<PAGE>
Filed Pursuant to Rule 424(a)
Registration No. 33-03367
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PRELIMINARY PROSPECTUS, DATED MAY 24, 1996
PROSPECTUS
3,000,000 SHARES
[LOGO]
COMMON STOCK
All of the 3,000,000 shares of Common Stock offered hereby are being sold by
Cholestech Corporation ("Cholestech" or the "Company"). The Company's Common
Stock is quoted on the Nasdaq National Market under the symbol "CTEC." On May
23, 1996, the last reported sale price for the Common Stock was $7.13 per share.
See "Price Range of Common Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total(3)............................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock on the same terms and conditions
set forth above, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------
The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that delivery of such shares will be made at the
offices of the agent of Vector Securities International, Inc., in New York, New
York, on or about , 1996.
---------------------
Vector Securities International, Inc. Principal Financial Securities, Inc.
, 1996
<PAGE>
[LOGO]
[PICTURE OF PRODUCTS]
---------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS UNDER THE CAPTIONS "PROSPECTUS SUMMARY," "RISK FACTORS,"
"USE OF PROCEEDS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" AND "BUSINESS" AND ELSEWHERE IN THIS PROSPECTUS
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 (THE "REFORM ACT"). SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF
THE COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHER THINGS, THE
FOLLOWING: THE COMPANY'S HISTORY OF LOSSES AND UNCERTAINTY OF PROFITABILITY; THE
UNCERTAINTY OF MARKET ACCEPTANCE OF THE L-D-X SYSTEM; THE COMPANY'S DEPENDENCE
ON DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS; THE COMPANY'S LIMITED SALES,
MARKETING AND DISTRIBUTION EXPERIENCE AND DEPENDENCE ON DISTRIBUTORS; THE RISKS
ASSOCIATED WITH CASSETTE MANUFACTURING; THE COMPANY'S HIGHLY COMPETITIVE
INDUSTRY AND RAPID TECHNOLOGICAL CHANGE WITHIN THE COMPANY'S INDUSTRY; THE
UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION AND RELIANCE ON
TECHNOLOGY LICENSED FROM THIRD PARTIES; CHANGES IN, OR FAILURE TO COMPLY WITH,
GOVERNMENT REGULATION; THE UNCERTAINTY OF THIRD PARTY REIMBURSEMENT FOR
PROCEDURES PERFORMED USING THE COMPANY'S PRODUCTS; THE POTENTIAL FLUCTUATIONS IN
THE COMPANY'S QUARTERLY RESULTS; THE COMPANY'S DEPENDENCE ON RETENTION AND
ATTRACTION OF KEY EMPLOYEES; GENERAL ECONOMIC AND BUSINESS CONDITIONS; AND OTHER
FACTORS REFERENCED IN THIS PROSPECTUS. SEE "RISK FACTORS."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS, INCLUDING INFORMATION UNDER "RISK FACTORS." EXCEPT AS
OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS, INCLUDING FINANCIAL
INFORMATION, SHARE AND PER SHARE DATA, ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." SPECIAL NOTE: CERTAIN STATEMENTS SET
FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
REFORM ACT. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 2
FOR ADDITIONAL FACTORS RELATING TO SUCH STATEMENTS.
Cholestech Corporation ("Cholestech" or the "Company") develops,
manufactures and markets a proprietary point of care diagnostic system (the
"L-D-X System") which measures specific analytes to detect various diseases and
disorders within five minutes using a single drop of whole blood. The Company
currently markets its L-D-X System and a series of lipid and glucose panels for
preventive screening and monitoring applications. In January 1996, the L-D-X
System and the Company's total cholesterol, high density lipoprotein ("HDL"),
triglycerides and glucose tests were granted waived status under the Clinical
Laboratory Improvement Amendments of 1988 ("CLIA"), the first such waiver
granted under CLIA's newly-developed ease of use, accuracy and precision
guidelines. The CLIA waiver allows health care providers to use the L-D-X System
without the additional operating costs and extensive regulatory requirements
associated with CLIA compliance. The Company believes that the L-D-X System is
the only multi-analyte diagnostic system to be classified as waived under CLIA.
The Company also believes that the L-D-X System's CLIA waived status,
technological flexibility, ease of use, accuracy and low maintenance costs
provide it with competitive advantages over other point of care diagnostic
systems.
As a result of the cost and administrative burden associated with CLIA
compliance, the L-D-X System and its lipid-focused test menu were initially
marketed to health care providers performing high volume preventive risk factor
screening, including hospitals, corporate wellness programs, community health
centers and health promotion service providers. Immediate results are important
in this setting because it allows high risk individuals to be identified and
enrolled in appropriate intervention programs in the same visit. With its recent
CLIA waived status, the Company has expanded its marketing and distribution
focus to also target the monitoring market, in particular the physician office
laboratory ("POL") and pharmacy segments. The Company's access to this market
was limited prior to the CLIA waiver because of the cost and administrative
burden associated with the CLIA regulations. The Company intends to target
initially the 54,000 POLs in the United States. The Company believes that the
L-D-X System will enable health care providers in the monitoring market,
particularly POLs, to better control their medical costs by eliminating the need
for patient follow-up with test results and reducing the time before therapy can
be prescribed or modified, and to permit them to capture additional revenue from
conducting testing in their offices. In order to effectively penetrate the POL
market, the Company has recently entered into a non-exclusive distribution
agreement with Physician Sales and Services, Inc. ("PSS"), a national medical
products distributor with more than 700 sales professionals who focus on the POL
market.
The L-D-X System consists of a portable analyzer and proprietary disposable
test cassettes. The test cassette is the focal point of the L-D-X System and the
key to its flexibility. The Company has incorporated most of the critical
technological features of the system into the test cassette so that as new tests
are developed, the existing L-D-X Analyzer can be utilized with simple software
upgrades. The Company has recently demonstrated the feasibility of performing
immunoassay-based tests on the L-D-X Analyzer. The Company believes that, if an
immunoassay cassette is successfully developed, the L-D-X Analyzer will be the
only point of care diagnostic system capable of performing both dry chemistry
and immunoassay-based tests on a single instrument.
The Company intends to leverage the technological flexibility of L-D-X-
System to capitalize on attractive markets that can be served by point of care
diagnostic instruments. The Company is developing additional test cassettes
which will enable it to provide a more comprehensive line of products to the
monitoring market. These cassettes include tests for uric acid, blood urea
nitrogen and creatinine used to measure kidney function. The Company believes
that these tests, along with cholesterol and glucose, are among the most ordered
tests by physicians in the POL market. In May 1996, the Company entered into an
agreement with Metra Biosystems, Inc. ("Metra Biosystems") to develop an
immunoassay test cassette to measure bone resorption, a key gauge of the
effectiveness of osteoporosis treatment. The Company has also demonstrated the
feasibility of measuring prostate specific antigen ("PSA") for prostate cancer
screening from whole blood using the Company's technology.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.............................. 3,000,000 shares
Common Stock outstanding after the Offering....... 11,131,824 shares (1)
Use of proceeds................................... For research and development, capital
expenditures, repayment of indebtedness, expansion
of sales and marketing capabilities, and other
working capital and general corporate purposes
Nasdaq National Market symbol..................... CTEC
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................................... $ 1,518 $ 3,744 $ 3,029 $ 4,038 $ 6,873
Cost of products sold......................................... 565 4,908 4,972 3,933 4,505
--------- --------- --------- --------- ---------
Gross profit (loss)........................................... 953 (1,164) (1,943) 105 2,368
--------- --------- --------- --------- ---------
Operating expenses:
Research and development.................................... 6,124 1,843 2,134 715 714
Sales and marketing......................................... 1,446 2,171 2,909 2,694 3,168
General and administrative.................................. 2,373 3,133 2,288 1,983 1,376
--------- --------- --------- --------- ---------
Total operating expenses.................................. 9,943 7,147 7,331 5,392 5,258
--------- --------- --------- --------- ---------
Loss from operations.......................................... (8,990) (8,311) (9,274) (5,287) (2,890)
Interest income, net.......................................... 100 246 364 243 144
--------- --------- --------- --------- ---------
Net loss...................................................... $ (8,890) $ (8,065) $ (8,910) $ (5,044) $ (2,746)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per share (2)........................................ $ (13.38) $ (1.57) $ (1.14) $ (.63) $ (.34)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares (2)............................ 664 5,122 7,791 7,954 8,042
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED (3)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and restricted marketable securities......................... $ 4,111 $ 21,956
Working capital..................................................................... 4,442 23,036
Total assets........................................................................ 9,645 27,490
Long-term obligations, net of current portion....................................... 810 11
Accumulated deficit................................................................. (49,662) (49,662)
Shareholders' equity................................................................ 5,982 25,375
</TABLE>
- ------------------
(1) Based upon shares outstanding as of March 31, 1996. Excludes: (i) 518,244
shares of Common Stock issuable upon exercise of options outstanding as of
March 31, 1996, with a weighted average exercise price of $3.49 per share;
(ii) 39,242 shares of Common Stock issuable upon exercise of warrants
outstanding as of March 31, 1996, with an exercise price of $3.50 per share;
(iii) 183,412 shares of Common Stock reserved for future issuance under the
Company's stock plans; (iv) 39,526 shares of Common Stock issued to Metra
Biosystems in May 1996 at a purchase price of $6.325 per share; and (v) an
aggregate of up to $750,000 of Common Stock to be purchased by Metra
Biosystems at fair market value upon achievement of certain milestones by
the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business -- Strategic Relationships,"
"Management -- 1988 Stock Incentive Program," "-- Employee Stock Purchase
Plan," "Description of Capital Stock" and Notes 7 and 10 of Notes to
Financial Statements.
(2) See Note 1 of Notes to Financial Statements for an explanation of shares
used in computing net loss per share.
(3) Adjusted to reflect the sale of 3,000,000 shares of Common Stock offered by
the Company hereby, at an assumed public Offering price of $7.13 per share
and after deducting estimated underwriting discounts and commissions and the
estimated expenses of the Offering, and the anticipated application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
4
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY BY POTENTIAL INVESTORS IN EVALUATING AN
INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. SPECIAL NOTE: CERTAIN
STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE REFORM ACT. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS" ON PAGE 2 FOR ADDITIONAL FACTORS RELATING TO SUCH STATEMENTS.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY. The Company has
experienced significant operating losses since inception and, as of March 31,
1996, had an accumulated deficit of $49.7 million. The Company has not generated
significant revenues to date, and there can be no assurance that significant
revenues will ever be achieved. The Company expects to continue to incur
operating losses as well as negative cash flows from operations as it expands
its product research and development efforts for new test panels, expands sales
and marketing activities to address the monitoring market, particularly POLs,
and the screening market, and expands manufacturing capacity for existing and
new test panels. The Company's ability to increase revenues and achieve
profitability and positive cash flows from operations will depend, in part, upon
successful commercialization of existing product offerings in the monitoring
market, particularly to POLs, of which there can be no assurance. See "--
Uncertainty of Market Acceptance of L-D-X System." The Company's ability to
increase revenues and achieve profitability and positive cash flows from
operations will also depend upon the Company's ability to complete the
development of and successfully introduce additional diagnostic tests currently
under development. There can be no assurance that the Company's development
efforts will result in commercially available products, that the Company will
obtain required regulatory clearances or approvals for any new tests in a timely
manner, or at all, that the Company will be successful in introducing any new
tests, that the Company will be able to achieve and maintain cost-efficient,
high-volume manufacturing capacity for any new tests or that any new tests will
achieve a significant level of market acceptance. The development and
commercialization of the new tests will require additional development, sales
and marketing, manufacturing and other expenditures. The required level and
timing of such expenditures will impact the Company's ability to achieve
profitability and positive cash flows from operations. There can be no assurance
that the Company will ever achieve significant commercial revenues or
profitability in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
UNCERTAINTY OF MARKET ACCEPTANCE OF L-D-X SYSTEM. The Company has generated
only limited revenues to date, primarily from sales of the L-D-X System to
hospitals, public health departments, corporate wellness programs, health
promotion service providers, managed care organizations, community health
centers, the military and others in the screening market. In order for the
Company to increase revenues and achieve profitability and positive cash flows
from operations, the L-D-X System must achieve a significant degree of market
acceptance among health care providers in the monitoring market, particularly
POLs. The substantial majority of diagnostic tests used by physicians and other
health care providers are performed by independent clinical laboratories and
hospital-based laboratories. Physicians and other health care providers will not
use the L-D-X System unless they determine that it is an attractive alternative
to other means of screening or monitoring blood detected diseases, particularly
independent clinical laboratories and hospital-based laboratories, and that the
clinical benefits to the patient and cost savings achieved through use of the
L-D-X System outweigh the cost of the system. Such determination will depend, in
part, upon the L-D-X System's accuracy, ease of use, rapid test time,
reliability, cost effectiveness, portability and level of third party
reimbursement. Even if the advantages of the L-D-X System in diagnosing and
monitoring patients with blood detected diseases are established as clinically
significant, physicians, medical clinics, pharmacists and other health care
providers may elect not to purchase and use the L-D-X System for any number of
other reasons. For example, physicians and other health care providers may not
change their established means of having such tests performed, may not make the
necessary investment to purchase the Company's products or may not be able to
obtain adequate reimbursement from third party payors for tests performed using
the L-D-X System. In addition, the growing prevalence of managed care and health
maintenance organizations may adversely affect the POL market. A growing number
of physicians are salaried employees and have no financial incentive to perform
testing. Many HMO and managed care organizations have
5
<PAGE>
contracts with laboratories which require participating or employed physicians
to send patient specimens to contracted laboratories. Finally, physicians are
under growing pressure by Medicare and private insurers to limit their testing
to "medically necessary" tests. As a result of these and other factors, there
can be no assurance that demand for the L-D-X System, particularly in the
monitoring market, will be sufficient to allow for profitable operations. In
addition, even if the Company is successful in placing analyzers at the point of
care, there can be no assurance that placement of analyzers will result in
sustained demand for cassettes. The L-D-X System and its component analyzer and
testing cassettes, all of which are based upon a single set of core
technologies, are currently the Company's only products and will continue to
account for substantially all of the Company's revenues for the foreseeable
future. Because the L-D-X System currently represents the Company's sole product
focus, the Company could be required to cease operations if the L-D-X System
does not achieve a significant level of market acceptance. See "Business --
Market Overview," "-- Products," "-- Sales and Marketing" and "-- Third Party
Reimbursement."
DEPENDENCE ON DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS. The Company is
in the early stages of developing tests designed to extend the L-D-X System's
capability to include additional tests useful to health care providers,
particularly POLs. The Company believes that its revenue growth and
profitability will depend, in part, upon its ability to complete development of
and successfully introduce these new tests. In addition, some of these new tests
depend on the development of immunoassay-based technologies and the
incorporation of these technologies into the L-D-X System. The Company will be
required to undertake time-consuming and costly development activities and seek
regulatory approval for these new tests. There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these new tests, that
regulatory clearance or approval of any new tests will be granted by the Food
and Drug Administration ("FDA") on a timely basis, if at all, or that the new
tests will adequately meet the requirements of the applicable market or achieve
market acceptance. For example, although the Company believes that most of the
new tests under development will require a pre-market clearance under Section
510(k) ("510(k)") of the Federal Food, Drug and Cosmetic Act of 1938, as
amended, for marketing in the United States, a requirement that the Company file
a pre-market approval ("PMA") application for a new test would significantly
delay the Company's ability to market such test and significantly increase the
costs of development. Certain of the Company's products under development,
including the PSA test, may require a PMA. Further, in order to achieve
significant market acceptance, any new tests must be classified as waived under
CLIA, of which there can be no assurance. In order to successfully commercialize
any new tests, the Company will be required to establish and maintain reliable,
cost-efficient, high-volume manufacturing capacity for such tests. The Company
has in the past encountered difficulties in scaling up production of new test
cassettes, including problems involving production yields, quality control and
assurance, variations and impurities in the raw materials and performance of the
manufacturing equipment. If the Company is unable for technological or other
reasons to complete the development, introduction and scale up of manufacturing
of any new tests or if such new tests do not achieve a significant level of
market acceptance, the Company's business, financial condition and results of
operations could be materially adversely affected. See "Business -- Products,"
"-- Manufacturing" and "-- Government Regulation."
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE; DEPENDENCE ON THIRD
PARTY DISTRIBUTORS. In order for the Company to increase revenues and achieve
profitability, the L-D-X System must achieve a significant degree of market
acceptance among health care providers in the monitoring market, particularly
POLs. The Company has only limited experience marketing and selling to the
monitoring market in the United States. The Company intends to distribute its
products to this market primarily through a limited number of national
distributors. The Company has only recently entered into a distribution
arrangement with such a national distributor, PSS. The Company may be required
to enter into additional distribution arrangements in order to achieve broad
distribution of its products. There can be no assurance that the Company will be
able to maintain the recently established distribution relationship with PSS or
that the Company will be able to enter into and maintain arrangements with
additional distributors on a timely basis, if at all. The Company will be
dependent upon these distributors to assist it
6
<PAGE>
in promoting market acceptance of the L-D-X System and creating demand for the
Company's products. The risks associated with dependence upon distributors will
be exacerbated by the Company's intention to rely on a limited number of
distributors, with the result that sales to these distributors will account for
a significant portion of the Company's revenues. There can be no assurance that
these distributors will devote the resources necessary to provide effective
sales and marketing support to the Company. In addition, the Company's
distributors may give higher priority to the products of other medical
suppliers, thus reducing their efforts to sell the Company's products. The
Company does not expect that its distributors will be contractually committed to
make future purchases of the Company's products and could therefore discontinue
carrying the Company's products in favor of a competitor's product at any time
or for any reason. If the Company is unable to establish appropriate
arrangements with distributors or if any of the Company's distributors become
unwilling or unable to promote, market and sell the L-D-X System, the Company's
business, financial condition and results of operations would be materially
adversely affected. See "Business -- Sales and Marketing" and "-- Strategic
Relationships."
In addition, in order to increase sales and market acceptance of the L-D-X
System, the Company will also be required to expand its direct sales force and
marketing organization. Establishing a sales and marketing capability sufficient
to support the level of sales necessary for the Company to attain profitability
will require substantial efforts and significant management and financial
resources. The Company is currently actively recruiting a new executive officer
to replace the Company's former Executive Vice President of Marketing and Sales,
who resigned in April 1996. There can be no assurance that the Company will be
able to recruit and retain direct sales and marketing personnel, in particular a
new executive officer of sales and marketing, in order to build a sales and
marketing organization, that building such a sales and marketing organization
will be cost effective or that the Company's sales and marketing efforts will be
successful. See "Business -- Sales and Marketing."
RISKS ASSOCIATED WITH CASSETTE MANUFACTURING. The Company manufactures
internally all of the test cassettes that are components of the L-D-X System.
The manufacture of cassettes is a highly complex and precise process. Such
manufacturing is sensitive to a wide variety of factors, including variations
and impurities in the raw materials, difficulties in the manufacturing process,
performance of the manufacturing equipment and the level of contaminants in the
manufacturing environment. The Company has in the past experienced lower than
expected production yields that have adversely affected gross margins and
delayed product shipments. To the extent that the Company does not achieve
acceptable manufacturing yields of test cassettes or experiences product
shipment delays, the Company's business, financial condition and results of
operations would be materially adversely affected. The Company's cassette
manufacturing lines represent a single point of potential failure in its
manufacturing process that would be costly and time consuming to replace if
their operation were interrupted. Furthermore, the Company has a limited number
of employees dedicated to the operation and maintenance of the cassette
manufacturing equipment, the loss of whom could impact the Company's ability to
effectively operate and service such equipment. The interruption of cassette
manufacturing operations or the loss of employees dedicated to the cassette
manufacturing facility could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company
manufactures all of the cassettes at its Hayward, California manufacturing
facility, and any prolonged inability to utilize such facility as a result of
earthquake, fire or otherwise would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company believes that it will be required to expand manufacturing
capacity for new and existing test cassettes. There can be no assurance that
such expansion of cassette manufacturing capacity can be completed in a timely
fashion, if ever. Failure to increase cassette manufacturing capacity on a cost
effective and timely basis and in compliance with applicable regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company will be
required to build a new cassette manufacturing line for the immunoassay test
cassettes under development. To date, the Company has not developed the core
technologies,
7
<PAGE>
processes and production equipment for an immunoassay cassette manufacturing
line. Failure to successfully develop an immunoassay cassette manufacturing line
and achieve acceptable yields could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Business
- -- Manufacturing."
HIGHLY COMPETITIVE INDUSTRY; RAPID TECHNOLOGICAL CHANGE. The testing market
in which the Company competes is intensely competitive. The Company's
competition consists mainly of independent clinical laboratories and
hospital-based laboratories, as well as manufacturers of bench top and other
point of care analyzers. The substantial majority of diagnostic tests used by
physicians and other health care providers are currently performed by
independent clinical laboratories and hospital-based laboratories. The Company
expects that these laboratories will compete intensely to maintain their
dominance of the testing market. In order to achieve market acceptance for the
L-D-X System, the Company will be required to demonstrate that the L-D-X System
is an attractive alternative to the clinical laboratory and hospital-based
laboratory. 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 the testing services provided by these
laboratories. See "-- Uncertainty of Market Acceptance for L-D-X System." In
addition, companies having a significant presence in the diagnostic market, such
as Abbott Laboratories, Clinical Diagnostic Systems, a division of Johnson and
Johnson which was formerly a division of Eastman Kodak Company, and Boehringer
Mannheim GmbH ("Boehringer Mannheim"), have developed or are developing
analyzers targeted for point of care. These competitors have substantially
greater financial, technical, research and other resources and larger, more
established marketing, sales, distribution and service organizations than the
Company. In addition, such competitors offer broader product lines than the
Company, have greater name recognition than the Company, and offer discounts as
a competitive tactic. In addition, several smaller companies are currently
making or developing products that compete or will compete with those of the
Company. The Company expects that the reclassification of the L-D-X System as
waived under CLIA will result in competitors seeking to develop products that
qualify for waived classification. The Company expects that such competitors
will compete intensely to maintain and increase their market shares. There can
be no assurance that the Company's 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 the
Company's current or future products, or that would render the Company's
technologies and products obsolete or noncompetitive. The Company's products
must compete effectively overall with the existing and future products of its
competitors primarily on the basis of ability to perform tests at the point of
care, ease of use, testing of multiple analytes from a single sample, ability to
conduct tests without a skilled technician or a blood pretreatment step, the
breadth of tests available, market presence, cost effectiveness, precision,
accuracy and immediacy of results. There can be no assurance that the Company
will have the financial resources, technical expertise or marketing,
distribution or support capabilities to compete successfully in the future. See
"Business -- Products -- Products Under Development," "-- Technology" and "--
Competition."
UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION; LICENSE OF
TECHNOLOGY OF THIRD PARTIES. The Company's ability to compete effectively will
depend in part on its ability to develop and maintain proprietary aspects of its
technology, and operate without infringing the proprietary rights of others.
Cholestech has eight United States and several foreign issued patents and is
currently prosecuting patent applications with certain foreign patent offices.
There can be no assurance that any of the Company's pending patent applications
will result in the issuance of any patents, or that, if issued, any such patents
will offer protection against competitors with similar technology. There can be
no assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented in the future or that the rights created thereunder
will provide a competitive advantage. In addition, there can be no assurance
that competitors, many of which have substantially greater resources than the
Company and have made substantial investments in competing technologies, will
not seek to apply for and obtain patents covering technologies that are more
effective than the Company's technologies or would render
8
<PAGE>
the Company's technologies or products obsolete or uncompetitive, or will
prevent, limit or interfere with the Company's ability to make, use or sell its
products either in the United States or in international markets.
The medical products industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. There can be no
assurance that the Company will not in the future become subject to patent
infringement claims and litigation or interference proceedings conducted in the
United States Patent and Trademark Office ("USPTO") to determine the priority of
inventions. The defense and prosecution of intellectual property suits, USPTO
interference proceedings, and related legal and administrative proceedings are
both costly and time consuming. Litigation may be necessary to enforce any
patents issued to the Company, to protect trade secrets or know-how owned by the
Company or to determine the enforceability, scope and validity of the
proprietary rights of others. Any litigation or interference proceeding will
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties or require
the Company to seek licenses from third parties which may not be available on
commercially reasonable terms.
The Company's current products incorporate technologies which are the
subject of patents issued to, and patent applications filed by, others. The
Company has obtained licenses for certain of these technologies. There can be no
assurance that the Company will be able to obtain licenses for technology
patented by others on commercially reasonable terms, that it will be able to
develop alternative approaches if unable to obtain licenses or that the
Company's current and future licenses will be adequate for the operation of
Cholestech's business. The failure to obtain such licenses or identify and
implement alternative approaches could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company also relies upon trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position and no
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its right to its trade secrets, any of which could have an
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Patents and Proprietary Technology."
GOVERNMENT REGULATION. The manufacture and sale of diagnostic products,
including the L-D-X System, are subject to extensive regulation by numerous
governmental authorities, principally the FDA and corresponding state and
foreign regulatory agencies. The Company will not be able to commence marketing
or commercial sales in the United States of any of the new tests until it
receives clearance or approval from the FDA. The process of obtaining FDA and
other required regulatory clearances and approvals is lengthy, expensive and
uncertain. As a result, there can be no assurance that any of the Company's new
tests under development, even if successfully developed, will ever obtain such
clearance or approval. Additionally, certain material changes to medical
products already cleared or approved by the FDA are also subject to further FDA
review and clearance or approval. The loss of previously obtained clearances, or
failure to comply with existing or future regulatory requirements would have a
material adverse effect on the Company's business, financial condition and
results of operations. The L-D-X Analyzer and all existing test cassettes
required 510(k) clearance. A 510(k) clearance is subject to continual review and
later discovery of previously unknown problems may result in restrictions on the
product's marketing or withdrawal of the product from the market. In general,
the Company intends to develop and market tests that will require 510(k)
clearance. It generally takes from four to twelve months from the date of
submission to obtain 510(k) clearance, but it can take longer. In addition,
certain of the Company's products under development, such as the PSA test, may
require submission of a PMA application which is a much longer and more costly
process and involves the submission of extensive supporting data and clinical
information. A PMA application must be filed if a proposed device is not
substantially equivalent to a legally marketed Class I or Class II device, or if
it is a
9
<PAGE>
Class III device for which the FDA has called for PMAs. See "Business --
Government Regulation." A PMA application may be submitted to the FDA only after
clinical trials and the required patient follow-up for a particular test are
successfully completed. Upon filing of a PMA application, the FDA commences a
review process that generally takes one to three years from the date on which
the PMA application is accepted for filing, but may take significantly longer.
There can be no assurance that the Company's products under development will
require only 510(k) clearance rather than the more lengthy PMA approval. A
requirement that the Company file a PMA application for a new test would
significantly delay the Company's ability to market such test and significantly
increase the costs of development. See "Business -- Government Regulation."
Sales of medical devices outside the United States are subject to regulatory
requirements that vary from country to country. The time required to obtain
approval to market medical devices may be shorter or longer than that required
for FDA approval, and the requirements could differ. Such requirements could
adversely effect the Company's ability to sell its products internationally.
The use of Cholestech's products and those of its competitors is also
affected by CLIA and related federal and state regulations, which provide for
regulation of laboratory testing. The scope of these regulations includes
quality control, proficiency testing, personnel standards and federal
inspections. CLIA categorizes tests as "waived," or as being "moderately
complex" or "highly complex," on the basis of specific criteria. Prior to
January 1996, CLIA categorized the L-D-X System as moderately complex. The
testing of control materials on the L-D-X System, as required by CLIA for
laboratories performing moderately complex tests, involved the additional daily
expense of two test cassettes and control materials, and adversely affected the
cost effective utilization of the L-D-X System by low volume users. In January
1996, the L-D-X System and the total cholesterol ("TC"), HDL, Triglycerides and
Glucose tests in any combination were reclassified as waived under CLIA. In
order to successfully commercialize the tests that are currently under
development, the Company believes that it will be critical to obtain waived
classification for such tests under CLIA. There can be no assurance that any new
tests developed by the Company will qualify for the waived classification. Any
failure of the new tests to obtain waived status under CLIA will adversely
impact the Company's ability to commercialize such tests, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, there can be no assurance that any future
amendment of CLIA or the promulgation of additional regulations impacting
laboratory testing will not have an adverse effect on the Company's ability to
market the L-D-X System. For example, if CLIA regulations were modified in a
manner that reduced regulatory requirements and burdens faced by competitive
products, any competitive advantage of the L-D-X System's waived status would be
reduced or eliminated.
The Company's manufacturing processes, as well as in certain instances those
of its contract manufacturers are also subject to stringent federal, state and
local regulations governing the use, generation, manufacture, storage, handling
and disposal of certain materials and wastes. The Company and its contract
manufacturers must economically manufacture products in compliance with federal,
state and foreign regulations regarding the manufacture of health care products
and diagnostic devices, including current Good Manufacturing Practice ("cGMP")
regulations and similar foreign regulations and state and local health, safety
and environmental regulations, which include testing, control and documentation
requirements. Failure to comply with cGMP and other applicable regulatory
requirements by the Company and in certain circumstances, its contract
manufacturers, including marketing products for unapproved uses, could result
in, among other things, warning letters, fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
refusal of the government to grant premarket clearance or premarket approval for
devices, withdrawal of approvals and criminal prosecution. Changes in existing
regulations or adoption of new governmental regulations or policies could
prevent or delay regulatory approval of the Company's products. There can be no
assurance that the Company will not be required to incur significant costs in
the future in complying with manufacturing and environmental regulations. See
"Business -- Government Regulation."
UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT. In the United States,
health care providers, such as hospitals and physicians, that purchase
diagnostic products such as the Company's
10
<PAGE>
L-D-X System, generally rely on third party payors, principally private health
insurance plans, federal Medicare and state Medicaid, to reimburse all or part
of the cost of the procedure in which the product is being used. The Company's
ability to commercialize its products successfully in the United States will
depend in part on the extent to which reimbursement for the costs of such
products and related treatment will be available from government health
authorities (such as the Health Care Financing Administration ("HCFA"), which
determines Medicare reimbursement levels), private health insurers and other
organizations. Such third party payors can affect the pricing or the relative
attractiveness of the Company's products by regulating the maximum amount of
reimbursement provided by such payors for testing services. Reimbursement is
currently not available for certain uses of the Company's products. For example,
the cost of the L-D-X System is generally not subject to reimbursement by
government and other third party payors. In addition, the tests performed by
public health departments, corporate wellness programs and other large volume
users in the screening market are generally not subject to reimbursement. In
addition, certain health care providers are moving towards 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 screening
of blood disease levels. The Company is unable to predict what changes will be
made in the reimbursement methods utilized by third party payors. The Company
could be adversely affected by changes in reimbursement policies of governmental
or private health care payors, particularly to the extent any such changes
affect reimbursement for procedures in which the Company's products are used.
Third party payors are increasingly scrutinizing and challenging the prices
charged for medical products and services. Decreases in reimbursement amounts
for tests performed using the Company's products may decrease amounts physicians
and other practitioners are able to charge patients, which in turn may adversely
affect the Company's ability to sell its products on a profitable basis. Failure
by physicians and other users to obtain reimbursement from third party payors,
or changes in government and private third party payors' policies toward
reimbursement of tests employing the Company's products could have a material
adverse effect on the Company's 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 the Company's existing products or products under development.
Effective October 1, 1991, HCFA adopted new regulations providing for the
inclusion of capital-related costs in the prospective payment system, under
which providers are reimbursed on a per-diagnosis basis at fixed rates unrelated
to actual costs, based on diagnostic related groups ("DRGs"). Under this system
of reimbursement, equipment costs generally will not be reimbursed separately,
but rather will be included in a single, fixed-rate, per patient reimbursement.
These regulations are being phased in over a ten year period, and, although the
full implications of these regulations cannot yet be known, the Company believes
that the new regulations will place more pressure on hospitals' operating
margins, causing them to limit capital expenditures. These regulations could
have an adverse effect on the Company if hospitals decide to defer obtaining
medical equipment as a result of any such limitation on their capital
expenditures. The Company is unable to predict what adverse impact on the
Company, 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.
In addition, market acceptance of the Company's products in international
markets is dependent, in part, upon 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.
The Company believes that the overall 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 the Company. There can be no
assurance as to either United States 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
11
<PAGE>
future legislation, regulation, or reimbursement policies of third party payors
will not otherwise adversely affect the demand for the Company's products or its
ability to sell its products on a profitable basis. See "Business -- Third Party
Reimbursement."
FLUCTUATIONS IN QUARTERLY RESULTS. The Company may experience significant
fluctuations in revenues and results of operations on a quarter to quarter basis
in the future. Quarterly operating results will fluctuate due to numerous
factors, including the timing and level of market acceptance of the L-D-X
System, particularly by POLs, the timing of introduction and availability of new
tests, the timing and level of expenditures associated with new product
development activities, the timing and level of expenditures associated with
expansion of sales and marketing activities and overall operations, the
Company's ability to cost effectively expand cassette manufacturing capacity and
maintain consistently acceptable yields in the manufacture of cassettes, the
timing of establishment of strategic distribution arrangements and the success
of the activities conducted under such arrangements, variations in manufacturing
efficiencies, changes in demand for its products, order cancellations,
competition, changes in government regulation and other factors, the timing of
significant orders from and shipments to customers, and general economic
conditions. These factors are difficult to forecast, and these or other factors
could have a material adverse effect on the Company's business, financial
condition and results of operations. Fluctuations in quarterly demand for
products may adversely affect the continuity of the Company's manufacturing
operations, increase uncertainty in operational planning, disrupt cash flow from
operations and contribute to the volatility of the Company's stock price. The
Company's expenses are based in part on the Company's expectations as to future
revenue levels and to a large extent are fixed in the short term. If revenues do
not meet expectations, the Company's business, financial condition and results
of operations could be materially adversely affected. The Company believes that
period to period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
As a result of the foregoing factors, it is likely that in some future quarter
the Company's revenue or operating results will be below the expectations of
public market analysts and investors. In such event the price of the Company's
Common Stock could be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Manufacturing."
NEED TO MANAGE EXPANDING OPERATIONS. If the Company is successful in
achieving market acceptance for the L-D-X System, the Company will be required
to expand its operations, particularly in the areas of research and development,
sales and marketing and manufacturing. As the Company expands its operations in
these areas, such expansion will likely result in new and increased
responsibilities for management personnel and place significant strain upon the
Company's management, operating and financial systems and resources. To
accommodate any such growth and compete effectively, the Company will be
required to implement and improve information systems, procedures and controls,
and to expand, train, motivate and manage its work force. The Company's future
success will depend to a significant extent on the ability of its current and
future management personnel to operate effectively, both independently and as a
group. There can be no assurance that the Company's personnel, systems,
procedures and controls will be adequate to support the Company's future
operations. Any failure to implement and improve the Company's operational,
financial and management systems or to expand, train, motivate or manage
employees as required by future growth, if any, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "-- Dependence on Retention and Attraction of Key Employees" and "Business
- -- Employees" and "Management."
DEPENDENCE ON SUPPLIERS. Certain key components and raw materials used in
the manufacturing of the Company's products are currently provided by
single-source vendors. Although the Company believes that alternative sources
for such components and raw materials are available, any supply interruption in
a single-sourced raw material would have a material adverse effect on the
Company's ability to manufacture products until a new source of supply were
qualified. There can be no assurance that the Company will be successful in
qualifying additional sources on a timely basis or at all, which would have a
material adverse effect on the Company's business. In addition, an uncorrected
impurity or supplier's variation in a raw material, either unknown to the
Company or incompatible with the Company's manufacturing process, could have a
material adverse effect on the Company's ability to
12
<PAGE>
manufacture products. Also, because the Company is a small customer of many of
its suppliers, there can be no assurance that suppliers will devote adequate
resources to supplying the Company's needs. Any interruption or reduction in the
future supply of any key components or raw materials currently obtained from
single or limited sources could have a material adverse effect on the Company's
business, operating results and financial condition in any given period. See
"Business -- Manufacturing."
DEPENDENCE ON RETENTION AND ATTRACTION OF KEY EMPLOYEES. The Company's
success depends in significant part upon the continued service of certain key
scientific, technical, regulatory and managerial personnel, and its continuing
ability to attract and retain additional highly qualified scientific, technical,
clinical, regulatory and managerial personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to retain
such personnel or that it can attract or retain other highly qualified
scientific, technical, clinical, regulatory and managerial personnel in the
future, including key sales and marketing personnel. In particular, the Company
is currently actively recruiting a new executive officer to replace the
Company's former Executive Vice President of Marketing and Sales, who resigned
in April 1996. The loss of additional key personnel or the inability to hire or
retain qualified personnel, in particular a new executive officer of sales and
marketing, could have a material adverse effect upon the Company's business,
financial condition and results of operations.
POSSIBLE FUTURE CAPITAL REQUIREMENTS. The Company intends to expend
substantial funds for research and product development, expansion of sales and
marketing activities, expansion of manufacturing capacity and other working
capital and general corporate purposes. Although the Company believes that the
net proceeds of the Offering, together with its unrestricted cash balances,
internally generated funds, bank borrowings under existing lines of credit and
proceeds from issuances of Common Stock to Metra Biosystems, will be sufficient
to meet its capital requirements for the foreseeable future, there can be no
assurance that the Company will not require additional financing. For example,
the Company may be required to expend greater than anticipated funds if
unforeseen difficulties arise in expanding manufacturing capacity for existing
cassettes or in the course of completing required additional development,
obtaining necessary regulatory approvals, obtaining waived status under CLIA or
introducing or scaling up manufacturing for new tests. The Company's future
liquidity and capital requirements will depend upon numerous additional factors,
including the costs and timing of expansion of manufacturing capacity, the
number and type of new tests the Company seeks to develop, the success of these
development efforts, the costs and timing of expansion of sales and marketing
activities, the extent to which the Company's existing and new products gain
market acceptance, competing technological and market developments, the progress
of commercialization efforts of the Company's distributors, the costs involved
in preparing, filing, prosecuting, maintaining and enforcing patent claims and
other intellectual property rights, developments related to regulatory and third
party reimbursement matters and CLIA, and other factors. In the event that
additional financing is needed, the Company may seek to raise additional funds
through public or private financing, collaborative relationships or other
arrangements. Any additional equity financing may be dilutive to shareholders,
and debt financing, if available, may involve restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require
the Company to relinquish its rights to certain of its technologies, products or
marketing territories. The failure of the Company to raise capital when needed
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that such
financing, if required, will be available on satisfactory terms, if at all. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
SUFFICIENCY AND AVAILABILITY OF PRODUCT LIABILITY INSURANCE. Sale of the
Company's products entails risk of product liability claims. The medical testing
industry has historically been litigious, and the Company faces financial
exposure to product liability claims in the event that use of its products
result in personal injury. The Company also faces the possibility that defects
in the design or manufacture of its products might necessitate a product recall.
There can be no assurance that the Company will not experience losses due to
product liability claims or recalls in the future. The Company currently
maintains product liability insurance with coverage limits of $5.0 million per
occurrence and $5.0 million annually in the aggregate, and there can be no
assurance that the coverage limits of the Company's
13
<PAGE>
insurance policies will be adequate. Such insurance is expensive, difficult to
obtain and may not be available in the future on acceptable terms, or at all. No
assurance can be given that product liability insurance can be maintained in the
future at a reasonable cost or in sufficient amounts to protect the Company
against losses due to liability. 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 the Company's
products. In addition, a product liability claim in excess of relevant insurance
coverage or product recall could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Product Liability and Insurance."
UNCERTAINTY RELATED TO HEALTH CARE REFORM. Political, economic and
regulatory influences are subjecting the health care industry in the United
States to fundamental change. The Company anticipates that Congress, state
legislatures and the private sector will continue to review and assess
alternative health care delivery and payment systems. Potential approaches that
have been considered include mandated basic health care benefits, controls on
health care spending through limitations on the growth of private health
insurance premiums and Medicare and Medicaid spending, the creation of large
insurance purchasing groups, price controls and other fundamental changes to the
health care delivery system. Legislative debate is expected to continue in the
future, and market forces are expected to demand reduced costs. The Company
cannot predict what impact the adoption of any federal or state health care
reform measures, future private sector reform or market forces may have on its
business.
MANAGEMENT DISCRETION OVER PROCEEDS OF THE OFFERING. Although the Company
expects to use approximately $6.0 million of the net proceeds of this Offering
for repayment of indebtedness, for research and development, expansion of
manufacturing capacity, and expansion of sales and marketing capabilities during
fiscal 1997, the Company's management will retain broad discretion as to the
allocation of a significant portion of the net proceeds of this Offering. See
"Use of Proceeds."
ISSUANCE OF PREFERRED STOCK COULD DELAY OR PREVENT CORPORATE TAKEOVER. The
Board of Directors has the authority to issue up to 5,000,000 shares of
undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without any further vote or action by
the shareholders. The issuance of Preferred Stock under certain circumstances
could have the effect of delaying or preventing a change in control of the
Company or otherwise adversely affecting the rights of the holders of Common
Stock. See "Description of Capital Stock."
POTENTIAL VOLATILITY OF STOCK PRICE. The market price of the shares of
Common Stock, like that of the common stock of many other medical products and
high technology companies, has in the past been, and is likely in the future to
continue to be highly volatile. Factors such as fluctuations in the Company's
operating results, announcements of technological innovations or new commercial
products by the Company or competitors, government regulation, changes in the
current structure of the health care financing and payment systems, developments
in or disputes regarding patent or other proprietary rights, economic and other
external factors and general market conditions may have a significant effect on
the market price of the Common Stock. Moreover, the stock market has from time
to time experienced extreme price and volume fluctuations which have
particularly affected the market prices for medical products and high technology
companies and which have often been unrelated to the operating performance of
such companies. These broad market fluctuations, as well as general economic,
political and market conditions, may adversely affect the market price of the
Company's Common Stock. In the past, following periods of volatility in the
market price of a company's stock, securities class action litigations have
occurred against the issuing company. There can be no assurance that such
litigation will not occur in the future with respect to the Company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, operating results and financial condition. Any adverse
determination in such litigation could also subject the Company to significant
liabilities. See "Price Range of Common Stock."
DILUTION. Investors participating in the Offering will incur immediate,
substantial dilution. To the extent outstanding options to purchase the
Company's Common Stock are exercised, there will be further dilution. See
"Dilution."
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<PAGE>
ABSENCE OF DIVIDENDS. The Company has not paid any cash dividends since
inception and does not anticipate paying cash dividends in the foreseeable
future. See "Dividend Policy."
THE COMPANY
Cholestech was incorporated under the laws of the state of California on
February 2, 1988. The Company's principal executive offices are located at 3347
Investment Boulevard, Hayward, California 94545, and its telephone number is
(510) 732-7200.
Cholestech, L-D-X and the logo are registered trademarks of the Company.
This Prospectus also includes trademarks of companies other than the Company.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be approximately $19.4 million
($22.4 million if the Underwriters' over-allotment option is exercised in full),
based on an assumed Offering price of $7.13 per share, and after deducting
estimated underwriting discounts and commissions and the estimated expenses of
the Offering.
From these estimated net proceeds, the Company will repay the outstanding
balances of the Company's (i) bank line of credit (approximately $250,000 as of
March 31, 1996), which borrowings bore interest at 8.25% per annum as of March
31, 1996, which mature on October 31, 1996, and which were incurred to provide
working capital and (ii) a long-term note of approximately $1.3 million as of
March 31, 1996, which borrowings bear interest at a rate of 16% per annum, which
are required to be repaid in 36 monthly installments of approximately $53,000,
and which were incurred to provide working capital. The balance of the net
proceeds will be used for research and development related to the expansion of
test menus, of which approximately $2.0 million has been budgeted for fiscal
1997, capital expenditures related to expansion of manufacturing capacity, of
which approximately $2.0 million has been budgeted for fiscal 1997, expansion of
sales and marketing capabilities, of which approximately $500,000 has been
budgeted for fiscal 1997, and for other working capital and general corporate
purposes. The Company may also use a portion of the net proceeds for the
acquisition of technologies, businesses or products that are complementary to
those of the Company, although no such acquisitions are planned or being
negotiated as of the date of this Prospectus, and no portion of the net proceeds
has been allocated for any specific acquisition. Pending such uses, the net
proceeds of this Offering will be invested in short-term, interest bearing,
investment grade securities.
