-----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, S+WiRl1JAWTsOQ3ZDeLhj0/0qiKHhVeGDyi9ioH3151c2GPEbNPJMgAYcItYYN7f gxcE+4gQ8GVE8kiYFiSdfQ== 0000950123-98-004789.txt : 19980512 0000950123-98-004789.hdr.sgml : 19980512 ACCESSION NUMBER: 0000950123-98-004789 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980511 SROS: NONE 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-Q SEC ACT: SEC FILE NUMBER: 000-19841 FILM NUMBER: 98615464 BUSINESS ADDRESS: STREET 1: 303A COLLEGE RD EAST CITY: PRINCETON STATE: NJ ZIP: 08540 BUSINESS PHONE: 6092439300 MAIL ADDRESS: STREET 1: 303 COLLEGE ROAD EAST CITY: PRINCETON STATE: NJ ZIP: 08540 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 Commission File Number 0-19841 i-STAT CORPORATION (Exact name of registrant as specified in its charter) Delaware 22-2542664 (State or other jurisdiction of (I.R.S. employer incorporation or organization) Identification No.) 303 College Road East, Princeton, New Jersey 08540 (Address of Principal Executive Offices) (Zip Code) (609) 243-9300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The number of shares outstanding of each of the Issuer's classes of common stock as of the latest practicable date.
Class April 29, 1998 Common Stock, $ .15 par value 13,223,710
2 i-STAT CORPORATION TABLE OF CONTENTS
PAGE NUMBER ------ PART I FINANCIAL INFORMATION ITEM 1 - Financial Statements Consolidated Condensed Statements of Operations and Comprehensive Income for the three months ended March 31, 1998 and 1997 .................... 3 Consolidated Condensed Balance Sheets as of March 31, 1998 and December 31, 1997 ............................ 4 Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 1998 and 1997 .................................. 5 Notes to Consolidated Condensed Financial Statements ..................... 6-8 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations ............................. 9-12 PART II OTHER INFORMATION ITEM 1 - Legal Proceedings ............................................... 13 ITEM 6 - Exhibits and Reports on Form 8-K ................................ 14 SIGNATURES ........................................................................ 15
2 3 i-STAT CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (In thousands of dollars, except share and per share data) (unaudited)
Three Months Ended March 31, -------------------------------- 1998 1997 ------------ ------------ Net sales .............................. $ 8,786 $ 7,806 Cost of sales .......................... 7,690 6,333 ------------ ------------ Gross profit ................. 1,096 1,473 ------------ ------------ Operating expenses: Research and development .......... 1,769 1,569 General and administrative ........ 1,855 1,507 Consolidation of operations ....... 736 -- Sales and marketing ............... 3,272 2,732 ------------ ------------ Total operating expenses ........ 7,632 5,808 ------------ ------------ Operating loss ............... (6,536) (4,335) ------------ ------------ Other income (expense), net ............ 409 341 ------------ ------------ Net loss ............................... (6,127) (3,994) ------------ ------------ Other comprehensive income/(loss) Foreign currency translation ...... (7) 1 ------------ ------------ Comprehensive loss ..................... $ (6,134) $ (3,993) ============ ============ Basic and diluted net loss per share ... $ (0.40) $ (0.30) ============ ============ Shares used in computing basic and diluted net loss per share ........ 15,355,804 13,362,138 ============ ============
The accompanying notes are an integral part of these consolidated condensed financial statements. 3 4 i-STAT CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands of dollars, except share and per share data) (unaudited)
March 31, December 31, 1998 1997 --------- ----------- ASSETS Current assets: Cash and cash equivalents ......................................... $ 28,758 $ 32,914 Accounts receivable, net .......................................... 4,456 5,206 Inventories ....................................................... 5,902 5,927 Prepaid expenses and other current assets ......................... 707 775 --------- --------- Total current assets ......................................... 39,823 44,822 Plant and equipment, net of accumulated depreciation of $17,942 and $16,858 ............................................... 12,925 12,619 Other assets ........................................................... 1,588 1,729 --------- --------- Total assets ................................................. $ 54,336 $ 59,170 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................................. $ 2,193 $ 2,174 Accrued expenses .................................................. 4,892 3,733 Deferred revenue .................................................. 223 218 --------- --------- Total current liabilities .................................... 7,308 6,125 --------- --------- Stockholders' equity: Preferred Stock, $.10 par value, shares authorized 7,000,000: Series A Junior Participating Preferred Stock, $.10 par value, 1,500,000 shares authorized; none issued ..................... -- -- Series B Preferred Stock, $.10 par value, 2,138,702 shares authorized and issued ....................... 