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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 December 27, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
- --- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 000-20198
CHOLESTECH CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3065493
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
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 such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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At December 27, 1996, 11,204,397 shares of no par common stock of the Registrant
were outstanding.
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CHOLESTECH CORPORATION
PART I
FINANCIAL INFORMATION
PAGE
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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 6. EXHIBITS AND REPORTS ON FORM 8-K. 13
SIGNATURES 14
2
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CHOLESTECH CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
December 27, 1996 March 29, 1996 (1)
----------------- -----------------
Current assets:
Cash and cash equivalents $ 6,944 $ 361
Marketable securities 4,011 --
Restricted marketable securities -- 3,750
Accounts receivable 1,722 1,107
Inventories 2,545 1,910
Prepaid expenses and other assets 188 167
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Total current assets 15,410 7,295
Property and equipment, net 2,410 2,041
Marketable securities 2,785 --
Other assets, net 218 309
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$ 20,823 $ 9,645
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings $ -- $ 250
Accounts payable and accrued expenses 1,657 1,614
Accrued payroll and benefits 238 253
Product warranty 212 187
Current portion of long-term debt -- 499
Other liabilities 48 50
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Total current liabilities 2,155 2,853
Long-term debt, less current portion -- 799
Other liabilities 20 11
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Total liabilities 2,175 3,663
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Shareholders' equity:
Preferred stock -- --
Common stock 69,121 55,644
Accumulated deficit (50,473) (49,662)
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Total shareholders' equity 18,648 5,982
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$ 20,823 $ 9,645
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(1) The information in this column was derived from the Company's audited
financial statements for the fiscal year ended March 29, 1996.
See accompanying notes to condensed financial statements.
3
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CHOLESTECH CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Thirteen weeks ended Thirty-nine weeks ended
-------------------- -----------------------
12/27/96 12/29/95 12/27/96 12/29/95
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Revenues:
Domestic $ 2,942 $ 1,188 $ 8,085 $ 3,601
International 227 428 900 949
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3,169 1,616 8,985 4,550
Cost of products sold 1,662 1,041 4,931 2,900
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Gross profit 1,507 575 4,054 1,650
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Operating expenses:
Sales and marketing 989 806 2,858 2,206
Research and development 365 149 818 539
General and administrative 495 336 1,374 1,053
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Total operating expenses 1,849 1,291 5,050 3,798
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Loss from operations (342) (716) (996) (2,148)
Other income, net 179 17 185 155
Net loss $ (163) $ (699) $ (811) $(1,993)
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Net loss per share $ (0.01) $ (0.09) $ (0.08) $ (0.25)
------- ------- ------- -------
------- ------- ------- -------
Weighted average common
shares 11,176,669 8,040,082 10,103,329 8,021,074
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See accompanying notes to condensed financial statements.
4
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CHOLESTECH CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Thirty-nine weeks ended
------------------------------------
December 27, 1996 December 29, 1995
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Cash flows from operating activities:
Net loss $ (811) $(1,993)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 597 457
Deferred revenue 2 (20)
Compensation expense relating to
stock options issued below market -- 30
Forgiveness of note receivable -- 36
Changes in assets and liabilities:
Accounts receivable (615) (62)
Inventories (635) (322)
Prepaid expenses and other assets (21) (18)
Other assets (18) --
Accounts payable and accrued expenses 43 380
Accrued payroll and benefits (15) (141)
Product warranty 25 --
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Net cash used in operating activities (1,448) (1,653)
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Cash flows from investing activities:
Purchase of marketable securities (181,410) --
Proceeds from the sale of marketable securities 178,364 --
Purchases of property and equipment (811) (213)
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Net cash used in investing activities (3,857) (213)
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Cash flows from financing activities:
Proceeds from long-term debt -- 1,500
Repayment of long-term debt (1,298) (99)
Proceeds from short-term bank borrowing 800 --
Repayment of short-term bank borrowing (1,050) --
Principal payments on capital leases (41) (75)
Issuance of common stock 13,477 96
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Net cash provided by financing activities 11,888 1,422
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Net change in cash and cash equivalents 6,583 (444)
Cash and cash equivalents at beginning of period 361 1,230
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Cash and cash equivalents at end of period $ 6,944 $ 786
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Supplemental disclosures of non-cash financing
and investing activities:
Capital lease obligations incurred for
acquisition of property and equipment $ 46 $ --
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See accompanying notes to condensed financial statements.
