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