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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1997
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ______ to _____
Commission file number: 000-20198
CHOLESTECH CORPORATION
(Exact name of registrant as specified in its charter)
California 94-3065493
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3347 Investment Boulevard, Hayward, CA 94545
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (510) 732-7200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
Yes____X____ No_________
At September 26, 1997, 11,292,368 shares of common stock of the Registrant were
outstanding.
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<PAGE>
CHOLESTECH CORPORATION
PART I
FINANCIAL INFORMATION
Page
----
ITEM 1. FINANCIAL STATEMENTS.
Condensed Balance Sheets 3
Condensed Statements of Operations 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. 8
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS. 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 21
SIGNATURES 22
2
<PAGE>
CHOLESTECH CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
CONDENSED BALANCE SHEETS
(in thousands)
(unaudited)
<CAPTION>
Assets
September 26, 1997 March 28, 1997 (1)
------------------ ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,491 $ 6,088
Marketable securities 9,502 7,921
Accounts receivable, net 3,233 1,866
Inventories 2,408 2,353
Prepaid expenses and other current assets 564 280
-------- --------
Total current assets 20,198 18,508
Property and equipment, net 2,582 2,399
Other assets, net 105 180
-------- --------
$ 22,885 $ 21,087
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 2,503 $ 1,629
Accrued payroll and benefits 622 527
Product warranty 214 214
-------- --------
Total current liabilities 3,339 2,370
Other liabilities -- 14
Total liabilities 3,339 2,384
Shareholders' equity:
Preferred stock -- --
Common stock 69,424 69,174
Unrealized gains on investments 37 --
Accumulated deficit (49,915) (50,471)
Total shareholders' equity 19,546 18,703
-------- --------
$ 22,885 $ 21,087
======== ========
<FN>
(1) The information in this column was derived from the Company's audited financial statements for the fiscal year ended March 28,
1997.
See Notes to Condensed Financial Statements
</FN>
</TABLE>
3
<PAGE>
<TABLE>
CHOLESTECH CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
9/26/97 9/27/96 9/26/97 9/27/96
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Domestic $ 4,910 $ 2,670 $ 8,718 $ 5,143
International 502 386 897 673
------------ ------------ ------------ ------------
5,412 3,056 9,615 5,816
Cost of products sold 2,701 1,626 4,696 3,269
------------ ------------ ------------ ------------
Gross profit 2,711 1,430 4,919 2,547
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 1,311 963 2,487 1,869
Research and development 522 269 997 453
General and administrative 595 464 1,148 879
------------ ------------ ------------ ------------
Total operating expenses 2,428 1,696 4,632 3,201
------------ ------------ ------------ ------------
Income (loss) from operations 283 (266) 287 (654)
Other income (expense), net 163 29 281 6
------------ ------------ ------------ ------------
Income (loss) before taxes 446 (237) 568 (648)
Provision for income taxes 9 -- 12 --
------------ ------------ ------------ ------------
Net income (loss) $ 437 $ (237) $ 556 $ (648)
============ ============ ============ ============
Net income (loss) per share $ .04 $ (0.02) $ .05 $ (0.07)
============ ============ ============ ============
Weighted average common shares and
equivalents outstanding 11,751,564 10,969,099 11,641,165 9,566,660
============ ============ ============ ============
<FN>
See Notes to Condensed Financial Statements
</FN>
</TABLE>
4
<PAGE>
<TABLE>
CHOLESTECH CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Twenty-six weeks ended
----------------------
09/26/97 09/27/96
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 556 $ (648)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 441 374
Changes in assets and liabilities:
Accounts receivable (1,367) (925)
Inventories (55) (464)
Prepaid and other current assets (284) (138)
Other assets 7 (16)
Accounts payable and accrued expenses 897 95
Accrued payroll and benefits 95 (44)
--------- ---------
Net cash provided by (used in) operating activities 290 (1,766)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of marketable securities 9,758 (152,937)
Purchases of marketable securities (11,302) 148,532
Purchases of property and equipment (556) (561)
--------- ---------
Net cash used in investing activities (2,100) (4,966)
--------- ---------
Cash flows from financing activities:
Repayment of long-term debt -- (1,298)
Proceeds from short-term bank borrowing -- 800
Prepayment of short-term bank borrowing -- (1,050)
Principal payments on capital leases (37) (30)
Issuance of common stock 250 13,373
--------- ---------
Net cash provided by financing activities 213 11,795
--------- ---------
Net change in cash and cash equivalents (1,597) 5,063
Cash and cash equivalents at beginning of period 6,088 361
--------- ---------
Cash and cash equivalents at end of period $ 4,491 $ 5,424
========= =========
Supplemental disclosures of non-cash financing and investing activities:
Capital lease obligations incurred for
acquisition of property and equipment $ -- $ 46
========= =========
Unrealized gain on marketable securities $ 37 $ --
========= =========
<FN>
See Notes to Condensed Financial Statements
</FN>
</TABLE>
5
<PAGE>
CHOLESTECH CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Interim Results
The interim unaudited financial information of Cholestech Corporation
(the "Company") is prepared in conformity with generally accepted
accounting principles and such principles are applied on a basis
consistent with the audited financial information contained in the
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on June 27, 1997. The financial information included herein
has been prepared by management, without audit by independent
accountants who do not express an opinion thereon, and should be read
in conjunction with the audited financial statements contained in the
Annual Report on Form 10-K. The condensed balance sheet as of March 28,
1997 has been derived from, but does not include all the disclosures
contained in, the audited financial statements for the year ended March
28, 1997. The information furnished includes all adjustments and
accruals consisting only of normal recurring accrual adjustments that
are, in the opinion of management, necessary for a fair presentation of
results for the interim periods. Certain information or footnote
disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles has been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission.
The foregoing interim results are not necessarily indicative of the
results of operations for the full fiscal year ending March 27, 1998.
2. Balance Sheet Data
The components of inventories are as follows (in thousands):
September 26, 1997 March 28, 1997
------------------ --------------
Raw materials $ 708 $ 703
Work-in-process 1,037 585
Finished goods 663 1,065
------ ------
$2,408 $2,353
====== ======
3. Earnings Per Share
Net income (loss) per share is computed by dividing net income (loss)
by the weighted average number of common and common equivalent shares
outstanding during each period. Common equivalent shares, consisting of
stock options, are included in determining net income (loss) per share,
to the extent they are dilutive, using the treasury stock method.
