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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER: 000-20198
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CHOLESTECH CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3065493
(STATE OR OTHER JURISDICTION OF (I. R. S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3347 INVESTMENT BOULEVARD
HAYWARD, CALIFORNIA 94545
(510) 732-7200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. [ ]
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 March 30,
2001 as reported on the NASDAQ National Market, was approximately $46,199,000.
Shares of common stock held by each officer and director and by each person who
owns 5% or more of the outstanding common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of June 20, 2001, the registrant had outstanding 12,112,219 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 2001 Annual Meeting
of Shareholders to be held August 16, 2001.
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CHOLESTECH CORPORATION
FORM 10-K
FOR THE YEAR ENDED MARCH 30, 2001
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......... 19
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 20
Item 6. Selected Consolidated Financial Data........................ 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 23
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 42
Item 8. Financial Statements and Supplementary Data................. 43
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 43
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 44
Item 11. Executive Compensation...................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 44
Item 13. Certain Relationships and Related Transactions.............. 44
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form
8-K......................................................... 44
Signatures.................................................. 48
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PART I
This Annual Report on Form 10-K, the exhibits hereto and the information
incorporated by reference herein contain "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended, and such forward looking
statements involve risks and uncertainties. When used in this Report, the words
"expect," "anticipate," and "estimate" and similar expressions are intended to
identify forward looking statements. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include those discussed below and those
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" or incorporated by reference herein. Cholestech
Corporation ("we", "us" or "Cholestech") undertakes no obligation to publicly
release any revisions to these forward looking statements to reflect events or
circumstances after the date this Report is filed with the Securities and
Exchange Commission or to reflect the occurrence of unanticipated events.
ITEM 1. BUSINESS
GENERAL
In the past fiscal year, we engaged in three business activities:
- Diagnostic Products -- which develops, manufactures and markets our
Cholestech L-D-X(R) System (the "L-D-X System") which performs
near-patient diagnostic tests that assist in assessing the risk of heart
disease, certain liver diseases, and in the monitoring of therapy to
treat those diseases.
- WellCheck(TM) -- which conducts cholesterol testing within the United
States that assesses the risk of heart disease and assists in the
monitoring of therapy to treat that diseases.
- WellCheck.com -- which provides interactive tools to consumers through
the Internet to better assess the risk of heart disease and to monitor
and motivate personal health management of that disease.
Diagnostic Products currently manufactures and markets the L-D-X System,
including the L-D-X Analyzer and a variety of single-use test cassettes, in the
United States and internationally. The L-D-X System allows health care 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, diabetes or liver disease.
WellCheck currently provides cholesterol and related testing services and
education to the general public using the L-D-X System and creates opportunities
for sales of test cassettes manufactured by our Diagnostic Products business.
WellCheck's professionals provide high quality services and offer test event
expertise to both event sponsors and consumers. As part of our testing services,
we utilize our proprietary Test Event Activity Management System ("TEAMS")
technology which automates registration, data acquisition and information
management at promotional, corporate wellness and other consumer testing events
and provides consumers with a personalized risk assessment for heart disease.
Substantially all of WellCheck's revenue is derived from promotional programs
with major pharmaceutical companies marketing lipid-lowering statin drugs. We
believe an opportunity exists to further expand our testing services business in
the promotional, corporate wellness, retail markets and other convenient venues
which broaden consumer access to testing while assisting consumer product
companies, such as pharmaceutical companies, in customer acquisition. Our goal
is to develop the first nationwide consumer testing services company for chronic
diseases.
We launched WellCheck.com in October 1999 to develop website content and
our TEAMS technology to provide consumers with interactive tools to learn about
and manage heart disease. Based on our determination that adequate sponsor
funding for a retail-oriented, chronic disease management model roll out was
unavailable at present, we refocused on expanding our activities in the
promotional and corporate wellness markets. As a result, our WellCheck.com
business unit and its consumer-oriented website have been repositioned as a
technology support tool for our WellCheck testing business. In the fourth
quarter of fiscal
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2001, we recorded a non-cash, non-recurring charge of $1.96 million to reflect
the impairment of certain intangible assets associated with the development of
WellCheck.com's website and database.
More recently we merged WellCheck.com into WellCheck. We intend to operate
and manage WellCheck and WellCheck.com as one business segment in fiscal 2002
and beyond.
MARKET OVERVIEW
We believe the market for our products and services exists where the
management of heart disease meets the growing consumer trend for personal health
management.
Heart disease consists of long lasting or frequently recurring illnesses
that, due to their protracted and serious nature, are costly to treat and
monitor. High cholesterol is a significant contributing factor to cardiovascular
diseases, which remain the number one cause of death in America and kill more
people than the next seven diseases combined. Heart disease is also the leading
cause of death among diabetics.
- The American Heart Association estimates that more than 61 million people
suffer from some form of cardiovascular disease, which is the leading
cause of death of adults in the United States and resulted in over
949,000 deaths in 1998.
- Based on the evidence of scientific studies, the National Cholesterol
Education Program ("NCEP") expert panel on the detection, evaluation and
treatment of high blood cholesterol in adults and the National Institutes
of Health ("NIH") in May 2001 issued new guidelines which are expected to
substantially increase the number of Americans being treated for high
cholesterol. Numerous research studies substantiate that reducing high
cholesterol levels, primarily LDL levels, significantly reduces the risk
of a coronary event. The number of Americans following therapeutic
lifestyle changes is expected to increase from 52 million to 65 million
and the number of prescribed cholesterol lowering drugs is projected to
increase from 13 million to approximately 36 million.
- According to the new NIH guidelines, it is estimated that approximately
101 million, or one out of every two adult Americans, should be treated
for the chronic condition of high cholesterol, which has been linked by
conclusive evidence to cardiovascular disease.
- Diabetes is estimated to afflict approximately 16 million people in the
United States, over a third of whom have not yet been identified as being
diabetic.
- Heart disease is the leading cause of diabetes-related deaths. Adults
with diabetes have heart disease death rates approximately two to four
times higher than adults without diabetes.
The current healthcare system in the United States, while historically
successful in treating acute conditions, was not designed to adequately serve
the growing need for preventive healthcare and the management of chronic
conditions such as heart disease. In addition, over 42 million Americans do not
have health insurance. Both of these factors are driving a growing trend towards
personal health management, which we believe we are uniquely positioned to
service by providing practical, economical and efficient tools and information
to address a widespread, growing need for convenient, accurate cholesterol
testing as a part of a disease management program which may reduce costs and
improve treatment. Our cost effective technologies:
- identify at risk patients via convenient testing venues;
- screen for heart disease by identifying individuals with elevated
cholesterol levels;
- monitor the ongoing condition of people with heart disease whose
treatment programs may involve long-term, complex drug therapies; and
- enable consumers to take a more active role in their personal health
management.
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MARKET OPPORTUNITY FOR SPONSORS AND PARTNERSHIPS
Many consumer product companies are interested in reaching consumers who
may potentially be at risk for elevated cholesterol and therefore more likely to
purchase their products. Because our technology and services are designed to
meet the needs of consumers who wish to personally manage their cardiovascular
health, we are an attractive partner to these other companies.
Pharmaceutical companies have focused considerable resources on developing
drugs for the treatment of heart disease, diabetes and other chronic diseases.
While drug therapy is necessary for the overall treatment of chronic diseases,
diagnostic screening and the proper monitoring of therapy are also important in
both an effective program to manage chronic diseases and patient education.
Widespread diagnostic screening for chronic diseases helps in the early
identification of patients who may benefit from drug therapy. Effective
administration of drug therapies often requires careful therapeutic monitoring
of a drug's impact on body chemistry to ensure proper drug dosages, monitor
improvement and reduce the risk of side effects. Moreover, ongoing compliance
with drug therapy is necessary for effective treatment and reduces the risk to
patients of adverse side effects.
In addition, a wide range of non-pharmaceutical companies have developed
products which target consumers with cholesterol problems or interests. These
include the manufacturers of food, vitamins and other non-regulated
nutraceutical products which have features and benefits designed to reduce
cholesterol.
