........... (20,464) -- -- Net proceeds from private placement of Series D Redeemable Convertible Preferred Stock and Warrants................... 27,681 -- -- Purchase of Treasury Stock................................... -- (750) -- Loan to officer.............................................. -- (257) (716) -------- ------- -------- Net cash provided by financing activities................. 42,062 3,375 118 -------- ------- -------- Effect of currency exchange rate changes on cash................. (37) (108) (40) -------- ------- -------- Net increase (decrease) in cash and cash equivalents......... 23,576 (6,039) (12,815) Cash and cash equivalents at beginning of year............... 19,536 25,575 38,390 -------- ------- -------- Cash and cash equivalents at end of year..................... $ 43,112 $19,536 $ 25,575 ======== ======= ======== 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. $ 95 $ 143 $ 276 ======== ======= ======== Conversion of Preferred Stock to Common Stock................ $ -- $ (214) $ -- ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. 37 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 manufacturing existing products as well as 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 Balance sheet amounts from the Company's Canadian subsidiary have been translated using exchange rates in effect at the balance sheet dates and the resulting translation adjustments have been included in the accumulated other comprehensive loss as a separate component of Consolidated Stockholders' Equity. The Statement of Operations from the Company's Canadian subsidiary has been translated using the average monthly exchange rates in effect during each year. Foreign currency 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. Costs are accounted for on the first-in first-out (FIFO) basis. Inventories are reviewed on a regular basis for quantities in excess of production requirements, obsolescence, and for compliance with the Company's quality specifications. PLANT AND EQUIPMENT Plant and equipment are stated at the lower of cost or fair value 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 remaining term of the lease, whichever is less. The cost of major additions and betterments are capitalized; maintenance and repairs that 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. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", 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 value of long-lived assets. Fair value is determined by comparisons to quoted or estimated selling prices or by using the anticipated cash flows discounted at a rate commensurate with the risk involved. 38 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 from the sale of products are recorded when the product is shipped, title and risk of loss have transferred to the purchaser and payment terms are fixed or determinable. Revenues from service contracts are recognized when performance of the service is complete or over the term of the contract. WARRANTY RESERVE The Company establishes a reserve for future warranty repairs as the Company ships its products. The reserve is based on the Company's actual historical experience of repaired units as compared to total units shipped. The Company reviews the reasonableness of this accrual on a regular basis. BASIC AND DILUTED LOSS PER SHARE Basic loss per share is computed by dividing income available to common stockholders by the weighted average number of Common Shares outstanding for the period. Diluted loss per share 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 potentially dilutive Common Shares in the diluted per-share computation for all periods presented, as the result is antidilutive due to the Company's net loss. Options to purchase 2,385,837 shares of Common Stock at $6.02 - $32.58 per share, which expire on various dates from April 2002 to August 2011, were outstanding at December 31, 2001. In addition, warrants to purchase 1,875,357.5 shares of Common Stock at $8.00 per share were outstanding at December 31, 2001. The options and warrants were not included in the computation of diluted loss per share because the effect would be antidilutive (i.e., decrease the net loss per share) due to the Company's net loss. COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income", requires foreign currency translation adjustments to be included in other comprehensive loss. The only components of accumulated other comprehensive loss for the Company are foreign currency translation adjustments resulting from the translation of the financial statements of the Company's Canadian subsidiary.
IN THOUSANDS OF DOLLARS 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------ Net loss................................................ $(23,220) $(7,495) $(12,802) Other comprehensive income (loss): Foreign currency translation......................... (1,115) (663) 672 -------- ------- -------- Comprehensive loss...................................... $(24,335) $(8,158) $(12,130) ======== ======= ========
ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles in the United States 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, 2001 were held at one institution and invested in a money market fund which invests in short-term U.S. Government Securities. Accounts receivable are generally with 39 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) distributors such as Abbott (84% of total net revenues in 2001), FUSO, Inc., and Heska Corporation. The Company provides credit to its customers on an unsecured basis after evaluating their credit status. 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. PREFERRED STOCK DIVIDENDS The Company records dividends at their fair market value. If the Series D Redeemable Convertible Preferred Stock (the "Series D Stock") dividend is paid in cash, the amount of cash paid is deemed to be the fair value of the dividend. If the Series D Stock dividend is accrued and not paid in cash, the fair value of the dividend is dependent upon the fair market value of the Company's Common Stock when the dividend is declared at the end of each calendar quarter. The Series D Stock and accrued dividends can be converted into Common Stock by the holder at a fixed conversion price of $8.00 per share. In order to determine the fair value of the dividend, the amount of the dividend to be accrued is divided by $8.00 per share in order to determine the equivalent number of Common Shares. The equivalent number of Common Shares is then multiplied by the fair market value, which is deemed to be the closing price of the Common Stock on the date the dividend was declared, and the result is the fair value of the dividend. Any difference in the actual dividend accrued and the fair value of the dividend is recorded in additional paid-in capital. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS On June 20, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No. 141 is effective for all business combinations initiated after June 30, 2001. This Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combinations", and SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations within the scope of this Statement are to be accounted for using one method, the purchase method. On June 20, 2001, FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 for all goodwill and other intangible assets recognized in an entity's statement of financial position at the beginning of that fiscal year, regardless of when those previously recognized assets were initially recognized. This Statement supersedes APB Opinion No. 17, "Intangible Assets." It addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in the financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The Company will adopt SFAS No. 142 in the first quarter of 2002, as required. The Company is in the process of evaluating the useful lives of its existing intangible assets and anticipates that any changes in the useful lives will not have a material impact on its financial position or results of operations. The Company has never engaged in a business combination and as a result the Company has no goodwill in its Consolidated Balance Sheets. On August 15, 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. In addition, the associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset's useful life. The Company does not expect that the adoption of this Statement will have a material impact on its financial position or results of operations. On October 4, 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This Statement requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions. The Company adopted this Statement in 2001. The adoption of this Statement did not have an impact on the Company's financial position or results of operations. 40 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. INVENTORIES Inventories consist of the following:
IN THOUSANDS OF DOLLARS December 31, - ---------------------------------------------------------------------------------------------------- 2001 2000 Raw materials..................................................... $ 4,462 $ 5,696 Work-in-process................................................... 3,058 3,700 Finished goods.................................................... 5,873 6,006 ------- ------- $13,393 $15,402 ======= =======
In the fourth quarter of 2001 the Company recorded a charge of $1.7 million related to the write-off of certain cartridges in inventory and the replacement of certain cartridges in the field that exhibited a higher than usual quality check rejection rate. At December 31, 2001 finished goods inventory is presented net of a reserve of approximately $1.0 million related to the write-off of certain cartridges in inventory at year-end. In addition, a reserve of $0.6 million related to the replacement of certain cartridges in the field is recorded in accrued expenses at December 31, 2001 (see Note 5). 3. PLANT AND EQUIPMENT Plant and equipment, net, consists of the following:
IN THOUSANDS OF DOLLARS December 31, - ------------------------------------------------------------------------------------------------------- 2001 2000 Equipment loaned to customers..................................... $ 2,045 $ 2,052 Manufacturing equipment........................................... 37,634 37,364 Furniture and fixtures............................................ 1,372 1,318 Leasehold improvements............................................ 5,064 4,378 -------- -------- 46,115 45,112 Less accumulated depreciation and amortization.................... (31,151) (27,346) -------- -------- $ 14,964 $ 17,766 ======== ========
Depreciation expense was approximately $5,136,000, $4,644,000 and $4,224,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Accumulated depreciation and amortization includes accumulated depreciation on loaned equipment of approximately $2,029,000 and $1,947,000 for the years ended December 31, 2001 and 2000, respectively. Maintenance and repairs expense for the years ended December 31, 2001, 2000 and 1999 was approximately $929,000, $1,026,000 and $938,000, respectively. During the fourth quarter of 2001, the Company reviewed its plant and equipment assets and determined that a write-down of $1,124,000 was required for certain fixed assets, which were associated with certain projects that had not been completed at the Company's Canadian facility, as lower cost alternatives were found. This write-down reduced the carrying value of certain assets down to their estimated fair values. The estimated fair values of the assets represents their estimated sales price less any selling costs. The write-down is included in the Consolidated Statement of Operations as a separate line item. 41 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, - --------------------------------------------------------------------------------------------------- 2001 2000 Patents, licenses and trademarks.................................. $2,757 $2,448 Less accumulated amortization..................................... (975) (821) ------ ------ $1,782 $1,627 ====== ======