4. Borrowing Arrangements
In December 1996, the Company entered into an agreement with Wells
Fargo Bank for a $3 million revolving line of credit (the "line of
credit"). While the agreement is in effect, the Company is required to
maintain on deposit assets with collective value, as defined in the
line of credit agreement, equivalent to no less than 100% of the
outstanding principle balance. Amounts outstanding under the line of
credit bear interest at the bank's prime rate. The line of credit
agreement expires on November 30, 1997 and is renewable. As of
September 26, 1997, there were no borrowings outstanding under the line
of credit.
6
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CHOLESTECH CORPORATION
5. New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share" ("SFAS 128"), which will be
effective for the Company's third quarter of fiscal 1998. Under SFAS
128, primary earnings per share is replaced by basic earnings per share
and fully diluted earnings per share is replaced by diluted earnings
per share. If the Company had adopted this statement for the quarter
ended September 26, 1997, the net income (loss) per share for the
quarters ended September 26, 1997 and September 27, 1996 would have
been the same as presently reported herein.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for the reporting of comprehensive income and its
components in a full set of general purpose financial statements for
periods beginning after December 15, 1997. Reclassification of
financial statements for earlier periods for comparative purposes is
required. The Company will adopt SFAS 130 in fiscal 1999 and does not
expect such adoption to have a material effect on the financial
statements.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131, which is effective for periods
beginning after December 15, 1997, revises information regarding the
reporting of certain operating segments. It also establishes standards
for related disclosures about products and services, geographic areas
and major customers. The Company will adopt SFAS 131 in fiscal 1999 and
does not expect such adoption to have a material effect on the
financial statements.
6. Shareholder Rights Plan
In January 1997, the Board of Directors approved a shareholder rights
plan under which shareholders of record on March 31, 1997 received a
right to purchase (a "Right") one-thousandth of a share of Series A
Participating Preferred Stock at an exercise price of $44, subject to
adjustment. The Rights will separate from the Common Stock and Rights
certificates will be issued and, will become exercisable upon the
earlier of: (i) 10 days or such later date as may be determined by a
majority of the Board of Directors following a public announcement that
a person or group of affiliated or associated persons has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of
the Company's outstanding Common Stock or (ii) 10 business days
following the commencement of, or announcement of an intention to make,
a tender offer or exchange offer the consummation of which would result
in the beneficial ownership by a person or group of 15% or more of the
outstanding Common Stock of the Company. The Rights expire on the
earlier of (i) January 22, 2007 or (ii) redemption or exchange of the
Rights.
7. Agreements
In June 1997, the Company entered into an agreement with Parke-Davis, a
division of Warner-Lambert Company (NYSE: WLA) and Pfizer, Inc. (NYSE:
PFE), valued at approximately $1 million, to supply Cholestech L.D.X(R)
Systems and disposable lipid profile cassettes to 1,000 physician
investigators to monitor lipid levels of their patients, in a Phase IV
clinical trial. Cholestech's distribution partner, Physician Sales and
Service (NASDAQ: PSSI), will become the servicing agent for Cholestech
L.D.X Systems involved in the Parke-Davis trials. At the conclusion of
the program, physicians who participated in the trials will be able to
provide on-going lipid and diabetes counseling utilizing the Cholestech
L.D.X System.
7
<PAGE>
CHOLESTECH CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors discussed herein, under "General" and "Potential Factors Affecting
Future Operating Results." These forward-looking statements include, but are not
limited to, the statement under "General" regarding the Company's expectation of
continuing to incur negative cash flows, the statement under "Sales and
Marketing" regarding the Company's expectation that sales and marketing expenses
will increase, the statement under "Research and Development" regarding the
development of tests for new disease states and the Company's anticipation that
research and development expenditures will increase, and the statement in the
third paragraph under "Liquidity and Capital Resources" regarding the length of
time that the Company's resources will be sufficient to meet its capital
requirements.
General
The Company develops, manufactures and markets a proprietary platform
technology - the Cholestech L.D.X(R) System - which in the preventive care
market measures specific analytes to detect various diseases and disorders
within five minutes using a single drop of whole blood. Despite positive
operating income in the first twenty-six weeks fiscal 1998, the Company has
experienced significant operating losses in prior periods and, as of September
26, 1997, had an accumulated deficit of $49.9 million. The Company is developing
certain additional tests designed to extend the Cholestech 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 that it may incur 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 therapeutic 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 have an impact on the Company's ability to
maintain profitability and positive cash flows from operations.
On July 24, 1997, the Food and Drug Administration (FDA) granted
clearance on the Company's notification of intent to market pursuant to Section
510 (k) of the Food, Drug and Cosmetics Act of 1938, as amended, ("Section 510
(k) Notification") to market a creatinine and blood urea nitrogen diagnostic
test cassette or renal function panel. The Company believes that these two tests
are among the most commonly ordered tests in physician offices. 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 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. In order to successfully
commercialize the creatinine and blood urea nitrogen test cassette in the United
States, the Company believes that it will be critical to obtain waived
classification under the Clinical Laboratory Improvement Amendments of 1988. The
Company has submitted an application to the Centers for Disease Control and
Prevention requesting the creatinine and blood urea nitrogen disposable test be
classified as waived under the requirements of Clinical Laboratories Improvement
Amendments of 1988 ("CLIA"). There can be no assurance that any new tests
developed by the Company, including the creatinine and blood urea nitrogen test,
will qualify for the waived classification. Any failure of the new tests to
obtain waived status under the CLIA will adversely impact the Company's ability
to
8
<PAGE>
CHOLESTECH CORPORATION
commercialize such tests.
Result of Operations
Thirteen weeks ended September 26, 1997 and September 27, 1996
and
Twenty-six weeks ended September 26, 1997 and September 27, 1996
Revenues. During the thirteen weeks ended September 26, 1997, revenues
increased $2.4 million (77%) to $5.4 million from $3 million in the thirteen
weeks ended September 27, 1996. Domestic revenues increased $2.3 million (84%)
to $4.9 million from $2.7 million in the thirteen weeks ended September 27,
1996. During the first twenty-six weeks of fiscal 1998, revenues increased $3.8
million (65%) to $9.6 million from $5.8 million in the first twenty-six weeks of
fiscal 1997. Domestic revenues increased $3.6 million (70%) to $8.7 million from
$5.1 million in the first twenty-six weeks of fiscal 1997. The increase in
domestic revenues reflects a continuing unit increase in sales of the disposable
test cassettes and the Cholestech L.D.X(R) System to hospitals, manageD care
organizations, public health departments, corporations, physician office
laboratories and other health care providers in the diagnostic screening and
therapeutic monitoring markets. As of September 26, 1997, the Company had
shipped approximately 2,500 Cholestech L.D.X System into the physician office
laboratory market
During the thirteen weeks ended September 26, 1997, international
revenues increased $116,000 (30%) to $502,000 from $386,000 in the thirteen
weeks ended September 27, 1996. During the first twenty-six weeks of fiscal
1998, international revenues increased $224,000 (33%) to $897,000 from $673,000
in the first twenty-six weeks of fiscal 1997. The increase in international
revenues reflects continued product demand in the European market. International
revenues as a percentage of total revenues declined to 9% the thirteen weeks
ended September 26, 1997 from 13% in the thirteen weeks ended September 27,
1996. The decrease in international revenues as a percentage of total revenues
reflects the substantial increase in domestic revenues from sales of the
Cholestech L.D.X System. The Company expects that international revenues will
continue to decline as a percentage of total revenues in future periods as the
Company continues to increase sales and marketing efforts in the United States.