214 214 Common Stock, $.15 par value, shares authorized 25,000,000; shares issued 13,224,227 at March 31, 1998 and 13,203,527 at December 31, 1997 ............................................ 1,984 1,981 Additional paid-in capital ........................................ 209,879 209,594 Other, net ........................................................ (384) (194) Accumulated deficit ............................................... (164,407) (158,273) Accumulated other comprehensive loss related to foreign currency translation ................................. (258) (277) --------- --------- Total stockholders' equity .............................. 47,028 53,045 --------- --------- Total liabilities and stockholders' equity .............. $ 54,336 $ 59,170 ========= =========
The accompanying notes are an integral part of these consolidated condensed financial statements. 4 5 i-STAT CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands of dollars) (unaudited)
Three Months Ended March 31, ------------------------ 1998 1997 -------- -------- Cash flows from operating activities: Net loss ...................................................... $ (6,127) $ (3,994) Adjustments to reconcile net loss to net cash used in operating activities ............................................... 930 107 Change in assets and liabilities .............................. 2,193 574 -------- -------- Net cash used in operating activities .................... (3,004) (3,313) -------- -------- Cash flows from investing activities: Purchase of equipment ......................................... (1,390) (1,349) Other ......................................................... (45) (29) -------- -------- Net cash used in investing activities .................... (1,435) (1,378) -------- -------- Cash flows from financing activities: Proceeds from sale of Common Stock ............................ 288 102 -------- -------- Net cash provided by financing activities ................ 288 102 -------- -------- Effect of currency exchange rate changes on cash ................... (5) (27) -------- -------- Net decrease in cash and cash equivalents .......................... (4,156) (4,616) Cash and cash equivalents at beginning of period ................... 32,914 28,417 -------- -------- Cash and cash equivalents at end of period ......................... $ 28,758 $ 23,801 ======== ========
The accompanying notes are an integral part of these consolidated condensed financial statements. 5 6 i-STAT CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation The information presented as of March 31, 1998 and 1997, and for the periods then ended, is unaudited, but includes all adjustments (consisting only of normal recurring accruals) which the management of i-STAT Corporation (the "Company") believes to be necessary for the fair presentation of results for the periods presented. The results for the interim periods are not necessarily indicative of results to be expected for the year. The year end consolidated condensed balance sheet data was derived from the audited financial statements, but does not include all disclosures required by generally accepted accounting principles. These condensed financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 1997, including the Notes thereto, which were included as part of the Company's Annual Report on Form 10-K, File No. 0-19841. 2. Net Loss Per Share The Company has adopted Statement of Financial Accounting Standards No. 128 "Earnings Per Share" which requires the presentation of basic earnings per share (EPS), and diluted earnings per share. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The Company has not included potential common shares in the diluted per-share computation as the result is antidilutive. The numerator and denominator of the basic and diluted per share computations were as follows:
In thousands of dollars, except shares and per share amount For the Quarter Ended March 31, 1998 - ------------------------------------------------------------------------------------------------------------------- Loss Shares Per-Share Amount Before Comprehensive Income/(Loss) Basic and diluted EPS Loss available to Common Stockholders $(6,127) 15,355,804 $(0.40) -----------------------------------------------
In thousands of dollars, except shares and per share amount For the Quarter Ended March 31, 1997 - ------------------------------------------------------------------------------------------------------------------- Loss Shares Per-Share Amount Before Comprehensive Income/(Loss) Basic and diluted EPS Loss available to Common Stockholders $(3,994) 13,362,138 $(0.30) ------------------------------------------------