Amortization expense was approximately $154,000, $135,000 and $138,000 for the years ended December 31, 2001, 2000 and 1999, respectively. 5. ACCRUED EXPENSES Accrued expenses consist of the following:
IN THOUSANDS OF DOLLARS December 31, - --------------------------------------------------------------------------------------------------- 2001 2000 Accrued employee incentive awards................................. $1,142 $ 861 Compensated absences.............................................. 1,049 1,038 Cartridge replacement reserve (see Note 2)........................ 620 - Professional fees................................................. 529 484 Accrued commissions............................................... 273 273 Other............................................................. 1,283 1,832 ------ ------- $4,896 $ 4,488 ====== =======
6. LEASING TRANSACTIONS The Company leases two facilities as part of its manufacturing facilities in Ontario, Canada. One facility, comprised of 53,802 square feet, has a lease that expires in 2010. The second facility's lease, comprised of 43,054 square feet, expires in February 2004, subject to, at the Company's option, renewal for one five-year term. Rent expense for these facilities was approximately $712,000, $667,000 and $456,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The Company also leases a 37,474 square foot 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. The Company also leases 5,950 square feet of warehouse space in Jamesburg, New Jersey. The lease expires in October 2003. Rent expense for these facilities was approximately $752,000, $708,000 and $656,000 for 2001, 2000 and 1999, respectively. At December 31, 2001, other assets include $98,000 in restricted cash which acts as collateral for future lease payments for the New Jersey facility. The Company's lease for its cartridge assembly facility in Plainsboro, New Jersey expired in February 1999 (the assembly operation was relocated to the Ontario, Canada, location during 1998). Rent expense for this facility was approximately $56,000 for the year ended December 31, 1999. As of December 31, 2001, future minimum lease payments are as follows:
Year Ending December 31: IN THOUSANDS OF DOLLARS Operating Leases - ---------------------------------------------------------------------------------------------------------------- 2002........................................................................................... $1,487 2003........................................................................................... 1,273 2004........................................................................................... 440 2005........................................................................................... 396 2006........................................................................................... 401 Thereafter..................................................................................... 1,708 ------ Total minimum lease payments................................................................... $5,705 ======
42 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. PREFERRED STOCK AND WARRANTS 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. SERIES A JUNIOR PARTICIPATING PREFERRED STOCK 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. 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. SERIES B PREFERRED STOCK 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. During 1999, Hewlett-Packard Company ("HP") transferred its holding of Series B Stock to Agilent Technologies, Inc. ("Agilent"), one of its subsidiaries at that time. 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 holding. Upon conversion, the Series B Stock was automatically cancelled. As a result there are no authorized shares of Series B Stock as of December 31, 2001. SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS In August 2001, the Company closed a $34.1 million private placement with several institutional investors. The financing consisted of 1,480,000 shares of Common Stock at $9.218 per share, 20,464 shares of Series C Redeemable Convertible Preferred Stock with a stated value of $1,000 per share (the "Series C Stock") and six year warrants to purchase up to 1,295,000 shares of Common Stock at $10.139 per share (the "Series C Warrants"). The Series C Warrants are callable by the Company if the closing price of the Company's Common Stock is greater than $16.50 for ten consecutive business days. If the Company calls the Series C Warrants, then the Company must issue replacement warrants of equal quantity at a strike price of $19.25 and with a term equal to the remaining term on the initial Series C Warrants. The Company recorded the Series C Stock, Series C Warrants and the Common Stock issued in the transaction at their net relative fair values of $18.8 million, $3.0 million and $11.0 million, respectively, which were determined by an independent, third party appraisal firm and were net of issuance expenses in the aggregate amount of $1.3 million. The Series C Stock was accreted from its relative fair value on the date of issuance of approximately $18.8 million to its redemption value on November 29, 2001 of approximately $20.5 million. The resulting accretion of approximately $1.7 million is shown as Accretion of Preferred Stock below the net loss in the Company's Consolidated Statements of Operations. The Company incurred expenses of approximately $1.3 million related to the transaction, which were allocated to the Common Stock, Series C Stock and Series C warrants based on their relative fair values. In addition, at the time of issuance the Series C Stock was deemed to have a "beneficial conversion feature" because the conversion price of the Series C Stock reflected a twelve percent discount to the fair market value of the Common Stock. The beneficial conversion feature was calculated on August 3, 2001, the commitment date, and was approximately $3.7 million. The beneficial conversion feature was accreted into the Series C Stock from the date of issuance through November 29, 2001. In December 2001, the Company elected to redeem all outstanding shares of Series C Stock at their face value, thus leaving no Series C Stock outstanding. As a result of the redemption of the Series C Stock, approximately $20.5 million was returned to the holders and Series C Warrants representing 555,000 shares of Common Stock were cancelled. In December 2001, as a result of the issuance of the Series D Stock and pursuant to anti-dilution provisions, the Series C Warrants were adjusted from 740,000 shares of Common Stock at a strike price of $10.139 per share, to 937,857.5 shares at a strike price of $8.00 per share. In addition, as a result of the redemption of the Series C Stock, the accretion 43 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) related to the "beneficial conversion feature" of $3.7 million was reversed. Thus, the 2001 Company's Consolidated Statements of Operations does not include any accretion related to the "beneficial conversion feature". SERIES D REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS In December 2001, the Company closed a $30.0 million private placement with affiliates of Cerberus Capital Management, L.P. (collectively "Cerberus"). The financing consisted of 30,000 shares of Series D Stock with a stated value of $1,000 per share and an 8% preferential dividend and six year warrants to purchase up to 937,500 shares of Common Stock at $8.00 per share (the "Series D Warrants"). The Series D Stock is mandatorily redeemable in December 2011 and may be redeemed by the Company any time after December 2007. The Series D Stock may be converted into Common Stock at the holders' option at a conversion price of $8.00 per share of Common Stock, subject to certain ownership level restrictions. No holder of the Series D Stock and Series D Warrants may convert or exercise its securities into shares of the Company's Common Stock if after the conversion, such holder, together with any of its affiliates, would beneficially own over the ownership limitation percentage set by the Company, initially 14.99%. Under certain circumstances, the restrictions for Cerberus may be eased so that it will be entitled to convert or exercise its securities into shares of Common Stock if after the conversion it, together with any of its affiliates, do not beneficially own in excess of 34% of the outstanding shares of the Company's Common Stock. Absent these limitations, Cerberus' current ownership would represent the right to acquire approximately 26.7% of the outstanding voting securities of the Company at December 31, 2001. These limitations do not prevent the holders from acquiring and selling shares of the Company's Common Stock. Cerberus is entitled to appoint one person to the Company's Board of Directors for so long as it holds 10% of the outstanding securities of the Company on a fully diluted basis. The Company recorded the Series D Stock and the Series D Warrants issued in the transaction at their net relative fair values of $25.2 million and $2.5 million, respectively, which were determined by an independent, third party appraisal firm and were net of issuance expenses in the aggregate amount of $2.3 million. The Series D Stock is being accreted over a period of ten years from its relative fair value on the date of issuance of approximately $25.2 million to its stated value of $30.0 million. The resulting accretion of $0.036 million is shown below net loss in the Consolidated Statements of Operations. The Company incurred issuance expenses of approximately $2.3 million related to the transaction, which were allocated to the Series D Stock and Series D Warrants based on their relative fair values. The holders of the Series D Stock are entitled to receive a cumulative dividend of 8% of the liquidation preference, payable quarterly. The dividends may be paid in cash, or accrue and be added to the liquidation preference, becoming payable in cash upon redemption or payable in Common Stock upon conversion. During the periods that the Common Stock trades at or above $15.00 per share for 45 consecutive trading days, the dividend rate will be reduced to 2%, and if during subsequent periods the Common Stock trades below $10.00 per share for 45 consecutive trading days, the dividend rate will adjust back to 8%. A dividend of approximately $0.2 million was recorded at its fair value for the period of time the Series D Stock was outstanding in December 2001 has been accrued and is shown in the Consolidated Statement of Operations below the net loss. At December 31, 2001, the value of the Series D Stock presented in the Consolidated Balance Sheets of approximately $25.3 million is comprised of its initial net relative fair value of approximately $25.2 million, plus accretion of $0.036 million, plus the accrued and unpaid dividends of approximately $0.1 million. At December 31, 2001, the liquidation preference amount of the Series D Stock is approximately $30.1 million, comprised of the stated value of $30.0 million plus accrued and unpaid dividends of approximately $0.1 million, and the Series D Stock is convertible into approximately 3.767 million shares of Common Stock at a conversion price of $8.00 per share of Common Stock. 44 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"). Both Plans have been approved by the Company's stockholders. The maximum number of issuable shares of Common Stock is 5,300,000 of which 1,281,859 are available for grant at December 31, 2001. Options under the 1985 Stock Option Plan can be granted until November 26, 2005, and options under the Equity Incentive Plan can be granted until March 31, 2008. The exercise price of an option is based upon the fair market value of the Company's Common Stock at the time of the grant, as determined by utilizing the closing price of the Company's Common Stock on the day prior to the date of 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. The table below is a summary of stock option activity for the years 1999, 2000, and 2001.