Cost of Products Sold. Cost of products sold during the thirteen weeks
ended September 26, 1997 increased $1.0 million (66%) to $2.7 million from $1.7
million in the thirteen weeks ended September 27, 1996, as unit sales of the
disposable test cassettes and Cholestech L.D.X Systems increased. Gross margin
was 50% and 47% in the thirteen weeks ended September 26, 1997 and September 27,
1996, respectively. The improvement in the gross margin was primarily
attributable to growth in the volume of units sold.
During the first twenty-six weeks of fiscal 1998, cost of products sold
increased $1.4 million (44%) to $4.7 million from $3.3 million in the first
twenty-six weeks of fiscal 1997, as unit sales of disposable test cassettes and
the Cholestech L.D.X Systems increased. Gross margin was 51% and 44% in the
first twenty-six weeks of fiscal 1998 and 1997, respectively. The decrease in
the gross margin was primarily attributable to the margin impact from the
business partnership with Parke-Davis and the Company moving from a single shift
to one and half shifts to meet increased demand.
The Company has obtained rights to use certain technology in the
manufacturing of certain of its products. The related agreements, which expire
at various times in calendar 1997
9
<PAGE>
CHOLESTECH CORPORATION
through 2006, require the Company to pay royalties ranging from 2% to 4.6% of
net sales of the applicable products. Total royalty expenses in the thirteen
weeks ended September 26, 1997 and September 26, 1997 were $152,000 and
$126,000, respectively, and were charged to cost of products sold. Total royalty
expenses for first twenty-six weeks of fiscal 1998 and 1997 were $314,000 and
$237,000, respectively, and also were charged to cost of products sold.
Sales and Marketing Expenses. Sales and marketing expenses in the
thirteen weeks ended September 26, 1997 were $1.3 million compared to $963,000
for the same period in fiscal 1997, and $2.5 million for the first twenty-six
weeks of fiscal 1998 compared to $1.9 million for the first twenty-six weeks of
fiscal 1997. These increases in sales and marketing expenses were attributable
to continued expansion of the Company's domestic sales and marketing
organization, increased expenses related to the continued penetration in the
therapeutic monitoring market, increased commissions associated with increased
revenues and, to a lesser extent, participation in domestic conferences and
trade shows. Sales and marketing expenses as a percentage of revenues decreased
to 24% for the thirteen weeks ended September 26, 1997 from 32% for the same
period in fiscal 1997, and decreased to 26% for the first twenty-six weeks of
fiscal 1998 from 32% for the first twenty-six weeks of fiscal 1997. The Company
currently anticipates that sales and marketing expenses will continue to
increase in absolute dollars in future periods as the Company expands sales and
marketing activities to address the monitoring market, in particular the
physician office laboratory and pharmacy segments.
Research and Development Expenses. Research and development expenses
for the thirteen weeks ended September 26, 1997 were $522,000 compared to
$269,000 for the same period in fiscal 1997, and $997,000 for the first
twenty-six weeks of fiscal 1998 compared to $453,000 for the first twenty-six
weeks of fiscal 1997. The increases in research and development expense were
attributable to continued development of additional tests and an increase in
headcount. Research and development expenses as a percentage of revenues
increased to 10% for the thirteen weeks ended September 26, 1997 from 9% for the
thirteen weeks ended September 27, 1996. Research and development expenses as a
percentage of revenues increased to 10% for the first twenty-six weeks of fiscal
1998 from 8% for the first twenty-six weeks of fiscal 1997. These increases as a
percentage of revenues resulted from the Company's building research and
development infrastructure faster then revenue.
The Company is currently developing additional tests to detect and
monitor disease states such as metabolic bone diseases and disorders, liver
function, prostate cancer, cardiovascular disease 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 before such tests can be marketed.
However, the Company believes that its future revenue growth and profitability
will depend, in part, upon its ability to complete development and successfully
introduce new test panels designed to extend the Cholestech L.D.X System's
capabilities to include additional tests useful in the diagnostic screening and
therapeutic monitoring markets. The Company currently anticipates that research
and development expenditures will increase in future periods as product
development and manufacturing scale-up efforts for new tests increase.
General and Administrative Expenses. General and administrative
expenses for the thirteen weeks ended September 26, 1997 were $595,000 compared
to $464,000 for the same period in fiscal 1997 and $1.1 million for the first
twenty-six weeks of fiscal 1998 compared to $879,000 for the first twenty-six
weeks of fiscal 1997. These increases in general and administrative expenses
resulted from increased investment in the Company's information systems. General
and administrative expenses as a percentage of revenues decreased to 11% for the
thirteen weeks ended September 26, 1997 from 15% for the same period in fiscal
1997, and decreased to 12% for the first twenty-six weeks of fiscal 1998 from
15% for the first twenty-six
10
<PAGE>
CHOLESTECH CORPORATION
weeks of fiscal 1997. These decreases as a percentage of revenues occurred due
to a faster revenue growth then the Company's ability to responsibly build
infrastructure.
Interest Income (Expense), Net. Interest income (expense), net consists
of interest income earned on investment of cash, cash equivalents and marketable
security balances, offset in part by interest expense incurred on capital lease
financing, and for the thirteen weeks ended September 27, 1996 and first
twenty-six weeks of fiscal 1997, other borrowings of the Company. The Company
recorded net interest income of $163,000 in the thirteen weeks ended September
26, 1997 compared to $29,000 for the same period in fiscal 1997 and $281,000 for
the first twenty-six weeks of fiscal 1998 compared to $6,000 for the same period
in fiscal 1997. These increases in net interest income reflect higher interest
income earned on investment of cash balances generated from the Company's public
offering of common stock in June 1996 and lower average borrowings outstanding
during the thirteen weeks ended September 26, 1997 and the first twenty-six
weeks of fiscal 1998.
