**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended June 30, 2002**

 

**CommissionFile Number 0-19841**

 

**i-STAT CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                     |   | **22-2542664**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |   | (I.R.S.  Employer Identification No.) |
|                                                             |   |                                  |
| **104 Windsor Center Drive, East Windsor, NJ**                   |   | **08520**                             |
| (Address  of Principal Executive Offices)                        |   | (Zip  Code)                           |

 

**(609) 443-9300**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

| Yes  ý |   | No  o |
|-----------------------|--------|-----------------|

 

The number of sharesoutstanding of each of the Issuer’s classes of Common Stock as of the latestpracticable date.

 

| **Class**                     |   | **August 12, 2002** |   |
|-------------------------------|--------|---------------------|--------|
|                          |   |                |   |
| Common Stock, $0.15 par value |   | 20,117,110          |   |

** **

 

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**i-STAT CORPORATION**

 

**TABLE OFCONTENTS**

 
| PART  I    |   | FINANCIAL  INFORMATION                                                                                             |
|------------|--------|--------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                               |
|       |   | Item  1 - Financial Statements                                                                                     |
|       |   |                                                                                                               |
|       |   | Consolidated  Condensed Statements of Operations for the three months and six months ended  June 30, 2002 and 2001 |
|       |   |                                                                                                               |
|       |   | Consolidated  Condensed Balance Sheets as of June 30, 2002 and December 31, 2001                                   |
|       |   |                                                                                                               |
|       |   | Consolidated  Condensed Statements of Cash Flows for the six months ended June 30, 2002 and  2001                  |
|       |   |                                                                                                               |
|       |   | Notes  to Consolidated Condensed Financial Statements                                                              |
|       |   |                                                                                                               |
|       |   | Item  2 - Management’s  Discussion and Analysis of Financial Condition and Results of Operations              |
|       |   |                                                                                                               |
| PART II    |   | OTHER INFORMATION                                                                                                  |
|       |   |                                                                                                               |
|       |   | Item  1 - Legal Proceedings                                                                                        |
|       |   |                                                                                                               |
|       |   | Item  4 - Submission of Matters to a Vote of Security Holders                                                      |
|       |   |                                                                                                               |
|       |   | Item 6 -  Exhibits and Reports on Form 8-K                                                                         |
|       |   |                                                                                                               |
| SIGNATURES |

 

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**i-STATCORPORATION**

**CONSOLIDATEDCONDENSED STATEMENTS OF OPERATIONS**

 

**(Inthousands of dollars, except share and per share data)**

(unaudited)

 
|                                                                                             |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|--------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                                             |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
|                                                                                             |   |                             |   |                           |   |   |   |   |   |
| Net revenues:                                                                                    |   |                             |   |                           |   |   |   |   |   |
| Related party product  sales                                                                     |   | $                                | 12,376 |                           | $      | 11,936 |   | $ | 23,932 |   | $ | 22,244 |   |
| Third party product  sales                                                                       |   | 2,229                            |   | 1,929                          |   | 4,898 |   | 3,774 |   |
| Other related party  revenues                                                                    |   | 175                              |   | 175                            |   | 350 |   | 350 |   |
| Other third party  revenues                                                                      |   | —                           |   | 327                            |   | — |   | 327 |   |
| Total net revenues                                                                               |   | 14,780                           |   | 14,367                         |   | 29,180 |   | 26,695 |   |
|                                                                                             |   |                             |   |                           |   |   |   |   |   |
| Cost of products sold                                                                            |   | 12,198                           |   | 12,045                         |   | 24,946 |   | 22,571 |   |
| Research and  development                                                                        |   | 1,937                            |   | 1,985                          |   | 3,874 |   | 3,929 |   |
| General and  administrative                                                                      |   | 2,013                            |   | 1,929                          |   | 3,399 |   | 3,504 |   |
| Sales and marketing                                                                              |   | 2,529                            |   | 2,327                          |   | 4,799 |   | 4,739 |   |
| Litigation settlement                                                                            |   | —                           |   | 10,491                         |   | — |   | 10,491 |   |
| Total operating  expenses                                                                        |   | 18,677                           |   | 28,777                         |   | 37,018 |   | 45,234 |   |
|                                                                                             |   |                             |   |                           |   |   |   |   |   |
| Operating loss                                                                                   |   | (3,897                           | )      | (14,410                        | )      | (7,838 | ) | (18,539 | ) |
|                                                                                             |   |                             |   |                           |   |   |   |   |   |
| Other income, net                                                                                |   | 322                              |   | 188                            |   | 511 |   | 491 |   |
|                                                                                             |   |                             |   |                           |   |   |   |   |   |
| Net loss                                                                                         |   | (3,575                           | )      | (14,222                        | )      | (7,327 | ) | (18,048 | ) |
|                                                                                             |   |                             |   |                           |   |   |   |   |   |
| Dividends on Preferred  Stock                                                                    |   | (274                             | )      | —                         |   | (823 | ) | — |   |
| Accretion of Preferred  Stock                                                                    |   | (111                             | )      | —                         |   | (223 | ) | — |   |
|                                                                                             |   |                             |   |                           |   |   |   |   |   |
| Net loss available to  Common Stockholders                                                       |   | $                                | (3,960 | )                              | $      | (14,222 | ) | $ | (8,373 | ) | $ | (18,048 | ) |
|                                                                                             |   |                             |   |                           |   |   |   |   |   |
| Basic and diluted net  loss per share available to Common Stockholders                           |   | $                                | (0.20  | )                              | $      | (0.78 | ) | $ | (0.42 | ) | $ | (0.99 | ) |
|                                                                                             |   |                             |   |                           |   |   |   |   |   |
| Shares used in  computing basic and diluted net loss per share available to Common  Stockholders |   | 20,084,703                       |   | 18,305,715                     |   | 20,033,059 |   | 18,268,956 |   |

 

Theaccompanying notes are an integral part of these consolidated condensedfinancial statements.

 

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**i-STATCORPORATION**

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

 

**(Inthousands of dollars, except share and per share data)**

(unaudited)