Weighted Average Weighted Average Option Exercise Price Fair Market Options Activity per Share Value per Option - --------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1998............... 2,141,865 $12.30 Exercisable at December 31, 1998............... 1,087,830 $12.71 Options granted................................ 1,070,063 $ 9.30 $ 9.21 Options exercised.............................. (125,132) $ 6.99 Options forfeited.............................. (219,315) $11.81 Options Expired................................ (7,984) $11.75 Outstanding at December 31, 1999............... 2,859,497 $11.45 Exercisable at December 31, 1999............... 1,349,002 $12.19 Options granted................................ 474,047 $13.16 $13.28 Options exercised.............................. (526,066) $ 8.33 Options forfeited.............................. (204,791) $13.61 Options Expired................................ (22,001) $20.64 Outstanding at December 31, 2000............... 2,580,686 $12.15 Exercisable at December 31, 2000............... 1,167,008 $12.49 Options granted................................ 222,242 $19.52 $19.95 Options exercised.............................. (181,728) $11.52 Options forfeited.............................. (120,618) $15.67 Options Expired................................ (114,745) $11.60 Outstanding at December 31, 2001............... 2,385,837 $12.73 Exercisable at December 31, 2001............... 1,330,620 $11.96
The weighted average remaining contractual lives of outstanding options at December 31, 2001 was approximately 6.2 years. 45 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company applies the provisions of APB Opinion No. 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 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------- Actual net loss available to Common Stockholders............ $(25,087) $ (7,495) $(12,802) Pro forma net loss available to Common Stockholders......... $(29,695) $(11,914) $(17,125) Actual basic and diluted net loss per share................. $ (1.33) $ (0.43) $ (0.83) Pro forma basic and diluted net loss per share.............. $ (1.57) $ (0.68) $ (1.11)
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 $4,608,000, $4,419,000 and $4,323,000 for 2001, 2000 and 1999, 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:
2001 2000 1999 - ---------------------------------------------------------------------------------------------------------- Dividend yield............................................ 0% 0% 0% Expected volatility....................................... 64.26% 71.29% 62.00% Risk free interest rate................................... 4.98% 6.71% 5.44% Expected option lives..................................... 5 years 5 years 5 years
The following table summarizes information about stock options outstanding at December 31, 2001.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE Range of Number Outstanding Weighted Average Weighted Average Number Exercisable Weighted Average Exercise Price at 12/31/01 Remaining Life Exercise Price at 12/31/01 Exercise Price - --------------------------------------------------------------------------------------------------------------------------- $ 6.02 - $ 8.88 638,509 6.02 $ 7.23 434,508 $ 6.79 $ 9.06 - $ 13.00 942,705 6.63 $11.09 515,575 $10.76 $ 14.10 - $ 21.00 485,419 5.38 $16.44 223,185 $15.96 $ 21.38 - $ 24.06 302,328 6.67 $22.39 140,476 $23.55 $32.58 16,876 4.22 $32.58 16,876 $32.58 - --------------------------------------------------------------------------------------------------------------------------- $ 6.02 - $ 32.58 2,385,837 6.20 $12.73 1,330,620 $11.96 - ---------------------------------------------------------------------------------------------------------------------------
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. The fair value was determined by utilizing the closing price of the Company's Common Stock on the day prior to the date of grant. One executive officer was awarded 250,000 shares of restricted Common Stock, 50,000 shares of which immediately vested on February 5, 1999, and 200,000 shares of which vested on February 5, 2002. The remaining 60,000 shares were awarded to the other three executive officers and vested over a three-year period. On June 30, 1999, in connection with the award of 250,000 shares to one executive officer, the Company loaned the executive officer approximately $716,000 to pay withholding taxes. The promissory note carries an interest rate of 5.37%, payable annually, and the principal amount of the loan is repayable in April 2003. In April 2000, a second promissory note of approximately $257,000 was issued. The second promissory note carries an interest rate of 6.36%, payable annually. 46 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) One third of the principal amount of these loans will be forgiven each April through 2003 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 $1,326,000, $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, 2001, 2000 and 1999, respectively. During 2001, 2000 and 1999, 10,751, 10,256 and 17,503 shares of restricted Common Stock were awarded to outside directors as part of their annual compensation. The restricted Common Stock grants had fair values of $150,000, $133,000 and $163,000 in 2001, 2000 and 1999 at their respective dates of grant, as determined by utilizing the closing price of the Company's Common Stock on the day prior to the dates of grant. The fair value of each grant was recorded as compensation expense in its respective year of grant. 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 years ended December 31, 2001, 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, as determined by utilizing the closing price of the Company's Common Stock on the day prior to the date of grant. Compensation under the plan is charged to earnings over the restriction period and amounted to approximately $5,000, $22,000 and $141,000 in 2001, 2000, and 1999, 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 $5,667,000, $5,243,000 and $3,900,000 for the years ended December 31, 2001, 2000 and 1999, respectively, including deferred revenue of $129,000, $129,000 and $0, respectively. The Company also has other license and distribution agreements, including agreements with HP and Abbott (see Notes 10 & 11). 10. RELATED PARTY TRANSACTIONS The Company had the following related party activity with Abbott and HP, primarily related to license and distribution agreements.
ABBOTT LABORATORIES IN THOUSANDS OF DOLLARS 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- Revenues............................................... $ 49,600 $ 45,927 $ 35,499 (Payable)/receivable at year end....................... $ (2,673) $ 3,607 $ 4,069 Deferred revenue at year end........................... $ 5,720 $ 10,781 $ 6,474
HEWLETT-PACKARD COMPANY IN THOUSANDS OF DOLLARS 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- Revenues............................................... $ 138 $ 2,375 Purchases.............................................. $ 41 $ 816 Receivable at year end................................. $ 116
HP 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. One former director of the Company provided consulting services to the Company in 1999 and received $15,000. 47 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. 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 primary objective of the Abbott alliance was 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 against 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, $10,800,000 and $5,200,000 were received in September 1998, January 1999, January 2000 and January 2001, respectively. Unamortized revenue relating to these prepayments in the amounts of $603,000 and $10,606,000 are included in deferred revenue, current at December 31, 2001 and 2000, respectively, and $4,991,000 is included in deferred revenues from related party, non-current at December 31, 2001. The $4,991,000 will be recognized in the Company's income if Abbott unilaterally terminates the Distribution Agreement. If the Company unilaterally terminates the Distribution Agreement without cause (as defined), the Company will be obligated to repay the $4,991,000 to Abbott upon termination of the Distribution Agreement. During the first quarter of each year under the Abbott Distribution Agreement, the Company and Abbott conduct a reconciliation of the annual prepayments made by Abbott against future incremental cartridge sales. The reconciliation for the first quarter of 2002 resulted in a credit due to Abbott of approximately $10.2 million. As a result of this credit due to Abbott at December 31, 2001, the net accounts receivable balance is a liability in the amount of $2.7 million (comprised of gross receivables of $7.5 million offset by a credit balance owed to Abbott of $10.2 million), and is classified as "Accounts payable to related party" within short-term liabilities. 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. Abbott has advised the Company it has reached the minimum three-year growth rate milestone and the Company agrees that the milestone has been met. If the Distribution Agreement is terminated, other than (i) by the Company for cause; 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) a one-time termination fee calculated to compensate Abbott for a portion of its costs in undertaking the distribution relationship, (b) an additional $4,991,000 of unamortized revenue related to the $25,000,000 in prepayments made by Abbott against future incremental product sales, and (c) residual payments for five years following termination based on a declining percentage of Abbott's net sales of the Company's products during the final twelve months of the Distribution Agreement. The Company expects that such payments would have a material impact on its cash flows and results of operations. Under the terms of the Research Agreement, the Company is required to conduct research and develop products primarily to be commercialized by Abbott. Such research and development is to 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 that is developed during the course of work performed under the Research Agreement. In connection with this agreement, reimbursements from Abbott of $2,697,000 and $1,762,000 are included in net revenues in 2000 and 1999, respectively. There were no research and 48 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) development reimbursements from Abbott in 2001 and Abbott is not currently 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 for a period of one year following the termination of the initial term of the Distribution Agreement. 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. 12. INCOME TAXES The difference between income tax expense and the expected tax which that result from the use of the Federal Statutory income tax rate is as follows:
2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Computed tax at statutory Federal rate............... (34.0%) (34.0%) (34.0%) State income taxes, net of Federal benefits.......... (3.3%) (6.8%) 0.0% Foreign (income)/loss not subject to United States tax................................. 0.9% (4.5%) 8.1% Change in valuation allowance........................ 27.6% 32.1% 24.6% Other................................................ 4.2% 2.9% 1.3% ---- ----- --- Income tax (benefit)/expense......................... (4.6%) (10.3%) 0.0% ==== ===== ===