The actual amount expended and timing of the use of net proceeds of this
Offering for each purpose may vary significantly depending upon many factors,
including the costs and timing of expansion of manufacturing capacity, the
number and type of tests the Company seeks to develop, the success of these
development efforts, the costs and timing of expansion of sales and marketing
activities, the extent to which the Company's existing and new products gain
market acceptance, competing technological and market developments, the progress
of commercialization efforts of the Company's distributors, the costs involved
in preparing, filing, prosecuting, maintaining and enforcing patent claims and
other intellectual property rights, developments related to regulatory and third
party reimbursement matters and CLIA, and other factors.
16
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "CTEC." On May 23, 1996, the last reported sale price for the Company's
Common Stock on the Nasdaq National Market was $7.13 per share. The following
table sets forth the quarterly high and low closing sale prices for the
Company's Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR 1995
First Quarter $ 5.25 $ 2.50
Second Quarter 3.25 1.75
Third Quarter 3.25 1.13
Fourth Quarter 3.00 1.50
FISCAL YEAR 1996
First Quarter $ 2.50 $ 1.50
Second Quarter 3.00 2.13
Third Quarter 3.75 2.25
Fourth Quarter 7.56 3.13
FISCAL YEAR 1997
First Quarter (through May 23, 1996) $ 7.63 $ 5.75
</TABLE>
On May 7, 1996, there were approximately 309 holders of record of the
Company's Common Stock.
DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock. The
Company currently expects to retain future earnings, if any, to finance the
growth and development of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
17
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of March 31, 1996 and as adjusted to give effect to the sale of 3,000,000 shares
of Common Stock offered by the Company hereby at an assumed Offering price of
$7.13 per share, and after deducting estimated underwriting discounts and
commissions and the estimated expenses of the Offering, and the anticipated
application of the estimated net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED (2)
--------- ---------------
<S> <C> <C>
(IN THOUSANDS)
Short-term debt including current portion of long-term liabilities (1)................ $ 782 $ 33
--------- ---------------
--------- ---------------
Long-term liabilities, net of current portion (1)..................................... $ 810 $ 11
--------- ---------------
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares authorized, none issued and
outstanding, actual and as adjusted................................................ -- --
Common Stock, no par value; 25,000,000 shares authorized, 8,131,824 shares issued
and outstanding, actual; 11,131,824 shares issued and outstanding, as adjusted
(2)................................................................................ 55,644 75,037
Accumulated deficit................................................................. (49,662) (49,662)
--------- ---------------
Total shareholders' equity........................................................ 5,982 25,375
--------- ---------------
Total capitalization............................................................ $ 6,792 $ 25,386
--------- ---------------
--------- ---------------
</TABLE>
- ------------------------
(1) See Note 4 of Notes to Financial Statements.
(2) Excludes: (i) 518,244 shares of Common Stock issuable upon exercise of
options outstanding as of March 31, 1996, with a weighted average exercise
price of $3.49 per share; (ii) 39,242 shares of Common Stock issuable upon
exercise of warrants outstanding as of March 31, 1996, with an exercise
price of $3.50 per share; (iii) 183,412 shares of Common Stock reserved for
future issuance under the Company's stock plans; (iv) 39,526 shares of
Common Stock issued to Metra Biosystems in May 1996 at a purchase price of
$6.325 per share; and (v) an aggregate of up to $750,000 of Common Stock to
be purchased by Metra Biosystems at fair market value upon achievement of
certain milestones by the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Business -- Strategic
Relationships," "Management -- 1988 Stock Incentive Program," "-- Employee
Stock Purchase Plan," "Description of Capital Stock" and Notes 7 and 10 of
Notes to Financial Statements.
18
<PAGE>
DILUTION
The net tangible book value of the Company at March 31, 1996 was $5.7
million, or $0.70 per share. Net tangible book value per share is equal to the
Company's net tangible assets (tangible assets of the Company less total
liabilities) divided by the number of shares of Common Stock outstanding.
Without taking into account any other changes in net tangible book value after
March 31, 1996 other than to give effect to the sale of the 3,000,000 shares of
Common Stock by the Company in the Offering at an assumed Offering price of
$7.13 per share and after deducting estimated underwriting discounts and
commissions and the estimated expenses of the Offering, the pro forma net
tangible book value of the Company as of March 31, 1996 would have been $25.1
million, or $2.25 per share. This represents an immediate increase in net
tangible book value of $1.55 per share to existing shareholders and an immediate
dilution in net tangible book value of $4.88 per share to new investors. The
following table sets forth the per share dilution to new investors in the
Offering:
<TABLE>
<S> <C> <C>
Assumed Offering price per share..................................... $ 7.13
Net tangible book value per share at March 31, 1996................ $ 0.70
Increase per share attributable to new investors................... 1.55
-----
Pro forma net tangible book value per share after the Offering....... 2.25
---------
Dilution per share to new investors.................................. $ 4.88
---------
---------
</TABLE>
The foregoing computations exclude: (i) 518,244 shares of Common Stock
issuable upon exercise of options outstanding as of March 31, 1996, with a
weighted average exercise price of $3.49 per share; (ii) 39,242 shares of Common
Stock issuable upon exercise of warrants outstanding as of March 31, 1996, with
an exercise price of $3.50 per share; (iii) 183,412 shares of Common Stock
reserved for future issuance under the Company's stock plans; (iv) 39,526 shares
of Common Stock issued to Metra Biosystems in May 1996 at a purchase price of
$6.325 per share; and (v) an aggregate of up to $750,000 of Common Stock to be
purchased by Metra Biosystems at fair market value upon achievement of certain
milestones by the Company. To the extent that such options and warrants are
exercised or such shares are issued, there will be further dilution to new
investors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business -- Strategic Relationships," "Management --
1988 Stock Incentive Program," "-- Employee Stock Purchase Plan," "Description
of Capital Stock" and Notes 7 and 10 of Notes to Financial Statements.
19
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus. The statement of operations data set forth below
for the fiscal years ended March 31, 1994, 1995 and 1996 and the balance sheet
data as of March 31, 1995 and 1996 are derived from financial statements of the
Company that have been audited by Price Waterhouse LLP, independent accountants,
which are included elsewhere in this Prospectus, and are qualified by reference
to such financial statements and notes thereto. The statement of operations data
for the fiscal years ended March 31, 1992 and 1993 and the balance sheet data as
of March 31, 1992, 1993 and 1994 are derived from financial statements of the
Company that have been audited by Price Waterhouse LLP and are not included
herein.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Products............................................ $ 939 $ 3,744 $ 3,029 $ 4,038 $ 6,873
Licenses............................................ 579 -- -- -- --
--------- --------- --------- --------- ---------
1,518 3,744 3,029 4,038 6,873
Cost of products sold................................. 565 4,908 4,972 3,933 4,505
--------- --------- --------- --------- ---------
Gross profit (loss)................................... 953 (1,164) (1,943) 105 2,368
--------- --------- --------- --------- ---------
Operating expenses:
Research and development............................ 6,124 1,843 2,134 715 714
Sales and marketing................................. 1,446 2,171 2,909 2,694 3,168
General and administrative.......................... 2,373 3,133 2,288 1,983 1,376
--------- --------- --------- --------- ---------
Total operating expenses.......................... 9,943 7,147 7,331 5,392 5,258
--------- --------- --------- --------- ---------
Loss from operations.................................. (8,990) (8,311) (9,274) (5,287) (2,890)
Interest income, net.................................. 100 246 364 243 144
--------- --------- --------- --------- ---------
Net loss.............................................. $ (8,890) $ (8,065) $ (8,910) $ (5,044) $ (2,746)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per share (1)................................ $ (13.38) $ (1.57) $ (1.14) $ ( .63) $ ( .34)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares (1).................... 664 5,122 7,791 7,954 8,042
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
MARCH 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and restricted marketable
securities........................................... $ 4,355 $ 18,964 $ 11,058 $ 5,230 $ 4,111
Working capital....................................... 1,942 14,660 9,239 5,929 4,442
Total assets.......................................... 8,730 25,399 15,685 10,041 9,645
Long-term liabilities................................. 650 361 54 44 810
Accumulated deficit................................... (24,898) (32,962) (41,872) (46,916) (49,662)
Shareholders' equity.................................. 4,264 21,991 13,412 8,513 5,982
</TABLE>
- --------------
(1) See Note 1 of Notes to Financial Statements for an explanation of shares
used in computing net loss per share.
(2) The Company's fiscal year is a 52- 53 week period ending on the last Friday
in March. All fiscal years referenced in this Prospectus consist of 52
weeks, except fiscal 1995, which consisted of 53 weeks. For convenience, the
Company has indicated in this Prospectus that its fiscal year ends on March
31.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION OF CHOLESTECH
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO
INCLUDED ELSEWHERE IN THIS PROSPECTUS. SPECIAL NOTE: CERTAIN STATEMENTS SET
FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
REFORM ACT. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 2
FOR ADDITIONAL FACTORS RELATING TO SUCH STATEMENTS.
GENERAL
The Company develops, manufactures and markets a proprietary point of care
diagnostic system which measures specific analytes to detect various diseases
and disorders within five minutes using a single drop of whole blood. The
Company has experienced significant operating losses since inception and, as of
March 31, 1996, had an accumulated deficit of $49.7 million. The Company has not
generated significant revenues to date, and there can be no assurance that
significant revenues will ever be achieved. The Company is developing certain
additional tests designed to extend the L-D-X System's capabilities. The Company
believes that its future growth will depend, in part, upon its ability to
complete development and successfully introduce these new tests. The Company
expects to continue to incur operating losses as well as negative cash flows
from operations as it expands product research and development efforts for new
test panels, pursues regulatory clearances and approvals, expands sales and
marketing activities to address the monitoring market, and develops and expands
manufacturing capacity for existing and new test panels. The development and
commercialization of the new tests will require additional development, sales
and marketing, manufacturing and other expenditures. The required level and
timing of such expenditures will impact the Company's ability to achieve
profitability and positive cash flows from operations.
RESULTS OF OPERATIONS
YEARS ENDED MARCH 31, 1995 AND 1996
REVENUES. The Company's revenues increased by 70.2% from $4.0 million in
fiscal 1995 to $6.9 million in fiscal 1996. Domestic revenues increased by 72.2%
from $3.2 million in fiscal 1995 to $5.6 million in fiscal 1996 while
international revenues increased by 62.2% from $817,000 in fiscal 1995 to $1.3
million in fiscal 1996. The increase in revenues reflected increased unit sales
of the L-D-X Analyzer and test cassettes to hospitals, managed care
organizations, public health departments, corporations and other health care
providers in the screening market. The Company's product sales to the United
States monitoring market were minimal in each fiscal year. The Company expects
that international revenues will continue to decline as a percentage of total
revenues in future periods as the Company increases sales and marketing efforts
in the monitoring market in the United States.
COSTS OF PRODUCTS SOLD. Costs of products sold increased 14.5% from $3.9
million in fiscal 1995 to $4.5 million in fiscal 1996, as unit sales of the
L-D-X Analyzer and test cassettes increased. Gross margin was 2.6% and 34.5% in
fiscal 1995 and 1996, respectively. The improvement in the gross margin was
primarily attributable to improved cassette manufacturing yields, improved
quality assurance procedures and growth in the volume of units sold. During
fiscal 1995, the Company improved cassette manufacturing yields and quality
assurance procedures and reduced staffing levels by eliminating technical and
engineering positions specific to initial product development and scale-up of
manufacturing capacity. The resulting manufacturing efficiencies and cost
reductions were reflected for the full year of fiscal 1996.
RESEARCH AND DEVELOPMENT. Research and development expenses remained
constant between fiscal 1995 and fiscal 1996 as a result of the Company's
decision to concentrate available resources on expansion of sales and marketing
activities for existing test panels. However, the Company believes that its
future revenue growth and profitability will depend, in part, upon its ability
to complete development
21
<PAGE>
and successfully introduce new test panels designed to extend the L-D-X System's
capabilities to include additional tests useful in the screening and monitoring
markets. The Company is currently developing additional tests to detect disease
states such as metabolic bone diseases and disorders, prostate cancer and
diabetes. Each of these new tests is at an early stage of development and the
Company will be required to undertake time consuming and costly development
activities and seek regulatory approval for these new tests. As a result, the
Company currently anticipates that research and development expenditures will
increase significantly in future periods as product development and
manufacturing scale-up efforts for new tests increase.
SALES AND MARKETING. Sales and marketing expenses increased 17.6% from $2.7
million in fiscal 1995 to $3.2 million in fiscal 1996. The increase in sales and
marketing expenses was primarily attributable to expansion of the Company's
domestic direct sales and marketing organization, increased commissions
associated with increased product sales and, to a lesser extent, participation
in domestic conferences and trade shows. The Company currently anticipates that
sales and marketing expenses will increase in future periods as the Company
expands sales and marketing activities to address the monitoring market, in
particular the POL segment of the monitoring market.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
30.6% from $2.0 million in fiscal 1995 to $1.4 million in fiscal 1996. The
decrease in general and administrative expenses was primarily a result of
reduced headcount and reduced expenditures for rent and insurance. In fiscal
1995, general and administrative expenses included a one-time charge of
approximately $114,000 as a result of headcount reductions. Absent such one-time
charge, general and administrative expenses for fiscal 1995 would have been $1.9
million.
INTEREST INCOME (EXPENSE), NET. Interest income was earned on investment of
cash balances generated from prior equity financings of the Company. Interest
expense was incurred on capital lease financings, the bank line of credit and
long-term debt obtained by the Company.
YEARS ENDED MARCH 31, 1994 AND 1995
REVENUES. Revenues increased 33.3% from $3.0 million in fiscal 1994 to $4.0
million in fiscal year 1995. Domestic revenues increased by 74.6% from $1.8
million in fiscal 1994 to $3.2 million in fiscal 1995, while international
revenues decreased by 31.1% from $1.2 million in fiscal 1994 to $817,000 in
fiscal 1995. The increase in domestic revenues reflected an increase in sales of
diagnostic tests to the domestic screening market. The decrease in international
revenues reflected the completion in fiscal 1994 of the Company's promotional
activities with Warner Lambert/Parke Davis Corporation ("Warner Lambert") in
Italy relating to Warner Lambert's hypolipidemic agent, Lopid.
COSTS OF PRODUCTS SOLD. Costs of products sold decreased 20.9% from $5.0
million in fiscal 1994 to $3.9 million in fiscal 1995. Costs of products sold as
a percentage of total revenues decreased from 164.1% in fiscal 1994 to 97.4% in
fiscal 1995. The decrease was primarily attributable to the Company's successful
completion of efforts to improve cassette manufacturing yields and improve
quality assurance procedures. The improvements in cassette manufacturing and
quality assurance procedures enabled the Company to reduce staffing levels by
eliminating technical and engineering positions specific to initial product
development and expansion of the Company's manufacturing capacity.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased 66.5%
from $2.1 million in fiscal 1994 to $715,000 in fiscal 1995. The decrease in
research and development expenses was primarily a result of completing the
development of, and obtaining FDA approval for, a TC/HDL/Glucose test and a
Lipid Profile plus Glucose test and, transitioning to product marketing in
fiscal 1995 from product development in fiscal 1994. The fiscal 1995 expenses
included $715,000 for new product development and product enhancements to meet
customer demands while fiscal 1994 expenses included $733,000 for manufacturing
scale-up costs and $1.4 million related to continued development of the L-D-X
System and its related products.
SALES AND MARKETING. Sales and marketing expenses decreased 7.4% from $2.9
million in fiscal 1994 to $2.7 million in fiscal 1995. The decrease in sales and
marketing expenses was a direct result of the
22
<PAGE>
Company's efforts to improve efficiency. During fiscal 1995, the Company focused
on increasing domestic product sales while selectively targeting potential
sources of international product sales. The strategy allowed the Company to
reduce sales and marketing expenses in fiscal 1995 although product sales
increased.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 13.3% from $2.3 million in fiscal 1994 to $2.0 million in fiscal 1995.
General and administrative expenses for fiscal 1995 included a one-time charge
of approximately $114,000 due to a reduction in the number of administrative
personnel. Absent such one-time charge, general and administrative expenses for
fiscal 1995 would have been $1,869,000. In addition, fiscal 1994 expenses
included a net gain of $290,000 upon the settlement of a dispute in connection
with a licensing agreement. Absent such net gain, general and administrative
expenses for fiscal 1994 would have been $2.6 million. After consideration of
the net gain and one-time charge, actual general and administrative expenses for
fiscal 1995 decreased approximately $709,000 or 28% from fiscal 1994. The
decrease resulted from the Company's efforts to control costs and conserve
resources through reduced headcount and improved operating efficiency.
INTEREST INCOME (EXPENSE), NET. Interest income was earned on investment of
cash balances generated from equity financings of the Company. Interest expense
was incurred on capital lease financings obtained by the Company.
INCOME TAX CARRYFORWARDS
As of March 31, 1996, the Company had net operating loss carryforwards
available to reduce taxable income through 2011 for federal and state income tax
purposes of approximately $46.0 million and $21.0 million, respectively.
Additionally, the Company had research and development credit carryforwards
available to reduce income taxes through 2011 for federal and state income tax
purposes of approximately $1.5 million and $493,000, respectively. There is an
annual limitation of approximately $1.5 million for federal and state income tax
reporting purposes on the use of approximately $8.1 million and $1.1 million of
net operating losses, and of $390,000 and $160,000 of tax credit carryforwards,
respectively. The Company's net operating losses and tax credit carryforwards
incurred prior to December 1992 are subject to an annual limitation of
approximately $5.5 million for federal and state income tax reporting purposes
on the use of approximately $28.2 million and $8.1 million of net operating loss
carryforwards, respectively, and of $1.2 million and $379,000 of tax credit
carryforwards, respectively. If the amount of these limitations are not utilized
in any year, the amount not utilized increases the allowable limit in the
subsequent year.
IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("FAS 121")
which requires the Company to review for impairment long-lived assets, certain
identifiable intangibles and goodwill related to those assets whenever events or
changes in circumstances indicate that the carrying amount of an asset might not
be recoverable. In certain situations, an impairment loss would be recognized.
The Company will adopt FAS 121 during fiscal 1997 and, based on its initial
evaluation, does not expect its adoption to have a material impact on the
Company's financial condition or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123") which established a fair value based method of
accounting for stock-based compensation plans and requires additional
disclosures for those companies who elect not to adopt the new method of
accounting. The Company will adopt FAS 123 during fiscal 1997. The Company
intends to continue to account for employee stock options using the intrinsic
value method prescribed by APB Opinion No. 25 and to adopt the "disclosure only"
pro forma alternative described in FAS 123.
23
<PAGE>
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company may experience significant fluctuations in revenues and results
of operations on a quarter to quarter basis in the future. Quarterly operating
results will fluctuate due to numerous factors, including the timing and level
of market acceptance of the L-D-X System, particularly with respect to POLs, the
timing of introduction and availability of new tests, the timing and level of
expenditures associated with new product development activities, the timing and
level of expenditure associated with expansion of sales and marketing activities
and overall operations, the Company's ability to cost-effectively expand
cassette manufacturing capacity and maintain consistently acceptable yields in
the manufacture of cassettes, the timing of establishment of strategic
distribution arrangements and success of the activities conducted under such
arrangements, variations in manufacturing efficiencies, changes in demand for
its products based on changes in third party reimbursement, competition, changes
in government regulation and other factors, the timing of significant orders
from and shipments to customers, and general economic conditions. These factors
are difficult to forecast, and these or other factors could have a material
adverse effect on the Company's business, financial condition and results of
operations. Fluctuations in quarterly demand for products and order
cancellations may adversely affect the continuity of the Company's manufacturing
operations, increase uncertainty in operational planning, disrupt cash flow from
operations and contribute to the volatility of the Company's stock price. The
Company's expenses are based in part on the Company's expectations as to future
revenue levels and to a large extent are fixed in the short-term. If actual
revenues do not meet expectations, the Company's business, financial condition
and results of operations could be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the sale of equity
securities and, to a lesser extent, through capital lease financings and a long
term note payable. Through March 31, 1996, the Company had received
approximately $54.9 million in net proceeds from equity financings. As of March
31, 1996, the Company had approximately $361,000 of cash and cash equivalents.
In addition, the Company had $3.75 million of restricted marketable securities
that currently secure a $3.0 million revolving bank line of credit. While the
line of credit is in effect, the Company is required to maintain on deposit with
the bank $3.75 million of restricted marketable securities or a $3.0 million
certificate of deposit as pledged collateral, restricted as to use when the
Company has outstanding borrowings under the agreement. The line of credit
expires on October 31, 1996. As of March 31, 1996, borrowings under the line of
credit totaled $250,000. If the Company's cash and restricted marketable
securities were to fall below $3.0 million, the Company would be required to
either renegotiate the terms or cancel the revolving line of credit. At March
31, 1996, the Company also had approximately $1.3 million outstanding under a
long term note. The note contains various provisions including requirements that
the Company maintain at least $3.0 million in cash and restricted marketable
securities and a security deposit in the amount of $150,000 payable to the
lender in the event of a default on the note. If the Company's cash and
restricted marketable securities were to fall below $3.0 million, the Company
would be required to deposit with the lender an additional $200,000 as a
security deposit.
Net cash used in operating activities was approximately $7.2 million, $5.0
million and $2.4 million in fiscal 1994, 1995 and 1996, respectively. Cash used
in operating activities resulted primarily from net losses. Net cash provided by
investing activities in fiscal 1995 resulted primarily from the sales of
marketable securities. During fiscal 1996, net cash used in investing activities
reflected the Company's purchases of property and equipment. Net cash used in
financing activities in fiscal 1995 reflected the repayment of capital lease
obligations, while the net cash provided by financing activities in fiscal 1996
reflected approximately $1.7 million in net proceeds from a note payable,
borrowing under the line of credit and issuances of Common Stock.