Basic and diluted net loss per share is calculated using the weighted average number of common shares and preferred shares outstanding for all periods presented. Preferred shares have been included in the calculations since their date of issuance as they are convertible into common shares on a 1:1 basis and have substantially the same characteristics as common stock. Options to purchase 2,279,396 shares of common stock at $1.50 - $34.11 per share, which expire on various dates from May 1998 to January, 2008, were outstanding at March 31, 1998. These shares were not included in the computation of diluted EPS because the effect would be antidilutive due to the net loss. Recently Issued Accounting Pronouncements: The Company has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which establishes standards for the reporting and display of comprehensive income and its components in a full set of financial statements. The adoption of this Statement had no impact on the Company's net loss or stockholders' equity. Statement No. 130 requires foreign currency translation adjustments, which prior to adoption were reported separately in stockholders' equity, to be included in other comprehensive earnings. Prior year financial statements have been reclassified to conform to the requirements of Statement No. 130. 6 7 i-STAT CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) (continued) In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 " Disclosures about Segments of an Enterprise and Related Information" which establishes standards for the way that public business enterprises report information about operating segments, geographic areas, products and major customers. The Company is required to adopt this standard as of the end of 1998 and is currently evaluating the impact of this standard on the Company's required disclosure. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement modifies financial statement disclosures related to pension and other postretirement plans, including standardization of disclosures for pension plans and other postretirement plans, permitting the aggregation of information regarding certain plans, additional disclosures related to the change in benefit obligations and the fair value of plan assets, and elimination of certain other disclosures. As with SFAS Nos. 130 and 131, this statement addresses disclosure issues and therefore will not have an effect on the Company's financial position or results of operations, and the Company is required to adopt this standard as of the end of 1998. Reclassification: Certain reclassifications have been made to 1997 amounts to conform them to the 1998 presentation. 3. Inventories Inventories consist of the following:
March 31, 1998 December 31, 1997 -------------- ----------------- (In thousands of dollars) Raw materials $1,959 $2,206 Work in process 2,483 1,482 Finished goods 1,460 2,239 ------ ------ $5,902 $5,927 ====== ======
4. Commitments and Contingencies The Company is a defendant in a case entitled Nova Biomedical Corporation, Plaintiff v. i-STAT Corporation, Defendant. The Complaint, which was filed in the United States District Court for the District of Massachusetts on June 27, 1995, alleges infringement by i-STAT of Nova's U.S. Patent No. 4,686,479. In February 1998, the Court entered summary judgement in favor of the Company on the issue of patent infringement. Accordingly, the Company has been found not to infringe, either literally or under the patent law "doctrine of equivalents", Nova's patent. However, if the plaintiff should appeal and prevail on this issue, a prospect which the Company believes to be highly unlikely, it could have a material impact on the financial position, results of operations and cash flows of the Company. The Company had asserted and is pursuing counterclaims under the antitrust laws alleging that Nova commenced the action knowing that the patent was not infringed and that it has reason to believe that the patent was invalid and unenforceable. The Company is a defendant in a class action complaint entitled Susan Kaufman, on behalf of herself and all other similarly situated, Plaintiff, v. i-STAT Corporation, William P. Moffitt, Lionel M. Sterling, Imants R. Lauks and Matthias Plum, Jr. The class action was brought by Susan Kaufman on her behalf and on behalf of all purchasers of the Company's Common Stock between May 9, 1995 and March 19, 1996. The complaint, which was filed in the Superior Court of New Jersey in Mercer County on June 19, 1996, alleges New Jersey common law fraud and negligent misrepresentation, and is predicated on a "fraud on the market" theory in connection with 7 8 i-STAT CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) (continued) certain sales of i-STAT stock by the Company's chief executive officer, chief technology officer and two outside directors during a nine-month period. The plaintiffs seek unspecified compensatory damages, interest and payment of all costs and expenses incurred in connection with the class action. The Company believes the complaint is without merit and, on April 28, 1998, the Court entered summary judgment in favor of all the defendants. However, if the plaintiff should appeal and prevail in this matter, it could have a material impact on the financial position, results of operations and cash flows of the Company. The Company is 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, alleges infringement by i-STAT of Customedix's U.S. Patent No. 4,342,964. The Plaintiff seeks injunctive relief and an accounting for i-STAT's profits and the damages to Customedix from such alleged infringement. The case currently is in the preliminary stages of discovery. The Company intends to contest the case vigorously and does not believe that it has infringed the Customedix patent. The Company has obtained an opinion from recognized patent counsel to the effect that no infringement has occurred. However, if the plaintiff should prevail in this matter, it could have a material impact on the financial position, results of operation and cash flows of the Company. 