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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
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Annual report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934
for
the fiscal year ended March 25, 2005
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or
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Transition report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934
for
the transition period
from to
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Commission File Number: 000-20198
CHOLESTECH CORPORATION
(Exact name of registrant as specified in its charter)
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CALIFORNIA |
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94-3065493 |
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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3347 INVESTMENT
BOULEVARD |
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HAYWARD, CALIFORNIA
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94545 |
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(Address of principal executive
offices)
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(Zip Code)
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Registrant’s telephone number, including area code:
(510) 732-7200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
SERIES A PARTICIPATING PREFERRED STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act). Yes þ No o
The aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the closing sale
price of the common stock on September 24, 2004 as reported
on the NASDAQ National Market, was approximately $75,964,000.
Shares of common stock held by each executive officer and
director and by each person who owns 5% or more of the
outstanding common stock have been excluded from this
computation. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. The
registrant does not have any non-voting stock.
As of May 31, 2005, the registrant had
outstanding 14,648,713 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant has incorporated by reference into Part III
of this Annual Report on Form 10-K portions of its Proxy
Statement for the 2005 Annual Meeting of Shareholders to be held
August 17, 2005.
Cholestech Corporation
Annual Report on Form 10-K
For The Fiscal Year Ended March 25, 2005
Table of Contents
1
Part I
Some of the statements contained in this Annual Report on
Form 10-K are forward-looking statements about Cholestech
Corporation (“we,” “us” or
“Cholestech”), including but not limited to those
specifically identified as such, that involve risks and
uncertainties. The statements contained in the Report on
Form 10-K that are not purely historical are forward
looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act,
including, without limitation, statements regarding our
expectations, beliefs, intentions or strategies regarding the
future. All forward-looking statements included in this Report
on Form 10-K are based on information available to us on
the date hereof, and we assume no obligation to update any such
forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors, which may cause
our actual results to differ materially from those implied by
the forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as
“may,” “will,” “should,”
“expects,” “plans,” “anticipates,”
“believes,” “estimates,”
“predicts,” “potential” or
“continue” or the negative of these terms or other
comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither any
other person nor we assume responsibility for the accuracy and
completeness of such statements. Important factors that may
cause actual results to differ from expectations include those
discussed in “Factors Affecting Future Operating
Results” beginning on page 38 in this document.
We were incorporated under the laws of the State of California
in February 1988. Our principal executive offices are located at
3347 Investment Boulevard, Hayward California 94545 and our
telephone number at that location is (510) 732-7200.
OVERVIEW
We are a leading provider of diagnostic tools and information
for immediate risk assessment and therapeutic monitoring of
heart disease and diabetes. We currently manufacture the
LDX® System (the “LDX System”), which includes
the LDX Analyzer and a variety of single-use test cassettes and
market the LDX System in the United States, Europe, Asia,
Australia and South America. The LDX System, which is waived
under the Clinical Laboratory Improvement Amendments
(“CLIA”), allows healthcare providers to perform
individual tests or combinations of tests with a single drop of
blood from a fingerstick within five minutes. Our current
products measure and monitor blood cholesterol, related lipids,
glucose and liver function, and are used to test patients at
risk of or suffering from heart disease, diabetes and liver
disease. The LDX System can also provide the Framingham Risk
Assessment from the patient’s results as measured on the
lipid profile cassette. In fiscal year 2005, revenue from sales
of the LDX Analyzer and single use test cassettes represented
over 90% of our revenue.
We also market and distribute the
GDXtm System
(the “GDX System”) under a multi-year global
distribution agreement with Provalis Diagnostics Ltd. We began
distributing the GDX System under this agreement in July 2002.
The Cholestech GDX is a hemoglobin A1c (“A1C”) testing
system that is also waived under CLIA and is used to measure A1C
in less than five minutes using a single drop of blood from a
fingerstick. The quantitative measure of A1C is well-established
as an indicator of a patient’s long-term glycemic control.
Unlike daily glucose monitoring, which provides a snapshot of a
patient’s glucose level at the time of testing, A1C
provides an average glucose level over the previous
90 days. A1C levels indicate the long-term progress of a
patient’s diabetes and therapy management.
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The current healthcare system in the United States, while
historically successful in treating acute conditions, is
currently not adequately serving the growing need for preventive
healthcare and the management of chronic disease. In addition,
it is estimated by the U.S. Census Bureau that
approximately 44 million Americans do not have health
insurance. These factors are driving a growing trend towards
personal health management, which we believe requires practical,
economical and efficient tools to address a widespread, growing
need. Our cost effective diagnostic technologies provide
convenient, accurate testing as a part of a disease management
program and are used for screening for heart disease and
diabetes by identifying individuals with elevated cholesterol
and blood glucose levels and monitoring the ongoing condition of
people with heart disease and diabetes whose treatment programs
may involve long-term, complex drug therapies.
We specifically target our products for markets outside of
traditional hospital or clinical laboratories through our
worldwide network of over 85 distributors. Our primary market is
the physician office laboratory market, which consists of
approximately 104,000 sites operated by physicians or groups of
physicians that are registered with the Centers for
Medicare & Medicaid Services (“CMS”),
approximately 51,000 of which are registered to perform only
tests that have been waived under CLIA. According to CMS, the
number of CLIA waived physician office laboratories has
increased 27% since 2000.
Sales of our products to international markets represented 14%
of our revenue in fiscal year 2005. While a majority of such
sales are in Europe, we are expanding into Asia, and South
America. See Note 10 of the consolidated Financial
Statements for details on our international revenue.
Providing rapid service to our customers is one of the
fundamentals of our business. Generally we fulfill our
customers’ orders within two business days of the placement
of an order, resulting in no material backlog as of
March 25, 2005. Although there are certain months of the
year in which testing for cholesterol typically increases, such
as September which is National Cholesterol Month and February
which is National Heart Month, historically we have not
experienced fluctuations in sales of our products due to
seasonality.
We plan to leverage our worldwide installed base of diagnostic
systems in our customers’ locations and current LDX product
platform by introducing new test cassettes. In addition, we plan
to leverage our distribution capabilities by adding new
technology platforms, such as our recently announced market
development and product distribution agreement involving a novel
and proprietary system for addressing endothelial dysfunction.
We believe that this strategy, combined with the enactment of
Medicare coverage for cholesterol and diabetes screening
beginning January 2005, a continued emphasis by major
pharmaceutical companies on obtaining over-the-counter status
for certain statin drugs and the ongoing efforts by
pharmaceutical companies to promote awareness of both the risk
factors and the importance of screening and monitoring related
to heart disease and diabetes, will position our company to
capitalize on attractive long-term growth opportunities.
MARKET OVERVIEW
We believe the market for our products exists where healthcare
providers, as well as healthcare product and service
organizations, seek to identify, treat and monitor individuals
with chronic conditions such as heart disease and diabetes. High
cholesterol is a significant contributing factor to
cardiovascular disease, which remains the leading cause of death
in the United States and kills more people than the next five
diseases combined. Heart disease is also the leading cause of
death among diabetics.
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In 2002, the estimated cost in the United States of coronary
heart disease and diabetes was $244 billion. |
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The American Heart Association estimates that more than
70 million people suffer from some form of cardiovascular
disease, which is the leading cause of death of adults in the
United States. |
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Heart disease is the leading cause of death in people with type
2 diabetes, which has a death rate from heart disease which is
two to four times higher than for those who do not have diabetes. |
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Based on evidence from scientific studies, the National
Cholesterol Education Program (“NCEP”) expert panel
and the National Institutes of Health (“NIH”) issued
guidelines in May 2001 which are expected to substantially
increase the number of Americans being treated for high
cholesterol. Numerous research studies substantiate that
reducing high cholesterol levels reduces the risk of a coronary
event by 31%. NIH guidelines continue to encourage the increase
of cholesterol testing as the recommended LDL levels decreased
from 100 to 80 in 2004. |
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Based on the NIH guidelines, approximately 201 million
Americans should be screened or monitored for high cholesterol.
Additionally, the number of Americans on therapeutic lifestyle
changes, such as dietary treatment, is expected to increase from
about 52 million to about 65 million. The number of
Americans prescribed a cholesterol-lowering drug is expected to
almost triple from about 13 million to about
36 million. |
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Diabetes is estimated to afflict approximately 18 million
people in the United States, over a third of whom have not yet
been identified as being diabetic. Additionally, 41 million
Americans require treatment for prevention of diabetes and
97 million should be screened or monitored for diabetes
risk based on data from American Diabetes Association and Health
and Human Services guidelines. |
OUR STRATEGY
Our strategy is to be the leading provider of diagnostic tools
and information for immediate risk assessment and therapeutic
monitoring of heart disease and diabetes. The components of this
strategy include:
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Leverage Our Installed Base. We intend to leverage our
installed base of LDX systems in each customer location by
adding new test cassettes to our current testing platform and
offering new products which increase the amount and frequency of
testing. Our current research and development efforts include
the planned introduction of new test cassettes for high
sensitivity C-Reactive Protein (“hs-CRP”) and lipid
profile/alanine aminotransferase (“ALT”). |
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Improve Cassette Usage. We intend to increase the sale of
single-use test cassettes through the placement of additional
LDX Analyzers, development of new diagnostic tests and increased
customer retention activities through marketing programs and the
deployment of additional field service personnel focused on our
installed base. |
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Increase Market Penetration. We intend to further
penetrate the physician office laboratory and health promotion
markets by increasing the number of installed LDX Analyzers both
domestically and internationally through our network of over 85
distributors. We continue to implement marketing and related
programs to increase awareness of the advantages of the LDX
System among healthcare providers and third party payors. |
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Expand Manufacturing Capabilities and Efficiencies. We
continue to expand our manufacturing capacity for the single-use
cassettes. Additionally, we plan to continue to introduce
improvements into our processes to enhance our manufacturing
operations, including quality, throughput, yields and
efficiencies. |
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PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
We manufacture, market and develop diagnostic testing technology
which facilitates the performance of diagnostic testing at
alternative sites from traditional hospital laboratories to
assist in rapidly assessing the risk of heart disease, diabetes
and certain liver diseases and in the monitoring of therapy to
treat those diseases. We primarily sell our products through
distributors at a discount, based on certain factors, from our
published list price. We manufacture and market the LDX System,
which is CLIA waived and includes the LDX Analyzer and a variety
of single-use test cassettes, in the United States and
internationally.
We also market and distribute the GDX System under a multi-year
global distribution agreement with Provalis Diagnostics Ltd. We
began distributing the GDX System under this agreement in July
2002. The GDX System is an A1C testing system that is CLIA
waived and is used to measure A1C in less than five minutes by
using a single drop of blood from a fingerstick. A1C testing
monitors the average blood glucose levels of people with
diabetes as an indicator of overall blood glucose control. The
quantitative measure of A1C is well-established as an indicator
of a patient’s long-term glycemic control. Unlike daily
glucose monitoring, which provides a snapshot of a
patient’s glucose level at the time of testing, A1C
provides an average glucose level over the previous
90 days. A1C levels indicate the long-term progress of a
patient’s diabetes and therapy management.
Our research and development expenses were $4.3 million,
$3.2 million and $2.7 million for fiscal years 2005,
2004 and 2003, respectively.
Overview of the Cholestech LDX System
The LDX System is an easy to use, multi-analyte testing system
consisting of a telephone-sized analyzer, a variety of
single-use, credit card-sized test cassettes, a printer and
accessories. The LDX System allows healthcare providers to
perform individual tests or combinations of tests with a single
drop of blood within five minutes. Minimal training is required
to operate the LDX System and the sample does not need to be
pre-treated. To run a test, the healthcare provider pricks the
patient’s finger, transfers a drop of blood to the
cassette’s sample well, inserts the cassette into the LDX
Analyzer’s cassette drawer and presses the “run”
button. All further steps are performed by the LDX System, which
produces results comparable in accuracy to results provided by
larger, more expensive bench top and clinical laboratory
instruments that are not CLIA waived.
The design of the LDX System incorporates proprietary technology
into the test cassettes and maintains the LDX Analyzer as a
platform that can be easily adapted as new tests and other
product upgrades are introduced. As healthcare providers perform
different tests, the encoding on the cassette’s magnetic
strip communicates test specific and calibration information to
the LDX Analyzer. Changes that cannot be captured on the
cassette’s magnetic strip can be accomplished by changes to
the LDX Analyzer’s removable read only memory software
pack. This flexible design enables healthcare providers to
perform a variety of tests using the same LDX Analyzer and to
take advantage of new tests and other product upgrades without
having to purchase a new LDX Analyzer.
The LDX System includes software that performs cardiac risk
assessments using risk factor parameters developed from the
Framingham study, a long term study of cholesterol levels and
cardiovascular disease. A risk assessment is required by
the NIH guidelines.
The LDX Analyzer
Revenue from the LDX Analyzer represented 6%, 8% and 9% of total
revenue in fiscal years 2005, 2004 and 2003, respectively. The
LDX Analyzer is a propietary, four-channel, reflectance
photometer that measures
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the amount of light reflected from the reaction surfaces of a
test cassette and incorporates a microprocessor with built-in
software. The LDX Analyzer contains a drawer for insertion of
the cassette, three buttons for user activation and a liquid
crystal display to present the test results. Using the
information and instructions encoded on the cassette’s
magnetic strip, the LDX Analyzer’s built-in microprocessor
regulates the reaction conditions, controls the optical
measurements of analyte concentrations on the cassette’s
reaction pads, executes the required calculations and, within
five minutes, displays the results on the liquid crystal
display. The results are displayed as a numerical value of the
level of the analyte tested and can be transferred to a printer,
computer or computer network.
The built-in software calculates the numeric values of the test
results and is contained in a removable read only memory
software pack mounted in an access well on the bottom of the LDX
Analyzer. We upgrade the software as new products are developed,
allowing healthcare providers to easily replace the existing
read only memory pack with a new pack containing upgraded
software. The LDX Analyzer, along with a printer, accessories
and starter pack, comprises a LDX System and currently has a
domestic list price of $2,055.
Cassette Products
Revenue from cassette products represented 83%, 81% and 79% of
total revenue in fiscal years 2005, 2004 and 2003, respectively.
Our line of single-use, disposable test cassettes for the LDX
System incorporates patented and licensed technology for
distributing precisely measured plasma to up to four reaction
pads for simultaneous testing. Each cassette has three parts: a
main body that contains the sample well into which the blood
sample is dispensed, a reaction bar where plasma is transferred
for analysis and a magnetic strip encoded with test instructions
and lot specific calibration information for the various
chemistries on the reaction pads. Capillary action draws a drop
of blood through a separation medium within the cassette,
stopping the cellular components of the blood while transferring
a small volume of plasma to the cassette’s reaction pads.
When the plasma contacts the reaction pads, the dry chemistry
reacts with the analytes in the plasma, producing color. The
intensity of color developed indicates the concentration of the
analytes in the plasma. The magnetic strip contains information
needed by the LDX Analyzer to convert the reflected color
reading into a concentration level for the accurate measurement
of the analytes being tested. As a result of this automatic
process, the healthcare provider does not have to interpret any
color reaction, relate a reading to a separate chart or input
calibration information. Our available test cassettes range in
current domestic list price from $4.07 to $11.59 per
cassette and include up to six results per cassette.
Overview of the Cholestech GDX System
The GDX System is a patented, easy to use, A1C testing system
consisting of a small desktop analyzer, single-use test
cartridges and accessories. The GDX System allows healthcare
providers to perform A1C tests with a single drop of blood
within five minutes. Minimal training is required to operate the
GDX System and the sample does not need to be pre-treated. To
run a test, the healthcare provider pricks the patient’s
finger, transfers a drop of blood to a sample reagent solution
in the test cartridge and initiates a timing sequence. This
sample solution and two successive reagent solutions are added
to the test cartridge when indicated by the GDX Analyzer’s
user-guiding icon displays. All measurement steps are performed
by the GDX System, which produces results comparable in accuracy
to results provided by larger, more expensive bench top and
clinical laboratory instruments that are not CLIA waived.
The GDX Analyzer
The GDX Analyzer uses a photometer that measures the amount of
light transmitted through the reaction solutions and
incorporates a microprocessor with built-in software. The GDX
Analyzer contains a receptacle for insertion of the cartridge,
three buttons for user activation and a liquid crystal display
to present user-
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guiding icons and the test results. The GDX Analyzer’s
built-in microprocessor regulates the reaction conditions,
controls the optical measurements of analyte concentrations in
the cartridge’s reaction solutions, executes the required
calculations and, within five minutes, displays the results on
the liquid crystal display. The results are displayed as a
numerical value of the A1C level and can be transferred to a
printer, computer or computer network. The GDX Analyzer is
certified by the National Glycohemoglobin Standardization
Program. The GDX Analyzer, along with accessories, comprises a
GDX System and currently has a domestic list price of $895.
Cartridge Product
The GDX System’s A1C single-use, disposable test cartridges
use a well-established boronate affinity chromatography
technique to separate the glycated hemoglobin fraction from the
nonglycated fraction. Hemoglobin in red blood cells becomes
glycated with prolonged exposure to high levels of glucose
(blood sugar) in diabetic patients. After an A1C test cartridge
has been placed in the GDX Analyzer, a small sample of blood is
added to the first sample solution tube, which contains boronate
affinity resin. The red blood cells are instantly disrupted to
release the hemoglobin and the boronate affinity resin binds the
glycated hemoglobin. After a short incubation step, the liquid
is poured into the funnel of the test cartridge and the
nonglycated fraction is collected in an optical chamber where
the hemoglobin concentration is photometrically measured. The
glycated hemoglobin remains bound to the boronate affinity
resin, which sits at the bottom of the test cartridge funnel.
The boronate affinity resin/glycated hemoglobin is then washed
with the solution in the second tube. The final step separates
the glycated hemoglobin from the boronate affinity resin using
the solution in the third tube. The glycated hemoglobin
concentration is then measured and the GDX Analyzer uses an
algorithm to convert the results into the percentage A1C in the
blood sample. As a result of this automatic process, the
healthcare provider does not have to interpret any color
reaction, relate a reading to a separate chart or input
calibration information. All three tubes used during the test
are integral to the test cartridge and the GDX Analyzer displays
each step of the process with a user-guiding icon. Our A1C test
cartridges currently have a domestic list price of $7.95 each.
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The following table summarizes our current products and products
under development:
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Regulatory Status (1) |
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Instrument
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LDX Analyzer
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FDA cleared; CLIA waived |
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GDX Analyzer
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FDA cleared, CLIA waived |
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Endo-PAT
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510(k) cleared |
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Cassette Products
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Current
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Lipid Profile (Lipid)
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FDA cleared; CLIA waived |
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(Total cholesterol/ High density
lipoproteins/ Calculated low density lipoproteins/ Triglycerides)
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Lipid Profile plus Glucose (Lipid/
GLU)
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FDA cleared; CLIA waived |
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Total Cholesterol and Glucose (TC,
GLU)
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FDA cleared; CLIA waived |
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Total Cholesterol/ High Density
Lipoproteins/ Glucose (TC, HDL, GLU)
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FDA cleared; CLIA waived |
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Total Cholesterol and High Density
Lipoproteins (TC, HDL)
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FDA cleared; CLIA waived |
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Total Cholesterol (TC)
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FDA cleared; CLIA waived |
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Alanine Aminotransferase (ALT)/
Aspartate Aminotransferase (AST)
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FDA cleared, CLIA waived |
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Under Development (2)
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High Sensitivity C-Reactive Protein
(HS-CRP)
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510(k) cleared |
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Lipid Profile Alanine
Aminotransferase (Lipid/ ALT)
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No regulatory filing required |
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In Feasibility Studies
(3)
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Total Bilirubin (Tbil)
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Not filed or applied |
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Alkaline Phosphate (ALP)
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Not filed or applied |
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Creatine Kinase (CK)
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Not filed or applied |
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Direct Low Density Lipoproteins
(LDL)
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Not filed or applied |
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Hemoglobin A1c (A1C)
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Not filed or applied |
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Cartridge Product
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Hemoglobin A1c (A1C)
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FDA cleared; CLIA waived |
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| (1) |
“FDA” means the United States Food and Drug
Administration; “FDA cleared” means the product has
received market clearance pursuant to Section 510(k) of the
Food, Drug and Cosmetics Act of 1938, as amended. “CLIA
waived” means the Food and Drug Administration has granted
our application to classify the product as having waived status
with respect to the Clinical Laboratory Improvement Amendments. |
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Products under development are those that have completed the
feasibility phase of the commercialization process and have
begun the development phase. During the development phase,
manufacturing processes are developed and defined, initial lots
are made using those manufacturing processes and performance
against product specifications is demonstrated. The products
under development are then transferred to manufacturing prior to
launch. |
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Products in the feasibility phase of our commercialization
process are studied to determine the compatibility of the
reagents with the single use test cassette and preliminary data
is generated to indicate if the reagents can perform to
preliminary specifications. |
Current Cassette and Cartridge Products
Our current test products are designed to measure and monitor
blood cholesterol, related lipids, glucose, alanine and
aspartate aminotransferase, and A1C. Lipids travel in the blood
within water-soluble particles called lipoproteins.
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Lipid Profile. We offer a lipid profile cassette, which
directly measures TC, HDL and triglycerides. This cassette meets
all of the screening and monitoring guidelines recommended by
the NIH guidelines. In addition, the lipid profile cassette
calculates estimated values for LDL and the ratio of TC to HDL.
The development of cardiovascular disease has been associated
with three lipoprotein abnormalities: high levels of LDL, high
levels of very low density lipoproteins (“VLDL”) and
low levels of HDL. LDL, the major carrier of cholesterol and
VLDL, a major carrier of triglycerides in the blood, have been
shown to be associated with deposits of plaque on the arterial
wall. High levels of triglycerides can also lead to development
of such plaque. Accumulation of this plaque leads to a narrowing
of the arteries and increases the likelihood of cardiovascular
disease. The lipid profile cassette thus performs multiple tests
in the diagnostic screening and ongoing therapeutic monitoring
of individuals who have high LDL levels or who exhibit two or
more other cardiovascular disease risk factors. NCEP guidelines
recommend that healthcare providers perform two lipid profiles,
one to four weeks apart, before initiating lipid lowering drug
therapy. |
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Lipid Profile plus Glucose Panel, Total Cholesterol and
Glucose Panel, and Total Cholesterol/ High Density Lipoproteins/
Glucose Panel. Recognizing the relationship between diabetes
and abnormal lipid levels, we developed a blood glucose test for
the LDX System and combined it with each of its three lipid
related test panels. The resulting panels provide input used in
the diagnostic screening and therapeutic monitoring of patients
with diabetes, whether or not they are aware they are diabetic,
as well as individuals who may be at risk of cardiovascular
disease. |
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Total Cholesterol and High Density Lipoproteins Panel.
The total cholesterol (“TC”) and high density
lipoproteins (“HDL”) panel is the recommended test
under the current NIH guidelines if the individual being
screened has not fasted. HDL particles circulate in the blood
and can pick up cholesterol from arteries and carry it to the
liver for elimination from the body. HDL is sometimes called
“good cholesterol” because of this function. This
panel also calculates the ratio of TC to HDL, a recognized
measure of cholesterol induced cardiac risk. |
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Total Cholesterol. This stand-alone test for measuring TC
was our first test, developed in conjunction with NCEP
guidelines issued in 1988. |
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Alanine and Aspartate Aminotransferase. Patients
undergoing certain drug therapies must be monitored for
increases in certain enzymes that are associated with liver
damage. The alanine and aspartate aminotransferase (“ALT/
AST”) test combined with our lipid profile allows
healthcare providers to monitor both the impact of and potential
adverse side effects on the liver from lipid lowering and
diabetic therapies. |
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A1C. Hemoglobin A1c (“A1C”) is recommended by
the American Diabetes Association for long-term management of
glycemia in diabetes mellitus. Patients being treated to lower
their blood glucose levels are tested from two to four times per
year depending on whether their A1C levels are stable or their
therapy is changing. |
Cassette Products Under Development
Products listed under development are undergoing optimization of
design, performance testing, scale up, clinical trials,
regulatory submissions and transfer to production.
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| • |
High Sensitivity C-Reactive Protein. The hs-CRP test
measures, by immunoassay, the amount of CRP present in a patient
sample. Recent research has demonstrated that CRP is a systemic
marker of |
9
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inflammation and the measurement of
CRP is useful in the detection and evaluation of infection,
tissue injury, inflammatory disorders, and associated diseases.
Studies have shown that CRP is an independent risk factor for
coronary heart disease and when used in conjunction with certain
other risk factors, such as total cholesterol and
HDL-cholesterol, is useful in predicting future cardiovascular
events. We expect the hs-CRP test to be available in the summer
of 2005.
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| • |
Lipid Profile/Alanine
Aminotransferase. We
plan to offer a single cassette containing both our CLIA waived
lipid profile and ALT tests (“Lipid/ALT”). The
integration of the lipid parameters (total cholesterol,
HDL cholesterol and triglycerides) and liver function
parameter (ALT) will provide convenience and ease of use for our
customers. We expect this product to be available in late
calendar year 2005.
|
Cassette Products in Feasibility Studies
We are in various stages of feasibility studies for new
cassettes that would expand our product line for diagnostic
testing. We may develop additional tests depending on the
progress of our existing development efforts and available
resources.
Liver Panel
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| • |
ALT/ AST. |
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| • |
Total Bilirubin. The total bilirubin test is a liver
function test that is helpful in the differentiation of the
cause of jaundice. |
| |
| • |
Alkaline Phosphatase. Alkaline phosphatase is a group of
enzymes that are active at an alkaline pH. Alkaline phosphatase
activity is highest in the liver, bone, intestine and kidney and
is a useful test of liver function. Measurement of alkaline
phosphatase in the blood in differentiating hepatobiliary
disease from osteogenic bone disease. |
Statin Safety Panel
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| • |
ALT/ AST. |
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| • |
Creatine Kinase. Creatine kinase (“CK”) is an
enzyme with high levels of enzyme activity in skeletal muscle.
Measurement of CK in patients on statin drug therapy is useful
for monitoring for damage to skeletal muscle, a rare side effect
of statin therapy. |
Individual Test Cassettes
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| • |
Direct Low Density Lipoproteins. The direct low density
lipoproteins (“LDL”) cholesterol test permits the
direct measurement of LDL cholesterol in a patient sample. The
calculated LDL cholesterol is subject to a number of limitations
including the need for a fasting sample. The direct LDL
cholesterol test is reimbursable, whereas the calculated test is
not. |
| |
| • |
Hemoglobin A1C. The American Diabetes Association
recommends measurement of A1C for all individuals with diabetes
at least twice a year. A1C measurement is a diagnostic test by
immunoassay, used by healthcare providers to assess a
diabetic’s long-term compliance with prescribed diet and
insulin usage. A relatively high percentage of A1C to glucose
indicates poor patient compliance, which can lead to severe
health problems. |
10
Other Platforms
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| • |
Vascular Endothelial Dysfunction. The Endo-PAT is a
non-invasive device that is as a diagnostic aid in the detection
of coronary artery endothelial dysfunction. The endothelium is
the lining of all the blood vessels and is the site of the
development of coronary artery disease. |
STRATEGIC RELATIONSHIPS
We have established and continually seek to develop strategic
relationships to enhance the commercialization of our products.
In particular, we intend to enter into additional strategic
alliances with major pharmaceutical, health promotion and other
related companies to enhance our business strategy in the
management of chronic diseases. Our current strategic
relationships are described below.
Distribution
We have non-exclusive distribution agreements to market, sell
and distribute our products to healthcare providers in the
United States, Europe, Latin America and Asia. We believe our
partnerships will further our access to medical, occupational
health and other health care professionals who seek effective
in-office diagnostic and therapeutic monitoring tools for
cholesterol and diabetes management. Significant distributors of
our products include: Physician Sales and Service, Inc., Henry
Schein, Inc., McKesson Corporation, Cardinal Health, Inc.,
Edwards Medical Supply, and Fisher Scientific International, Inc.
ImpactHealth.com, Inc.
ImpactHealth.com, Inc. (“ImpactHealth”) is a
nationwide provider of clinical testing services that markets
services and self-testing products to the pharmaceutical,
managed care, employer and health product retail industries. In
December 2002, ImpactHealth acquired certain assets and
obligations of WellCheck, a testing services business which was
formally 100% owned by us. In connection with the
acquisition, we have entered into a three-year renewable supply
agreement involving the purchase of the LDX System and test
cassettes by ImpactHealth on an exclusive basis.
Itamar Medical
In April 2004, we signed a market development and product
distribution agreement with Itamar Medical Limited
(“Itamar”), involving a novel and proprietary system,
the Endo-PAT, for assessing vascular endothelial dysfunction.
Vascular disease experts recognize endothelial dysfunction as an
early stage in the development of atherosclerosis.
Marketing Programs
Our LDX System continues to be utilized in a number of
regionally based marketing programs in the United States,
including healthcare industry conventions. Our international
sales and marketing team continues to work with selected global
pharmaceutical companies in connection with country specific
marketing programs. Pharmaceutical companies utilizing our
LDX System in connection with such programs include
AstraZeneca PLC and Pfizer Inc.
SALES AND MARKETING
Our sales and marketing strategy is to expand our presence in
the heart disease and diabetes screening and monitoring markets,
focusing primarily on the healthcare professional,
pharmaceutical and corporate wellness markets. In order to
execute this strategy and create opportunities for our products,
we intend to expand our professional sales force and focus our
efforts on partnering, distribution and marketing activities.
11
Our sales and marketing strategy includes increasing penetration
into the physician office laboratory and health promotion
markets and leveraging our installed base of LDX and
GDX Analyzers. We plan to dedicate a significant portion of
our sales and marketing efforts to educate current and potential
customers about the clinical and economic benefits of diagnostic
screening and therapeutic monitoring and about new test
cassettes as they become available for distribution. In order to
support this effort, over the last year we hired representatives
who focus on calling our key accounts by phone. We also plan to
continue to cultivate strategic relationships with development
partners, pharmaceutical companies and distributors. We intend
to leverage the technology, customer base, marketing power and
distribution networks of these partners to accelerate market
penetration and increase cassette usage. Our current marketing
activities are primarily focused on:
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Physician Office Laboratories. We have entered into
nonexclusive distribution agreements with five national medical
products distributors, Cardinal Health, Fisher Scientific,
McKesson, Physician Sales and Service and Henry Schein, which
together have more than 2,500 sales professionals who focus
primarily on the United States physician office laboratory
(“POL”) market. We have also retained more than
35 regional distributors in the United States. In addition,
we and our distributors focus sales and marketing efforts on
physicians whose practices include a high incidence of the
cholesterol-related diseases targeted by our test cassettes,
including cardiologists, lipid clinicians, internists and family
practitioners. |
| |
| • |
Health Promotion. We have ongoing relationships with
approximately 15 regional distributors whose primary focus
are to provide equipment and supplies to customers that conduct
diagnostic screening for cholesterol and related lipid levels
and diabetes. Some of these distributors also sell to the
POL market segment. |
| |
| • |
International. Our international distribution strategy is
to penetrate targeted geographical markets by selling directly
to distributors in those markets. We have entered into
non-exclusive agreements with approximately 35 foreign
distributors to distribute the LDX System and cassettes
primarily in Europe, Asia and South America. |
COMPETITION
The diagnostic products markets in which we operate are
intensely competitive. Our competition consists primarily of
clinical and hospital laboratories, as well as manufacturers of
bench top analyzers. The substantial majority of diagnostic
tests used by physicians and other healthcare providers are
currently performed by clinical and hospital laboratories. We
expect that these laboratories will compete aggressively to
maintain dominance in the market. To achieve broad market
acceptance, we must demonstrate that the LDX System and
GDX System are attractive alternatives to bench top
analyzers and clinical and hospital laboratories. This will
require physicians to change their established means of having
such tests performed. There can be no assurance that the
LDX System and GDX System will be able to compete with
these other analyzers and testing services.