The Company intends to expend substantial funds for product research and
development, expansion of sales and marketing activities, expansion of
manufacturing capacity and other working capital and general corporate purposes.
Although the Company believes that the net proceeds of the Offering,
24
<PAGE>
together with its unrestricted cash balances, internally generated funds, bank
borrowings under existing lines of credit and proceeds from issuances of Common
Stock to Metra Biosystems will be sufficient to meet its capital requirements
for the foreseeable future, there can be no assurance that the Company will not
require additional financing. The Company's actual liquidity and capital
requirements will depend upon numerous additional factors, including the costs
and timing of expansion of manufacturing capacity, the number and type of new
tests the Company seeks to develop, the costs and timing of expansion of sales
and marketing activities, the extent to which the Company's existing and new
products gain market acceptance, competing technological and market
developments, the progress of commercialization efforts of the Company's
distributors, the costs involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims and other intellectual property rights, developments
related to regulatory and third party reimbursement matters and CLIA, and other
factors. In the event that additional financing is needed, the Company may seek
to raise additional funds through public or private financing, collaborative
relationships or other arrangements. Any additional equity financing may be
dilutive to shareholders, and debt financing, if available, may involve
restrictive covenants. Collaborative arrangements, if necessary to raise
additional funds, may require the Company to relinquish its rights to certain of
its technologies, products or marketing territories. The failure of the Company
to raise capital when needed could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that such financing, if required, will be available on satisfactory
terms, if at all.
25
<PAGE>
BUSINESS
GENERAL
Cholestech develops, manufactures and markets a proprietary point of care
diagnostic system which measures specific analytes to detect various diseases
and disorders within five minutes using a single drop of whole blood. The
Company currently markets its L-D-X- System and a series of lipid and glucose
panels for preventive screening and monitoring applications. In January 1996,
the L-D-X System and the Company's TC, HDL, triglycerides and glucose tests were
granted waived status under CLIA, the first such waiver granted under CLIA's
newly-developed ease of use, accuracy and precision guidelines. The CLIA waiver
allows health care providers to use the L-D-X System without the additional
operating costs and extensive regulatory requirements associated with CLIA
compliance. The Company believes that the L-D-X- System is the only
multi-analyte diagnostic system to be classified as waived under CLIA. The
Company believes that the L-D-X System's CLIA waived status, technological
flexibility, ease of use, accuracy and low maintenance costs provide it with
competitive advantages over other point of care diagnostic systems.
MARKET OVERVIEW
Diagnostic testing of blood for chronic diseases and disorders is typically
performed in independent clinical laboratories or hospital-based laboratories
where large numbers of blood samples are processed in batches and test results
are often not returned to physicians in less than 24 hours. The Company believes
that as a result of the potential benefits and advantages of point of care
testing , there exists an opportunity to shift certain types of diagnositc
testing from clinical laboratories and hospital-based laboratories to the point
of care. These potential benefits and advantages include permitting the health
care practitioner to provide immediate feedback to the patient as well as
allowing health care practitioners to closely monitor the therapeutic
effectiveness of treatment and thereby improve patient compliance. The Company
also believes that point of care testing could help to reduce overall delivery
costs and could improve patient outcomes by providing diagnosis as close to the
patient as possible, thereby eliminating the need for additional patient
follow-up with test results and redundant and time consuming procedures and
processes, reducing paperwork and minimizing the time to medical intervention.
Two of the principal markets in which point of care testing is performed are
the screening and monitoring markets. The screening market is generally
comprised of hospitals, corporate wellness programs, health promotion service
providers, managed care organizations, community health centers, public health
programs, fitness centers, the military and other independent screeners. These
health care providers focus on identifying patients who may be at risk for
certain diseases or disorders and directing them to appropriate therapeutic or
preventive care programs. The monitoring market is generally comprised of POLs,
lipid clinics, cardiac rehabilitation centers and pharmacies. These health care
providers focus on disease management and perform testing to monitor (i)
patients who are identified as at risk for certain diseases, (ii) patients on
dietary or drug therapy, and (iii) patients at risk of, or who have suffered,
heart attacks or who are in cardiac rehabilitation. The Company believes that
the number of potential point of care testing sites is large. For example, the
National Cholesterol Education Program ("NCEP") and American Heart Association
have encouraged cholesterol testing in such places as worksites, community
health centers and a variety of preventive medicine programs in order to make
such testing readily available. Until recently, point of care testing has been
conducted predominately in the high volume screening and monitoring settings.
Point of care testing in the monitoring market has been embraced by low volume
POLs only on a limited basis due to the costs and administrative burdens
associated with government regulatory requirements. In addition, technological
limitations have restricted the number of tests which can be performed cost
effectively at the point of care.
Historically, the Federal Clinical Laboratory Improvement Amendments of 1967
applied only to clinical and hospital-based laboratories, and physicians were
able to perform any laboratory testing that they believed was appropriate for
their patients. The POL market grew as a result of the development of
26
<PAGE>
easy to use laboratory testing equipment and the economic incentives for
physicians to perform such testing in their own offices. In 1988, the regulatory
environment in the POL market changed with the promulgation of CLIA which
applies to all laboratories, including POLs, which perform testing on human
specimens. Under CLIA, all laboratories are required to register with HCFA, but
laboratories conducting non-waived tests must pay higher registration fees and
submit to biannual federal inspections. Laboratories conducting non-waived tests
are also required to implement a comprehensive quality assurance program, which
includes a detailed procedure manual, enrollment in a proficiency testing
program and a requirement to run two levels of quality control material each day
of testing, even if only one patient sample is run. Moreover, CLIA regulations
include personnel requirements that vary depending on the complexity of tests
performed. See "-- Government Regulation." Since POL testing is often done in
low volumes and CLIA requirements can significantly increase the costs of
testing, performing non-waived tests in a POL setting, particularly in low
volume POLs, is often not cost effective. When CLIA regulations went into effect
in 1992, many physicians discontinued all but waived testing. Clinical and
hospital-based laboratories, however, have continued to perform such testing and
as a result currently dominate this market.
SCREENING MARKET
In the screening market, health care providers perform high volume
preventive risk factor screening, particularly for cholesterol and glucose.
Although not subject to reimbursement by Medicare or other third party payors,
risk factor screening has proven to be an effective way to decrease the overall
cost of medical care. Hospitals and health departments offer health screening in
local communities. Many corporations offer periodic cholesterol screenings to
their employees at the worksite as part of worksite health promotion programs.
Of those companies providing cholesterol screenings, approximately 30% also
measure glucose. Worksite health promotion is advocated by government agencies
such as the National Heart, Lung and Blood Institute and the Centers for Disease
Control and Prevention ("CDC"). In addition, private organizations promote
worksite health promotion with a variety of programs such as the American Heart
Association's "Heart at Work" Program and the YMCA's "Corporate Health
Enhancement Program," which serves more than 2,000 worksites nationally. The
Public Health Service has set goals for the number of worksites offering
cholesterol education and testing to be increased from 16% in 1983 to 50% by the
year 2000. Due to the high volume of testing performed by health care providers
in the screening market, the adoption of CLIA and its resulting cost increases
and administrative burdens did not have a significant negative impact on testing
in the screening market. Since CLIA went into effect in 1992, the Company has
focused its sales and marketing efforts on the distribution of its products into
the various segments of the screening market.
MONITORING MARKET
Since the Company received notice from the CDC in January 1996 that the
L-D-X System and the TC, HDL, triglycerides and glucose tests in any combination
have been classified as waived under CLIA, the Company has expanded its sales
and marketing focus to include the monitoring market, in particular the POL and
pharmacy segments. There are currently 54,000 POLs which perform different types
of diagnostic tests. The Company currently offers four of the eight most common
blood chemistry tests performed at POLs, with two additional tests under
development. In addition, there are currently 68,000 pharmacies which could
potentially offer point of care testing. The Company believes that long term
success in the pharmacy market will be dependent upon the development of patient
monitoring programs developed by pharmacies and implemented with managed care
practitioners and physicians on a local basis.
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STRATEGY
The Company's business strategy includes the following elements:
- LEVERAGE CORE TECHNOLOGIES TO ENHANCE PRODUCT OFFERINGS. The Company
intends to leverage the technological flexibility of the L-D-X System by
developing new test cassettes which utilize the existing L-D-X Analyzer in
order to capitalize on the Company's installed based of instruments as
well as to make the L-D-X System more attractive to new customers. The
Company is currently in various stages of development of new products
which utilize biological markers for screening and monitoring certain
common diseases, such as metabolic bone diseases and disorders, prostate
cancer and diabetes. In addition, the Company is developing new tests for
blood urea nitrogen, uric acid and creatinine for renal function analysis
and liver enzymes for hepatic damage.
- INCREASE PENETRATION OF SCREENING MARKET AND EXPAND INTO MONITORING
MARKET. The Company believes that the CLIA waived status of its products
will increase the number of potential customers in the screening market,
and will enable the Company to access the monitoring market. The Company
is currently developing new products to make its product line more
attractive to the POL market as well as to expand its screening market
offerings.
- EXPAND DISTRIBUTION CHANNELS. The Company intends to augment its direct
sales and marketing efforts by continuing to establish relationships with
selected third party distributors to strategically access target markets.
The Company has recently entered into a distribution agreement with PSS,
one of the largest medical products distributors in the United States, to
sell the L-D-X System to the POL market.
- ESTABLISH STRATEGIC RELATIONSHIPS. The Company has established and intends
to continue to establish strategic relationships to develop new products
and to expand its customer base. The Company believes that such
relationships will enable it to take advantage of the financial resources,
technological capabilities and market presence of its partners to enhance
its competitive position in the screening market and expand into the
monitoring market. In May 1996, the Company entered into a development,
marketing and licensing agreement with Metra Biosystems to develop an
immunoassay test cassette incorporating Metra Biosystems' bone resorption
technology to be used with the L-D-X System. The Company is also
participating in a pilot program with the American Pharmaceutical
Association funded by Merck & Co. ("Merck") to demonstrate the ability of
pharmacists to improve patient outcomes with drug therapy and behavior
modification.
TECHNOLOGY
The L-D-X System is a self-contained, easy to use package of products
consisting of a versatile, telephone-sized electronic analyzer, a line of
disposable test cassettes, and accessories that enable a user to perform
combinations of blood tests in five minutes or less. Although no special user
training is needed and the test sample does not need to be pre-treated, the
Cholestech L-D-X System produces results that are comparable to the precision
and accuracy typically seen in larger, more expensive bench top and
laboratory-based analyzers. Correlation studies of the L-D-X System and clinical
laboratory analyzers have shown that the L-D-X System meets NCEP guidelines for
precision and accuracy. In addition, the ease of use and precision and accuracy
of the L-D-X System were factors necessary for the L-D-X System to receive
waived status under CLIA. The Company believes that it is the only manufacturer
with a CLIA waived multi-analyte diagnostic system.
The Company believes the L-D-X System provides the following benefits and
advantages:
- FLEXIBILITY OF L-D-X SYSTEM. The design of the L-D-X System incorporates
as much of the system's technology as possible into the test cassettes and
maintains the L-D-X Analyzer as a flexible measuring device that can be
adapted as new tests and other product upgrades are
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introduced. As new tests are marketed, encoding on the cassette's magnetic
stripe communicates the product change to the L-D-X Analyzer and provides
the L-D-X Analyzer the information needed to measure and display the test
results. Changes that cannot be captured on the cassette's magnetic stripe
can be accomplished by software changes in the L-D-X Analyzer's removable
read only memory ("ROM") pack. This flexible design is intended to permit
the installed base of users to incorporate new tests and other product
upgrades to the L-D-X System without having to purchase a new analyzer.
- COST EFFECTIVENESS. The Company believes that point of care specimen
analysis made possible by the L-D-X System may provide savings to third
party payors and physicians. Point of care testing allows the health care
practitioner to provide immediate results to the patient, thereby
increasing the possibility for improved patient outcomes and eliminating
the requirement that the patient return to receive test results. In
addition, the Company believes that the L-D-X System's waived status under
CLIA, together with prevailing third party reimbursement rates and
recommended fees, may provide a financial incentive for many health care
providers to test patients at the point of care and capture revenue rather
than forwarding it to the clinical laboratory.
- IMMEDIATE RESULTS. The L-D-X System provides the health care practitioner
with results in approximately five minutes, allowing for immediate point
of care risk factor analysis, diagnosis and monitoring. The immediacy of
the test results allows the practitioner to begin treatment during the
same visit, perform additional tests if needed or select an alternative
treatment. The L-D-X System's ability to provide immediate test results
also improves the usefulness of screening applications, such as worksite
testing programs.
- SIMULTANEOUS PERFORMANCE OF MULTIPLE TESTS. With the L-D-X System, a
single cassette can perform up to four tests simultaneously, enabling the
Company to develop test cassettes that meet specific market needs. In the
monitoring market, the performance of multiple tests with a single
cassette may also result in more reimbursement revenue for the physician.
- EASE OF USE. The L-D-X System requires no special medical or chemistry
training to operate and obtain test results. In addition, the L-D-X System
eliminates the need to pre-treat the testing sample.
- FEWER OPPORTUNITIES FOR ERROR. The L-D-X System eliminates many of the
steps traditionally involved in blood testing, including sample
transportation, preparation and storage, and interpretation of analyte
color reactions, thereby reducing opportunities for human error and
preserving the integrity of the sample.
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 and incorporates a
microprocessor with on board software. The L-D-X Analyzer contains an entry
drawer for insertion of the cassette, three buttons for user activation and a
liquid crystal display to present the test measurements. The L-D-X Analyzer can
also transmit results to a printer or laboratory management computer system for
data handling and record keeping. The L-D-X Analyzer includes cardiac risk
assessment software that allows the health care practitioner to perform cardiac
risk assessment using TC and HDL test results and information about other
cardiac risk factors the health care practitioner enters into the L-D-X
Analyzer.
To run a test, the health care provider presses the "run" button on the
L-D-X Analyzer to open the cassette drawer, applies the sample of whole blood
directly to the test cassette's sample well, inserts the cassette onto the
drawer and presses the run button again. All further steps are done by the L-D-X
Analyzer. Utilizing the information and instructions encoded on the cassette's
magnetic stripe, the L-D-X Analyzer's on board microprocessor controls the
reaction conditions, controls the optical measurements of analyte concentrations
on the cassette's reaction pads, executes the required calculations and, within
approximately five minutes, displays the quantitative results on the liquid
crystal display.
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The ROM software that instructs and controls the operation of the L-D-X
Analyzer's on board microprocessor is contained in a removable ROM pack mounted
in an access well on the bottom of the L-D-X Analyzer. The Company intends to
upgrade the software in its ROM pack as the Company develops new products. A
user can then easily remove the ROM pack and replace it with a new ROM pack
containing upgraded software. To date, the Company has made available to
existing users a new ROM pack, without charge, containing the cardiac risk
assessment software described above, as well as a new ROM pack, for a fee,
reflecting certain changes required to receive the CLIA waiver.
DISPOSABLE TEST CASSETTES
The focal point of the L-D-X System is the line of disposable test cassettes
which incorporate patented technology, including a method for distributing
precisely measured plasma to multiple reaction pads for simultaneous testing
along with the technology to instruct the L-D-X Analyzer how to perform the
tests and all related calculations.
Each cassette consists of 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 stripe encoded with test instructions
and lot specific calibration information for the various chemistries on the
reaction pads. Capillary action draws a drop of whole blood through a separation
medium within a 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 on the reaction pads reacts
with the analyte(s) in the plasma producing color. The intensity of color
developed is proportional to the concentration of the analyte(s) in the plasma.
The magnetic stripe contains information needed by the L-D-X Analyzer to convert
the reflected color reading into a concentration level for the accurate
measurement of analytes being tested. This feature frees the user from having to
interpret any color reaction, relate a reading to a separate chart or input any
calibration information.
For certain future tests, the Company will be required to modify the design
of the existing dry chemistry cassette. For example, the Company's immunoassay
tests currently under development require the use of antibodies bound to the
reaction membrane and a wash step which removes bound reactants that would
interfere with the test. The new immunoassay cassette under development has the
same external dimensions as the currently available dry chemistry cassette, but
will require the Company to develop new technologies that would allow it to
perform an immunoassay test, of which there can be no assurance. The Company
believes that, if the immunoassay cassette is successfully developed, the L-D-X
Analyzer will be the only instrument capable of performing both dry chemistry
and immunoassay-based tests on a single instrument. See "-- Products -- Products
Under Development."
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PRODUCTS
The Company's current products include the L-D-X Analyzer and a series of
lipid and glucose test cassettes for the screening and monitoring markets. In
addition, the Company is in the process of developing new tests to expand its
product menu, including immunoassay-based test cassettes to provide preventive
monitoring assays for the detection of metabolic bone diseases and disorders and
prostate cancer. The following table summarizes the Company's current cassette
products and products under development:
<TABLE>
<CAPTION>
L-D-X TEST APPLICATION TEST TYPE STATUS (1)
- ----------------------- ----------------------- ------------ -----------------------
CURRENT PRODUCTS
<S> <C> <C> <C>
TC Cardiac Risk Dry Marketed; FDA cleared;
Chemistry CLIA waived
TC and HDL Cardiac Risk Dry Marketed; FDA cleared;
Chemistry CLIA waived
Lipid Profile (TC/HDL/ Cardiac Risk Dry Marketed; FDA cleared;
Triglycerides) Chemistry CLIA waived
TC and Glucose Cardiac & Diabetes Risk Dry Marketed; FDA cleared;
Chemistry CLIA waived
TC/HDL/Glucose Cardiac & Diabetes Risk Dry Marketed; FDA cleared;
Chemistry CLIA waived
Lipid Profile plus Cardiac & Diabetes Risk Dry Marketed; FDA cleared;
Glucose Chemistry CLIA waived
PRODUCTS UNDER
DEVELOPMENT
Bone Markers Osteoporosis Immunoassay Prototype Stage
Uric Acid Renal Function Dry Feasibility Studies
Chemistry
Blood Urea Nitrogen Renal Function Dry Feasibility Studies
Chemistry
Creatinine Renal Function Dry Feasibility Studies
Chemistry
Prostate Specific Prostate Disease Immunoassay Feasibility Studies
Antigen
Glycated Hemoglobin Diabetes Specific Feasibility Studies
Binding
</TABLE>
--------------------------
(1) "Marketed" means that commercial sales of the product have commenced. "FDA
cleared" means that the product has received 510(k) clearance from the
FDA. "CLIA waived" means that the product has been classified as waived
under CLIA by the CDC. "Feasibility studies" means that a theoretical
design for the product has been developed and the test chemistry is being
evaluated in the laboratory. "Prototype stage" means cassette shelf-life
is being evaluated, pilot manufacturing equipment is being developed, and
the new test is being evaluated in-house against samples designed to mimic
the range of real patient samples.
CURRENT PRODUCTS
The Company's current products are designed to measure and monitor blood
cholesterol and related lipids and glucose. Lipids travel in the blood within
water-soluble particles called lipoproteins. These lipid carriers include VLDL
(very-low-density lipoproteins), LDL (low-density lipoproteins) and HDL (high
density lipoproteins). VLDL, a major carrier of triglycerides in the blood, and
LDL, the major carrier of cholesterol, have been shown to be associated with
deposits on the arterial wall, which are sometimes referred to as
atherosclerotic plaque. The accumulation of this plaque leads to a narrowing of
the arteries and increases the likelihood of coronary heart disease, the leading
cause of death in the United States. HDL particles, which circulate in the blood
and can pick up cholesterol from arteries and carry it to the liver for
elimination from the body, counterbalance this mechanism. HDL is sometimes
called "good cholesterol" because of this function. The development of coronary
heart disease has been associated with three lipoprotein abnormalities: (i) high
levels of LDL; (ii) high levels of VLDL; and (iii) low levels of HDL.
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Recognizing the relationship between diabetes and dyslipidemia (abnormal
lipid levels), Cholestech developed a glucose test for the L-D-X System.
Diabetes is a complex disorder of carbohydrate, fat and protein metabolism. It
is manifested by a relative or absolute deficiency in insulin, the hormone that
facilitates and controls the use of glucose by the body. Because of the
deficiency of insulin, diabetic patients have an impaired tolerance to glucose,
which leads to a number of short term and long term complications, such as nerve
damage, kidney disease and retinal damage.
The Company's L-D-X System includes the L-D-X Analyzer which measures
analyte concentrations on the test cassette and displays the quantitative
results. The L-D-X Analyzer currently has a list price of $1,795. A description
of the Company's test cassettes is provided below.
TC. A stand alone test for measuring total cholesterol. The TC test
currently has a list price of $2.95.
TC AND HDL PANEL. The total cholesterol and HDL cholesterol panel provides
results for TC and HDL and calculates the ratio of TC to HDL, a recognized
measure of lipid-induced cardiac risk. The Company believes that the TC and HDL
Panel is the only currently available point of care test which, using only a
single drop of whole blood from a simple fingerstick, addresses the NIH
guidelines regarding the evaluation of coronary heart disease through the
testing of not only TC, but also the important HDL component. As a result, the
Company believes the TC and HDL Panel is particularly useful in corporate
wellness and initial screening applications. The TC and HDL Panel currently has
a list price of $7.50.
LIPID PROFILE. The Company offers a Lipid Profile which directly measures
TC, HDL and triglycerides. In addition to providing direct results for TC, HDL
and triglycerides, the Lipid Profile calculates estimated values for LDL and
VLDL and calculates the ratio of TC to HDL. The Lipid Profile thus performs,
using a small sample of whole blood from a simple fingerstick, each test
identified by the NIH guidelines as important in the diagnosis and ongoing
monitoring of individuals who have high TC levels or who exhibit two or more
other coronary heart disease risk factors. The Lipid Profile also allows the
health care practitioner to follow the NIH guidelines to perform three lipid
profiles, each one week apart, prior to initiating drug or dietary therapy. The
Lipid Profile currently has a list price of $9.95.