5. 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 will relocate its cartridge assembly operation in Plainsboro, New Jersey to its manufacturing facility in Ontario, Canada. The relocation of cartridge assembly is anticipated to commence in May 1998 and be completed by August 1998. As a result of this consolidation of operations, 66 employees in the cartridge assembly operations were notified during the quarter that they 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, expires in September 1998. The Company anticipates that it will relocate these activities to another building in the general area of Princeton, New Jersey. The charge to earnings in 1998 for these relocations, including severance and retention payments to affected employees, the physical move of equipment, rent and utilities on the unoccupied Plainsboro facility until that lease expires in February 1999, and readdressing packaging, marketing materials and stationery, and miscellaneous costs is estimated to be approximately $1.7 million, with approximately $0.7 million being recorded as a charge to earnings in the three months ended March 31, 1998. The charge to earnings in the first quarter of 1998 comprises approximately $0.4 million for severance and retention payments, and approximately $0.3 million for lease costs in respect of the unoccupied Plainsboro facility. Retention payments are charged to expense over the retention period. 8 9 i-STAT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company develops, manufactures and markets medical diagnostic products for blood analysis that provide healthcare professionals with immediate and accurate critical diagnostic information at the point of patient care. The Company markets and distributes 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 South America through selected distribution channels. The Company and HP also jointly market the Company's products into the critical care departments of hospitals in the United States which meet certain criteria. The Company is actively planning market introduction into other foreign markets, including but not limited to, through its arrangements with HP. The Company's revenues are affected principally by the number of hospitals using the i-STAT(R) System and the rate at which i-STAT's disposable cartridges are used by these hospitals. This, in turn, is highly dependent upon the willingness of hospitals to adapt their traditional blood diagnostic testing approaches to the point-of-care system advocated by the Company. During 1997 the Company continued to focus its marketing efforts primarily on potential large scale adopters of the i-STAT System. Such high volume customers tend to require a longer sales cycle as the marketing focus with respect to such customers is on having these customers re-engineer or replace their "stat" lab departments with the i-STAT System, as compared to other potential customers who may be using the i-STAT System as a supplement to their existing arrangements. To further this strategy, in early 1997 the Company expanded its policy of offering substantial price discounts to high volume users. These volume discounts are only provided to customers who commit to purchase 18,000 or more cartridges per year, with the highest discounts going to purchasers of 120,000 or more cartridges per year. The Company believes that this strategy will accelerate the rate of market penetration for its products and thus have a beneficial long-term effect upon revenue growth. However, the near-term rate of growth in sales revenue and gross margin will be adversely impacted by both the longer sales cycle and the lower cartridge prices that such high volume customers may receive. Pursuant to a technology collaboration between the Company and HP, in November 1997 HP commenced selling a patient monitoring system (the "Integrated Analyzer") which integrates all of the blood diagnostics capabilities of the i-STAT System. In the long-term, the Company hopes to realize significant cartridge revenue growth and royalty revenues from the sale of the Integrated Analyzer by HP. However, in the near-term revenue growth from sales of the Integrated Analyzer is expected to be insignificant because of the uncertainties associated with new product introduction and because some of the initial purchasers of the Integrated Analyzer will be existing users of the hand-held analyzer sold by the Company. Results of Operations Three Months Ended March 31, 1998 The Company generated revenues of approximately $8.8 million and $7.8 million for the three months ended March 31, 1998 and 1997, respectively, including international revenues (as a percentage