In 2001 and 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 2001 and 2000, the Company recognized $1,141,000 and $867,000, respectively, from the sale of State of New Jersey income tax benefits. 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. At December 31, 2001, the Company had net operating loss carryforwards of approximately $102,510,000 for New Jersey income tax purposes, which expire in varying amounts through 2008. At December 31, 2001, the Company had net operating loss carryforwards of approximately $184,340,000 for United States Federal income tax purposes, which expire in varying amounts through 2021. The Company also has unused research and development tax credits of approximately $1,435,000 for United States Federal income tax purposes which expire in varying amounts through 2021. The timing and manner in which the United States Federal operating loss carryforwards and credits are utilized in any year by the Company may be limited by Internal Revenue Code Section 382. At December 31, 2001, the Company had net operating loss carryforwards of approximately $1,031,000 for Ontario provincial tax purposes, which expire in 2006. The Company has unused Canadian and Ontario provincial research and development expense carryforwards of approximately $14,315,000 and $11,416,000, respectively, which have an unlimited life. Additionally, the Company has unused Canadian investment tax credits of approximately $2,734,000 which expire in varying amounts through 2011. The Company accounts for income taxes in accordance with the provisions of SFAS No. 109. SFAS No. 109 requires 49 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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, 2001 and 2000 was approximately $7,958,000 and $4,303,000, respectively. Temporary differences and carryforwards, which give rise to the deferred tax assets and liabilities at December 31, 2001 and 2000, are as follows:
2001 2000 Deferred Tax Deferred Tax IN THOUSANDS OF DOLLARS Assets (Liabilities) Assets (Liabilities) - ------------------------------------------------------------------------------------------------------------------- Net Operating Loss--United States..................................... $ 62,652 $ 54,268 Net Operating Loss--Canada............................................ 3,166 3,168 Net Operating Loss--Province (Canada)................................. 1,597 1,737 State Taxes.......................................................... 11,190 10,787 Deferred Revenue..................................................... 1,892 3,740 Tax Credits--United States............................................ 1,435 1,463 Tax Credits--Canada................................................... 2,734 2,529 Intangibles.......................................................... 356 (58) Depreciation--United States........................................... (674) (276) Depreciation--Canada.................................................. 512 158 Depreciation--Province (Canada)....................................... 468 218 Other................................................................ 2,364 2,000 -------- --------- 87,692 79,734 -------- --------- Valuation Allowance--United States.................................... (68,025) (61,137) Valuation Allowance--Canada........................................... (6,412) (5,855) Valuation Allowance--Province (Canada)................................ (2,065) (1,955) Valuation Allowance--State............................................ (11,190) (10,787) -------- --------- 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 cash contributions to these plans, and compensation expense in the amount of approximately $171,000, $103,000 and $101,000 was recorded for the years ended December 31, 2001, 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 was 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, alleged infringement by the Company of Nova Biomedical Corporation's ("Nova") U.S. Patent No. 4,686,479 (the "Patent"). 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. The Federal Circuit affirmed two of the grounds of the dismissal (proper interpretation of the Patent and 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 scheduled for July 2001. Management concluded that the uncertainty inherent in any jury trial as well as the drain on the Company's resources merited a resolution of this lawsuit. Accordingly, on July 26, 2001 the Company entered 50 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) into a license agreement and a settlement agreement under which the Company agreed to pay Nova $10.5 million, which was recorded as a charge in the second quarter of 2001. Pursuant to the agreements, $6.5 million was paid on July 26, 2001, a retroactive royalty of $0.5 million was paid on August 14, 2001 for the period of January 1, 2001 through June 30, 2001, and $3.5 million plus interest was due to be paid over one year in equal quarterly installments, pursuant to a secured promissory note. The promissory note was prepaid on August 3, 2001. The license agreement provides for the payment to Nova of a royalty equal to 4% of the invoice price of products sold in the United States after January 1, 2001, which products determine hematocrit levels according to any method used by the Company prior to December 31, 2000, as well as any method covered by the Patent. The royalties are payable through the life of the Patent (July 22, 2005). The Company has commercialized products that determine hematocrit levels using a method that was not used by the Company prior to December 31, 2000 and which the Company believes is not covered by the Patent. Consequently, the Company does not believe that it owes any additional royalties to Nova. On February 28, 2002, Nova filed a demand for arbitration claiming that the method by which the Company's products determine hematocrit are covered under the Patent and the license agreement. Nova is seeking royalties from July 1, 2001 to date. If the Company is unsuccessful in defending its position in the arbitration and does not develop new methods that do not utilize the covered technology, it may be forced to continue to pay royalties to Nova through the life of the Patent and approximately $0.6 million in respect of products sold through December 31, 2001. The Company plans to defend this matter vigorously. 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. The Company and Abbott are in disagreement over the amount of money Abbott is entitled to for the sharing of certain cartridge production cost savings resulting from an increase in sales volume. This disputed item relates to different interpretations of certain terms of the Agreement between Abbott and the Company. If this disagreement is not resolved amicably, under the Distribution Agreement between the Company and Abbott it must be resolved through binding arbitration. Management of the Company believes that Abbott's position on this issue in dispute is without merit and that, in the event that this issue is resolved through arbitration, the Company will not incur any additional liability to Abbott. The disagreement regarding the sharing of certain cartridge production cost savings resulting from an increase in sales volume over the past three years is approximately $1.0 million at December 31, 2001, and if this matter is resolved in favor of Abbott, which management of the Company believes is unlikely, the Company's cost of goods sold would increase by up to the amount in dispute. All adjustments would be made when, and if, it is determined that an unfavorable outcome to the Company is probable. 51 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. 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, - ---------------------------------------------------------------------------------------------------------------- 2001 2000 1999 Net revenues: United States.......................................... $44,123 $39,973 $31,437 Canada................................................. 238 302 271 Japan.................................................. 6,248 6,621 4,610 Other International.................................... 8,223 8,141 8,907 ------- ------- ------- Total.................................................. $58,832 $55,037 $45,225 ======= ======= =======
IN THOUSANDS OF DOLLARS Year Ended December 31, - ------------------------------------------------------------------------------------------ 2001 2000 Long-lived assets: United States.......................................... $ 3,840 $ 3,991 Canada................................................. 13,074 15,646 ------- ------- Total.................................................. $16,914 $19,637 ======= =======
The Company's total net revenues from Abbott were approximately $49,600,000, $45,927,000 and $35,499,000 for the years ended December 31, 2001, 2000 and 1999, respectively. 52 i-STAT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2001 First Second Third Fourth IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------------------------------------- Net revenues..................................... $ 12,328 $ 14,367 $ 14,586 $ 17,551 Operating loss................................... ($4,129) ($14,410) ($2,798) ($3,819) Net loss available to Common Stockholders........ ($3,826) ($14,222) ($5,228)1,2 ($1,811)1 Basic and diluted net loss per share............. ($0.21) ($0.78) ($0.27) ($0.09) Weighted average shares used in computing basic and diluted net loss per share available to Common Stockholders............. 18,232,494 18,305,715 19,306,880 19,822,672
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.... ($0.29) ($0.19) ($0.01) $0.04 Weighted average shares used in computing basic net income (loss) per share............ 15,871,683 18,004,095 18,060,265 18,104,346 Weighted average shares used in computing diluted net income (loss) per share...................... 15,871,683 18,004,095 18,060,265 19,305,72
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. 1 Net loss available to Common Stockholders for the third quarter of 2001 includes a $1.8 million charge for accretion of the beneficial conversion feature related to the Series C Stock. This accretion was reversed in the fourth quarter of 2001 as a result of the redemption of all outstanding shares of Series C Stock. Thus, the fourth quarter of 2001 includes a benefit of $1.8 million related to this reversal. 2 Net loss available to Common Stockholders and basic and diluted net loss per share amounts are $0.4 million and $0.02, respectively, greater than the amounts originally reported in the Company's Form 10-Q for the quarter ended September 30, 2001 because of additional accretion associated with financing costs allocated to the Series C Stock. 53 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 March 26, 2002 appearing in this 2001 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 March 26, 2002 54 SCHEDULE II i-STAT CORPORATION VALUATION and Qualifying Accounts
Balance at Charged to Charged to Balance at In thousands of dollars, except Beginning Costs and Other end of share and per share data of Period Expenses Accounts Deductions Period - -------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 2001: Reserve for Doubtful Accounts................... $ 28 $ -- $ -- $ -- $ 28 ========= ========= ======== ======= ========== 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, 2001: Tax Valuation Reserve........................... $ 79,734 $ 7,958 $ -- $ -- $ 87,692 ========= ========= ======== ======= ========== 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 ========= ========= ======== ======= ==========
* Trade accounts receivable written-off against the reserve for doubtful accounts. 55 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 1st day of April, 2002. i-STAT CORPORATION By: /s/ William P. Moffitt -------------------------------- William P. Moffitt President and Chief Executive Officer POWERS 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 April 1, 2002 - ------------------------------------ Director (Principal Executive Officer) William P. Moffitt /s/ Roger J. Mason Vice President of Finance, Treasurer and Chief April 1, 2002 - ------------------------------------ Financial Officer (Principal Financial and Roger J. Mason Accounting Officer) /s/ J. Robert Buchanan Chairman of the Board April 1, 2002 - ------------------------------------ J. Robert Buchanan /s/ Stephen D. Chubb Director April 1, 2002 - ------------------------------------ Stephen D. Chubb /s/ Sam H. Eletr Director April 1, 2002 - ------------------------------------ Sam H. Eletr /s/ Daniel R. Frank Director April 1, 2002 - ------------------------------------ Daniel R. Frank /s/ Lionel N. Sterling Director April 1, 2002 - ------------------------------------ Lionel N. Sterling /s/ Anne M. VanLent Director April 1, 2002 - ------------------------------------ Anne M. VanLent