Income Taxes. As the Company has significant net operating loss and tax
credit carryforwards, the provisions for income taxes for the thirteen weeks
ended September 26, 1997 and twenty-six weeks of fiscal 1998 represent the
estimated alternative minimum tax. Management expects to utilize additional net
operating loss and other tax carryforward amounts to the extent of income is
earned during fiscal 1998. Accordingly, the Company's estimated effective tax
rate is expected to remain low throughout fiscal 1998.
New Accounting Pronouncements. In February 1997, the Financial
Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS
128"), which will be effective for the Company's third quarter of fiscal 1998.
Under SFAS 128, primary earnings per share is replaced by basic earnings per
share and fully diluted earnings per share is replaced by diluted earnings per
share. If the Company had adopted this statement for the quarter ended September
26, 1997, the net income (loss) per share for the quarters ended September 26,
1997 and September 27, 1996 would have been the same as presently reported
herein.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for the reporting of comprehensive income and its components in a full
set of general purpose financial statements for periods beginning after December
15, 1997. Reclassification of financial statements for earlier periods for
comparative purposes is required. The Company will adopt SFAS 130 in fiscal 1999
and does not expect such adoption to have a material effect on the financial
statements.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131, which is effective for periods beginning after December
15, 1997, revises information regarding the reporting of certain operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The Company will adopt SFAS
131 in fiscal 1999 and does not expect such adoption to have a material effect
on the financial statements.
11
<PAGE>
CHOLESTECH CORPORATION
Liquidity and Capital Resources
The Company has financed its operations primarily through product
sales, the sale of equity securities and, to a lesser extent, through capital
lease financing. From inception to September 26, 1997, the Company raised
approximately $69 million in net proceeds from equity financings. As of
September 26, 1997, the Company had approximately $14.0 million of cash, cash
equivalents and short-term marketable securities. There was no material change
in the level of cash, cash equivalents, marketable securities and restricted
marketable securities from first twenty-six weeks of fiscal 1997 to first
twenty-six weeks of fiscal 1998. In addition, the Company has available a $3
million revolving bank line of credit agreement. While the agreement is in
effect, the Company is required to maintain on deposit assets with a collective
value, as defined in the line of credit agreement, equivalent to no less than
100% of the outstanding principal balance. Amounts outstanding under the line of
credit bear interest at the bank's prime rate. The line of credit agreement
expires on November 30, 1997 and is renewable. As of September 26, 1997, there
were no borrowings outstanding under the line of credit.
Net cash provided by operating activities was approximately $290,000
during the first twenty-six weeks of fiscal 1998 compared to net cash used by in
operating activities of $1.8 million during first twenty-six weeks of fiscal
1997. In the first twenty-six weeks of fiscal 1998, net income from product
sales was the primary factor contributing to cash provided by operating
activities. In the first twenty-six weeks of fiscal 1997, the net loss,
increases in accounts receivable and inventory were the factors contributing to
cash used by operating activities. Net cash used in investing activities of
approximately $2.1 million in the first twenty-six weeks of fiscal 1998 and $5
million in the first twenty-six weeks of 1997 resulted from the Company's net
purchases of marketable securities and property and equipment. Net cash provided
by financing activities in the first twenty-six weeks of fiscal 1998 was
$213,000, reflecting issuance of Common Stock, primarily pursuant to the
employee stock purchase plan and the stock incentive program but was offset in
part by principal payments on capital leases. Net cash provided by financing
activities in the first twenty-six weeks of fiscal 1997 was $11.8 million,
reflecting issuance of Common Stock, primarily from the Company's June 1996
public offering, but was offset in part by principal payments on capital leases,
repayment of long-term debt and repayment of short-term bank borrowings.
The Company intends to expend substantial funds for product research
and development, continued expansion of sales and marketing activities,
expansion of manufacturing capacity and other working capital and general
corporate purposes. Although the Company believes that its cash, cash
equivalents and short-term marketable securities balances as of September 26,
1997 and its available bank line of credit, together with amounts to be
generated from operations, 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 or take advantage of favorable capital markets to
secure additional financing or take advantage of favorable capital markets to
secure additional financing. The Company's actual liquidity and capital
requirements will depend upon numerous 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
12
<PAGE>
CHOLESTECH CORPORATION
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.
Potential Factors Affecting Future Operating Results
History of Losses; Uncertainty of Future Profitability. The Company has
experienced significant operating losses since inception and as of September 26,
1997, had an accumulated deficit of $49.9 million. 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, such as (i) the timing and level of market acceptance of the
Cholestech L.D.X(R) System, particularly with respect to the therapeutiC
monitoring market; (ii) the timing of introduction and availability of new
tests; (iii) the timing and level of expenditures associated with new product
development activities; (iv) the timing and level of expenditures associated
with expansion of sales and marketing activities and overall operations; (v) the
Company's ability to cost-effectively expand cassette manufacturing capacity and
maintain consistently acceptable yields in the manufacture of disposable test
cassettes; (vi) the timing of establishment of strategic distribution
arrangements and the success of the activities conducted under such
arrangements; (vii) variations in manufacturing efficiencies; (viii) changes in
demand for its products based on changes in third party reimbursement,
competition, changes in government regulation and other factors; (ix) the timing
of significant orders from and shipments to customers; and (x) 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, and/or affect cash
flow from operations. 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.
Uncertainty of Market Acceptance of the Cholestech L.D.X System. The
Company has generated revenues to date, primarily from sales of the Cholestech
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 diagnostic screening
market and therapeutic monitoring market. In order for the Company to increase
revenues, sustain profitability and maintain positive cash flows from
operations, the Cholestech L.D.X System must continue to achieve market
acceptance among health care providers in the therapeutic monitoring market,
particularly physician office laboratories. Physicians and other health care
providers are not likely to use the Cholestech L.D.X System unless they
determine that it is an attractive alternative to other means of diagnostic
screening or monitoring of blood detected diseases. Even if the advantages of
the Cholestech L.D.X System in diagnosing and therapeutic monitoring patients
with blood detected diseases are established, physicians, medical clinics,
pharmacists and other health care providers may elect not to purchase and use
the Cholestech L.D.X System for any number of reasons. As a result, there can be
no assurance that demand for the Cholestech L.D.X System, particularly in the
therapeutic monitoring market, will be sufficient to allow sustainable profits
from operations.