Some of the emerging issues in healthcare are the increase of self-insured
employers and the increase of health and quality-of-life programs offered by
employers to their employees. We are also well positioned to help these
companies provide programs which screen their employees for cardiovascular risk
and support cardiovascular health programs within the employer's provider plan.
We believe we are well positioned to meet the needs of potential sponsors
and partners. Our unique technology, easy and convenient service and interactive
tools create a personal interaction with the consumer, which may be expanded to
include other related products and services.
MARKET SEGMENTS
We specifically target our products and services at markets outside of
traditional hospital or clinical laboratories. These markets include:
- physician office laboratories, which are operated by physicians or groups
of physicians. The physician office laboratory market consists of
approximately 96,000 sites that are registered with the Health Care
Finance Administration, approximately 41,000 of which are registered to
perform only tests that have been waived under the Clinical Laboratory
Improvement Act ("CLIA waived");
- health promotion sites, which include a variety of locations such as
corporate wellness programs, fitness centers, health promotion service
providers, community health centers, public health programs, the United
States military and other independent screeners; and
- consumer events such as promotional sporting and social events and retail
venue events.
OUR STRATEGY
Our objective is to extend the technological capabilities and performance
of our core Diagnostic Products business to meet the anticipated need for
widespread community based testing for heart disease. We developed our WellCheck
testing business to integrate our traditional Diagnostic Products business with
a testing service to meet this projected need. By combining diagnostic products
with testing services we hope to achieve both financial and competitive
advantages due to increased market penetration, expanded sales of test cassettes
manufactured by our Diagnostic Products business and improved disease management
therapy and compliance.
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The components of our strategy related to our Diagnostic Products business
include:
- Increase Market Penetration. We intend to further penetrate the physician
office laboratory and health promotion markets by increasing the number
of installed L-D-X Analyzers both domestically and internationally. We
have implemented marketing and related programs to increase awareness of
the advantages of the L-D-X System among health care providers, third
party payors and consumers. In addition, we have entered into strategic
relationships with major pharmaceutical companies to promote preventive
care testing with the L-D-X System as an important component of the
management of cholesterol-related disease.
- Expansion of Testing Technology. We intend to develop a more effective
and efficient platform technology and expand our range of multi-element,
single-use, disposable cassettes to address additional diagnostic tests
to screen for and manage chronic disease, such as our alanine
aminotransferase ("ALT") test, which was waived under CLIA by the United
States Food and Drug Administration in April 2001 and will assist in
monitoring the impact and potential adverse side effects on the liver
from lipid lowering and other therapies.
- Expansion of Cassette Usage. We intend to increase the sale of single-use
test cassettes through additional placement of L-D-X Analyzers,
development of new diagnostic tests and broadening the testing venues
offered by our WellCheck business.
- Expansion of Manufacturing Capabilities and Efficiencies. We intend to
expand our manufacturing capacity by completing a third line for the
manufacture of cassettes, which is currently in a pre-production
validation stage and should be in full operation in July 2001.
Additionally, we will seek to introduce new manufacturing technologies to
improve the key performance attributes of our manufacturing process,
including quality, yields and efficiencies.
- Expansion of Distribution Relationships. We intend to augment our sales
and marketing efforts by continuing to establish relationships with
select third party distributors to strategically access and service our
markets in the United States and internationally.
The components of our strategy related to our WellCheck business include:
- Broaden Consumer Testing. We intend to broaden the geographic coverage of
our WellCheck testing services by furthering our expansion in the
promotional and corporate wellness markets, expanding into the retail
market and other convenient venues designed to increase consumer access
and acquiring additional regional testing companies. In addition, an
expansion of our consumer testing services will create opportunities for
sales of test cassettes manufactured by our Diagnostic Products business.
- Improve Consumer Access to Testing. We intend to focus on testing outside
of clinical or hospital laboratories by providing products and services
that improve people's access to cholesterol-related disease risk
assessment and management. We believe that more convenient testing will
increase the frequency of diagnostic testing and may lead to earlier
identification of patients at risk of or suffering from
cholesterol-related diseases.
- Enhance TEAMS Technology. We have developed, and intend to enhance, our
software for test event activity management, which is a proprietary
interactive testing program designed to facilitate the operation of a
cholesterol-related disease testing event using the L-D-X System by
providing data acquisition and patient information management to both the
event sponsor and the consumer.
- Further Develop Strategic Relationships and Business Partnerships. We
have established and intend to further develop strategic relationships to
improve penetration of our target markets. In particular, we intend to
further our alliances with major pharmaceutical companies and other
companies interested in health promotion to position our products and
services as the preferred tools for the personal health management for
cholesterol-related diseases. We also intend to provide companies
interested in targeting consumers who are at risk for cholesterol-related
diseases a more effective, direct means of interacting with consumers.
For example, we currently have two contracts to provide screening for a
major pharmaceutical manufacturer through our relationship with GMR
Marketing, an Omnicom
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DAS agency which is a leader in sports, mobile, music/entertainment,
ethnic, and lifestyle marketing and produces major events on a nationwide
basis on behalf of its clients.
We merged WellCheck.com into WellCheck. We intend to leverage the synergies
of the two segments into a more efficient business. The merger became effective
in June 22, 2001.
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
We offer a variety of products and services in each of our businesses,
including products currently under development.
DIAGNOSTIC PRODUCTS
Diagnostic Products manufactures, markets and develops diagnostic testing
technology which facilitates the performance of near patient diagnostic testing
to assist in assessing the risk of certain cholesterol-related diseases, certain
liver diseases, and in the monitoring of therapy to treat those diseases.
Diagnostic Products currently manufactures and markets the L-D-X System,
including the L-D-X Analyzer and a variety of single-use test cassettes, in the
United States and internationally.
Overview of the Cholestech L-D-X(R) System
The L-D-X System is an easy to use, multi-element testing system consisting
of a telephone-sized analyzer, a variety of single-use, credit card-sized test
cassettes, a printer and accessories. The L-D-X System allows health care
providers to perform individual tests or combinations of tests with a single
drop of blood within five minutes. No special training is required to operate
the L-D-X System, and the sample does not need to be pre-treated. To run a test,
the health care provider pricks the patient's finger, transfers a drop of blood
to the cassette's sample well, inserts the cassette into the L-D-X Analyzer's
cassette drawer and presses the "run" button. All further steps are performed by
the L-D-X System, which produces results comparable in accuracy to results from
larger, more expensive bench top and clinical laboratory instruments that are
not CLIA waived.
The design of the L-D-X System incorporates as much proprietary technology
as possible into the test cassettes and maintains the L-D-X Analyzer as a
platform that can be easily adapted as new tests and other product upgrades are
introduced. As health care providers perform different tests, the encoding on
the cassette's magnetic strip communicates test specific and calibration
information to the L-D-X Analyzer. Changes that cannot be captured on the
cassette's magnetic strip can be accomplished by changes to the L-D-X Analyzer's
removable read only memory software pack. This flexible design enables health
care providers to perform a variety of tests using the same L-D-X Analyzer and
to take advantage of new tests and other product upgrades without having to
purchase a new L-D-X Analyzer.
The L-D-X 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.
The L-D-X Analyzer
The L-D-X Analyzer is a four-channel, reflectance photometer that measures
the amount of light reflected from the reaction surfaces of a test cassette and
incorporates a microprocessor with built-in software. The L-D-X 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 L-D-X
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 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 L-D-X Analyzer. We will continue to
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upgrade the software as new products are developed, allowing health care
providers to easily replace the existing read only memory pack with a new pack
containing upgraded software. The L-D-X Analyzer, along with a printer,
accessories and starter pack, comprises a L-D-X System and currently has a
domestic list price of $1,995.
Cassette Products
Our line of single-use test cassettes for the L-D-X System incorporates
patented and licensed technology for distributing precisely measured plasma to
multiple 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 L-D-X Analyzer to
convert the reflected color reading into a concentration level for the accurate
measurement of the analytes being tested. This automatic process means that the
health care 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 $3.95 to $10.95 per cassette
and include up to four tests per cassette.