5
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CHOLESTECH CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. 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 25, 1996.
However, 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 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 29, 1996 has been derived from, but does not include all the
disclosures contained in, the audited financial statements for the year
ended March 29, 1996. 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.
2. The foregoing interim results are not necessarily indicative of the results
of operations for the full fiscal year ending March 28, 1997.
3. The components of inventories are as follows (in thousands):
DECEMBER 27, 1996 MARCH 29, 1996
----------------- --------------
Raw materials $ 648 $ 875
Work-in-process 783 380
Finished goods 1,114 655
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$2,545 $1,910
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4. 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.
5. In May 1996, the Company entered into a development, marketing and license
agreement (the "Agreement") with Metra Biosystems, Inc. ("Metra
Biosystems") to develop an immunoassay test cassette incorporating Metra
Biosystems' bone resorption technology to be used with the Cholestech
L-D-X-REGISTERED TRADEMARK- 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 development milestones by the Company.
6. On June 28, 1996, the Company successfully completed a public offering and
issued 2,500,000 shares of common stock at $5.00 per share. On July 9,
1996, the underwriters for the public offering exercised an over allotment
option to purchase an additional 375,000 shares of Cholestech common stock
at $5.00 per share. Aggregate proceeds to the Company from the public
offering and over allotment option (collectively the "Public Offering")
were $12.9 million, net of underwriting discounts and commissions and
offering expenses. A portion of the proceeds was used to repay the
outstanding balances of the Company's (a) bank line of credit of
approximately $1.0 million and (b) a long-term note of approximately $1.2
million.
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CHOLESTECH CORPORATION
7. On December 20, 1996, the Company entered into an agreement with a
bank for a $3 million revolving line-of-credit ("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 under the line-of-credit. The principle amounts outstanding
under the line-of-credit will bear interest at a rate per annum equal to
the bank's prime rate in effect from time to time. The Company is not
required to pay any commitment fees on the unused available credit. The
commitment by the bank expires on November 30, 1997 and is renewable.
As of December 27, 1996, there were no borrowings outstanding under the
line-of-credit.
8. In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for
Stock-Based Compensation." Effective March 30, 1996, the Company adopted
FAS 123 and elected to continue to measure compensation cost for its
employee stock compensation plans using the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Annual proforma disclosure of
net earnings and net earnings per share will reflect the difference between
compensation cost included in net earnings and the related costs measured
by the fair value-based method defined in FAS 123, including tax effects,
that would have been recognized in the statement of operations if the fair
value-based method had been used.
7
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CHOLESTECH CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 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 "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 OPERATING LOSSES AS WELL AS NEGATIVE CASH FLOWS, THE
STATEMENT UNDER "SALES AND MARKETING" REGARDING THE COMPANY'S ANTICIPATION
THAT SALES AND MARKETING EXPENSES WILL INCREASE, THE STATEMENT UNDER
"RESEARCH AND DEVELOPMENT" REGARDING 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 - Cholestech L-D-X-REGISTERED TRADEMARK- System - whose first
applications in the point of care market 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 December 27, 1996, had an accumulated deficit of $50.5 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 have an
impact on the Company's ability to achieve profitability and positive cash flows
from operations.
RESULT OF OPERATIONS
THIRTEEN WEEKS ENDED DECEMBER 27, 1996 VS. THIRTEEN WEEKS ENDED DECEMBER 29,
1995
AND
THIRTY-NINE WEEKS ENDED DECEMBER 27, 1996 VS. THIRTY-NINE WEEKS ENDED DECEMBER
29, 1995
REVENUES. During the thirteen weeks ended December 27, 1996,
revenues increased $1.6 million (96%) to $3.2 million from $1.6 million
in the thirteen weeks ended December 29, 1995. Domestic revenues
increased $1.7 million (148%) to $2.9 million from $1.2 million in the
thirteen weeks ended December 27, 1996. During the first thirty-nine
weeks of fiscal 1997, revenues increased $4.4 million (97%) to $9
million from $4.6 million in the first thirty-nine weeks of fiscal 1996.