 
|                                                                                                                                                                                     |   | **June 30,  2002** |   | **December 31,  2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|------------------------|--------|
|                                                                                                                                                                                     |   |               |   |                   |   |
| ASSETS                                                                                                                                                                                   |   |               |   |                   |   |
| Current assets:                                                                                                                                                                          |   |               |   |                   |   |
| Cash and cash  equivalents                                                                                                                                                               |   | $                  | 28,512 |                   | $      | 43,112 |   |
| Accounts receivable,  net                                                                                                                                                                |   | 761                |   | 546                    |   |
| Accounts receivable  from related party, net                                                                                                                                             |   | 6,905              |   | —                 |   |
| Inventories                                                                                                                                                                              |   | 11,781             |   | 13,393                 |   |
| Prepaid expenses and  other current assets                                                                                                                                               |   | 995                |   | 1,924                  |   |
| Total current assets                                                                                                                                                                     |   | 48,954             |   | 58,975                 |   |
|                                                                                                                                                                                     |   |               |   |                   |   |
| Plant and equipment,  net of accumulated depreciation of $34,700 in 2002 and $31,151 in 2001                                                                                             |   | 14,867             |   | 14,964                 |   |
| Other assets                                                                                                                                                                             |   | 2,034              |   | 1,950                  |   |
| Total assets                                                                                                                                                                             |   | $                  | 65,855 |                   | $      | 75,889 |   |
|                                                                                                                                                                                     |   |               |   |                   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                               |   |               |   |                   |   |
| Current liabilities:                                                                                                                                                                     |   |               |   |                   |   |
| Accounts payable                                                                                                                                                                         |   | $                  | 2,578  |                   | $      | 2,662 |   |
| Accounts payable to  related party, net                                                                                                                                                  |   | —             |   | 2,673                  |   |
| Accrued expenses                                                                                                                                                                         |   | 4,407              |   | 4,896                  |   |
| Deferred revenue-  related party, current                                                                                                                                                |   | 47                 |   | 662                    |   |
| Total current  liabilities                                                                                                                                                               |   | 7,032              |   | 10,893                 |   |
|                                                                                                                                                                                     |   |               |   |                   |   |
| Deferred liability -  related party, non-current                                                                                                                                         |   | 5,027              |   | 5,058                  |   |
| Total liabilities                                                                                                                                                                        |   | 12,059             |   | 15,951                 |   |
|                                                                                                                                                                                     |   |               |   |                   |   |
| Series D Redeemable  Convertible Preferred Stock, liquidation value $31,350                                                                                                              |   | 26,732             |   | 25,334                 |   |
|                                                                                                                                                                                     |   |               |   |                   |   |
| Stockholders’ equity:                                                                                                                                                               |   |               |   |                   |   |
| Preferred Stock, $0.10  par value, 7,000,000 shares authorized:                                                                                                                          |   |               |   |                   |   |
| Series A Junior  Participating Preferred Stock, $0.10 par value, 1,500,000 shares authorized;  none issued                                                                               |   | —             |   | —                 |   |
| Series C Convertible  Preferred Stock, $0.10 par value, 25,000 shares authorized; none issued                                                                                            |   | —             |   | —                 |   |
| Common Stock, $0.15  par value, 50,000,000 shares authorized: 20,157,927 and 20,107,483 shares issued,  and 20,117,110 and 20,066,666 shares outstanding in 2002 and 2001,  respectively |   | 3,024              |   | 3,016                  |   |
| Treasury Stock, at  cost, 40,817 shares                                                                                                                                                  |   | (750               | )      | (750                   | )      |
| Additional paid-in  capital                                                                                                                                                              |   | 254,259            |   | 255,442                |   |
| Unearned compensation                                                                                                                                                                    |   | —             |   | (55                    | )      |
| Loan to officer, net                                                                                                                                                                     |   | (255               | )      | (417                   | )      |
| Accumulated deficit                                                                                                                                                                      |   | (227,512           | )      | (220,185               | )      |
| Accumulated other  comprehensive loss                                                                                                                                                    |   | (1,702             | )      | (2,447                 | )      |
| Total stockholders’  equity                                                                                                                                                         |   | 27,064             |   | 34,604                 |   |
| Total liabilities and  stockholders’ equity                                                                                                                                         |   | $                  | 65,855 |                   | $      | 75,889 |   |

 

Theaccompanying notes are an integral part of these consolidated condensedfinancial statements.

 

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**i-STATCORPORATION**

**CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS**

 

**(Inthousands of dollars)**

(unaudited)

 
|                                                                                                    |   | **Six Months Ended  June 30,** |   |
|---------------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                                    |   | **2002**                       |   | **2001** |   |
|                                                                                                    |   |                           |   |   |   |
| Cash flows from  operating activities:                                                                  |   |                           |   |   |   |
| Net loss                                                                                                |   | $                              | (7,327 | ) | $ | (18,048 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities                             |   | 2,282                          |   | (1,598 | ) |
| Changes in assets and  liabilities                                                                      |   | (7,654                         | )      | 13,843 |   |
| Net cash used in  operating activities                                                                  |   | (12,699                        | )      | (5,803 | ) |
|                                                                                                    |   |                           |   |   |   |
| Cash flows from  investing activities:                                                                  |   |                           |   |   |   |
| Purchase of equipment                                                                                   |   | (1,625                         | )      | (3,307 | ) |
| Other                                                                                                   |   | (180                           | )      | (105 | ) |
| Net cash used in  investing activities                                                                  |   | (1,805                         | )      | (3,412 | ) |
|                                                                                                    |   |                           |   |   |   |
| Cash flows from  financing activities:                                                                  |   |                           |   |   |   |
| Proceeds from stock  options exercised                                                                  |   | 87                             |   | 2,029 |   |
| Expenses related to  private placement of Series D Redeemable Convertible Preferred Stock and  Warrants |   | (50                            | )      | — |   |
| Net cash provided by  financing activities                                                              |   | 37                             |   | 2,029 |   |
|                                                                                                    |   |                           |   |   |   |
| Effect of currency  exchange rate changes on cash                                                       |   | (133                           | )      | 7 |   |
|                                                                                                    |   |                           |   |   |   |
| Net decrease in cash  and cash equivalents                                                              |   | (14,600                        | )      | (7,179 | ) |
| Cash and cash  equivalents at beginning of period                                                       |   | 43,112                         |   | 19,536 |   |
| Cash and cash  equivalents at end of period                                                             |   | $                              | 28,512 |   | $ | 12,357 |   |

 

Theaccompanying notes are an integral part of these consolidated condensedfinancial statements.

 

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**i-STATCORPORATION**

**NOTES TOCONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

 

(unaudited)

 

**1.**             **General**

 

*Basisof Presentation*

 

The informationpresented as of June 30, 2002 and 2001, and for the periods then ended, isunaudited, but includes all adjustments (consisting of normal recurringaccruals except for the inventory adjustment discussed in Note 2 and thelitigation settlement discussed in Note 3) which the management of i-STATCorporation (the “Company”) believes to be necessary for the fair presentationof results for the periods presented. The results for the interim periods are not necessarily indicative ofresults to be expected for the year. The December 31, 2001 consolidated condensed balance sheet data wasderived from the audited financial statements, but does not include alldisclosures required by generally accepted accounting principles.  These condensed financial statements shouldbe read in conjunction with the Company’s audited financial statements for theyear ended December 31, 2001, including the Notes thereto, which were includedas part of the Company’s Annual Report on Form 10-K, File No. 0-19841.

 

*Basicand Diluted Loss per Share*

 

Basic loss per share iscalculated by dividing income available to common stockholders by the weightedaverage number of Common Shares outstanding for the period.  Diluted earnings per share would reflect thepotential dilution that could occur if securities or other contracts to issueCommon Stock were exercised or converted into Common Stock or resulted in theissuance of Common Stock that then shared in the earnings of the Company.  The Company has not included potentiallydilutive Common Shares in the diluted per-share computation for all periodspresented, as the result is antidilutive due to the Company’s net loss.

 

Options to purchase3,360,354 shares of common stock with exercise prices of $4.41 - $32.58 pershare, which expire on various dates from December 2002 to June 2012, wereoutstanding at June 30, 2002.  Inaddition, warrants to purchase 1,875,357.5 shares of Common Stock at $8.00 pershare were outstanding at June 30, 2002. The options and warrants were not included in the computation of dilutedloss per share because the effect would be antidilutive due to the Company’snet loss.

 

*Comprehensive Income*

 

Statement of FinancialAccounting Standards (‘SFAS”) No. 130, “Reporting Comprehensive Income,”requires certain items to be included in other comprehensive income.  The only component of accumulated othercomprehensive income (loss) for the Company is foreign currency translationadjustments resulting from the translation of the financial statements of theCompany’s Canadian subsidiary.

 
|                                |   | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |   |
|-------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                |   | **2002**                        |   | **2001**                      |   | **2002** |   | **2001** |   |
|                                |   | **(In thousands of dollars)**   |   |
| Net loss                            |   | $                               | (3,575 | )                             | $      | (14,222 | ) | $ | (7,327 | ) | $ | (18,048 | ) |
| Other comprehensive  income (loss): |   |                            |   |                          |   |   |   |   |   |
| Foreign currency  translation       |   | 729                             |   | 661                           |   | 745 |   | (232 | ) |
| Comprehensive loss                  |   | $                               | (2,846 | )                             | $      | (13,561 | ) | $ | (6,582 | ) | $ | (18,280 | ) |

 

6

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*Foreign Currency Translation/Transactions*

 

In general,balance sheet amounts from the Company’s Canadian Subsidiary have beentranslated using exchange rates in effect at the balance sheet dates and theresulting translation adjustments have been included in the accumulated othercomprehensive loss as a separate component of Consolidated Stockholder’sEquity.  The Statement of Operationsfrom the Company’s Canadian subsidiary has been translated using the averagemonthly exchange rates in effect during each period presented.  Effective May 31, 2002, as a result ofrepayment of a portion of intercompany debt owed by the Company's Canadiansubsidiary and that subsidiary's deemed ability to repay the remainingintercompany debt, the Company is required to treat such intercompany debt asshort-term in accordance with SFAS No. 52 "Foreign CurrencyTranslation." SFAS No. 52 requires the Company to record the impact offoreign currency gains and losses on short-term intercompany debt in theCompany's results of operations. Foreign currency gains of $0.1 million were recorded for both the threemonths and six months ending June 30, 2002. These gains were primarily the result of the impact of the exchange ratebetween U.S. dollars and Canadian dollars on the intercompany debt owed byi-STAT Corporation’s Canadian subsidiary to i-STAT Corporation.  The amount of these gains and losses couldbe material in the event of significant changes in the exchange rate betweenU.S. dollars and Canadian dollars.