The following table summarizes our current products and products under
development:
PRODUCT REGULATORY STATUS(1)
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INSTRUMENT
L-D-X Analyzer FDA cleared; CLIA waived
CASSETTE PRODUCTS
Current
Total cholesterol FDA cleared; CLIA waived
Total cholesterol and High density FDA cleared; CLIA waived
lipoproteins
Lipid Profile FDA cleared; CLIA waived
(Total cholesterol/High density lipoproteins/
Calculated low density
lipoproteins/Triglycerides)
Total cholesterol and Glucose FDA cleared; CLIA waived
Total cholesterol/High density FDA cleared; CLIA waived
lipoproteins/Glucose
Lipid Profile plus Glucose FDA cleared; CLIA waived
Alanine Aminotransferase (AST) FDA cleared; CLIA waived
Under Development(2)
Aspartate Aminotransferase (ALT) Not filed or applied
In Feasibility Studies(3)
Glycated Hemoglobin Not filed or applied
Direct high density lipoproteins Not filed or applied
Direct low density lipoproteins Not filed or applied
High sensitivity C-Reactive Protein (CRP) Not filed or applied
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(1) "FDA" means the United States Food and Drug Administration; "FDA cleared"
means the product has received 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 Act.
(2) 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
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against product specifications is demonstrated. The products under
development are then transferred to manufacturing prior to launch.
(3) 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 Products
Our current cassette products are designed to measure and monitor blood
cholesterol, related lipids, glucose and alanine aminotransferase. Lipids travel
in the blood within water-soluble particles called lipoproteins.
- Total Cholesterol. This stand-alone test for measuring total cholesterol
("TC") was our first test, developed in conjunction with National
Cholesterol Education Panel guidelines issued in 1988.
- Total Cholesterol and High Density Lipoproteins Panel. The TC and high
density lipoproteins ("HDL") panel addresses current National Cholesterol
Education Panel guidelines regarding the nonfasting screening for the
risk of cardiovascular disease by testing both TC and HDL. 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.
We believe the TC and HDL panel is particularly useful in diagnostic
screening applications. This panel also calculates the ratio of TC to HDL, a
recognized measure of cholesterol induced cardiac risk.
- Lipid Profile. We offer a lipid profile cassette, which directly measures
TC, HDL and triglycerides. 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. National Cholesterol Education Panel guidelines recommend that
health care providers perform three lipid profiles, each one week apart,
before initiating lipid lowering drug therapy.
- Total Cholesterol and Glucose Panel, Total Cholesterol/High Density
Lipoproteins/Glucose Panel and Lipid Profile plus Glucose
Panel. Recognizing the relationship between diabetes and abnormal lipid
levels, we developed a glucose test for the L-D-X 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 of individuals who may be at risk for cardiovascular
disease.
- Alanine Aminotransferase. Patients undergoing certain drug therapies must
be monitored for increases in certain enzymes that are associated with
liver damage. The availability of an alanine aminotransferase ("ALT")
test combined with our lipid profile will allow health care providers to
monitor both the impact of and potential adverse side effects on the
liver from lipid lowering and diabetic therapies. We received 510(k)
clearance to market ALT in September 1999 and received CLIA waived status
in April 2001.
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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.
- Aspartate Amino Transferase. Patients undergoing certain drug therapies
must be monitored for increases in certain enzymes that are associated
with liver damage. The availability of an aspartate amino transferase
("AST") test in conjunction with the our ALT test would allow health care
providers to monitor both the impact of and potential adverse side effect
on the liver from lipid lowering and diabetic therapies. This cassette
product has completed the feasibility phase and is starting the
development process.
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.
- Glycated Hemoglobin. Glycated hemoglobin (hemoglobin A1c) measurement is
an immunoassay test used by health care providers to assess a diabetic's
long-term compliance with prescribed diet and insulin usage. A relatively
high percentage of glycated hemoglobin to glucose indicates poor patient
compliance, which can lead to severe health problems. The American
Diabetes Association recommends at least semi-annual measurement of
glycated hemoglobin for all individuals with diabetes.
- Direct High Density Lipoproteins. The direct HDL cholesterol test is able
to measure HDL cholesterol directly in the patient sample without the
need to remove the non-HDL cholesterol lipoproteins from the sample
before analysis, which takes place in the current HDL cholesterol test on
the L-D-X cassette. The direct HDL cholesterol test represents the next
generation of measurement of HDL cholesterol and is planned to replace
the current HDL cholesterol test.
- 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 should be reimbursable, whereas
the calculated test is not reimbursable.
- High Sensitivity C-Reactive Protein. The high sensitivity C-reactive
protein ("CRP") test measures, by immunoassay, the amount of CRP present
in a patient sample. CRP is an independent risk factor for heart disease
and is useful in predicting the risk of future cardiovascular events.
WELLCHECK(TM)
WellCheck provides easy and economic testing for heart disease in venues
across the United States that are convenient to consumers.
Overview of WellCheck Testing Services
WellCheck currently provides cholesterol and related testing services and
education to the general public using the L-D-X System and creates opportunities
for sales of test cassettes manufactured by our Diagnostic Products business.
WellCheck's professionals provide high quality services and offer test event
expertise to both event sponsors and consumers. As part of our testing services,
we utilize our proprietary TEAMS technology which automates registration, data
acquisition and information management at promotional, corporate wellness and
other consumer testing events and provides consumers with a personalized risk
assessment for heart disease. Substantially all of WellCheck's revenue is
derived from promotional programs with major pharmaceutical companies marketing
lipid-lowering statin drugs. We believe an opportunity exists to further expand
our testing services business in the promotional, corporate wellness, retail
markets and other convenient venues which broaden consumer access to testing
while assisting consumer
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product companies, such as pharmaceutical companies, in customer acquisition.
Our goal is to develop the first nationwide consumer testing services company
for chronic diseases.
We intend to seek opportunities to expand our WellCheck business through
both internal development and the assessment of additional acquisition or
partnership candidates to add more specific regional coverage to WellCheck's
testing services.
In addition, we continue to augment the capabilities of our TEAMS software,
a proprietary interactive testing program designed to facilitate the operation
of a cholesterol-related disease testing event using the L-D-X System. TEAMS is
used to capture participants' registration, self health assessment and results
from the L-D-X System while supporting event logistic processes. Information is
processed following National Cholesterol Education Program guidelines.
Individual participant reports, created for one to one education and consulting
with a WellCheck health promotion associate to assess an individual's results
and potential risk of heart disease based on the long-established Framingham
Study, can be provided immediately at the test site.
STRATEGIC RELATIONSHIPS
We have established and continually seek to develop strategic
relationships, which we believe will enhance the commercialization of our
products. In particular, we intend to enter into additional strategic alliances
with major pharmaceutical and other companies to enhance our market positioning
and our product offerings. Our current strategic relationships are described
below.
GMR Marketing Inc.
We have entered into numerous promotional programs with GMR Marketing Inc.,
a division of Omnicom ("GMR") in relation to the cholesterol-lowering statin
drug "Lipitor." These have included:
- "Screen Test For Health". GMR sponsored two WellCheck mobile screening
units to screen consumers for elevated cholesterol and cardiovascular
disease at promotional sporting events across the United States in 2000.
Three additional units have been added to the program and will conduct
testing through calendar 2001.
- "Tune Up For Life". GMR sponsored a WellCheck mobile screening unit to
provide men's health assessments across the United States in 2000 and
2001.
Physician Sales and Service, Inc.
We entered into a distribution partnership with Physician Sales and
Service, Inc. in 1996 for the distribution of our diagnostic products to
physician offices. Physician Sales and Service has been our largest single
customer for the last three years, contributing $6.1 million of revenue in
fiscal 2001, $4.6 million in fiscal 2000 and $3.4 million in fiscal 1999.
Merck and the American Pharmaceutical Association
In January 1996, the American Pharmaceutical Association announced Project
ImPACT (Improve Persistence And Compliance to Therapy), a joint effort between
the American Pharmaceutical Association, Merck & Co., Inc. ("Merck") and our
company (the "Project"). The goal of the Project was to demonstrate the ability
of pharmacists to improve patient outcomes by expanding the pharmacist's role in
chronic disease management, including monitoring the therapeutic effectiveness
of medications and providing counseling to patients. We and the American
Pharmaceutical Association believe that using pharmacists to provide such
services may result in both direct and indirect cost savings to patients and
third party payors, as well as provide economic incentives for pharmacists. We
supplied L-D-X Systems to monitor patients in the Project.