Companies with a significant presence in the diagnostic products
market, such as Abbott Laboratories, Bayer Diagnostics, Beckman
Coulter, Inc. and Roche Diagnostics (a subsidiary of Roche
Holdings Ltd.), have developed or are developing analyzers
designed for point of care testing. Such competitors also offer
broader product lines than us, have greater name recognition
than us and offer discounts as a competitive tactic. In
addition, several smaller companies are currently making or
developing products that compete or will compete with ours. We
believe we currently have a competitive advantage due to
(i) the status of the
12
LDX System which is waived under CLIA and can provide a
complete lipid profile in accordance with the
NIH guidelines in less than five minutes using a single
drop of blood; (ii) our ALT test, which is the only
ALT test waived under CLIA by the FDA and enables
physicians to monitor the potential side effects on the liver
from cholesterol lowering drugs and other medications;
(iii) the improving breadth of the CLIA waived tests that
we offer our installed base; and (iv) our network of over
85 distributors. We expect that our competitors will
compete actively to maintain and increase market share and will
seek to develop multi-analyte tests that qualify for CLIA waiver.
Our current and future products must compete effectively with
the existing and future products of our competitors primarily on
the basis of ease of use, breadth of tests available, market
presence, cost effectiveness, accuracy, immediacy of results and
the ability to perform tests near the patient, to test multiple
analytes from a single sample and to conduct tests without a
skilled technician or pre-treating blood. There can be no
assurance that we will have the financial resources, technical
expertise or marketing, distribution or support capabilities to
compete successfully in the future or, if we do have such
resources and capabilities, that we will employ them
successfully.
MANUFACTURING
We manufacture, test, perform quality assurance on, package and
ship our products from our approximately 69,000 square foot
facility located in Hayward, California. We maintain control of
those portions of the manufacturing process that we believe are
complex and provide an important competitive advantage.
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| • |
LDX Analyzer. The LDX Analyzer incorporates a
variety of subassemblies and components designed or specified by
us, including an optical element, microprocessors, circuit
boards, a liquid crystal display and other electrical
components. These components and subassemblies are manufactured
by a variety of suppliers and are shipped to us for final
assembly and quality assurance. Our manufacturing process for
the LDX Analyzer consists primarily of assembly, testing,
inspection and packaging. Testing consists of a burn-in period,
functional tests and integrated system testing using specially
produced test cassettes. Our manufacturing process complies with
FDA Quality System Requirements, ISO 9001 and
TÜV GS Mark guidelines. We believe we can expand our
current LDX Analyzer manufacturing capacity as needed. |
| |
| • |
Cassettes. We purchase chemicals, membranes, plastic
parts and other raw materials from suppliers and convert these
raw materials, using proprietary processes, into single-use test
cassettes. We believe our proprietary processes and custom
designed equipment are important components of our cassette
manufacturing operations. We have developed core manufacturing
technologies, processes and production machinery, including
membrane lamination and welding, discrete membrane impregnation,
on-line calibration and software control of the manufacturing
process. The overall manufacturing process meets
FDA Quality System Requirements and in-vitro diagnostic
directive, including in process and final quality assurance
testing. All our cassette production is currently on our high
volume manufacturing line. We use a second manufacturing line
for research and development purposes. |
| |
| • |
Raw Materials and Quality Assurance. Suppliers provide us
with the subassemblies, components and raw materials necessary
for the manufacture of our products. These subassemblies,
components and raw materials are inspected and tested by our
quality control personnel. We expect the supply of raw materials
to be adequate for our current level of business and into the
foreseeable future. Our manufacturing facilities are subject to
periodic inspection by regulatory authorities. Certain key
components and raw materials used in the manufacturing of our
products are currently provided by single |
13
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source vendors and on a purchase
order basis. Our quality assurance personnel also perform
finished goods quality control and inspection and maintain
documentation for compliance with quality systems regulations
and other government manufacturing regulations.
|
PATENTS AND PROPRIETARY TECHNOLOGY
We have 10 patents in the United States covering various
technologies, including the method for separating HDL from other
lipoproteins in a dry chemistry format, the basic design of the
testing cassette and the LDX Analyzer and the method of
correcting for the effects of substances that can interfere with
testing of a blood sample. We have filed four additional patent
applications in the United States and internationally under the
Patent Cooperation Treaty and individual foreign applications.
We are also the licensee of United States patents relating to
the measurement of Lp(a) and a portion of our cassette
technology.
Our current products incorporate technologies which are the
subject of patents issued to and patent applications filed by
others. We have obtained licenses for certain of these
technologies and might be required to obtain licenses for
others. There can be no assurance that we will be able to obtain
licenses for technology patented by others on commercially
reasonable terms, or at all, that we will be able to develop
alternative approaches if we are unable to obtain licenses or
that our current and future licenses will be adequate for the
operation of our business. The failure to obtain such licenses
or identify and implement alternative approaches could have a
material adverse effect on our business, financial condition and
results of operations.
In December 2003, we and Roche Diagnostics signed a settlement
agreement and a license agreement which settled and dismissed
all existing patent litigation between us on a worldwide basis.
As part of the settlement, we agreed to pay Roche an ongoing
royalty and Roche granted an irrevocable, non-exclusive,
worldwide license to us for its patents related to
HDL cholesterol. In addition, the parties also agreed upon
a mechanism for the resolution of future patent infringement
disputes. We believe that any such dispute resolution will
confirm that our HDL cholesterol test cassette, currently
under development, does not infringe Roche’s patents. If
however, upon the resolution of any dispute, it is ultimately
determined that our new HDL cholesterol test cassette is
covered by Roche’s patents, we will pay Roche the same
ongoing royalty.
There can be no assurance that patent infringement claims will
not be asserted against us by other parties in the future, that
in such event we will prevail or that we will be able to obtain
necessary licenses on reasonable terms, or at all. Adverse
determinations in any litigation could subject us to significant
liabilities and/or require us to seek licenses from third
parties. If we are unable to obtain necessary licenses or are
unable to develop or implement alternative technology, we may be
unable to manufacture and sell the affected products. Any of
these outcomes could have a material adverse effect on our
business, financial condition or results of operations.
We rely substantially on trade secrets, technical know-how and
continuing invention to develop and maintain our competitive
position. We work actively to foster continuing technological
innovation to maintain and protect our competitive position, and
we have taken security measures to protect our trade secrets and
periodically explore ways to further enhance trade secret
security. There can be no assurance that such measures will
provide adequate protection for our trade secrets or other
proprietary information. Although we have entered into
proprietary information agreements with our employees,
consultants and advisors, there can be no assurance that these
agreements will provide adequate remedies for any breach.
14
GOVERNMENT REGULATION
Food and Drug Administration and Other Regulations
The manufacture and sale of our products are subject to
regulation by numerous governmental authorities, principally the
FDA and corresponding state and foreign regulatory agencies.
Pursuant to the Food, Drug and Cosmetics Act of 1938, as amended
(the “FDC Act”), the FDA regulates the clinical
testing, manufacture, labeling, distribution and promotion of
medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial
suspension of production, failure of the government to grant
pre-market clearance or pre-market approval for devices and
criminal prosecution. The FDA also has the authority to request
repair, replacement or refund of the cost of any device
manufactured or distributed by us.
In the United States, medical devices are classified into one of
three classes, Class I, II or III, on the basis
of the controls deemed by the FDA to be necessary to reasonably
ensure their safety and effectiveness. Class I devices are
subject to general controls (e.g., labeling, registration,
listing and adherence to quality systems regulations).
Class II devices are subject to general controls,
pre-market notification and special controls
(e.g., performance standards, post-market surveillance and
patient registries). Generally, Class III devices are those
that must receive pre-market approval from the FDA
(e.g., life sustaining, life supporting and implantable
devices or new devices which have not been found substantially
equivalent to legally marketed devices) and require clinical
testing to assure safety and effectiveness.
Before a new device can be introduced into the market, the
manufacturer must generally obtain marketing clearance through a
pre-market notification under Section 510(k) of the FDC Act
or a pre-market approval application under Section 515 of
the FDC Act or be exempt from 510(k) requirements. Most
Class I devices are exempt from 510(k) requirements. A
510(k) clearance typically will be granted if the submitted
information establishes that the proposed device is
“substantially equivalent” to a legally marketed
Class I or II medical device or to a Class III
medical device for which the FDA has not called for a pre-market
approval. A 510(k) notification must contain information to
support a claim of substantial equivalence, which may include
laboratory test results or the results of clinical studies of
the device in humans. It generally takes from four to
12 months from the date of submission to obtain 510(k)
clearance, but it may take longer. A “not substantially
equivalent” determination by the FDA, or a request for
additional information, could delay the market introduction of
new products that fall into this category. For any devices that
are cleared through the 510(k) process, modifications or
enhancements that could significantly affect safety or
effectiveness or constitute a major change in the intended use
of the device will require new 510(k) submissions. We obtained
510(k) clearance before marketing the LDX Analyzer and all
existing test cassettes in the United States.
In general, we intend to develop and market tests that will
receive 510(k) clearance. However, if we cannot establish that a
proposed test cassette is substantially equivalent to a legally
marketed device, we will be required to seek pre-market approval
of the proposed test cassette from the FDA through the
submission of a pre-market approval application. If a future
product were to require submission of this type of application,
regulatory approval of such product would involve a much longer
and more costly process than a 510(k) clearance. We do not
believe that our products under development will require the
submission of a pre-market approval application, which can be
lengthy, expensive and uncertain. A FDA review of a pre-market
approval application generally takes one to three years from the
date it is accepted for filing, but may take significantly
longer.
15
Any products manufactured or distributed by us pursuant to
FDA clearance or approvals are subject to pervasive and
continuing regulation by the FDA and certain state agencies,
including record keeping requirements and reporting of adverse
experience with the use of the device. Labeling and promotional
activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. Current
FDA enforcement policy prohibits the marketing of approved
medical devices for unapproved uses.
The FDC Act regulates our quality control and manufacturing
procedures by requiring us and our contract manufacturers to
demonstrate compliance with quality systems regulations. The FDA
monitors compliance with these requirements by requiring
manufacturers to register with the FDA, which subjects them to
periodic inspections. We were recently inspected by the FDA as
part of a routine quality system audit. The State of California
also regulates and inspects our manufacturing facilities. We
have been inspected twice by the State of California to date and
are manufacturing under an issued medical device
manufacturer’s facility license from the State of
California. If any violations of our applicable regulations are
noted during a FDA, European Notified Body or State of
California inspection of our manufacturing facilities or those
of our contract manufacturers, the continued marketing of our
products could be materially adversely affected.
The European Union (“EU”) has promulgated rules that
require that devices such as ours receive the right to affix the
CE mark, a symbol of adherence to applicable
EU directives. We have completed all the testing necessary
to comply with applicable regulations to currently be eligible
for self certification. While we intend to satisfy the requisite
policies and procedures that will permit us to continue to affix
the CE mark to our products in the future, there can be no
assurance that we will be successful in meeting EU certification
requirements. Failure to receive the right to affix the CE mark
may prohibit us from selling our products in EU member
countries and could have a material adverse effect on our
business, financial condition and results of operations.
We and our products are also subject to a variety of state and
local laws and regulations in those states or localities where
our products are or will be marketed. Any applicable state or
local laws or regulations may hinder our ability to market our
products in those states or localities. For example, eight
states have regulations that impose requirements on pharmacies
and/or pharmacists that perform clinical testing, four of which
have regulations that prohibit certain pharmacy-based testing.
We are also subject to numerous federal, state and local laws
relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous
substances. There can be no assurance that we will not be
required to incur significant costs to comply with such laws and
regulations now or in the future or that such laws or
regulations will not have a material adverse effect on us.
Changes in existing requirements or adoption of new requirements
or policies could increase the cost of or otherwise adversely
affect our ability to comply with regulatory requirements.
Failure to comply with regulatory requirements could have a
material adverse effect on us.
Clinical Laboratory Improvement Amendments, 1988
The use of our products in the United States is subject to CLIA,
which provides for federal regulation of laboratory testing, an
activity also regulated by most states. Laboratories must obtain
either a Certificate of Waiver or a registration certificate
(for moderately complex testing) from CMS. Some states may
require a state license also. The CLIA regulations seek to
ensure the quality of medical testing. The three primary
mechanisms to accomplish this goal are daily quality control
requirements to ensure the accuracy of
16
laboratory devices and procedures, proficiency testing to
measure testing accuracy and personnel standards to assure
appropriate training and experience for laboratory workers. CLIA
categorizes tests as “waived,” or as being
“moderately complex” or “highly complex” on
the basis of specific criteria. To successfully commercialize
tests that are currently under development, we believe it will
be critical to obtain waived classification for such tests under
CLIA, because CLIA waiver allows healthcare providers to use the
LDX System with fewer requirements and at a lower cost.
THIRD PARTY REIMBURSEMENT
In the United States, healthcare providers such as hospitals and
physicians that purchase products such as the LDX System and
single-use test cassettes generally rely on third party payors,
including private health insurance plans, federal Medicare,
state Medicaid and managed care organizations, to reimburse all
or part of the cost of the procedure in which the product is
being used. Our ability to commercialize our products
successfully in the United States will depend in part on the
extent to which reimbursement for the costs of tests performed
with the LDX System and related treatment will be available
from government health authorities, private health insurers and
other third party payors. For example, provisions for
cholesterol and diabetes screening were included in the federal
Prescription Drug and Medicare Improvement Act of 2003, which
was implemented in January 2005. Third party payors can affect
the pricing or the relative attractiveness of our products by
regulating the maximum amount of reimbursement provided by such
payors for testing services. Reimbursement is currently not
available for certain uses of our products in particular
circumstances. Pharmacists also face blocking state legislation
in a number of states, which precludes them from accessing
federally available reimbursement codes and practices. Third
party payors are increasingly scrutinizing and challenging the
prices charged for medical products and services. Decreases in
reimbursement amounts for tests performed using our products may
decrease amounts physicians and other practitioners are able to
charge patients, which in turn may adversely affect our ability
to sell our products on a profitable basis. In addition, certain
healthcare providers are moving toward a managed care system in
which such providers contract to provide comprehensive
healthcare for a fixed cost per patient. Managed care providers
are attempting to control the cost of healthcare by authorizing
fewer elective procedures, such as the screening of blood for
chronic diseases.
We are unable to predict what changes will be made in the
reimbursement methods used by third party payors. The inability
of healthcare providers to obtain reimbursement from third party
payors, or changes in third party payors’ policies toward
reimbursement of tests using our products, could have a material
adverse effect on our business, financial condition and results
of operations. Given the efforts to control and reduce
healthcare costs in the United States in recent years, there can
be no assurance that currently available levels of reimbursement
will continue to be available in the future for our existing
products or products under development.
In 1991, the Health Care Finance Administration adopted
regulations providing for the inclusion of capital related costs
in the prospective payment system for hospital inpatient
services under which most hospitals are reimbursed by Medicare
on a per diagnosis basis at fixed rates unrelated to actual
costs, based on diagnostic related groups. Under this system of
reimbursement, equipment costs generally are not reimbursed
separately, but rather are included in a single, fixed rate, per
patient reimbursement. Medicare reform legislation requires CMS
to implement a prospective payment system for outpatient
hospital services as well. This system may also provide for a
per-patient fixed rate reimbursement for outpatient department
capital costs. We believe these regulations place more pressure
on hospitals’ operating margins, causing them to limit
capital expenditures. These regulations could have an adverse
effect on us if hospitals decide
17
to defer obtaining medical equipment as a result of any such
limitation on their capital expenditures. The Medicare
legislation also requires CMS to adopt uniform coverage and
administration policies for laboratory tests. We are unable to
predict what adverse impact on us, if any, additional government
regulations, legislation or initiatives or changes by other
payors affecting reimbursement or other matters that may
influence decisions to obtain medical equipment may have.
We believe the escalating cost of medical care and services has
led to and will continue to lead to increased pressures on the
healthcare industry, both foreign and domestic, to reduce the
cost of care and services, including products offered by us. In
addition, market acceptance of our products in international
markets is dependent, in part, on the availability of
reimbursement within prevailing healthcare payment systems.
Reimbursement and healthcare payment systems in international
markets vary significantly by country, and include both
government sponsored healthcare and private insurance. There can
be no assurance in either domestic or foreign markets that third
party reimbursement and coverage will be available or adequate,
that current reimbursement amounts will not be decreased in the
future or that future legislation, regulation or reimbursement
policies of third party payors will not otherwise adversely
affect the demand for our products or our ability to sell our
products on a profitable basis.
PRODUCT LIABILITY AND INSURANCE
The sale of our products entails risk of product liability
claims. The medical testing industry has historically been
litigious, and we face financial exposure to product liability
claims if use of our products results in personal injury. We
also face the possibility that defects in the design or
manufacture of our products might necessitate a product recall.
There can be no assurance that we will not experience losses due
to product liability claims or recalls in the future. We
currently maintain product liability insurance, but there can be
no assurance that the coverage limits of our insurance policies
will be adequate. Such insurance is expensive, difficult to
obtain and no assurance can be given that product liability
insurance can be maintained in the future on acceptable terms,
or in sufficient amounts to protect us against losses due to
liability, or at all. An inability to maintain insurance at an
acceptable cost or to otherwise protect against potential
product liability could prevent or inhibit the continued
commercialization of our products. In addition, a product
liability claim in excess of relevant insurance coverage or a
product recall could have a material adverse effect on our
business, financial condition and results of operations.
We have liability insurance covering our property and operations
with coverage, deductible amounts and exclusions, which we
believe are customary for companies of our size in our industry.
However, there can be no assurance that our current insurance
coverage is adequate or that we will be able to maintain
insurance at an acceptable cost or otherwise to protect against
liability.
EMPLOYEES
As of March 25, 2005, we employed 204 full-time
associates. There were 93 employees in manufacturing,
48 employees in sales and marketing, 31 employees in
administration and 32 employees in research and
development. None of our associates are covered by a collective
bargaining agreement, and management considers relations with
employees to be excellent.
18
EXECUTIVE OFFICERS
The names, ages and positions of our current executive officers
are as follows:
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| Name |
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Age | |
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Position |
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| |
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Warren E. Pinckert II
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61 |
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President, Chief Executive Officer
and Director
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John F. Glenn
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43 |
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Vice President of Finance, Chief
Financial Officer, Treasurer and Secretary
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Barbara T. McAleer
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47 |
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Vice President of Quality Assurance
and Regulatory Affairs
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Kenneth F. Miller
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49 |
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Vice President of Sales and
Marketing
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Terry L. Wassmann
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|
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58 |
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Vice President of Human Resources
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Donald P. Wood
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53 |
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Vice President of Operations
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Thomas E. Worthy
|
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|
63 |
|
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Vice President of Development
|
Warren E. Pinckert II has served as our President,
Chief Executive Officer and a Director since June 1993.
Mr. Pinckert served as our Executive Vice President of
Operations from 1991 to June 1993, and as our Chief Financial
Officer and Vice President of Business Development from 1989 to
June 1993. Mr. Pinckert also served as our Secretary from
1989 to January 1997. Before joining Cholestech,
Mr. Pinckert was Chief Financial Officer of Sunrise Medical
Inc., an international durable medical products manufacturer,
from 1983 to 1989. Mr. Pinckert also serves on the board of
directors of PacifiCare Health Systems, Inc., a managed care
organization and is on the Board of Advisors for the
San Francisco State University School of Business.
Mr. Pinckert holds a Bachelor of Science degree in
Accounting and a Masters of Business Administration degree from
the University of Southern California.
John F. Glenn has served as our Corporate Vice President
of Finance, Chief Financial Officer, Treasurer and Secretary
since October 2004. Before joining Cholestech, Mr. Glenn
was Vice President of Finance and Chief Financial Officer at
Invivo Corporation, a provider of monitoring systems for
patients in medical settings, from 1990 to 2004. Invivo was sold
to Intermagnetics General Corporation in January 2004.
Mr. Glenn holds a Bachelor of Science degree in Business
Administration from the University of Nevada and a Masters of
Business Administration from the University of Santa Clara.
Barbara T. McAleer has served as our Vice President of
Quality Assurance and Regulatory Affairs since February 2005.
Before joining Cholestech, Ms. McAleer was a managing
partner at LOL Partners, a consulting firm specializing in the
healthcare industry. From January 2001 to June 2003, she was
General Manager/ Vice President of Operations & Quality
for Calypte Biomedical Corporation. Before joining Calypte,
Ms. McAleer spent 1982 to 2000 with Johnson &
Johnson in various manufacturing and quality assurance
positions. Ms. McAleer holds a Bachelor of Science degree
in Operations Management from Penn State University and a
Masters of Business Administration from Claremont Graduate
School, Peter Drucker Management Center.
Kenneth F. Miller has served as our Vice President of
Sales and Marketing since June 2004. Before joining Cholestech,
Mr. Miller served as the Chief Operating Officer at
R2 Technology Inc. from July 2002 to March 2004. He also
served as R2 Technology’s Chief Marketing Officer from June
2000 to June 2002. Prior to joining R2 Technology,
Mr. Miller served as Chief Operating Officer of
LiquidBorclens Inc. from October 1999 to May 2000 and Vice
President of Sales of Alaris Medical Inc. from April 1997 to
October 1999. Mr. Miller holds a Bachelor of Science degree
in Chemistry, Zoology, and Physiology from Rutgers University
and a Masters of Business Administration degree from Fairleigh
Dickinson University.
Terry L. Wassmann has served as our Vice President of
Human Resources since March 2000. Before joining Cholestech,
Ms. Wassmann served as Staff Relations Manager with Robert
Half International from July 1999 to March 2000. From February
1986 to December 1999, Ms. Wassmann was employed by
Boehringer Mannheim where she held numerous positions within the
Human Resources department, including the
19
Director of Human Resources of the Indiana and California based
Diagnostics Division. Ms. Wassmann has been awarded the
SPHR title from the Society of Human Resource Management.
Donald P. Wood has served as our Vice President of
Operations since April 2003. From July 2001 to March 2003,
Mr. Wood served as Vice President of Bone Health, a
business unit of Quidel Corporation and was responsible for Bone
Health Product Operations, Device Research and Development, and
Sales and Marketing. He also served as Quidel’s Vice
President of Ultrasound Operations from August 1999 to July
2001. Prior to joining Quidel, Mr. Wood was the Director of
Ultrasound Operations for Metra Biosystems Inc. from July 1998
to August 1999. He also served as its Director of Operations
from October 1995 to July 1998. Mr. Wood also served as
Senior Director of Operations for BioChem Pharma Inc. from July
1994 to October 1995 and Mr. Wood held numerous positions
within operations for Serono Diagnostics Inc. from 1980 to July
1994. Mr. Wood holds a Bachelor of Science degree in
Business Administration from Bloomsburg University.
Dr. Thomas E. Worthy has served as our Vice
President, Development since August 1999. From April 1998 to
August 1999, he served as our Director of Technical Affairs.
Before joining Cholestech, Dr. Worthy held Director of
Research and Development positions at Microgenics Corporation, a
division of Boehringer Mannheim Corporation, from January 1980
to April 1998, and at MetPath, Inc. from May 1981 to February
1988. He holds a Doctor of Philosophy degree in Radiation
Biology from the University of Tennessee, a Master of Science
degree in Microbiology from Northern Illinois University and a
Bachelor of Arts degree in Biology from Albion College.
AVAILABLE INFORMATION
We are subject to the reporting requirements under the
Securities Exchange Act of 1934. Consequently, we are required
to file reports and information with the Securities and Exchange
Commission (SEC), including reports on the following forms:
annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments
to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934. These reports and other information concerning our company
may be accessed through the SEC’s website at
http://www.sec.gov. The public may read and copy any materials
that we file with the SEC at the SEC’s Public Reference
Room at 450 Fifth Street, NW, Washington, DC 20549. The
public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330.
You may also find on our website at http://www.cholestech.com
electronic copies of our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934. The contents of our website are
not incorporated by reference in this Annual Report on
Form 10-K.
Item 2: Properties
Our offices are located in an approximately 69,000 square
foot leased facility in Hayward, California. Our facilities
contain approximately 10,000 square feet of warehouse
space, 8,000 square feet of manufacturing space,
4,000 square feet of laboratory space and the balance
devoted to marketing and administrative and common areas. Our
lease pertaining to this facility expires in April 2017. We
expect that our current leased facilities will be sufficient for
our needs over the next 12 months.
Item 3: Legal Proceedings
On August 2, 2002, N.V. Euromedix (“Euromedix”)
filed suit against us in the Commercial Court in Leuven, Belgium
(No. F5700-02), seeking damages for the wrongful
termination of an implied distribution agreement
20
with our company for Europe and parts of the Middle East. On
November 7, 2002, the court dismissed the suit. On
December 31, 2002, Euromedix filed suit against us in the
Commercial Court in Leuven, Belgium (No. B/02/00044),
seeking damages in the amount of
approximately €3.5 million
for the wrongful termination of an implied distribution
agreement with our company for Europe and parts of the Middle
East. At the introductory hearing on April 1, 2003, the
case was sent to the general docket and there have been no
further developments. We believe this claim is without merit and
intend to continue to defend the claim vigorously.
On March 14, 2003, we initiated trademark infringement
proceedings against Euromedix before the President of the
Commercial Court in Leuven, Belgium (No. BRK/03/00017), seeking
in principle an order (i) to prohibit Euromedix from
selling, stocking, importing, exporting or promoting in the
European Economic Area (EEA) products that violate our
trademarks, under a penalty
of €10,000 for
each LDX Analyzer sold, a penalty
of €1,000 for each
cassette sold contrary to the prohibition and
a €25,000 penalty
for each publicity of advertisement for such products;
(ii) to prohibit Euromedix from using certain slogans and
phrases, in combination with products associated with certain of
our trademarks, in trade documents or other announcements, under
a penalty of €25,000
for each document used contrary to this prohibition; and
(iii) to order the destruction of the inventory of products
held by Euromedix that violate our trademarks, which have been
imported into the EEA without our permission.
A hearing was held on April 29, 2003 regarding certain
procedural issues. In a judgment rendered on May 27, 2003,
the Judge of Seizures of the Court of First Instance referred
the complaint to the Constitutional Court before rendering a
final decision. The Judge of Seizures asked the Constitutional
Court to render an opinion regarding certain constitutional
issues related to the trademark infringement arguments we raised
at the hearing. On March 24, 2004, the Constitutional Court
issued its judgment which supported our claims. A hearing was
scheduled for November 9, 2004 by the Judge of Seizures of
the Court of First Instance to hear additional submissions. On
December 21, 2004, the Judge of Seizures of the Court of
First Instance decided against Euromedix’s opposition to
certain procedural issues.
After the decisions of the Judge of Seizures of the Court of
First Instance, we have filed requests for a procedural calendar
in the three trademark infringement proceedings against
Euromedix of which two are pending before the President of the
Commercial Court of Leuven and one before the Commercial Court
of Leuven. Both parties have exchanged submissions. All three
cases are scheduled for pleadings at a hearing on June 21,
2005.
Euromedix has filed a request for a procedural calendar in the
case pending before the Commercial Court of Leuven regarding the
termination of the business relationship on July 11, 2002.
We have to file submissions by August 18, 2005 and final
submissions by October 3, 2005. The case is set for
pleadings at a hearing on November 8, 2005.
On March 26, 2004, a putative class action lawsuit
captioned Northshore Dermatology Center, S.C. v.
Cholestech Corporation, and Does 1-10, Case No.
04CH05342, was filed in the Circuit Court of Cook County,
Illinois. We were served with the complaint and summons on
March 31, 2004. The complaint alleged that we violated the
federal Telephone Consumer Protection Act and various Illinois
state laws by sending unsolicited advertisements via facsimile
transmission to residents of Illinois. The complaint sought
class certification and statutory damages of $500 to $1,500 each
on behalf of a class that would include all residents of
Illinois who received an unsolicited facsimile advertisement
from us. On January 18, 2005 the parties entered into an
agreement to settle all claims on behalf of a nationwide class.
Under the terms of the settlement, in March 2005 we paid
$625,000 in cash to settle all claims, $600,000 of which was
funded by
21
insurance. We also agreed to pay up to $50,000 for providing
notice to the class and for processing claims. The Court granted
preliminary settlement approval and a final settlement approval
hearing is currently scheduled for July 11, 2005.
We are also subject to various additional legal claims and
assessments in the ordinary course of business, none of which
are expected by management to result in a material adverse
effect on the financial statements.
Item 4: Submission of Matters to a Vote of Security Holders
None.
22
Part II
|
|
| Item 5: |
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities |
Our common stock is quoted on the NASDAQ National Market under
the symbol “CTEC.” On March 24, 2005, the last
reported sale price for our common stock on the NASDAQ National
Market was $10.00 per share. The following table sets forth
the quarterly high and low trading prices for our common stock
as reported by the NASDAQ National Market for the periods
indicated.
| |
|
|
|
|
|
|
|
|
| |
|
High | |
|
Low | |
|
Fiscal Year 2004
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
12.89 |
|
|
$ |
7.28 |
|
|
Second Quarter
|
|
|
11.11 |
|
|
|
7.30 |
|
|
Third Quarter
|
|
|
9.31 |
|
|
|
6.20 |
|
|
Fourth Quarter
|
|
|
9.39 |
|
|
|
6.72 |
|
|
Fiscal Year 2005
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
10.29 |
|
|
$ |
7.20 |
|
|
Second Quarter
|
|
|
8.15 |
|
|
|
6.16 |
|
|
Third Quarter
|
|
|
8.62 |
|
|
|
6.35 |
|
|
Fourth Quarter
|
|
|
13.68 |
|
|
|
7.69 |
|
As of March 25, 2005, there were 14,614,914 shares of
our common stock issued and outstanding and held by
approximately 156 holders of record. We estimate that there are
approximately 5,000 beneficial owners of our common stock.
Dividend Policy
We have never declared or paid cash dividends on our common
stock and do not anticipate paying cash dividends in the
foreseeable future. We currently expect to retain future
earnings, if any, for use in the operation and expansion of our
business and do not anticipate paying any cash dividends in the
foreseeable future.
Equity Compensation Plans
The information require by this item regarding equity
compensation plans is incorporated by reference under the
section entitled Equity Compensation Plan Information
contained in our proxy statement for our 2005 annual meeting
of shareholders.