TC AND GLUCOSE PANEL, TC/HDL/GLUCOSE PANEL AND LIPID PROFILE PLUS
GLUCOSE. These panels address the need for screening and monitoring patients
with demonstrated or incipient diabetes mellitus and individuals who may be at
risk of cardiovascular disease and individuals who may not be aware that they
are diabetic. These test combinations are potentially desirable because glucose
and TC tests are frequently conducted at occupational health sites. The TC and
Glucose Panel, the TC/HDL/Glucose Panel and the Lipid Profile plus Glucose have
a list price of $3.95, $8.50 and $10.95, respectively.
MARKETS. In response to conclusive evidence relating high TC to heart
disease, the NIH in 1985 launched the NCEP, a nationwide effort to reduce the
prevalence of high blood cholesterol. In 1988, the NCEP issued guidelines for
the testing of all adults over 20 years of age for high blood cholesterol, and
more extensive lipid monitoring and treatment for those found to be in high risk
categories. Testing guidelines were subsequently expanded to include children
over the age of two with a family history of high blood cholesterol or coronary
heart disease and to include in certain circumstances a lipid profile,
consisting of TC, HDL, LDL and triglycerides. Since the NCEP initiated its
recommendations, the market for cholesterol and other lipid tests has
experienced significant growth. NCEP data indicate that more than 50% of the
adult population in the United States has high or borderline high TC.
It is estimated that Type II diabetes, which involves insulin deficiency or
insulin resistance, afflicts more than 14 million persons in the United States,
but only half of those with Type II diabetes have been identified. Screening for
these patients who have non-symptomatic diabetes is important, because proper
treatment will minimize the long term complications of the disease.
PRODUCTS UNDER DEVELOPMENT
The Company's strategy is to use the technological flexibility of the L-D-X
System to develop new cassettes that address disease states and testing markets
the Company believes provide attractive
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commercial opportunities. The Company is in the early stages of developing new
cassettes that would expand its product line in the screening market and would
better position its product line for the POL market. To date, the Company has
been engaged primarily in conducting research and development to determine the
feasibility of performing these new tests on the L-D-X System. The Company will
initially focus its available resources on the development of uric acid, blood
urea nitrogen, creatinine and liver enzyme tests, as well as the
immunoassay-based test to detect and monitor metabolic bone diseases and
disorders being developed in conjunction with Metra Biosystems. The Company will
undertake the development of additional tests depending on the progress of its
existing development efforts and its available resources. To complete its
product development programs, particularly with respect to the immunoassays, the
Company may be required to develop new core technologies, processes and
production equipment. In addition, the Company may also be required to retain
additional scientific, engineering and manufacturing staff. There can be no
assurance that the Company will be successful in developing any of the tests
described below, or even if successfully developed, that such tests will receive
regulatory clearance, be capable of being cost effectively manufactured in
sufficient quantities, on a timely basis and in compliance with regulatory
guidelines, or be successfully marketed. The Company intends to design and
develop most of these products so as to be eligible for FDA 510(k) clearance and
waivers under CLIA, although there can be no assurance that the Company's
products under development will obtain such clearances or waivers. See "Risk
Factors."
Products currently being developed by the Company are described below.
METABOLIC BONE DISEASES AND DISORDERS. Osteoporosis is the most widespread
form of bone disease characterized by a general loss of bone density. This loss
of bone density can lead to a weakening of the bone, thereby making the bone
more prone to fractures. Biological markers of bone metabolism are secreted in
urine, and it has been shown that the level of secretion correlates to the
amount of bone loss. The measured levels of these markers has also been shown to
be responsive to osteoporosis therapies such as hormone replacement. According
to the National Osteoporosis Foundation, this disease afflicts over 25 million
Americans and over 200 million people worldwide. In the United States,
approximately 1.5 million osteoporosis related fractures occur each year. For
Caucasian women, it is estimated that the risk of hip fractures approximates the
combined risks of breast, endometrial and ovarian cancers. The World Health
Organization estimates that the cost of osteoporosis related fractures in the
United States exceeds $7 billion annually.
The Company has entered into an agreement with Metra Biosystems to develop
and market Metra Biosystems' Pyrilinks-D and other related bone marker
technologies on the L-D-X System. The Company has successfully demonstrated the
feasibility of meeting the initial specifications for the Company's technology
for this urine-based immunoassay test on the L-D-X System and is in the
prototype stage of development. See "-- Strategic Relationships."
RENAL FUNCTION TESTS. The Company is developing a menu expansion of tests
to include tests for uric acid, blood urea nitrogen and creatinine for the POL.
The Company believes that these tests are among the most commonly ordered tests
in physician offices. Uric acid elevations occur in renal diseases as well as
gout, and low uric acid levels are sometimes associated with diabetes and severe
liver disease. Blood urea nitrogen elevations occur in chronic renal disease as
well as urinary tract obstruction. Blood urea nitrogen is useful to monitor
hemodialysis and other therapies. Creatinine is also a measure of renal function
and is used in combination with uric acid and blood urea nitrogen tests. In
addition, creatinine is used as a measure of renal blood flow which may have
become reduced due to congestive heart failure or dehydration. Low levels of
creatinine may result from decreased hepatic production in advanced liver
disease. The Company is currently conducting feasibility studies for each of
these tests.
PROSTATE SPECIFIC ANTIGEN (PSA). The American Cancer Society estimates that
in 1996, 317,000 Americans will be diagnosed with prostate cancer and predicts
that deaths from prostate cancer in the United States will reach over 41,000
making it the second leading cause of cancer related deaths. The American Cancer
Society recommends that men 50 and older receive a PSA blood test annually. By
making early detection possible, treatment can begin when there is a higher
likelihood of success,
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leading to better survival rates from the disease. The Company has demonstrated
the feasibility of measuring PSA from a single drop of whole blood using the
Company's technology. The Company expects that the PSA test may require PMA
approval from the FDA. See "-- Government Regulation."
GLYCATED HEMOGLOBIN. Glycated hemoglobin measurement is used by physicians
to assess a diabetic's long term compliance with prescribed diet and insulin
usage. This test measures the percent of the patient's hemoglobin which has
become coupled to glucose. A relatively high percentage of hemoglobin to glucose
indicates poor patient compliance, which can lead to severe health problems. The
American Diabetes Association ("ADA") recommends at least semi-annual
measurement for all diabetic patients. It is estimated that there are seven to
eight million diagnosed diabetics in the United States.
The Company has been notified by the U.S. Department of Health and Human
Services that it will receive a "Small Business Innovative Research" grant of
$100,000 to further develop this test on the L-D-X System. The Company is
currently evaluating the feasibility of a test to detect glycated hemoglobin on
the L-D-X System.
OTHER PRODUCTS UNDER DEVELOPMENT. The Company currently sells two cassettes
which can calculate LDL cholesterol levels from the combined readings of TC, HDL
and triglycerides. LDL cholesterol is the fraction of TC which leads to heart
disease and is referred to as "bad" cholesterol. There is now available a direct
version of the LDL test, and the Company is considering adapting this form of
the test to the L-D-X System. The advantage of this direct test over the
calculated version of the test is that it does not require the patient to fast
before testing. However, since lipid management requires the physician to assess
a patient treatment on both "good" and "bad" cholesterol, the disadvantage of
the stand alone direct LDL test is the lack of the patient's HDL values. The
Company believes that the L-D-X System may overcome this problem with its
ability to run multiple tests simultaneously on the system.
The Company is currently evaluating the feasibility of a test to detect the
levels of liver enzymes in whole blood. Liver enzymes are measures of hepatic
damage which may be caused by a number of diseases and/or chemical toxicities.
The ability to monitor the levels of liver enzymes is important because a large
number of drugs, including cholesterol lowering drugs, can cause liver damage.
The Company believes that a liver enzyme test would complement its lipid
diagnostic products.
Lp(a) is a lipoprotein which is a component of LDL. It has been established
in the scientific literature that Lp(a) is a risk factor for atherosclerosis,
and it is believed that Lp(a) may be the component of LDL which is responsible
for the risk associated with LDL. The Company believes that a test for Lp(a) may
emerge as the dominate test for cardiac risk in the future. The Company has
licensed the rights to a new technology to measure Lp(a). This technology is
currently being evaluated by the Company and a number of collaborators.
There can be no assurance that the Company will be able to complete
successful development of any of these future products. Furthermore, there can
be no assurance that even if these products and/or any other future products are
successfully developed, the Company will be able to successfully receive FDA
clearance or approval or CLIA waivers on a timely basis, manufacture such
products on a cost effective basis and in compliance with applicable regulatory
standards, or successfully market these products. See "Risk Factors --
Dependence on Development and Introduction of New Products."
SALES AND MARKETING
To date, the Company has focused its sales and marketing efforts on
hospitals, managed care organizations, large physician group practices,
corporate wellness programs, community health centers, health promotion service
providers and other independent screeners in the screening market. With the
recent CLIA waiver of its existing product line, the Company believes that it
has a significant opportunity
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to access the monitoring market. The Company utilizes a combination of a direct
sales force and regional distributors to sell into the screening market and is
developing a national distribution network to access the monitoring market.
The Company provides continuing customer support, including an automated
order entry system, and technical support whenever needed to promote customer
satisfaction. A U.S. toll-free number gives the customer immediate access to
Cholestech's in-house customer service and technical support group. Customer
service representatives also assist customers to order cassettes and
accessories. The Company maintains an in-house instrument service capability
that provides repairs to instruments either under warranty or on a parts and
labor basis.
SCREENING MARKET
The Company's distribution strategy for the screening market is to sell both
directly to high volume customers and to selected regional distributors. The
Company believes that its products provide a cost effective, easy to use
alternative for preventive health care programs that are focused on identifying
high risk individuals with possible cardiovascular disease and diabetes and
enrolling them into appropriate disease intervention programs to reduce their
overall health risk.
The Company sells directly through a field sales group which includes nine
regional sales managers. In addition, the Company has established a
telemarketing effort to support large volume customers and utilizes direct mail
campaigns to increase demand for its products. The Company also has entered into
agreements with nine regional distributors that augment the Company's direct
sales efforts.
The Company's international distribution strategy for the screening market
is designed to opportunistically penetrate targeted geographical markets by
selling directly to individual distributors in those areas. The Company has
entered into agreements with several foreign distributors to distribute the
L-D-X System primarily in Europe and Latin America and is negotiating similar
agreements with other distributors in South and Central America.
MONITORING MARKET
The Company's sales and marketing efforts in the monitoring market will
initially be focused on the POL and pharmacy segments. To efficiently access the
54,000 POLs, the Company is negotiating with several national and regional
distributors. As of April 1, 1996, the Company entered into a national, non-
exclusive distribution agreement with PSS, a national medical products
distributor with more than 700 sales professionals who focus on the POL market.
The pharmacy market consists of 68,000 pharmacies which may provide point of
care testing. The Company believes that marketing success in the pharmacy market
will be dependent upon the development of patient monitoring programs
implemented in conjunction with managed care providers and physicians on a local
basis. In January 1996, the American Pharmaceutical Association announced
Project IMPACT (IMprove Persistence And Compliance to Therapy). Project IMPACT
is being funded by Merck, and its goal is to demonstrate the ability of
pharmacists to enhance patient outcomes with drug therapy and behavior
modification. The pilot program enlarges the pharmacist's role to one in which
the pharmacist monitors therapeutic effectiveness of medications and provides
counseling services to the patient. Utilizing pharmacists to provide such
services may result in both direct and indirect cost savings to the patient and
the patient's insurer. The Company is participating in Project IMPACT through
the use of its L-D-X System to monitor patients in this pharmacy-based
cholesterol management project. The Company intends to utilize the program to
evaluate the potential market for the L-D-X System among pharmacists. Project
IMPACT will monitor approximately 900 patients at 32 community-based pharmacies
across the country for a period of two years.
There can be no assurance that the Company will be able to penetrate the
monitoring market, including the POL or pharmacy segments, or that physicians
will use the L-D-X System instead of clinical laboratory services for the same
tests. See "Risk Factors -- Uncertainty of Market Acceptance of the L-D-X
System."
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STRATEGIC RELATIONSHIPS
The Company's strategy includes establishing strategic relationships to
develop new products, expand its customer base, and provide the Company with
technological, clinical, marketing, financial and other key resources.
In May 1996, the Company entered into a development, marketing and licensing
agreement with Metra Biosystems to develop an immunoassay test cassette
incorporating Metra Biosystems' bone resorption technology to be used with the
L-D-X System. Pursuant to the agreement, Metra Biosystems purchased 39,526
shares of the Company's Common Stock for an aggregate purchase price of $250,000
($6.325 per share) and is obligated to purchase $750,000 of additional shares of
Common Stock upon the completion of specified milestones by the Company. The
Company has granted Metra Biosystems registration rights in connection with
Metra Biosystems' purchase of the Company's Common Stock. See "Description of
Capital Stock -- Registration Rights."
In connection with the development of the immunoassay test cassette, Metra
Biosystems granted Cholestech a non-exclusive, royalty-bearing license to use,
make, sell, offer to sell, import or distribute the resulting cassette to assess
bone resorption, a gauge of the effectiveness of treatments of certain metabolic
diseases and disorders and certain future products worldwide (the "Metra
License"). The Company is obligated to pay royalties to Metra Biosystems on the
bone resorption product and on products that stem from work done in the course
of the collaboration but do not incorporate any of Metra Biosystems' proprietary
technology. The parties will negotiate royalties on future Metra Biosystems
products as appropriate. Under the agreement, the Company will market the
immunoassay test through its existing distribution channels in the United
States. The Company and Metra Biosystems will work together to market and
distribute the tests internationally.
There can be no assurance that the Company will be successful in developing
a bone resorption test or any other product under this agreement, that this
agreement will not expire prior to its term, or that even if any products are
developed that they will be successfully marketed. The Company expects to enter
into additional strategic agreements in the future to develop, commercialize and
sell its current and future products. There can be no assurance that the Company
will be able to negotiate acceptable agreements in the future, or that such
relationships will be successful. In addition, there can be no assurance that
the Company's strategic partners will not pursue alternative competing
technologies or products.
MANUFACTURING
The Company manufactures, tests, performs quality assurance, packages and
ships products at its 30,000 square foot facility located in Hayward,
California. The Company maintains control of those portions of the manufacturing
process that it believes are complex and provide important barriers to entry by
competitors. The production processes employed by the Company to manufacture
cassettes differ significantly from those employed in the manufacture of the
analyzer.
MANUFACTURE OF CASSETTES
The Company purchases chemicals, membranes and other raw materials from
third party suppliers and converts these raw materials, using proprietary
processes, into cassettes. The Company believes its proprietary processes and
custom-designed equipment are important components of its cassette manufacturing
operations. The Company has developed core manufacturing technologies, processes
and production machinery, including (i) membrane lamination and welding; (ii)
discrete membrane impregnation; (iii) on-line calibration; and (iv) software
control of the manufacturing process. The Company is currently in the process of
completing validation of the second cassette manufacturing line and expects the
line to be fully operational in mid-1996. In the event that cassette sales
volume significantly increases, the Company would be required to construct a
third cassette manufacturing line. There can be no assurance that such expansion
of cassette manufacturing capacity can be completed in a timely fashion, if
ever, and the failure to increase cassette manufacturing capacity on a cost
effective and timely basis would have a material adverse effect on the Company's
business, financial condition and results of operations.
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Manufacturing of the cassettes is highly complex and sensitive to a wide
variety of factors, including variations and impurities in the raw materials,
performance of the manufacturing equipment and the level of contaminants in the
manufacturing environment. Incoming inspection of raw materials, in-process
controls, improved manufacturing equipment performance, and better operator
proficiency and training all contribute to improvements in yield. Continuous
improvement of process factors are key determinants of manufacturing output and
efficiency, product quality and reliability and overall profitability. Although
the Company believes that it has acceptable cassette yields and should be able
to maintain the current cassette yield in the future, there can be no assurance
that such improvement will be maintained or that the Company will not suffer
future periodic cassette yield problems in connection with new or existing
products. Failure to maintain the improvements in process yield or failure to
obtain acceptable yields on future products could have a material adverse effect
on the Company's business. See "Risk Factors -- Risks Associated with Cassette
Manufacturing."
MANUFACTURE OF L-D-X ANALYZER
The analyzer employs a variety of subassemblies and components designed or
specified by the Company, 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 the Company for final assembly. The Company's manufacture of the
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. The Company believes it can
expand its current analyzer manufacturing capacity at minimal cost.
RAW MATERIALS; QUALITY ASSURANCE
Outside vendors provide Cholestech with subassemblies, components and raw
materials. These materials are purchased, inspected and tested by the Company's
quality control personnel. The Company's quality control personnel also perform
finished goods quality control and inspection and maintain documentation for
compliance with cGMP and other government manufacturing regulations.
Cholestech's manufacturing facilities are subject to periodic inspection by
regulatory authorities. See "-- Government Regulation." Certain key components
and raw materials used in the manufacturing of the Company's products are
currently provided by single-source vendors pursuant to the Company's periodic
purchase orders. The Company believes that it maintains an adequate level of
such components and raw materials in inventory and believes that alternative
sources for such components and raw materials are available. However, any supply
interruption in a sole-sourced component or raw material would have a material
adverse effect on the Company's business once the inventory is depleted and
until a new source of supply were qualified. In addition, an uncorrected
impurity or supplier's variation in a raw material, either unknown to the
Company or incompatible with the Company's manufacturing process, could have a
material adverse effect on the Company's business. Because the Company is a
small customer of many of its suppliers, there can be no assurance that its
suppliers will devote adequate resources to supplying the Company's needs. See
"Risk Factors -- Dependence on Suppliers."
COMPETITION
The testing market in which the Company competes is intensely competitive.
The Company's competition consists mainly of independent clinical laboratories
and hospital-based laboratories, as well as with manufacturers of bench top and
other point of care analyzers. The substantial majority of diagnostic tests used
by physicians and other health care providers are currently performed by
clinical laboratories and hospital-based laboratories. The Company expects that
these laboratories will compete intensely to maintain their dominance in the
monitoring market. In order to achieve broad market acceptance for the L-D-X
System, the Company will be required to demonstrate that the L-D-X System is an
attractive alternative to the independent clinical laboratory and hospital-based
laboratory. This will
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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 the testing services provided by these laboratories. See "Risk
Factors -- Uncertainty of Market Acceptance of L-D-X System."
In addition, companies having a significant presence in the diagnostic
market, such as Abbott Laboratories, Clinical Diagnostic Systems, a division of
Johnson and Johnson which was formerly a division of Eastman Kodak Company, and
Boehringer Mannheim, have developed or are developing analyzers targeted for
point of care. These competitors have substantially greater financial,
technical, research and other resources and larger, more established marketing,
sales, distribution and service organizations than the Company. In addition,
such competitors offer broader product lines than the Company, have greater name
recognition than the Company, and offer discounts as a competitive tactic. The
Company believes that it currently has a competitive advantage with the
classification of its existing products as waived under CLIA. The Company
expects that the reclassification of the L-D-X System as waived under CLIA will
result in competitors seeking to develop products that qualify for waived
classification. There can be no assurance that the Company's 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 the Company's current or future products, or that would render
the Company's technology or products obsolete or noncompetitive.
The Company's products must compete effectively overall with the existing
and future products of its competitors primarily on the basis of the ability to
perform tests at point of care, ease of use, testing of multiple analytes from a
single sample, ability to conduct tests without a skilled technician or a blood
pretreatment step, the breadth of tests available, market presence, cost
effectiveness, precision, accuracy or immediacy of results. There can be no
assurance that the Company will have the financial resources, technical
expertise or marketing, distribution or support capabilities to compete
successfully in the future. See "Business -- Products -- Products Under
Development -- Technology and -- Competition."
PATENTS AND PROPRIETARY TECHNOLOGY
The Company pursues an active patenting policy to protect inventions and
technology which are important to its business. The Company owns eight United
States patents covering various aspects of the technology incorporated in its
products, 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. The Company has also filed patent
applications relating to its core inventions and technology internationally
under the Patent Cooperation Treaty and individual foreign applications. The
Company is also the licensee of one United States patent relating to the
measurement of Lp(a) and a number of third party patents relating to its
cassette technology.
The medical products industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and any potential
litigation can result in substantial loss or diversion of revenues of the
Company and could have a material adverse effect on the Company. There can be no
assurance that pending patent applications filed by the Company will be approved
or that the issued or pending patents will not be challenged or circumvented by
competitors. Notwithstanding the Company's active pursuit of patent protection,
the Company believes that its future success will depend primarily upon the
technical expertise, creative skills and management abilities of its officers,
directors and key employees rather than on patent ownership.
There can be no assurance that infringement claims will not be asserted by
other parties in the future, that in such event the Company will prevail or that
it will be able to obtain licenses on reasonable terms. Adverse determinations
in any litigation could subject the Company to significant liabilities and/ or
require the Company to seek licenses from third parties. If the Company is
unable to obtain necessary
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licenses or is unable to develop or implement alternative technology, the
Company may be unable to manufacture and sell the affected products. Any of
these outcomes could have a material adverse effect on the Company's business.
The Company relies substantially on trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position. The
Company works actively to foster continuing technological innovation to maintain
and protect its competitive position, and the Company has taken security
measures to protect its trade secrets and periodically explores ways to further
enhance trade secret security. There can be no assurance that such measures will
provide adequate protection for the Company's trade secrets or other proprietary
information. Although the Company has entered into proprietary information
agreements with its employees, consultants and advisors, there can be no
assurance that these agreements will have adequate remedies for any breach.
There can be no assurance that the Company's competitors will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's trade secrets or disclose such
technology, or that the Company can meaningfully protect its right to its trade
secrets.
GOVERNMENT REGULATION
FDA AND OTHER REGULATIONS
The manufacture and sale of the Company's products are subject to regulation
by numerous governmental authorities, principally the FDA and corresponding
state and foreign regulatory agencies. Pursuant to 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 premarket clearance or premarket approval for devices,
withdrawal of marketing approvals, a recommendation by the FDA that the Company
not be permitted to enter into government contracts 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 the Company.