Directed by the American Pharmaceutical Association Foundation and funded
with an unrestricted educational grant from Merck and us, the Project involved
397 patients, 26 pharmacy practice sites in 12 states and over 60 pharmacists.
It was designed to demonstrate how pharmacists who act as disease
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managers for patients with high cholesterol or lipid disorders can improve
persistence and compliance with therapy, working in collaboration with the
patient's physician.
In March 2000, we announced the final results of the Project at the
American Pharmaceutical Association's 147th Annual Meeting in Washington D.C.
The Project's final results, based on 24 months of data, demonstrated that
monitoring lipid levels at regular intervals and healthcare provider
collaboration, increased rates for persistence to 93.6% and for compliance with
medication therapy to 90.1%. The Project also found that 62.5% of these patients
had reached and maintained the National Cholesterol Education Panel's
cholesterol goals. These results represent a twofold to fourfold improvement
when compared to historical findings. In addition, the March/April 2000 issue of
the Journal of the American Pharmaceutical Association announced that our L-D-X
System played an integral part in helping participating health care providers
successfully manage patients with cholesterol disorders achieve optimal results.
SALES AND MARKETING
Our sales and marketing strategy is to capitalize on anticipated widespread
community based testing to identify individuals who require treatment for high
cholesterol and provide easy to use tools and information for therapeutic
monitoring. In order to fulfill this strategy, we intend to expand our
professional sales force and distribution capabilities, develop additional
venues for convenient consumer testing and market interactive tools for personal
health management directly to consumers, interested sponsors and partners.
Diagnostic Products
The sales and marketing strategy for our Diagnostic Products business is to
increase penetration into the physician office laboratory and health promotion
markets and leverage our installed base of L-D-X Analyzers through increased use
of cassettes. We plan to dedicate a significant portion of the sales and
marketing efforts of our Diagnostic Products business to educate current and
potential owners of L-D-X Systems about the clinical and economic benefits of
diagnostic screening and therapeutic monitoring with the L-D-X System and about
new test cassettes as they become available for distribution. We also plan to
continue to cultivate strategic relationships with development partners,
pharmaceutical companies and distributors. We intend to leverage the technology,
customer bases, marketing power and distribution networks of these partners to
accelerate market penetration and cassette usage. Diagnostic Products' current
marketing activities are primarily focused on:
- Physician Office Laboratories. We have entered into nonexclusive
distribution agreements with two national medical products distributors,
Physician Sales and Service and General Medical (currently a division of
McKesson Corporation), which together have more than 1,300 sales
professionals who focus on the physician office laboratory market. In
addition, we have retained more than 30 regional distributors. We and our
distributors focus our 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 15 regional
distributors who provide equipment and supplies to customers that conduct
diagnostic screening for cholesterol and related lipid levels and
diabetes. Additionally, through agreements with regional distributors and
screening organizations, we provide the L-D-X System for the diagnostic
screening of employees of Exxon Corporation, General Motors Corporation,
Ford Motor Company and Sears, Roebuck and Co.
- International. Our international distribution strategy is to penetrate
targeted geographic markets by selling directly to both high volume users
and distributors in those markets. We have entered into non-exclusive
agreements with 39 foreign distributors to distribute the L-D-X System,
primarily in Europe, the Pacific Rim and Latin America.
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WellCheck
The sales and marketing strategy for our WellCheck business is to broaden
the geographic coverage of WellCheck's testing services and further penetrate
the promotional, corporate wellness and other consumer testing venue markets.
WellCheck's current marketing activities are primarily focused on:
- pharmaceutical companies;
- conventions;
- corporate wellness partners;
- retail venue partners; and
- public health programs.
COMPETITION
The diagnostic product markets in which we operate are intensely
competitive. Our competition consists mainly of clinical and hospital
laboratories, as well as manufacturers of bench top analyzers. The substantial
majority of diagnostic tests used by physicians and other health care providers
are currently performed by clinical and hospital laboratories. We expect that
these laboratories will compete intensely to maintain dominance in the market.
To achieve broad market acceptance, we must demonstrate that the L-D-X System is
an attractive alternative to benchtop 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 L-D-X 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, Beckman Coulter, Inc. and Roche Diagnostics (a
subsidiary of Roche Holdings Ltd.), have developed or are developing analyzers
designed for preventive 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.
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 the status of the L-D-X System as the only CLIA waived system
capable of performing multiple tests simultaneously on a single instrument. 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. There can be no assurance that our competitors will not succeed in
obtaining CLIA waived status for their products or in developing or marketing
technologies or products that are more effective and commercially attractive
than our current or future products, or that would render our technology or
products obsolete or noncompetitive.
Our WellCheck business is one of numerous preventive care testing services
across the United States. Competing testing services companies are almost
exclusively regional and privately held, with limited access to capital. While
we believe the market opportunity for nationwide consumer testing of cholesterol
vastly exceeds the current ability of all existing testing services combined,
there is no guarantee that a larger, more well-known company with greater access
to capital than us may not choose to take advantage of this market opportunity
by competing with us.
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.
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MANUFACTURING
We manufacture, test, perform quality assurance on, package and ship our
products from our approximately 47,000 square foot facilities 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.
- L-D-X Analyzer. The L-D-X 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 third parties and are
shipped to us for final assembly and quality assurance. Our manufacture
of the L-D-X 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. We
believe we can expand our current L-D-X Analyzer manufacturing capacity
as needed.
- Cassettes. We purchase chemicals, membranes and other raw materials from
third party 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. We have
two fully operational cassette manufacturing lines. We are currently
building a third manufacturing line, which is currently in preproduction
validation stage and should be fully operational in July 2001.
- Raw Materials and Quality Assurance. Outside vendors 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. Our quality
control personnel also perform finished goods quality control and
inspection and maintain documentation for compliance with quality systems
regulations and other government manufacturing regulations. 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 source
vendors and on a purchase order basis.
PATENTS AND PROPRIETARY TECHNOLOGY
We have nine United States patents 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 L-D-X Analyzer and the method
of correcting for the effects of substances that can interfere with testing of a
blood sample. We have also filed patent applications relating to our technology
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), the measurement of bone resorption markers and 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.
We currently face patent infringement claims filed by Roche Diagnostics, a
subsidiary of Roche Holdings Ltd., in several individual European countries.
There can be no assurance that patent infringement claims will not be asserted
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
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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.
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 United States Food and Drug
Administration (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 twelve 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 L-D-X Analyzer and all existing test
cassettes in the United States.
In general, we intend to develop and market tests that will require no more
than 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-
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market approval application generally takes one to three years from the date it
is accepted for filing, but may take significantly longer.
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. 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 and
currently have the right to affix the CE mark to our products. 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 Act Regulations
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 registration
certificate from the Health Care Finance Administration, register with an
approved accreditation agency or obtain a state license in a state with a
federally approved license program. 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 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 health care providers to use the L-D-X System at a lower cost.
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THIRD PARTY REIMBURSEMENT
In the United States, health care providers, such as hospitals and
physicians, that purchase products such as the L-D-X 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 L-D-X System and related
treatment will be available from government health authorities, private health
insurers and other third party payors. 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. For example, tests performed in the health promotion market are
generally not subject to reimbursement. 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 health care providers are
moving toward a managed care system in which such providers contract to provide
comprehensive health care for a fixed cost per patient. Managed care providers
are attempting to control the cost of health care 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 health care 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 ("HCFA") 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 HCFA 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 to defer obtaining medical equipment as
a result of any such limitation on their capital expenditures. The Medicare
legislation also requires HCFA 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 products and services has led to
and will continue to lead to increased pressures on the health care industry,
both foreign and domestic, to reduce the cost of products 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 health care payment systems. Reimbursement and
health care payment systems in international markets vary significantly by
country, and include both government sponsored health care 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.
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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.