56 Exhibit Index Exhibit No. Description 3.7 Certificate of Designation, Preferences and Rights of Series D Convertible Preferred Stock 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. EX-3.7 3 y58910ex3-7.txt CERTIFICATE OF DESIGNATION i-STAT CORPORATION CERTIFICATE OF DESIGNATION OF SERIES D CONVERTIBLE PREFERRED STOCK i-STAT Corporation (the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware, does hereby certify that, pursuant to authority conferred upon the Corporation's Board of Directors (the "Board") by the Corporation's Restated Certificate of Incorporation, as amended and including any Certificate of Designations filed therewith (the "Certificate"), and pursuant to Section 151 of the General Corporation Law of the State of Delaware, the Board at a meeting duly held on December 5, 2001, adopted resolutions (i) authorizing a new series of the Corporation's previously authorized preferred stock, $0.10 par value per share, and (ii) providing for the designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions thereof, of 30,000 shares of Series D Convertible Preferred Stock of the Corporation, as follows: RESOLVED, that the Corporation is authorized to issue 30,000 shares of Series D Convertible Preferred Stock, $0.10 par value per share, which shall have the following powers, designations, preferences and other special rights: Section 1. Designation, Amount and Par Value. The series of preferred stock shall be designated as the Corporation's Series D Convertible Preferred Stock (the "Preferred Stock") and the number of shares so designated shall be 30,000 (which shall not be subject to increase without the consent of the holders (each, a "Holder" and collectively, the "Holders") of a majority of the Preferred Stock.). Each share of Preferred Stock shall have a par value of $.10 and a stated value equal to $1,000 (the "Stated Value"). Capitalized terms used and not defined elsewhere in this Certificate of Designation shall have the respective meanings ascribed to them in Section 9. Section 2. Ranking. The Preferred Stock shall rank, with respect to dividend distributions and distributions upon a Liquidation Event (as defined herein), senior to all classes of common stock of the Corporation (including the Common Stock) and senior to any other class of capital stock or series of preferred stock established by the Corporation prior to or after the date hereof (the "Original Issue Date"). All classes of Common Stock of the Corporation and any other class of capital stock or series of preferred stock established prior to or after the Original Issue Date to which the Preferred Stock is senior are collectively referred to herein as "Junior Securities." Section 3. Dividends. (a) Each holder of Preferred Stock shall be entitled to receive, out of funds legally available for the payment of dividends, cumulative dividends in an amount per share equal to the Applicable Percentage (as defined herein) of the Series D Liquidation Preference Payment (as defined herein) as of the immediately preceding Dividend Payment Date (as defined herein) (or, for the initial Dividend Period (as defined herein), as of the Original Issue Date). Dividends paid pursuant to this Section 3(a) shall be payable in arrears on March 31, June 30, September 30 and December 31 of each year (each of such dates being a "Dividend Payment Date" and each such quarterly period being a "Dividend Period"). Each such dividend shall be payable to the holders of record of shares of the Preferred Stock on the 10th day prior to the relevant Dividend Payment Date, as they appear on the stock records of the Corporation at the close of business on such record dates. Such dividends shall accrue quarterly from the Original Issue Date to the Holders thereof (except that dividends on any amounts added to the Series D Liquidation Preference Payment pursuant to Section 3(b) shall accrue from the date such amounts are added to the Series D Liquidation Preference Payment), whether or not declared by the Board and whether or not in any Dividend Period or Periods there shall be funds of the Corporation legally available for the payment of such dividends. (b) At the Corporation's option, dividends may be paid in cash. If dividends are not paid in cash on any Dividend Payment Date for the immediately preceding Dividend Period (or portion thereof if less than a full Dividend Period), the unpaid amount shall be added to the Series D Liquidation Preference Payment for purposes of calculating succeeding Dividend Periods' dividends. Notwithstanding anything else contained herein, once any dividends for the immediately preceding Dividend Period (or portion thereof if less than a full Dividend Period) are so added to the Series D Liquidation Preference Payment, such dividends will no longer be payable in cash. (c) The "Applicable Percentage" shall be eight percent (8%) per annum; provided that if at any time the Per Share Market Value of the Common Stock is at or above $15.00 per share (subject to equitable adjustment for stock splits, combinations, stock dividends and similar events) for 45 consecutive Trading Days, such rate shall be reduced to two percent (2%) per annum beginning on the next Trading Day and shall continue at such rate unless and until the Per Share Market Value of the Common Stock is below $10.00 per share (subject to equitable adjustment for stock splits, combinations, stock dividends and similar events) for 45 consecutive Trading Days, at which point such rate shall re-adjust to eight percent (8%) per annum the next Trading Day. The adjustment to the Applicable Percentage pursuant to this Section 3(c) shall continue until all shares of Preferred Stock shall have been converted pursuant to Section 7 or redeemed pursuant to Section 8 hereto. The Applicable Percentage for the initial Dividend Period, or any other period shorter or longer than a full Dividend Period, on the Preferred Stock shall be computed on the basis of the actual number of days elapsed over four (4) 90-day quarters and a 360-day year. The Applicable Percentage shall also be subject to adjustment in accordance with Section 8(c) hereof. Section 4. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Corporation (a "Liquidation Event"), whether voluntary or involuntary, the Holders of the shares of Preferred Stock then outstanding shall be entitled to receive, prior and in preference to any payment or distribution of any of the assets of the Corporation to the holders of any Junior Securities, by reason of their ownership thereof, an amount per share equal to the sum of $1,000 per share (the "Series D Issuance Price") (subject to equitable adjustment for stock splits, combinations, stock dividends and similar events) and (ii) an amount equal to all accrued and/or -2- declared but unpaid dividends on such share, computed to the date payment thereof is made as provided in Section 3 hereof (together with the Series D Issuance Price, the "Series D Liquidation Preference Payment"). If upon the occurrence of any Liquidation Event, the assets and funds to be distributed among the holders of the Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire assets and funds of the Corporation available for distribution shall be distributed pro rata among the Holders of the Preferred Stock in proportion to the number of shares of Preferred Stock owned by each such Holder bears to the total number of shares of Preferred Stock then outstanding. (b) (i) For purposes of this Section 4(b)(i), (x) any merger, reorganization or consolidation of the Corporation into or with any other corporation or entity (including a stock for stock exchange or stock for cash exchange), or (y) a sale, conveyance, transfer, license, lease, abandonment or other disposition or transfer of all or substantially all of the assets of the Corporation, including without limitation, all or substantially all of its intellectual property (other than by means of a license in the ordinary course of business), in one or more related transactions shall be deemed a Liquidation Event of the Corporation unless the holders of capital stock of the Corporation immediately prior thereto shall, immediately thereafter, hold as a group the right to cast at least a majority of votes of all holders of voting securities of the resulting or surviving corporation or entity, or the parent of such surviving corporation or entity, on any matter on which any such holder of voting securities shall be entitled to vote. (ii) In any such events, if the consideration received by the Corporation is other than cash, its value will be deemed its fair market value; provided that, the fair market value of any securities or assets shall be valued as follows: (x) Securities not subject to an investment letter or other similar restrictions on free marketability: (A) If traded on Nasdaq, the value shall be deemed to be the average of the closing bid prices of the securities on Nasdaq or such exchange, as applicable, over the thirty (30) day period ending three (3) days prior to the consummation of the Liquidation Event; (B) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty (30) day period ending three (3) days prior to the consummation of the Liquidation Event; and (C) If there is no active public market, the value shall be the fair market value thereof, as determined by an investment banking firm selected by the Corporation and reasonably approved by holders of a majority of the then outstanding shares of Preferred Stock. (y) The method of valuation of securities subject to an investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to make an -3- appropriate discount from the market value determined as above in (x)(A), (B) or (C) to reflect the approximate fair market value thereof, as determined by an investment banking firm selected by the Corporation and reasonably approved by holders of a majority of the then outstanding shares of Preferred Stock. (c) The Corporation shall give each holder of record of Preferred Stock written notice of an impending Liquidation Event not later than fifteen (15) days prior to the stockholders' meeting called to approve such transaction or not later than fifteen (15) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending Liquidation Event and the provisions of this Section 4, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than fifteen (15) days after the Corporation has given the first notice provided for herein or sooner than fifteen (15) days after the Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Preferred Stock that represent at least a majority of the voting power of all then outstanding shares of the Preferred Stock. Section 5. Voting Rights. Except as may be otherwise provided in this Certificate of Designation or required by law, the Preferred Stock shall vote together with all other classes and series of stock of the Corporation as a single class on all actions to be taken by the stockholders of the Corporation. The Holders shall have the right to one vote on each such action for each whole share of Common Stock into which such Preferred Stock could then be converted (taking into account the Conversion limitations then applicable pursuant to Section 7(a)(iii), and with respect to such vote, such Holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the By-Laws of the Corporation. Section 6. Protective Provisions. The Corporation shall not, and shall not permit any of its Subsidiaries to, without the affirmative vote or written consent of the Holders of a majority of the then outstanding shares of Preferred Stock, voting or consenting as a separate class: (a) make any Restricted Payment (as defined below). For the purposes hereof, "Restricted Payment" means (i) the declaration or payment of any dividends or any other distributions of any sort by the Corporation in respect of its Junior Securities, (ii) the direct or indirect purchase, redemption or other acquisition or retirement for value of any of the Corporation's capital stock or any security exercisable or exchangeable for its capital stock (other than the redemption of the Preferred Stock) or the exercise by the Corporation of any option to exchange any capital stock that by its terms is exchangeable solely at its option, or (iii) the setting apart of money or other property for any redemption, purchase or other analogous fund for the redemption, purchase, or acquisition of any of the Corporation's capital stock or any security exercisable or exchangeable for the Corporation's capital stock; -4- (b) engage in Affiliated Party Transactions, except for transactions (i) on an arm's-length basis for fair value with Abbott Laboratories or other distribution or technology partners; (ii) with any Wholly-Owned Subsidiary; (iii) on an arm's-length basis for fair value with