 

*Recently Issued Accounting Pronouncements:*

 

On August 15, 2001, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accountingfor Asset Retirement Obligations.”  SFASNo. 143 is effective for fiscal years beginning after June 15, 2002.  This statement requires that the fair valueof a liability for an asset retirement obligation be recognized in the periodin which it is incurred if a reasonable estimate of fair value can bemade.  In addition, the associated assetretirement costs are capitalized as part of the carrying amount of the long-livedasset and subsequently allocated to expense over the asset’s useful life.  The Company does not expect that theadoption of this statement will have a material impact on its financialposition or results of operations.

 

In May 2002, FASB issuedSFAS No. 145, “Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS 13, andTechnical Corrections as of April 2002.” SFAS No. 145 is effective for fiscal years after May 15, 2002 and iseffective for SFAS No. 13 transactions occurring after May 15, 2002.  This statement rescinds SFAS No. 4 and, thusthe exception to applying Accounting Principles Board Opinion No. 30 (“APB No.30”) to all gains and losses related to extinguishments of debt.  As a result, gains and losses fromextinguishments of debt are classified as extraordinary items only if they metthe criteria in APB No. 30.  SFAS No. 64previously amended SFAS No. 4 and is no longer necessary.  This statement also amends SFAS No. 13 torequire sale-leaseback accounting for certain lease modifications that haveeconomic effects that are similar to sale-leaseback transactions.  This statement rescinds SFAS No. 44 andmakes various technical corrections to other existing pronouncements.  The Company does not expect the adoption ofthis statement will have a material impact on its financial position or resultsof operations.

 

On July 29, 2002, FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  SFAS No. 146 is effectivefor exit or disposal activities that are initiated after December 31,2002.  This statement addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3.  “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in Restructuring).”  Thisstatement requires that a liability for a cost associated with an exit ordisposal activity be recognized when the liability is incurred.  Under Issue 94-3, a liability for an exitcost as defined in Issue 94-3 was recognized at the date of an entity’scommitment to an exit plan.  Therefore,this statement eliminates the definition and requirements for recognition ofexit costs in Issue 94-3.  Thisstatement also establishes that fair value is the objective for initialmeasurement of the liability.  TheCompany does not expect that the adoption of this statement will have amaterial impact on its financial position or results of operation.

 

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**2.             Inventories**

 

Inventories consist of the following:

 
|            |   | **June 30, 2002**             |   | **December 31, 2001** |   |
|-----------------|--------|-------------------------------|--------|-----------------------|--------|
|            |   | **(In thousands of dollars)** |   |
|            |   |                          |   |                  |   |
| Raw materials   |   | $                             | 4,515  |                  | $      | 4,462 |   |
| Work-in-process |   | 3,812                         |   | 3,058                 |   |
| Finished goods  |   | 3,454                         |   | 5,873                 |   |
|            |   | $                             | 11,781 |                  | $      | 13,393 |   |

 

In the first quarter of2002, the Company recorded a charge of $1.6 million related to the write-off ofcertain cartridges in inventory and the replacement of certain cartridges inthe field that exhibited a higher than usual quality check rejection rate (theentire $1.6 million relates to inventory produced during the first quarter of2002).  This charge was in addition to acharge of $1.7 million that was recorded in the fourth quarter of 2001 related tothe same quality check rejection rate issue. At December 31, 2001, as a result of the charges, finished goodsinventory are presented net of an aggregate reserve of $1.0 million.  In addition, a reserve of $0.2 million and$0.6 million related to the replacement of certain cartridges in the field isrecorded in accrued expenses at June 30, 2002 and December 31, 2001,respectively.

 

**3.             Commitmentsand Contingencies**

 

The Company was adefendant in a case entitled Nova Biomedical Corporation, Plaintiff v. i-STATCorporation, Defendant.  Thecomplaint, which was filed in the United States District Court for the Districtof Massachusetts on June 27, 1995, alleged infringement by the Company of NovaBiomedical Corporation’s (“Nova”) U.S. Patent No. 4,686,479 (the“Patent”).  In February 1998, the Courtentered summary judgment in favor of the Company on the issue of patentinfringement.  The plaintiff appealedthe dismissal to the Federal Circuit. The Federal Circuit affirmed two of the grounds of the dismissal (properinterpretation of the Patent and that the Company does not literally infringe),but remanded the case to the District Court with instructions to reconsiderwhether the Company’s device performs a certain measurement in a substantiallyequivalent way to a method covered by the Patent, and therefore infringes underthe “doctrine of equivalents.”  On July26, 2001 the Company entered into a license agreement and a settlementagreement with Nova under which the Company agreed to pay Nova $10.5 million,which was recorded as a charge in the second quarter of 2001.  Pursuant to the agreements, $6.5 million waspaid on July 26, 2001, a retroactive royalty of $0.5 million was paid on August14, 2001 for the period of January 1, 2001 through June 30, 2001, and $3.5million plus interest was due to be paid over one year in equal quarterlyinstallments, pursuant to a secured promissory note.  The promissory note was prepaid on August 3, 2001.  The license agreement provides for thepayment to Nova of a royalty equal to 4% of the invoice price of products soldin the United States after January 1, 2001, which products determine hematocritlevels according to any method used by the Company prior to December 31, 2000,as well as any method covered by the Patent. The royalties are payable through the life of the Patent (July 22,2005).  The Company has commercializedproducts that determine hematocrit levels using a method that was not used bythe Company prior to December 31, 2000 and which the Company believes is notcovered by the Patent.  Consequently,the Company does not believe that it owes any additional royalties toNova.  On February 28, 2002, Nova fileda demand for arbitration claiming that the method by which the Company’sproducts determine hematocrit is covered under the Patent and the licenseagreement.  Nova is seeking royaltiesfrom July 1, 2001.  If the Company isunsuccessful in defending its position in the arbitration and does not developnew methods that do not utilize the covered technology, it may be forced tocontinue to pay royalties to Nova through the life of the Patent andapproximately $1.1 million in respect of products sold from July 1, 2001through June 30, 2002.  The Companyplans to defend this matter vigorously.

 

The Company and AbbottLaboratories (“Abbott”) are in disagreement over the amount of money Abbott isentitled to for the sharing of certain cartridge production cost savingsresulting from an increase in sales volume. This disputed item relates to different interpretations of certain termsof the Company’s exclusive marketing and distribution agreement with Abbottdated August 3, 1998 (the “Distribution Agreement”).  If this disagreement is not resolved

 

8

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amicably, it must beresolved through binding arbitration as prescribed under the DistributionAgreement.  Management of the Companybelieves that Abbott’s position on this issue in dispute is without merit andthat, in the event that this issue is resolved through arbitration, the Companywill not incur any additional liability to Abbott.  The amount in dispute is approximately $1.1 million at June 30,2002, and if this matter is resolved in favor of Abbott, which management ofthe Company believes unlikely, the Company’s cost of goods sold would increaseby up to the amount in dispute.  Suchadjustment would be made when, and if, it is determined that an unfavorableoutcome to the Company is probable.