The services performed by our WellCheck business entail risk of
professional liability and cyber liability claims. The medical testing industry
has historically been litigious, and we face financial exposure to professional
liability, malpractice and cyber liability claims if services provided by our
employees and our products result in personal injury. There can be no assurance
that we will not experience losses due to such claims in the future. We
currently maintain professional liability and cyber 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 such 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 claims could prevent or inhibit the
continued commercialization of our products and services. In addition, a claim
in excess of relevant insurance coverage 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 30, 2001, we employed 221 full-time, regular associates,
including 136 in our Diagnostic Products business, 61 in our WellCheck business,
eight in our WellCheck.com business and 16 in corporate administration. There
were 78 associates in sales, marketing and administration, 84 associates in
manufacturing, 43 associates in field testing and 16 associates devoted to
research and development. None of the associates is covered by a collective
bargaining agreement, and management considers relations with employees to be
excellent.
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EXECUTIVE OFFICERS
The names, ages and positions of our current executive officers are as
follows:
NAME AGE POSITION
---- --- --------
Warren E. Pinckert II........ 57 President, Chief Executive Officer and Director
William W. Burke............. 42 Vice President of Finance, Chief Financial Officer,
Treasurer and Secretary
Robert J. Dominici........... 57 Executive Vice President and Chief Operating Officer
(Diagnostic Products)
David A. Gyorke.............. 41 Vice President of Operations (Diagnostic Products)
Timothy I. Still............. 35 Vice President of Sales and Marketing
(Diagnostic Products)
Kevin R. Stromberg........... 39 Vice President of Engineering (WellCheck)
Terry L. Wassmann............ 54 Vice President of Human Resources
Thomas E. Worthy............. 59 Vice President of Development and Regulatory Affairs
(Diagnostic Products)
Warren E. Pinckert II has served as our President, Chief Executive Officer
and a Director since June 1993. Mr. Pinckert served as Executive Vice President
of Operations of Cholestech from 1991 to June 1993, and as Chief Financial
Officer and Vice President of Business Development of Cholestech from 1989 to
June 1993. Mr. Pinckert also served as Secretary of Cholestech 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. Mr.
Pinckert holds a Bachelor of Science degree in Accounting and a Masters of
Business Administration degree from the University of Southern California and is
a certified public accountant.
William W. Burke has served as Vice President of Finance, Chief Financial
Officer, Treasurer and Secretary since joining our company in April 2001. From
August 1998 to March 2001, Mr. Burke was a Managing Director in Bear, Stearns &
Co. Inc.'s investment banking department where he was responsible for broadening
Bear Stearns' investment banking franchise in the southwest in several
industries, including healthcare. As a Managing Director in Everen Securities,
Inc.'s ("Everen's") investment banking group from May 1991 to May 1995 and
January 1998 to August 1998, he specialized in advising emerging growth medical
technology companies. From May 1995 to January 1998, he served as Managing
Director and Director of Healthcare Investment Banking for Principal Financial
Securities, Inc., which was acquired by Everen in January 1998. Mr. Burke holds
a Bachelor of Business Administration degree in Finance from the University of
Texas at Austin and a Masters of Business Administration degree from the
University of Pennsylvania's Wharton Graduate Business School.
Robert J. Dominici joined our company as Executive Vice President of
Marketing and Sales in August 1998. In September 1999, Mr. Dominici was promoted
to Chief Operating Officer of our Diagnostic Products business. From January
1997 to May 1998, Mr. Dominici served as Senior Vice President/General Manager
Corporate Accounts for Boehringer Mannheim Corporation, a healthcare diagnostic
products company. Before his position as Senior Vice President, Corporate
Accounts, Mr. Dominici held other positions within Boehringer Mannheim including
Vice President Marketing, Sales and Services and President of the Laboratory
Systems Division. From February 1992 to December 1996, he was President and
Chief Executive Officer of Microgenics Corporation, a wholly owned subsidiary of
Boehringer Mannheim. Mr. Dominici holds a Bachelor of Science degree in Biology
and Chemistry from Otterbein College.
David A. Gyorke was recently promoted to the position of Vice President of
Operations for our Diagnostic Products business in July 2000. Mr. Gyorke
previously served as our Director of the Operations' Engineering Groups. Before
joining Cholestech in January 1999, Mr. Gyorke was the Manufacturing &
Technology Engineering Manager of Target Therapeutics, a neuro medical device
manufacturer and a division of the Boston Scientific Corporation. During his
tenure with Target, Mr. Gyorke was responsible for various product lines plus
implementing new processing technologies for the neuro catheter, balloon,
guidewire and embolic
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coil production lines. Mr. Gyorke's experience also includes positions with
Bio-Rad Laboratories, Diasonics Ultrasound Inc. and defense contractors
ArgoSystems, Inc. and Raytheon Company. His engineering internship was with
McDonnell Douglas. Mr. Gyorke holds a Bachelor of Science degree in Industrial
Engineering from the California Polytechnic State University, San Luis Obispo.
Timothy I. Still is Vice President of Sales and Marketing and Sales for our
Diagnostic Products business. Mr. Still joined Cholestech as the Senior Director
of Marketing in December 1997. Before joining Cholestech, Mr. Still was a
Director of Global Marketing and Business Development for Boehringer Mannheim
Corporation. During his tenure with Boehringer Mannheim from August 1992 to
November 1997, Mr. Still was responsible for the global sales and marketing of
the CEDIA immunoassay product line. Before joining Boehringer Mannheim, Mr.
Still was a Product Manager with Bio-Rad Laboratories from June 1992 to August
1992 where he was responsible for the marketing of various immunoassay reagents
and instrumentation. Mr. Still holds a Bachelor of Science degree in Biological
Sciences from the University of California at Davis and a Masters of Business
Administration degree in Marketing and Entrepreneurship from the University of
Southern California.
Kevin R. Stromberg is Vice President of Engineering and Operations for our
WellCheck business. Mr. Stromberg was previously Vice President of Engineering
of WellCheck.com from April 2000 to January 2001. Before joining Cholestech, he
was Director of Information technology for Bay Alarm Company from February 1998
to April 2000. Before Bay Alarm, Mr. Stromberg held the position of Engineering
Manager from January 1996 to February 1998 for Sun Microsystems, Inc. From 1994
to 1996, he held several positions at Shared Medical Systems' Allegra Division.
Additionally, he held positions from 1992 to 1994 with Interactive Development
Environments, Inc. and Wollongong Software companies and operated his own
consulting business. Mr. Stromberg holds a Bachelor of Science degree in
Computer Information Systems from the University of San Francisco.
Terry L. Wassmann joined our company in March 2000 as Vice President of
Human Resources. Before joining Cholestech, Ms. Wassmann served as Staff
Relations Manager with Robert Half International from July 1999 to March 2000.
From February 1986 until December 1999, Ms. Wassmann was employed by Boehringer
Mannheim where She held numerous positions within the Human Resources
department, including the Director of Human Resources of the Indiana and
California based Diagnostics Division.
Dr. Thomas E. Worthy is Vice President, Development and Regulatory Affairs
for our Diagnostic Products business. He was previously our Director of
Technical Affairs. Before joining Cholestech, Dr. Worthy held Director of
Research and Development positions at Microgenics Corporation from February 1988
to April 1998, a division of Boehringer Mannheim Corporation, 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.
ITEM 2. PROPERTIES
We lease 47,000 square feet in Hayward, California and 5,100 square feet in
Oakland, California. Our facilities contain approximately 8,000 square feet of
laboratory space and 10,000 square feet of manufacturing space with the balance
devoted to marketing and administrative and common areas. Our original lease on
the main Hayward facility expired on March 31, 2000 and we have agreed to renew
the lease for two years at 90% of the then current market rate. We believe this
facility is adequate to meet our requirements through the expiration of our
lease. Additionally, we are in negotiations to extend the lease for four to
eight years for our current headquarters location and anticipate finalizing this
lease in mid 2001. We also rent 3,000 square feet on a month-to-month basis in
Hammond, Louisiana.
ITEM 3. LEGAL PROCEEDINGS
On February 5, 1999, a complaint entitled Ree v. Pinckert, et al., No.