of total revenues) of $2.5 million (28.2%) and $2.3 million (28.9%), respectively. Sales to the Company's Japanese marketing partners represented approximately 10.9% and 21.8% of the Company's worldwide sales for the three months ended March 31, 1998 and 1997, respectively. International sales included deferred Japanese revenue of approximately $0.8 million (9.9% of total revenues) for the three months ended March 31, 1997. There was no comparable deferred revenue in the three months ended March 31, 1998, as the balance of such deferred revenue was fully amortized to income at December 31, 1997. The $1.8 million (25.4%) increase in product revenues (excluding the deferred revenue of $0.8 million in the same period of the prior year) was primarily due to increased shipment volume of the Company's cartridges reflecting higher cartridge consumption by existing hospital customers and the addition of new hospital customers in the U.S. and internationally. Worldwide cartridge shipments increased 36.1% to 1,284,575 units in the three months ended March 31, 1998, from 943,975 units in the three months ended March 31, 1997. Revenues from the increased cartridge shipments were partially offset by lower worldwide average selling prices per cartridge, which declined from approximately $5.64 to $4.90 per cartridge in the same periods. Cartridge average selling prices are expected to continue to decline as the customer mix shifts to higher volume customers that receive lower cartridge list price. 9 10 i-STAT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Gross profit decreased by approximately $0.4 million to $1.1 million in the quarter ended March 31, 1998, compared with a gross profit of $1.5 million in the quarter ended March 31, 1997. The prior year number for the same period includes approximately $0.8 million of deferred Japanese revenue. Exclusive of deferred revenue, gross profit on product revenue increased by approximately $0.4 million (57%) from $0.7 million to $1.1 million. To the extent that sales volume increases, the Company expects its gross profit to improve as manufacturing costs (including direct labor and a large component of overhead) are spread over a larger number of product units. The Company incurred research and development costs (as a percentage of sales) of approximately $1.8 million (20.1%) and $1.6 million (20.1%) for the three months ended March 31, 1998 and 1997, respectively, consisting of costs associated with the personnel, material, equipment and facilities necessary for conducting new product development. The Company's current research and development program includes the development of tests for the measurement of coagulation, which are scheduled to move into the production phase towards the end of 1998. The Company also is studying the development of tests to measure enzymes, hematology parameters (such as platelets and white blood cell counts) and other analytes. Consequently, research and development expenditures are expected to increase significantly 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. The Company incurred general and administrative expenses (as a percentage of sales) of approximately $1.9 million (21.1%) and $1.5 million (19.3%) for the three months ended March 31, 1998 and 1997, respectively. General and administrative expenses consisted primarily of salaries and benefits of personnel, office costs, professional fees and other costs necessary to support the Company's infrastructure. The dollar increase from year to year is primarily attributable to increased legal fees and expenses associated with the defense of the Nova patent infringement action and other legal matters, and the Company's increased need for management personnel and other services to support its growth. 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 will relocate its cartridge assembly operation in Plainsboro, New Jersey to its manufacturing facility in Ontario, Canada. The relocation of cartridge assembly is anticipated to commence in May 1998 and be completed by August 1998. As a result of this consolidation of operations, 66 employees in the cartridge assembly operations were notified during the quarter 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, expires in September 1998. The Company anticipates that it will relocate these activities to another building in the general area of Princeton, New Jersey. The charge to earnings in 1998 for these relocations, including severance and retention payments to affected employees, the physical move of equipment, rent and utilities on the unoccupied Plainsboro facility until that lease expires in February 1999, and readdressing packaging, marketing materials and stationery, and miscellaneous costs is estimated to be approximately $1.7 million, with approximately $0.7 million being recorded as a charge to earnings in the three months ended March 31, 1998. The charge to earnings in the first quarter of 1998 comprises approximately $0.4 million for severance and retention payments, and approximately $0.3 million for lease costs in respect of the unoccupied Plainsboro facility. Retention payments are charged to expense over the retention