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, premarket notification
and adherence to cGMPs). Class II devices are subject to general controls and to
special controls (e.g. performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those that
must receive premarket approval by the FDA to assure their safety and
effectiveness (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 and FDA approval prior to marketing and distribution.
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 an approval of a PMA application under Section
515 of the FDC Act. 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 PMAs. 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 a 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. The L-D-X Analyzer and all existing test
cassettes required that the Company obtain 510(k) clearance prior to marketing
in the United States.
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In general, the Company intends to develop and market tests that will
require no more than 510(k) clearance. However, if the Company cannot establish
that a proposed test cassette is substantially equivalent to a legally marketed
device, the Company must seek pre-market approval of the proposed test cassette
from the FDA through the submission of a PMA application. Certain products under
development, including the PSA test, may require submission of a PMA
application. A PMA application generally must be supported by extensive data
including, laboratory, preclinical and clinical data to demonstrate safety and
efficacy, as well as a complete description of the device and its components,
and a detailed description of the methods, facilities and controls used to
manufacture the device. In addition, the submission must include the proposed
labeling, advertising literature and training methods (if required). Upon
receipt of a PMA application, the FDA makes a threshold determination as to
whether the application is sufficiently complete to permit a substantive review.
If the FDA determines that the PMA application is sufficiently complete to
permit a substantive review, the FDA will accept the application for filing. The
PMA approval process can be lengthy, expensive and uncertain. An FDA review of a
PMA application generally takes one to three years from the date the PMA
application is accepted for filing, but may take significantly longer.
Any products manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to pervasive and continuing regulation by 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 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 the Company's quality control and manufacturing
procedures by requiring the Company and its contract manufacturers to
demonstrate compliance with cGMP. The FDA monitors compliance with these
requirements by requiring manufacturers to register with the FDA, which subjects
them to periodic inspections. While the Company's manufacturing processes,
facilities and practices have not been inspected by the FDA, the Company
believes that its manufacturing practices are in compliance with cGMP. The State
of California also regulates and inspects Cholestech's manufacturing facilities.
The Company has been inspected twice by the State of California to date and is
manufacturing under an issued medical device manufacturers facility license from
the State of California. If violations of the applicable regulations are noted
during an FDA or State of California inspection of the Company's manufacturing
facilities or the manufacturing facilities of its contract manufacturers, the
continued marketing of the Company's product could be adversely affected.
The Company and its products are also subject to a variety of state and
local laws and regulations in those states or localities where its products are
or will be marketed. Any applicable state or local laws or regulations may
hinder the Company's ability to market its products in those states or
localities.
The Company is 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 the Company
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 upon the Company.
Changes in existing requirements or adoption of new requirements or policies
could increase the cost of or otherwise adversely affect the ability of the
Company to comply with regulatory requirements. Failure to comply with
regulatory requirements could have a material adverse effect on the Company.
CLIA REGULATIONS
The use of the Company's 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 either must obtain a registration
certificate from HCFA, 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 and generally took
effect in September 1992 with a two-year phase-in of
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certain requirements. 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.
Prior to January 1996, the L-D-X System, including all current cassettes,
was categorized under CLIA as moderately complex. In January 1996, the L-D-X
System and the TC, HDL, Triglycerides and Glucose tests in any combination were
reclassified as waived under CLIA. Under the waived classification, users are
only required to obtain a certificate of waiver from HCFA and pay a $100 fee.
This certificate must be renewed every two years. Current L-D-X System users,
including managed care organizations, hospitals, self-insured businesses and
health promotion organizations, will now be able to use the L-D-X System at a
lower cost. The Company provides United States purchasers of its products with
the documentation, systems and support necessary for the purchaser to comply
with CLIA. In order to successfully commercialize the tests that are currently
under development, the Company believes that it will be critical to obtain
waived classification for such tests under CLIA. There can be no assurance that
any new tests developed by the Company will qualify for the waived
classification. Any failure of the new tests to obtain waived status under CLIA
will adversely impact the Company's ability to commercialize such tests, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, there can be no assurance that
any future amendment of CLIA or the promulgation of additional regulations
impacting laboratory testing will not have an adverse effect on the Company's
ability to market the L-D-X System. If CLIA regulations were modified in a
manner that reduced regulatory requirements and burdens faced by competitive
products, any competitive advantage of the L-D-X System's waived status would be
reduced or eliminated.
THIRD PARTY REIMBURSEMENT
In the United States, health care providers, such as hospitals and
physicians, that purchase diagnostic products, including the Company's L-D-X
System, generally rely on third party payors, principally private health
insurance plans, federal Medicare and state Medicaid, to reimburse all or part
of the cost of the procedure in which the product is being used. The Company's
ability to commercialize its products successfully in the United States will
depend in part on the extent to which reimbursement for the cost of such
products and related treatment will be available from government health
administration authorities (such as HCFA, which determines Medicare
reimbursement levels), private health insurers and other organizations. Such
third party payors can affect the pricing or the relative attractiveness of the
Company's products by regulating the maximum amount of reimbursement provided by
such payors for testing services. Reimbursement is currently not available for
certain uses of the Company's products. For example, the cost of the L-D-X
Analyzer is generally not subject to reimbursement by government or other third
party payors. In addition, the tests performed by public health departments,
corporate wellness programs and other large volume users in the screening market
are generally not subject to reimbursement. In addition, certain health care
providers are moving towards 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 screening of blood disease
levels. The Company is unable to predict what changes will be made in the
reimbursement methods utilized by third party payors. The Company could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors, particularly to the extent any such changes affect
reimbursement for procedures in which the Company's products are used. Third
party payors are increasingly scrutinizing and challenging the prices charged
for medical products and services. Decreases in reimbursement amounts for tests
performed using the Company's products may decrease amounts physicians and other
practitioners are able to charge patients, which in turn may adversely affect
the Company's ability to sell its products on a profitable basis. Failure by
physicians and other users to obtain reimbursement from third party payors, or
changes in government and private third party payors' policies toward
reimbursement of tests
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employing the Company's products could have a material adverse effect on the
Company's business. 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, or that
adequate reimbursement will be available in the future for the Company's
existing products or products under development. See "Risk Factors --
Uncertainty Relating to Third Party Reimbursement."
Effective October 1, 1991, HCFA adopted new regulations providing for the
inclusion of capital-related costs in the prospective payment system, under
which providers are reimbursed on a
per-diagnosis basis at fixed rates unrelated to actual costs, based on DRGs.
Under this system of reimbursement, equipment costs generally will not be
reimbursed separately, but rather, will be included in a single, fixed-rate, per
patient reimbursement. These regulations are being phased in over a ten-year
period, and, although the full implications of these regulations cannot yet be
known, the Company believes that the new regulations will place more pressure on
hospitals' operating margins, causing them to limit capital expenditures. These
regulations could have an adverse effect on the Company if hospitals decide to
defer obtaining medical equipment as a result of any such limitation on their
capital expenditures. The Company is unable to predict what adverse impact on
the Company, 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.
In addition, market acceptance of the Company's products in international
markets is dependent, in part, upon 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.
The Company believes that the overall 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 the Company. There can be no
assurance as to either United States 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 the Company's products or its
ability to sell its products on a profitable basis.
PRODUCT LIABILITY AND INSURANCE
Sale of the Company's products entails risk of product liability claims. The
medical testing industry has historically been litigious, and the Company faces
financial exposure to product liability claims in the event that use of its
products result in personal injury. The Company also faces the possibility that
defects in the design or manufacture of its products might necessitate a product
recall. There can be no assurance that the Company will not experience losses
due to product liability claims or recalls in the future. The Company currently
maintains product liability insurance with coverage limits of $5.0 million per
occurrence and $5.0 million annually in the aggregate, and there can be no
assurance that the coverage limits of the Company's insurance policies will be
adequate. Such insurance is expensive, difficult to obtain and may not be
available in the future on acceptable terms, or at all. No assurance can be
given that product liability insurance can be maintained in the future at a
reasonable cost or in sufficient amounts to protect the Company against losses
due to liability. 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 the Company's products. In addition, a
product liability claim in excess of relevant insurance coverage or product
recall could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has liability insurance covering its property and operations
with coverage and deductible amounts and exclusions which the Company believes
are customary for companies of its size
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in its industry. The Company's personal property is insured for up to $4.0
million and it has comprehensive general liability coverage of up to $5.0
million. In addition, the Company has business interruption insurance of up to
$5.6 million. There can be no assurance that the Company's current insurance
coverage is adequate or that it will be able to maintain insurance at an
acceptable cost or otherwise to protect against liability.
EMPLOYEES
As of March 31, 1996, the Company employed 79 full-time employees. There
were 33 employees in sales, marketing and administration and 42 employees in
manufacturing and 4 employees devoted to research and development. The Company
seeks to attract and retain skilled and experienced employees with directly
relevant experience in the fields of interest, although there can be no
assurance that it will continue to do so in the future. The loss of key
personnel or the inability to hire or retain qualified personnel, in particular
a new executive officer of sales could have a material adverse effect on the
Company's business, financial condition and results of operations. None of the
employees is covered by a collective bargaining agreement, and management
considers relations with employees to be excellent.
FACILITIES
The Company leases a 30,000 square foot facility in Hayward, California. The
Company's facility contains approximately 5,000 square feet of laboratory space,
7,000 square feet of manufacturing space and approximately 18,000 square feet
devoted to marketing and administrative and common areas. The Company's lease on
the facility expires in the year 2000. The Company believes that this facility
is adequate to meet its requirements through the expiration of its lease.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company as of May 7, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Warren E. Pinckert II........................ 52 President, Chief Executive Officer and Director
Steven L. Barbato............................ 46 Vice President of Manufacturing
Gary E. Hewett............................... 44 Vice President of Diagnostic Development
Richard H. Janney............................ 37 Vice President of Finance and Chief Financial Officer
Harvey S. Sadow, Ph.D. (1)(2)................ 73 Chairman of the Board of Directors
Joseph Buchman, M.D. (1)..................... 66 Director
John L. Castello (2)......................... 60 Director
H.R. Shepard (1)............................. 75 Director
</TABLE>
- --------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
WARREN E. PINCKERT II joined the Company as Chief Financial Officer and Vice
President of Business Development in 1989 and became Secretary in February 1990.
Mr. Pinckert became Executive Vice President of Operations in May 1991 while
retaining his previous positions. In June 1993, Mr. Pinckert became President
and Chief Executive Officer and was appointed to the Board of Directors. Prior
to joining Cholestech, he was Chief Financial Officer for Sunrise Medical Inc.,
an international durable medical equipment manufacturer, from 1983 to 1989. Mr.
Pinckert also serves on the Board of Directors of PacifiCare Health Systems, a
managed care organization. Mr. Pinckert earned a B.S. in Accounting and an
M.B.A. from the University of Southern California and is a certified public
accountant.
STEVEN L. BARBATO joined the Company as Vice President of Manufacturing in
May 1992. From 1990 to January 1992, Mr. Barbato served as Vice President of
Operations of the Pandex Division of Baxter Diagnostics, Inc. ("Baxter
Diagnostics"), a biotechnical instrument and reagent development division and
served in other capacities at Baxter Diagnostics from January 1992 to May 1992.
From 1989 to 1990, Mr. Barbato served as Director of Manufacturing for the
Paramax Chemistry Division of Baxter Diagnostics, a division manufacturing
automated whole blood analyzers. From 1987 to 1989, Mr. Barbato was employed as
Manager of Manufacturing by the Pandex Division of Baxter Diagnostics. Mr.
Barbato earned a B.S. in Chemical Engineering from Northeastern University and
an M.B.A. from Xavier University.
GARY E. HEWETT, a co-founder of the Company, has served as Vice President of
Diagnostic Development since the Company's inception in 1988. From 1985 to 1988,
Mr. Hewett was employed by Genelabs, Inc., a biotechnology company, as Vice
President of Diagnostics. Prior to 1985, he was employed in a variety of
management and technical positions at the following companies: Cetus
Corporation, a biotechnology firm, from 1983 to 1985; Molecular Design, Inc., a
computer software company, from 1980 to 1983; Beckman Instruments, Inc., a
clinical instrument company, from 1978 to 1983; and Durrum Instrument (Dionics),
an analytical instrument firm, from 1975 to 1978. Mr. Hewett earned a B.A. in
Neurophysiology from the University of California, Berkeley.
RICHARD H. JANNEY joined the Company in September 1992 as Controller and
became Vice President of Finance and Chief Financial Officer in March 1995.
Prior to joining the Company, he was employed by Price Waterhouse LLP from 1984
to September 1992. Mr. Janney earned a B.S. in Business Administration from
California Polytechnic State University at San Luis Obispo and is a certified
public accountant.
HARVEY S. SADOW, PH.D. has been a Director of the Company since January 1990
and has served as Chairman of the Board of Directors of the Company since
February 1992. He was President and Chief
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Executive Officer of Boehringer Ingelheim Corporation, a health care company,
from 1971 to 1988, and of Boehringer Ingelheim Pharmaceuticals, Inc., an ethical
specialty pharmaceutical company, from 1984 to 1988. In 1988 upon his
retirement, he became Chairman of the Board of Directors of both Boehringer
Ingelheim Corporation and Boehringer Ingelheim Pharmaceuticals, Inc. Dr. Sadow
retired as Chairman of both companies in December 1990 and remained on the Board
of Directors of both companies until December 1992. From 1967 to 1971, Dr. Sadow
was Senior Vice President, Scientific Affairs, of the U.S.V. Pharmaceutical
Corporation, Revlon Health Care Division. He also serves as Chairman of the
Board of Directors of Cortex Pharmaceuticals, Inc., a neuroscience company; as a
director of Anika Research Corporation, a research company; as a director of
Cytel Corporation, a pharmaceutical company; a director of Houghten
Pharmaceutical Inc., a pharmaceutical company; and as a director of Penederm,
Inc., a dermatologic product company. Dr. Sadow earned a B.S. from the Virginia
Military Institute, an M.S. from the University of Kansas and a Ph.D. from the
University of Connecticut.
JOSEPH BUCHMAN, M.D. has been a Director of the Company since July 1994. He
is a practicing physician with a private practice in Ridgefield and Danbury,
Connecticut. He is a certified member of the American Board of Internal Medicine
and Cardiovascular Disease. Dr. Buchman is currently director of the Preventive
Cardiology Program for Danbury Hospital Health Services, and has been a member
of the Cardiothoracic and Vascular Group, a professional corporation in
Ridgefield, Connecticut since 1992. Prior to 1992, Dr. Buchman maintained a
private medical practice. Dr. Buchman has published numerous articles on the
subject of coronary risk factors. Dr. Buchman earned a B.A. from Wesleyan
University and a M.D. from New York University, College of Medicine.
JOHN L. CASTELLO has been a Director of the Company since August 1993. He is
the Chairman of the Board, President and Chief Executive Officer of Xoma
Corporation ("Xoma"), a biotechnology company. He joined Xoma in April 1992
after serving as President and Chief Operating Officer of the Ares Serono Group,
a Swiss ethical pharmaceutical company, from 1988 to August 1991, and prior to
that he was President of the Serano Diagnostics Division from 1986 to 1988. From
1977 to 1986, Mr. Castello held senior management positions at Amersham
International PLC and Abbott Laboratories. Mr. Castello also serves on the Board
of Directors of Metra Biosystems, Inc. Mr. Castello earned a B.S. in Mechanical
and Industrial Engineering from Notre Dame University.
H. R. SHEPHERD has been a director of the Company since July 1994. He is a
special advisor to the Chairman of the Board of Directors of Medeva PLC, an
international pharmaceuticals company, and is a founder and Chairman of the
Board of the Albert B. Sabin Vaccine Foundation. Mr. Shepherd served as Chairman
and Chief Executive Officer of Armstrong Pharmaceuticals, a company specializing
in aerosol pharmaceutical packaging and labeling, from 1985 to August 1993,
before it was acquired by Medeva PLC. Mr. Shepherd earned a B.S. from Cornell
University and a Honorary Doctorate of Humane Letter from Villanova University.
All directors are elected at each annual meeting of shareholders and hold
office until the election and qualification of their successors at the next
annual meeting of shareholders. Officers of the Company serve at the discretion
of the Board of Directors. There are no family relationships among the Company's
directors and executive officers.
DIRECTORS' COMPENSATION
Nonemployee directors who do not represent shareholders holding more than
one percent of the outstanding shares ("Outside Directors") receive a $1,000 fee
for each meeting of the Board of Directors attended. Outside Directors also
receive a $500 fee for each meeting of the Audit or Compensation Committee
attended that is not in conjunction with a regular board meeting. In addition,
the 1988 Stock Incentive Program provides that options to purchase the Company's
Common Stock may be granted to
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<PAGE>
Outside Directors pursuant to a nondiscretionary, automatic grant mechanism,
whereby each such director is granted an option to purchase 10,000 shares on the
date of each annual meeting of shareholders. Pursuant to the provisions of the
1988 Stock Incentive Program, in August 1995 Dr. Buchman, Mr. Castello, Dr.
Sadow and Mr. Shepherd were each granted nonstatutory options to purchase 10,000
shares of the Company's Common Stock at an exercise price of $2.25 per share.
See "-- 1988 Stock Incentive Program."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company and administers various incentive compensation and
benefit plans. The Compensation Committee consists of directors Sadow and
Castello. There are no interlocking relationships, as described by the
Securities and Exchange Commission, between the Compensation Committee members.
See "-- 1988 Stock Incentive Program" and "-- Employee Stock Purchase Plan."
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended March 31, 1996,
1995 and 1994, compensation awarded to, paid to or earned by, (i) the Company's
Chief Executive Officer and (ii) the Company's next four most highly compensated
executive officers whose salary and bonus exceeded $100,000 during the fiscal
year ended March 31, 1996 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------
-------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION(1) OPTIONS(#) COMPENSATION(2)($)
- --------------------------------------- --------- ---------- --------- ---------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Warren E. Pinckert II(3) .............. 1996 $ 145,440 $ -- $ -- 10,000 $ 6,050
President and Chief 1995 153,333 -- -- 249,958(5) 6,143
Executive Officer 1994 155,833 10,000 -- 209,958 6,193
Gary E. Hewett ........................ 1996 131,191 -- 39,336 -- 1,863
Vice President of Diagnostic 1995 130,000 10,000 4,278 70,000(5) 4,255
Development 1994 130,000 -- 11,605 -- 4,055
Linda H. Masterson(4) ................. 1996 131,000 -- 19,967 5,000 2,289
Executive Vice President of Marketing 1995 114,750 -- 17,922 90,000 2,063
and Sales 1994 -- -- -- -- --
Steven L. Barbato ..................... 1996 106,050 -- -- 3,000 5,914
Vice President of 1995 104,167 10,000 25,350 45,000(6) 5,971
Manufacturing 1994 95,000 6,891 36,075 10,000 6,048
</TABLE>
- --------------
(1) The amounts described hereunder were paid by the Company as follows: In
fiscal 1996, to Mr. Hewett, $35,640 for forgiveness of a loan and $3,696 for
the compensation paid in connection with the Company's Research and
Development Incentive Program; and to Ms. Masterson, $14,545 for relocation
expenses and $5,422 for income taxes paid on nonreimbursed relocation
expense. In fiscal 1995, to Mr. Hewett $2,851 and $917 for forgiveness of a
loan and income taxes paid on the forgiveness of the loan, respectively, and
$510 for the compensation paid in connection with the Company's Research and
Development Incentive Program; to Ms. Masterson $17,922 for relocation
46
<PAGE>
expenses; and to Mr. Barbato $25,350 for the forgiveness of a relocation
loan. In fiscal 1994, to Mr. Hewett $8,554 and $3,051 for forgiveness of a
loan and income taxes paid on the forgiveness of the loan, respectively; and
to Mr. Barbato $36,078 for the forgiveness of a relocation loan.
(2) The amounts described hereunder were paid by the Company for premiums on
group term life insurance and medical and dental insurance.
(3) In October 1994, Mr. Pinckert voluntarily reduced his compensation by 10%.
(4) Ms. Masterson joined the Company in May 1994 and resigned as Executive Vice
President of Marketing and Sales in April 1996.
(5) Represents options granted pursuant to an option exchange program approved
by the Board of Directors in August 1994. See description under "-- 1988
Stock Incentive Program."
(6) Includes 35,000 shares subject to options granted pursuant to an option
exchange program approved by the Board of Directors in August 1994. See
description under "-- 1988 Stock Incentive Program."
STOCK OPTION GRANTS
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the fiscal year ended March 31,
1996. All such options were awarded under the Company's 1988 Stock Incentive
Program.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
---------------------------------------------------------- STOCK PRICE
NUMBER OF PERCENT OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM(5)
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION --------------------
NAME GRANTED(#) FISCAL YEAR(1) SHARE(2)(3) DATE(4) 5%($) 10%($)
- ---------------------------------------- ----------- ----------------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Warren E. Pinckert II................... 10,000 4.7% $ 2.25 10/30/00 $ 6,216 $ 13,736
Linda H. Masterson(6)................... 5,000 2.3 2.25 10/30/00 563 1,125
Steven L. Barbato....................... 3,000 1.4 2.25 10/30/00 1,865 4,121
Gary E. Hewett(7)....................... -- -- -- -- -- --
</TABLE>
- --------------
(1) Based on an aggregate of 212,923 options granted under the 1988 Stock
Incentive Program.
(2) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock, as determined by the Board of Directors on the
date of grant.
(3) Exercise price may be paid in cash, check, promissory note, by delivery of
already-owned shares of the Company's Common Stock subject to certain
conditions, or pursuant to a cashless exercise procedure under which the
optionee provides irrevocable instructions to a brokerage firm to sell the
purchased shares and to remit to the Company, out of the sale proceeds, an
amount equal to the exercise price plus all applicable withholding taxes.