Domestic revenues increased $4.5 million (125%) to $8.1 million from
$3.6 million in the first thirty-nine weeks of fiscal 1996. These
increases in revenues reflect a continuing increase in unit sales of the
disposable test cassettes and the L-D-X System to hospitals, managed
care organizations, public health departments, corporations and other
health care providers in the screening and monitoring markets. As of
December 27, 1996, there were approximately 1,231 active health promotion
accounts, 27% increase from the number of accounts for twenty-six weeks
ended September 27, 1996. In April 1996 the Company launched its CLIA
waived product line into the physician office laboratory ("POL") market.
The Company has shipped
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CHOLESTECH CORPORATION
approximately 924 Cholestech L-D-X Systems-REGISTERED TRADEMARK-into the
POL market as of December 27, 1996. The Company is represented in the
monitoring market by Physician Sales and Service, Inc. and General
Medical, two of the largest distributors in the POL market.
During the thirteen weeks ended December 27, 1996, international
revenues decreased $201,000 (47%) to $227,000 from $428,000 in the
thirteen weeks ended December 29, 1995. During the first thirty-nine
weeks of fiscal 1997, international revenues decreased $49,000 (5%) to
$900,000 from $949,000 in the first thirty-nine weeks of fiscal 1996.
These decreases reflect the shipment of an unusal number of L-D-X
Systems to Europe in the thirty-nine weeks ended December 29, 1995.
COST OF PRODUCTS SOLD. Cost of products sold during the thirteen
weeks ended December 27, 1996 increased $621,000 (60%) to $1.7 million
from $1 million in the thirteen weeks ended December 29, 1995, as unit
sales of disposable test cassettes and the Cholestech L-D-X Systems increased.
Gross margin was 48% and 36% in the thirteen weeks ended December 27, 1996 and
December 29, 1995, respectively. The improvement in the gross margin was
primarily attributable to improved cassette manufacturing yields, growth in
the volume of units sold and improved quality assurance procedures.
During the first thirty-nine weeks of fiscal 1997, cost of products
sold increased $2 million (70%) to $4.9 million from $2.9 million in the
first thirty-nine weeks of fiscal 1996, as unit sales of disposable test
cassettes and the L-D-X Systems increased. Gross margin was 45% and 36%
in the first thirty-nine weeks of fiscal 1997 and 1996, respectively.
The improvement in the gross margin was primarily attributable to
improved cassette manufacturing yields, growth in the volume of units
sold and improved quality assurance procedures.
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 through 2006, provide for the Company to pay
royalties ranging from 0.6% to 6.0% of net sales of the applicable products.
Total royalty expense in the thirteen weeks ended December 27, 1996 and December
29, 1995 was $149,000 and $72,000, respectively, and was charged to cost of
products sold. Total royalty expense for first thirty-nine weeks of fiscal 1997
and 1996 was $386,000 and $160,000, respectively, and was charged to cost of
products sold.