Item 6: Selected Financial Data
The following selected consolidated financial data should be
read in conjunction with our consolidated financial statements
and notes thereto and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
The following selected consolidated statement of operations data
for the fiscal years ended March 25, 2005, March 26,
2004 and March 28, 2003 and the selected consolidated
balance sheet data as of March 25, 2005 and March 26,
2004 are derived from, and qualified by reference to, the
audited consolidated financial statements included elsewhere in
this Annual Report on Form 10-K. The selected consolidated
statement of operations data for the fiscal years ended
March 29, 2002 and March 30, 2001 and the consolidated
balance sheet data as of March 28, 2003, March 29,
2002 and March 30, 2001 have been derived from our audited
consolidated financial statements not included in this Annual
Report.
23
These historical results are not necessarily indicative of the
results of operations to be expected from any future period.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31,(1) | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
| |
|
| |
| |
|
(in thousands, except per share data) | |
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenue
|
|
$ |
52,877 |
|
|
$ |
52,376 |
|
|
$ |
48,541 |
|
|
$ |
41,747 |
|
|
$ |
32,489 |
|
| |
Cost of revenue
|
|
|
21,390 |
|
|
|
23,180 |
|
|
|
20,424 |
|
|
|
17,040 |
|
|
|
14,054 |
|
| |
|
|
| |
Gross profit
|
|
|
31,487 |
|
|
|
29,196 |
|
|
|
28,117 |
|
|
|
24,707 |
|
|
|
18,435 |
|
| |
|
|
| |
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Sales and marketing
|
|
|
11,494 |
|
|
|
12,654 |
|
|
|
11,737 |
|
|
|
9,241 |
|
|
|
8,287 |
|
| |
|
Research and development
|
|
|
4,252 |
|
|
|
3,159 |
|
|
|
2,722 |
|
|
|
2,201 |
|
|
|
2,195 |
|
| |
|
General and administrative
|
|
|
9,864 |
|
|
|
8,153 |
|
|
|
7,008 |
|
|
|
6,447 |
|
|
|
4,293 |
|
| |
|
Other operating costs
|
|
|
— |
|
|
|
250 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
Litigation and other related
|
|
|
— |
|
|
|
7,786 |
|
|
|
307 |
|
|
|
126 |
|
|
|
1,311 |
|
| |
|
|
| |
|
|
Total operating expenses
|
|
|
25,610 |
|
|
|
32,002 |
|
|
|
21,774 |
|
|
|
18,015 |
|
|
|
16,086 |
|
| |
|
|
| |
Income (loss) from operations
|
|
|
5,877 |
|
|
|
(2,806 |
) |
|
|
6,343 |
|
|
|
6,692 |
|
|
|
2,349 |
|
| |
Interest and other income, net
|
|
|
231 |
|
|
|
278 |
|
|
|
438 |
|
|
|
449 |
|
|
|
655 |
|
| |
|
|
| |
Income (loss) before taxes
|
|
|
6,108 |
|
|
|
(2,528 |
) |
|
|
6,781 |
|
|
|
7,141 |
|
|
|
3,004 |
|
| |
Provision (benefit) for income
taxes(2)
|
|
|
1,968 |
|
|
|
(11,201 |
) |
|
|
(3,934 |
) |
|
|
289 |
|
|
|
224 |
|
| |
|
|
| |
Income from continuing operations
|
|
|
4,140 |
|
|
|
8,673 |
|
|
|
10,715 |
|
|
|
6,852 |
|
|
|
2,780 |
|
| |
|
|
| |
Gain (loss) from discontinued
operations
|
|
|
8 |
|
|
|
34 |
|
|
|
(1,377 |
) |
|
|
(1,302 |
) |
|
|
(5,386 |
) |
| |
Loss from sale of discontinued
operations
|
|
|
— |
|
|
|
— |
|
|
|
(4,445 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
| |
Net income (loss)
|
|
$ |
4,148 |
|
|
$ |
8,707 |
|
|
$ |
4,893 |
|
|
$ |
5,550 |
|
|
$ |
(2,606 |
) |
| |
|
|
| |
Income from continuing operations
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
$ |
0.29 |
|
|
$ |
0.62 |
|
|
$ |
0.79 |
|
|
$ |
0.54 |
|
|
$ |
0.23 |
|
| |
|
|
| |
|
Diluted
|
|
$ |
0.29 |
|
|
$ |
0.61 |
|
|
$ |
0.76 |
|
|
$ |
0.50 |
|
|
$ |
0.22 |
|
| |
|
|
| |
Income (loss) from discontinued
operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
$ |
0.00 |
|
|
$ |
0.01 |
|
|
$ |
(0.43 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.45 |
) |
| |
|
|
| |
|
Diluted
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
(0.41 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.43 |
) |
| |
|
|
| |
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
$ |
0.29 |
|
|
$ |
0.63 |
|
|
$ |
0.36 |
|
|
$ |
0.44 |
|
|
$ |
(0.22 |
) |
| |
|
|
| |
|
Diluted
|
|
$ |
0.29 |
|
|
$ |
0.61 |
|
|
$ |
0.35 |
|
|
$ |
0.40 |
|
|
$ |
(0.21 |
) |
| |
|
|
| |
Shares used to compute net income
(loss) per share(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
|
14,295 |
|
|
|
13,922 |
|
|
|
13,551 |
|
|
|
12,658 |
|
|
|
12,046 |
|
| |
|
|
| |
|
Diluted
|
|
|
14,472 |
|
|
|
14,235 |
|
|
|
14,077 |
|
|
|
13,730 |
|
|
|
12,416 |
|
| |
|
|
24
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended March 31,(1) | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
| |
|
| |
| |
|
(in thousands) | |
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash, cash equivalents and
marketable securities
and long term investments
|
|
$ |
33,468 |
|
|
$ |
23,602 |
|
|
$ |
26,081 |
|
|
$ |
22,107 |
|
|
$ |
12,365 |
|
| |
Working capital
|
|
|
33,578 |
|
|
|
23,986 |
|
|
|
22,579 |
|
|
|
20,848 |
|
|
|
10,254 |
|
| |
Total assets
|
|
|
74,121 |
|
|
|
63,230 |
|
|
|
52,012 |
|
|
|
42,751 |
|
|
|
30,742 |
|
| |
Accumulated deficit
|
|
|
(24,732 |
) |
|
|
(28,880 |
) |
|
|
(37,587 |
) |
|
|
(42,480 |
) |
|
|
(48,030 |
) |
| |
Shareholders’ equity
|
|
|
66,592 |
|
|
|
57,278 |
|
|
|
44,728 |
|
|
|
36,721 |
|
|
|
24,858 |
|
|
|
| (1) |
Our fiscal year is a 52-53 week period ending on the last
Friday in March. All fiscal years referenced in this Annual
Report on Form 10-K consisted of 52 weeks. For
convenience, we have indicated in this Annual Report on
Form 10-K that our fiscal year ends on March 31 and
refer to the fiscal year ending March 25, 2005 as fiscal
year 2005, March 26, 2004 as fiscal year 2004,
March 28, 2003 as fiscal year 2003, March 29, 2002 as
fiscal year 2002, and the fiscal year ending March 30, 2001
as fiscal year 2001. |
| |
| (2) |
Benefit for income taxes in fiscal years 2004 and 2003 includes
a $10.2 million and $4.2 million, respectively, gain
from a net deferred income tax benefit which resulted from the
reversal of a portion of the valuation allowance previously
established for deferred tax assets, primarily net operating
losses. |
| |
| (3) |
See Note 1 of Notes to Consolidated Financial Statements
for an explanation of the shares used to compute net income
(loss) per share. |
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
INTRODUCTION
Management’s discussion and analysis of financial condition
and results of operations, or MD&A, is provided as a
supplement to the accompanying consolidated financial statements
and footnotes contained in Item 15 of this report and
provides an understanding of our results of operations,
financial condition and changes in financial condition. This
discussion contains forward-looking statements. These statements
are based on our current expectations, assumptions, estimates
and projections about our business and our industry, and involve
known and unknown risks, uncertainties and other factors that
may cause our or our industry’s results, levels of
activity, performance or achievement to be materially different
from any future results, levels of activity, performance or
achievements expressed or implied in or contemplated by the
forward-looking statements. Our actual results and the timing of
selected events could differ materially from those anticipated
in these forward-looking statements as a result of selected
factors, including those set forth in this section. MD&A is
organized as follows:
|
|
| • |
Overview. This section provides a general
description and recent history of our business. |
| |
| • |
Results of operations. This section provides our
analysis and outlook for the significant line items on our
consolidated statement of operations. |
| |
| • |
Liquidity and capital resources. This section
provides an analysis of our liquidity and cash flows, as well as
a discussion of our commitments that existed as of
March 25, 2005. |
| |
| • |
Critical accounting policies. This section discusses
those accounting policies that both are considered important to
our financial condition and results of operations, and require
us to exercise subjective or complex judgments in their
application. In addition, all of our significant accounting
policies, including our critical accounting policies, are
summarized in Note 1 to our consolidated financial
statements. |
25
|
|
| • |
Recent accounting pronouncements. This section
describes the issuance and effects of new accounting
pronouncements. |
| |
| • |
Factors affecting future operating results. This
section discusses the most significant factors that could affect
our future financial results. The factors discussed in this
section are in addition to factors that may be described in the
MD&A captions discussed above and elsewhere in this report. |
OVERVIEW
We are a medical device company that develops, manufactures and
markets products that perform diagnostic testing at sites
outside of traditional hospital and clinical laboratories to
assist in the assessment of the risk of heart disease, diabetes
and certain liver diseases and in the monitoring of therapy to
treat those diseases. Our products are sold worldwide. Our
primary market is the physician laboratory market, which
consists of approximately 104,000 sites that are registered with
the Centers for Medicare & Medicaid Services
(“CMS”), approximately 51,000 of which are registered
to perform only tests that have been waived under CLIA.
Our corporate headquarters is located in Hayward, California.
All of our manufacturing, research, regulatory and
administrative activities are conducted at this location. We
sell our products through a worldwide network of over 85
distributors. We have 21 regional sales managers who coordinate
and work with our distribution partners to identify and promote
sales of our products. We also employ 14 field technical service
representatives who are responsible for field customer service
and customer retention initiatives within our existing installed
base of products.
Recent Events
We have experienced recent significant developments and are
monitoring certain events that may have an impact on our
company, including the following:
|
|
| • |
In April 2004, we announced a market development and product
distribution agreement involving a novel and proprietary system
for assessing vascular endothelial dysfunction which will
further broaden our portfolio of products that enable physicians
to assess and monitor heart disease and diabetes. We will invest
resources to support pre-launch market research and market
development activities. We will also be responsible for the sale
and installation of the Endo-PAT in early adopter sites to
further promote recognition of the product and technology while
assessing United States market development needs. |
| • |
In June 2004 we announced that the FDA granted 510(k) clearance
for our new hs-CRP test. The new hs-CRP test cassette can be
used on our existing Cholestech LDX® System once a simple
software upgrade has been completed. This 510(k) clearance will
allow us to market the product to moderately complex
laboratories. We also plan to seek waived status from the FDA
for the hs-CRP test. CRP is a systemic marker of inflammation
and the measurement of CRP is useful as an aid in the detection
and evaluation of infection, tissue injury, inflammatory
disorders, and associated diseases. We plan to introduce hs-CRP
in the summer of 2005. |
| • |
In June 2004, we announced that our second liver enzyme test,
AST, received the FDA waiver under the CLIA. This classification
establishes our AST product as the only CLIA-waived diagnostic
test for AST that healthcare providers can use to easily,
reliably and conveniently assess damage to the liver due to
drugs or certain diseases. The AST test will run on our LDX
System, in conjunction with our ALT test, delivering results
with the same precision and accuracy, in less than five minutes
using a single drop of blood, as methods performed in
centralized or reference labs. Combining these two tests on a |
26
|
|
|
single cassette advances our goal
of offering a four-test liver function panel. We began shipping
the AST product in September 2004.
|
| • |
In November 2004, the CMS announced
the 2005 Physician Fee Schedule, which guarantees access to
preventive cholesterol screenings for 39 million
Medicare-eligible beneficiaries. Beginning in January of 2005,
Medicare Section 612 — Cardiovascular Screening
coverage went into effect as part of the larger Medicare
Prescription Drug, Improvement, and Modernization Act of 2003
(MMA). All Medicare beneficiaries will have access to preventive
cholesterol screening blood tests for the early detection of
cardiovascular disease and all new Medicare members will be
covered for an initial physical examination. Both include the
use of three tests to detect early risk for cardiovascular
disease, including total cholesterol, a HDL-cholesterol, and a
triglycerides test, which can be ordered as a lipid panel or
individually.
|
RESULTS OF OPERATIONS
In the following discussion of our results of operations,
results related to WellCheck have been classified as
“discontinued operations”.
COMPARISON OF FISCAL YEARS ENDED MARCH 25, 2005 AND
MARCH 26, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
March 25, | |
|
March 26, | |
|
|
|
|
| |
|
2005 | |
|
2004 | |
|
|
|
|
| |
|
| |
|
Amount of | |
|
Percentage | |
| |
|
|
|
% of | |
|
|
|
% of | |
|
Increase | |
|
Increase | |
| |
|
Amount | |
|
sales | |
|
Amount | |
|
sales | |
|
(Decrease) | |
|
(Decrease) | |
| |
|
| |
|
Revenue
|
|
$ |
52,877 |
|
|
|
100 |
% |
|
$ |
52,376 |
|
|
|
100 |
% |
|
$ |
501 |
|
|
|
1 |
% |
|
Cost of revenue
|
|
|
21,390 |
|
|
|
40 |
|
|
|
23,180 |
|
|
|
44 |
|
|
|
(1,790 |
) |
|
|
(8 |
) |
| |
|
|
|
Gross profit
|
|
|
31,487 |
|
|
|
60 |
|
|
|
29,196 |
|
|
|
56 |
|
|
|
2,291 |
|
|
|
8 |
|
| |
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales and marketing
|
|
|
11,494 |
|
|
|
22 |
|
|
|
12,654 |
|
|
|
24 |
|
|
|
(1,160 |
) |
|
|
(9 |
) |
| |
Research and development
|
|
|
4,252 |
|
|
|
8 |
|
|
|
3,159 |
|
|
|
6 |
|
|
|
1,093 |
|
|
|
35 |
|
| |
General and administrative
|
|
|
9,864 |
|
|
|
18 |
|
|
|
8,153 |
|
|
|
16 |
|
|
|
1,711 |
|
|
|
21 |
|
| |
Other operating costs
|
|
|
— |
|
|
|
— |
|
|
|
250 |
|
|
|
— |
|
|
|
(250 |
) |
|
|
(100 |
) |
| |
Legal and other related
|
|
|
— |
|
|
|
— |
|
|
|
7,786 |
|
|
|
15 |
|
|
|
(7,786 |
) |
|
|
(100 |
) |
| |
|
|
| |
|
Total operating expenses
|
|
|
25,610 |
|
|
|
48 |
|
|
|
32,002 |
|
|
|
61 |
|
|
|
(6,392 |
) |
|
|
(20 |
) |
| |
|
|
|
Income (loss) from operations
|
|
|
5,877 |
|
|
|
11 |
|
|
|
(2,806 |
) |
|
|
(5 |
) |
|
|
8,683 |
|
|
|
309 |
|
|
Interest and other income, net
|
|
|
231 |
|
|
|
— |
|
|
|
278 |
|
|
|
1 |
|
|
|
(47 |
) |
|
|
(17 |
) |
|
Provision (benefit) for income taxes
|
|
|
1,968 |
|
|
|
4 |
|
|
|
(11,201 |
) |
|
|
(21 |
) |
|
|
13,169 |
|
|
|
(118 |
) |
| |
|
|
|
Income from continuing operations
|
|
|
4,140 |
|
|
|
8 |
|
|
|
8,673 |
|
|
|
17 |
|
|
|
(4,533 |
) |
|
|
(52 |
) |
|
Income from discontinued operations
|
|
|
8 |
|
|
|
— |
|
|
|
34 |
|
|
|
— |
|
|
|
(26 |
) |
|
|
(76 |
) |
|
Net income
|
|
$ |
4,148 |
|
|
|
8 |
% |
|
$ |
8,707 |
|
|
|
17 |
% |
|
$ |
(4,559 |
) |
|
|
(52 |
)% |
| |
|
|
Revenue. Our total revenue increased 1% to
$52.9 million in fiscal year 2005 from $52.4 million
in fiscal year 2004 due primarily to increased sales of
single-use test cassettes, which was offset by decreased sales
in the first quarter of fiscal year 2005 due to our decision to
eliminate quarter end discounts on large volume purchases by its
distribution partners. Revenue for our LDX analyzer decreased
18% in fiscal year 2005. The revenue decline was attributable to
a promotion earlier in the year in which certain end-users were
provided a free LDX when they purchased a predetermined number
of single-use test cassettes from our distribution partners.
27
Revenue for our GDX analyzer and related single-use test
cartridges decreased 33% in fiscal year 2005. The decline in GDX
and related product revenue related to our decision to
de-emphasize those products in order to focus on our lipid and
products under development and business in light of Medicare
reimbursement for cholesterol and diabetes screening, which can
be performed on the LDX.
Domestic revenue for fiscal year 2005 increased
$0.6 million, or 1% to $45.6 million from
$45.0 million in fiscal year 2004. On October 1, 2004,
we increased our domestic list price for all of our LDX related
products by 3%, which increased domestic LDX revenue by
approximately $750,000. Most of the increase in domestic revenue
related to revenue from single-use test cassettes which
increased $1.8 million, or 5%, to $39.1 million for
fiscal year 2005 from $37.3 million for fiscal year 2004.
Revenue for the LDX analyzer decreased $0.9 million, or
33%, to $1.9 million for fiscal year 2005 from
$2.8 million for fiscal year 2004. We expect domestic LDX
revenue for fiscal year 2006 to increase due to the release of
our new ALT/AST, hs-CRP and Lipid/ALT test cassettes and
increased testing on our installed base due to the recently
enacted Medicare reimbursement for the screening of lipids for
the Medicare population. Additionally, domestic revenue for our
GDX analyzer and related single-use test cartridges decreased
$0.6 million, or 26%, to $1.6 million for fiscal year
2005 from $2.2 million for fiscal year 2004. The decline in
GDX and related product revenue related to our decision to
de-emphasize those products in order to focus on our lipid and
pending products and business in light of Medicare reimbursement
for cholesterol and diabetes screening which can be performed on
the LDX.
International revenue decreased 2% in fiscal year 2005 from
fiscal year 2004. The decrease was primarily related to a
reduction of orders from pharmaceutical companies in Latin
America. International revenue is primarily to related
pharmaceutical promotional programs which tend to occur in
irregular patterns and are difficult to forecast. Most of the
decline related to the sale of single-use test cassettes, which
decreased 3% in fiscal year 2005. This was offset by LDX revenue
which increased 21% for the same period. Additionally,
international revenue for our GDX and related products decreased
57% in fiscal year 2005.
Cost of Revenue. Cost of revenue includes direct labor,
direct material, overhead and royalties. Our cost of revenue
decreased $1.8 million, or 8%, to $21.4 million in
fiscal year 2005 from $23.2 million in fiscal year 2004. As
a percentage of sales, the gross margins were 60% and 56% for
fiscal year 2005 and fiscal year 2004, respectively. The
improvement in gross margin related to the shift in product mix
toward single-use cassettes, which are our highest margin
products. Factory spending decreased 2% for fiscal year 2005
compared to fiscal year 2004. In addition, inventory scrap
decreased by $1.0 million due to improvements in the
manufacturing process and controls, which improved the yield
during the production of single-use test cassettes. A 3% price
increase on domestic LDX and related products, increased margins
by approximately $750,000 or 1%. During fiscal year 2006, we
anticipate factory spending will continue to increase at a rate
lower than the increase in unit production as we improve
manufacturing efficiency through increased production and cost
control.
We have licensed certain technology used in some of our
products. One ongoing royalty agreement, which expires in March
2006, requires us to pay a royalty of 2% on net sales of single
use test cassettes. In December 2003, as part of a
settlement agreement with Roche, we entered into another royalty
agreement that applies to only the HDL portion of cholesterol
test cassettes we sell. This agreement was effective as of
December 1, 2003 and expires on December 3, 2013.
Royalty spending in fiscal year 2005 increased by
$1 million, or 80%, from fiscal year 2004 due to the
agreement with Roche relating to HDL products. Royalty payments
are charged to cost of revenue as incurred.
28
Operating Expenses
Sales and Marketing. Sales and marketing expenses include
salaries, commissions, bonuses, travel and expenses for outside
services related to marketing programs. Sales and marketing
expenses decreased $1.2 million, or 9%, to
$11.5 million for fiscal year 2005 from $12.7 million
for fiscal year 2004. A decline of $1.3 million in product
marketing expenses, including product sample, advertising and
market research, was the primary reason for the decrease.
Additionally, travel costs decreased by $337,000. This was
partially offset by wages, commissions and related costs which
increased by $479,000 and employee costs, including recruiting
and relocation, which increased by $225,000. As a percent of
total revenue, sales and marketing expenses were 22% and 24% for
fiscal year 2005 and fiscal year 2004, respectively. We expect
that our sales and marketing costs will remain constant as a
percentage of revenue in fiscal year 2006.
Research and Development. Research and development
expenses include salaries, bonuses, professional consulting
service expenses, supplies and depreciation of capital
equipment. Research and development expenses increased
$1.1 million, or 35%, to $4.3 million for fiscal year
2005 from $3.2 million for fiscal year 2004. The increased
spending related primarily to higher headcount and associated
wages, benefits and allocated facilities, which were connected
to new product development. Outside consultants costs related to
new product development also increased. As a percent of total
revenue, research and development expenses increased to 8% for
fiscal year 2005 from 6% for fiscal year 2004. We expect our
research and development costs to increase as a percentage of
revenue during fiscal year 2006 as we prepare new products for
the marketplace.
General and Administrative. General and administrative
expenses include compensation, benefits and expenses for outside
professional services, including information services, legal and
accounting. General and administrative expenses increased
$1.7 million, or 21%, to $9.9 million for fiscal year
2005 from $8.2 million for fiscal year 2004. This increase
was primarily attributable to a $836,000 increase in costs
associated with outside professional services and consulting,
including accounting support, which primarily related to
compliance cost for the Sarbanes-Oxley Act of 2002.
Additionally, bonuses and other benefit related costs increased
$1.2 million relating to obtaining management goals, higher
benefit cost structure and increased headcount. This increase
was offset by lower insurance premiums including directors and
officers’ liability insurance premiums, which decreased
$328,000. As a percent of total revenue, general and
administrative expenses increased to 19% for fiscal year 2005
from 16% for fiscal year 2004. We expect our general and
administrative costs will decrease as a percentage of revenue in
fiscal year 2006.
Other Operating Costs. For fiscal year 2004, other
operating costs were $250,000, with no corresponding costs for
fiscal year 2005. This cost related to the write-off of an
option to purchase a patent which we determined no longer had an
economic value.
Litigation and Other Related. Our litigation and other
related expenses included professional consulting fees, court
related costs and other fees relating to Roche litigation. These
costs were $7.8 million in fiscal year 2004 with no
corresponding expense in fiscal year 2005. These costs are
related to our settlement with Roche in connection with ongoing
patent infringement litigation. Pursuant to the settlement
agreement, which serves as a basis for the dismissal of all
patent litigation between us and Roche on a worldwide basis, we
made a lump sum payment of $7.0 million to Roche on
December 30, 2003.
Interest and Other Income, Net. Interest income and other
income, net reflects income from the investment of cash balances
and marketable securities, net of expenses. Interest income
decreased 17% to $231,000 in fiscal year 2005 from $278,000 in
fiscal 2004. Loss from the sale of marketable securities was
$18,000
29
during fiscal year 2005 compared to a gain of $121,000 in fiscal
year 2004. We expect income from marketable securities to remain
constant unless there is a change in the market yield on
corporate bonds or use of investments.
Income Taxes. For fiscal year 2005, we recorded a
provision for income taxes of $2.0 million for an effective
tax rate of 32.2%. The effective tax rate is less than the
applicable federal and state tax rates due to a benefit relating
to California manufacturers’ investment credit and research
and development credits. The income tax benefit of
$11.2 million recorded in fiscal year 2004, primarily
related to the release of the valuation allowance previously
established for our net operating losses. We expect to use net
operating loss carryforwards (“NOL”) and other tax
carryforwards to the extent taxable income is earned in fiscal
year 2006 and beyond. As of March 25, 2005, we had NOL
carryforwards of $42.6 million available to reduce future
taxable income for federal income tax purposes and
$2.7 million for state tax purposes.
Ownership changes, as defined under Section 382 of the
Internal Revenue Code, have occurred. As a result, the annual
limitation on utilization of net operating losses generated
prior to December 16, 1992 is approximately
$5.7 million. We expect that this annual limitation will
not cause any of the net operating losses to expire prior to
utilization.
Discontinued Operations. Discontinued operations in 2005
and 2004 includes TEAMS royalty revenue sold to Impact Health
upon the sale of Wellcheck. Income from discontinued operations
decreased 76% to $8,000 in fiscal year 2005 from income of
$34,000 in fiscal year 2004.
We will recognize contingent sales proceeds, pursuant to the
terms of our sale of WellCheck, including the TEAMS royalty and
performance remuneration, as a component of discontinued
operations.
COMPARISON OF FISCAL YEARS ENDED MARCH 26, 2004 AND
MARCH 28, 2003
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
March 26, 2004 | |
|
March 28, 2003 | |
|
|
|
|
| |
|
| |
|
Amount of | |
|
Percentage | |
| |
|
|
|
% of | |
|
|
|
% of | |
|
Increase | |
|
Increase | |
| |
|
Amount | |
|
sales | |
|
Amount | |
|
sales | |
|
(Decrease) | |
|
(Decrease) | |
| |
|
| |
|
Revenue
|
|
$ |
52,376 |
|
|
|
100 |
% |
|
$ |
48,541 |
|
|
|
100 |
% |
|
$ |
3,835 |
|
|
|
8 |
% |
|
Cost of revenue
|
|
|
23,180 |
|
|
|
44 |
|
|
|
20,424 |
|
|
|
42 |
|
|
|
2,756 |
|
|
|
13 |
|
| |
|
|
|
Gross profit
|
|
|
29,196 |
|
|
|
56 |
|
|
|
28,117 |
|
|
|
58 |
|
|
|
1,079 |
|
|
|
4 |
|
| |
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales and marketing
|
|
|
12,654 |
|
|
|
24 |
|
|
|
11,737 |
|
|
|
24 |
|
|
|
917 |
|
|
|
8 |
|
| |
Research and development
|
|
|
3,159 |
|
|
|
6 |
|
|
|
2,722 |
|
|
|
6 |
|
|
|
437 |
|
|
|
16 |
|
| |
General and administrative
|
|
|
8,153 |
|
|
|
16 |
|
|
|
7,008 |
|
|
|
14 |
|
|
|
1,145 |
|
|
|
16 |
|
| |
Other operating costs
|
|
|
250 |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
250 |
|
|
|
— |
|
| |
Legal and other related
|
|
|
7,786 |
|
|
|
15 |
|
|
|
307 |
|
|
|
1 |
|
|
|
7,479 |
|
|
|
2,436 |
|
| |
|
|
| |
|
Total operating expenses
|
|
|
32,002 |
|
|
|
61 |
|
|
|
21,774 |
|
|
|
45 |
|
|
|
10,228 |
|
|
|
47 |
|
| |
|
|
|
Income (loss) from operations
|
|
|
(2,806 |
) |
|
|
(5 |
) |
|
|
6,343 |
|
|
|
13 |
|
|
|
(9,149 |
) |
|
|
(144 |
) |
|
Interest and other income, net
|
|
|
278 |
|
|
|
1 |
|
|
|
438 |
|
|
|
1 |
|
|
|
(160 |
) |
|
|
(37 |
) |
|
Benefit for income taxes
|
|
|
(11,201 |
) |
|
|
(21 |
) |
|
|
(3,934 |
) |
|
|
(8 |
) |
|
|
(7,267 |
) |
|
|
185 |
|
| |
|
|
|
Income from continuing operations
|
|
|
8,673 |
|
|
|
17 |
|
|
|
10,715 |
|
|
|
22 |
|
|
|
(2,042 |
) |
|
|
19 |
|
|
Gain (loss) from discontinued
operations
|
|
|
34 |
|
|
|
— |
|
|
|
(1,377 |
) |
|
|
(3 |
) |
|
|
1,411 |
|
|
|
102 |
|
|
Loss from sale of discontinued
operations
|
|
|
— |
|
|
|
— |
|
|
|
(4,445 |
) |
|
|
(9 |
) |
|
|
4,445 |
|
|
|
100 |
|
| |
|
|
|
Net income (loss)
|
|
$ |
8,707 |
|
|
|
17 |
% |
|
$ |
4,893 |
|
|
|
10 |
% |
|
$ |
3,814 |
|
|
|
78 |
% |
| |
|
|
30
Revenue. Our total revenue increased 8% to
$52.4 million in fiscal year 2004 from $48.5 million
in fiscal year 2003 due primarily to increased revenue relating
to the sale of single use test cassettes. This increase was
attributable to the continued adoption of the ATP III
guidelines for treatment of high cholesterol, the increased
number of CLIA waived laboratories and increased growth in the
use of statin drugs, all of which resulted in higher demand for
our LDX Analyzer and single use test cassettes.
International revenue increased 12% during fiscal year 2004 over
fiscal year 2003. Revenue for single-use cassettes increased 10%
while unit volume increased 13%. The increase was primarily due
to the impact of promotional activities related to the launch by
AstraZeneca PLC of its statin drug Crestor. International LDX
Analyzer revenue decreased 12% in fiscal year 2004 due to lower
promotional equipment spending by pharmaceutical companies.
Revenue for the GDX Analyzer and single use test cartridges
increased 15% during fiscal year 2004. The increase was
primarily to due to the benefit of a full year of revenue
attributed to the product which was launched in July 2002.
Cost of Revenue. Cost of revenue includes direct labor,
direct material, overhead and royalties. Our cost of revenue
increased 13% to $23.2 million for fiscal year 2004 from
$20.4 million for fiscal year 2003. The increase in cost of
revenue related primarily to additional products shipped in
support of the 8% increase in revenue during fiscal year 2004
over the prior fiscal year. Additionally, expenses associated
with promotional programs tied to revenue increased in fiscal
year 2004. Factory spending increased 17% during fiscal year
2004 over fiscal year 2003, while unit production of single use
test cassettes increased 21%. The increase in spending is
related to royalty, material scrap, warranty and product testing
costs.
We have licensed certain technology used in some of our
products. One ongoing royalty agreement, which expires in
calendar year 2006, requires us to pay a royalty of 2% on net
sales of all single use test cassettes. In December 2003, as
part of a settlement agreement with Roche, we entered into
another royalty agreement that is applied to only the HDL
portion of cholesterol test cassettes we sell. This new
agreement was effective as of December 1, 2003 and expires
on December 3, 2013. Total royalty expense was
$1.2 million in fiscal year 2004 and $753,000 in fiscal
year 2003 and was included in cost of revenue.