(4) The stock options granted in the fiscal year ended March 31, 1996 are
exercisable starting three months after the date of grant, with 6.25% of the
shares covered thereby becoming exercisable at that time and with an
additional 6.25% of the option shares becoming exercisable at the end of
each three month period thereafter, with full vesting occurring on the
fourth anniversary of the date of grant. Under the 1988 Stock Incentive
Program, the Board retains the discretion to modify the terms, including the
price, of outstanding options.
(5) Potential realizable value is based on the assumption that the Common Stock
of the Company appreciates at the annual rate shown (compounded annually)
from the date of grant until the
47
<PAGE>
expiration of the five year option term. These numbers are calculated based
on the requirements promulgated by the Securities and Exchange Commission
and do not reflect the Company's estimate of future stock price growth.
(6) Ms. Masterson resigned as Executive Vice President of Marketing and Sales in
April 1996.
(7) Mr. Hewett is eligible to receive cash bonuses under the Company's Research
and Development Incentive Program.
The following table sets forth certain information regarding the exercise of
stock options by the Named Executive Officers during the fiscal year ended March
31, 1996 and stock options held as of March 31, 1996 by the Named Executive
Officers.
OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED VALUE OPTIONS(#) ($)(2)
ON EXERCISE REALIZED -------------------------- --------------------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Warren E. Pinckert II.......... 1,470 $ 2,279 179,972 98,111 $ 562,847 $ 312,232
Linda H. Masterson(3).......... -- -- 35,937 59,063 128,199 222,285
Steven L. Barbato.............. -- -- 29,562 18,438 93,125 65,148
Gary E. Hewett................. 20,827 125,678 77,499 17,501 249,879 53,605
</TABLE>
- --------------
(1) Market value of underlying securities at date of exercise less the exercise
price, but does not necessarily indicate that the optionee sold the
underlying stock.
(2) Fair market value of the Common Stock as of March 31, 1996 minus the
exercise price.
(3) Ms. Masterson resigned as Executive Vice President of Marketing and Sales in
April 1996.
1988 STOCK INCENTIVE PROGRAM
The Company's 1988 Stock Incentive Program (the "Option Program") was
adopted in 1988. The Option Program provides for the granting to employees
(including officers and employee directors) of incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and
the granting of nonstatutory stock options to employees (including officers),
directors and consultants. The purpose of the Option Program is to attract and
retain the best available personnel to the Company and to give them a greater
personal stake in the success of the Company. A total of 1,550,000 shares of
Common Stock has been reserved for issuance under the Program.
The Option Program is currently administered by the Compensation Committee
of the Board of Directors, which determines the terms of the options granted
under the Option Program, including the exercise price, number of shares subject
to the option and the exercisability thereof. Generally, options granted to
employees and consultants under the Option Program vest and become exercisable
at a rate of 6.25% of the shares subject to the option per quarter but may not
be exercised prior to one year from the commencement of employment or the
consultant relationship. The terms of all incentive stock options and
nonstatutory stock options granted under the Option Program may not exceed ten
years and one day, although the Company generally grants options with five year
terms. However, the terms of all incentive stock options and nonstatutory stock
options granted to an optionee who, at the time of grant, owns stock
representing more than 10% of the voting rights of the Company's outstanding
capital stock, may not exceed five years. No option granted under the Option
Program may be transferred by the optionee other than by will or the laws of
descent or distribution and each option may be exercised, during the lifetime of
the optionee, only by such optionee. In the event of a merger of the Company
with or into another corporation or a sale of substantially all of the Company's
assets, each option will be assumed or an equivalent option substituted by the
successor corporation unless the Compensation
48
<PAGE>
Committee accelerates the exercisability of all outstanding options. Options
granted to executive officers and directors provide that all unvested options
are accelerated to vest fully upon the sale, merger or liquidation of the
Company.
The exercise price of all incentive stock options granted under the Option
Program must be at least equal to the fair market value of the shares on the
date of grant. With respect to any participant who owns stock possessing more
than 10% of the voting rights of the Company's outstanding capital stock, the
exercise price of any incentive stock option granted must equal at least 110% of
the fair market value on the grant date. No incentive stock options may be
granted to a participant, which, when aggregated with all other incentive stock
options granted to such participant, would have an aggregate fair market value
in excess of $100,000 becoming exercisable in any calendar year. The exercise
price of all nonstatutory stock options granted under the Option Program must be
at least 85% of the fair market value of the Common Stock on the date of grant.
No options have been granted to date at prices less than 100% of the fair market
value on the date of grant.
The Option Program provides that options may not be granted to Outside
Directors who represent significant shareholders. The Option Program provides
that options may be granted to Outside Directors only pursuant to a
nondiscretionary, automatic grant mechanism, whereby each Outside Director is
automatically granted an option to purchase 10,000 shares on the date of each
annual meeting of shareholders. Each new Outside Director that becomes an
Outside Director within six months after an annual meeting of shareholders will
automatically be granted an option to purchase 10,000 shares upon the date on
which such person first becomes an Outside Director. Options granted to Outside
Directors have an exercise price equal to the fair market value of a share of
Common Stock on the date of grant and vest at a rate of 25% per calendar quarter
following the date of grant so long as the optionee remains a director of the
Company.
In August 1994, the Compensation Committee of the Board of Directors
implemented a Stock Option Exchange Program (the "Exchange Program") for all
current employees and consultants, including the executive officers. Under the
Exchange Program all current employees and consultants owning stock options with
an exercise price greater than $3.50 per share were given the opportunity to
exchange their stock options for new options having an exercise price of $3.50
per share. At the time of the Committee action approving the Exchange Program,
the market value of the Company's common stock was $2.50 per share. In exchange
for the opportunity to exchange stock options, each employee or consultant
forfeited approximately 25% of his or her then-current vesting credit. The
Compensation Committee took this action to maintain morale across the Company,
to help maintain momentum in the development projects and to retain key
contributors in all areas of the Company, including the executive officers.
As of March 31, 1996, 490,905 shares of Common Stock had been issued
pursuant to stock purchase rights or upon exercise of options granted under the
Option Program, options to purchase 875,683 shares of Common Stock at a weighted
average exercise price of $3.29 per share were outstanding and 183,412 shares
remained available for future option grants under the Program.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors and approved by the Company's shareholders in April
1992. The Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code of 1986, as amended. A total of 200,000 shares of Common Stock has
been reserved for issuance under the Purchase Plan. The Purchase Plan has
offering periods of approximately six months, commencing on or after each
January 1 and July 1. The Purchase Plan is administered by the Compensation
Committee of the Board of Directors. The Purchase Plan permits eligible
employees to purchase Common Stock through payroll deductions, which may not
exceed 15% of an employee's compensation. No employee may purchase more than
$25,000 worth of Common Stock in any calendar year. Employees are eligible to
participate if they are employed by the
49
<PAGE>
Company or a subsidiary of the Company designated by the Board of Directors for
at least 20 hours per week and have been so employed for more than five months
in a calendar year. The price of stock purchased under the Purchase Plan is 85%
of the lower of (i) the fair market value of the Common Stock at the beginning
of the offering period or (ii) the fair market value of the Common Stock at the
end of the offering period. Employees may end their participation in the
offering at any time during the offering period, and participation ends
automatically on termination of employment with the Company.
401(K) PLAN
Effective in September 1990, the Company adopted the Cholestech Corporation
Retirement Savings Plan (the "401(k) Plan") that covers all eligible employees
of the Company. During calendar 1995, an eligible employee could elect to defer,
in the form of contributions to the 401(k) Plan, between 1% and 15% of the total
compensation that would otherwise be paid to the employee, not to exceed $9,240
per year (adjusted for cost-of-living increases). During calendar 1996, the
maximum deferral election has increased to $9,500. Employees' contributions are
invested in selected equity mutual funds, a guaranteed interest contract account
or a money market fund according to the directions of the employees. The
contributions are fully vested and nonforfeitable at all times. The 401(k) Plan
provides for employer contributions as determined by the Board of Directors.
Through March 31, 1996, the Company had not made any contributions to the 401(k)
Plan.
EMPLOYMENT AGREEMENTS
Pursuant to an employment agreement with the Company entered into in June
1993, Mr. Pinckert was entitled to receive an initial annual base salary of
$160,000 for fiscal 1996 versus the $145,440 he actually received. In October
1994 Mr. Pinckert voluntarily reduced his base salary by 10% to $144,000 in
order to lower the operating costs of the Company. The Board of Directors has
approved a twelve-month wage and benefits continuation package for Mr. Pinckert
in the event he is terminated from the Company.
The Board of Directors has approved a six-month wage and benefits
continuation package for Mr. Barbato and Mr. Janney in the event of the
involuntary termination of their employment with the Company. In addition, the
Board of Directors has approved a three-month wage and benefits continuation
package for Mr. Hewett in the event of the involuntary termination of his
employment with the Company.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Restated Articles of Incorporation
that eliminate to the fullest extent permissible under California law the
liability of its directors to the Company for monetary damages. Such limitation
of liability does not affect the availability of equitable remedies such as
injunctive relief or rescission. The Company's Bylaws provide that the Company
shall indemnify its directors and officers to the fullest extent permitted by
California law, including in circumstances in which indemnification is otherwise
discretionary under California law. The Company has entered into indemnification
agreements with its officers and directors containing provisions which may
require the Company, among other things, to indemnify the officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified.
There is no currently pending litigation or proceeding involving a director,
officer, employee or other agent of the Company in which indemnification would
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
50
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1988, the Company granted a loan to Mr. Hewett in connection with
his purchase of 35,640 shares of the Company's Common Stock pursuant to a stock
purchase agreement. The loan was evidenced by a promissory note in the amount of
$35,640 due in April 1993, which bore interest at the annual rate of 8%. The
loan was secured in November 1989 by independent collateral. In September 1991,
the Board of Directors approved the forgiveness of the loan in the event of the
involuntary termination of Mr. Hewett's employment with the Company. In June
1993, the Board of Directors approved an amendment to the loan agreement
providing for forgiveness of the principal loan balance in April 1995 as long as
Mr. Hewett remained employed by the Company until such time. The remaining
balance of the loan, $35,640, was forgiven in April 1995.
In April 1992, the Company entered into an employment agreement with Mr.
Barbato providing for certain relocation benefits, including the cost of
alternative housing for up to six months until his prior residence was sold,
reimbursement of moving expenses and closing costs upon the sale of his prior
residence, and a bridge loan to assist the purchase of a new residence in the
event such purchase occurred before the sale of his prior residence. In July
1992, Mr. Barbato executed a promissory note evidencing a $100,000 bridge loan.
This interest free promissory note was repaid in full in October 1992. In July
1992, Mr. Barbato borrowed $65,000 from the Company pursuant to a promissory
note. This promissory note bears interest at a rate of 8.0% per annum and was
due September 1994. This promissory note provided for quarterly forgiveness of
$8,125 of the outstanding balance and any accrued interest as additional
compensation as long as Mr. Barbato remained employed with the Company. The loan
was forgiven in full as of March 31, 1995.
All future transactions, including loans, between the Company and its
officers, directors, principal shareholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested outside directors, and will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
51
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of March 31, 1996 and as adjusted to
reflect the sale of the 3,000,000 shares of Common Stock offered hereby
(assuming no exercise of the Underwriters over-allotment option): (i) by each
Director, (ii) by each of the Named Executive Officers, and (iii) by all
Directors and executive officers as a group. The Company does not know of any
person that is the beneficial owner of more than 5% of the outstanding shares of
Common Stock. Except as otherwise noted, the shareholders named in the table
have sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them, subject to applicable community property
laws.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
OWNED(2)
SHARES ----------------------------
BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER(1) OWNED(2) OFFERING OFFERING
- ------------------------------------------------------------------------------- ----------- ------------- -------------
<S> <C> <C> <C>
Warren E. Pinckert II (3)...................................................... 277,838 3.4% 2.5%
Harvey S. Sadow, Ph.D. (4)..................................................... 55,723 * *
John L. Castello (5)........................................................... 27,500 * *
Joseph Buchman (6)............................................................. 17,500 * *
H.R. Shepherd (7).............................................................. 17,500 * *
Gary E. Hewett (8)............................................................. 136,880 1.7 1.2
Linda H. Masterson (9)......................................................... 49,602 * *
Steve L. Barbato (10).......................................................... 32,562 * *
626,135 7.6 5.4
All current Directors and executive officers as a group (9 persons) (11).......
</TABLE>
- --------------
Less*than one percent.
(1)
The addresses of the persons set forth above is the address of the Company
appearing elsewhere in this Prospectus.
(2)
This table is based upon information supplied by officers, directors and
principal shareholders. Applicable percentage of ownership is based on
8,131,824 shares of Common Stock outstanding as of March 31, 1996 together
with applicable options for such shareholder. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission, and includes voting and investment power with respect to
shares. Shares of Common Stock subject to options or warrants currently
exercisable or exercisable within 60 days after March 31, 1996 are deemed
outstanding for computing the percentage ownership of the person holding
such options or warrants, but are not deemed outstanding for computing the
percentage of any other person.
(3)
Includes 196,221 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
(4)
Includes 48,595 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
(5)
Represents 27,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
(6)
Represents 17,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
(7)
Represents 17,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
(8)
Includes 81,874 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
(9)
Includes 41,875 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
(10)
Represents 32,562 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
(11)
Includes 474,376 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1996.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Restated Articles of Incorporation provide that the authorized
capital stock of the Company is 25,000,000 shares of Common Stock, no par value,
and 5,000,000 shares of undesignated Preferred Stock, no par value. As of March
31, 1996, 8,131,824 shares of Common Stock and no shares of Preferred Stock were
outstanding. As of May 7, 1996, there were 309 holders of record of the
Company's Common Stock.
COMMON STOCK
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock being offered by the Company hereby will be upon payment therefor,
validly issued, fully paid and nonassessable. Subject to the prior rights of the
holders of any Preferred Stock, the holders of outstanding shares of Common
Stock are entitled to receive dividends out of assets legally available therefor
at such times and in such amounts as the Board of Directors may from time to
time determine. The shares of Common Stock are neither redeemable nor
convertible and the holders thereof have no preemptive or subscription rights to
purchase any securities of the Company. Upon liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to receive pro rata
the assets of the Company which are legally available for distribution, after
payment of all debts and other liabilities and subject to the prior rights of
any holders of Preferred Stock then outstanding. Each outstanding share of
Common Stock is entitled to one vote on all matters submitted to a vote of
stockholders and have cumulative voting rights with respect to the election of
directors.
WARRANTS
As of March 31, 1996, there were outstanding warrants to purchase an
aggregate of 39,242 shares of Common Stock at an exercise price of $3.50 per
share. Such warrants expire on July 15, 1999.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the Preferred
Stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting a series or the
designation of such series, without any further vote or action by the Company's
shareholders. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of delaying, deferring or preventing a change in
control of the Company without further action by the shareholders and may
adversely affect the market price of, and the voting and other rights of, the
holders of Common Stock. The Company has no current plans to issue any shares of
Preferred Stock.
REGISTRATION RIGHTS
Metra Biosystems holds 39,526 shares of Common Stock and has the obligation
to purchase $750,000 of additional shares of Common Stock upon achievement of
certain milestones by the Company pursuant to a development and licensing
agreement. The aggregate number of shares to be purchased is determined by
dividing the milestone payment by a weighted average trading price based on the
five day trading period prior to the completion of the milestone (collectively
the "Registrable Securities"). Metra Biosystems or its transferees is entitled
to certain rights with respect to the registration of such shares under the
Securities Act of 1933 (the "Securities Act"). Beginning May 6, 1997, if the
Company proposes to register any of its securities under the Securities Act,
either for its own account or the account
53
<PAGE>
of other securityholders, Metra Biosystems is entitled to notice of such
registration and is entitled to include Registrable Securities therein,
provided, among other conditions, that between May 6, 1997 and May 6, 1998, the
Company shall only be required to include in such registration one-half of the
Registrable Securities. In addition, Metra Biosystems may require the Company,
beginning May 6, 1997, on not more than two occasions in any 12 month period to
file a registration statement on Form S-3 under the Securities Act, at the
Company's expense, with respect to all of the Registrable Securities. The
Company is required to use its best efforts to affect such registration, subject
to certain conditions and limitations. Further, in the event Metra Biosystems
requests a registration on Form S-3 and the Company is not then entitled to use
Form S-3, then Metra Biosystems may require the Company to file a registration
statement on Form S-1 at the Company's expense, with respect to all of the
Registrable Securities. The Company is required to use its best efforts to
effect such registration, subject to certain conditions and limitations. The
registration rights of Metra Biosystems terminate upon the earlier to occur of
May 6, 2001 or at such time as Metra Biosystems is able to dispose of all of the
Registrable Securities in one three-month period pursuant to provisions of Rule
144.
TRANSFER AGENT
The transfer agent for the Common Stock is Wells Fargo Bank, N.T.&N.A.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters (the "Underwriters") named below, for whom Vector Securities
International, Inc. and Principal Financial Securities, Inc. are acting as
representatives (the "Representatives"), have severally agreed to purchase,
subject to the terms and conditions of the Underwriting Agreement, and the
Company has agreed to sell to the Underwriters, the following respective number
of shares of Common Stock.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------------------------------------------------------------------------------- -----------------
<S> <C>
Vector Securities International, Inc.................................................
Principal Financial Securities, Inc..................................................
--------
Total.............................................................................. 3,000,000
--------
--------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The nature
of the Underwriters' obligation is such that they are committed to purchase all
shares of Common Stock offered hereby if any such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
public offering of the shares of Common Stock, the Offering price and other
selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable at any
time during the 30-day period after the date of this Prospectus, to purchase up
to an additional 450,000 shares of Common Stock at the public offering price set
forth on the cover page of this Prospectus, less underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose of
covering over allotments, if any, in connection with the Offering. To the extent
such option is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares of Common Stock set forth next to such
Underwriter's name in the preceding table bears to the total number of shares
listed in the table.
The Offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of this Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The executive officers, directors and certain other stockholders of the
Company have agreed that they will not, without the prior written consent of
Vector Securities International, Inc., offer, sell or otherwise dispose of any
shares of Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock owned by
them for a period of 90 days after the date of this Prospectus. The Company has
agreed that it will not, without the prior written consent of Vector Securities
International, Inc., offer, sell or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock for a period of 90
days after the date of this Prospectus, except that the Company may grant
additional options under its stock option plan, issue shares under its employee
stock purchase plan, issue shares to Metra Biosystems pursuant to the agreement
described under "Business -- Strategic Relationships" or issue shares upon the
exercise of outstanding stock options or warrants.
In connection with the Offering, certain Underwriters and selling group
members (if any) who are qualifying registered market makers on the Nasdaq
National Market may engage in passive market-
55
<PAGE>
making transactions in the Common Stock on the Nasdaq National Market in
accordance with Rule 10b-6A under the Securities Exchange Act of 1934 during the
two business day period before commencement of sales in the Offering. The
passive market making transactions must comply with applicable volume and price
limits and be identified as such. In general, a passive market maker may display
its bid at a price not in excess of the highest independent bid for the
security. If all independent bids are lowered below the passive market maker's
bid, however, such bid must then be lowered when certain purchase limits are
exceeded. Net purchases by a passive market maker on each day are generally
limited to a specified percentage of the passive market making average daily
trading volume in the Common Stock during a price period and must be
discontinued when such limit is reached. Passive market making may stabilize the
market price of the Common Stock at a level above that which might otherwise
prevail, and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto,
California. Certain legal matters in connection with the Offering will be passed
upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.
EXPERTS
The balance sheets as of March 31, 1995 and 1996 and the statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended March 31, 1996 and the financial statement schedule included in
this Prospectus and elsewhere in the Registration Statement, have been so
included in this Prospectus and in the Registration Statement in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The statements in this Prospectus under the captions "Risk Factors --
Uncertainty of Patent and Propriertary Technology Protection; License of
Technology of Third Parties" and "Business -- Patents and Proprietary
Technology" have been reviewed and approved by Dehlinger & Associates, patent
counsel for the Company, as experts on such matters, and are included herein in
reliance upon that review and approval.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549, and at the Commission's following Regional Offices: Suite 1400,
Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois 60661; and
13th Floor, Seven World Trade Center, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act of 1933 with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is made
to the Registration Statement and the exhibits and schedules filed as a part
thereof. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete. In each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, and each such statement is qualified in
all respects by such reference. Copies of the Registration Statement, including
exhibits and schedules thereto, may be inspected without charge at the
Commission's principal office in Washington, D.C., or obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549.
56
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statement of Changes in Shareholders' Equity............................................................... F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Cholestech Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in shareholders' equity and of cash flows present fairly,
in all material respects, the financial position of Cholestech Corporation at
March 31, 1995 and March 29, 1996, and the results of its operations and its
cash flows for each of the three years in the period ended March 29, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Jose, California
April 24, 1996, except as to Note 11,
which is as of May 9, 1996
F-2
<PAGE>
CHOLESTECH CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, 1995 MARCH 29, 1996
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................................... $ 1,230,000 $ 361,000
Marketable securities........................................................... 4,000,000 --
Restricted marketable securities................................................ -- 3,750,000
Accounts receivable............................................................. 664,000 1,107,000
Inventories..................................................................... 1,351,000 1,910,000
Prepaid expenses and other assets............................................... 168,000 167,000
-------------- --------------
Total current assets.......................................................... 7,413,000 7,295,000
Property and equipment, net....................................................... 2,182,000 2,041,000
Other assets, net................................................................. 446,000 309,000
-------------- --------------
$ 10,041,000 $ 9,645,000
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings...................................................... $ -- $ 250,000
Accounts payable and accrued expenses........................................... 893,000 1,614,000
Accrued payroll and benefits.................................................... 304,000 253,000
Product warranty................................................................ 150,000 187,000
Current portion of long-term debt............................................... -- 499,000
Other liabilities............................................................... 137,000 50,000
-------------- --------------
Total current liabilities..................................................... 1,484,000 2,853,000
Long-term debt, less current portion.............................................. -- 799,000
Other liabilities................................................................. 44,000 11,000
-------------- --------------
Total liabilities............................................................. 1,528,000 3,663,000
-------------- --------------
Commitments (Notes 5 and 6).......................................................