 

**4.             RelatedParty Transactions**

 

On July 25, 2002, theCompany announced its intention to terminate its Distribution Agreement withAbbott, effective December 31, 2003. As a result, the Company is obligated tomake the following payments to Abbott on the dates noted: (a) on December 31,2003 a $5.0 million one-time termination fee to compensate Abbott for a portionof its costs in undertaking the distribution relationship, (b) on December 31,2003 $5.0 million representing the unrecogized portion of a $25.0 millionprepayment made by Abbott against incremental product sales, (c) early in 2004,approximately $5.0 million to repurchase inventory and equipment from Abbott,as required in the Distribution Agreeement, and (d) on December 31, 2004 and oneach December 31 thereafter through 2008, for a total of five unequal residualpayments based upon Abbott’s net sales of the Company’s products during thefinal twelve months of the Distribution Agreement term, approximately $55million.   These payments will have amaterial impact on the Company’s cash flows and results of operations.  The Company anticipates that the profitmargins presently being earned by Abbott as a result of the sale of theCompany’s products will be earned by the Company commencing January 1, 2004,and will provide the Company with the sufficient cash to fund thesepayments.  The Company has begun to takeactions to assume primary responsibility for the marketing and sale of itsproducts, effective January 1, 2004. During the quarter ended June 30, 2002, these actions included hiringsix additional sales personnel.  TheCompany anticipates further additions of personnel in the coming quarters.  TheCompany may incur additional costs or recognize lower revenues than anticipatedas a result of resuming direct distribution of its products.

 

Net product sales toAbbott were $12.4 million and $11.9 million for the three months ended June 30,2002 and 2001, respectively and $23.9 million and $22.2 million for the sixmonths ended June 30, 2002 and 2001, respectively.  Other related party revenues from Abbott were  $0.2 million in each of the three-monthperiods ended June 30, 2002 and 2001 and $0.4 million in each of the six monthperiods ended June 30, 2002 and 2001. The other related party revenues from Abbott consist of amounts reimbursedby Abbott for services performed by the Company’s implementation coordinators.

 

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** **

**i-STATCORPORATION**

**MANAGEMENT'SDISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**General**

** **

i-STATCorporation (“i-STAT” or the “Company”), which was incorporated in Delaware in1983, together with its wholly-owned subsidiary, i-STAT Canada Limited,develops, manufactures and markets medical diagnostic products for bloodanalysis that provide health care professionals with immediate and accuratecritical, diagnostic information at the point of patient care.

 

TheCompany’s current products, known as the *i-STAT® System*, consist ofportable, hand-held analyzers and single-use disposable cartridges, each ofwhich simultaneously performs different combinations of commonly ordered bloodtests in approximately two minutes.  The*i-STATSystem* also includes peripheral components that enable the resultsof tests to be transmitted by infrared means to both a proprietary informationsystem for managing the user’s point-of-care testing program and to the user’sinformation systems for billing and archiving.

 

The*i-STATSystem* currently performs blood tests for sodium, potassium,chloride, glucose, creatinine, urea nitrogen, hematocrit, ionized calcium,lactate, Celite® ACT (activated clotting time), arterial blood gases(pH, PCO2 and PO2), and bicarbonate, and derives certainother values, such as total carbon dioxide, base excess, anion gap, hemoglobinand O2 saturation, by calculation from the tests performed.  The Company continues to engage in researchand development in order to improve its existing products and develop newproducts based on the *i-STAT System* technology.  During the second quarter of 2002, theCompany received approval from the Food and Drug Administration to market atest which measures Prothrombin Time (“PT”). The Company expects to begin shipment of the PT test for initialevaluation in the third quarter of 2002 with the first revenue shipments of theproduct expected to occur in the first quarter of 2003.  The Company is currently developing twoadditional tests for the measurement of coagulation:  kaolin ACT and partial thromboplastin time (“aPTT”).  Subject to regulatory approvals, the Companyexpects to begin commercial introduction of the kaolin ACT test in early2003.  The Company also is conductingresearch and development on cardiac marker tests, the first of which utilizesthe Troponin I immunoassay.  TheTroponin I test is scheduled to commence clinical trials late in 2002 and,subject to regulatory approvals, to be commercially introduced in 2003.  In the fourth quarter of 2000, the Companyintroduced the *i-STAT 1 Analyzer*.  The *i–STAT1 Analyzer* permits a customer to run all i-STAT cartridges as wellas Abbott MediSense® glucose strips on one integrated hand-helddevice.  The *i-STAT 1 Analyzer* also incorporates a number ofenhancements, including a bar code reader, an improved user interface, and anenhanced data management system which, in conjunction with a central datamanagement system developed by the Company, enhances the customer’s ability tocentrally manage a widely distributed point-of-care testing program.

 

Priorto November 1, 1998, the Company marketed and distributed its products in theUnited States and Canada principally through its own direct sales and marketingorganization, in Japan through Japanese marketing partners, in Europe throughHewlett-Packard Company and in Mexico, South America, China, Australia, andcertain other Asian and Pacific Rim countries, through selected distributionchannels.  On August 3, 1998, theCompany entered into a long-term sales, marketing and research alliance withAbbott Laboratories (“Abbott”), which, among other things, since November 1,1998, has altered significantly the manner in which the Company markets andsells its products worldwide.  Themajority of the Company’s revenues are now derived from Abbott.  Please see “Alliance with Abbott Laboratories”under Item 7 of the Company’s Annual Report on Form 10–K for the yearended December 31, 2001 for a description of the Company’s agreements withAbbott.

 

On July 25, 2002, the Company announced itsintention to terminate its exclusive marketing and distribution agreement datedAugust 3, 1998 (the “Distribution Agreement”) with Abbott, effective December31, 2003.  As a result, the Company isobligated to make the following payments on the dates noted: (a) on December31, 2003 a $5.0 million one-time termination fee to compensate Abbott for aportion of its costs in undertaking the distribution relationship, (b) onDecember 31, 2003 $5.0 million representing the unrecognized portion of a $25.0million prepayment made by Abbott against incremental product sales, (c) earlyin 2004, approximately $5.0 million to repurchase inventory and equipment fromAbbott, as required in the Distribution Agreement, and (d) on December 31, 2004and on each December 31 thereafter through 2008, for a total of five unequalpayments, residual payments based upon Abbott’s net sales of the Company’sproducts during the final twelve months of the Distribution Agreementterm,  approximately $55 million.  These payments will have a material impacton the Company’s cash flows and results of operations.  Thesepayments will have a material impact on the Company’s cash flows and results ofoperations.  The Company anticipatesthat the profit margins presently being earned by Abbott as a result of thesale of the

 

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Company’sproducts, will be earned by the Company commencing January 1, 2004, and willprovide the Company with the sufficient cash to fund these payments.  TheCompany has begun to take actions to assume primary responsibility for themarketing and sale of its products, effective January 1, 2004.  During the quarter ended June 30, 2002 theseactions included hiring six additional sales personnel.  The Company anticipates further additions ofpersonnel in coming quarters.  TheCompany may incur additional costs or recognize lower revenues than anticipatedas a result of resuming direct distribution of its products.

 

**Results of Operations**

 

**Three Months Ended June 30, 2002**

** **

The Company generatedtotal net revenues of $14.8 million and $14.4 million for the three monthsended June 30, 2002 and 2001, respectively, including international netrevenues (as a percentage of total net revenues) of $3.9 million (26.1%) and$3.5 million (24.1%), respectively. Total net revenues from Abbott represented 84.9% and 84.3% of theCompany’s worldwide total net revenues for the three months ended June 30, 2002and 2001, respectively.

 

The$0.4 million, or 2.9%, increase in total net revenues was primarily due toincreased shipment volumes of the Company’s cartridges.  Total worldwide cartridge shipmentsincreased by 13.6% to 3,407,850 units in the three months ended June 30, 2002,from 2,999,350 units in the three months ended June 30, 2001.  The increase in cartridge sales volumereflects higher cartridge consumption by existing hospital users and theaddition of new hospital accounts in the international market.  The increase in worldwide cartridge volumewas partially offset by a decrease in worldwide average selling prices percartridge, which decreased from $3.35 in the second quarter of 2001 to $3.30 inthe second quarter of 2002.  Thedecrease in worldwide average selling prices is primarily attributable to lowerend-user selling prices in Japan. Worldwide hand-held analyzer shipments decreased 11.4% to 846 units inthe three months ended June 30, 2002, from 955 units in the three months endedJune 30, 2001.  Other related partyrevenues were $0.2 million in each of the three-month periods ended June 30,2002 and June 30, 2001.