Dependence on Development and Introduction of New Products. The Company
is in the early stages of developing tests designed to extend the Cholestech
L.D.X System's capability to include additional tests useful to health care
providers, particularly physician office laboratories. The Company believes that
its revenue growth and future profitability will depend, in part, upon its
ability to complete development of and successfully introduce these new tests.
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
13
<PAGE>
CHOLESTECH CORPORATION
marketing of these new tests, that regulatory clearance or approval of any new
tests will be granted by the FDA or the Center for Disease Control and
Prevention (for waived status) 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. On July 24, 1997, the FDA approved the Company's Section 510
(k) Notification to market the Company's creatinine and blood urea nitrogen
disposable test cassette. The Company has submitted a request for waived
classification to the Centers for Disease Control and Prevention for the use of
the creatinine and blood urea nitrogen test cassette with the L.D.X System. To
date, the Centers for Disease Control and Prevention has not acted upon the
Company's request. In order to successfully commercialize the creatinine and
blood urea nitrogen disposable test cassette in the United States, the Company
believes it is critical to obtain waived status under CLIA. In order to
successfully commercialize any new tests, including the creatinine and blood
urea nitrogen disposable test cassette, 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.
Limited Sales, Marketing and Distribution Experience; Dependence on
Third Party Distributors. In order for the Company to increase revenues and
achieve sustainable profitability, the Cholestech L.D.X System must achieve a
significant degree of market acceptance among health care providers in the
monitoring market, particularly physician office laboratories and retail
pharmacies. The Company has only limited experience in marketing and selling to
the monitoring market in the United States. In the last twelve months, the
Company has entered into distribution arrangements with two national
distributors, General Medical Inc. and AmeriSource Health Corporation. 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 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 in promoting market acceptance.
It is uncertain 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. 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 Cholestech L.D.X System and disposable test cassettes, the
Company's business, financial condition and results of operations would be
materially adversely affected.
Risks Associated with Cassette Manufacturing. The Company internally
manufactures all the disposable test cassettes that are components of the
Cholestech L.D.X System. The manufacture of the disposable test 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. The Company
believes that it may be required to expand manufacturing capacity for new and
existing test cassettes. In fiscal 1997, the Company added a second
manufacturing line for dry chemistry cassettes. The Company intends to add a
third manufacturing line for dry chemistry cassettes in the third or fourth
quarter of fiscal 1999 to address future constraints on capacity. There can be
no assurance that such expansion of cassette manufacturing capacity can be
completed in a timely fashion, if ever. In addition, the Company will be
required to build a new cassette manufacturing line for the immunoassay test
14
<PAGE>
CHOLESTECH CORPORATION
cassettes under development, such as metabolic bone diseases and disorders. To
date, the Company has not developed the core technologies, processes and
production equipment for an immunoassay cassette manufacturing line. To the
extent the Company does not achieve acceptable manufacturing yields of
disposable test cassettes or experiences product shipment delays, the Company's
business, financial condition and results of operations would be materially
adversely affected.
Highly Competitive Industry; Rapid Technological Change. The diagnostic
screening and therapeutic monitoring markets in which the Company competes are
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 preventive care testing systems. In order to achieve
market acceptance for the Cholestech L.D.X System(R), the Company will be
required to demonstrate that the Cholestech L.D.X System is an attractive
alternative to the clinical laboratory and hospital-based laboratory, as well as
bench top and other diagnostic systems. This will require physicians to change
their established means of having such tests performed. The Company expects that
the reclassification of the Cholestech L.D.X System as waived under CLIA will
result in competitors seeking to develop products that qualify for waived
classification. If the BUN/Creatinine disposable test cassette is not granted
waived status, there can be no assurance that the Company will be able to obtain
waived status, that if such status is not obtained, the BUN/Creatinine cassette
will achieve market acceptance or that competitors will not obtain waived status
for a similar product. 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 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. There can be no assurance that the Cholestech L.D.X
System will be able to compete with the testing services provided by these
laboratories and analyzers.
Dependence on Proprietary Technology, Uncertainty of Patent and
Proprietary Technology Protection, Dependence on 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 patents and one foreign issued patent and is currently
pursuing several 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 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. 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 to determine the
priority of inventions. 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 parties which may not be available on commercially reasonable terms.
Government Regulation. The manufacture and sale of diagnostic products,
including the Cholestech 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. 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
15
<PAGE>
CHOLESTECH CORPORATION
effect on the Company's business, financial condition and results of operations.
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 pre-market approval application which is much longer and
more costly process and involves the submission of extensive supporting data and
clinical information. A pre-market approval 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 pre-market approval
application, the FDA commences a review process that generally takes one to
three years from the date on which the pre-market approval 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 pre-market approval. A requirement that
the company file a pre-market approval application for a new test would
significantly delay the Company's ability to market such test and significantly
increase the costs of development.
The European Union ("EU") has promulgated rules which require that
medical products receive the right to affix the CE mark, a symbol of adherence
to quality assurance standards and compliance with applicable EU regulations.
Cholestech's products are covered by the In Vitro Diagnostics Directive which
becomes effective July 1, 1998. The Company has completed all the testing
necessary to comply with applicable safety regulations, and has received or
expects to receive the appropriate certifications, relative to those
regulations, by the end of December 1997. While the Company intends to satisfy
the requisite policies and procedures that will permit it to affix the CE mark
to its products, there can be no assurance that the Company will be successful
in meeting the European certification requirements, and failure to receive the
right to affix the CE mark will prohibit the company from selling its products
in member countries of the EU.
The time required to obtain approval for sale in foreign countries may
be longer or shorter than that required for FDA approval, and the requirements
may differ. Export sales of investigational devices that are subject to PMA and
IDE requirements and have not received FDA marketing approval are subject to FDA
export requirements. In accordance with the FDA Export Reform & Enforcement Act
of 1996, such devices may be exported to any country provided that the device
has marketing authorization in one of the countries identified in the Act. If
the device has no such marketing authorization and is intended for marketing,
approval much be obtained from the FDA to export to any country. In order to
obtain export approval, the Company maybe required to provide the FDA with
documentation from the medical device regulatory authority of the country in
which the study is to be conducted or the purchaser is located, stating that the
exportation of the device has the approval of the country. In addition, the FDA
must find that exportation of the device is not contrary to the public health
and safety of the country in order for the Company to obtain the permit. The
Company has obtained such required approvals for each of its currently marketed
products and expects to apply for such approvals for the Blood Urea
Nitrogen/Creatinine test and additional tests as they are developed.