C99-0562 (PJH) was filed in the United States District Court for the Northern
District of California. The action is a putative class action and the complaint
alleges that our company and certain of its current and former officers violated
the federal
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securities laws by making false and misleading statements concerning our company
and its business during the period of June 28, 1996 through June 25, 1998. On
June 14, 2001, we executed an agreement in principle with plaintiffs to resolve
this matter for a payment $3 million by our insurance carrier. We recorded a
$1.3 million charge during the year ended March 30, 2001 for legal fees and
insurance costs related to resolving this matter. The settlement is contingent
on Court approval.
On December 23, 1999, a complaint requesting an injunction, No. ES-580-199,
was filed in Zug, Switzerland by Roche Diagnostics seeking a cease and desist
order barring us and two of our distributors from distributing HDL assay
single-use test cassettes in Switzerland. The complaint alleges that we violated
a Roche European patent for HDL. We have filed our response to the complaint. On
July 11, 2000 the court denied the plaintiff's request for an injunction and
ordered them to pay a portion of our legal fees. The plaintiff has appealed the
court ruling. At this point in time no schedule has been set regarding
additional court activity. There can be no assurance as to wether the plaintiffs
will take any additional action, or any additional action be resolved in our
favor.
In September 2000, we were served a complaint, No. Ei/Ti ROCH 04002, filed
in Vienna, Austria by Roche Diagnostics, a subsidiary of Roche Holdings, Ltd.,
seeking a cease and desist order barring us and one of our distributors from
distributing HDL assay single-use test cassettes in Austria. The complaint
alleges that we violated a Roche European patent for HDL. At this point, no
schedule has been set regarding court activity. There can be no assurance as to
whether the plaintiffs will take any additional action or whether any additional
action will be resolved in our favor.
Additionally, in January 2000, a complaint, No. 4 O 4/00, was filed in the
District Court, Dusseldorf, Germany by Roche Diagnostics against us and two of
our distributors seeking a cease and desist order barring the distributors from
shipping HDL single-use test cassettes into Germany. The complaint alleges we
and our distributors violated a Roche German priority patent for HDL by selling
our single-use test cassette containing a HDL assay. The court has requested
additional information be submitted by both parties, but has not made any ruling
or set additional court dates. We believe the suit is without merit and intend
to defend the case vigorously. Therefore, we do not believe that the outcome of
this matter will result in a material adverse effect. However, there can be no
assurance that the lawsuit will be resolved in our favor.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the NASDAQ National Market under the symbol
"CTEC." On March 30, 2001, the last reported sale price for our common stock on
the NASDAQ National Market was $4.81 per share. The following table sets forth
the quarterly high and low trading prices for our common stock.
HIGH LOW
------ -----
FISCAL YEAR 2000
First Quarter............................................... $ 2.97 $1.94
Second Quarter.............................................. 8.38 2.25
Third Quarter............................................... 7.50 5.63
Fourth Quarter.............................................. 10.44 5.19
FISCAL YEAR 2001
First Quarter............................................... $ 8.97 $6.00
Second Quarter.............................................. 8.00 6.38
Third Quarter............................................... 7.50 4.81
Fourth Quarter.............................................. 6.59 3.69
As of March 30, 2001 there were approximately 211 holders of record of our
common stock.
We have never paid cash dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED 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 30, 2001, March 31, 2000 and March 26,1999 and
the selected consolidated balance sheet data as of March 30, 2001 and March 31,
2000 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 27, 1998 and March 28, 1997 and the consolidated balance sheet data as of
March 26, 1999, March 27, 1998 and March 28, 1997 have been derived from our
audited consolidated financial statements not included herein. These historical
results are not necessarily indicative of the results of operations to be
expected from any future period.
YEAR ENDED MARCH 31,(1)
-----------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue(2)..................................... $37,003 $27,549 $22,032 $21,664 $12,861
Cost of revenue(2)............................. 15,280 11,211 10,252 10,513 6,957
------- ------- ------- ------- -------
Gross profit................................... 21,723 16,338 11,780 11,151 5,904
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing......................... 11,388 7,032 6,606 5,380 4,108
Research and development.................... 2,586 3,021 2,703 2,224 1,341
Website and other related costs............. 1,952 -- -- -- --
General and administrative.................. 5,079 3,510 2,381 2,087 1,537
Goodwill amortization....................... 709 100 -- -- --
Legal and other related..................... 1,312 219 826 -- --
Impairment charge........................... 1,958 -- -- -- --
------- ------- ------- ------- -------
Total operating expenses............... 24,984 13,882 12,516 9,691 6,986
------- ------- ------- ------- -------
Income (loss) from operations.................. (3,261) 2,456 (736) 1,460 (1,082)
Interest and other income, net................. 655 805 663 569 273
------- ------- ------- ------- -------
Income (loss) before taxes..................... (2,606) 3,261 (73) 2,029 (809)
Provision for income taxes..................... -- 129 -- 41 --
------- ------- ------- ------- -------
Net income (loss).............................. $(2,606) $ 3,132 $ (73) $ 1,988 $ (809)
======= ======= ======= ======= =======
Net income (loss) per share:
Basic....................................... $ (.22) $ 0.27 $ (0.01) $ 0.18 $ (0.08)
======= ======= ======= ======= =======
Diluted..................................... $ (.22) $ 0.26 $ (0.01) $ 0.17 $ (0.08)
======= ======= ======= ======= =======
Shares used to compute net income (loss) per
share:(3)
Basic....................................... 12,046 11,724 11,484 11,289 10,382
======= ======= ======= ======= =======
Diluted..................................... 12,046 11,920 11,484 11,905 10,382
======= ======= ======= ======= =======
MARCH 31,(1)
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities............................. $ 12,365 $ 13,741 $ 11,427 $ 14,751 $ 14,009
Working capital........................... 10,254 11,522 13,342 17,662 16,124
Total assets.............................. 30,742 32,218 24,283 25,788 21,087
Accumulated deficit....................... (48,030) (45,424) (48,556) (48,483) (50,471)
Shareholders' equity...................... 24,858 26,476 21,769 21,446 18,703
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- ---------------
(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, except fiscal 2000, which consisted of 53 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 30, 2001 as
fiscal 2001, the fiscal year ending March 31, 2000 as fiscal 2000, the
fiscal year ending March 26, 1999 as fiscal 1999, the fiscal year ending
March 27, 1998 as fiscal 1998 and the fiscal year ending March 28, 1997 as
fiscal 1997.
(2) Revenue and costs of revenue figures have been revised as a result of the
retroactive adoption of EITF 00-10 "Accounting for Shipping and Handling
Fees and Costs".
(3) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the shares used to compute net income (loss) per share.
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward looking statements.
These statements relate to future events or our future financial performance and
involve known and unknown risks, uncertainties and other factors that may cause
our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the forward
looking statements. These risks and other factors include those listed under
"Risk Factors" and elsewhere in this Annual Report on Form 10-K. In some cases,
you can identify forward-looking statements by terminology such as "may",
"will", "should", "expect", "plan", "anticipate", "believe", "estimate",
"predict", "potential", "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under
"Factors Affecting Future Operating Results". These factors may cause our actual
results to differ materially from any forward looking statement.
Although we believe the expectations reflected in the forward looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these forward
looking statements. We are under no duty to update any of the forward looking
statements after the date of this Annual Report on Form 10-K to conform our
prior statements to actual results.
OVERVIEW
In the past fiscal year, we engaged in three business segments:
- Diagnostic Products -- which develops, manufactures and markets our
L-D-X(R) System (the "L-D-X System") which performs near-patient
diagnostic tests that assist in assessing the risk of certain
cholesterol-related diseases, certain liver diseases, and in the
monitoring of therapy to treat that diseases.
- WellCheck -- which conducts consumer testing within the United States
that assesses the risk of certain cholesterol-related and other diseases
and assists in the monitoring of therapy to treat those diseases.
- WellCheck.com -- which provides interactive tools to consumers through
the Internet to better assess the risk of certain cholesterol-related and
other diseases and to monitor and motivate personal health management of
those diseases.
Diagnostic Products currently manufactures and markets the L-D-X System,
including the L-D-X Analyzer and a variety of single-use test cassettes, in the
United States and internationally. The L-D-X System allows health care 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 or liver
disease.