 

Manufacturing costs (asa percentage of product sales) associated with product sales for the threemonths ended June 30, 2002 and 2001 were $12.2 million (83.5%) and $12.0million (86.9%), respectively.  Cost ofproducts sold as a percentage of product sales generally decreases withincreased production volumes of the Company’s cartridges and with improvementsin manufacturing productivity yields.

 

The Company incurredresearch and development costs (as a percentage of total net revenues) of $1.9million (13.1%) and $2.0 million (13.8%) for the three months ended June 30,2002 and 2001, respectively.  Researchand development expenses consist of costs associated with the personnel,material, equipment and facilities necessary for conducting new productdevelopment.  Research and developmentexpenditures may increase over the next several years.  The amount and timing of such increase willdepend upon numerous factors including the level of activity at any point intime, the breadth of the Company’s development objectives and the success ofits development programs.

 

The Company incurredgeneral and administrative expenses (as a percentage of total net revenues)of  $2.0 million (13.6%) and $1.9million (13.4%) for the three months ended June 30, 2002 and 2001,respectively.  General andadministrative expenses consist primarily of salaries and benefits ofpersonnel, office costs, legal and other professional fees and other costsnecessary to support the Company’s infrastructure.

 

The Company incurredsales and marketing expenses (as a percentage of total net revenues) of $2.5million (17.1%) and $2.3 million (16.2%) for the three months ended June 30,2002 and 2001, respectively.  Sales andmarketing expenses consist primarily of salaries, commissions, benefits,travel, business development and similar expenditures for salesrepresentatives, implementation coordinators and international marketingsupport, as well as order entry, product distribution, technical services,clinical affairs, product literature, market research, and other salesinfrastructure costs.  A portion of thecosts of the implementation coordinators is reimbursed by Abbott, and as aresult, $0.2 million of reimbursement is included in total net revenues in eachof the three-month periods ended June 30, 2002 and 2001.  The increase in sales and marketing expensesis primarily attributable to the increase in sales personnel as the Companyprepares to assume primary responsibility for the

 

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marketing and sale ofits products.   The Company anticipatesfurther personnel additions and increased sales and marketing costs in thecoming quarters.

 

Other income, net, of$0.3 million and $0.2 million for the three months ended June 30, 2002 and2001, respectively, primarily reflects interest income earned on cash and cashequivalents and the net impact of foreign currency gains and losses.  Effective May 31, 2002, as a result ofrepayment of a portion of intercompany debt owed by the Company's Canadiansubsidiary and that subsidiary's deemed ability to repay the remainingintercompany debt, the Company is required to treat such intercompany debt asshort-term in accordance with SFAS No. 52 "Foreign CurrencyTranslation."  SFAS No. 52 requiresthe Company to record the impact of foreign currency gains and losses onshort-term intercompany debt in the Company's results of operations.  Foreign currency gains of $0.1 million wererecorded for the three months ended June 30, 2002.  These gains were the result of the impact of the exchange ratebetween U.S. dollars and Canadian dollars on the intercompany debt owed byi-STAT Corporation’s Canadian subsidiary to i-STAT Corporation.  The amount of the gains and losses could bematerial in the event of significant changes in the exchange rate between U.S.dollars and Canadian dollars.

 

During the three monthsended June 30, 2001, the Company recognized settlement costs of $10.5 millionrelated to the settlement of the patent infringement lawsuit with NovaBiomedical Corporation, of which $10.0 million was a settlement payment to Novaand $0.5 million was for retroactive royalties due to Nova based on sales ofcertain products.

 

In the second quarter of2002, the Company recorded accretion of Preferred Stock of $0.1 million anddividends on Preferred Stock of $0.3 million. The accretion of Preferred Stock relates to the issuance by the Companyof Series D Redeemable Convertible Preferred Stock (the “Series D Stock”) inDecember of 2001.  The accretionrecorded by the Company reflects amortization of the difference between the netfair value at issuance and the redemption (or stated) value of such stock.  The Series D Stock is being accreted over aperiod of ten years.

 

The Series D Stockcarries a dividend of 8%, which is either accrued or paid in cash quarterly, atthe option of the Company.  The second quarter2002 dividend on the Series D Stock was recorded at its fair value of $0.3million.  The dividend was not paid incash and its stated value of $0.6 million was accrued and added to the carryingvalue and liquidation preference of the Series D Stock.  The difference between the stated value andthe fair value of the dividend was recorded as a charge to additionalpaid-in-capital.

 

Net loss available toCommon Stockholders for the three months ended June 30, 2002 was $4.0 million,or 20 cents per basic and diluted share, compared with a net loss of $14.2million, or 78 cents per basic and diluted share, for the second quarter of2001.  The decrease in the net loss isprimarily related to the settlement costs recognized in the second quarter of2001 by the Company as part of the Nova Biomedical Corporation patentinfringement resolution.  The weightedaverage number of shares used in computing basic and diluted net loss per sharewas 20.085 million and 18.306 million in the 2002 and 2001 periods, respectively.  The increase in the weighted average numberof shares primarily reflects the issuance of 1,480,000 shares of Common Stockin August 2001 and the exercise of employee stock options.

 

**Six Months Ended June30, 2002**

** **

The Company generatedtotal net revenues of $29.2 million and $26.7 million for the six months endedJune 30, 2002 and 2001, respectively. Total net revenues included international revenues (as a percentage oftotal revenues) of  $7.9 million (26.9%)and $6.6 million (24.9%), respectively. Total net revenues from Abbott represented 83.2% and 84.6% of theCompany’s worldwide total net revenues for the six months ended June 30, 2002and 2001, respectively.

 

The $2.5 million (9.3%)increase in total net revenues was primarily due to increased internationalsales volume of the Company’s cartridges, reflecting higher cartridgeconsumption by existing hospital customers and the addition of new hospitalcustomers, along with increased sales of the i-STAT 1 analyzer.  Worldwide cartridge sales increased 5.9% to6,097,675 units in the six months ended June 30, 2002, from 5,758,350 units inthe six months ended June 30, 2001.  Worldwide average selling prices per cartridge were $3.37 in bothperiods ended June 30, 2002 and June 30, 2001. Analyzer sales volume increased 17.6% to 2,021 units in the six monthsended June 30, 2002, from 1,719 units in the six months ended June 30,2001.  Other related party revenues were$0.4 million in each of the six-month periods ended June 30, 2002 and June 30,2001.

 

Manufacturing costs (asa percentage of product sales) associated with product sales for the six monthsended June 30, 2002 and 2001 were $24.9 million (86.5%) and $22.6 million(86.8%), respectively.  Cost of productssold, as a percentage of product sales, generally decreases with increasedproduction volume of the Company’s cartridges and improvements in manufacturingproductivity and yields.  Cost ofproducts sold, as a percentage of product sales, improved for the six months

 

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ended June 30, 2002 ascompared to 2001 due to increased production volume, which caused fixedmanufacturing costs to be spread over a larger number of product units, and thefact that the first half of 2001 was negatively impacted by reduced levels ofproduction and higher than normal scrap levels.  However, cost of products sold as a percentage of product saleswas negatively impacted by a charge of $1.6 million recorded in the first quarterof 2002 for the write-off of certain cartridges in inventory and thereplacement of certain cartridges in the field that exhibited a higher thanusual quality check rejection rate.

 

The Company incurredresearch and development costs (as a percentage of total net revenues) of $3.9million (13.3%) and $3.9 million (14.7%) for the six months ended June 30, 2002and 2001, respectively.  Research anddevelopment expenses consist of costs associated with the personnel, material,equipment and facilities necessary for conducting new product development.Research and development expenditures may increase over the next severalyears.  The amount and timing of suchincrease will depend upon numerous factors including the level of activity atany point in time, the breadth of the Company’s development objectives and thesuccess of its development programs.

 

The Company incurredgeneral and administrative expenses (as a percentage of total net revenues)of  $3.4 million (11.6%) and $3.5million (13.1%) for the six months ended June 30, 2002 and 2001, respectively.  General and administrative expenses consistprimarily of salaries and benefits of personnel, office costs, legal and otherprofessional fees and other costs necessary to support the Company’sinfrastructure.