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. In January
1996, the Cholestech L.D.X System and the 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. There can be no assurance that any new tests developed by the
Company will qualify for the waived classification, including the Blood Urea
Nitrogen/Creatinine disposable test cassette. Any failure of the new tests to
obtain waived status CLIA will adversely impact the
16
<PAGE>
CHOLESTECH CORPORATION
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.
Uncertainty Relating to Third Party Reimbursement. In the United
States, health care providers, such as hospitals and physicians, that purchase
products such as the Company's Cholestech L.D.X System and disposable test
cassettes, generally rely on third party payers, 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, private health insurers and other organizations. Such third party
payers can affect the pricing or the relative attractiveness of the Company's
products by regulating the maximum amount of reimbursement provided by such
payers for testing services. Reimbursement is currently not available for
certain uses of the Company's products. For example, the cost of the Cholestech
L.D.X System is generally not subject to reimbursement by government and other
third party payers. 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. Failure by physicians and other users to obtain reimbursement from
third party payers, or changes in government and private third party payers'
policies toward reimbursement of test 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.
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.
Dependence on Suppliers. Certain key components and raw materials used
in manufacturing of the Company's products are currently provided by
single-source vendors. Any supply interruption in a single-source component or
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 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.
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
17
<PAGE>
CHOLESTECH CORPORATION
personnel. The loss of key personnel or the inability to hire or retain
qualified personnel could have a material adverse effect upon the Company's
business, financial condition and results of operations.
Risk of Product Liability; Product Liability Insurance May Be
Insufficient or Unavailable. 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. 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. 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.
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
non-designated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without any further vote or action by
the shareholders. To date, the Board of Directors has designated 25,000 shares
as Series A Participating Preferred Stock in connection with the Company's
Shareholder Rights Plan. 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.
On January 22, 1997, pursuant to a Preferred Shares Rights Agreement
(the "Rights Agreement") between the Company and ChaseMellon Shareholder
Services, LLC (the "Rights Agent"), the Company's Board of Directors declared a
dividend of one right (a "Right") to purchase on one-thousandth share of the
Company's Series A Participating Preferred Stock ("Series A Preferred") for each
outstanding share of Common Stock of the Company. The dividend was payable on
March 31, 1997 (the "Record Date") to stockholders of record as of the close of
business on that day. Each Right entitles the registered holder to purchase from
the Company on one-thousandth of a share of Series A Preferred at an exercise
price of $44.00 (the "Purchase Price"), subject to adjustment. The Rights
approved by the Board are designed to protect and maximize the value of the
outstanding equity interests in the Company in the event of an unsolicited
attempt by an acquirer to take over the Company, in a manner or on terms not
approved by the Board of Directors. The Rights have been declared by the Board
in order to deter coercive tactics, including a gradual accumulation of shares
in the open market of a 15% or greater position to be followed by a merger, or a
partial or two-tier tender offer that does not treat all stockholders equally.
The Rights should not interfere with any merger or business combination approved
by the Board of Directors. However, the Rights may have the effect of rendering
more difficult or discouraging an acquisition of the Company deemed undesirable
by the Board of Directors. The Rights may cause substantial dilution to a person
or group that attempts to acquire the Company on terms or in a manner not
approved by the Company's Board of Directors, except pursuant to an offer
conditioned upon the negation, purchase or redemption of the Rights.
Potential Volatility of Stock Price. The market price of shares of the
Company's Common Stock, like that of the common stock of many other medical
products and 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,
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CHOLESTECH CORPORATION
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.
Absence of Dividends. The Company has not paid any cash dividends since
inception and does not anticipate paying cash dividends in the foreseeable
future.
19
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CHOLESTECH CORPORATION
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 22, 1997, the Company held its 1997 Annual Meeting of
Shareholders. The following is a brief description of each matter voted upon at
the meeting and a statement of the number of votes cast for, against or withheld
and the number of abstentions and the number of broker non-voters with respect
to each matter.
1. The shareholders elected the following Directors:
Nominee For Withheld
------------------------ --------- --------
Dr. Joseph Buchman 8,961,745 155,003
John L. Castello 8,967,868 148,880
Warren E. Pinckert II 8,966,278 150,470
Dr. Harvey S. Sadow 8,963,645 153,103
H.R. Shepherd 8,962,735 154,013
2. The shareholders approved the adoption of the Company's 1997
Stock Incentive Program and authorized the reservation of
900,000 shares of Common Stock for issuance thereunder.
For Against Abstain
--- ------- -------
3,786,173 657,639 203,407
3 The shareholders approved an amendment to the Company's 1992
Employee Stock Purchase Plan to increase the aggregate number
of shares of Common Stock authorized for issuance under such
plan by 200,000 shares.
For Against Abstain
--- ------- -------
5,074,666 409,004 60,752
4. The shareholders ratified the appointment of Price Waterhouse
LLP as independent accountants of the Company for the fiscal
year ending March 27, 1998.
For Against Abstain
--- ------- -------
9,045,550 26,095 45,103
20
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CHOLESTECH CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.17 Consulting Agreement between Registrant and
Warner-Lambert Company, Inc. dated June 18,
1997.
11.1 Statement of Computation of Per Share
Earnings.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. No reports on Form 8-K were
filed during the quarter ended September 26, 1997.
21
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CHOLESTECH CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHOLESTECH CORPORATION
Date November 10, 1997 /s/ Warren E. Pinckert II
------------------------ -------------------------------------
Warren E. Pinckert II
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Andrea J. Tiller
-------------------------------------
Andrea J. Tiller
Vice President of Finance and Chief
Financial Officer
(Principal Financial and Accounting Officer)
22
COMPANY CONSULTING AGREEMENT
----------------------------
June 10, 1997
Mark Kussman, VP Sales and Marketing
Cholestech Corporation
3347 Investment Blvd,
Hayward, CA 94545-3808 '
Dear Mark:
Warner-Lambert Company (the "Company") is pleased to offer Cholestech
Corporation (hereinafter referred to as "Consultant") an opportunity to provide
services to its Parke-Davis Pharmaceutical Division in connection with the
projects listed on Exhibit A attached hereto and made a part of this Agreement,
subject to the following terms and conditions:
1. This Agreement shall be effective from June 10, 1997, until the
earlier of (a) completion of the services specified in Exhibit A; or (b) June
30, 1998, unless terminated earlier in accordance with Paragraph 7.