a Qualified Joint Venture; (iv) made for tax planning purposes; (iv) where the aggregate value of the transaction is not in excess of $100,000 or (v) that are loans to officers and employees on terms approved by a majority of the entire Board, provided that the aggregate principal amount and accrued interest on loans to officers and employees outstanding may not exceed $5,000,000 at any one time; (c) reorganize, reclassify or recapitalize any shares of capital stock of the Corporation; (d) acquire any assets (whether by means of an asset purchase, stock purchase or merger) in excess of $1,000,000 in any one transaction or series of related transactions that take place within a twelve-month period that are not reasonably related to the Corporation's business as presently conducted; (e) convey, sell, lease, assign, transfer, exchange or otherwise dispose of any of its property, business or assets whether now owned or hereafter acquired in excess of $1,000,000 in any one transaction or series of related transactions that take place within a twelve-month period, except for: (i) the sale or other disposition of any tangible or intangible personal property that has become obsolete or worn out and is disposed of in the ordinary course of business, (ii) the sale or other disposition of inventory made in the ordinary course of business, (iii) capitalized leases and sale/leaseback transactions (subject to the rights of the Purchasers (as such term is defined in the Purchase Agreement) in Section 4.7 of the Purchase Agreement and to the provisions of Section 6(g) hereof) or (iv) the sale of the Corporation which is structured as a sale of all or substantially all of the assets of the Corporation; (f) make any advance, loan, extension of credit or capital contribution to, or purchase any stock (other than in connection with acquisitions made by the Corporation in accordance with paragraph (d)), bonds, notes, debentures or other securities of, or make any other investment in, any Person except: (i) the Corporation may make investments in, or loans or advances to, any Wholly-Owned Subsidiaries and any Wholly-Owned Subsidiaries may make investments in, or loans or advances to, the Corporation, (ii) the Corporation or its Wholly-Owned Subsidiaries may acquire and hold receivables owing to it, if created in the ordinary course of business and payable or dischargeable in accordance with customary trade terms, (iii) the Corporation may make Full Recourse Loans to Qualified Joint Ventures pro rata to their equity ownership in such Qualified Joint Ventures; provided that such Full Recourse Loans are made on the same terms as, and contemporaneously with, Full Recourse Loans made by the other equity owners of such Qualified Joint Venture; (iv) the Corporation may make loans to officers and employees on terms approved by a majority of the entire Board, provided that the aggregate principal amount and accrued interest on loans outstanding to officers and employees may not exceed $5,000,000 at any one time; (v) direct obligations of the government of the United States of America or any agency or instrumentality therein, (vi) interest-bearing certificates of deposit or repurchase agreements issued by a commercial banking institution located in and authorized to do business as a commercial bank in the United States, and (vii) -5- money market accounts maintained at a commercial bank located in and authorized to do business as a commercial bank in the United States; (g) create, incur, assume, permit, guarantee or otherwise become or remain liable, directly or indirectly, with respect to any Indebtedness except Indebtedness in the aggregate amount at any one time outstanding of $12,000,000, provided that Corporation may, or permit any of its Subsidiaries to, create, incur, assume, permit, guarantee or otherwise become or remain liable, directly or indirectly, for Indebtedness in excess of $12,000,000 at any one time outstanding if at the date of such creation, incurrence, permission, guarantee or becoming or remaining liable for such Indebtedness in excess of $12,000,000, the Corporation and its consolidated Subsidiaries are meeting or surpassing the Operating Targets. The Operating Targets shall mean targets, on a consolidated basis, for the Corporation's revenues, operating income, earnings before interest, taxes, depreciation and amortization, and net income as proposed by the Corporation and approved by the Holders of a majority of the outstanding shares of Preferred Stock in their sole and absolute discretion. For so long as the Corporation and its Subsidiaries are not meeting or surpassing the Operating Targets at a time when there is more than $12,000,000 of Indebtedness in the aggregate outstanding (the "Excess Indebtedness"), the Corporation shall not, or shall not permit any of its Subsidiaries, to incur, assume, permit, guarantee or otherwise become or remain liable, directly or indirectly, with respect to any additional Indebtedness but may refinance or renew the Excess Indebtedness on terms no less favorable to the Corporation and its Subsidiaries than the Excess Indebtedness being refinanced or renewed; (h) permit to exist limitations on the payment of dividends or distributions by the Corporation (with respect to the Preferred Stock) or by its Subsidiaries; (i) amend, alter or repeal its Certificate of Incorporation, this Certificate of Designation or By-laws (whether by merger, consolidation, reclassification, combination or otherwise), or waive any provisions thereof, in a manner that would adversely affect the rights, preferences, privileges or powers of the Preferred Stock or which would increase or decrease the amount of authorized shares of Preferred Stock; (j) create or authorize the creation of or issuance of (including without limitation, by way of merger, consolidation, reclassification, recapitalization or otherwise), or obligate itself to authorize or issue, any equity security of the Corporation, ranking senior to, or pari passu with, the Preferred Stock with respect to rights, privileges, liquidations preferences, dividends or distributions; (k) effect any liquidation, dissolution or winding up of the Corporation; or (l) enter into any contract, agreement or understanding with respect to any of the foregoing. Section 7. Conversion. (a) (i) Optional Conversion. Subject to the limitations set forth in Section 7(a)(iii), each share of Preferred Stock shall be convertible into shares of Common Stock at the Conversion Ratio, at the option of the Holder, at any time and from time to time. Holders shall -6- effect conversions by providing the Corporation with the form of conversion notice attached hereto as Exhibit A (a "Conversion Notice"). Each Conversion Notice shall specify the number of shares of Preferred Stock to be converted, the number of shares of Preferred Stock owned prior to the conversion at issue, the number of shares of Preferred Stock owned subsequent to the conversion at issue and the date on which such conversion is to be effected, which date may not be prior to the date the Holder delivers such Conversion Notice by facsimile (the "Conversion Date"). The number of shares of Preferred Stock shown as owned by the Holder prior to and giving effect to a conversion shall control absent manifest or mathematical error. If no Holder Conversion Date is specified in a Conversion Notice, the Holder Conversion Date shall be the date that such Conversion Notice is deemed delivered hereunder. To effect conversions of Preferred Stock, a Holder shall not be required to surrender the certificate(s) representing such shares of Preferred Stock to the Corporation unless all of the shares of Preferred Stock represented thereby are so converted. (ii) [Intentionally Omitted] (iii) Certain Conversion Restrictions. Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by a Holder that is not an Institutional Investor upon any conversion of shares of Preferred Stock (or otherwise in respect hereof) shall, until such time as the Standstill Agreement has been terminated or has expired, be limited to the extent necessary to insure that, following such conversion, the total number of shares of Common Stock then beneficially owned by such Holder and its affiliates and any other persons whose beneficial ownership of Common Stock would be aggregated with such Holder's for purposes of Section 13(d) of the Exchange Act, does not exceed 14.99% of the total number of issued and outstanding shares of Common Stock (including for such purpose the shares of Common Stock issuable upon such exercise). Upon termination or expiration of the Standstill Agreement, the number of shares of Common Stock that may be acquired by such Holder upon any conversion of shares of Preferred Stock (or otherwise in respect hereof) shall be limited to the extent necessary to prevent such Holder from becoming an "Acquiring Person" under the Plan as a result of such conversion. For such purposes, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. Each delivery of a Conversion Notice hereunder will constitute a representation by a Holder that it has evaluated the limitation set forth in this paragraph and determined that issuance of the full number of Underlying Shares requested in such Conversion Notice is permitted under this paragraph. The Corporation will have no obligation to issue shares of Common Stock in excess of the limitation referred to in this Section until such time, if any, as such shares of Common Stock may be issued in compliance with such limitation. (b) (i) Not later than three Trading Days after each Conversion Date, the Corporation will issue and deliver to the Holder at the Corporation's expense a certificate or certificates registered in such name or names as the Holder may direct which shall be free of restrictive legends and trading restrictions (other than those required by Section 4.1 of the Purchase Agreement) representing the number of shares of Common Stock being acquired upon the conversion of shares of Preferred Stock. The Corporation shall, upon request of the Holder, if available, use its best efforts to deliver any certificate or certificates required to be delivered by the Corporation under this Section electronically through the Depository Trust Corporation or -7- another established clearing corporation performing similar functions. If in the case of any Conversion Notice such certificate or certificates are not delivered to or as directed by the applicable Holder by the fourth Trading Day after the Conversion Date, the Holder shall be entitled to elect by written notice to the Corporation at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Corporation shall immediately return the certificates representing the shares of Preferred Stock tendered for conversion. (ii) In addition to any other rights available to the Holder, if the Corporation fails to deliver to the Holder such certificate or certificates pursuant to Section 3(b)(i), by the fourth Trading Day after the Conversion Date, and if after such fourth Trading Day the Holder purchases (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by such Holder of the Underlying Shares which the Holder was entitled to receive upon such conversion (a "Buy-In"), then the Corporation shall (A) pay in cash to the Holder the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such Holder was entitled to receive from the conversion at issue multiplied by (2) the market price of the Common Stock at the time of the sale giving rise to such purchase obligation and (B) at the option of the Holder, either return the shares of Preferred Stock for which such conversion was not honored or deliver to such Holder the number of shares of Common Stock that would have been issued had the Corporation timely complied with its conversion and delivery obligations under Section 3(b)(i). For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of shares of Preferred Stock with respect to which the market price of the Underlying Shares on the date of conversion totaled $10,000, under clause (A) of the immediately preceding sentence the Corporation shall be required to pay the Holder $1,000. The Holder shall provide the Corporation written notice indicating the amounts payable to the Holder in respect of the Buy-In. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Corporation's failure to timely deliver certificates representing shares of Common Stock upon conversion of the shares of Preferred Stock as required pursuant to the terms hereof. (c) (i) The conversion price for each share of Preferred Stock in effect on any Conversion Date (the "Conversion Price") shall equal $8.00 (subject to equitable adjustment for stock splits, combinations, stock dividends and similar events). (ii) If the Corporation, at any time while shares of Preferred Stock are outstanding, shall distribute to all holders of Common Stock (and not to the Holders) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security, then in each such case the Conversion Price at which each share of Preferred Stock shall thereafter be convertible shall be determined by multiplying the Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Per Share Market Value determined as of the record date mentioned above, and of which the numerator shall be such Per Share Market Value on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common -8- Stock as determined by the Board in good faith. If the Holder shall dispute the findings of the Corporation's Board, then such fair market value shall be determined by an investment banking firm selected by the Corporation and reasonably approved by the Holders of a majority of the outstanding Preferred Stock. In either case the adjustments shall be described in a statement provided to the Holders of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above. (iii) All calculations under this Section 7 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Corporation or its Subsidiaries, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (iv) Whenever the Conversion Price is adjusted pursuant to the terms hereof, the Corporation shall promptly mail to each Holder a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. (v) In case of any reclassification, reorganization or recapitalization of the Common Stock, or any compulsory share exchange pursuant to which the Common Stock is entitled to receive or is converted into other securities, cash or property, the Holders shall have the right thereafter to convert such shares only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, reorganization, recapitalization or share exchange, and the Holders shall be entitled upon such event to receive such amount of securities, cash or property as a holder of the number of shares of Common Stock of the Corporation into which such shares of Preferred Stock could have been converted immediately prior to such reclassification, reorganization, recapitalization or share exchange would have been entitled. This provision shall similarly apply to successive reclassifications or share exchanges. The Corporation shall not effect any transaction described in this subsection unless the resulting successor or acquiring entity (if not the Corporation) assumes by written instrument the obligation to deliver to the Holders of the Preferred Stock such shares of stock and/or securities as, in accordance with the foregoing provisions, the Holders of Preferred Stock may be entitled to receive. (vi) Subject to Section 8, in case of any merger or consolidation of the Corporation with or into another Person, sale by the Corporation of more than one-half of the assets of the Corporation (on an as valued basis) in one or a series of related transactions or similar transactions, a Holder shall have the right thereafter to convert its shares of Preferred Stock into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger, consolidation or sale, and such Holder shall be entitled upon such event or series of related events to receive such amount of securities, cash and property as the shares of Common Stock into which such shares of Preferred Stock could have been converted immediately prior to such merger, consolidation or sale would have been entitled. The terms of any such merger, sale or consolidation shall include such terms so as continue to give the Holders the right to receive the securities, cash and property set forth -9- in this Section upon any conversion or redemption following such event. This provision shall similarly apply to successive such events. The Corporation shall not effect any transaction described in this subsection unless the resulting successor or acquiring entity (if not the Corporation) assumes by written instrument the obligation to deliver to the Holders of the Preferred Stock such shares of stock and/or securities as, in accordance with the foregoing provisions, the Holders of Preferred Stock may be entitled to receive. (vii) If (a) the Corporation shall declare a dividend (or any other distribution) on the Common Stock, (b) the Corporation shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (c) the Corporation shall authorize the granting to all holders of Common Stock, rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (d) the approval of any stockholders of the Corporation shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Corporation is a party, any sale or transfer of all or substantially all of the assets of the Corporation, or any compulsory share of exchange whereby the Common Stock is converted into other securities, cash or property, or (e) the Corporation shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation; then the Corporation shall notify the Holders at their last addresses as they shall appear upon the stock books of the Corporation, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange. Holders are entitled to convert shares of Preferred Stock during the 20-day period commencing the date of such notice to the effective date of the event triggering such notice. (d) The Corporation covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock solely for the purpose of issuance upon conversion of Preferred Stock, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders, not less than such number of shares of Common Stock as shall be issuable upon the conversion of all outstanding shares of Preferred Stock. The Corporation covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized and issued and fully paid and nonassessable. (e) Upon a conversion hereunder the Corporation shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Per Share Market Value at such time. If any fraction of an Underlying Share would, except for the provisions of this Section, be issuable upon a conversion hereunder, the Corporation shall pay an amount in cash equal to the Conversion Ratio multiplied by such fraction. -10- (f) The issuance of certificates for Common Stock on conversion of Preferred Stock shall be made without charge to the Holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Corporation shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such shares of Preferred Stock so converted. (g) Any and all notices or other communications or deliveries to be provided by the Holders of the Preferred Stock hereunder, including, without limitation, any Conversion Notice, shall be in writing and delivered personally, by facsimile or sent by a nationally recognized overnight courier service, addressed to the attention of the Chief Financial Officer of the Corporation addressed to 104 Windsor Center Drive, East Windsor, NJ 08520, Facsimile No.: (609) 243-9311, attention Chief Financial Officer, or to such other address or facsimile number as shall be specified in writing by the Corporation for such purpose. Any and all notices or other communications or deliveries to be provided by the Corporation hereunder shall be in writing and delivered personally, by facsimile or sent by a nationally recognized overnight courier service, addressed to each Holder at the facsimile telephone number or address of such Holder appearing on the books of the Corporation, or if no such facsimile telephone number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:30 p.m. (New York City time)(with confirmation of transmission), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:30 p.m. (New York City time) (with confirmation of transmission) on any date and earlier than 11:59 p.m. (New York City time) on such date (with confirmation of transmission), (iii) upon receipt, if sent by a nationally recognized overnight courier service (next day service specified), or (iv) upon actual receipt by the party to whom such notice is required to be given. Section 8. Redemption. (a) Mandatory Redemption. The Corporation shall not have the right to call or redeem at any time all or any shares of Preferred Stock, except as expressly authorized herein. On the Mandatory Redemption Date, the Corporation shall redeem all of the shares of Preferred Stock. The "Mandatory Redemption Date" shall be the tenth (10th) anniversary of the Original Issue Date or if such date is not a Trading Day, the first Trading Day thereafter. (b) Optional Redemption. At any time after the sixth (6th) anniversary of the Original Issue Date (the "Optional Redemption Date", and together with the Mandatory Redemption Date, the "Redemption Date"), the Corporation may redeem at its option all of the shares of Preferred Stock held by the Holders by providing written notice (the "Notice") thereof to the Holders on a date not less than fifteen (15) and not more than sixty (60) days prior to the Optional Redemption Date which shall be fixed by the Corporation and specified on the Notice; provided, that the Corporation may redeem less than all of the shares of Preferred Stock held by the Holders only upon the consent of the Holders of a majority of shares of Preferred Stock. In the event the Corporation redeems pursuant to this Section 8(b) less than all of the shares of -11- Preferred Stock held by the Holders upon the consent to the Holders of a majority of shares of Preferred Stock, the Corporation shall redeem such shares of Preferred Stock on a pro rata basis determined by the aggregate amount of shares of Preferred Stock held by each Holder. (c) Redemption Price and Payment. The Preferred Stock to be redeemed on a Redemption Date shall be redeemed by paying for each share, in cash, out of any assets of the Corporation legally available therefor, an amount equal to the Redemption Price (as defined below). For purposes of this Section 8(c), the "Redemption Price" shall mean $1,000 plus accrued and unpaid dividends on each outstanding share of Preferred Stock. (d) Mechanics of Redemption. At least 10 but not more than 60 days prior to a Redemption Date, written notice (the "Redemption Notice") shall be given by the Corporation by mail, postage prepaid, or by facsimile or email transmission, to each holder of record (at the close of business on the business day next preceding the day on which the Redemption Notice is given) of shares of Preferred Stock notifying such holder of the redemption and specifying the Redemption Price, the Redemption Date and the place where the Redemption Price shall be payable. The Redemption Notice shall be addressed to each Holder of shares of Preferred Stock to be redeemed at his address as shown by the records of the Corporation. From and after the close of business on the Redemption Date, if on the Redemption Date the Redemption Price is paid or tendered for payment, then notwithstanding that the certificates evidencing any of the shares of Preferred Stock elected to be redeemed shall not have been surrendered, dividends with respect to such shares of Preferred Stock shall cease to accrue and all rights of holders of such shares of Preferred Stock subject to redemption (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. Any shares of Preferred Stock redeemed pursuant to this Section 8 shall be canceled and shall not under any circumstances be reissued; and the Corporation may from time to time take such appropriate corporate action as may be necessary to reduce accordingly the number of authorized shares of Preferred Stock. The Corporation shall not send a Notice to redeem the shares of Preferred Stock pursuant to Section 8(b) unless the assets of the Corporation legally available for redemption are sufficient to redeem the total number of shares of Preferred Stock to be redeemed on an Optional Redemption Date and the Corporation redeems all such shares. In the event of a redemption of Preferred Stock pursuant to Section 8(a), if (i) the assets of the Corporation legally available for redemption of shares of Preferred Stock on the Mandatory Redemption Date are insufficient to