 

The Company incurredsales and marketing expenses (as a percentage of total net revenues) of $4.8million (16.4%) and $4.7 million (17.6%) for the six months ended June 30, 2002and 2001, respectively.  Sales andmarketing expenses consist primarily of salaries, benefits, travel, and other expendituresfor sales representatives, product implementation coordinators, internationalmarketing support, order entry, distribution, technical services, productliterature, market research, clinical studies and other sales infrastructurecosts.  A portion of the costs ofproduct implementation coordinators is reimbursed by Abbott, and as result,total net revenues and gross profit include $0.4 million of such reimbursementin each of the six-month periods ended June 30, 2002 and 2001. The increase in salesand marketing expenses is primarily attributable to the increase in salespersonnel as the Company prepares to assume primary responsibility for themarketing and sale of its products.  The Company anticipates further personnel additions and increased salesand marketing costs in the coming quarters.

 

Other income, net, of$0.5 million for the six months ended June 30, 2002 and 2001, primarilyreflects interest income earned on cash and cash equivalents and the net impactof foreign currency gains and losses. Effective May 31, 2002, as a result of repayment of a portion ofintercompany debt owed by the Company's Canadian subsidiary and thatsubsidiary's deemed ability to repay the remaining intercompany debt, theCompany is required to treat such intercompany debt as short-term in accordancewith SFAS No. 52 "Foreign Currency Translation."  SFAS No. 52 requires the Company to recordthe impact of foreign currency gains and losses on short-term intercompany debtin the Company's results of operations. Foreign currency gains of $0.1 million were recorded for the six monthsended June 30, 2002.  These gains werethe result of the impact of the exchange rate between U.S. dollars and Canadiandollars on the intercompany debtowed by i-STAT Corporation’s Canadian subsidiary to i-STAT Corporation.  The amount of the gains and losses could bematerial in the event of significant changes in the exchange rate between U.S.dollars and Canadian dollars.

 

During the six monthsended June 30, 2001, the Company recognized settlement costs of $10.5 millionrelated to the settlement of the patent infringement lawsuit with NovaBiomedical Corporation, of which $10.0 million was a settlement payment to Novaand $0.5 million was for retroactive royalties due to Nova based on sales ofcertain products.

 

During the six monthsended June 30, 2002, the Company recorded accretion of Preferred Stock of $0.2million and dividends on Preferred Stock of $0.8 million.  The accretion of Preferred Stock relates tothe issuance by the Company of Series D Redeemable Convertible Preferred Stock(the “Series D Stock”) in December of 2001. The accretion recorded by the Company reflects amortization of thedifference between the net fair value at issuance and the redemption (orstated) value of such stock.  The SeriesD Stock is being accreted over a period of ten years.

 

The Series D Stockcarries a dividend of 8%, which is either accrued or paid in cash quarterly, atthe option of the Company.  The dividendon the Series D Stock was recorded at its fair value of $0.8 million for thesix months ended June 30, 2002.  Thedividend was not paid in cash and its stated value of $1.2 million was accruedand added to the carrying value and liquidation preference of the Series DStock.  The difference between thestated value and the fair value of the dividend was recorded as a charge toadditional paid-in-capital.

 

Net loss available toCommon Stockholders for the six months ended June 30, 2002 was $8.4 million, or42 cents per basic and diluted share, compared with a net loss of $18.0million, or 99 cents per basic and diluted share for the six months

 

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ended June 30,2001.  The weighted average number ofshares used in computing basic and diluted net loss per share was 20.033million and 18.269 million in the 2002 and 2001 periods, respectively. Theincrease in the weighted average number of shares primarily reflects theissuance of 1,480,000 shares of Common Stock in August 2001 and the exercise ofemployee stock options.

 

**Liquidity and CapitalResources**

** **

At June 30, 2002, theCompany had cash and cash equivalents of $28.5 million, a decrease of $14.6million from the December 31, 2001 balance of $43.1 million.  The decrease primarily reflects $12.7 millionof cash used in operating activities as a result of the application of  $10.2 million received from Abbott in priorperiods to amounts owed by Abbott, combined with $1.6 million of equipmentpurchases.  Working capital decreased by$6.2 million from $48.1 million to $41.9 million during the same period.  Changes in working capital during the sixmonths ended June 30, 2002 were primarily comprised of the decrease in cash andcash equivalents of $14.6 million and the decrease in inventory of $1.6 millionoffset by an increase in accounts receivable of $6.9 million, a decrease inaccounts payable to related party of $2.7 million and a decrease in deferredrevenue — related party, current of $0.6 million.

 

The Company expects itscash and cash equivalents to be sufficient to meet its obligations and itsliquidity and capital requirements for the foreseeable future, including thosepayment obligations to Abbott that result from termination of the DistributionAgreement, as described previously. However, numerous factors may change this expectation, including theresults of the Company’s sales and marketing activities, particularly upon itsresumption of direct marketing and sale of its products and its new productdevelopment efforts, manufacturing difficulties, manufacturing efficiencies andplant expansion plans, the results of litigation and other dispute resolutionproceedings, competitive conditions, long-term strategic decisions, and otherfactors listed under “Factors That May Affect Future Results” in the Company’s2001 Annual Report on Form 10-K on file with the Securities and ExchangeCommission.  The Company regularlymonitors capital raising alternatives in order to take advantage ofopportunities to supplement its current working capital upon favorable terms,including joint ventures, strategic corporate partnerships or other alliancesand the sale of equity and/or debt securities.

 

International sales areinvoiced and paid in U.S. dollars. However, the cartridge price received from international partners,including Abbott, may be affected by changes in the value of the U.S. dollarrelative to local currencies because the price paid by customers to ourpartners is set in local currencies. When the value of foreign currencies changes with respect to the U.S.dollar, the price paid by our partners to us changes due to the foreignexchange conversion of local currency prices. Price reductions are limited, however, by guaranteed U.S. dollar minimumprices established for each cartridge.

 

The Company’s cartridgemanufacturing is conducted through a wholly-owned subsidiary in Canada.  Most manufacturing labor and overhead costsof this subsidiary are incurred in Canadian dollars, while some raw materialpurchases are made in U.S. dollars.  TheCanadian operation is primarily funded by payments in U.S. dollars made by theU.S. parent Company for cartridges purchased for resale to its customers.  Since most of the cartridge manufacturingexpenses are incurred in Canadian dollars, the cost of products sold andtherefore, the Company’s consolidated results of operations and cash flows canbe impacted by a change in exchange rates between the Canadian dollar and theU.S. dollar.

 

The impact of inflationon the Company’s business has been minimal and is expected to be minimal forthe near-term.

 

**Contingencies**

 

The Company was adefendant in a case entitled Nova Biomedical Corporation, Plaintiff v.i-STAT Corporation, Defendant.  Thecomplaint, which was filed in the United States District Court for the Districtof Massachusetts on June 27, 1995, alleged infringement by the Company of NovaBiomedical Corporation’s (“Nova”) U.S. Patent No. 4,686,479 (the“Patent”).  In February 1998, the Courtentered summary judgment in favor of the Company on the issue of patent infringement.  The plaintiff appealed the dismissal to theFederal Circuit.  The Federal Circuitaffirmed two of the grounds of the dismissal (proper interpretation of the Patentand that the Company does not literally infringe), but remanded the case to theDistrict Court with instructions to reconsider whether the Company’s deviceperforms a certain measurement in a substantially equivalent way to a methodcovered by the Patent, and therefore infringes under the “doctrine ofequivalents.”  On July 26, 2001 theCompany entered into a license agreement and a settlement agreement with Novaunder which the Company agreed to pay Nova $10.5

 

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million, which wasrecorded as a charge in the second quarter of 2001.  Pursuant to the agreements, $6.5 million was paid on July 26,2001, a retroactive royalty of $0.5 million was paid on August 14, 2001 for theperiod of January 1, 2001 through June 30, 2001, and $3.5 million plus interestwas due to be paid over one year in equal quarterly installments, pursuant to asecured promissory note.  The promissorynote was prepaid on August 3, 2001.  Thelicense agreement provides for the payment to Nova of a royalty equal to 4% ofthe invoice price of products sold in the United States after January 1, 2001,which products determine hematocrit levels according to any method used by theCompany prior to December 31, 2000, as well as any method covered by thePatent.  The royalties are payablethrough the life of the Patent (July 22, 2005).  The Company has commercialized products that determine hematocritlevels using a method that was not used by the Company prior to December 31,2000 and which the Company believes is not covered by the Patent.  Consequently, the Company does not believethat it owes any additional royalties to Nova. On February 28, 2002, Nova filed a demand for arbitration claiming thatthe method by which the Company’s products determine hematocrit is coveredunder the Patent and the license agreement. Nova is seeking royalties from July 1, 2001.  If the Company is unsuccessful in defending its position in thearbitration and does not develop new methods that do not utilize the coveredtechnology, it may be forced to continue to pay royalties to Nova through thelife of the Patent and approximately $1.1 million in respect of products soldfrom July 1, 2001 through June 30, 2002. The Company plans to defend this matter vigorously.