Operating Expenses
Sales and Marketing. Our sales and marketing expenses
include salaries, commissions, bonuses, expenses for outside
services, marketing programs and travel expenses. Sales and
marketing expenses increased 8% to $12.7 million from
$11.7 million for fiscal year 2003. The increase in wages
and related and travel reflects a full year impact of increase
in staffing related to providing additional technical service
support to our installed base which was expanded late in fiscal
year 2003, and severance accrual for our former Vice President
of Sales and Marketing. The increase in outside services is
related to market research and expenses related to industry
specific public relations initiatives. Product marketing
expenses decreased primarily due to fewer free samples and lower
distributor relation expenses which declined due to our
refocusing of sales activities towards more direct involvement
by our sales force with the distributors.
Research and Development. Our research and development
expenses include salaries, bonuses, expenses for outside
services, supplies and amortization of capital equipment.
Research and development expenses increased 16% to
$3.2 million in fiscal year 2004 from $2.7 million in
fiscal year 2003. The increases in wages and related, outside
services and development materials all relate to increased
efforts to develop new test cassette products for use on our LDX
Analyzer.
31
General and Administrative. Our general and
administrative expenses include salaries and benefits, as well
as expenses for outside professional services including
information services, legal, accounting, insurance and costs
associated with our board of directors. General and
administrative expense increased 16% to $8.2 million in
fiscal year 2004 from $7.0 million in fiscal year 2003. The
increase in shared facilities costs is attributable to a full
year in the expanded space leased for our corporate offices in
Hayward, California. Additionally, a larger percentage of shared
facilities cost were included in the general and administrative
expense in fiscal year 2003. Insurance costs increased due to
the additional policy premiums for director’s and
officer’s insurance. Outside service expenses increased due
to larger expenditures for legal, accounting and consulting
services during fiscal year 2004. As we continue to grow, expand
and maintain profitability, we will continue to register with
new state tax agencies. While the cost of taxes and other fees
paid to state agencies have not been material, we have
experienced a significant increase in accounting services
expense related to the administration and filing of state income
tax documentation. Additionally, we have required more outside
professional services to meet the increasing cost of being a
public company including additional requirements of the
Sarbanes-Oxley Act of 2002.
Other Operating Costs. For fiscal year 2004, other
operating costs were $250,000. We had no corresponding operating
costs for fiscal year 2003. These costs related to the write-off
of an option to purchase a patent, which we determined no longer
had an economic value.
Litigation and Other Related. Our legal and related
expenses included professional consulting fees, court related
costs and other fees relating to litigation. Legal and related
expenses increased to $7.8 million in fiscal year 2004 from
$307,000 in fiscal year 2003. These costs are related to our
settlement with Roche in connection with ongoing patent
infringement litigation. Pursuant to the settlement agreement,
which serves as a basis for the dismissal of all patent
litigation between us and Roche on a worldwide basis, we made a
lump sum payment of $7.0 million to Roche on
December 30, 2003.
Interest and Other Income, Net. Interest income reflects
income from the investment of cash balances and marketable
securities, net of expenses. Interest income decreased 37% to
$278,000 in fiscal year 2004 from $438,000 in fiscal year 2003.
The decline in interest income is attributable to lower yields
on securities investments. Gain from the sale of marketable
securities was $121,000 during fiscal year 2004 compared to
$114,000 in fiscal year 2003.
Income Taxes. The income tax benefit of
$11.2 million and $3.9 million taken in fiscal year
2004 and 2003, respectively, primarily related to the release of
the valuation allowance previously established for our net
operating losses. We released $10.2 million of valuation
allowance in fiscal year 2004 and $4.2 million in fiscal
year 2003.
Discontinued Operations. Discontinued operations include
all revenue, cost of revenue, compensation, benefits, travel and
other expenses related to the operations of WellCheck. Income
from discontinued operations increased 102% to $34,000 in fiscal
year 2004 from a loss of $1.4 million in fiscal year 2003.
The increase in income from discontinued operations in fiscal
year 2004 related mainly to TEAMS royalty revenue. During fiscal
year 2003 the loss from discontinuing operations related to the
operations of WellCheck through December 23, 2003 when the
business was sold.
Loss on Sale of Discontinued Operations. In fiscal year
2003, we completed the sale of certain assets and the assignment
of certain obligations of our subsidiary WellCheck. We incurred
a charge of $4.4 million reflecting the write-off of
certain fixed assets, goodwill, compensation expenses for staff,
professional
32
services, the termination of property leases and other
liabilities in excess of the $250,000 note receivable. We had no
such charge in fiscal year 2004.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow information for the three years ended March 25,
2005 was as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Mar 25, | |
|
Mar 26, | |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
Cash, cash equivalents, and
marketable securities
|
|
$ |
33,468 |
|
|
$ |
23,602 |
|
| |
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
10,242 |
|
|
|
(1,124 |
) |
|
Net cash used in investing
activities
|
|
|
(11,432 |
) |
|
|
(7,165 |
) |
|
Net cash provided by financing
activities
|
|
|
2,992 |
|
|
|
2,044 |
|
| |
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
$ |
1,802 |
|
|
$ |
(6,245 |
) |
| |
|
|
We have financed our operations primarily through the sale of
equity securities, including employee stock option exercises,
and net cash provided by operations. From our inception to
March 25, 2005, we have raised $87.3 million in net
proceeds from equity financings. In addition to these amounts,
we have available a $4.0 million revolving bank line of
credit agreement which was renewed in September 2004 and will
expire in September 2006. While the agreement is in effect, we
are required to deposit assets with a collective value, as
defined in the line of credit agreement, equivalent to no less
than 100% of the outstanding principal balance. Amounts
outstanding under the line of credit bear interest at either our
choice of 0.5% below the bank’s prime rate or 1.75% above
the LIBOR rate, depending on the payment schedule. We did not
borrow under this line of credit during fiscal year 2005. As a
result, there were no limitations on our deposited assets.
Cash Provided by (Used in) Operating Activities. The net
cash provided by operations increased $11.4 million to
$10.2 million for fiscal year 2005. Net cash provided by
operations was primarily attributable to net income of
$4.1 million and $4.9 million of non-cash adjustments,
including depreciation and deferred taxes. Accounts receivable
decreased $1.4 million due to a more consistent
distribution of revenue within the fiscal year related to the
end of quarter end discounts to distribution partners. This was
offset by a $2.2 million increase in inventory due to an
anticipation of increased sales volumes.
The $1.1 million use of cash in operations during fiscal
year 2004 was primarily attributed to increased working capital
other than cash. Reductions in accounts payable and accrued
payroll, and the increase in accounts receivable combined for a
net $2.4 million use of cash. This was countered by net
profit which after non-cash adjustments for depreciation, tax
benefits, and inventory reserves, generated $704,000 of cash
flow. Additionally $274,000 of cash was provided by reductions
to prepaid expenses and other assets.
Cash Used in Investing Activities. Investing activities
resulted in the net use of $11.4 million of cash during
fiscal year 2005. Spending on additional manufacturing
equipment, facilities improvements and software accounted for
$3.1 million of capital improvements, as well as an
$8.3 million purchase of marketable securities during the
year. During fiscal year 2006, we intend to invest approximately
$5.0 million in capital purchases related to expansion of
our manufacturing capacity, research and development, computer
systems and tenant improvements.
33
Spending on enhancements to manufacturing equipment, software,
computers and leasehold improvements accounted for
$3.5 million of capital improvements during fiscal year
2004. Additionally, we made a $3.7 million net purchase of
marketable securities during the year.
Cash Provided by Financing Activities. Cash provided by
financing activities for fiscal years 2005, 2004 and 2003 relate
to the issuance of common stock pursuant to the employee stock
incentive and employee stock purchase plans. During fiscal years
2005 and 2004 we raised $3.0 million and $2.0 million,
respectively, from the two programs. The amount raised in the
future will depend on the market value of our common stock, the
prices of the incentive options and the purchase price relating
to the employee stock purchase plan.
Contractual Obligations
The following summarizes our contractual obligations as of
March 25, 2005, and the effect such obligations are
expected to have on our liquidity and cash flow in future
periods is (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period | |
| |
|
| |
| |
|
Less | |
|
|
|
More | |
|
|
| |
|
than 1 | |
|
1-3 | |
|
3-5 | |
|
than | |
|
|
| |
|
Year | |
|
Years | |
|
Years | |
|
5 Years | |
|
Total | |
| |
|
| |
|
Operating lease obligations(1)
|
|
$ |
1,074 |
|
|
$ |
2,271 |
|
|
$ |
1,883 |
|
|
$ |
3,567 |
|
|
$ |
8,795 |
|
|
Purchase obligations
|
|
|
999 |
|
|
|
219 |
|
|
|
— |
|
|
|
— |
|
|
|
1,218 |
|
| |
|
|
|
Total
|
|
$ |
2,073 |
|
|
$ |
2,490 |
|
|
$ |
1,883 |
|
|
$ |
3,567 |
|
|
$ |
10,013 |
|
| |
|
|
|
|
| (1) |
This represents the minimum payments due under lease obligations. |
We expect that cash generated from our projected revenue,
existing cash, cash equivalents and marketable securities and
proceeds from the exercise of employee stock options will enable
us to maintain our current and planned core operations for at
least the next 12 months. Excluding the Roche settlement in
fiscal year 2004, we have achieved positive net cash provided by
operations for fiscal years 2000 through 2005, and we expect to
continue to generate cash from operations for the foreseeable
future.
In our efforts to grow, we are looking to acquire technologies
which could complement our current product offering. However,
should we acquire such technologies we may need to use a
significant amount of cash which could cause us to need to raise
funds from debt or equity offerings. In the event that we would
need additional financing for the operation of our business, we
can draw upon our existing $4.0 million line of credit
which would require us to maintain cash and investments as
collateral. However, we may be required to finance any
additional requirements through additional equity, debt
financing or credit facilities. We may not be able to obtain
additional financings or credit facilities, or if these funds
are available, they may not be available on satisfactory terms.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or
are reasonably likely to have, a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures
or capital resources that are material to investors.
34
QUARTERLY FINANCIAL DATA
(In thousands, except share data)
(unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended | |
| |
|
| |
| |
|
Mar. 25, | |
|
Dec. 24, | |
|
Sept. 24, | |
|
June 25, | |
|
Mar. 26, | |
|
Dec. 26, | |
|
Sept. 26, | |
|
June 27, | |
| |
|
2005 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2003 | |
|
2003 | |
| |
|
| |
|
Revenue
|
|
$ |
15,214 |
|
|
$ |
14,573 |
|
|
$ |
13,537 |
|
|
$ |
9,553 |
|
|
$ |
11,942 |
|
|
$ |
13,363 |
|
|
$ |
13,357 |
|
|
$ |
13,714 |
|
|
Gross profit
|
|
|
9,323 |
|
|
|
8,802 |
|
|
|
7,813 |
|
|
|
5,549 |
|
|
|
6,090 |
|
|
|
7,197 |
|
|
|
7,740 |
|
|
|
8,169 |
|
|
Income (loss) from continuing
operations
|
|
|
1,808 |
|
|
|
1,678 |
|
|
|
1,001 |
|
|
|
(346 |
) |
|
|
10,439 |
|
|
|
(3,951 |
) |
|
|
916 |
|
|
|
1,269 |
|
|
Gain (loss) from discontinued
operations
|
|
|
2 |
|
|
|
1 |
|
|
|
4 |
|
|
|
1 |
|
|
|
5 |
|
|
|
5 |
|
|
|
9 |
|
|
|
15 |
|
|
Net income (loss)
|
|
$ |
1,810 |
|
|
$ |
1,679 |
|
|
$ |
1,005 |
|
|
$ |
(345 |
) |
|
$ |
10,444 |
|
|
$ |
(3,946 |
) |
|
$ |
925 |
|
|
$ |
1,284 |
|
|
Income (loss) from continuing
operations per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.13 |
|
|
$ |
0.12 |
|
|
$ |
0.07 |
|
|
$ |
(0.02 |
) |
|
$ |
0.74 |
|
|
$ |
(0.28 |
) |
|
$ |
0.07 |
|
|
$ |
0.09 |
|
| |
Diluted
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
0.07 |
|
|
$ |
(0.02 |
) |
|
$ |
0.73 |
|
|
$ |
(0.28 |
) |
|
$ |
0.06 |
|
|
$ |
0.09 |
|
|
Loss from discontinued operations
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
| |
Diluted
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.13 |
|
|
$ |
0.12 |
|
|
$ |
0.07 |
|
|
$ |
(0.02 |
) |
|
$ |
0.74 |
|
|
$ |
(0.28 |
) |
|
$ |
0.07 |
|
|
$ |
0.09 |
|
| |
Diluted
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
0.07 |
|
|
$ |
(0.02 |
) |
|
$ |
0.73 |
|
|
$ |
(0.28 |
) |
|
$ |
0.06 |
|
|
$ |
0.09 |
|
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of financial statements requires management to
make estimates and judgments that affect the reported amounts of
assets and liabilities, revenue and expenses and disclosures at
the date of the financial statements. On an ongoing basis, we
evaluate our estimates, including those related to accounts
receivable, inventories and income taxes. We use authoritative
pronouncements, historical experience and other assumptions as
the basis for making estimates. Actual results could differ from
these estimates.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our consolidated financial statements.
Revenue Recognition
We recognize revenue from product sales when there is pervasive
evidence that an arrangement exists, title has transferred to
our customers, the price is fixed and determinable and
collection is reasonably assured. Provisions for discounts to
customers, returns or other adjustments are recorded as a
reduction of revenue and provided for in the same period that
the related product sales are recorded based upon analyses of
historical discounts and returns. We recognize revenue
associated with services upon completion of the
35
services to be performed under contract when all obligations are
satisfied, and collection is reasonably assured. If all
conditions to recognize revenue are not met, we are required to
defer revenue recognition.
Allowance for Doubtful Accounts
We maintain an accounts receivable allowance for an estimated
amount of losses that may result from a customer’s
inability to pay for products purchased. If the financial
condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional
allowances may be required, which could adversely affect our
operating results. The allowance for doubtful accounts was
$230,000 and $169,000 for fiscal years 2005 and 2004,
respectively.
Inventory Valuation
We state inventories at the lower of cost or market, cost being
determined using standard costs which approximates the first-in,
first-out (FIFO) method. We establish provisions for
excess, obsolete and unusable inventories after evaluation of
historical sales, forecasted sales, product expiration and
current inventory levels. We charge to cost of revenue the
increase in the provision for excess, obsolete and unusable
inventory, which was $419,000, $651,000 and $92,000 in fiscal
years 2005, 2004 and 2003, respectively. If the market value of
our products decline, the demand for our products decline or if
a significant amount of the material were to become unusable,
our operating results could be adversely affected.
Income Taxes
We use the asset and liability method of accounting for income
taxes, which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences
of temporary differences between the financial reporting and
income tax bases of assets and liabilities. We continually
review our deferred tax asset to determine if a valuation
allowance is required, primarily based on its estimates of
future taxable income. Changes in our assessment of the need for
a valuation allowance could give rise to a valuation allowance
and an expense in the period of the change.
Stock Based Compensation
We account for stock-based employee compensation arrangements in
accordance with provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees
(“APB 25”) and comply with the disclosure
provision of Statement on Financial Accounting Standards,
“SFAS”, No. 123, Accounting for Stock-based
Compensation (“SFAS 123”) as amended by
SFAS No. 148, Accounting for Stock-based
Compensation Transition and Disclosure. The pro forma
disclosure of the difference between compensation expense
included in net income (loss) and the related cost measured by
the fair value method is presented in Note 1 to the
consolidated financial statements included in this Annual Report
on Form 10-K. If we were to include the cost of stock-based
employee compensation in the financial statements, our operating
results would decline based on the fair value of the stock-based
employee compensation. The fair value used to determine the
amount of compensation is based on several estimates including
expected stock volatility, expected life of grant and expected
employee turnover.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board,
“FASB”, issued SFAS No. 151, “Inventory
Costs, an amendment of ARB No. 43, Chapter 4,”
(“SFAS 151”). SFAS 151 clarifies that
abnormal inventory costs such as costs of idle facilities,
excess freight and handling costs, and wasted materials
(spoilage) are required to be recognized as current period
charges. The provisions of SFAS 151 are effective for the
fiscal
36
year beginning after June 15, 2005. The adoption of
SFAS 151 is not expected to have a material impact on our
consolidated financial position, results of operations and cash
flows.
In December 2004, the FASB issued SFAS No. 153,
“Exchanges of Non-monetary Assets, an amendment of APB
Opinion No. 29,” (“SFAS 153”).
SFAS 153 addresses the measurement of exchanges of
non-monetary assets and redefines the scope of transactions that
should be measured based on the fair value of the assets
exchanged. SFAS 153 is effective for non-monetary asset
exchanges occurring in fiscal periods beginning after
June 15, 2005. The adoption of SFAS 153 is not
expected to have a material effect on the Company’s
consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123
(revised 2004), “Share-Based Payment,”
(“SFAS 123(R)”). SFAS 123(R) will require us
to measure all employee stock-based compensation awards using a
fair value method and record such expense in its consolidated
financial statements. In addition, the adoption of
SFAS 123(R) will require additional accounting related to
the income tax effects and additional disclosure regarding the
cash flow effects resulting from share-based payment
arrangements. On March 23, 2005, our Board of Directors
approved an acceleration of vesting for all outstanding unvested
stock options with a per share exercise price equal to or
greater than $12.06. The primary purpose of the acceleration of
vesting was to eliminate future compensation expense we would
otherwise recognize in our income statement with respect to
these accelerated options upon the adoption of SFAS 123(R).
The aggregate estimated compensation expense associated with
these accelerated options that would have been recognized in our
income statements after adoption of SFAS 123(R), prior to
the delay discussed below, was approximately $1.1 million.
As a result, options to purchase 93,337 shares of our
common stock became immediately exercisable as of March 23,
2005. Of the total options accelerated, our executive officers
held options to purchase an aggregate of 27,085 shares of
common stock.
In March 2005, the Securities and Exchange Commission
(“SEC”) issued Staff Accounting
Bulletin No. 107 (“SAB 107”) which
provides guidance regarding the application of SFAS 123(R).
SAB 107 expresses views of the staff regarding the
interaction between SFAS No. 123(R) and certain SEC
rules and regulations and provides the staff’s views
regarding the valuation of share-based payment arrangements for
public companies. In particular, SAB 107 provides guidance
related to share-based payment transactions with nonemployees,
the transition from nonpublic to public entity status, valuation
methods (including assumptions such as expected volatility and
expected term), the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the
classification of compensation expense, non-GAAP financial
measures, first-time adoption of SFAS 123(R) in an interim
period, capitalization of compensation cost related to
share-based payment arrangements, the accounting for income tax
effects of share-based payment arrangements upon adoption of
SFAS 123(R), the modification of employee share options
prior to adoption of SFAS 123(R) and disclosures in
Management’s Discussion and Analysis (“MD&A”)
subsequent to adoption of SFAS 123(R).
On April 14, 2005, the SEC approved a new rule that delays
the effective date for SFAS 123(R) to annual periods
beginning after June 15, 2005. The adoption of
SFAS 123(R) on April 1, 2006 is expected to have a
material impact on our results of operations, financial position
and statement of cash flows. We are evaluating the transition
method and pricing model alternatives upon adoption.
37
FACTORS AFFECTING FUTURE OPERATING RESULTS
We have a history of fluctuating operating results, which
may result in the market price of our common stock
declining
Our revenue and operating results have varied significantly from
quarter to quarter in the past and may continue to fluctuate in
the future. As of March 25, 2005, we had an accumulated
deficit of $24.7 million. We recorded a net profit of
$4.9 million for fiscal year 2003, a net profit of
$8.7 million for fiscal year 2004, and a net profit of
$4.1 million for fiscal year 2005. The following are some
of the factors that could cause our revenue, operating results
and margins to fluctuate significantly from quarter to quarter:
|
|
| • |
the timing and level of market acceptance of the LDX System
and the GDX System; |
| |
| • |
manufacturing problems, efficiencies, capacity constraints or
delays; |
| |
| • |
the timing of the introduction, availability and market
acceptance of new tests and products; |
| |
| • |
changes in demand for our products based on changes in
third-party reimbursement policies, changes in government
regulation and other factors; |
| |
| • |
product pricing and discounts; |
| |
| • |
the timing and level of expenditures associated with research
and development activities; |
| |
| • |
the timing, establishment and maintenance of strategic
distribution arrangements and the success of the activities
conducted under such arrangements; |
| |
| • |
the timing of significant orders from, and shipments to,
customers; |
| |
| • |
competition from diagnostic companies with greater financial
capital and resources; |
| |
| • |
costs and timing associated with business development
activities, including potential licensing of technologies or
intellectual property rights; |
| |
| • |
additions or departures of our key personnel; |
| |
| • |
promotional program spending by both domestic and European
pharmaceutical companies; |
| |
| • |
variations in the mix of products sold; and |
| |
| • |
litigation or the threat of litigation. |
These and other factors are difficult to predict and could have
a material adverse effect on our business, financial condition
and operating results. Fluctuations in quarterly demand for our
products may cause our manufacturing operations to fluctuate in
volume, increase uncertainty in operational planning and/or
affect cash flows from operations. We commit to many of our
expenses in advance, based on our expectations of future
business needs. These costs are largely fixed in the short-term.
As a result, when business levels do not meet expectations, our
fixed costs will not be recovered and we will experience losses.
This situation is likely to result in the future because of the
variability and unpredictability of our revenue. This also means
that our results will likely not meet the expectations of public
market security analysts or investors at one time or another,
which may result in the market price of our common stock
declining.
38
Our business depends on our ability to protect our
proprietary technology through patents and other means and to
operate without infringing the proprietary rights of
others
Our success depends in part on our ability to develop and
maintain the proprietary aspects of our technology and operate
without infringing the proprietary rights of others. We have ten
United States patents, one German patent and have filed patent
applications relating to our technology internationally under
the Patent Cooperation Treaty and individual foreign patent
applications. The risks of relying on the proprietary nature of
our technology include:
|
|
| • |
our pending patent applications may not result in the issuance
of any patents, or, if issued, such patents may not offer
protection against competitors with similar technology; |
| |
| • |
our patents may be challenged, invalidated or circumvented in
the future, and the rights created under our patents may not
provide a competitive advantage; |
| |
| • |
competitors, many of whom have substantially greater resources
than us and have made substantial investments in competing
technologies, may seek to apply for and obtain patents covering
technologies that are more effective than ours. This could
render our technologies or products obsolete or uncompetitive or
could prevent, limit or interfere with our ability to make, use
or sell our products either in the United States or in
international markets; |
| |
| • |
the medical products industry has been characterized by
extensive litigation regarding patents and other intellectual
property rights; and |
| |
| • |
an adverse determination in litigation or interference
proceedings to which we may become a party could subject us to
significant liabilities to third parties or require us to seek
licenses from third parties, which may not be available on
commercially reasonable terms or at all. |
We may in the future become subject to patent infringement
claims and litigation or interference proceedings conducted in
the United States Patent and Trademark Office to determine the
priority of inventions. Litigation may also be necessary to
enforce any patents issued to us, to protect our trade secrets
or know-how or to determine the enforceability, scope and
validity of the proprietary rights of others. The defense and
prosecution of intellectual property suits, patent interference
proceedings and related legal and administrative proceedings are
both costly and time consuming and will likely result in
substantially diverting the attention of technical and
management personnel from our business operations. We may also
be subject to significant damages or equitable remedies
regarding the development and sale of our products and operation
of our business.
For example, in fiscal year 2004, we entered into a settlement
agreement and license agreement with Roche, which settled all
existing patent litigation between the parties on a worldwide
basis. As a part of the settlement, we pay Roche an ongoing
royalty and Roche granted an irrevocable, non-exclusive,
worldwide license to us for its patents related to
HDL cholesterol. In addition, the parties also agreed upon
a mechanism for the resolution of future patent infringement
disputes. We believe that any such dispute resolution will
confirm that our HDL cholesterol test cassette, currently under
development, does not infringe Roche’s patents. If however,
upon the resolution of any such dispute, it is ultimately
determined that our new HDL cholesterol test cassette is
covered by Roche’s patents, we will pay Roche the same
ongoing royalty.
We rely on trade secrets, technical know-how and continuing
invention to develop and maintain our competitive position.
Others may independently develop substantially equivalent
proprietary information
39
and techniques or otherwise gain access to our trade secrets or
disclose such technology. We may also be unable to adequately
protect our trade secrets, or be capable of protecting our
rights to our trade secrets.
We depend on technology that we license from others, which
may not be available to us in the future and would prevent us
from introducing new products and harm our business
Our current products incorporate technologies that are the
subject of patents issued to, and patent applications filed by,
others. We have obtained licenses for certain of these
technologies. We may in the future be required to negotiate to
obtain licenses for new products. Some of our current licenses
are subject to rights of termination and may be terminated. Our
licensors may not abide by their contractual obligations and, as
a result, may limit the benefits we currently derive from their
licenses. We may be unable to renegotiate or obtain licenses for
technology patented by others on commercially reasonable terms,
or at all. We also may be unable to develop alternative
approaches if we are unable to obtain licenses. Our future
licenses may also not be adequate for the operation of our
business. Failure to obtain, maintain or enforce necessary
licenses on commercially reasonable terms or to identify and
implement alternative approaches could prevent us from
introducing our products and severely harm our business.
Our stock price has been highly volatile and is likely to
continue to be volatile, which could result in substantial
losses for investors
The market price of our common stock has in the past been, and
in the future is likely to be, highly volatile. For example,
between March 26, 2004 and March 25, 2005, the price
of our common stock, as reported on the NASDAQ National Market
System, has ranged from a low of $6.16 to a high of $13.68.
These fluctuations could result in substantial losses for
investors. Our stock price may fluctuate for a number of reasons
including:
|
|
| • |
quarterly variations in our operating results; |
| |
| • |
litigation or threat of litigation; |
| |
| • |
developments in or disputes regarding patent or other
proprietary rights; |
| |
| • |
announcements of technological or competitive developments by us
and our competitors; |
| |
| • |
regulatory developments regarding us or our competitors; |
| |
| • |
changes in the current structure of the healthcare financing and
payment systems; |
| |
| • |
our failure to achieve, or changes in, financial estimates by
securities analysts and comments or opinions about us by
securities analysts or major shareholders; |
| |
| • |
stock market price and volume fluctuations, which have
particularly affected the market prices for medical products and
high technology companies and which are often been unrelated to
the operating performance of such companies; and |
| |
| • |
general economic, political and market conditions. |
With the advent of the internet, new avenues have been created
for the dissemination of information. We do not have control
over the information that is distributed and discussed on
electronic bulletin boards and investment chat rooms. The
motives of the people or organizations that distribute such
information may not be in our best interest or in the interest
of our shareholders. This, in addition to other forms of
investment information, including newsletters and research
publications, could result in a significant decline in the
market price of our common stock.
40
In addition, stock markets have from time to time experienced
extreme price and volume fluctuations. The market prices for
diagnostic product companies have been affected by these market
fluctuations and such effects have often been unrelated to the
operating performance of such companies. These broad market
fluctuations may cause a decline in the market price of our
common stock.
Securities class action litigation is often brought against a
company after a period of volatility in the market price of its
stock. This type of litigation has been brought against us in
the past and could be brought against us in the future, which
could result in substantial expense and damage awards and divert
management’s attention from running our business.
If third-party reimbursement for use of our products is
eliminated or reduced, our sales will be greatly reduced and our
business may fail
In the United States, healthcare providers that purchase
products such as the LDX System and the GDX System
generally rely on their patients’ healthcare insurers,
including private health insurance plans, federal Medicare,
state Medicaid and managed care organizations, to reimburse all
or part of the cost of the procedure in which the product is
being used. We will be unable to successfully market our
products if their purchase and use is not subject to
reimbursement from government health authorities, private health
insurers and other third-party payors. If this reimbursement is
not available or is limited, healthcare providers will be much
less likely to use our products, our sales will be greatly
reduced and our business may fail.
There are current conditions in the healthcare industry that
increase the possibility that third-party payors may reduce or
eliminate reimbursement for tests using our products in certain
settings. These conditions include:
|
|
| • |
third-party payors are increasingly scrutinizing and challenging
the prices charged for both existing and new medical products
and services; |
| |
| • |
healthcare providers are moving toward a system in which
employers are requiring participants to bear a greater burden of
the cost of their healthcare benefits which could result in
fewer elective procedures, such as the use of our products for
diagnostic screening; |
| |
| • |
general uncertainty regarding what changes will be made in the
reimbursement methods used by third-party payors and how that
will affect the use of products such as ours, which may deter
healthcare providers from adopting the use of our
products; and |
| |
| • |
an overall escalating cost of medical products and services has
led to and will continue to lead to increased pressures on the
healthcare industry, both domestic and international, to reduce
the cost of products and services, including products offered by
us. |
Market acceptance of our products in international markets is
also dependent, in part, on the availability of reimbursement or
funding, as the case may be, within prevailing healthcare
systems. Reimbursement, funding and healthcare payment systems
in international markets vary significantly by country and
include both government sponsored healthcare and private
insurance. Third-party reimbursement and coverage may not be
available or adequate in either the United States or
international markets, and current reimbursement or funding
amounts may be decreased in the future. Also, future
legislation, regulation or reimbursement policies of third-party
payors may adversely affect demand for our products or our
ability to sell our products on a profitable basis. Any of these
events could materially harm our business.
41
If the healthcare system in the United States undergoes
fundamental change, these changes may harm our business
We believe that the healthcare industry in the United States is
likely to undergo fundamental changes due to current political,
economic and regulatory influences. We anticipate that Congress,
state legislatures and the private sector will continue to
review and assess alternative healthcare delivery and payment
systems. Potential alternatives include mandated basic
healthcare benefits, controls on healthcare spending through
limitations on the growth of private health insurance premiums
and Medicare and Medicaid spending, the creation of large
insurance purchasing groups, price controls and other
fundamental changes to the healthcare delivery system. We expect
legislative debate to continue in the future and for market
forces to demand reduced costs. We cannot predict what impact
the adoption of any federal or state healthcare reform measures,
future private sector reform or market forces may have on our
business. Any changes in the healthcare system could potentially
have extremely negative effects on our business.