2. Consultant agrees to provide services under this Agreement to the
best of Consultant's abilities and in accordance with the Company's reasonable
objectives as communicated by Irene Laurora or her designee or successor. During
the term of this Agreement, Consultant shall be free to provide services to
others provided that such services do not interfere with or create a conflict of
interest with obligations under this Agreement and provided the Company's
facilities or personnel are not utilized for such other services.
3. Any information, including, but not limited to, information relating
to the business, products, marketing plans and policies of the Company or its
affiliates, supplied to Consultant by the Company or its affiliates (either
directly or indirectly, and in whatever form) or developed by Consultant in
carrying out services under this Agreement, shall be deemed to be confidential
and proprietary and the property of the Company with the exception of
information which was already known to Consultant at the time received by
Consultant from the Company or its affiliates (either directly or indirectly),
provided Consultant delivers conclusive written evidence of such prior knowledge
to the Company within forty-five (45) days after the information was disclosed
to Consultant.
4. During and after the term of this Agreement, Consultant agrees not
to use the confidential and proprietary information described in Paragraph 3 for
any purpose other than in furtherance of services under this Agreement and not
to disclose such information to any third party without the prior written
consent of the
<PAGE>
2
Company. Consultant agrees to return all such confidential and proprietary
information to the Company, including, but not limited to, records, memoranda
and reports, together with all photographic copies, handwritten notes, excerpts
or other copies thereof promptly after request by the Company, or, in any event,
promptly upon expiration or termination of this Agreement.
5. All ideas, inventions and discoveries, whether patentable or not,
conceived by Consultant (alone or with others) as a result of the services
provided under this Agreement shall be the sole and exclusive property of the
Company and is hereby assigned to the Company or as the Company may direct
without additional compensation to Consultant. Ideas, inventions and discoveries
shall be deemed to have been conceived as a result of the services provided
under this Agreement if conceived either (i) during the term of this Agreement,
or (ii) within one (1) year after the termination of this Agreement, if based
upon information provided to Consultant by or at the direction of the Company or
its corporate affiliates or developed by Consultant in carrying out its duties
under this Agreement.
Obtaining, maintaining, defending and enforcing patent rights in any
country of the world with respect to any such ideas, inventions and discoveries
shall be entirely within the discretion and at the expense of the Company, but
Consultant agrees to give all necessary assistance in connection therewith,
including execution of documents.
6. Consultant shall be entitled to receive a fee of one million one
hundred fifteen thousand dollars ($1,115,000.00) provided under this Agreement
to be paid per payment schedule outlined in EXHIBIT A.
7. This Agreement may be terminated by the Company upon thirty (30)
days written notice. In the event of such termination, and notwithstanding any
other provision in this Agreement, fees will be paid by the Company only for
work or services completed prior to the termination date.
Further, this Agreement may be terminated by the Company with immediate
effect upon written notice to Consultant in the event of Consultant's breach of
any of the terms of this Agreement which shall not have been remedied within
fourteen (14) days of written notice with request to do so.
8. Neither party may assign this Agreement or any part thereof without
the written consent of the other party. Notwithstanding the foregoing, either
party may assign this Agreement to a successor to all or a substantial portion
of its business without the consent of the other party.
9. Consultant shall serve as an independent contractor to the Company
and Consultant shall have no authority or capacity to bind the Company and its
affiliates or to act on their behalf. This Agreement does not create a
partnership between the parties hereto. Consultant expressly acknowledges for
itself, its
<PAGE>
3
employees, agents and subcontractors, that none of its employees, agents or
subcontractors are employees of Company and that none of its employees, agents
or subcontractors are entitled to participate in any benefit plans of Company.
Consultant further acknowledges that none of its employees, agents or
subcontractors are eligible to participate in any such benefit plans, even if it
is later determined that the status of any of them was that of an employee
during the period of this engagement of Consultant by Company. Consultant on
behalf of itself and its employees, agents and subcontractors, hereby expressly
waives any claim for benefits coverage attributable to the services provided
under this Agreement. Consultant shall provide Company with an acknowledgement
in the form of Exhibit B attached hereto from each and all of its employees,
agents and subcontractors who perform services under this Agreement.
Further, Consultant shall indemnify the Company for any liability of
the Company or its affiliates for any bodily injury or property damage incurred
by the Company and caused by Consultant in performance of services under this
Agreement, unless resulting solely from the gross negligence or willful
misconduct of the Company or its affiliates,
10. Consultant declares that Consultant has complied with all federal,
state and local laws that may be required to provide services hereunder,
including, without limitation, those regarding business permits and licenses.
11. Consultant understands and acknowledges awareness ef the following:
(a) Neither federal, nor state, nor local income tax nor payroll tax of
any kind shall be withheld or paid by the Company on behalf of
Consultant or the employees of Consultant. Consultant shall not be
treated as an employee with respect to services provided hereunder for
federal or state tax purposes.
(b) No workers' compensation insurance shall be obtained by the Company
concerning Consultant or any employees of Consultant. Consultant shall
comply with applicable workers' compensation law concerning Consultant
and any employees of Consultant.
(c) Consultant is responsible to pay, according to applicable law,
Consultant's income taxes, Independent tax counsel of Consultant's own
choice should be consulted with respect to such matters.
12. Consultant shall keep records of its work performed in connection
with this Agreement consistent with good business, medical and research practice
and in any event, as and in a manner in which the Company directs.
<PAGE>
4
13. Consultant agrees to provide periodic written status reports, as
reasonably requested by the Company, of Consultant's services performed
hereunder.
14. Paragraphs 3, 4, 5 and 9 herein shall survive the termination or
expiration of this Agreement.
15, A waiver by either party of any term or condition of this Agreement
in any instance shall not be deemed or construed to be a waiver of such term or
condition for the future, or of any subsequent breach thereof. All rights,
remedies, undertakings or obligations contained in this Agreement shall be
cumulative and none of them shall be in limitation of any other right, remedy,
undertaking or obligation of either party.
16. If and to the extent that any court of competent jurisdiction holds
any provision of this Agreement to be invalid or unenforceable in a final
nonappealable order, such holding shall in no way affect the validity of the
remainder of this Agreement.
17. Any notice given to a party under or in connection with this
Agreement shall be in writing and shall be personally delivered or deposited in
the United States mail, postage prepaid, by certified mail with return receipt
requested, to the party at the address set forth below for such party:
TO THE COMPANY: Warner-Lambert Company
201 Tabor Road
Morris Plains, New Jersey 07950
Attn: Irene Laurora, PharmD
with a copy to: Assistant General Counsel, Pharmaceuticals, N.A.