redeem the total number of outstanding shares of Preferred Stock to be redeemed on such Mandatory Redemption Date or (ii) the Corporation fails for any other reason to redeem the total number of outstanding shares of Preferred Stock to be redeemed on such Mandatory Redemption Date other than because of a failure on the part of a holder of Preferred Stock to deliver a certificate evidencing such shares (a "Non-Redemption Event"), the holders of shares of Preferred Stock to be redeemed shall share ratably in any assets legally available for redemption of such shares according to the respective amounts which would be payable with respect to the full number of shares owned by them if all such outstanding shares were redeemed in full and with respect to the dividend on the Preferred Stock to be paid under Section 3 hereof, the Applicable Percentage shall increase by 2% over the Applicable Percentage for the prior period on the expiration date of each sixty (60) day period after the Mandatory Redemption Date that the Preferred Stock is not redeemed in full up to a maximum of 16%. The shares of Preferred Stock not redeemed remain -12- outstanding and entitled to all rights and preferences provided herein. At any time thereafter when additional funds of the Corporation are legally available for the redemption of shares of Preferred Stock, such assets will be used immediately to redeem the balance of such shares, or such portion thereof for which assets are then legally available, on the basis set forth above. (e) Non-Redemption Event. (i) Notwithstanding the provisions of Section 3 hereof, in the event of a Non-Redemption Event, the Corporation shall promptly give written notice thereof to each Holder and the Holders shall, immediately upon the giving of written notice to the Corporation by the Holders of at least a majority of the outstanding shares of Preferred Stock voting together as a single class, be entitled to elect the number of additional directors (collectively, the "Series D Directors") which shall provide the Holders with the greater of (x) percentage representation on the Board equal to the ownership percentage of the Corporation represented by the sum of (i) the Preferred Shares held by the Holders on an as converted basis, (ii) all shares of Common Stock held by the Holders and (iii) the shares of Common Stock issuable upon the exercise of unexercised warrants then held by the Holders (in each case without regard to any limitation on percentage ownership as provided for in the Abbott Standstill Agreement, Abbott Purchase Agreement or any other limitation on conversion or exercise) and (y) 20% of the directors on the Board; and the holders of shares of Common Stock and of any other class or series of voting stock, as a class, shall be entitled to elect the remaining members of the Board. (ii) Whenever under the provisions of subsection (i) above the right shall have accrued to the Holders of the shares of Preferred Stock as a class to elect the Series D Directors, the Holders of Preferred Stock shall be entitled immediately thereafter to act by written consent without a meeting to elect the Series D Directors. In the event that the holders of Preferred Stock do not choose to act by written consent in lieu of a meeting, the Board shall, within ten days after delivery to the Corporation at its principal office of a request to such effect by the Holders of at least 10% of the then outstanding shares of Preferred Stock, call a special meeting of the holders of Preferred Stock for the election of directors, to be held upon not less than 20 nor more than 30 days' notice to such holders. At any meeting so called or at any other meeting held while the holders of the outstanding shares of Preferred Stock shall have the voting power provided in subsection (i) above, the holders of a majority of the then outstanding shares of Preferred Stock, present in person or by proxy, shall be sufficient to constitute a quorum for the election of directors as herein provided. So long as the Non-Redemption Event shall continue, any vacancy in the office of a Series D Director may be filled by written consent of the Series D Directors remaining in office or, if none remains in office, by vote of the Holders of a majority of the outstanding shares of Preferred Stock, voting together as a single class. As long as the Non-Redemption Event shall continue, holders of any of the outstanding capital stock (other than the Preferred Stock) of the Corporation entitled to vote on the election of directors shall not be entitled to vote on the election or removal of the Series D Directors. (iii) Upon redemption of all outstanding Preferred Stock pursuant to this Section 8, the holders of the shares of Preferred Stock shall be divested of all of the voting rights specified in subsection (i) above. The term of office of each Series D Director elected by the holders of the Preferred Stock pursuant to such special voting right shall forthwith terminate -13- and the number of directors constituting the entire Board shall be reduced by the number of the Series D Directors. Section 9. Definitions. For the purposes hereof, the following terms shall have the following meanings: "Abbott Purchase Agreement" means the Common Stock Purchase Agreement, dated as of August 3, 1998, between the Corporation and Abbott Laboratories. "Affiliate" means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144 of the Securities Act. "Affiliated Party Transactions" means any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate. "Common Stock" means the Corporation's common stock, par value $0.15 per share, and stock of any other class into which such shares may hereafter have been reclassified or changed. "Conversion Ratio" means, at any time, a fraction, the numerator of which is the Series D Liquidation Preference Payment and the denominator of which is the Conversion Price at such time. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Full Recourse Loan" means a loan for which the liability to the Corporation is not limited to specific assets for payment. "Indebtedness" means (a) all obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all obligations under capitalized leases, (d) all obligations or liabilities of others secured by a lien on any asset of the Corporation or any Subsidiary, irrespective of whether such obligation or liability is assumed, (e) all obligations of the Corporation or any Subsidiary for the deferred purchase price of assets (other than trade debt incurred in the ordinary course of business) and (f) any obligation guaranteeing or intended to guarantee any obligation of any other Person. "Institutional Investor" shall have the meaning set forth in the Plan as in effect on the Original Issuance Date. "Nasdaq" means the Nasdaq National Market. "Per Share Market Value" means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on the -14- Nasdaq or a Subsequent Market, the closing bid price per share of the Common Stock for such date (or the nearest preceding date) on the Nasdaq or such Subsequent Market on which the Common Stock is then listed or quoted; (b) if prices for the Common Stock are then quoted on the OTC Bulletin Board, the closing bid price per share of the Common Stock for such date (or the nearest preceding date) so quoted; (c) if prices for the Common Stock are then reported in the "Pink Sheets" published by the National Quotation Bureau Incorporated (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by a majority-in-interest of the Holders. "Person" means a corporation, an association, a partnership, a limited liability company, an organization, a business, an individual, a government or political subdivision thereof or a governmental agency. "Plan" means the Stockholder Protection Agreement, dated as of June 26, 1995, between the Corporation and First Fidelity Bank, N.A., as rights agent. "Purchase Agreement" means the Securities Purchase Agreement, dated as of December 6, 2001, to which the Corporation and the original Holders are parties, as amended, modified or supplemented from time to time in accordance with its terms. "Qualified Joint Venture" means any joint venture (whether in the form of a corporation, partnership, or other entity) in which the Corporation or a Wholly-Owned Subsidiary has at least a 20% equity interest; provided that the joint venture engages in activity reasonably related to the Corporation's business as conducted on the Original Issuance Date. "Securities Act" means the Securities Act of 1933, as amended. "Standstill Agreement" means the Standstill Agreement, dated as of August 3, 1998, between the Corporation and Abbott Laboratories. "Subsequent Market" means either the New York Stock Exchange, American Stock Exchange or Nasdaq SmallCap Market. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which 50% or more of the total voting power of shares of capital stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of such Person (or combination thereof) and (ii) any partnership or limited liability company (a) the sole general partner or the managing general partner or member of which is such Person or a Subsidiary of such Person or (b) the only general partners or members of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "Trading Day" means (a) a day on which the shares of Common Stock are traded on the Nasdaq or on such Subsequent Market on which the shares of Common Stock are then listed or quoted, or (b) if the shares of Common Stock are not listed on the Nasdaq or a -15- Subsequent Market, a day on which the shares of Common Stock are traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the shares of Common Stock are not quoted on the OTC Bulletin Board, a day on which the shares of Common Stock are quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided, that in the event that the shares of Common Stock are not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close. "Underlying Shares" means, collectively, the shares of Common Stock into which the shares of Preferred Stock are convertible in accordance with the terms hereof. "Wholly-Owned Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding capital stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person and the Wholly-Owned Subsidiaries of such Person. -16- IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation to be duly executed as of the 10th day of December, 2001. i-STAT Corporation By: /s/ Roger J. Mason -------------------------------------------- Name: Roger J. Mason Title: Vice President of Finance, Treasurer and Chief Financial Officer EXHIBIT A NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to convert shares of Preferred Stock) The undersigned hereby elects to convert the number of shares of Series D Convertible Preferred Stock indicated below, into shares of common stock, par value $0.15 per share (the "Common Stock"), of i-STAT Corporation, a Delaware corporation (the "Corporation"), according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Corporation in accordance therewith. No fee will be charged to the Holder for any conversion, except for such transfer taxes, if any. Conversion calculations: Date to Effect Conversion Number of shares of Preferred Stock to be Converted Stated Value of shares of Preferred Stock to be Converted Number of shares of Preferred Stock remaining after Conversion Number of shares of Common Stock to be Issued Applicable Conversion Price Signature Name Address By the delivery of this Notice of Conversion the undersigned represents and warrants to the Corporation that its ownership of the Common Stock does not exceed the amounts determined in accordance with Section 13(d) of the Exchange Act, specified under Section 7(a)(iii) of the Certificate of Designations governing the rights and privileges of the Series D Convertible Preferred Stock. [Remainder of page intentionally left blank] EX-23 4 y58910ex23.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8/S-3 (File No. 33-48889). Form S-8 (Files No. 33-67456, 33-76152, 33-96114, and 33-65357), Form S-3 (Files No. 33-92796, 333-68770, 333-76934) of i-STAT Corporation of our reports dated March 26, 2002 relating to the consolidated financial statements and financial statement schedule, which appear in this Form 10-K. PricewaterhouseCoopers LLP Florham Park, New Jersey April 1, 2002 -----END PRIVACY-ENHANCED MESSAGE-----