We depend on distributors to sell our products and failure
to successfully maintain these relationships could adversely
affect our ability to generate revenue
To increase revenue and achieve sustained profitability, we will
have to successfully maintain our existing distribution
relationships and develop new distribution relationships. We
depend on our distributors to assist us in promoting market
acceptance of the LDX System and the GDX System. However, we may
be unable to enter into and maintain new arrangements on a
timely basis, or at all. Even if we do enter into additional
distributor relationships, those distributors may not devote the
resources necessary to provide effective sales and marketing
support to our products. In addition, our distributors sell
products offered by our competitors. If our competitors offer
our distributors more favorable terms or have more products
available to meet their needs or utilize the leverage of broader
product lines sold through the distributor, those distributors
may de-emphasize or decline to carry our products. In addition,
our distributors’ order decision-making process is complex
and involves several factors, including end-user demand,
warehouse allocation and marketing resources, which can make it
difficult to accurately predict total sales for the quarter
until late in the quarter. In order to keep our products
included in distributors’ marketing programs, in the past
we have provided promotional goods or made short-term pricing
concessions. The discontinuation of promotional goods or pricing
concessions could have a negative effect on our business. Our
distributors could also modify their business practices, such as
payment terms, inventory levels or order patterns. If we are
unable to maintain successful relationships with distributors or
expand our distribution channels or we experience unexpected
changes in payment terms, inventory levels or other practices by
our distributors, our business will suffer.
We may be unable to accurately predict future sales
through our distributors, which could harm our ability to
efficiently manage our internal resources to match market
demand
Our product sales are primarily made through our network of over
85 domestic and international distributors. As a result, our
financial results, quarterly product sales, trends and
comparisons are affected by fluctuations in the buying patterns
of end-user customers and our distributors, and by the changes
in inventory levels of our products held by these distributors.
We have only limited visibility over the inventory levels of our
products held by our domestic and international distributors.
While we attempt to assist our distributors in maintaining
targeted stocking level of our products, we may not consistently
be accurate or successful. This process involves the exercise of
judgment and use of assumptions as to future uncertainties
including end-user customer demand, and the reaction of our
distributors to our new quarterly pricing policy. Consequently,
actual results could differ from our estimates. Inventory levels
of our products held by our distributors may exceed or fall
below the levels we consider desirable on a going-forward basis,
which
42
may harm our financial results due to unexpected buying patterns
of our distributors or our ability to efficiently manage or
invest in internal resources, such as manufacturing and shipping
capacity, to meet the actual demand for our products.
We may be unable to effectively compete against other
providers of diagnostic products, which could cause our sales to
decline
The market for diagnostic products in which we operate is
intensely competitive. Our business is based on the sale of
diagnostic products that physicians and other healthcare
providers can administer in their own facilities without sending
samples to laboratories. Thus, our competition consists
primarily of clinical reference laboratories and hospital-based
laboratories that use automated testing systems, as well as
manufacturers of other rapid diagnostic tests. To achieve and
maintain market acceptance for the LDX System and the GDX
System, we must demonstrate that the LDX System and the GDX
System are cost effective and time saving alternatives to other
rapid diagnostic tests as well as to clinical and hospital
laboratories. Even if we can demonstrate that our products are
more cost effective and save time, physicians and other
healthcare providers may resist changing their established
source of such tests. The LDX System and the GDX System may be
unable to compete with these other testing services and
analyzers. In addition, companies with a significant presence in
the market for clinical diagnostics, such as Abbott
Laboratories, Bayer Diagnostics, Beckman Coulter, Inc. and Roche
Diagnostics (a subsidiary of Roche Holdings, Ltd.) have
developed or are developing analyzers designed for point of care
testing. These competitors have substantially greater financial,
technical, research and other resources and larger, more
established marketing, sales, distribution and service
organizations than us. These competitors also offer broader
product lines than us, have greater name recognition than us and
offer discounts as a competitive tactic. In addition, several
smaller companies are currently making or developing products
that compete or will compete with ours. We may not have the
financial resources, technical expertise or marketing,
distribution or support capabilities to compete successfully in
the future. Even if we do have such resources and capabilities,
we may not employ them successfully.
Our LDX System, including the LDX Analyzer and single use test
cassettes, currently accounts for substantially all of the
revenue of our business. If this revenue does not grow, our
overall business will be severely harmed. In addition, we have
limited experience marketing and distributing the GDX System,
and it is uncertain whether this product will achieve broad
market acceptance in our target markets and generate significant
revenue in the future. For us to increase revenue, sustain
profitability and maintain positive cash flows from operations,
the LDX System and the GDX System must continue to and begin to
gain market acceptance among healthcare providers, particularly
physician office laboratories. We have made only limited sales
of the LDX System to physician office laboratories to date
relative to the size of the available market. Factors that could
prevent broad market acceptance of the LDX System and the GDX
System include:
|
|
| • |
low levels of awareness of the availability of our technology in
both the physician and other customer groups; |
| |
| • |
the availability and pricing of other testing alternatives; |
| |
| • |
a decrease in the amount of reimbursement for performing tests
on the LDX System and the GDX System. |
| |
| • |
many managed care organizations have contracts with
laboratories, which require participating or employed physicians
to send patient specimens to contracted laboratories; and |
43
|
|
| • |
physicians are under growing pressure by Medicare and other
third-party payors to limit their testing to “medically
necessary” tests. |
If our LDX System does not achieve broader market acceptance and
our GDX System does not achieve favorable market acceptance, our
business will not grow. Even if we are successful in continuing
to place our LDX Analyzer at physician office laboratories and
other near-patient testing sites and marketing our GDX System,
there can be no assurance that placement of these products will
result in sustained demand for our single use test cassettes and
single use test cartridges.
In addition, we must leverage our installed base of systems in
order to increase the sales of our single use test cassettes and
single use test cartridges. If we are unable to increase the
usage of cassettes on our current installed base, we will have
to identify new customers and induce them to purchase an
analyzer, which requires more time and effort and has a
significantly larger purchase price than the single use test
cassettes.
As a result of these many hurdles to achieving broad market
acceptance for the LDX System and the GDX System, demand may not
be sufficient to sustain revenue and profits from operations.
Because the LDX System currently contributes the vast majority
of our revenue, and we expect the GDX System to contribute a
portion of our revenue in the future, we could be required to
cease operations if the LDX System and the GDX System do not
achieve and maintain a significant level of market acceptance.
If we do not successfully develop, acquire or form
alliances to introduce and market new tests and products, our
future business will be harmed
We believe our business will not grow significantly if we do not
develop, acquire or form alliances for new tests and products to
use in conjunction with the LDX System and the GDX System. If we
do not develop market and introduce new tests and products to
the market, our business will not grow significantly and will be
harmed. Developing new tests involves many significant problems
and risks, including:
|
|
| • |
research and development is a very expensive process; |
| |
| • |
research and development takes a very long time to result in a
marketable product; |
| |
| • |
significant costs (including diversion of resources) may be
incurred in development before knowing if the development will
result in a test that is commercially viable; |
| |
| • |
a new test will not be successful unless it is effectively
marketed to its target market; |
| |
| • |
the manufacturing process for a new test must be reliable, cost
efficient and high volume and must be developed and implemented
in a timely manner to produce the test for sale; |
| |
| • |
new tests must meet a significant market need to be
successful; and |
| |
| • |
new tests must obtain proper regulatory approvals to be marketed. |
We could experience difficulties that delay or prevent the
successful development, introduction and marketing of new tests
and products. For example, regulatory clearance or approval of
any new tests or products may not be granted on a timely basis,
or at all. We have experienced difficulties obtaining regulatory
approval for tests in the past. Because the evaluation of
applications by the FDA for CLIA waived status is not based on
precisely defined, objectively measurable criteria, we cannot
predict the likelihood of obtaining CLIA waived status for
future products. In addition, our business strategy includes
entering into agreements with clinical and commercial
collaborators and other third parties for the development,
clinical
44
evaluation and marketing of existing products and products under
development. These agreements may be subject to rights of
termination and may be terminated without our consent. The
parties to these agreements also may not abide by their
contractual obligations to us and may discontinue or sell their
current lines of business. Research performed under a
collaboration for which we receive or provide funding may not
lead to the development of products in the timeframe expected,
or at all. If these agreements are terminated earlier than
expected, or if third parties do not perform their obligations
to us properly and on a timely basis, we may not be able to
successfully develop new products as planned, or at all.
We face risks from failures in our manufacturing
processes
We manufacture all of the single use test cassettes that are
used with the LDX Analyzer. The manufacture of single use test
cassettes is a highly complex and precise process that is
sensitive to a wide variety of factors. Significant additional
resources, implementation of additional manufacturing equipment
or changes in our manufacturing processes have been, and may
continue to be, required for the scaling-up of each new product
prior to commercialization or in order to meet increasing
customer demand once commercialization begins, and this work may
not be completed successfully or efficiently. In the past, we
have experienced lower than expected manufacturing yields that
have adversely affected gross margins and delayed product
shipments. If we do not maintain acceptable manufacturing yields
of test cassettes or experience product shipment delays, our
business, financial condition and operating results could be
materially adversely affected. We may reject or be unable to
sell a substantial percentage of test cassettes because of:
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|
| • |
raw materials variations or impurities; |
| |
| • |
human error; |
| |
| • |
manufacturing process variances and impurities; and |
| |
| • |
decreased manufacturing equipment performance. |
Our LDX manufacturing equipment and cassette manufacturing lines
would be costly and time consuming to repair or replace if their
operation were interrupted. The interruption of our
manufacturing operations or the loss of associates dedicated to
the manufacturing facility could severely harm our business. The
risks involving our manufacturing lines include:
|
|
| • |
as our production levels have increased, we could be required to
use our machinery more hours per day and the down time resulting
from equipment failure could increased; |
| |
| • |
the custom nature of much of our manufacturing equipment
increases the time required to remedy equipment failures and
replace equipment; |
| |
| • |
we have a limited number of associates dedicated to the
operation and maintenance of our manufacturing equipment, the
loss of whom could impact our ability to effectively operate and
service such equipment; |
| |
| • |
we manufacture all of our cassettes at our Hayward, California
manufacturing facility, so manufacturing operations are at risk
to interruption from earthquake, fire, power outages or other
events affecting this one location; and |
| |
| • |
our newest manufacturing line is operating at production
capability. Our failure to maintain production levels and
operate this line at production capability for an extended
period would impact our ability to increase our manufacturing
capacity. |
45
Our operating results may suffer if we do not reduce our
manufacturing costs
We believe we will be required to reduce manufacturing costs for
new and existing test cassettes to achieve sustained
profitability. We currently manufacture the majority of our dry
chemistry cassettes on a single production line. A second
manufacturing line is currently used for overflow production and
for research and development purposes. The complexity and custom
nature of our manufacturing process increases the amount of time
and money required to add an additional manufacturing line. In
addition, we may need to implement additional cassette
manufacturing cost reduction programs. Failure to maintain full
production levels for our newest manufacturing line could
prevent us from satisfying customer orders in a timely manner,
which could lead to customer dissatisfaction and loss of
business and a failure to reduce manufacturing costs for dry
chemistry tests, which could prevent us from achieving sustained
profitability.
Our future results could be harmed by economic, political,
regulatory and other risks associated with international
sales
Historically, a significant portion of our total revenue has
been generated outside of the United States. International
revenue as a percentage of our total revenue was approximately
14% in fiscal year 2005 and 14% in fiscal year 2004. We
anticipate that international revenue will continue to represent
a significant portion of our total revenue in the future. Our
revenue is generally denominated in United States dollars;
however, a strengthening of the dollar could make our products
less competitive in foreign markets and, as a result, our future
revenue from international operations may be unpredictable. We
make foreign currency denominated purchases related to our GDX
System in the United Kingdom. This exposes us to risks
associated with currency exchange fluctuations. To minimize this
risk, we have undertaken certain foreign currency hedging
transactions; however, weakening of the dollar could make the
cost of the GDX System less competitive in the domestic market,
resulting in less predictable domestic revenue.
In addition to foreign currency risks, our international sales
and operations may also be subject to the following risks:
|
|
| • |
our dependency on pharmaceutical companies’ promotional
programs as a primary source of international revenue; |
| |
| • |
unexpected changes in regulatory requirements; |
| |
| • |
the impact of recessions in economies outside the United States; |
| |
| • |
changes in a specific country’s or region’s political
or economic conditions, particularly in emerging nations; |
| |
| • |
less effective protection of intellectual property rights in
some countries; |
| |
| • |
changes in tariffs and other trade protection measures; |
| |
| • |
difficulties in managing international operations; and |
| |
| • |
potential insolvency of international distributors and
difficulty in collecting accounts receivable and longer
collection periods. |
If we are unable to minimize the foregoing risks, they may harm
our current and future international sales and, consequently,
our business.
46
We depend on single source suppliers for certain materials
used in our manufacturing process and failure of our suppliers
to provide materials to us could harm our business
We currently depend on single source vendors to provide certain
subassemblies, components and raw materials used in the
manufacture of our products. We also depend on a third-party
manufacturer for the GDX System. Any supply interruption in a
single sourced material or product could restrict our ability to
manufacture and distribute products until a new source of supply
is identified and qualified. We may not be successful in
qualifying additional sources of supply on a timely basis, or at
all. Failure to obtain a usable alternative source or product
could prevent us from manufacturing and distributing our
products, resulting in inability to fill orders, customer
dissatisfaction and loss of business. This would likely severely
harm our business. In addition, an uncorrected impurity or
supplier’s variation in material, either unknown to us or
incompatible with our manufacturing process, could interfere
with our ability to manufacture and distribute products. Because
we are a small customer of many of our suppliers and we purchase
their subassemblies, components and materials with purchase
orders instead of long-term commitments, our suppliers may not
devote adequate resources to supplying our needs. Any
interruption or reduction in the future supply of any materials
currently obtained from single or limited sources could severely
harm our business.
We rely on a limited number of customers for a substantial
part of our revenue
Sales to a limited number of customers have accounted for a
significant portion of our revenue in each fiscal period. We
expect that sales to a limited number of customers will continue
to account for a substantial portion of our total revenue in
future periods. Our top ten customers comprised approximately
67% of our revenue in fiscal year 2005. In fiscal year 2005,
Physicians Sales and Service accounted for approximately 24% of
our total revenue, Henry Schein Inc. accounted for approximately
9% and McKesson Medical Surgical accounted for approximately 7%
of our total revenue. In fiscal year 2004, Physicians Sales and
Service accounted for approximately 23% of our total revenue,
Henry Schein Inc. accounted for approximately 9% and McKesson
Medical Surgical accounted for approximately 8% of our total
revenue. We have experienced periods in which sales to some of
our major customers, as a percentage of total revenue, have
fluctuated due to delays or failures to place expected orders.
We do not have long-term agreements with any of our customers,
who generally purchase our products pursuant to cancelable
short-term purchase orders. If we were to lose a major customer
or if orders by or shipments to a major customer were to
otherwise decrease or be delayed, our operating results would be
harmed.
Recently enacted and proposed changes in securities laws
and regulations will increase our costs
The Sarbanes-Oxley Act of 2002 along with other recent and
proposed rules from the Securities and Exchange Commission and
NASDAQ require changes in our corporate governance, public
disclosure and compliance practices. Many of these new
requirements will increase our legal and financial compliance
costs, and make some corporate actions more difficult, such as
proposing new or amendments to stock option plans, which now
require shareholder approval. These developments could make it
more difficult and more expensive for us to obtain director and
officer liability insurance, and we may be required to accept
reduced coverage or incur substantially higher costs to obtain
coverage. These developments also could make it more difficult
for us to attract and retain qualified executive officers and
qualified members of our board of directors, particularly to
serve on our audit committee.
Our products are subject to multiple levels of government
regulation and any regulatory changes are difficult to predict
and may be damaging to our business
The manufacture and sale of our diagnostic products, including
the LDX System and the GDX System, is subject to extensive
regulation by numerous governmental authorities, principally the
FDA and correspond-
47
ing state and foreign regulatory agencies. We are unable to
commence marketing or commercial sales in the United States of
any of the new tests we develop until we receive the required
clearances and approvals. The process of obtaining required
regulatory clearances and approvals is lengthy, expensive and
uncertain. As a result, our new tests under development, even if
successfully developed, may never obtain such clearance or
approval. Additionally, certain material changes to products
that have already been cleared or approved are subject to
further review and clearance or approval. Medical devices are
subject to continual review, and later discovery of previously
unknown problems with a cleared product may result in
restrictions on the product’s marketing or withdrawal of
the product from the market. If we lose previously obtained
clearances, or fail to comply with existing or future regulatory
requirements, we may be unable to market the affected products,
which would depress our revenue and severely harm our business.
In addition, any future amendment or addition to regulations
impacting our products could prevent us from marketing the LDX
System and the GDX System. Regulatory changes could hurt our
business by increasing burdens on our products or by reducing or
eliminating certain competitive advantages of the LDX
System’s and the GDX System’s waived status. Food and
Drug Administration clearance or approval of products such as
ours can be obtained by either of two processes:
|
|
| • |
the 510(k) clearance process, which generally takes from four to
12 months but may take longer; and |
| |
| • |
the pre-market approval process, which is a longer and more
costly process than a 510(k) clearance process, involves the
submission of extensive supporting data and clinical information
and generally takes one to three years but may take
significantly longer. |
If our future products are required to obtain a pre-market
approval, this would significantly delay our ability to market
those tests and significantly increase the costs of development.
The use of our products and those of our competitors is also
affected by federal and state regulations, which provide for
regulation of laboratory testing, as well as by the laws and
regulations of foreign countries. The scope of these regulations
includes quality control, proficiency testing, personnel
standards and inspections. In the United States, clinical
laboratory testing is regulated under the Clinical Laboratory
Improvement Act of 1976.
The LDX Analyzer, our total cholesterol, high density
lipoproteins, triglycerides and glucose tests in any
combination, our ALT test cassette, the GDX Analyzer and A1C
test cartridges have been classified as waived from the
application of many of the requirements under the CLIA. We
believe this waived classification is critical for our products
to be successful in their domestic markets. Any failure of our
new tests to obtain waived status under the CLIA will severely
limit our ability to commercialize such tests. Loss of waived
status for existing diagnostic products or failure to obtain
waived status for new products could limit our revenue from
sales of such products, which would severely harm our business.
We may face fines or our manufacturing facilities could be
closed if we fail to comply with manufacturing and environmental
regulations
Our manufacturing processes and, in certain instances, those of
our contract manufacturers, are subject to stringent federal,
state and local regulations governing the use, generation,
manufacture, storage, handling and disposal of certain materials
and wastes. Failure to comply with present or future regulations
could result in many things, including warning letters, fines,
injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, refusal of the
government to grant pre-market clearance or pre-market approval
for devices, withdrawal of approvals and criminal prosecution.
Any of these develop-
48
ments could harm our business. We and our contract manufacturers
are also subject to federal, state and foreign regulations
regarding the manufacture of healthcare products and diagnostic
devices, including:
|
|
| • |
Quality System Regulations, which requires manufacturers to be
in compliance with Food and Drug Administration regulations; |
| |
| • |
ISO9001/EN46001 requirements, which is an industry standard for
maintaining and assuring conformance to quality
standards; and |
| |
| • |
other foreign regulations and state and local health, safety and
environmental regulations, which include testing, control and
documentation requirements. |
Changes in existing regulations or adoption of new governmental
regulations or policies could prevent or delay regulatory
approval of our products or require us to incur significant
costs to comply with manufacturing and environmental
regulations, which could harm our business.
We may pursue strategic acquisitions which could have an
adverse impact on our business if they are unsuccessful
We continue to evaluate strategic opportunities available to us
and we may pursue product, technology or business acquisitions.
These acquisitions could be very costly, could result in
dilution to existing investors and could result in integration
problems that harm our business as a whole. Any acquisition
could result in expending significant amounts of cash, issuing
potentially dilutive equity securities or incurring debt or
unknown liabilities associated with the acquired business. In
addition, our acquisitions may not be successful in achieving
our desired strategic objectives, which could materially harm
our operating results and business. Acquisitions may also result
in difficulties in assimilating the operations, technologies,
products, services and personnel of the acquired company or
business or in achieving the cost savings or other financial
benefits we anticipated. These difficulties could result in
additional expenses, diversion of management attention and an
inability to respond quickly to market issues. Any of these
results could harm us financially.
If we are successful in growing sales, our business will
be harmed if we cannot effectively manage the operational and
management challenges of growth
If we are successful in achieving and maintaining market
acceptance for the LDX System and the GDX System, we will be
required to expand our operations, particularly in the areas of
sales, marketing and manufacturing. As we expand our operations,
this expansion will likely result in new and increased
responsibilities for management personnel and place significant
strain on our management, operating and financial systems and
resources. To accommodate any such growth and compete
effectively, we will be required to implement and improve our
information systems, procedures and controls, and to expand,
train, motivate and manage our work force. Our personnel,
systems, procedures and controls may not be adequate to support
our future operations. Any failure to implement and improve
operational, financial and management systems or to manage our
work force as required by future growth, if any, could harm our
business and prevent us from improving our financial condition
as a result of increased sales.
Our business could be negatively affected by the loss of
key personnel or our inability to hire qualified
personnel
Our success depends in significant part on the continued service
of certain key scientific, technical, regulatory and managerial
personnel. Our success will also require us to continue to
identify, attract, hire and retain additional highly qualified
personnel in those areas. Competition for qualified personnel in
our industry is very competitive due to the limited number of
people available with the necessary technical skills
49
and understanding of our industry. We may be unable to retain
our key personnel or attract or retain other necessary highly
qualified personnel in the future, which would harm the
development of our business.
Product liability and professional liability suits against
us could result in expensive and time consuming litigation,
payment of substantial damages and an increase in our insurance
rates
Sale and use of our products and the past performance of testing
services by our formerly wholly owned subsidiary could lead to
the filing of a product liability or professional liability
claim. If any of these claims are brought, we may have to expend
significant resources defending against them. If we are found
liable for any of these claims, we may have to pay damages that
could severely hurt our financial position. Loss of these claims
could also hurt our reputation, resulting in our losing business
and market share. The medical testing industry has historically
been litigious, and we face financial exposure to these
liability claims if use of our products results in personal
injury or improper diagnosis. We also face the possibility that
defects in the design or manufacture of our products might
necessitate a product recall.
We currently maintain product liability insurance and
professional liability insurance for claims relating to the past
performance of testing services, but there can be no assurance
that the coverage limits of our insurance policies will be
adequate. Insurance is expensive and difficult to obtain, and we
may be unable to maintain product liability insurance in the
future on acceptable terms or in sufficient amounts to protect
us against losses due to product liability. Inability to
maintain insurance at an acceptable cost or to otherwise protect
against potential product liability could prevent or inhibit the
continued commercialization of our products. In addition, a
product liability or professional liability claim in excess of
relevant insurance coverage or a product recall could severely
harm our financial condition.
We may need additional capital in the future to support
our growth, and such additional funds may not be available to
us
We intend to expend substantial funds for capital expenditures
and working capital related to research and development,
expansion of sales and marketing activities and other working
capital and general corporate purposes. Although we believe our
cash, cash equivalents, marketable securities, cash flow
anticipated to be generated by future operations and available
bank borrowings under an existing line of credit will be
sufficient to meet our operating requirements for the
foreseeable future, we may still require additional financing.
For example, we may be required to expend greater than
anticipated funds if unforeseen difficulties arise in expanding
manufacturing capacity for existing cassettes or in the course
of completing required additional development, obtaining
necessary regulatory approvals, obtaining waived status under
CLIA or introducing or scaling up manufacturing for new tests.
If we need additional capital in the future, we may seek to
raise additional funds through public or private financing,
collaborative relationships or other arrangements. Any
additional equity financing may be dilutive to our existing
shareholders or have rights, preferences and privileges senior
to those of our existing shareholders. If we raise additional
capital through borrowings, the terms of such borrowings may
impose limitations on how our management may operate the
business in the future. Collaborative arrangements, if necessary
to raise additional funds, may require us to relinquish our
rights to technologies, products or marketing territories. Our
failure to raise capital on acceptable terms when needed could
prevent us from developing our products and our business.
50
We have made use of a device to limit the possibility that
we are acquired, which may mean that a transaction that
shareholders are in favor of or are benefited by may be
prevented
Our board of directors has the authority to issue up to
5,000,000 shares of preferred stock and to determine the
rights, preferences, privileges and restrictions of such shares
without any further vote or action by our shareholders. To date,
our board of directors has designated 25,000 shares as
Series A participating preferred stock in connection with
our “poison pill” anti-takeover plan. The issuance of
preferred stock under certain circumstances could have the
effect of delaying or preventing an acquisition of our company
or otherwise adversely affecting the rights of the holders of
our stock. The “poison pill” may have the effect of
rendering more difficult or discouraging an acquisition of our
company which is deemed undesirable by our board of directors.
The “poison pill” may cause substantial dilution to a
person or group attempting to acquire us on terms or in a manner
not approved by our board of directors, except pursuant to an
offer conditioned on the negation, purchase or redemption of the
rights issued under the “poison pill.”
51
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk
QUANTITATIVE DISCLOSURES
Our exposure to market risks is inherent in our operations,
primarily to interest rates relating to our investment portfolio.
We are subject to interest rate risks on cash and cash
equivalents, available for sale marketable securities and any
future financing requirements. Interest rate risks related to
marketable securities are managed by managing maturities in our
marketable securities portfolio.
Generally we hold our marketable securities until maturity.
These securities have maturity dates that do not exceed fiscal
year 2007 and have predominately fixed interest rates. We have
concluded that the income on our investments would not be
significantly impacted by short term changes in interest rates.
When the securities mature and the principal is reinvested, the
yield will reflect the market conditions at that time.
Fluctuations in short-term interest rates may change the fair
market value of our investments; however, as the marketable
securities approach maturity, the fair value will approximate
our cost basis.
We use forward exchange contracts to manage a portion of the
foreign currency exposures arising from inventory purchases and
accounts payable denominated in foreign currencies. As of
March 25, 2005, we had one outstanding forward contract to
purchase £33,000 for approximately $61,000. The open
contract matures on April 15, 2005 and hedges certain
forecasted inventory purchases denominated in the British Pound
Sterling. There was no unrealized gain or loss on the forward
contract as of March 25, 2005. There was no gain or loss
recorded in the period from hedge ineffectiveness or from
forecasted transactions no longer expected to occur. We do not
enter into foreign exchange forward contracts for trading
purposes. We do not expect gains or losses on these contracts to
have a material impact on our financial results.
The following table presents the future principal cash flows or
amount and related weighted average interest rates expected by
year for our existing cash and cash equivalents, marketable
securities and long term investments:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year | |
| |
|
| |
| |
|
2005 | |
|
2006 | |
|
2007 | |
|
Total | |
|
Fair Value | |
| |
|
| |
| |
|
(in thousands) | |
| |
Cash and cash equivalents
|
|
$ |
4,304 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,304 |
|
|
$ |
4,304 |
|
| |
Short-term marketable securities
|
|
$ |
19,574 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
19,574 |
|
|
$ |
19,574 |
|
|
Weighted average interest rate
|
|
|
3.74 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Long-term marketable securities
|
|
$ |
— |
|
|
$ |
494 |
|
|
$ |
9,096 |
|
|
$ |
9,590 |
|
|
$ |
9,590 |
|
|
Weighted average interest rate
|
|
|
— |
|
|
|
2.80 |
% |
|
|
3.69 |
% |
|
|
— |
|
|
|
— |
|
QUALITATIVE DISCLOSURES
Our primary interest rate risk exposures relate to:
|
|
| • |
available for sale securities will fall in value if market
interest rates increase; and |
| |
| • |
the impact of interest rate movements on our ability to obtain
adequate financing to fund future operations. |
52
We have the ability to hold a significant portion of the fixed
income investments until maturity and therefore would not expect
the operating results or cash flows to be affected to a
significant degree by a sudden change in market interest rates
on our short and long-term marketable securities portfolio.
|
|
| Item 8. |
Financial Statements and Supplementary Data |
Our consolidated financial statements and the independent
accountants’ report appear on pages F-1 to F-26 of
this Annual Report. See Item 15 for an index of
consolidated financial statements and supplementary data.
|
|
| Item 9. |
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure |
Not applicable.
|
|
| Item 9A. |
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures. The
Company’s principal executive and financial officers
evaluated the Company’s disclosure controls and procedures
(as defined in Exchange Act Rule 13a-15(e)) as of the end
of the period covered by this Annual Report on Form 10-K.
Based on that evaluation, the Company’s principal executive
and financial officers concluded that the Company’s
disclosure controls and procedures are effective to ensure that
information required to be disclosed in reports that we file or
submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
Changes in Internal Control Over Financial Reporting.
There were no changes in the Company’s internal control
over financial reporting during the quarter ended March 25,
2005 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over
financial reporting.
Management’s Report on Internal Control Over Financial
Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the
Company. The Company’s internal control over financial
reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. Because of its
inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
To evaluate the effectiveness of internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley
Act, management conducted an assessment, including testing,
using the criteria in Internal Control— Integrated
Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on their
assessment, management concluded the Company maintained
effective internal control over financial reporting as of
March 25, 2005, based on criteria in Internal
Control— Integrated Framework issued by the COSO.
Management’s assessment of the effectiveness of the
Company’s internal control over financial reporting as of
March 25, 2005, has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated
in its report which is included herein.
53
Item 9B. Other Information
None.
Part III
|
|
| Item 10. |
Directors and Executive Officers of the Registrant |
The information required by this item concerning our directors
is incorporated by reference from the sections captioned
“Proposal One — Election of Directors”
and “Section 16(a) Beneficial Ownership Reporting
Compliance” contained in our Proxy Statement related to the
2005 Annual Meeting of Shareholders to be held August 17,
2005, to be filed by us within 120 days of the end of our
fiscal year pursuant to General Instruction G(3) of
Form 10-K (the “Proxy Statement”). Certain
information required by this item concerning executive officers
is set forth in Part I of this Annual Report under
“Business — Executive Officers” and certain
other information required by this item is incorporated by
reference from the section captioned “Section 16(a)
Beneficial Ownership Reporting Compliance” contained in our
Proxy Statement.
|
|
| Item 11. |
Executive Compensation |
The information required by this item is incorporated by
reference from the section captioned “Executive
Compensation and Other Matters” and “Corporate
Governance” contained in our Proxy Statement.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters |
The information required by this item is incorporated by
reference from the section captioned “Security Ownership of
Certain Beneficial Owners and Management” and “Equity
Compensation Plan Information” contained in our Proxy
Statement.
|
|
| Item 13. |
Certain Relationships and Related Transactions |
The information required by this item is incorporated by
reference from the sections captioned “Compensation
Committee Interlocks and Insider Participation” and
“Related Party Transactions” contained in our Proxy
Statement.
|
|
| Item 14. |
Principal Accountant Fees and Services |
The information required by this item is incorporated by
reference from the section captioned
“Proposal Two — Ratification of Appointment
of Independent Registered Public Accounting Firm” in our
Proxy Statement.
54
Part IV
|
|
| Item 15. |
Exhibits and Financial Statement Schedules |
(a)(1) Financial Statements.
The following consolidated financial statements are included in
this Annual Report on Form 10-K:
| |
|
|
|
|
| |
|
Page |
| |
|
|
|
|
|
F-1
|
|
|
|
F-3
|
|
|
|
F-4
|
|
|
|
F-5
|
|
|
|
F-6
|
|
|
|
F-7
|
| |
(a)(2) Financial Statement
Schedules.
|
|
|
| |
|
|
|
F-26
|
All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated
financial statements or notes thereto.