 

The Company and Abbottare in disagreement over the amount of money Abbott is entitled to for thesharing of certain cartridge production cost savings resulting from an increasein sales volume.  This disputed itemrelates to different interpretations of certain terms of the DistributionAgreement.  If this disagreement is notresolved amicably, it must be resolved through binding arbitration asprescribed by the Distribution Agreement. Management of the Company believes that Abbott’s position on this issuein dispute is without merit and that, in the event that this issue is resolvedthrough arbitration, the Company will not incur any additional liability toAbbott.  The amount in dispute isapproximately $1.1 million at June 30, 2002, and if this matter is resolved infavor of Abbott, which management of the Company believes is unlikely, theCompany’s cost of goods sold would increase by up to the amount indispute.  Such adjustment would be madewhen, and if, it is determined that an unfavorable outcome to the Company isprobable.

 

**Recent AccountingPronouncements**

 

On August 15, 2001, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accountingfor Asset Retirement Obligations.”  SFASNo. 143 is effective for fiscal years beginning after June 15, 2002.  This statement requires that the fair valueof a liability for an asset retirement obligation be recognized in the periodin which it is incurred if a reasonable estimate of fair value can bemade.  In addition, the associated assetretirement costs are capitalized as part of the carrying amount of thelong-lived asset and subsequently allocated to expense over the asset’s usefullife. The Company does not expect that the adoption of this statement will havea material impact on its financial position or results of operations.

 

In May 2002, FASB issuedSFAS No. 145, “Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS 13, andTechnical Corrections as of April 2002.” SFAS No. 145 is effective for fiscal years beginning after May 15, 2002and is effective for SFAS No. 13 transactions occurring after May 15,2002.  This statement rescinds SFAS No.4 and, thus the exception to applying Accounting Principles Board Opinion No.30 (“APB No. 30”) to all gains and losses related to extinguishments ofdebt.  As a result, gains and lossesfrom extinguishments of debt are classified as extraordinary items only if theymet the criteria in APB No. 30.  SFASNo. 64 previously amended SFAS No. 4 and is no longer necessary.   This statement also amends SFAS No. 13 torequire sale-leaseback accounting for certain lease modifications that haveeconomic effects that are similar to sale-leaseback transactions.  This statement rescinds SFAS No. 44 andmakes various technical corrections to other existing pronouncements.  The Company does not expect the adoption ofthis statement will have a material impact on its financial position or resultsof operations.

 

On July 29, 2002, FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  SFAS No. 146 is effectivefor exit or disposal activities that are initiated after December 31,2002.  This statement addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3.  “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in Restructuring).”  Thisstatement requires that a liability for a cost associated with an exit ordisposal activity be recognized when the liability is incurred.  Under Issue 94-3, a liability for an exitcost as defined in Issue 94-3 was recognized at the date of an entity’scommitment to an exit plan.  Therefore,this statement eliminates the definition and requirements for recognition ofexit costs in Issue 94-3.  Thisstatement also establishes that fair value is the objective for initial

 

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measurement of theliability.  The Company does not expectthat the adoption of this statement will have a material impact on it financialposition or results of operations.

 

***SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS***

** **

*CERTAIN STATEMENTS IN THIS “MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” MAY RELATE TOFUTURE EVENTS AND EXPECTATIONS AND AS SUCH CONSTITUTE “FORWARD-LOOKINGSTATEMENTS,” WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACTOF 1995.  THE WORDS “BELIEVES,”“ANTICIPATES,” “PLANS,” “EXPECTS,” AND SIMILAR EXPRESSIONS ARE INTENDED TOIDENTIFY 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 ANYFUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCHFORWARD-LOOKING STATEMENTS AND TO VARY SIGNIFICANTLY FROM REPORTING PERIOD TOREPORTING PERIOD.  SUCH FACTORS INCLUDE,AMONG OTHERS, COMPETITION FROM EXISTING MANUFACTURERS AND MARKETERS OF BLOODANALYSIS PRODUCTS WHO HAVE GREATER RESOURCES THAN THE COMPANY, ECONOMIC ANDGEOPOLITICAL CONDITIONS AFFECTING THE COMPANY’S TARGET MARKETS, ACTS OFTERRORISM, THE UNCERTAINTY OF NEW PRODUCT DEVELOPMENT INITIATIVES, THE ABILITYTO ATTRACT AND RETAIN KEY SCIENTIFIC, TECHNOLOGICAL AND MANAGEMENT PERSONNEL,DEPENDENCE UPON LIMITED SOURCES FOR PRODUCT MANUFACTURING COMPONENTS, UPON ASINGLE MANUFACTURING FACILITY AND UPON INNOVATIVE AND HIGHLY TECHNICALMANUFACTURING TECHNIQUES, MARKET RESISTANCE TO NEW PRODUCTS AND POINT-OF-CARE-BLOODDIAGNOSIS, INCONSISTENCY IN CUSTOMER ORDER PATTERNS, DOMESTIC AND INTERNATIONALREGULATORY CONSTRAINTS, UNCERTAINTIES OF INTERNATIONAL TRADE, PENDING ANDPOTENTIAL DISPUTES CONCERNING OWNERSHIP OF INTELLECTUAL PROPERTY, AVAILABILITYOF CAPITAL UPON FAVORABLE TERMS AND DEPENDENCE UPON AND CONTRACTUALRELATIONSHIPS WITH STRATEGIC PARTNERS, PARTICULARLY ABBOTT LABORATORIES.  IN ADDITION, THE COMPANY’S DECISION TO ENDITS ALLIANCE WITH ABBOTT LABORATORIES AND RESUME DIRECT DISTRIBUTION OF ITSPRODUCTS INVOLVES ADDITIONAL RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TOQUANTIFY AT THIS TIME.  FOR EXAMPLE, THECOMPANY MAY INCUR COSTS OR RECOGNIZE REVENUES IN CONNECTION WITH RESUMINGDIRECT DISTRIBUTION THAT ARE GREATER OR LESSER, RESPECTIVELY, THAN ANTICIPATED.  SEE ADDITIONAL DISCUSSION UNDER “FACTORSTHAT MAY AFFECT FUTURE RESULTS” IN THE COMPANY’S ANNUAL REPORT ON FORM 10-K FORTHE YEAR ENDED DECEMBER 31, 2001, AND OTHER FACTORS DETAILED FROM TIME TO TIMEIN THE COMPANY’S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.*

 

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**i-STATCORPORATION**

 

**PART II — OTHER INFORMATION**

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**Item 1. Legal Proceedings**