WellCheck currently provides cholesterol and related testing services and
education to the general public using the L-D-X System and creates opportunities
for sales of test cassettes manufactured by our Diagnostic Products business.
WellCheck's professionals provide high quality services and offer test event
expertise to both event sponsors and consumers. As part of our testing services,
we utilize our proprietary TEAMS technology which automates registration, data
acquisition and information management at promotional, corporate wellness and
other consumer testing events and provides consumers with a personalized risk
assessment for heart disease. Substantially all of WellCheck's revenue is
derived from promotional programs with major pharmaceutical companies marketing
lipid-lowering statin drugs. We believe an opportunity exists to further expand
our testing services business in the promotional, corporate wellness, retail
markets and other convenient venues which broaden consumer access to testing
while assisting consumer product companies, such as pharmaceutical companies, in
customer acquisition. Our goal is to develop the first nationwide consumer
testing services company for chronic diseases.
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We launched WellCheck.com operations in October 1999 to develop website
content and TEAMS technology to provide consumers with interactive tools to
learn about and manage cholesterol-related diseases. Based on our determination
that adequate sponsor funding for a retail-oriented, chronic disease management
model roll out was unavailable at present, we refocused on expanding our
activities in the promotional and corporate wellness market. As a result, our
WellCheck.com business unit and its consumer-oriented website have been
repositioned as a technology support tool for our WellCheck business. In the
fourth quarter of fiscal 2001, we recorded a non-cash, non-recurring charge of
$1.96 million to reflect the impairment of certain intangible assets associated
with the development of WellCheck.com's website and database.
More recently we merged WellCheck.com into WellCheck. We intend to operate
and manage WellCheck and WellCheck.com as one business segment in fiscal 2002
and beyond.
RESULTS OF OPERATIONS
YEARS ENDED MARCH 30, 2001 AND MARCH 31, 2000
Revenue. Our total revenue increased 34.3% to $37.0 million in fiscal 2001
from $27.5 million in fiscal 2000. Diagnostic Products represented 87.8% of
total revenue in fiscal 2001 and 98.0% of total revenue in fiscal 2000.
International revenue represented 17.4% of our total revenue in fiscal
2001, compared to 17.6% in fiscal 2000. In fiscal 2001 all international revenue
related to the Diagnostic Products business unit.
Segment performance was as follows:
- Diagnostic Products revenue increased 20.3% to $32.5 million in fiscal
2001 from $27.0 million in fiscal 2000. The increase in revenue mainly
reflected an 18.1% increase in unit sales of single-use test cassettes.
The growth was in the physician office laboratory, health promotion and
international markets. Additionally, unit sales of the L-D-X System
increased by 42.9%. L-D-X sales increased in all markets, other than
pharmacy.
- WellCheck revenue increased 706.7% to $4.4 million in fiscal 2001 from
$549,000 in fiscal 2000. The increase in revenue reflected the fact that
WellCheck was only included in our results of operations during the last
two months of fiscal 2000.
- WellCheck.com revenue increased to $85,000 in fiscal 2001 from no revenue
in fiscal 2000.
Cost of Revenue. Our cost of revenue increased 36.3% to $15.3 million in
fiscal 2001 from $11.2 million in fiscal 2000. Gross margins were 58.7% in
fiscal 2001 and 59.3% in fiscal 2000. Diagnostic Products accounted for 92.0% of
our cost of products sold and the other 8% related to service revenue from
WellCheck and WellCheck.com in fiscal 2001. Diagnostic Products accounted for
98.6% of our costs of products sold and 1.4% related to service revenue in
fiscal 2000.
Segment performance was as follows:
- Diagnostic Products cost of revenue includes direct labor, direct
material, overhead and royalties. Cost of revenue increased 27.1% to
$14.1 million in fiscal 2001 from $11.1 million in fiscal 2000. The
increase was primarily related to the higher unit sales of single-use
test cassettes, and costs of validations and testing of our new
manufacturing line for cassettes which is currently in preproduction
validation. Gross margin was 56.7% in fiscal 2001 and 59.1% in fiscal
2000. The gross margin decline was primarily attributable to spending
related to prepare the new production equipment for full operation during
July 2001.
We have licensed certain technology used in the manufacturing of certain of
our products. A related agreement, which expires in 2006, requires us to
pay a royalty of 2.0% on net sales of single use test cassettes. Total
royalty expense was $490,000 in fiscal 2001 and $456,000 in fiscal 2000 and
such amounts were charged to cost of product revenue.
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- WellCheck cost of revenue includes reimbursed travel expenses, laboratory
services, medical waste disposal and the cost of medical testing
equipment and supplies. Costs of product provided by the Diagnostic
Products business are eliminated on consolidation. Total cost of revenue
was $1.2 million in fiscal 2001 and $155,000 for the two months of
operations in fiscal 2000.
- WellCheck.com does not have any costs associated with its revenue. Costs
associated with the maintenance of TEAMS and the website are included in
website and related costs in the consolidated statement of operations.
Operating Expenses
Sales and Marketing. Our sales and marketing expense includes salaries,
commissions, bonuses, expenses for outside services related to marketing
programs and travel expenses. Sales and marketing expenses increased 61.9% to
$11.4 million in fiscal 2001 from $7.0 million in fiscal 2000. Sales and
marketing expenses increased to 30.8% of revenue in fiscal 2001 from 25.5% in
fiscal 2000. Diagnostic Products accounted for 70% of sales and marketing
expenses for fiscal 2001 and 97.2% of sales and marketing expenses for fiscal
2000.
Sales and marketing expense in each of our segments was as follows:
- Diagnostic Products sales and marketing expense increased 16.6% to $8.0
million in fiscal 2001 from $6.8 million in fiscal 2000. The increase
relates to increased advertising, trade show and promotional costs. Sales
and marketing expense decreased to 24.5% of revenue in fiscal 2001 from
25.3% of revenue in fiscal 2000.
- WellCheck sales and marketing expense increased significantly to $2.7
million in fiscal 2001 from $200,000 in fiscal 2000. This increase
reflects the fact that WellCheck was only included in our results of
operations for last two months of fiscal 2000.
- WellCheck.com sales and marketing expense was $683,000 in fiscal 2001.
During fiscal 2000 there was no sales and marketing expense as this
business was focused on developing the concept and structure of the
website and had not started contacting potential customers for
sponsorship or advertising related to the business.
Research and Development. Our research and development expense includes
salaries, bonuses, and expenses for outside services, supplies and amortization
of capital equipment. Research and development expense decreased 14.4% to $2.6
million in fiscal 2001 from $3.0 million in fiscal 2000. Research and
development expenses as a percentage of revenue decreased to 7.0% in fiscal 2001
compared to 11.0% in fiscal 2000. Diagnostic Products accounted for 84.9% of
research and development expense in fiscal 2001 and 79.8% of research and
development expense in fiscal 2000. WellCheck.com incurred 15.1% of the research
and development expense reported in fiscal 2001.
Research and development expense in each of our segments was as follows:
- Diagnostic Products research and development expense decreased 9.0% to
$2.2 million in fiscal 2001 from $2.4 million in fiscal 2000. This
reduction was mainly attributable to reduced head count and related
expenses as the ALT single-use test cassette approached development
completion. Research and development expense as a percentage of revenue
decreased to 6.8% in fiscal 2001 compared to 8.9% in fiscal 2000.
- WellCheck incurred no research and development expense in fiscal 2001.
- WellCheck.com research and development expense was $392,000 in fiscal
2001, net of $874,000 of certain capitalized website costs and $286,000
of capitalized TEAMS software development costs.
General and Administrative. Our general and administrative expense includes
salaries and benefits, as well as expenses for outside professional services
including information services, legal fees, accounting, our medical advisory
board and costs associated with our board of directors. General and
administrative expense increased by 44.7% to $5.1 million in fiscal 2001 from
$3.5 million in fiscal 2000. General and administrative expense increased to
13.7% of revenue in fiscal 2001 from 12.7% in fiscal 2000. Diagnostic Products
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represented 52.1% of general and administrative expense in fiscal 2001 and 67.5%
of general and administrative expenses in fiscal 2000. WellCheck.com accounted
for 25.4% and WellCheck accounted for 22.5% of the general and administrative
expense in fiscal 2001.