(a)(3) Exhibits.
| |
|
|
|
|
| |
3 |
.1(1) |
|
Restated Articles of Incorporation
of Registrant
|
| |
3 |
.2(2) |
|
Bylaws of Registrant, as amended to
date
|
| |
4 |
.2(3) |
|
Amended and Restated Preferred
Share Rights Agreement dated January 1, 2005 between
Registrant and Computershare Investor Services, LLC, including
the Certificate of Determination, the form of Rights Certificate
and Summary of Rights attached thereto as Exhibits A, B and
C, respectively
|
| |
10 |
.1(4) |
|
1988 Stock Incentive Program, as
amended, and forms of agreements thereto
|
| |
10 |
.3(2) |
|
Standard Industrial Lease Agreement
between Registrant and Sunlife Assurance Company of Canada dated
October 22, 1989
|
| |
10 |
.3.1(5) |
|
First Amendment to Standard
Industrial Lease Agreement between Registrant and Sunlife
Assurance Company of Canada dated April 1995
|
| |
10 |
.4(2) |
|
Form of Indemnification Agreement
between Registrant and its officers and its directors
|
| |
10 |
.17.10(6) |
|
Revolving Line of Credit Note
effective September 1, 2004 by and between Wells Fargo Bank
and Registrant
|
| |
10 |
.20(7) |
|
1997 Stock Incentive Program, as
amended, and form of agreement thereto
|
| |
10 |
.21(8) |
|
1999 Nonstatutory Stock Option
Plan, as amended, and form of agreement thereto
|
| |
10 |
.25(9) |
|
Employment Agreement between
Registrant and Thomas E. Worthy dated August 6, 1999
|
| |
10 |
.26(9) |
|
Employment Agreement between
Registrant and Terry L. Wassmann dated March 28, 2000
|
55
| |
|
|
|
|
| |
10 |
.29(10) |
|
2000 Stock Incentive Program, as
amended, and form of agreement thereto
|
| |
10 |
.29.1 |
|
Form of 2000 Stock Incentive
Program Notice of Grant of Stock Purchase Right
|
| |
10 |
.32(11) |
|
Employment Agreement between
Registrant and William W. Burke dated March 14, 2001
|
| |
10 |
.37(12) |
|
Lease Agreement between Registrant
and the BIV Group dated July 23, 2001
|
| |
10 |
.37.1(13) |
|
Lease Agreement Addendum No. One by
and between Registrant and BIV Group dated November 19, 2004
|
| |
10 |
.38(14) |
|
2002 Employee Stock Purchase Plan
and form of agreement thereto
|
| |
10 |
.39(15) |
|
Stock Purchase Agreement dated
December 23, 2002 between Registrant, WellCheck Inc. and
ImpactHealth.com, Inc.
|
| |
10 |
.40(16) |
|
Amended and Restated Severance
Arrangement between Registrant and Warren E. Pinckert II
dated June 14, 2001
|
| |
10 |
.40.1(16) |
|
First Amendment to Amended and
Restated Severance Arrangement between Registrant and Warren E.
Pinckert II dated March 27, 2003
|
| |
10 |
.41(16) |
|
Change of Control Severance
Agreement between Registrant and Warren E. Pinckert II
dated June 14, 2001
|
| |
10 |
.41.1(16) |
|
First Amendment to Change of
Control Severance Agreement between Registrant and Warren E.
Pinckert II dated January 23, 2003
|
| |
10 |
.41.2(17) |
|
Amended and Restated Change of
Control Severance Agreement between Registrant and Warren E.
Pinckert II dated March 25, 2004
|
| |
10 |
.42(16) |
|
Severance Agreement between
Registrant and William W. Burke dated July 17, 2001
|
| |
10 |
.43(16) |
|
Change of Control Severance
Agreement between Registrant and William W. Burke dated
July 21, 2001
|
| |
10 |
.43.1(16) |
|
First Amendment to Change of
Control Severance Agreement between Registrant and William W.
Burke dated January 23, 2003
|
| |
10 |
.43.2(17) |
|
Amended and Restated Change of
Control Severance Agreement between Registrant and William W.
Burke dated March 25, 2004
|
| |
10 |
.46(16) |
|
Severance Agreement between
Registrant and Terry L. Wassmann dated July 17, 2001
|
| |
10 |
.46.1(16) |
|
First Amendment to Severance
Agreement between Registrant and Terry L. Wassmann dated
January 23, 2003
|
| |
10 |
.47(16) |
|
Change of Control Severance
Agreement between Registrant and Terry L. Wassmann dated
January 23, 2003
|
| |
10 |
.47.1(16) |
|
First Amendment to Change of
Control Severance Agreement between Registrant and Terry L.
Wassmann dated January 23, 2003
|
| |
10 |
.47.2(17) |
|
Amended and Restated Change of
Control Severance Agreement between Registrant and Terry L
Wassmann dated March 25, 2004
|
| |
10 |
.48(16) |
|
Severance Agreement between
Registrant and Thomas E. Worthy dated July 19, 2001
|
| |
10 |
.48.1(18) |
|
First Amendment to Severance
Agreement between Registrant and Thomas E. Worthy dated
October 10, 2003
|
| |
10 |
.50(16) |
|
Employment Agreement between
Registrant and Donald P. Wood dated March 31, 2003
|
56
| |
|
|
|
|
| |
10 |
.51(16) |
|
Severance Agreement between
Registrant and Donald P. Wood dated April 1, 2003
|
| |
10 |
.51.1(18) |
|
First Amendment to Severance
Agreement between Registrant and Donald P. Wood dated
October 10, 2003
|
| |
10 |
.52(18) |
|
Change of Control Severance
Agreement between Registrant and Donald P. Wood dated
October 10, 2003
|
| |
10 |
.52.1(17) |
|
Amended and Restated Change of
Control Severance Agreement between Registrant and Donald P.
Wood dated March 25, 2004
|
| |
10 |
.54(18) |
|
Change of Control Severance
Agreement between Registrant and Thomas E. Worthy dated
October 10, 2003
|
| |
10 |
.54.1(17) |
|
Amended and Restated Change of
Control Severance Agreement between Registrant and Thomas E.
Worthy dated March 25, 2004
|
| |
10 |
.55(18) |
|
Change of Control Severance
Agreement between Registrant and Kenneth F. Miller dated
June 2, 2004
|
| |
10 |
.56(19) |
|
Severance Agreement between
Registrant and John F. Glenn dated October 12, 2004
|
| |
10 |
.57(19) |
|
Change of Control Severance
Agreement between Registrant and John F. Glenn dated
October 12, 2004
|
| |
10 |
.58(6) |
|
Transition Agreement between
Registrant and William W. Burke dated July 21, 2004
|
| |
10 |
.59(20) |
|
Change of Control Severance
Agreement dated February 1, 2005 between Registrant and
Barbara McAleer
|
| |
10 |
.60(20) |
|
Severance Agreement dated
February 1, 2005 between Registrant and Barbara McAleer
|
| |
23 |
.1 |
|
Consent of Independent Registered
Public Accounting Firm
|
| |
24 |
.1 |
|
Power of Attorney (see page 59)
|
| |
31 |
.1 |
|
Certification of Chief Executive
Officer under Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended
|
| |
31 |
.2 |
|
Certification of Chief Financial
Officer under Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended
|
| |
32 |
|
|
Certifications of Chief Executive
Officer and Chief Financial Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
(1) Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-1
(No. 33-54300) as declared effective by the Securities and
Exchange Commission on December 16, 1992.
(2) Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-1
(No. 33-47603) as declared effective by the Securities and
Exchange Commission on June 26, 1992.
(3) Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form 8-K filed
with the Securities and Exchange Commission on January 5,
2005.
(4) Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-8
(No. 333-22475) as declared effective by the Securities and
Exchange Commission on February 28, 1997.
(5) Incorporated by reference to exhibits filed with
Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995.
(6) Incorporated by reference to exhibit filed with
Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 24, 2004.
(7) Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-8
(No. 333-38151) as declared effective by the Securities and
Exchange Commission on October 17, 1997.
57
(8) Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-8
(333-94503) as declared effective by the Securities and Exchange
Commission on January 12, 2000.
(9) Incorporated by reference to exhibits filed with
Registrant’s Annual Report on Form 10-K for the fiscal
year ended March 31, 2000.
(10) Incorporated by reference to exhibit filed with
Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 26, 2003.
(11) Incorporated by reference to exhibits filed with
Registrant’s Annual Report on Form 10-K for the fiscal
year ended March 30, 2001.
(12) Incorporated by reference to exhibits filed with
Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 28, 2001.
(13) Incorporated by reference to exhibits filed with
Registrant’s Report on Form 8-K filed with the
Securities and Exchange Commission on November 23, 2004.
(14) Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-8
(No. 333-98143) as declared effective by the Securities and
Exchange Commission on August 15, 2002.
(15) Incorporated by reference to exhibits filed with
Registrant’s Report on Form 8-K filed with the
Securities and Exchange Commission on January 6, 2003.
(16) Incorporated by reference to exhibits filed with
Registrant’s Annual Report on Form 10-K for the fiscal
year ended March 28, 2003.
(17) Incorporated by reference to exhibits filed with
Registrant’s Annual Report on Form 10-K for the fiscal
year ended March 26, 2004.
(18) Incorporated by reference to exhibit filed with
Registrant’s Quarterly Report on Form 10-Q for the
quarter ended December 26, 2003.
(19) Incorporated by reference to exhibits filed with
Registrant’s Report on Form 8-K filed with the
Securities and Exchange Commission on October 14, 2004.
(20) Incorporated by reference to exhibits filed with
Registrant’s Report on Form 8-K filed with the
Securities and Exchange Commission on February 2, 2005.
(b) Exhibits.
See Item 15(a)(3) above.
(c) Financial Statement Schedules.
See Item 15(a)(2) above.
58
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
| |
By: |
/s/ WARREN E.
PINCKERT II
|
|
|
| |
|
| |
Warren E. Pinckert II |
| |
President, Chief Executive |
| |
Officer and Director |
Date: June 8, 2005
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Warren E.
Pinckert II and John F. Glenn, and each of them, his or her
true and lawful attorneys-in-fact and agents, each with full
power of substitution and resubstitution, to sign any and all
amendments (including post-effective amendments) to this Annual
Report on Form 10-K and to file the same, with all
exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or
substitutes, or any of them, shall do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities and Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated:
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
/s/
WARREN E.
PINCKERT II
(Warren
E. Pinckert II)
|
|
President, Chief Executive Officer
and Director (Principal Executive Officer)
|
|
June 8, 2005
|
| |
/s/
JOHN F. GLENN
(John
F. Glenn)
|
|
Vice President of Finance, Chief
Financial Officer, Treasurer and Secretary (Principal Financial
and Accounting Officer)
|
|
June 8, 2005
|
| |
/s/
JOHN H. LANDON
(John
H. Landon)
|
|
Director
|
|
June 8, 2005
|
| |
/s/
MICHAEL D. CASEY
(Michael
D. Casey)
|
|
Director
|
|
June 8, 2005
|
| |
/s/
JOHN L. CASTELLO
(John
L. Castello)
|
|
Director
|
|
June 8, 2005
|
| |
/s/
ELIZABETH H. DAVILA
(Elizabeth
H. Davila)
|
|
Director
|
|
June 8, 2005
|
| |
/s/
STUART HEAP
(Stuart
Heap)
|
|
Director
|
|
June 8, 2005
|
| |
/s/
LARRY Y. WILSON
(Larry
Y. Wilson)
|
|
Director
|
|
June 8, 2005
|
59
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Cholestech Corporation:
We have completed an integrated audit of Cholestech
Corporation’s 2005 consolidated financial statements and of
its internal control over financial reporting as of
March 25, 2005 and audits of its March 26, 2004 and
March 28, 2003 consolidated financial statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our
audits, are presented below.
Consolidated financial statements and financial statement
schedule
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Cholestech
Corporation at March 25, 2005 and March 26, 2004, and
the results of its operations and its cash flows for each of the
three years in the period ended March 25, 2005 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in
Management’s Report on Internal Control Over Financial
Reporting appearing under Item 9A, that the Company
maintained effective internal control over financial reporting
as of March 25, 2005 based on criteria established in
Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of March 25, 2005, based on
criteria established in Internal Control—Integrated
Framework issued by the COSO. The Company’s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on
the effectiveness of the Company’s internal control over
financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
evaluating management’s assessment, testing and evaluating
the design and operating effective-
F-1
ness of internal control, and performing such other procedures
as we consider necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Jose, California
June 7, 2005
F-2
Cholestech Corporation
Consolidated Balance Sheets
(In thousands, except share data)
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 25, 2005 | |
|
March 26, 2004 | |
| |
|
| |
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
4,304 |
|
|
$ |
2,502 |
|
| |
Marketable securities
|
|
|
19,574 |
|
|
|
11,300 |
|
| |
Accounts receivable, net
|
|
|
4,651 |
|
|
|
6,038 |
|
| |
Inventories, net
|
|
|
8,356 |
|
|
|
6,083 |
|
| |
Prepaid expenses and other assets
|
|
|
1,889 |
|
|
|
1,715 |
|
| |
Note receivable
|
|
|
— |
|
|
|
200 |
|
| |
Deferred tax assets
|
|
|
2,333 |
|
|
|
2,100 |
|
| |
|
|
| |
|
Total current assets
|
|
|
41,107 |
|
|
|
29,938 |
|
|
Property and equipment, net
|
|
|
8,176 |
|
|
|
8,257 |
|
|
Long-term marketable securities
|
|
|
9,590 |
|
|
|
9,800 |
|
|
Long-term deferred tax assets
|
|
|
15,248 |
|
|
|
15,235 |
|
| |
|
|
| |
|
Total assets
|
|
$ |
74,121 |
|
|
$ |
63,230 |
|
| |
|
|
| |
|
LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable and accrued
expenses
|
|
$ |
4,259 |
|
|
$ |
3,149 |
|
| |
Accrued payroll and benefits
|
|
|
2,984 |
|
|
|
2,489 |
|
| |
Other liabilities
|
|
|
286 |
|
|
|
314 |
|
| |
|
|
| |
|
Total current liabilities
|
|
|
7,529 |
|
|
|
5,952 |
|
| |
|
|
|
Commitments and contingencies
(Note 5)
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Preferred Stock, no par value;
5,000,000 shares authorized, no shares issued and
outstanding
|
|
|
— |
|
|
|
— |
|
| |
Common Stock, no par value;
25,000,000 shares authorized; 14,614,914 and
14,095,075 shares issued and outstanding at March 25,
2005 and March 26, 2004, respectively
|
|
|
91,681 |
|
|
|
86,009 |
|
| |
Accumulated other comprehensive
income (loss)
|
|
|
(116 |
) |
|
|
149 |
|
| |
Deferred compensation
|
|
|
(241 |
) |
|
|
— |
|
| |
Accumulated deficit
|
|
|
(24,732 |
) |
|
|
(28,880 |
) |
| |
|
|
| |
|
Total shareholders’ equity
|
|
|
66,592 |
|
|
|
57,278 |
|
| |
|
|
| |
|
|
Total liabilities and
shareholders’ equity
|
|
$ |
74,121 |
|
|
$ |
63,230 |
|
| |
|
|
See accompanying notes to consolidated financial statements.
F-3
Cholestech Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended | |
| |
|
| |
| |
|
March 25, | |
|
March 26, | |
|
March 28, | |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
Revenue
|
|
$ |
52,877 |
|
|
$ |
52,376 |
|
|
$ |
48,541 |
|
|
Cost of revenue
|
|
|
21,390 |
|
|
|
23,180 |
|
|
|
20,424 |
|
| |
|
|
|
Gross profit
|
|
|
31,487 |
|
|
|
29,196 |
|
|
|
28,117 |
|
| |
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales and marketing
|
|
|
11,494 |
|
|
|
12,654 |
|
|
|
11,737 |
|
| |
Research and development
|
|
|
4,252 |
|
|
|
3,159 |
|
|
|
2,722 |
|
| |
General and administrative
|
|
|
9,864 |
|
|
|
8,153 |
|
|
|
7,008 |
|
| |
Other operating costs
|
|
|
— |
|
|
|
250 |
|
|
|
— |
|
| |
Litigation and other related
|
|
|
— |
|
|
|
7,786 |
|
|
|
307 |
|
| |
|
|
| |
|
Total operating expenses
|
|
|
25,610 |
|
|
|
32,002 |
|
|
|
21,774 |
|
| |
|
|
|
Income (loss) from operations
|
|
|
5,877 |
|
|
|
(2,806 |
) |
|
|
6,343 |
|
|
Interest and other income, net
|
|
|
231 |
|
|
|
278 |
|
|
|
438 |
|
| |
|
|
|
Income (loss) before taxes
|
|
|
6,108 |
|
|
|
(2,528 |
) |
|
|
6,781 |
|
|
Provision (benefit) for income taxes
|
|
|
1,968 |
|
|
|
(11,201 |
) |
|
|
(3,934 |
) |
| |
|
|
| |
Income from continuing operations
|
|
|
4,140 |
|
|
|
8,673 |
|
|
|
10,715 |
|
| |
Loss from sale of discontinued
operations, net
|
|
|
— |
|
|
|
— |
|
|
|
(4,445 |
) |
| |
Gain (loss) from discontinued
operations, net
|
|
|
8 |
|
|
|
34 |
|
|
|
(1,377 |
) |
| |
|
|
|
Net income
|
|
$ |
4,148 |
|
|
$ |
8,707 |
|
|
$ |
4,893 |
|
| |
|
|
|
Income from continuing operations
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.29 |
|
|
$ |
0.62 |
|
|
$ |
0.79 |
|
| |
|
|
| |
Diluted
|
|
$ |
0.29 |
|
|
$ |
0.61 |
|
|
$ |
0.76 |
|
| |
|
|
|
Gain (loss) from discontinued
operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.00 |
|
|
$ |
0.01 |
|
|
$ |
(0.43 |
) |
| |
|
|
| |
Diluted
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
(0.41 |
) |
| |
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.29 |
|
|
$ |
0.63 |
|
|
$ |
0.36 |
|
| |
|
|
| |
Diluted
|
|
$ |
0.29 |
|
|
$ |
0.61 |
|
|
$ |
0.35 |
|
| |
|
|
|
Shares used to compute net income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
14,295 |
|
|
|
13,922 |
|
|
|
13,551 |
|
| |
|
|
| |
Diluted
|
|
|
14,472 |
|
|
|
14,235 |
|
|
|
14,077 |
|
| |
|
|
See accompanying notes to consolidated financial statements.
F-4
Cholestech Corporation
Consolidated Statement of Changes in Shareholders’ Equity
(In thousands, except share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Accumulated | |
|
|
|
|
|
|
| |
|
Common Stock | |
|
Other | |
|
|
|
|
|
|
| |
|
| |
|
Comprehensive | |
|
Deferred | |
|
Accumulated | |
|
|
| |
|
Shares | |
|
Amount | |
|
Income (Loss) | |
|
Compensation | |
|
Deficit | |
|
Total | |
| | |
|
Balance at March 29, 2002
|
|
|
13,213,503 |
|
|
|
79,200 |
|
|
|
1 |
|
|
|
— |
|
|
|
(42,480 |
) |
|
|
36,721 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
4,893 |
|
|
|
4,893 |
|
|
Change in unrealized gain (loss) on
available-for-sale securities, net
|
|
|
— |
|
|
|
— |
|
|
|
96 |
|
|
|
— |
|
|
|
— |
|
|
|
96 |
|
|
Change in future currency
contracts, net
|
|
|
— |
|
|
|
— |
|
|
|
(24 |
) |
|
|
— |
|
|
|
— |
|
|
|
(24 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,965 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock pursuant
to employee stock purchase plan and exercise of stock options
|
|
|
498,475 |
|
|
|
3,218 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,218 |
|
|
Purchase of authorized but unissued
stock
|
|
|
(13,425 |
) |
|
|
(176 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(176 |
) |
| |
|
|
|
Balance at March 28, 2003
|
|
|
13,698,553 |
|
|
|
82,242 |
|
|
|
73 |
|
|
|
— |
|
|
|
(37,587 |
) |
|
|
44,728 |
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,707 |
|
|
|
8,707 |
|
|
Change in unrealized gain (loss) on
available-for-sale securities, net
|
|
|
— |
|
|
|
— |
|
|
|
(66 |
) |
|
|
— |
|
|
|
— |
|
|
|
(66 |
) |
|
Change in future currency
contracts, net
|
|
|
— |
|
|
|
— |
|
|
|
142 |
|
|
|
— |
|
|
|
— |
|
|
|
142 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,783 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock pursuant
to employee stock purchase plan and exercise of stock options
|
|
|
396,522 |
|
|
|
2,044 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,044 |
|
|
Tax benefit on non-qualified stock
options
|
|
|
— |
|
|
|
1,723 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,723 |
|
| |
|
|
|
Balance at March 26, 2004
|
|
|
14,095,075 |
|
|
$ |
86,009 |
|
|
$ |
149 |
|
|
|
— |
|
|
$ |
(28,880 |
) |
|
$ |
57,278 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,148 |
|
|
|
4,148 |
|
|
Change in unrealized gain (loss) on
available-for-sale securities, net
|
|
|
— |
|
|
|
— |
|
|
|
(188 |
) |
|
|
— |
|
|
|
— |
|
|
|
(188 |
) |
|
Change in future currency
contracts, net
|
|
|
— |
|
|
|
— |
|
|
|
(77 |
) |
|
|
— |
|
|
|
— |
|
|
|
(77 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,883 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock pursuant
to employee stock purchase plan and exercise of stock options
|
|
|
496,157 |
|
|
|
2,992 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,992 |
|
|
Issuance of restricted stock
|
|
|
23,682 |
|
|
|
241 |
|
|
|
|
|
|
|
(241 |
) |
|
|
— |
|
|
|
— |
|
|
Tax benefit on non-qualified stock
options
|
|
|
— |
|
|
|
2,439 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,439 |
|
| |
|
|
|
Balance at March 25, 2005
|
|
|
14,614,914 |
|
|
$ |
91,681 |
|
|
$ |
(116 |
) |
|
$ |
(241 |
) |
|
$ |
(24,732 |
) |
|
$ |
66,592 |
|
| |
|
|
See accompanying notes to consolidated financial statements.
F-5
Cholestech Corporation
Consolidated Statements of Cash Flows
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended | |
| |
|
| |
| |
|
March 25, | |
|
March 26, | |
|
March 28, | |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
4,148 |
|
|
$ |
8,707 |
|
|
$ |
4,893 |
|
| |
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation and amortization
|
|
|
3,184 |
|
|
|
2,709 |
|
|
|
2,553 |
|
| |
|
Change in allowance for doubtful
accounts
|
|
|
(61 |
) |
|
|
54 |
|
|
|
59 |
|
| |
|
Change in inventory reserve
|
|
|
(395 |
) |
|
|
651 |
|
|
|
92 |
|
| |
|
Change in allowance for sales
returns
|
|
|
— |
|
|
|
(5 |
) |
|
|
(20 |
) |
| |
|
Deferred tax asset
|
|
|
2,193 |
|
|
|
(11,426 |
) |
|
|
(4,200 |
) |
| |
|
Loss on sale of WellCheck
|
|
|
— |
|
|
|
— |
|
|
|
4,445 |
|
| |
|
Stock acceleration charge
|
|
|
— |
|
|
|
— |
|
|
|
(72 |
) |
| |
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Accounts receivable
|
|
|
1,448 |
|
|
|
(892 |
) |
|
|
(1,509 |
) |
| |
|
|
Inventories
|
|
|
(1,878 |
) |
|
|
72 |
|
|
|
(1,941 |
) |
| |
|
|
Prepaid expenses and other assets
|
|
|
(174 |
) |
|
|
274 |
|
|
|
(845 |
) |
| |
|
|
Notes receivable
|
|
|
200 |
|
|
|
50 |
|
|
|
— |
|
| |
|
|
Accounts payable and accrued
liabilities
|
|
|
1,110 |
|
|
|
(808 |
) |
|
|
461 |
|
| |
|
|
Accrued payroll and benefits
|
|
|
495 |
|
|
|
(684 |
) |
|
|
(227 |
) |
| |
|
|
Other liabilities
|
|
|
(28 |
) |
|
|
174 |
|
|
|
24 |
|
| |
|
|
| |
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
10,242 |
|
|
|
(1,124 |
) |
|
|
3,713 |
|
| |
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Purchases of marketable securities
|
|
|
(31,560 |
) |
|
|
(47,894 |
) |
|
|
(49,427 |
) |
| |
Maturities of marketable securities
|
|
|
23,231 |
|
|
|
44,204 |
|
|
|
45,472 |
|
| |
Purchase of property and equipment
|
|
|
(3,103 |
) |
|
|
(3,475 |
) |
|
|
(2,925 |
) |
| |
|
|
| |
|
Net cash used in investing
activities
|
|
|
(11,432 |
) |
|
|
(7,165 |
) |
|
|
(6,880 |
) |
| |
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Issuance of common stock
|
|
|
2,992 |
|
|
|
2,044 |
|
|
|
3,218 |
|
| |
Purchase of authorized but unissued
stock
|
|
|
— |
|
|
|
— |
|
|
|
(104 |
) |
| |
|
|
| |
|
Net cash provided by financing
activities
|
|
|
2,992 |
|
|
|
2,044 |
|
|
|
3,114 |
|
| |
|
|
| |
Net increase (decrease) in cash and
cash equivalents
|
|
|
1,802 |
|
|
|
(6,245 |
) |
|
|
(53 |
) |
| |
Cash and cash equivalents at
beginning of year
|
|
|
2,502 |
|
|
|
8,747 |
|
|
|
8,800 |
|
| |
|
|
| |
Cash and cash equivalents at end of
year
|
|
$ |
4,304 |
|
|
$ |
2,502 |
|
|
$ |
8,747 |
|
| |
|
|
|
Supplemental disclosures of cash
flow information and non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$ |
148 |
|
|
$ |
590 |
|
|
$ |
59 |
|
|
Cash paid for legal settlement
|
|
|
— |
|
|
$ |
7,000 |
|
|
|
— |
|
|
Tax benefits of nonqualified stock
options
|
|
$ |
2,439 |
|
|
$ |
1,723 |
|
|
|
— |
|
|
Issuance of restricted stock
|
|
$ |
241 |
|
|
|
— |
|
|
|
— |
|
See accompanying notes to consolidated financial statements.
F-6
Cholestech Corporation
Notes to Consolidated Financial Statements
|
|
| 1. |
Summary of Significant Accounting Policies |
Description of the Company
Cholestech Corporation (the “Company”), incorporated
under the laws of the State of California, is a leading provider
of diagnostic tools and information for immediate risk
assessment and therapeutic monitoring of heart disease and
diabetes. The Company currently manufactures the
LDX System, which includes the LDX Analyzer and a
variety of single-use test cassettes, and markets the
LDX System in the United States, Europe, Asia, Australia
and South America. The LDX System, which is waived under
the Clinical Laboratory Improvement Amendments
(“CLIA”), allows healthcare providers to perform
individual tests or combinations of tests. The Company’s
current products measure and monitor blood cholesterol, related
lipids, glucose and liver function, and are used to test
patients at risk of or suffering from heart disease, diabetes
and liver disease. The LDX System can also provide the
Framingham Risk Assessment from the patient’s results as
measured on the lipid profile cassette.
The Company also markets and distributes the GDX System
under a multi-year global distribution agreement with Provalis
Diagnostics Ltd. The Cholestech GDX is a hemoglobin A1c
(“A1C”) testing system that is also waived under CLIA
and is used to measure A1C. The quantitative measure of A1C is
established as an indicator of a patient’s long-term
glycemic control. A1C levels indicate the long-term progress of
a patient’s diabetes and therapy management.
Fiscal year end
The Company’s fiscal year is a 52 - 53 week
period ending on the last Friday in March. Fiscal years 2005,
2004 and 2003 were comprised of 52 weeks.
Principles of consolidation
The consolidated financial statements include the accounts of
the Company and the accounts of WellCheck, Inc.
(“WellCheck”), its wholly owned subsidiary through
December 23, 2002. All significant intercompany
transactions and balances have been eliminated in consolidation.
Revenue recognition
The Company recognizes revenue from product sales when there is
pervasive evidence that an arrangement exists, title has
transferred to our customers, the price is fixed and
determinable and collection is reasonably assured. Provisions
for discounts to customers, returns or other adjustments are
recorded as a reduction of revenue and provided for in the same
period that the related product sales are recorded based upon
analyses of historical discounts and returns. The Company
recognizes revenue associated with services upon completion of
the services to be performed under contract when all obligations
are satisfied, and collection is reasonably assured. Our general
terms of sale are FOB shipping point and revenue recognition at
time of shipment. When the terms of sale are FOB receiving
point, assuming that all other revenue recognition criteria have
been met, revenue is recognized when the products have reached
the destination point.
The Company offers an early payment discount to qualified
customers.
The Company maintains a warranty allowance for the estimated
amount of repairs or replacement cost of all products which are
found to be defective. Provisions for warranty are provided for
in the same period that
F-7
the related product sales are recorded. The amount of allowance
is based upon analyses of historical repairs and replacements,
known improvements in design or changes in reliability.
The Company maintains a product return allowance, when required,
for the estimated amount of returns allowed by contract to some
customers. Provisions for returns are provided for in the same
period that the related product sales are recorded. The amount
of allowance is based upon analyses of returns and customer
contracts.
Shipping and handling charges are invoiced to customers based on
the amount of products sold. Shipping and handling fees are
recorded at the time of revenue recognition, and are included in
revenue.
The Company will from time to time provide free goods to
customers as samples for the purpose of motivating end users who
may be potential long-term users of the Company’s products.
In addition, on occasion the Company provides free goods to
customers as part of a sale transaction as an incentive. The
cost of free goods associated with revenue transactions is
charged to cost of goods sold.
Cash and cash equivalents
The Company considers all highly liquid investments with
maturities of three months or less at the date of purchase to be
cash equivalents. Cash equivalents as of March 25, 2005
consist principally of investments in money market funds.
Marketable securities
Marketable securities and other investments with maturities of
less than one year are classified as short-term marketable
securities. The Company has established policies, which limit
the type, credit quality and length of maturity of the
securities in which it invests. Marketable securities as of
March 25, 2005 consist principally of investments in
commercial paper, corporate bonds and
U.S. government-agency obligations. Marketable securities
are classified as available-for-sale and are carried at their
fair market value at the balance sheet date. Realized gains and
losses on sales of all such securities are reported in earnings
and are computed using the specific identification cost method.
Unrealized gains and losses on securities are included in
accumulated comprehensive income (loss) in shareholders’
equity. All investments with maturity dates greater than
365 days are classified as non-current.