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares authorized;
no shares issued and outstanding............................................... -- --
Common Stock, no par value; 25,000,000 shares authorized;
7,999,962 and 8,131,824 shares issued and outstanding.......................... 55,465,000 55,644,000
Note receivable from issuance of Common Stock................................... (36,000) --
Accumulated deficit............................................................. (46,916,000) (49,662,000)
-------------- --------------
Total shareholders' equity.................................................... 8,513,000 5,982,000
-------------- --------------
$ 10,041,000 $ 9,645,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CHOLESTECH CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 25, MARCH 31, MARCH 29,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Domestic............................................................ $ 1,844,000 $ 3,221,000 $ 5,548,000
International....................................................... 1,185,000 817,000 1,325,000
------------ ------------ ------------
3,029,000 4,038,000 6,873,000
Cost of products sold................................................. 4,972,000 3,933,000 4,505,000
------------ ------------ ------------
Gross profit (loss)................................................... (1,943,000) 105,000 2,368,000
------------ ------------ ------------
Operating expenses:
Research and development............................................ 2,134,000 715,000 714,000
Sales and marketing................................................. 2,909,000 2,694,000 3,168,000
General and administrative.......................................... 2,288,000 1,983,000 1,376,000
------------ ------------ ------------
Total operating expenses.......................................... 7,331,000 5,392,000 5,258,000
------------ ------------ ------------
Loss from operations.................................................. (9,274,000) (5,287,000) (2,890,000)
Interest income....................................................... 447,000 278,000 284,000
Interest expense...................................................... (83,000) (35,000) (140,000)
------------ ------------ ------------
Net loss.............................................................. $ (8,910,000) $ (5,044,000) $ (2,746,000)
------------ ------------ ------------
------------ ------------ ------------
Net loss per share.................................................... $ (1.14) $ (.63) $ (.34)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares........................................ 7,790,684 7,954,284 8,041,531
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
CHOLESTECH CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------------- --------------------- NOTE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT RECEIVABLE DEFICIT TOTAL
--------- ----------- --------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 26, 1993..... -- $ -- 7,648,471 $54,991,000 $ (36,000) ($32,962,000) $21,993,000
Issuance of Common Stock...... 262,141 226,000 226,000
Compensation expense relating
to stock options............. 104,000 104,000
Net loss...................... (8,910,000) (8,910,000)
--------- ----------- --------- ---------- ----------- ------------ ----------
Balance at March 25, 1994..... -- -- 7,910,612 55,321,000 (36,000) (41,872,000) 13,413,000
Issuance of Common Stock...... 89,350 72,000 72,000
Compensation expense relating
to stock options............. 72,000 72,000
Net loss...................... (5,044,000) (5,044,000)
--------- ----------- --------- ---------- ----------- ------------ ----------
Balance at March 31, 1995..... -- -- 7,999,962 55,465,000 (36,000) (46,916,000) 8,513,000
Issuance of Common Stock...... 131,862 140,000 140,000
Compensation expense relating
to stock options............. 39,000 39,000
Foregiveness of loan.......... 36,000 36,000
Net loss...................... (2,746,000) (2,746,000)
--------- ----------- --------- ---------- ----------- ------------ ----------
Balance at March 29, 1996..... -- $ -- 8,131,824 $55,644,000 $ -- ($49,662,000) $5,982,000
--------- ----------- --------- ---------- ----------- ------------ ----------
--------- ----------- --------- ---------- ----------- ------------ ----------
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
CHOLESTECH CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 25, MARCH 31, MARCH 29,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................ $ (8,910,000) $ (5,044,000) $ (2,746,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization..................................... 1,098,000 729,000 612,000
Deferred revenue.................................................. (215,000) (74,000) (30,000)
Compensation expense relating to stock options issued below
market........................................................... 104,000 72,000 39,000
Forgiveness of note receivable.................................... -- -- 36,000
Write-off of property and equipment............................... 231,000 2,000 3,000
Changes in assets and liabilities:
Accounts receivable............................................. 357,000 (283,000) (443,000)
Inventories..................................................... (31,000) 103,000 (559,000)
Prepaid expenses and other assets............................... 331,000 2,000 1,000
Other assets.................................................... 153,000 (8,000) (6,000)
Accounts payable and accrued expenses........................... (218,000) (115,000) 721,000
Accrued license fee............................................. (290,000) -- --
Accrued payroll and benefits.................................... 429,000 (391,000) (51,000)
Product warranty................................................ (110,000) -- 37,000
Other liabilities............................................... (100,000) -- --
------------ ------------ ------------
Net cash used in operating activities............................. (7,171,000) (5,007,000) (2,386,000)
------------ ------------ ------------
Cash flows from investing activities:
Sales (proceeds) of marketable securities, net...................... 436,000 5,630,000 250,000
Purchases of property and equipment................................. (657,000) (625,000) (331,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities............... (221,000) 5,005,000 (81,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt........................................ -- -- 1,500,000
Principal payments on long-term debt................................ -- -- (202,000)
Proceeds from short-term bank borrowing............................. -- -- 250,000
Principal payments on capital leases................................ (685,000) (268,000) (90,000)
Restricted cash investment.......................................... 380,000 -- --
Issuance of Common Stock............................................ 226,000 72,000 140,000
------------ ------------ ------------
Net cash (used in) provided by financing activities............... (79,000) (196,000) 1,598,000
------------ ------------ ------------
Net change in cash and cash equivalents............................... (7,471,000) (198,000) 869,000
Cash and cash equivalents at beginning of period...................... 8,899,000 1,428,000 1,230,000
------------ ------------ ------------
Cash and cash equivalents at end of period............................ $ 1,428,000 $ 1,230,000 $ 361,000
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.............................. $ 83,000 $ 35,000 $ 140,000
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of non-cash financing and investing
activities:
Capital lease obligations incurred for acquisition of property and
equipment.......................................................... $ 53,000 $ 105,000 $ --
------------ ------------ ------------
------------ ------------ ------------
Reclassification of $3,750,000 in marketable securities to
restricted marketable securities in connection with a line of
credit.
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CHOLESTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Cholestech Corporation (the "Company") was incorporated February 2, 1988 to
develop, manufacture and sell point-of-care systems which can perform various
diagnostic tests using a single drop of whole blood.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR END
The Company's fiscal year is a 52-53 week period ending on the last Friday
in March. Fiscal 1994, 1995 and 1996 comprised 52, 53 and 52 week periods,
respectively.
REVENUE RECOGNITION
All revenues from product sales are recognized at the time products are
shipped and are denominated in U.S. dollars. The Company also provides an amount
for estimated sales returns.
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents; investments with
maturities between three and twelve months are classified as short-term
marketable securities and investments with maturities which exceed twelve months
are classified as long-term marketable securities. The Company has established
policies which limit the type, credit quality and length of maturity of the
securities in which it invests. The Company's investment policy allows no
investments in any single private issuer to exceed $1,000,000 and the
investments must have, at a minimum, a credit rating of AA. Cash equivalents and
restricted marketable securities at March 29, 1996 consist principally of
investments in money-market funds, commercial paper and U.S. government-agency
obligations and are classified as available for sale. Restricted marketable
securities are carried at amortized cost, which approximates market. Unrealized
gains and losses are immaterial.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk include trade accounts receivable; however, this risk is limited
due to the large number of individually smaller customers. Collateral is not
required on these transactions. The Company maintains reserves for potential
credit losses and such losses, in the aggregate, have not exceeded management
expectations.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out (FIFO) method. Cost includes direct materials,
direct labor and manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets
which range from two to five years. Leasehold improvements are amortized over
their estimated useful lives, not to exceed the term of the related lease. The
cost of additions and improvements is capitalized while maintenance and repairs
are charged to expense as incurred.
WARRANTIES
The Company's products are generally under warranty against defects in
material and workmanship for a period of one year. The Company accrues for
estimated future warranty costs at the time of sale.
F-7
<PAGE>
CHOLESTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes, which requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between the
financial reporting and income tax bases of assets and liabilities.
NET LOSS PER SHARE
Net loss per share is computed by dividing the net loss by the weighted
average number of common and common equivalent shares outstanding during each
period. Common equivalent shares are included in determining net loss per share,
to the extent they are dilutive, using the treasury stock method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash equivalents, short-term bank borrowings and
current portion of long-term debt approximate fair value due to the short
maturity of those instruments.
The fair value of the Company's long-term debt, which approximates its
carrying value, is estimated based on the quoted market prices for the same or
similar issues or on the current rates offered to the Company for debt of
similar maturities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121") which
requires the Company to review for impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets whenever events or
changes in circumstances indicate that the carrying amount of an asset might not
be recoverable. In certain situations, an impairment loss would be recognized.
The Company will adopt FAS 121 during fiscal 1997 and, based on its initial
evaluation, does not expect its adoption to have a material impact on the
Company's financial condition or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123") which established a fair value based method of
accounting for stock-based compensation plans and requires additional
disclosures for those companies who elect not to adopt the new method of
accounting. The Company will adopt FAS 123 during fiscal 1997. The Company
intends to continue to account for employee stock options using the intrinsic
value method prescribed by APB Opinion No. 25 and to adopt the "disclosure only"
pro forma alternative described in FAS 123.
F-8
<PAGE>
CHOLESTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. BALANCE SHEET COMPOSITION
Accounts receivable consist of:
<TABLE>
<CAPTION>
MARCH 31, 1995 MARCH 29, 1996
-------------- --------------
<S> <C> <C>
Accounts receivable.......................................... $ 689,000 $ $1,189,000
Less allowance for doubtful accounts and sales returns....... (25,000) (82,000)
-------------- --------------
$ 664,000 $ 1,107,000
-------------- --------------
-------------- --------------
</TABLE>
Inventories consist of:
<TABLE>
<CAPTION>
MARCH 31, 1995 MARCH 29, 1996
-------------- --------------
<S> <C> <C>
Raw materials................................................ $ 854,000 $ 875,000
Work-in-process.............................................. 167,000 380,000
Finished goods............................................... 330,000 655,000
-------------- --------------
$ 1,351,000 $ 1,910,000
-------------- --------------
-------------- --------------
</TABLE>
Property and equipment consist of:
<TABLE>
<CAPTION>
MARCH 31, 1995 MARCH 29, 1996
-------------- --------------
<S> <C> <C>
Machinery and equipment...................................... $ 4,137,000 $ 4,322,000
Furniture and fixtures....................................... 276,000 280,000
Computer equipment........................................... 833,000 866,000
Leasehold improvements....................................... 203,000 215,000
Construction-in-progress..................................... 41,000 131,000
-------------- --------------
5,490,000 5,814,000
Less accumulated depreciation and amortization............... (3,308,000) (3,773,000)
-------------- --------------
$ 2,182,000 $ 2,041,000
-------------- --------------
-------------- --------------
</TABLE>
Property and equipment include assets under capital leases of $1,116,000 and
$841,000 and accumulated depreciation of $1,011,000 and $802,000 at March 31,
1995 and March 29, 1996, respectively.
3. SHORT-TERM BANK BORROWING
In December 1993, the Company entered into an agreement with a bank for a $3
million revolving line of credit. While the agreement is in effect, the Company
is required to maintain on deposit with the bank $3,750,000 of marketable
securities as pledged collateral, restricted as to use when the Company has any
outstanding borrowings under the agreement. The Company has the option of
selecting an interest rate on borrowings under the agreement based on the bank's
reference rate, LIBOR or the bank's short-term certificate-of-deposit rates
(ranging from 5.5% to 8.25%). The Company is not required to pay any commitment
fees on the unused available credit. The agreement expires on October 31, 1996.
As of March 29, 1996, there was $250,000 outstanding under the agreement.
F-9
<PAGE>
CHOLESTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
4. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
MARCH 29,
1996
------------
<S> <C>
Note payable, bearing interest at 16%, with monthly installments of $53,000, and
secured by fixed assets, inventory and a portion of accounts receivable........ $ 1,298,000
Less current portion............................................................ (499,000)
------------
Long-term portion............................................................... $ 799,000
------------
------------
</TABLE>
The note contains various provisions including requirements to maintain
$3,000,000 or more in cash, cash equivalents and restricted marketable
securities, net of all non-subordinated debt outstanding, and maintain a
security deposit in the amount of $150,000 payable to the lender in the event of
a default on the note. If the Company's cash and restricted marketable
securities were to fall below $3,000,000, the Company would be required to
deposit with the lender an additional $200,000 as a security deposit.
Annual maturities under the note are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- --------------------------------------------------------------------------------
<S> <C>
1997............................................................................ $ 499,000
1998............................................................................ 496,000
1999............................................................................ 303,000
------------
Total....................................................................... $ 1,298,000
------------
------------
</TABLE>
5. LEASES
The Company leases office and laboratory facilities under a noncancellable
operating lease which expires in 2000. The lease provides for renewal options
and options for expansion or reduction of the initial rental space. Rent expense
was $300,000, $300,000, and $195,000 for fiscal 1994, 1995 and 1996,
respectively.
The Company also leases equipment and furniture under capital leases which
contain renewal options and/or options to purchase the equipment and furniture
at fair market value.
Future minimum payments required under capital and noncancellable operating
leases at March 29, 1996 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES TOTAL
- ----------------------------------------------------------- --------- ---------- ----------
<S> <C> <C> <C>
1997....................................................... $ 35,000 $ 195,000 $ 230,000
1998....................................................... 7,000 200,000 207,000
1999....................................................... 5,000 205,000 210,000
2000....................................................... -- 205,000 205,000
--------- ---------- ----------
Total minimum lease payments............................... 47,000 $ 805,000 $ 852,000
---------- ----------
---------- ----------
Imputed interest........................................... (3,000)
---------
Present value of net minimum lease payments................ 44,000
Current portion of capital lease obligations............... (33,000)
---------
Capital lease obligations, less current portion............ $ 11,000
---------
---------
</TABLE>
F-10
<PAGE>
CHOLESTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
6. COMMITMENTS
The Company has obtained rights to use certain technology in the manufacture
of certain of its products. The related agreements provide for the Company to
pay royalties ranging from 0.6% to 6% of net sales of the applicable products.
Total royalty expense for fiscal 1994, 1995 and 1996 was $140,000, $132,000 and
$381,000, respectively.
7. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the Preferred
Stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting a series or the
designation of such series, without any further vote or action by the Company's
shareholders.
WARRANTS
At March 29, 1996, there were warrants for 39,242 shares of Common Stock
outstanding at an exercise price of $3.50 per share, which expire on July 15,
1999.
EMPLOYEE STOCK PURCHASE PLAN
In April 1992, the Company adopted the Employee Stock Purchase Plan (the
"Plan") which reserved 75,000 shares of Common Stock to be issued in accordance
with the Internal Revenue Code under such terms as approved by the officers of
the Company. In fiscal 1996, 32,177 shares and 18,637 shares were purchased by
employees at prices of $1.59 and $2.01 per share, respectively. In August 1995,
the shareholders approved an increase in the number of shares reserved for
issuance under the Plan from 75,000 to 200,000.
STOCK INCENTIVE PROGRAM
The Board of Directors adopted the 1988 Stock Incentive Program (the
"Program") which provides that incentive stock options (ISOs) and nonqualified
stock options (NSOs) for shares of Common Stock may be granted to employees and
consultants of the Company. In accordance with the Program, the stated exercise
price shall not be less than 100% and 85% of the fair market value of Common
Stock on the date of grant for ISOs and NSOs, respectively. The Program provides
that the options shall be exercisable over a period not to exceed five years and
a day and shall vest at a rate of at least 25 percent each year over a four year
period. Vesting may be accelerated upon the occurrence of certain events as
described in the stock option agreement. In August 1995, the shareholders
approved an increase in the number of shares of Common Stock reserved for
issuance under the Program from 1,300,000 to 1,550,000.
As a result of the Company's initial public offering of Common Stock in June
1992, options issued in November 1991 were determined to have been issued at an
amount less than the fair market value of the Company's Common Stock at the date
the options were granted. The difference between the option price and the fair
market value of the Company's Common Stock was determined to contain a
compensatory element. The compensatory element resulted in a charge to
operations in fiscal 1994, 1995 and 1996 of $104,000, $72,000 and $39,000,
respectively.
In August 1994, the Company's Board of Directors approved a plan to offer
all current employees and consultants holding outstanding options to purchase
Common Stock of the Company with exercise prices in excess of $3.50 per share
the opportunity to exchange such options for options priced at $3.50 per share.
In exchange for the new options, the employees and consultants forfeited
approximately 25 percent of their vesting credit. At the time of the approval,
the fair market value of the Company's Common Stock was $2.50 per share.
F-11
<PAGE>
CHOLESTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. SHAREHOLDERS' EQUITY (CONTINUED)
Stock option activity under the Program is as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISE PRICE
OPTIONS PER SHARE
------------ --------------
<S> <C> <C>
Balance, March 26, 1993......................................... 943,411 $ .20-$15.25
Granted....................................................... 290,652 $ 5.25-$ 7.13
Exercised..................................................... (237,234) $ .20-$ 5.00
Cancelled..................................................... (221,526) $ .20-$13.50
------------
Balance, March 25, 1994......................................... 775,303 $ .20-$15.25
Granted....................................................... 860,381 $ 1.75-$ 3.50
Exercised..................................................... (47,161) $ .20-$ 5.00
Cancelled..................................................... (709,495) $ .20-$15.25
------------
Balance, March 31, 1995......................................... 879,028 $ .20-$10.50
Granted....................................................... 212,923 $ 1.75-$ 6.56
Exercised..................................................... (79,885) $ .20-$ 3.50
Cancelled..................................................... (136,383) $ .20-$ 3.50
------------
Balance, March 29, 1996......................................... 875,683 $ .20-$10.50
------------
------------
</TABLE>
As of March 29, 1996, options for 518,244 shares of Common Stock were
exercisable.
8. INCOME TAXES
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1995 1996
-------------- --------------
<S> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards............................ $ 16,417,000 $ 17,611,000
Research and development tax credit
carryforwards.............................................. 1,881,000 1,963,000
Capitalized research and development........................ 456,000 487,000
Other....................................................... 300,000 (756,000)
Valuation allowance for deferred tax assets................. (19,054,000) (19,305,000)
-------------- --------------
$ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
The Company has net operating loss carryforwards available to reduce taxable
income through 2011 for federal and state income tax purposes of approximately
$46,044,000 and $21,035,000, respectively. Additionally, the Company has
research and development credit carryforwards available to reduce taxes payable
through 2011 for federal and state income tax purposes of approximately
$1,470,000 and $493,000, respectively.
As a result of the Series C Preferred Stock offerings in May 1990, there is
an annual limitation of approximately $1,500,000 for federal and state income
tax purposes on the use of approximately $8,100,000 and $1,080,000 of net
operating losses, and of $390,000 and $160,000 of tax credit carryforwards,
respectively. Additionally, as a result of the Company's secondary offering in
December 1992, the Company's net operating losses and tax credit carryforwards
incurred prior to December 1992 are subject to an annual limitation of
approximately $5,450,000 for federal and state income tax reporting purposes on
the use of approximately $28,176,000 and $8,099,000 of net operating loss
carryforwards,
F-12
<PAGE>
CHOLESTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
respectively, and of $1,151,000 and $379,000 of tax credit carryforwards,
respectively. If the amount of these limitations are not utilized in any year,
the amount not utilized increases the allowable limit in the subsequent year.
9. RETIREMENT SAVINGS PLAN
Effective in September 1990, the Company adopted the Cholestech Corporation
Retirement Savings Plan (the "401(k) Plan") that covers all employees of the
Company. An eligible employee may elect to defer, in the form of contributions
to the 401(k) Plan, between 1% and 15% of the total compensation that would
otherwise be paid to the employee, not to exceed $9,240 per year (adjusted for
cost-of-living increases). Employee contributions are invested in selected
mutual funds or a money market fund according to the directions of the employee.
The contributions are fully vested and nonforfeitable at all times. The 401(k)
Plan provides for employer contributions as determined by the Board of
Directors. The Company has not made any contributions through fiscal 1996.
10. SUBSEQUENT EVENTS
In May 1996, the Company entered into a development, marketing and license
agreement (the "Agreement") with Metra Biosystems to develop an immunoassay test
cassette incorporating Metra Biosystems bone resporation technology to be used
with the L-D-X System. Pursuant to the Agreement, Metra Biosystems purchased
39,526 shares of the Company's Common Stock for an aggregate purchase price of
$250,000 ($6.325 per share) and is obligated to purchase $750,000 of additional
shares of Common Stock upon the completion of specified milestones by the
Company.
On May 9, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission to register for sale 3,450,000 shares of
Common Stock, which includes 450,000 shares related to the over-allotment
option.
F-13
<PAGE>
[LOGO] [PICTURE OF CASSETTE]
- --------------------------------------------------------------------------------
CHOLESTECH L'D'X-REGISTERED TRADEMARK- PROCEDURE
Step 1: Take a blood sample from a fingerstick.
Step 2: Deposit the blood into the sample well of the test cassette.
Step 3: Insert the test cassette into the L-D-X Analyzer and press the "RUN"
button.
Step 4: In less than five minutes, the
L-D-X Analyzer displays the test results.
<PAGE>
- --------------------------------------------
--------------------------------------------
- --------------------------------------------
--------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON IS AUTHORIZED IN
CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED HEREIN, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SUCH SECURITIES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................... 3
Risk Factors..................................... 5
The Company...................................... 15
Use of Proceeds.................................. 16
Price Range of Common Stock...................... 17
Dividend Policy.................................. 17
Capitalization................................... 18
Dilution......................................... 19
Selected Financial Data.......................... 20
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 21
Business......................................... 26
Management....................................... 44
Certain Relationships and Related Transactions... 51
Principal Shareholders........................... 52
Description of Capital Stock..................... 53
Underwriting..................................... 55
Legal Matters.................................... 56
Experts.......................................... 56
Additional Information........................... 56
Index to Financial Statements.................... F-1
</TABLE>
3,000,000 SHARES
[LOGO]
COMMON STOCK
-------------------
PROSPECTUS
-------------------
Vector Securities International, Inc.
Principal Financial Securities, Inc.
, 1996
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