General and administrative expense in each of our segments was as follows:
- Diagnostic Products general and administrative expense increased by 11.5%
or $272,000 to $2.6 million in fiscal 2001 from $2.4 million in fiscal
2000. General and administrative expense decreased to 8.1% of revenue in
fiscal 2001, compared to 8.8% in fiscal 2000. The increase relates to the
wages, benefits and other costs for the segment's Chief Operating Officer
and staff. This position was not created until the third quarter of
fiscal 2000.
- WellCheck general and administrative expense was $1.1 million in fiscal
2001 compared to $245,000 in fiscal 2000. In fiscal 2001 general and
administrative expense was 25.8% of revenue. The increase reflects that
WellCheck was only included in our results of operations for the last two
months of fiscal 2000.
- WellCheck.com general and administrative expense was $1.3 million in
fiscal 2001 compared to $896,000 in fiscal 2000. The increase was due to
WellCheck.com being included in our results of operations for the last
six months of fiscal 2000.
Goodwill Amortization. Goodwill amortization expense includes the
amortization of capitalized costs associated with the purchase of Health Net in
January 2000. Amortization expense increased 609.0% to $709,000 in fiscal 2001
from $100,000 in fiscal 2000. All costs were associated with the WellCheck
business.
Legal and Other Related. Our legal and related expense includes
professional consulting fees, court related costs, and other fees relating to
litigation. Legal and related expense increased 499% to $1.3 million in fiscal
2001 from $219,000 in fiscal 2000. All costs incurred in fiscal 2001 and fiscal
2000 relate to the same class action lawsuit for which a settlement was reached
in June 2001.
Impairment Charge. In the fourth quarter of fiscal 2001 we recorded
impairment expense of $1.96 million relating to certain capitalized website and
database development costs. As we have been unable to generate significant
revenues from our website and related database, the determination was that the
carrying value of these costs exceeded their estimated future cash flows. There
was no impairment expense during fiscal 2000.
Interest and Other Income, Net. Interest income reflects income from the
investment of cash balances and marketable securities, net of expenses. Interest
income decreased 18.6% to $655,000 in fiscal 2001 from $805,000 in fiscal 2000.
This decrease was primarily the result of reduced cash equivalents and
marketable securities resulting from investments in our WellCheck and
WellCheck.com operations.
Income Taxes. We have significant net operating loss ("NOLs") and tax
credit carryforwards. There was no provision for income taxes in fiscal 2001 due
to the net operating loss. The $129,000 provision for income taxes in fiscal
2000 represented the estimated federal and state alternative minimum taxes
payable, reduced for the use of NOLs and tax credit carryforwards. Management
expects to use NOLs and other tax carryforward amounts to the extent taxable
income is earned in fiscal 2002 and beyond. Therefore, our effective tax rate
should continue to be substantially less than the applicable statutory rates. As
of March 30, 2001, we had NOL carryforwards of $44.3 million available to reduce
future taxable income for federal income tax purposes and NOL carryforwards of
$3.2 million available to reduce taxable income for state income tax purposes.
Additionally, we had research and development and other tax credit carryforwards
available to reduce income taxes for federal income tax purposes of $1.9 million
and research and development and other tax credit carryforwards available to
reduce income taxes for state income tax purposes of $768,000. We have
historically experienced significant operating losses and operate in an industry
subject to rapid technological changes. Therefore, management believes there is
sufficient uncertainty regarding our 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 at March 30, 2001.
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As a result of a change in our ownership which has occurred, there are
annual limitations of approximately $1.5 million for federal and state income
tax purposes on the combined use of federal NOLs and federal and state tax
credit carryforwards.
YEARS ENDED MARCH 31, 2000 AND MARCH 26, 1999
Revenue. Our total revenue increased 25.1% to $27.5 million in fiscal 2000
from $22.0 million in fiscal 1999. Diagnostic Products represented 98.5% of our
total revenue in fiscal 2000 and 100% in fiscal 1999.
International revenue represented 17.6% of our total revenue in fiscal
2000, compared to 12.9% in fiscal 1999. In fiscal 2000 all international revenue
related to the Diagnostic Products business unit.
Segment performance was as follows:
- Diagnostic Products revenue increased 22.5% to $27.0 million in fiscal
2000 from $22.0 million in fiscal 1999. The increase in revenue mainly
reflected increased unit sales of single-use test cassettes in the
physician office laboratory, health promotion and international markets.
Unit sales of the L-D-X System declined in all domestic markets, other
than international.
- WellCheck revenue totaled $549,000 in fiscal 2000. All revenue since
acquisition was earned during the last two fiscal months of fiscal 2000.
- WellCheck.com did not generate any revenue in fiscal 2000.
Cost of Revenue. Our cost of revenue increased 9.3% to $11.2 million in
fiscal 2000 from $10.3 million in fiscal 1999. Gross margins were 59.3% in
fiscal 2000 and 53.5% in fiscal 1999. Diagnostic Products accounted for 98.6% of
our cost of products sold in fiscal 2000 and 100% in fiscal 1999.
Segment performance was as follows:
- Diagnostic Products cost of revenue includes direct labor, direct
material, overhead and royalties. Cost of revenue increased 7.8% to $11.1
million in fiscal 2000 from $10.3 million in fiscal 1999. The increase in
cost relating to the higher unit sales of single-use test cassettes was
offset by reductions in indirect factory spending. Gross margins were
59.1% in fiscal 2000 and 53.5% in fiscal 1999. The gross margin
improvement was primarily attributable to stronger spending controls.
We have licensed certain technology used in the manufacturing of certain of
our products. A related agreement, which expires in 2006, requires us to
pay a royalty of 2.0% on net sales of the applicable products. Total
royalty expense was $456,000 in fiscal 2000 and $379,000 in fiscal 1999,
and such amounts were charged to cost of revenue.
- WellCheck cost of revenue includes reimbursed travel expenses, laboratory
services, medical waste disposal and the cost of medical testing
equipment and supplies. Costs of product provided by the Diagnostic
Products business are eliminated on consolidation. For the two months of
operations in fiscal 2000, total cost of revenue was $155,000.
- WellCheck.com cost of revenue will include costs related to the
development and expansion of our two Internet-related software tools,
TEAMS and WellCheck.com and amortization of capitalized website
development costs.
Operating Expenses
Sales and Marketing. Our sales and marketing expense includes salaries,
commissions, bonuses, expenses for outside services related to marketing
programs and travel expenses. Sales and marketing expenses increased 6.4% to
$7.0 million in fiscal 2000 from $6.6 million in fiscal 1999. Sales and
marketing expenses decreased to 25.5% of revenue in fiscal 2000 from 30.0% in
fiscal 1999. Diagnostic Products accounted for 97.2% of sales and marketing
expenses for fiscal 2000 and 100% for fiscal 1999.
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Sales and marketing expense in each of our segments was as follows:
- Diagnostic Products sales and marketing expense increased 3.3% to $6.8
million in fiscal 2000 from $6.6 million in fiscal 1999. The increase can
be attributed primarily to the increased use of professional outside
services. Sales and marketing expense decreased to 25.3% of revenue in
fiscal 2000 from 30.0% of revenue in fiscal 1999. This change was
partially impacted by the transfer of costs related to the former
Executive Vice President of Marketing and Sales, who became the Chief
Operating Officer of Diagnostic Products in October 1999 with associated
costs thereafter reported on the general and administrative line of the
Statement of Operations.
- WellCheck sales and marketing expense was $200,000 in fiscal 2000. This
business unit only operated during the last two months of fiscal 2000.
- WellCheck.com incurred no sales and marketing expense in fiscal 2000 as
this business was still in the development stage.
Research and Development. Our research and development expense includes
salaries, bonuses, expenses for outside services, supplies and amortization of
capital equipment. Research and development expense increased 11.8% to $3.0
million in fiscal 2000 from $2.7 million in fiscal 1999. Research and
development expenses as a percentage of revenue decreased to 11.0% in fiscal