The cost and fair market value of available-for-sale securities
as of March 25, 2005 are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Unrealized | |
|
Fair | |
|
|
|
|
| |
|
Amortized | |
|
Gain | |
|
Market | |
|
Maturity | |
|
|
| |
|
Cost | |
|
(Loss) | |
|
Value | |
|
Date | |
|
|
| |
|
|
|
|
| |
|
| |
|
|
|
Short-term marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Commercial paper
|
|
$ |
2,126 |
|
|
$ |
(6 |
) |
|
$ |
2,120 |
|
|
|
May 2005 - March 2006 |
|
|
|
| |
Corporate bonds
|
|
|
5,880 |
|
|
|
(38 |
) |
|
|
5,842 |
|
|
|
April 2005 - February 2006 |
|
|
|
| |
Government agency
|
|
|
11,685 |
|
|
|
(73 |
) |
|
|
11,612 |
|
|
|
May 2005 - March 2006 |
|
|
|
| |
|
|
|
|
|
|
|
| |
|
$ |
19,691 |
|
|
$ |
(117 |
) |
|
$ |
19,574 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Long-term marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Commercial paper
|
|
$ |
500 |
|
|
$ |
(4 |
) |
|
$ |
496 |
|
|
|
April 2006 |
|
|
|
| |
Corporate bonds
|
|
|
3,144 |
|
|
|
(34 |
) |
|
|
3,110 |
|
|
|
March 2006 - December 2006 |
|
|
|
| |
Government agency
|
|
|
6,058 |
|
|
|
(74 |
) |
|
|
5,984 |
|
|
|
April 2006 - January 2007 |
|
|
|
| |
|
|
|
|
|
|
|
| |
|
$ |
9,702 |
|
|
$ |
(112 |
) |
|
$ |
9,590 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
F-8
The cost and fair market value of available-for-sale securities
as of March 26, 2004 are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Unrealized | |
|
Fair | |
|
|
|
|
| |
|
Amortized | |
|
Gain | |
|
Market | |
|
Maturity | |
|
|
| |
|
Cost | |
|
(Loss) | |
|
Value | |
|
Date | |
|
|
| |
|
|
|
|
| |
|
| |
|
|
|
Short-term marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Commercial paper
|
|
$ |
283 |
|
|
$ |
— |
|
|
$ |
283 |
|
|
|
September 2004 - January 2005 |
|
|
|
| |
Corporate bonds
|
|
|
6,565 |
|
|
|
(3 |
) |
|
|
6,562 |
|
|
|
May 2004 - March 2005 |
|
|
|
| |
Government agency
|
|
|
4,444 |
|
|
|
11 |
|
|
|
4,455 |
|
|
|
May 2004 - February 2005 |
|
|
|
| |
|
|
|
|
|
|
|
| |
|
$ |
11,292 |
|
|
$ |
8 |
|
|
$ |
11,300 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Long-term marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Commercial paper
|
|
$ |
516 |
|
|
$ |
1 |
|
|
$ |
517 |
|
|
|
May 2007 |
|
|
|
| |
Corporate bonds
|
|
|
3,785 |
|
|
|
11 |
|
|
|
3,796 |
|
|
|
May 2005 - January 2006 |
|
|
|
| |
Government agency
|
|
|
5,477 |
|
|
|
10 |
|
|
|
5,487 |
|
|
|
April 2005 - January 2005 |
|
|
|
| |
|
|
|
|
|
|
|
| |
|
$ |
9,778 |
|
|
$ |
22 |
|
|
$ |
9,800 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
There was $229,000 in unrealized losses as of March 25,
2005 included in accumulated other comprehensive income in
shareholders’ equity and $30,000 in unrealized gains as of
March 26, 2004.
Derivative Instruments
All derivatives are recognized as either assets or liabilities
on the balance sheet and are carried at fair value. The
accounting for changes in the fair value of a derivative depends
upon the intended use of the derivative and the resulting
designation. For a derivative designated as a fair value hedge,
the gain or loss is recognized in earnings in the period of
change together with the offsetting loss or gain on the hedged
item attributed to the risk being hedged. For a derivative
designated as a cash flow hedge, the effective portion of the
derivative’s gain or loss is initially reported as a
component of accumulated other comprehensive income (loss) in
shareholders’ equity and subsequently reclassified into
earnings when the related inventory is sold and the hedged
exposure affects earnings. If the transaction being hedged fails
to occur, a forecasted transaction being hedged is no longer
expected to occur, or the hedging is determined to be
ineffective, the gain or loss on the associated financial
instrument is recorded immediately in earnings.
The Company uses financial instruments, such as forward exchange
contracts, to hedge a portion of certain existing and
anticipated foreign currency denominated transactions expected
to occur within 12 months. The terms of currency
instruments used for hedging purposes are generally consistent
with the timing of the transactions being hedged. The Company
enters into foreign currency forward exchange contracts to
manage foreign currency exposures arising from inventory
purchases and accounts payable denominated in foreign
currencies. The Company does not use derivative financial
instruments for trading or speculative purposes.
As of March 25, 2005, the Company had outstanding one
forward contract to purchase £33,000 for approximately
$61,000. The open contract matures on April 15, 2005 and
hedges certain forecasted inventory purchases denominated in the
British Pound Sterling. There was no unrealized gain or loss on
the forward contract as of March 25, 2005. There was no
gain or loss recorded during the year from hedge ineffectiveness
or from forecasted transactions no longer expected to occur.
Certain risks and uncertainties
Financial instruments that potentially subject the Company to
credit risk consist of cash and cash equivalents, marketable
securities accounts receivable and forward currency contracts.
Cash and cash
F-9
equivalents and marketable securities are maintained with a high
credit quality institution, and the composition and maturities
of the investments are regularly monitored by management.
Generally, these securities are highly liquid and may be
redeemed on demand and therefore have minimal risk associated
with them. The Company has not experienced any material losses
on its investments.
The Company is currently dependent on a sole or limited number
of suppliers for certain key components used in its products,
which may cause shortages that limit production capacity. There
can be no assurance that such shortages will not adversely
affect future operating results.
Concentration of credit risk with respect to trade accounts
receivable is considered to be limited due to the quality of our
customer base and the diversity of the Company’s geographic
sales areas. The Company performs ongoing credit evaluations of
its customers’ financial condition and generally requires
no collateral. The Company maintains a provision for potential
credit losses and historically such amounts, in the aggregate,
have been immaterial. Provisions are made for estimated product
returns, which historically have been immaterial.
Significant revenue concentration (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 25, 2005 | |
|
March 26, 2004 | |
|
March 28, 2003 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
Percent | |
| |
|
Revenue | |
|
of Total | |
|
Revenue | |
|
of Total | |
|
Revenue | |
|
of Total | |
| |
|
| |
|
Customer A
|
|
$ |
12,467 |
|
|
|
24 |
% |
|
$ |
11,967 |
|
|
|
23 |
% |
|
$ |
10,909 |
|
|
|
22 |
% |
|
Customer B
|
|
|
4,826 |
|
|
|
9 |
|
|
|
4,906 |
|
|
|
9 |
|
|
|
4,461 |
|
|
|
9 |
|
|
Customer C
|
|
|
3,695 |
|
|
|
7 |
|
|
|
4,073 |
|
|
|
8 |
|
|
|
3,401 |
|
|
|
7 |
|
| |
|
|
|
Total
|
|
$ |
20,988 |
|
|
|
40 |
% |
|
$ |
20,946 |
|
|
|
41 |
% |
|
$ |
18,771 |
|
|
|
38 |
% |
| |
|
|
Significant accounts receivable concentrations (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 25, 2005 | |
|
March 26, 2004 | |
| |
|
| |
|
| |
| |
|
Receivable | |
|
Percent | |
|
Receivable | |
|
Percent | |
| |
|
Balance | |
|
of Total | |
|
Balance | |
|
of Total | |
| |
|
| |
|
Customer A
|
|
$ |
744 |
|
|
|
16 |
% |
|
$ |
994 |
|
|
|
16 |
% |
|
Customer B
|
|
|
287 |
|
|
|
6 |
|
|
|
812 |
|
|
|
13 |
|
|
Customer C
|
|
|
385 |
|
|
|
8 |
|
|
|
851 |
|
|
|
14 |
|
| |
|
|
|
Total
|
|
$ |
1,416 |
|
|
|
30 |
% |
|
$ |
2,657 |
|
|
|
43 |
% |
| |
|
|
Inventories
Inventories are stated at the lower of cost or market, cost
being determined using standard costs which approximates the
first-in, first-out (FIFO) method. Cost includes direct
materials, direct labor and manufacturing overhead. Reserves for
potentially excess and obsolete inventory are made based on
management analysis of inventory levels, planned changes in
material usage and future sales forecasts.
Property and equipment
Property and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated
useful lives of the related assets. Estimated useful lives are 2
to 7 years for machinery and equipment, 3 years for
computer equipment, 5 years for furniture and fixtures and
14 to 17 years for patents. Leasehold improvements are
amortized over their estimated useful lives, not to exceed the
term of the related lease. The cost of additions and
improvements is capitalized while maintenance and repairs are
F-10
charged to expense as incurred. Upon sale or retirement, the
asset’s cost and related accumulated depreciation are
removed from the accounts and any related gain or loss is
reflected in operations.
Impairment of long-lived assets
The Company identifies and records impairment losses on
long-lived assets when events and circumstances indicate that
the future value of such assets is less than the carrying
amounts of those assets. Recoverability is measured by
comparison of the assets’ carrying amount to future net
undiscounted cash flows the assets are expected to generate. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the assets exceeds their projected discounted future
net cash flows.
Research and development
Research and development costs are expensed as incurred.
Research and development costs consist primarily of payroll and
related costs, materials and supplies used in development of new
products, and fees paid to consultants and outside service
providers.
Warranties
The Company records an accrual for estimated warranty costs when
revenue is recognized. Warranty covers repair costs of the LDX
Analyzer and replacement costs of defective single-use test
cassettes. The warranty period for the LDX Analyzer is one
year and for single use test cassettes is the shelf-life of the
product. The warranty cost of the GDX Analyzer and test
cartridges are the responsibility of the vendor. The Company has
processes in place to estimate accruals for warranty exposure.
The processes include estimated LDX Analyzer failure rates and
repair costs, known design changes, and estimated replacement
rates for single use test cassettes. Although the Company
believes it has the ability to reasonably estimate warranty
expenses, unforeseeable changes in factors impacting the
estimate for warranty could occur and such changes could cause a
material change in the Company’s warranty accrual estimate.
Such a change would be recorded in the period in which the
change was identified. Changes in the Company’s product
warranty liability during the fiscal years ended March 25,
2005 and March 26, 2004 were as follows:
| |
|
|
|
|
|
|
|
|
| Fiscal Year Ended |
|
March 25, 2005 | |
|
March 26, 2004 | |
| |
|
| |
|
Balance at the beginning of the year
|
|
$ |
314,000 |
|
|
$ |
116,000 |
|
|
Accruals and charges for warranty
for the year
|
|
|
779,000 |
|
|
|
970,000 |
|
|
Cost of repairs and replacements
|
|
|
(807,000 |
) |
|
|
(772,000 |
) |
| |
|
|
|
Balance at the end of the year
|
|
$ |
286,000 |
|
|
$ |
314,000 |
|
| |
|
|
Advertising costs
The cost of advertising is expensed as incurred. Advertising
expenses were $42,000, $281,000, and $175,000 for fiscal years
2005, 2004 and 2003, respectively.
Income taxes
The Company uses the asset and liability method of accounting
for income taxes, which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences
of temporary differences between the financial reporting and
income tax bases of assets and liabilities. Net income in fiscal
year 2004 included a $10.2 million gain from an income tax
benefit which resulted from the reversal of the balance of the
valuation allowance previously established for the
Company’s net operating losses (“NOLs”). Net
income in fiscal year 2003 included a $4.2 million gain
from the reversal of a portion of the valuation allowance. Prior
to fiscal year 2003, the Company had experienced significant
operating losses and operated in an industry subject to rapid
technological change. Therefore, the Company believed that
F-11
there was sufficient uncertainty regarding its ability to
generate future taxable income and use these NOLs and tax credit
carryforwards such that a full valuation allowance for deferred
tax assets was required as of March 29, 2002. The Company
continually reviews its deferred tax asset to determine if a
valuation allowance is required, primarily based on its
estimates of future taxable income. Changes in the
Company’s assessment of the need for a valuation allowance
could give rise to a valuation allowance and an expense in the
period of the change.
Net income (loss) per share
Basic earnings per share is computed by dividing net income
(loss) (numerator) by the weighted average number of common
shares outstanding (denominator) during the period. Diluted
earnings per share gives effect to all potential common stock
outstanding during a period, if dilutive. The following table
reconciles the numerator (net income or loss) and denominator
(number of shares) used in the basic and diluted per share
computations.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 25, | |
|
March 26, | |
|
March 28, | |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income from continuing operations
|
|
$ |
4,140 |
|
|
$ |
8,673 |
|
|
$ |
10,715 |
|
| |
Income (loss) from discontinued
operations
|
|
|
8 |
|
|
|
34 |
|
|
|
(5,822 |
) |
| |
|
|
| |
Net income
|
|
$ |
4,148 |
|
|
$ |
8,707 |
|
|
$ |
4,893 |
|
| |
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
14,295 |
|
|
|
13,922 |
|
|
|
13,551 |
|
| |
Effect of dilutive securities
|
|
|
177 |
|
|
|
313 |
|
|
|
526 |
|
| |
|
|
| |
Diluted
|
|
|
14,472 |
|
|
|
14,235 |
|
|
|
14,077 |
|
| |
|
|
|
Per share continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.29 |
|
|
$ |
0.62 |
|
|
$ |
0.79 |
|
| |
Effect of dilutive securities
|
|
|
(0.00 |
) |
|
|
(0.01 |
) |
|
|
(0.03 |
) |
| |
|
|
| |
Diluted
|
|
$ |
0.29 |
|
|
$ |
0.61 |
|
|
$ |
0.76 |
|
| |
|
|
|
Per share discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.00 |
|
|
$ |
0.01 |
|
|
$ |
(0.43 |
) |
| |
Effect of dilutive securities
|
|
|
(0.00 |
) |
|
|
(0.01 |
) |
|
|
0.02 |
|
| |
|
|
| |
Diluted
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
(0.41 |
) |
| |
|
|
|
Per share net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.29 |
|
|
$ |
0.63 |
|
|
$ |
0.36 |
|
| |
Effect of dilutive securities
|
|
|
(0.00 |
) |
|
|
(0.02 |
) |
|
|
(0.01 |
) |
| |
|
|
| |
Diluted
|
|
$ |
0.29 |
|
|
$ |
0.61 |
|
|
$ |
0.35 |
|
| |
|
|
Options to purchase 380,407, 1,410,172 and
1,811,253 shares of common stock were considered
anti-dilutive because the respective exercise prices were
greater than the average fair market value of common stock as of
March 25, 2005, March 26, 2004 and March 28,
2003, respectively.
Fair value of financial instruments
The carrying amounts of certain of the Company’s financial
instruments including cash and cash equivalents, accounts
receivable and accounts payable approximate fair value due to
their short maturities.
F-12
Use of estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. The primary estimates
underlying the Company’s financial statements include
allowance for doubtful accounts receivable, reserves for
obsolete, expiring and slow moving inventory, income taxes,
accruals for payroll, product warranty and other liabilities.
Actual results could differ from those estimates.
Accounting for stock-based compensation
The Company accounts for its stock-based compensation plans in
accordance with SFAS No. 123, Accounting for
Stock-Based Compensation (“SFAS 123”) as
amended by SFAS No. 148, Accounting for Stock-Based
Compensation — Transition and Disclosure
(“SFAS 148”). As permitted under
SFAS 148, the Company uses the intrinsic value-based method
of Accounting Principles Board (“APB”) Opinion
No. 25, Accounting for Stock Issued to Employees
(“APB 25”), to account for its
employee stock-based compensation plans. Under APB 25,
compensation expense is based on the difference, if any, on the
date of grant between the fair value of the Company’s
common shares and the exercise price of the option. Compensation
costs for stock options and restricted stock, if any, is
realized ratably over the vesting period.
The Company provides additional proforma disclosures required by
SFAS 123 as amended by SFAS 148. Had the compensation
cost for the Company’s stock option and stock purchase
plans been determined based on the fair value of the options at
the grant dates, as prescribed in SFAS 123, the
Company’s net income and net income per share would have
been as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended | |
| |
|
| |
| |
|
March 25, | |
|
March 26, | |
|
March 28, | |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
| |
|
(In thousands, except per share | |
| |
|
data) | |
|
Net income as reported
|
|
$ |
4,148 |
|
|
$ |
8,707 |
|
|
$ |
4,893 |
|
|
Deduct: total stock-based employee
compensation expense determined under fair value based method
for all awards, net of tax
|
|
|
(4,245 |
) |
|
|
(3,031 |
) |
|
|
(2,636 |
) |
| |
|
|
|
Net income pro forma
|
|
$ |
(97 |
) |
|
$ |
5,676 |
|
|
$ |
2,257 |
|
| |
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported — basic
|
|
$ |
0.29 |
|
|
$ |
0.63 |
|
|
$ |
0.36 |
|
| |
Pro forma — basic
|
|
$ |
(0.01 |
) |
|
$ |
0.41 |
|
|
$ |
0.17 |
|
| |
As reported — diluted
|
|
$ |
0.29 |
|
|
$ |
0.61 |
|
|
$ |
0.35 |
|
| |
Pro forma — diluted
|
|
$ |
(0.01 |
) |
|
$ |
0.40 |
|
|
$ |
0.16 |
|
The pro forma information presented above for fiscal year 2005
includes approximately $1.1 million of stock-based employee
compensation related to the accelerated vesting of certain
options in March 2005. The pro forma information for fiscal
years 2004 and 2003 has been revised from the information
previously presented in the Company’s Form 10-K for
the period ended March 26, 2004. Such pro forma disclosure
may not be representative of future compensation costs as
options vest over several years and additional grants are
anticipated to be made each year.
F-13
The fair value is estimated using the Black-Scholes valuation
model, with the following weighted-average assumptions used
during the applicable periods:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended | |
| |
|
| |
| |
|
March 25, | |
|
March 26, | |
|
March 28, | |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
Stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Expected volatility
|
|
|
71.0 |
% |
|
|
85.0 |
% |
|
|
95.0 |
% |
| |
Risk free interest rate
|
|
|
3.0 |
% |
|
|
1.0 |
% |
|
|
1.5 |
% |
| |
Dividend yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
| |
Fair value of stock options granted
|
|
$ |
5.54 |
|
|
$ |
6.53 |
|
|
$ |
8.33 |
|
| |
Expected Life
|
|
|
5.5 Years |
|
|
|
7 Years |
|
|
|
7 Years |
|
|
Stock purchase rights:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Expected volatility
|
|
|
74.0 |
% |
|
|
85.0 |
% |
|
|
69.0 |
% |
| |
Dividend yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
| |
Fair value of stock purchase rights
|
|
$ |
1.14 |
|
|
$ |
1.36 |
|
|
$ |
1.72 |
|
| |
Weighted Average exercise price
|
|
$ |
5.43 |
|
|
$ |
5.38 |
|
|
$ |
6.46 |
|
| |
Expected Life
|
|
|
6 Months |
|
|
|
6 Months |
|
|
|
6 Months |
|
Under APB 25, compensation expense for grants to employees
is based on the difference, if any, on the date of the grant,
between the fair market value of the Company’s stock and
the option exercise price. SFAS 123 defines a “fair
value” based method of accounting for an employee stock
option or similar equity investment. The pro forma disclosure of
the difference between compensation expense included in net
income and the related cost measured by the fair value method is
presented above.
The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of SFAS 123
and Emerging Issues Task Force No. 96-18, Accounting for
Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods and Services
(“EITF 96-18”), and FASB Interpretation
No. 28, Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plan
(“FIN 28”). This provides guidance for
accounting for stock options given to non-employees in exchange
for goods and services.
The Company did not grant stock options or have outstanding
options to non-employees for fiscal year 2005, fiscal year 2004
and fiscal year 2003.
Reclassifications
Certain financial statements items have been reclassified to
conform to the current year’s format. These
reclassifications had no impact on previously reported results
of operations.
Recent accounting pronouncements
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs, an amendment of ARB No. 43,
Chapter 4,” (“SFAS 151”). SFAS 151
clarifies that abnormal inventory costs such as costs of idle
facilities, excess freight and handling costs, and wasted
materials (spoilage) are required to be recognized as
current period charges. The provisions of SFAS 151 are
effective for the fiscal year beginning after June 15,
2005. The adoption of SFAS 151 is not expected to have a
material impact on the Company’s consolidated financial
position, results of operations and cash flows.
In December 2004, the FASB issued SFAS No. 153,
“Exchanges of Non-monetary Assets, an amendment of APB
Opinion No. 29,” (“SFAS 153”).
SFAS 153 addresses the measurement of exchanges of
non-monetary assets and redefines the scope of transactions that
should be measured based on the fair value of the
F-14
assets exchanged. SFAS 153 is effective for non-monetary
asset exchanges occurring in fiscal periods beginning after
June 15, 2005. The adoption of SFAS 153 is not
expected to have a material effect on the Company’s
consolidated financial position or results of operations.
In December 2004, the Financial Accounting Standards Board,
“FASB”, issued SFAS No. 123 (revised 2004),
“Share-Based Payment,” (“SFAS 123(R)”).
SFAS 123(R) will require the Company to measure all
employee stock-based compensation awards using a fair value
method and record such expense in its consolidated financial
statements. In addition, the adoption of SFAS 123(R) will
require additional accounting related to the income tax effects
and additional disclosure regarding the cash flow effects
resulting from share-based payment arrangements.
In March 2005, the Securities and Exchange Commission
(“SEC”) issued Staff Accounting
Bulletin No. 107 (“SAB 107”) which
provides guidance regarding the application of SFAS 123(R).
SAB 107 expresses views of the staff regarding the
interaction between SFAS No. 123(R), Share-Based
Payment, and certain SEC rules and regulations and provides the
staff’s views regarding the valuation of share-based
payment arrangements for public companies. In particular,
SAB 107 provides guidance related to share-based payment
transactions with nonemployees, the transition from nonpublic to
public entity status, valuation methods (including assumptions
such as expected volatility and expected term), the accounting
for certain redeemable financial instruments issued under
share-based payment arrangements, the classification of
compensation expense, non-GAAP financial measures, first-time
adoption of SFAS 123(R) in an interim period,
capitalization of compensation cost related to share-based
payment arrangements, the accounting for income tax effects of
share-based payment arrangements upon adoption of
SFAS 123(R), the modification of employee share options
prior to adoption of SFAS 123(R) and disclosures in
Management’s Discussion and Analysis (“MD&A”)
subsequent to adoption of SFAS 123(R).
On April 14, 2005, the SEC approved a new rule that delays
the effective date for SFAS 123(R) to annual periods
beginning after June 15, 2005. The adoption of
SFAS 123(R) on April 1, 2006 is expected to have a
material impact on the Company’s results of operations,
financial position and statement of cash flows. The Company is
evaluating the transition method and pricing model alternatives
upon adoption.
On December 23, 2002, the Company completed the sale of
certain assets and the assignment of certain obligations of its
wholly owned subsidiary WellCheck. The sale was made pursuant to
the terms and conditions of a Stock Purchase Agreement (the
“Agreement”) dated December 23, 2002 by and among
the Company, WellCheck and ImpactHealth.com, Inc. Under the
terms of the Agreement, the Company received a secured
promissory note in the aggregate principal amount of $250,000
(the “Note”) due on December 23, 2003, the right
to receive an additional $200,000 contingent upon the attainment
of certain performance measures and a royalty per participant
tested with the TEAMS for three years after the date of the
agreement. During fiscal year 2004 the terms of payment on the
note receivable was changed to a quarterly payment of $50,000.
As a result of the sale, the operations of WellCheck have been
accounted for as discontinued operations in accordance with
SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets and APB No. 30. Reporting the
Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring events and Transactions. Amounts in
the consolidated financial statements and related notes for all
periods shown have been reclassified to reflect the presentation
of discontinued operations.
F-15
Operating results for the discontinued operations are reported,
net of tax, under loss from discontinued operations in the
accompanying consolidated statements of operations.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 25, | |
|
March 26, | |
|
March 28, | |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
Revenue
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,472 |
|
|
Income (loss) before provision for
income taxes
|
|
|
12 |
|
|
|
56 |
|
|
|
(1,489 |
) |
|
Income tax benefit (cost)
|
|
|
(4 |
) |
|
|
(22 |
) |
|
|
112 |
|
| |
|
|
|
Net gain (loss)
|
|
$ |
8 |
|
|
$ |
34 |
|
|
$ |
(1,377 |
) |
| |
|
|
Contingent sale proceeds, including TEAMS royalty and
performance remuneration, will be recognized as earned as a
component of discontinued operations.
As a result of the sale, the Company recorded a loss of
$4.4 million in fiscal year 2003. The components of the
loss are as follows (in thousands):
| |
|
|
|
|
| |
|
March 28, 2003 | |
| |
|
| |
|
Net book value of WellCheck assets
and costs related to the sale
|
|
$ |
1,552 |
|
|
Net book value of goodwill
associated with WellCheck
|
|
|
3,143 |
|
|
Less note receivable
|
|
|
(250 |
) |
| |
|
|
|
|
Net loss
|
|
$ |
4,445 |
|
| |
|
|
|
|
|
| 3. |
Balance Sheet Composition |
Accounts receivable consist of (in thousands), net:
| |
|
|
|
|
|
|
|
|
| |
|
March 25, 2005 | |
|
March 26, 2004 | |
| |
|
| |
|
Accounts receivable
|
|
$ |
4,820 |
|
|
$ |
6,268 |
|
|
Less allowance for sales returns
|
|
|
— |
|
|
|
— |
|
|
Less allowance for doubtful accounts
|
|
|
(169 |
) |
|
|
(230 |
) |
| |
|
|
| |
|
$ |
4,651 |
|
|
$ |
6,038 |
|
| |
|
|
Inventories consist of (in thousands), net:
| |
|
|
|
|
|
|
|
|
| |
|
March 25, 2005 | |
|
March 26, 2004 | |
| |
|
| |
|
Raw materials
|
|
$ |
2,277 |
|
|
$ |
1,954 |
|
|
Work-in-progress
|
|
|
2,395 |
|
|
|
1,767 |
|
|
Finished goods
|
|
|
3,684 |
|
|
|
2,362 |
|
| |
|
|
| |
|
$ |
8,356 |
|
|
$ |
6,083 |
|
| |
|
|
F-16
Property and equipment consist of (in thousands), net:
| |
|
|
|
|
|
|
|
|
| |
|
March 25, 2005 | |
|
March 26, 2004 | |
| |
|
| |
|
Machinery and equipment
|
|
$ |
14,890 |
|
|
$ |
14,514 |
|
|
Furniture and fixtures
|
|
|
509 |
|
|
|
471 |
|
|
Computer equipment
|
|
|
3,330 |
|
|
|
2,766 |
|
|
Leasehold improvements
|
|
|
3,419 |
|
|
|
2,850 |
|
|
Patents
|
|
|
111 |
|
|
|
111 |
|
|
Construction-in-progress
|
|
|
632 |
|
|
|
566 |
|
| |
|
|
| |
|
|
22,891 |
|
|
|
21,278 |
|
|
Less accumulated depreciation and
amortization
|
|
|
(14,715 |
) |
|
|
(13,021 |
) |
| |
|
|
| |
|
$ |
8,176 |
|
|
$ |
8,257 |
|
| |
|
|
Depreciation and amortization expense of $3.2 million,
$2.7 million and $2.6 million was incurred in fiscal
years 2005, 2004, and 2003, respectively.
Accounts payable and accrued liabilities consist of (in
thousands):
| |
|
|
|
|
|
|
|
|
| |
|
March 25, 2005 | |
|
March 26, 2004 | |
| |
|
| |
|
Trade accounts payable
|
|
$ |
2,492 |
|
|
$ |
1,466 |
|
|
Accrued accounting and reporting
|
|
|
596 |
|
|
|
405 |
|
|
Accrued royalties
|
|
|
855 |
|
|
|
666 |
|
|
Accrued legal expenses
|
|
|
105 |
|
|
|
172 |
|
|
Accrued rent
|
|
|
72 |
|
|
|
186 |
|
|
Other accrued liabilities
|
|
|
139 |
|
|
|
254 |
|
| |
|
|
| |
|
$ |
4,259 |
|
|
$ |
3,149 |
|
| |
|
|
|
|
| 4. |
Borrowing Arrangements |
The Company entered into an agreement with its primary bank for
a $4 million revolving line of credit. While the line of
credit is in effect, the Company is required to maintain on
deposit with the bank assets with a collective value, as defined
in the line of credit agreement, equivalent to no less than 100%
of the outstanding principal balance. Amounts outstanding under
the line of credit bear interest at either the Company’s
choice of 0.5% below the bank’s prime rate or 1.75% above
the LIBOR rate, depending on the payment schedule. The line of
credit agreement expires in September 2006. As of March 25,
2005 and March 26, 2004, there were no borrowings
outstanding under the line of credit and there was no amount
reserved as a compensating balance.
5. Commitments and Contingencies
The Company leases office and laboratory facilities under a
non-cancelable operating lease. The lease for the Company’s
headquarters facility was renewed during fiscal year 2005 and
currently expires in March 2017. Rent expense was
$1.1 million, $1.2 million and $1.3 million for
fiscal years 2005, 2004 and 2003, respectively.
F-17
Future minimum payments required under the Company’s
non-cancelable operating lease as of March 25, 2005, were
(in thousands):
| |
|
|
|
|
|
2006
|
|
$ |
1,074 |
|
|
2007
|
|
|
1,115 |
|
|
2008
|
|
|
570 |
|
|
2009
|
|
|
586 |
|
|
2010
|
|
|
611 |
|
|
Thereafter
|
|
|
4,839 |
|
| |
|
|
|
| |
|
$ |
8,795 |
|
| |
|
|
|
On August 2, 2002, N.V. Euromedix (“Euromedix”)
filed suit against us in the Commercial Court in Leuven, Belgium
(No. F5700-02), seeking damages for the wrongful
termination of an implied distribution agreement with our
company for Europe and parts of the Middle East. On
November 7, 2002, the court dismissed the suit. On
December 31, 2002, Euromedix filed suit against us in the
Commercial Court in Leuven, Belgium (No. B/02/00044),
seeking damages in the amount of
approximately €3.5 million
for the wrongful termination of an implied distribution
agreement with our company for Europe and parts of the Middle
East. At the introductory hearing on April 1, 2003, the
case was sent to the general docket and there have been no
further developments. We believe this claim is without merit and
intend to continue to defend the claim vigorously.
On March 14, 2003, we initiated trademark infringement
proceedings against Euromedix before the President of the
Commercial Court in Leuven, Belgium (No. BRK/03/00017), seeking
in principle an order (i) to prohibit Euromedix from
selling, stocking, importing, exporting or promoting in the
European Economic Area (EEA) products that violate our
trademarks, under a penalty
of €10,000 for
each LDX Analyzer sold, a penalty
of €1,000 for each
cassette sold contrary to the prohibition and
a €25,000 penalty
for each publicity of advertisement for such products;
(ii) to prohibit Euromedix from using certain slogans and
phrases, in combination with products associated with certain of
our trademarks, in trade documents or other announcements, under
a penalty of €25,000
for each document used contrary to this prohibition; and
(iii) to order the destruction of the inventory of products
held by Euromedix that violate our trademarks, which have been
imported into the EEA without our permission.