SALES AND MARKETING. Sales and marketing expenses in the thirteen weeks
ended December 27, 1996 were $989,000 compared to $806,000 for the same period
in fiscal 1996, and $2.9 million for the first thirty-nine weeks of fiscal 1997
compared to $2.2 million for the same period in fiscal 1996. These increases in
sales and marketing expenses were primarily attributable to continued expansion
of the Company's domestic direct sales and marketing organization, increased
expenses related to the penetration in the 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 31% for the thirteen weeks
ended December 27, 1996 from 50% for the same period in fiscal 1996, and
decreased to 32% for the first thirty-nine weeks of fiscal 1997 from 48% for the
same period in fiscal 1996. 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 POL segment.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
thirteen weeks ended December 27, 1996 were $365,000 compared to $149,000 for
the same period in fiscal 1996, and $818,000 for the first thirty-nine weeks of
fiscal 1997 compared to $539,000 for the same period in fiscal 1996. 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. Research and development expenses as a
percentage of revenues increased to
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CHOLESTECH CORPORATION
12% for the thirteen weeks ended December 27, 1996 from 9% for the
thirteen weeks ended December 29, 1995. This increase as a percentage
of revenues resulted primarily from product development and
manufacturing scale-up efforts for new tests. Research and development
expenses as a percentage of revenues decreased to 9% for the first
thirty-nine weeks of fiscal 1997 from 12% for the same period in fiscal
1996. This decrease as a percentage of revenues resulted from faster
revenue growth than the Company's ability to responsibly build
infrastructure. 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 continues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for
the thirteen weeks ended December 27, 1996 were $495,000 compared to
$336,000 for the same period in fiscal 1996 and $1.4 million for the
first thirty-nine weeks of fiscal 1997 compared to $1.1 million for the
same period in fiscal 1996. These increases in general and
administrative expenses resulted primarily from higher professional fees
relating to recruitment and retention of new Chief Financial Officer,
legal fees relating to business development efforts, and an increased
investment in the Company's information systems. General and
administrative expenses as a percentage of revenues decreased to 16% for
the thirteen weeks ended December 27, 1996 from 21% for the same period
in fiscal 1996, and decreased to 15% for the first thirty-nine weeks of
fiscal 1997 from 23% for the same period in fiscal 1996. These
decreases as a percentage of revenues occurred due to a faster revenue
growth than the Company's ability to responsibly build infrastructure.
OTHER INCOME , NET. For the thirteen and thirty-nine weeks ended
December 27, 1996 and for the same periods of the prior year, other
income, net generally consists of interest income earned on investment
of cash and marketable security balances, offset in part by interest
expense incurred on capital lease financing, and for all periods other
then the thirteen weeks ended December 27, 1996, other borrowings of the
Company. The increase in other income, net in the first thirteen and
thirty-nine weeks of fiscal 1997, as compared to the same periods of
fiscal 1996, primarily reflects higher interest income earned on
investment of cash balances generated from the Company's Public Offering
of common stock in June 1996.
FACTORS AFFECTING FUTURE OPERATING 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, such
as (i) the timing and level of market acceptance of the Cholestech
L-D-X-REGISTERED TRADEMARK-System, particularly with respect to the
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
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 and order cancellations may adversely
affect the continuity of the Company's manufacturing operations,
increase uncertainty in operational planning, 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.
10
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CHOLESTECH CORPORATION
The Company has generated only limited revenues to date, primarily from
sales of the Cholestech L-D-X-REGISTERED TRADEMARK-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 maintain 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. Physicians and other health care providers are not likely to 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. Even if the
advantages of the L-D-X System in diagnosing and 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 L-D-X System
for any number of reasons. As a result, 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.
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. 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 United States Food
and Drug Administration 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. 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.
The Company internally manufactures all of the disposable test
cassettes that are components of the L-D-X System. The manufacture of
disposable test cassettes is a highly complex and precise process. To
the extent 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 test 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. 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,
as well as bench top and other point of care analyzers. 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 and analyzers.
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 financing and a
long-term note payable. Through December 27, 1996, the Company had raised
approximately $69 million in net proceeds from equity financings. As of December
27, 1996, the Company had approximately $6.9 million of cash and cash
equivalents and $6.8 million in marketable securities. In addition, the Company
has a $3 million revolving bank 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
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CHOLESTECH CORPORATION
agreement, equivalent to no less than 100% of the outstanding principle
balance under the line-of-credit. The principle amounts outstanding
under the line-of-credit will bear interest at a rate per annum equal to
the bank's prime rate in effect from time to time. The Company is not
required to pay any commitment fees on the unused available credit. The
commitment by the bank expires on November 30, 1997 and is renewable.
As of December 27, 1996, there were no borrowings outstanding under the
line-of-credit.