Warner-Lambert Company
201 Tabor Road
Morris Plains, New Jersey 07950
TO CONSULTANT: Cholestech Corporation
Attn: Mark Kussman
3347 Investment Blvd.
Hayward, CA 94545-3808
or, to such other address as to which the party has given notice. Such notices
shall be deemed given upon receipt.
18. This Agreement shall be governed by and construed in accordance
with the law (other than provisions relating to conflict of laws) of the State
of New Jersey.
<PAGE>
5
19. This letter contains the entire agreement between Consultant and
the Company with respect to the transactions contemplated herein and supersedes
all previous written and oral negotiations, commitments, and understandings. Its
terms shall not be altered or otherwise amended except pursuant to an instrument
in writing signed by each of the parties hereto and making specific reference to
this letter. Notwithstanding the foregoing, the obligations of Consultant under
any existing nondisclosure or confidentiality agreements with the Company shall
continue.
Please indicate your agreement to the above terms by signing and
returning the enclosed duplicate original of this letter Agreement.
Very truly yours,
WARNER-LAMBERT COMPANY
By: /s/ B. A. Jerris
-----------------------------
Name: B. A. Jerris
Title: Vice President Finance
6/18/97
Accepted and Agreed to
as of the date first
above written:
Cholestech Corporation
By: /s/ Mark J. Kussman
------------------------
Name: Mark J. Kussman
Title: VP Sales & Marketing
6/13/97
------------------------
(Date)
<PAGE>
6
EXHIBIT A
---------
Consultant shall provide services to Warner-Lambert Company's Parke-
Davis Pharmaceutical Division in connection with the Lipitor Primary Care
Iniatiative:
- --------------------------------------------------------------------------------
Item Per Physician Total
- --------------------------------------------------------------------------------
Cholestech L-D-X(R) Systern 1 1000
Chemistry analyzer and Power
Supply
- --------------------------------------------------------------------------------
Starter Kit (includes) 1 1000
50 Capillary Tubes
50 Capillary Plungers
50 Lancets
1 Mini-Pet Pipette
50 Pipette Tips
1 Accessoy Tray
- --------------------------------------------------------------------------------
Optics Check Cassette 1 1000
- --------------------------------------------------------------------------------
User Manual 1 1000
- --------------------------------------------------------------------------------
Training Video 1 1000
- --------------------------------------------------------------------------------
Procedure Manual 1 1000
- --------------------------------------------------------------------------------
Lipid Profile Cassettes (T-C, 30 30,000
LDL, HDL, TG)
- --------------------------------------------------------------------------------
Control Materials
1-Level 1 2mL vials
1-Level 2 2mL vials 1 pak of 2 vials 1000 2 vial paks
- --------------------------------------------------------------------------------
Marketing Brochures 2000
- --------------------------------------------------------------------------------
Full Warrant 1 year
- --------------------------------------------------------------------------------
Cholestech will provide training of investigators 1,000 at two investigator
meetings. Cholestech will provide full technical support throughout the course
of the study.
Payment Schedule:
A fee of one million one hundred fifteen thousand Dollars
($1,115,000.00) will be paid for services provided
First Payment - $500,000.00 will be paid upon signing of contract by
all parties
Second Payment - $515,000,00 will be paid upon completion of shipment
of the above items
Final Payment - an amount of up to $100,000.00 will be paid for
training conducted at the investigators' meetings upon conclusion of
the last of the two investigators' meetings, within 30 days of
Parke-Davis' receipt of consultant's submission of appropriate receipts
(reasonable and appropriate/necessary expenses for travel, lodging,
meals, or per client costs for performance of this agreement with
supporting documentation)
<PAGE>
7
EXHIBIT B
---------
TO CONSULTANT AGREEMENT BY AND BETWEEN
Mark Kussman ("CONSULTANT") AND WARNER-LAMBERT COMPANY ("COMPANY") AND
DATED AS OF 6/13/1997 (THE "AGREEMENT")
Mark Kussman (hereinafter referred to as "Employee/Agent/
Subcontractor") hereby expressly acknowledges that he/she is not an employee of
Company and that he/she is not entitled to participate in any benefit plans of
Company. Employee/Agent/Subcontractor further acknowledges that he/she is not
eligible to participate in any such benefit plans even if it is later determined
that his/her status was that of an employee of Company during the period of the
engagement between Consultant and Company under the Agreement. Employee\Agent\
Subcontractor hereby expressly waives any claim for benefits coverage
attributable to the services provided under the Agreement.
EMPLOYEE/AGENT/SUBCONTRACTOR
OF CONSULTANT
/s/ Mark Kussman
-----------------------------
Name:
Date: 6/13/97
-----------------------
EXHIBIT 11.1
<TABLE>
CHOLESTECH CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
Sept. 26, 1997 Sept 27,1996 Sept. 26, 1997 Sept 27,1996
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Primary:
Weighted average shares outstanding 11,260 10,969 11,243 9,566
Net effect of dilutive stock options 491 -- 398 --
-------- -------- -------- ---------
Total 11,751 10,969 11,641 9,566
======== ======== ======== =========
Net income (loss) $ 437 $ (237) $ 556 $ (648)
======== ======== ======== =========
Income (loss) per share $ 0.04 $ (0.02) $ 0.05 $ (0.07)
======== ======== ======== =========
Fully diluted:
Weighted average shares outstanding 11,260 10,969 11,243 9,566
Net effect of dilutive stock options 463 -- 463 --
-------- -------- -------- ---------
Total 11,723 10,969 11,706 9,566
======== ======== ======== =========
Net income (loss) $ 437 $ (237) $ 556 $ (648)
======== ======== ======== =========
Income (loss) per share $ 0.04 $ (0.02) $ 0.05 $ (0.07)
======== ======== ======== =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-27-1998
<PERIOD-END> SEP-26-1998
<CASH> 4491
<SECURITIES> 9502
<RECEIVABLES> 3338
<ALLOWANCES> 105
<INVENTORY> 2408
<CURRENT-ASSETS> 20198
<PP&E> 7418
<DEPRECIATION> 4836
<TOTAL-ASSETS> 22885
<CURRENT-LIABILITIES> 3339
<BONDS> 0
0
0
<COMMON> 69424
<OTHER-SE> (49878)
<TOTAL-LIABILITY-AND-EQUITY> 22885
<SALES> 9615
<TOTAL-REVENUES> 9615
<CGS> 4696
<TOTAL-COSTS> 9328
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> 568
<INCOME-TAX> 12
<INCOME-CONTINUING> 556
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 556
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