A hearing was held on April 29, 2003 regarding certain
procedural issues. In a judgment rendered on May 27, 2003,
the Judge of Seizures of the Court of First Instance referred
the complaint to the Constitutional Court before rendering a
final decision. The Judge of Seizures asked the Constitutional
Court to render an opinion regarding certain constitutional
issues related to the trademark infringement arguments we raised
at the hearing. On March 24, 2004, the Constitutional Court
issued its judgment which supported our claims. A hearing was
scheduled for November 9, 2004 by the Judge of Seizures of
the Court of First Instance to hear additional submissions. On
December 21, 2004, the Judge of Seizures of the Court of
First Instance decided against Euromedix’s opposition to
certain procedural issues.
After the decisions of the Judge of Seizures of the Court of
First Instance, we have filed requests for a procedural calendar
in the three trademark infringement proceedings against
Euromedix of which two are
F-18
pending before the President of the Commercial Court of Leuven
and one before the Commercial Court of Leuven. Both parties have
exchanged submissions. All three cases are scheduled for
pleadings at a hearing on June 21, 2005.
Euromedix has filed a request for a procedural calendar in the
case pending before the Commercial Court of Leuven regarding the
termination of the business relationship on July 11, 2002.
We have to file submissions by August 18, 2005 and final
submissions by October 3, 2005. The case is set for
pleadings at the hearing of November 8, 2005.
On March 26, 2004, a putative class action lawsuit
captioned Northshore Dermatology Center, S.C. v.
Cholestech Corporation, and Does 1-10, Case No. 04CH05342,
was filed in the Circuit Court of Cook County, Illinois. We were
served with the complaint and summons on March 31, 2004.
The complaint alleged that we violated the federal Telephone
Consumer Protection Act and various Illinois state laws by
sending unsolicited advertisements via facsimile transmission to
residents of Illinois. The complaint sought class certification
and statutory damages of $500 to $1,500 each on behalf of a
class that would include all residents of Illinois who received
an unsolicited facsimile advertisement from us. On
January 18, 2005 the parties entered into an agreement to
settle all claims on behalf of a nationwide class. Under the
terms of the settlement, we paid $625,000 in cash to settle all
claims, $600,000 of which was funded by insurance. We also
agreed to pay up to $50,000 for providing notice to the class
and for processing claims. The Court granted preliminary
settlement approval and a final settlement approval hearing is
currently scheduled for July 11, 2005.
On December 19, 2003, the Company entered into a settlement
agreement and license agreement with Roche Diagnostics
Corporation and Roche Diagnostics GmbH (“Roche”) in
connection with ongoing patent infringement litigation. The
settlement, which serves as the basis for the dismissal of all
patent litigation between the parties on a worldwide basis,
provides for the Company to make a $7 million payment to
Roche, which the Company made on December 30, 2003. In
addition, Roche agreed to grant an irrevocable, non-exclusive,
worldwide license to the Company for its patents related to HDL
cholesterol. As a part of this settlement, the Company will pay
Roche an ongoing royalty that will be applied to only the HDL
portion of cholesterol test cassettes sold by the Company.
Additionally the settlement agreement provides a mechanism for
resolving any future patent infringement disputes. The Company
believes that any such dispute resolution will confirm that its
new HDL cholesterol test cassette, currently under development,
does not infringe Roche’s patents. If however, upon the
resolution of any such dispute it is ultimately determined that
the Company’s new HDL cholesterol test cassette is covered
by Roche’s patents, the Company will pay the same ongoing
royalty. The parties have been in litigation in the United
States District Court for the Southern District of Indiana,
Germany, Belgium, Switzerland and Austria. Motions to dismiss
have been filed in each of these jurisdictions in connection
with the settlement. The one-time payment to Roche associated
with this settlement agreement, along with legal and related
expenses, is included as an expense in the Company’s
Consolidated Statements of Operations.
We are also subject to various additional legal claims and
assessments in the ordinary course of business, none of which
are expected by management to result in a material adverse
effect on the financial statements.
|
|
| 6. |
Restructuring Accruals |
During the third quarter of fiscal year 2003, the Company
recorded a restructuring charge of approximately $591,000 which
included wages, severance and other related costs for two
executives and two staff
F-19
members whose employment was terminated as a result of the
divestiture of the Company’s WellCheck testing services
business. The accrual represents costs recognized pursuant to
the EITF 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)
and SAB 100, Restructuring and Impairment
Charges. The restructuring accrual is included on the
Company’s consolidated balance sheets as a part of accrued
payroll and benefits. The Company made payments of $344,000 and
$178,000 to employees terminated under the fiscal year 2003
restructuring plan in fiscal year 2005 and fiscal year 2004,
respectively. As of March 25, 2005, the Company does not
expect to make any additional payments under the restructuring
plan.
The Company is authorized to issue 5,000,000 shares of
preferred stock. The board of directors has authority to issue
the preferred stock in one or more series and to fix the price,
rights, preferences, privileges and restrictions thereof,
including the dividend rights, dividend rates, conversion
rights, voting rights terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting a
series or the designation of such series, without any further
vote or action by the Company’s shareholders. In connection
with the Company’s shareholder rights plan,
25,000 shares of the preferred stock have been designated
Series A participating preferred stock. None of the shares
of Series A participating preferred stock were outstanding
as of March 25, 2005, nor was there any activity relating
to preferred stock during the three year period ended
March 25, 2005.
In 1997, 1999 and 2000 the shareholders approved Stock Incentive
Programs for the issuance of incentive stock options
(“ISOs”) and non–qualified stock options
(“NSOs”) as follows:
| |
|
|
|
|
|
|
| |
|
1997 Stock |
|
1999 Nonstatutory |
|
2000 Stock |
| |
|
Incentive Program |
|
Stock Option Program |
|
Incentive Program |
| |
|
|
|
Exercise price
|
|
Not less than 100% of fair market
value on date of grant
|
|
Not less than 100% of fair market
value on date of grant
|
|
Not less than 100% of fair market
value on date of grant
|
|
Exercise period
|
|
Not to exceed 7 years and a day
|
|
Not to exceed 10 years and a
day
|
|
Not to exceed 10 years and a
day
|
|
Vesting period per year
|
|
At least 25%
|
|
At least 25%
|
|
At least 25%
|
|
Type of options available
|
|
ISOs / NSOs
|
|
NSOs
|
|
ISOs / NSOs
|
|
Shares of common stock reserved
|
|
900,000
|
|
2,000,000
|
|
1,845,000
|
|
Share available for future grant as
of March 25, 2005
|
|
75,056
|
|
110,870
|
|
744,572
|
F-20
Stock option activity under the 1997 program, 1999 program and
2000 program is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted Average | |
| |
|
Outstanding | |
|
Exercise Price | |
| |
|
Options | |
|
Per Share | |
| |
|
| |
|
Balance, March 29, 2002
|
|
|
2,488,165 |
|
|
|
8.88 |
|
|
Granted
|
|
|
615,200 |
|
|
|
10.38 |
|
|
Exercised
|
|
|
(438,823 |
) |
|
|
6.45 |
|
|
Canceled
|
|
|
(259,820 |
) |
|
|
12.02 |
|
| |
|
|
|
|
|
|
|
Balance, March 28, 2003
|
|
|
2,404,722 |
|
|
|
9.37 |
|
|
Granted
|
|
|
577,250 |
|
|
|
8.76 |
|
|
Exercised
|
|
|
(311,001 |
) |
|
|
5.10 |
|
|
Canceled
|
|
|
(310,307 |
) |
|
|
11.58 |
|
| |
|
|
|
|
|
|
|
Balance, March 26, 2004
|
|
|
2,360,664 |
|
|
|
9.49 |
|
|
Granted
|
|
|
633,400 |
|
|
|
9.00 |
|
|
Exercised
|
|
|
(401,200 |
) |
|
|
6.17 |
|
|
Canceled
|
|
|
(468,829 |
) |
|
|
10.49 |
|
| |
|
|
|
|
|
|
|
Balance, March 25, 2005
|
|
|
2,124,035 |
|
|
|
9.75 |
|
| |
|
|
|
|
|
|
The following table summarizes information about stock options
outstanding as of March 25, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding | |
|
Options Exercisable | |
| |
|
| |
|
| |
| |
|
|
|
Weighted Avg. | |
|
Weighted Avg. | |
|
|
|
Weighted Avg. | |
| Range of Exercise Prices |
|
Number | |
|
Contractual Life(1) | |
|
Exercise Price | |
|
Number | |
|
Exercise Price | |
| |
|
| |
|
| |
|
$4.28 - $6.97
|
|
|
124,921 |
|
|
|
8.2 |
|
|
$ |
6.49 |
|
|
|
42,669 |
|
|
$ |
5.61 |
|
| |
|
$7.32 - $8.29
|
|
|
758,858 |
|
|
|
7.1 |
|
|
|
7.78 |
|
|
|
519,798 |
|
|
|
7.75 |
|
| |
|
$8.30 - $10.20
|
|
|
859,849 |
|
|
|
9.2 |
|
|
|
9.30 |
|
|
|
199,597 |
|
|
|
8.91 |
|
| |
|
$11.88 - $17.85
|
|
|
380,407 |
|
|
|
7.1 |
|
|
|
15.76 |
|
|
|
287,080 |
|
|
|
15.69 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
2,124,035 |
|
|
|
8.0 |
|
|
|
9.75 |
|
|
|
1,049,144 |
|
|
|
10.05 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) years
Employee stock purchase plan
In August 2002, the shareholders approved the 2002 Employee
Stock Purchase Plan (the “ESPP” which reserved
400,000 shares of common stock to be issued in accordance
with the Internal Revenue Code under such terms as approved by
the board of directors. The ESPP has a series of consecutive,
overlapping 24-month offering periods, which each offering
period consisting of four six-month purchase periods. Under the
terms of the ESPP, employees can choose semi-annually to have up
to 15% of their compensation withheld to purchase shares of
common stock. The purchase price is equal to 85% of the lower of
the closing price of the common stock on the NASDAQ National
Market on the first trading day of the offering period or the
last trading day of the purchase period. Under the ESPP, the
Company sold 95,038 and 85,521 shares of common stock to
employees in fiscal year 2005 and fiscal year 2004, respectively.
F-21
Restricted stock
The Company grants restricted stock to key employees, under its
2000 Stock Incentive Program, as a means of retaining and
rewarding them for long-term performance and to increase their
ownership in the Company. Shares awarded under the plan entitle
the shareholder to all rights of common stock ownership except
that the shares may not be sold, transferred, pledged, exchanged
or otherwise disposed of during the restriction period. The
restriction period is determined by a committee, appointed by
the board of directors, and may not exceed ten years.
The Company accounts for its restricted stock under APB Opinion
No. 25, Accounting for Stock Issued to Employees. On
March 23, 2005, 23,682 shares were granted with
restriction periods of four years at a market price of $10.19.
The shares were recorded at the market value on the date of
issuance as deferred compensation and the related amount is
being amortized to operations over the respective vesting
period. During the year ended March 25, 2005, unearned
compensation charged to operations related to these shares of
restricted stock was zero. At March 25, 2005, the
weighted-average grant date fair value and weighted-average
contractual life for outstanding shares of restricted stock was
$10.19 and four years, respectively.
Shareholder rights plan
In January 1997, the board of directors approved a shareholder
rights plan under which shareholders of record on March 31,
1997 received a right to purchase (the “Right”)
one-thousandth of a share of Series A participating
preferred stock at an exercise price of $44.00, subject to
adjustment. The Rights will separate from the common stock and
Rights certificates will be issued and will become exercisable
on the earlier of: (i) ten days (or such later date as may
be determined by a majority of the board of directors) following
a public announcement that a person or group of affiliated or
associated persons has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the
Company’s outstanding common stock or (ii) ten
business days following the commencement of, or announcement of
an intention to make, a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership
by a person or group of 15% or more of the Company’s
outstanding common stock. The Rights expire on the earlier of
(i) January 22, 2007 or (ii) redemption or
exchange of the Rights.
Stock option acceleration
On March 23, 2005, the Board of Directors (the
“Board”) of the Company, acting upon the
recommendation of the Compensation Committee of the Board,
approved an acceleration of vesting for all outstanding unvested
stock options with a per share exercise price equal to or
greater than $12.06 (the “Acceleration”). These
options had exercise prices in excess of the current market
value of the common stock on March 23, 2005, therefore, no
expense was recognized on the Acceleration. The options to
purchase 93,337 shares of the Company’s common
stock at exercise prices ranging from $12.06 to $17.85 became
immediately exercisable as of March 23, 2005.
During fiscal year 2002, two executives terminated their
employment with the Company. The vesting of a portion of their
stock options was accelerated, allowing the executives to
purchase option shares that would otherwise have expired
unvested, resulting in a $161,000 charge to operating expense.
During fiscal year 2003, the Company reached an agreement with
one of these executives to reacquire a portion of these option
shares at an amount less than the fair market value of the
stock, resulting in a recovery of $72,000 of the charge
recognized in 2002.
F-22
Authorized but unissued stock
As a result of the reacquiring of the shares from the former
executive, we currently have 13,425 shares of authorized
but unissued stock valued at $176,000. We have no formal stock
buyback program and no other commitments to repurchase any
additional shares of stock. There are no restrictions on by the
state of California on the use authorized but unissued shares.
|
|
| 8. |
Retirement Savings Plan |
All employees of the Company can participate in the Cholestech
Corporation Retirement Savings Plan (“the 401(k)
Plan”) in which an employee may elect to defer, in the form
of contributions to the 401(k) Plan, between 1% and 15% of the
employee’s W-2 income. Employee contributions are fully
vested and non-forfeitable at all times. The 401(k) Plan
provides for discretionary employer contributions as determined
by the board of directors. Company contributions to the 401(k)
Plan were $286,500, $209,000 and $0 in fiscal years 2005, 2004
and 2003, respectively.
The provision (benefit) for income taxes from continuing
operations consisted of (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Federal | |
|
State | |
|
Total | |
| |
|
| |
|
Year ended March 25, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
$ |
2,091 |
|
|
$ |
70 |
|
|
$ |
2,161 |
|
| |
Deferred
|
|
|
207 |
|
|
|
(400 |
) |
|
|
(193 |
) |
| |
|
|
| |
Total
|
|
$ |
2,298 |
|
|
$ |
(330 |
) |
|
$ |
1,968 |
|
| |
|
|
|
Year ended March 26, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
$ |
— |
|
|
$ |
225 |
|
|
$ |
225 |
|
| |
Deferred
|
|
|
(10,217 |
) |
|
|
(1,209 |
) |
|
|
(11,426 |
) |
| |
|
|
| |
Total
|
|
$ |
(10,217 |
) |
|
$ |
(984 |
) |
|
$ |
(11,201 |
) |
| |
|
|
|
Year ended March 28, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
$ |
266 |
|
|
$ |
— |
|
|
$ |
266 |
|
| |
Deferred
|
|
|
(4,200 |
) |
|
|
— |
|
|
|
(4,200 |
) |
| |
|
|
| |
Total
|
|
$ |
(3,934 |
) |
|
$ |
— |
|
|
$ |
(3,934 |
) |
| |
|
|
The differences between the expected federal statutory income
tax rate of 34% and the Company’s actual effective tax rate
(or benefit) for fiscal years 2005, 2004 and 2003 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended | |
| |
|
| |
| |
|
March 25, | |
|
March 26, | |
|
March 28, | |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
Expected provision (benefit) at
statutory rate
|
|
|
34.0 |
% |
|
|
(34.0 |
)% |
|
|
34.0 |
% |
|
State taxes, net of federal benefit
|
|
|
(3.6 |
) |
|
|
(25.7 |
) |
|
|
— |
|
|
Permanent differences
|
|
|
.5 |
|
|
|
1.9 |
|
|
|
2.5 |
|
|
Research and development credits
|
|
|
(.3 |
) |
|
|
(1.5 |
) |
|
|
(0.5 |
) |
|
Change in valuation allowance
|
|
|
— |
|
|
|
(406.3 |
) |
|
|
(65.9 |
) |
|
Alternative minimum tax
|
|
|
— |
|
|
|
— |
|
|
|
1.7 |
|
|
Other
|
|
|
1.6 |
|
|
|
(74.0 |
) |
|
|
(29.7 |
) |
| |
|
|
| |
|
|
32.2 |
% |
|
|
(539.6 |
)% |
|
|
(57.9 |
)% |
| |
|
|
F-23
The difference between the federal statutory income tax rate and
the Company’s effective tax rate for fiscal years 2004 and
2003 relates primarily to changes in the valuation allowance for
which a benefit was recognized.
Deferred tax assets and liabilities are recognized for the
future tax consequences of differences between the carrying
amounts of assets and liabilities and their respective tax bases
using enacted tax rates in effect for the year in which the
differences are expected to reverse. Significant deferred tax
assets and liabilities consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
|
| |
|
March 25, | |
|
March 26, | |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$ |
14,627 |
|
|
$ |
14,570 |
|
|
Accrued expenses
|
|
|
370 |
|
|
|
362 |
|
|
Inventory
|
|
|
319 |
|
|
|
473 |
|
|
Capitalized research and development
|
|
|
147 |
|
|
|
606 |
|
|
Research and development and other
tax credits
|
|
|
1,878 |
|
|
|
1,560 |
|
|
Property and equipment
|
|
|
174 |
|
|
|
— |
|
|
Other
|
|
|
66 |
|
|
|
— |
|
| |
|
|
| |
Total gross deferred tax assets
|
|
|
17,581 |
|
|
|
17,571 |
|
| |
Valuation allowance
|
|
|
— |
|
|
|
— |
|
| |
|
|
| |
Net deferred tax assets
|
|
|
17,581 |
|
|
|
17,571 |
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
— |
|
|
|
(236 |
) |
| |
|
|
| |
Net deferred tax assets
|
|
$ |
17,581 |
|
|
$ |
17,335 |
|
| |
|
|
Management has assessed the need for a valuation allowance
against deferred tax assets. Management believes it is more
likely than not that the Company’s deferred tax assets will
be fully realized. Therefore, no valuation allowance has been
established. The realizability of the deferred tax assets is
primarily dependent on the ability of the Company to generate
taxable income in the future. Subsequent changes in
Company’s estimate of future profitability could require
the Company to change its estimate of the realizability of its
deferred tax assets and record a valuation allowance. Such a
change in estimate would result in a material deferred tax
expense in the period of change.
As of March 25, 2005, the Company had net operating loss
carryforwards of approximately $42.6 million for federal
tax purposes and $2.7 million for state tax purposes, which
will expire from 2006 through 2024, if not utilized.
Additionally, the Company has federal and state tax credits,
primarily research and development credits, of $1.2 million
for federal tax purposes and $1.1 million for state tax
purposes. The federal credits will expire from 2006 through
2024, if not utilized. Approximately $438,000 of the state
credits will expire from 2009 through 2013, if not utilized. In
addition, $654,000 of the state credits carryforward
indefinitely.
Ownership changes, as defined under Section 382 of the
Internal Revenue Code, have occurred. As a result, the annual
limitation on utilization of net operating losses generated
prior to December 16, 1992 is approximately
$5.7 million. The Company expects that this annual
limitation will not cause any of the net operating losses to
expire prior to utilization.
F-24
On December 23, 2002, the Company completed the sale of
certain assets and the assignment of certain obligations of
WellCheck. Prior to the sale, WellCheck was one of the
Company’s two reportable segments. The Company now operates
its business in one segment, Diagnostic Products.
|
|
| 10. |
Geographic Information |
All of the Company’s products are similar in nature, have
similar production processes, are subject to the same regulatory
environment and are sold by the Company’s sales
professionals to companies that distribute healthcare products
to end users of such products. Sales of products to distributors
are made throughout the United States, Europe and Asia.
Cholestech has determined that it has only one class of similar
products.
The Company’s export sales were $7.3 million,
$7.4 million and $6.6 million in fiscal years 2005,
2004 and 2003, respectively. Sales to Europe were
$4.3 million, $4.1 million and $4.4 million in
fiscal years 2005, 2004 and 2003, respectively, with the
remainder of export sales to Asia and Latin America. All of the
Company’s assets are located in the United States.
F-25
Schedule II
Cholestech Corporation
Valuation and Qualifying Accounts
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
Additions to | |
|
|
|
Balance at | |
| |
|
Beginning | |
|
Costs & | |
|
|
|
End of | |
| |
|
of Period | |
|
Expenses | |
|
Deductions | |
|
Period | |
| |
|
| |
|
Fiscal Year Ended March 28,
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts
|
|
$ |
119,000 |
|
|
$ |
59,000 |
|
|
$ |
2,000 |
|
|
$ |
176,000 |
|
| |
Allowance for sales returns
|
|
|
25,000 |
|
|
|
— |
|
|
|
20,000 |
|
|
|
5,000 |
|
| |
Inventory reserve
|
|
|
81,000 |
|
|
|
92,000 |
|
|
|
— |
|
|
|
173,000 |
|
| |
|
Fiscal Year Ended March 26,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts
|
|
$ |
176,000 |
|
|
$ |
54,000 |
|
|
|
— |
|
|
$ |
230,000 |
|
| |
Allowance for sales returns
|
|
|
5,000 |
|
|
|
(5,000 |
) |
|
|
— |
|
|
|
— |
|
| |
Inventory reserve
|
|
|
173,000 |
|
|
|
651,000 |
|
|
|
— |
|
|
|
824,000 |
|
| |
|
Fiscal Year Ended March 25,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts
|
|
$ |
230,000 |
|
|
$ |
29,000 |
|
|
$ |
90,000 |
|
|
$ |
169,000 |
|
| |
Inventory reserve
|
|
|
824,000 |
|
|
|
— |
|
|
|
395,000 |
|
|
|
429,000 |
|
All other Schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable, and therefore have been omitted.
F-26
Exhibit Index
| |
|
|
|
3.1(1)
|
|
Restated Articles of Incorporation
of Registrant
|
|
3.2(2)
|
|
Bylaws of Registrant, as amended to
date
|
|
4.2(3)
|
|
Amended and Restated Preferred
Share Rights Agreement dated January 1, 2005 between
Registrant and Computershare Investor Services, LLC, including
the Certificate of Determination, the form of Rights Certificate
and Summary of Rights attached thereto as Exhibits A, B and
C, respectively
|
|
10.1(4)
|
|
1988 Stock Incentive Program, as
amended, and forms of agreements thereto
|
|
10.3(2)
|
|
Standard Industrial Lease Agreement
between Registrant and Sunlife Assurance Company of Canada dated
October 22, 1989
|
|
10.3.1(5)
|
|
First Amendment to Standard
Industrial Lease Agreement between Registrant and Sunlife
Assurance Company of Canada dated April 1995
|
|
10.4(2)
|
|
Form of Indemnification Agreement
between Registrant and its officers and its directors
|
|
10.17.10(6)
|
|
Revolving Line of Credit Note
effective September 1, 2004 by and between Wells Fargo Bank
and Registrant
|
|
10.20(7)
|
|
1997 Stock Incentive Program, as
amended, and form of agreement thereto
|
|
10.21(8)
|
|
1999 Nonstatutory Stock Option
Plan, as amended, and form of agreement thereto
|
|
10.25(9)
|
|
Employment Agreement between
Registrant and Thomas E. Worthy dated August 6, 1999
|
|
10.26(9)
|
|
Employment Agreement between
Registrant and Terry L. Wassmann dated March 28, 2000
|
|
10.29(10)
|
|
2000 Stock Incentive Program, as
amended, and form of agreement thereto
|
|
10.29.1
|
|
Form of 2000 Stock Incentive
Program Notice of Grant of Stock Purchase Right
|
|
10.32(11)
|
|
Employment Agreement between
Registrant and William W. Burke dated March 14, 2001
|
|
10.37(12)
|
|
Lease Agreement between Registrant
and the BIV Group dated July 23, 2001
|
|
10.37.1(13)
|
|
Lease Agreement Addendum No. One by
and between Registrant and BIV Group dated
November 19, 2004
|
|
10.38(14)
|
|
2002 Employee Stock Purchase Plan
and form of agreement thereto
|
|
10.39(15)
|
|
Stock Purchase Agreement dated
December 23, 2002 between Registrant, WellCheck Inc. and
ImpactHealth.com, Inc.
|
|
10.40(16)
|
|
Amended and Restated Severance
Arrangement between Registrant and Warren E. Pinckert II
dated June 14, 2001
|
|
10.40.1(16)
|
|
First Amendment to Amended and
Restated Severance Arrangement between Registrant and Warren E.
Pinckert II dated March 27, 2003
|
|
10.41(16)
|
|
Change of Control Severance
Agreement between Registrant and Warren E. Pinckert II
dated June 14, 2001
|
|
10.41.1(16)
|
|
First Amendment to Change of
Control Severance Agreement between Registrant and Warren E.
Pinckert II dated January 23, 2003
|
|
10.41.2(17)
|
|
Amended and Restated Change of
Control Severance Agreement between Registrant and Warren E.
Pinckert II dated March 25, 2004
|
| |
|
|
|
10.42(16)
|
|
Severance Agreement between
Registrant and William W. Burke dated July 17, 2001
|
|
10.43(16)
|
|
Change of Control Severance
Agreement between Registrant and William W. Burke dated
July 21, 2001
|
|
10.43.1(16)
|
|
First Amendment to Change of
Control Severance Agreement between Registrant and William W.
Burke dated January 23, 2003
|
|
10.43.2(17)
|
|
Amended and Restated Change of
Control Severance Agreement between Registrant and William W.
Burke dated March 25, 2004
|
|
10.46(16)
|
|
Severance Agreement between
Registrant and Terry L. Wassmann dated July 17, 2001
|
|
10.46.1(16)
|
|
First Amendment to Severance
Agreement between Registrant and Terry L. Wassmann dated
January 23, 2003
|
|
10.47(16)
|
|
Change of Control Severance
Agreement between Registrant and Terry L. Wassmann dated
January 23, 2003
|
|
10.47.1(16)
|
|
First Amendment to Change of
Control Severance Agreement between Registrant and Terry L.
Wassmann dated January 23, 2003
|
|
10.47.2(17)
|
|
Amended and Restated Change of
Control Severance Agreement between Registrant and Terry L.
Wassmann dated March 25, 2004
|
|
10.48(16)
|
|
Severance Agreement between
Registrant and Thomas E. Worthy dated July 19, 2001
|
|
10.48.1(18)
|
|
First Amendment to Severance
Agreement between Registrant and Thomas E. Worthy dated
October 10, 2003
|
|
10.50(16)
|
|
Employment Agreement between
Registrant and Donald P. Wood dated March 31, 2003
|
|
10.51(16)
|
|
Severance Agreement between
Registrant and Donald P. Wood dated April 1, 2003
|
|
10.51.1(18)
|
|
First Amendment to Severance
Agreement between Registrant and Donald P. Wood dated
October 10, 2003
|
|
10.52(18)
|
|
Change of Control Severance
Agreement between Registrant and Donald P. Wood dated
October 10, 2003
|
|
10.52.1(17)
|
|
Amended and Restated Change of
Control Severance Agreement between Registrant and Donald P.
Wood dated March 25, 2004
|
|
10.54(18)
|
|
Change of Control Severance
Agreement between Registrant and Thomas E. Worthy dated
October 10, 2003
|
|
10.54.1(17)
|
|
Amended and Restated Change of
Control Severance Agreement between Registrant and Thomas E.
Worthy dated March 25, 2004
|
|
10.55(18)
|
|
Change of Control Severance
Agreement between Registrant and Kenneth F. Miller dated
June 2, 2004
|
|
10.56(19)
|
|
Severance Agreement between
Registrant and John F. Glenn dated October 12, 2004
|
|
10.57(19)
|
|
Change of Control Severance
Agreement between Registrant and John F. Glenn dated
October 12, 2004
|
|
10.58(6)
|
|
Transition Agreement between
Registrant and William W. Burke dated July 21, 2004
|
|
10.59(20)
|
|
Change of Control Severance
Agreement dated February 1, 2005 between Registrant and
Barbara McAleer
|
| |
|
|
|
10.60(20)
|
|
Severance Agreement dated
February 1, 2005 between Registrant and Barbara McAleer
|
|
23.1
|
|
Consent of Independent Registered
Public Accounting Firm
|
|
24.1
|
|
Power of Attorney (see page 59)
|
|
31.1
|
|
Certification of Chief Executive
Officer under Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended
|
|
31.2
|
|
Certification of Chief Financial
Officer under Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended
|
|
32
|
|
Certifications of Chief Executive
Officer and Chief Financial Officer pursuant to
18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
(1) Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-1
(No. 33-54300) as declared effective by the Securities and
Exchange Commission on December 16, 1992.
(2) Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-1
(No. 33-47603) as declared effective by the Securities and
Exchange Commission on June 26, 1992.
(3) Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form 8-K filed
with the Securities and Exchange Commission on January 5,
2005.
(4) Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-8
(No. 333-22475) as declared effective by the Securities and
Exchange Commission on February 28, 1997.
(5) Incorporated by reference to exhibits filed with
Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995.
(6) Incorporated by reference to exhibit filed with
Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 24, 2004.
(7) Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-8
(No. 333-38151) as declared effective by the Securities and
Exchange Commission on October 17, 1997.
(8) Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-8
(333-94503) as declared effective by the Securities and Exchange
Commission on January 12, 2000.
(9) Incorporated by reference to exhibits filed with
Registrant’s Annual Report on Form 10-K for the fiscal
year ended March 31, 2000.
(10) Incorporated by reference to exhibit filed with
Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 26, 2003.
(11) Incorporated by reference to exhibits filed with
Registrant’s Annual Report on Form 10-K for the fiscal
year ended March 30, 2001.
(12) Incorporated by reference to exhibits filed with
Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 28, 2001.
(13) Incorporated by reference to exhibits filed with
Registrant’s Report on Form 8-K filed with the
Securities and Exchange Commission on November 23, 2004.
(14) Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-8
(No. 333-98143) as declared effective by the Securities and
Exchange Commission on August 15, 2002.
(15) Incorporated by reference to exhibits filed with
Registrant’s Report on Form 8-K filed with the
Securities and Exchange Commission on January 6, 2003.
(16) Incorporated by reference to exhibits filed with
Registrant’s Annual Report on Form 10-K for the fiscal
year ended March 28, 2003.
(17) Incorporated by reference to exhibits filed with
Registrant’s Annual Report on Form 10-K for the fiscal
year ended March 26, 2004.
(18) Incorporated by reference to exhibit filed with
Registrant’s Quarterly Report on Form 10-Q for the
quarter ended December 26, 2003.
(19) Incorporated by reference to exhibits filed with
Registrant’s Report on Form 8-K filed with the
Securities and Exchange Commission on October 14, 2004.
(20) Incorporated by reference to exhibits filed with
Registrant’s Report on Form 8-K filed with the
Securities and Exchange Commission on February 2, 2005.