** **

The Company was adefendant in a case entitled Nova Biomedical Corporation, Plaintiff v.i-STAT Corporation, Defendant.  Thecomplaint, which was filed in the United States District Court for the Districtof Massachusetts on June 27, 1995, alleged infringement by the Company of NovaBiomedical Corporation’s (“Nova”) U.S. Patent No. 4,686,479 (the “Patent”).  In February 1998, the Court entered summaryjudgment in favor of the Company on the issue of patent infringement.  The plaintiff appealed the dismissal to theFederal Circuit.  The Federal Circuitaffirmed two of the grounds of the dismissal (proper interpretation of thePatent and that the Company does not literally infringe), but remanded the caseto the District Court with instructions to reconsider whether the Company’sdevice performs a certain measurement in a substantially equivalent way to a methodcovered by the Patent, and therefore infringes under the “doctrine ofequivalents.”  On July 26, 2001 theCompany entered into a license agreement and a settlement agreement with Novaunder which the Company agreed to pay Nova $10.5 million, which was recorded asa charge in the second quarter of 2001. Pursuant to the agreements, $6.5 million was paid on July 26, 2001, aretroactive royalty of $0.5 million was paid on August 14, 2001 for the periodof January 1, 2001 through June 30, 2001, and $3.5 million plus interest wasdue to be paid over one year in equal quarterly installments, pursuant to asecured promissory note.  The promissorynote was prepaid on August 3, 2001.  Thelicense agreement provides for the payment to Nova of a royalty equal to 4% ofthe invoice price of products sold in the United States after January 1, 2001,which products determine hematocrit levels according to any method used by theCompany prior to December 31, 2000, as well as any method covered by thePatent.  The royalties are payablethrough the life of the Patent (July 22, 2005).  The Company has commercialized products that determine hematocritlevels using a method that was not used by the Company prior to December 31,2000 and which the Company believes is not covered by the Patent.  Consequently, the Company does not believethat it owes any additional royalties to Nova. On February 28, 2002, Nova filed a demand for arbitration claiming thatthe method by which the Company’s products determine hematocrit is covered underthe Patent and the license agreement. Nova is seeking royalties from July 1, 2001.  If the Company is unsuccessful in defending its position in thearbitration and does not develop new methods that do not utilize the coveredtechnology, it may be forced to continue to pay royalties to Nova through thelife of the Patent and approximately $1.1 million in respect of products soldfrom July 1, 2001 through June 30, 2002. The Company plans to defend this matter vigorously.

** **

**17**

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** **

**Item 4. Submission ofMatters to a Vote of Security Holders**

** **

The company held itsAnnual Meeting of Stockholders on May 30, 2002, at which time three matterswere submitted to a vote of stockholders. A description of the matters voted upon and a voting tabulation for eachmatter is as follows:

 

I.                                         Electionof six members to the Board of Directors, each to serve until the next AnnualMeeting.

 

|                      |   | **Number of Votes** |   |
|---------------------------|--------|---------------------|--------|
| **Name  of Nominee**      |   | **For**             |   | **Against/Withheld** |   | **Abstentions** |   | **Broker Non-Votes** |   |
| J. Robert Buchanan,  M.D. |   | 19,331,607          |   | 872,748 |   | N/A |   | N/A |   |
| Sam H. Eletr, Ph.D.       |   | 19,747,840          |   | 456,515 |   | N/A |   | N/A |   |
| Daniel R. Frank           |   | 19,747,840          |   | 456,515 |   | N/A |   | N/A |   |
| William P. Moffitt        |   | 19,741,930          |   | 462,425 |   | N/A |   | N/A |   |
| Lionel N. Sterling        |   | 19,741,659          |   | 462,696 |   | N/A |   | N/A |   |
| Anne M. VanLent           |   | 19,334,207          |   | 870,148 |   | N/A |   | N/A |   |

 

II.                                     Approvalof amendment to the Company’s Equity Incentive Plan.

 

| **For**    |   | **Against/Withheld** |   | **Abstentions** |   | **Broker Non-Votes** |   |
|------------|--------|----------------------|--------|-----------------|--------|----------------------|--------|
| 16,245,033 |   | 3,905,957            |   | 53,365          |   | N/A                  |   |

 

III.                                 Ratificationof the appointment of PricewaterhouseCoopers LLP, as independent accountants toaudit the Company’s books and accounts for the year 2002.

 

| **For**    |   | **Against/Withheld** |   | **Abstentions** |   | **Broker Non-Votes** |   |
|------------|--------|----------------------|--------|-----------------|--------|----------------------|--------|
| 19,768,813 |   | 425,797              |   | 9,745           |   | N/A                  |   |

 

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**EXHIBIT INDEX**

 

**ITEM 6.    Exhibits andReports on Form 8-K**

 
|   | (a)    |   | Exhibits                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                          |
|   | 3.1    |   | Restated  Certificate of Incorporation (Form S-8/S-3 Registration Statement, File No.  33-48889)*                                                                                                                                                                                                                                                             |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                          |
|   | 3.2    |   | By-Laws  (Form 10-K for fiscal year ended December 31, 1996)*                                                                                                                                                                                                                                                                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                          |
|   | 3.3    |   | Certificate  of Designation, Preferences and Rights of Series A Preferred Stock (Form 8-K,  dated July 10, 1995 and amended on September 11, 1995)*                                                                                                                                                                                                           |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                          |
|   | 3.5    |   | Certificate  of Designation, Preferences and Rights of Series C Preferred Stock (Form 10-Q  for the quarterly period ended September 30, 2001)*                                                                                                                                                                                                               |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                          |
|   | 3.6    |   | Certificate  of Amendment to the Restated Certificate of Incorporation (Form 10-Q for the  quarterly period ended September 30, 2001)*                                                                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                          |
|   | 3.7    |   | Certificate  of Designation, Preferences and Rights of Series D Preferred Stock (Form 10-K  for fiscal year ended December 31, 2001)*                                                                                                                                                                                                                         |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                          |
|   | 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)*                                                                                                                                                           |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.56  |   | Employment  Agreement between Registrant and Lorin J. Randall, dated May 30, 2002                                                                                                                                                                                                                                                                             |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                          |
|   | *      |   | These  items are hereby incorporated by reference from the exhibits of the filing or  report indicated (except where noted, Commission File No. 0-19841) and are  hereby made a part of this Report                                                                                                                                                           |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                          |
|   | (b)    |   | Reports  on Form 8-K                                                                                                                                                                                                                                                                                                                                          |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                          |
|   |   |   | On  April 1, 2002, the Company filed a current Report on Form 8-K attaching press  releases pertaining to adjustments to its previously announced 2001 financial  results and the acknowledgement by the Company that Abbott Laboratories had  met the minimum three-year growth rate milestone provided for in its  Distribution Agreement with the Company. |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                          |
|   |   |   | On  May 31, 2002, the Company filed a current Report on Form 8-K attaching a  press release pertaining to the appointment of Lorin Jeffry Randall as Senior  Vice President of Finance, Chief Financial Officer and Treasurer and the  resignation of Roger J. Mason as Vice President of Finance, Chief Financial  Officer and Treasurer.                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                          |
|   |   |   | On  July 26, 2002 the Company filed a current Report on Form 8-K attaching press  releases pertaining to the notification of its intent to terminate its  exclusive marketing and distribution agreement with Abbott Laboratories and  disclosing its financial results for the second quarter of 2002.                                                       |

 

19

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**SIGNATURES**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| DATE:    August  14, 2002 |   |                                                   |   |
|-----------------------------------------------|--------|--------------------------------------------------------|--------|
|                                          |   |                                                   |   |
|                                          |   | i-STAT  CORPORATION                                    |   |
|                                          |   | (Registrant)                                           |   |
|                                          |   |                                                   |   |
|                                          |   |                                                   |   |
|                                          | BY:    | */s/ William P. Moffitt*                               |   |
|                                          |   | William  P. Moffitt                                    |   |
|                                          |   | President  and Chief Executive Officer                 |   |
|                                          |   | (Principal  Executive Officer)                         |   |
|                                          |   |                                                   |   |
|                                          | BY:    | */s/ Lorin J. Randall*                                 |   |
|                                          |   | Lorin  J. Randall                                      |   |
|                                          |   | Senior  Vice President of Finance,                     |   |
|                                          |   | Treasurer  and Chief Financial Officer                 |   |
|                                          |   | (Principal  Financial Officer and  Accounting Officer) |
|                                               |        |                                                        |        |  |

 

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