period. The Company expects the consolidation to reduce future manufacturing and operating costs by approximately $2.0 million per year, commencing in the fourth quarter of 1998. Such savings will come from lower personnel costs, after hiring 52 employees for the expanded cartridge assembly operations in Ontario, Canada, and lower rent, utilities and other overhead expenses. The Company incurred sales and marketing expenses (as a percentage of sales) of approximately $3.3 million (37.2%) and $2.7 million (35.0%) for the three months ended March 31, 1998 and 1997, respectively, consisting primarily of salaries, benefits, travel, and other expenditures for sales representatives, product literature, market research, clinical studies, advertising and other sales and marketing costs. The dollar increase from year to year is attributable to increased sales and marketing personnel and other marketing costs necessary to support the Company's growth in product sales. The increase in other income, net, to approximately $0.4 million for the three months ended March 31, 1998, from approximately $0.3 million for the three months ended March 31, 1997, primarily reflects higher interest income earned on higher cash and cash equivalents balances. 10 11 i-STAT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Net losses for the three months ended March 31, 1998 increased 53.4 percent to approximately $6.1 million, or 40 cents per share, compared with a net loss of $4.0 million, or 30 cents per share, for the first quarter of 1997. The weighted average number of shares used in computing basic and diluted net loss per share was 15.356 million and 13.362 million in the 1998 and 1997 periods, respectively. The increase in the number of shares in 1998 primarily reflects the private placement of 1.850 million shares in June 1997. The increase in the net loss, in part reflects the reduction of deferred revenue ($0.8 million) and the charge for operations consolidation costs ($0.7 million) discussed above. Liquidity and Capital Resources At March 31, 1998, the Company had cash and cash equivalents of approximately $28.8 million, a decline of approximately $4.1 million from the December 31, 1997 balance of approximately $32.9 million, the decrease primarily reflecting approximately $3.0 million of cash used in operating activities and equipment purchases of approximately $1.4 million during the three months ended March 31, 1998. Working capital decreased by approximately $6.2 million from $38.7 million to $32.5 million during the same period, primarily reflecting the decrease in cash and cash equivalents, and an increase of approximately $1.2 million in accrued expenses. The increase in accrued expenses includes the charge for operations consolidation expenses of approximately $0.7 million. The Company expects its existing funds to continue to decline until its revenues are sufficient to support its growth, but to be sufficient to meet its obligations and its liquidity and capital requirements for the near term. The Company regularly monitors capital raising alternatives in order to take advantage of opportunities to supplement its current working capital upon favorable terms, including joint ventures, strategic corporate partnerships or other alliances and the sale of equity and/or debt securities. The Company's need, if any, to raise additional funds to meet its working capital and capital requirements will depend upon numerous factors, including the results of its marketing and sales activities, its new product development efforts, manufacturing efficiencies and competitive conditions. The impact of inflation on the Company's business has been minimal and is expected to be minimal for the near-term. 11 12 i-STAT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Impact of Year 2000 The "Year 2000" issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on a recent assessment, the Company determined that it will be required to modify some portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 issue could have a material impact on the operations of the Company. The Company has initiated formal communications with all of its significant suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company or a conversion that is incompatible with the Company's system would not have an adverse effect on the Company's systems. The Company has determined that it has no exposure to contingencies related to the Year 2000 issue for the products it has sold. The Company will utilize both internal and external resources to reprogram and test its computer software for Year 2000 modifications. The Company anticipates completing the Year 2000 project prior to any anticipated impact on its operating systems. The cost of the Year 2000 project is not expected to be material, as the required changes to internally supported software are small relative to the updates performed in the normal course of business and changes to externally supported software are covered by service contracts. The assessment of the costs of the project and the timing of the completion of Year 2000 modifications is based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. 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, competition from existing manufacturers and marketers of blood analysis products who have greater resources than the Company, the uncertainty of new product development initiatives, difficulties in transferring new technology to the manufacturing stage, market resistance to new products and point-of-care blood diagnosis, domestic and international regulatory constraints, uncertainties of international trade, pending and potential disputes concerning ownership of intellectual property, dependence upon strategic corporate partners for assistance in development of new markets 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. 12 13 i-STAT CORPORATION PART II - OTHER INFORMATION ITEM 1. Legal Proceedings The Company is a defendant in a case entitled Nova Biomedical Corporation, Plaintiff v. i-STAT Corporation, Defendant. The Complaint, which was filed in the United States District Court for the District of Massachusetts on June 27, 1995, alleges infringement by i-STAT of Nova's U.S. Patent No. 4,686,479. In February 1998, the Court entered summary judgment in favor of the Company on the issue of patent infringement. Accordingly, the Company has been found not to infringe, either literally or under the patent law "doctrine of equivalents", Nova's patent. However, if the plaintiff should appeal and prevail on this issue, a prospect which the Company believes to be highly unlikely, it could have a material impact on the financial position, results of operations and cash flows of the Company. The Company had asserted and is pursuing counterclaims under the antitrust laws alleging that Nova commenced the action knowing that the patent was not infringed and that it has reason to believe that the patent was invalid and unenforceable. The Company is a defendant in a class action complaint entitled Susan Kaufman, on behalf of herself and all other similarly situated, Plaintiff, v. i-STAT Corporation, William P. Moffitt, Lionel M. Sterling, Imants R. Lauks and Matthias Plum, Jr. The class action was brought by Susan Kaufman on her behalf and on behalf of all purchasers of the Company's Common Stock between May 9, 1995 and March 19, 1996. The complaint, which was filed in the Superior Court of New Jersey in Mercer County on June 19, 1996, alleges New Jersey common law fraud and negligent misrepresentation, and is predicated on a "fraud on the market" theory in connection with certain sales of i-STAT stock by the Company's chief executive officer, chief technology officer and two outside directors during a nine-month period. The plaintiffs seek unspecified compensatory damages, interest and payment of all costs and expenses incurred in connection with the class action. The Company believes the complaint is without merit and, on April 28, 1998, the Court entered summary judgment in favor of all defendants. However, if the plaintiff should appeal and prevail in this matter, it could have a material impact on the financial position, results of operations and cash flows of the Company. The Company is 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, alleges infringement by i-STAT of Customedix's U.S. Patent No. 4,342,964. The Plaintiff seeks injunctive relief and an accounting for i-STAT's profits and the damages to Customedix from such alleged infringement. The case currently is in the preliminary stages of discovery. The Company intends to contest the case vigorously and does not believe that it has infringed the Customedix patent. The Company has obtained an opinion from recognized patent counsel to the effect that no infringement has occurred. However, if the plaintiff should prevail in this matter, it could have a material impact on the financial position, results of operation and cash flows of the Company. 13 14 i-STAT CORPORATION ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 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)* 3.4 Certificate of Designation, Preferences and Rights of Series B Preferred Stock (Form 8-K, dated July 10, 1995 and amended on September 11, 1995)* 4.1 Stockholder Protection Agreement, dated as of June 26, 1995, between Registrant and First Fidelity Bank, National Association (Form 8-K, dated July 10, 1995 and amended on September 11, 1995)* 27 Financial Data Schedule * 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. (b) Reports on Form 8-K During the quarter for which this Report on Form 10-Q is filed, no reports on Form 8-K were filed. 14 15 i-STAT CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: May 11, 1998 i-STAT CORPORATION (Registrant) BY: /s/William P. Moffitt ----------------------- William P. Moffitt President and Chief Executive Officer (Principal Executive Officer) BY: /s/Roger J. Mason ----------------------- Roger J. Mason Vice President of Finance, Treasurer and Chief Financial Officer (Principal Financial Officer and Accounting Officer) 15 16 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 28,758 0 4,565 (109) 5,902 39,823 30,867 (17,942) 54,336 7,308 0 0 214 1,984 44,830 54,336 8,786 8,786 7,690 7,690 0 0 0 (6,127) 0 0 0 0 0 (6,127) (.40) (.40)
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