Net cash used in operating activities was approximately $1.5 million
and $1.7 million in the first thirty-nine weeks of fiscal 1997 and 1996,
respectively. Cash used in operating activities resulted primarily from
net losses and increases in inventory. In the first thirty-nine weeks
of fiscal 1997, increases in accounts receivable also contributed to net
cash used in operating activities. In the first thirty-nine weeks of
fiscal 1996, increases in accounts payable and accrued expenses were due
to the timing of payments partially offset the cash used in operating
activities. Net cash used in investing activities of approximately $3.9
million in the first thirty-nine weeks of fiscal 1997 resulted from the
Company's net purchases of marketable securities and property and
equipment, while in the same period of fiscal 1996 net cash used in
investing activities in the amount of $213,000, reflects purchases of
property and equipment. Net cash provided by financing activities in
the first thirty-nine weeks of fiscal 1997 was $11.9 million, reflecting
issuance of Common Stock, primarily from the Public Offering, offset in
part by principal payments on capital leases, repayment of long-term
debt and repayment of short-term bank borrowings. The net cash provided
by financing activities in the first thirty-nine weeks of fiscal 1996
reflected proceeds from the long-term debt and issuance 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 its unrestricted cash and marketable security
balances, internally generated funds, available bank borrowings under an
existing line of credit and proceeds from issuance 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 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.
12
<PAGE>
CHOLESTECH CORPORATION
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
10.10.4 Letter Agreement effective December 20, 1996
by and between Wells Fargo Bank and the
Registrant.
10.10.5 Revolving Line of Credit Note effective
December 20, 1996 by and between Wells Fargo
Bank and the Registrant.
10.10.6 General Pledge Agreement effective December
20, 1996 by and between Wells Fargo Bank and
the Registrant.
27.1 Financial Data Schedule.
b. Reports on Form 8-K. No reports on Form 8-K were filed during
the thirteen weeks ended December 27, 1996.
13
<PAGE>
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 February 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)
<PAGE>
East Bay Regional
Commercial Banking Office
One Kaiser Plaza, Suite 850
Oakland, CA 94612
November 19, 1996
Cholestech Corporation
3347 Investment Blvd.
Hayward, CA 94545
Dear Sir:
This letter is to confirm that Wells Fargo Bank, National Association
("Bank"), subject to all terms and conditions contained herein, has agreed to
make available to CHOLESTECH CORPORATION ("Borrower") a revolving line of
credit under which Bank will make advances to Borrower from time to time up
to and including November 30, 1997, not to exceed at any time the maximum
principal amount of Three Million Dollars ($3,000,000.00) ("Line of Credit"),
the proceeds of which shall be used to support Borrower's working capital
requirements.
I. CREDIT TERMS:
1. LINE OF CREDIT:
(a) LINE OF CREDIT NOTE. Borrower's obligation to repay advances under
the Line of Credit shall be evidenced by a promissory note substantially in
the form of Exhibit A attached hereto ("Line of Credit Note"), all terms of
which are incorporated herein by this reference.
(b) BORROWING AND REPAYMENT. Borrower may from time to time during the
term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at
any time exceed the maximum principal amount available thereunder, as set
forth above.
2. COLLATERAL:
As security for all indebtedness of Borrower to Bank subject hereto,
Borrower hereby grants to Bank security interests of first priority in all
Borrower's Investment Management Group Account Number 358210114.
<PAGE>
Cholestech Corporation
November 19, 1996
Page 2
All of the foregoing shall be evidenced by and subject to the terms of
such security agreements, financing statements, deeds of trust and other
documents as Bank shall reasonably require, all in form and substance
satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand
for all costs and expenses incurred by Bank in connection with any of the
foregoing security, including without limitation, filing and recording fees
and costs of appraisals, audits and title insurance. Security interest
limited to $3,000,000 prime rate plus interest.
II. INTEREST/FEES:
1. INTEREST. The outstanding principal balance of the Line of Credit
shall bear interest at the rate of interest set forth in the Line of Credit
Note.
2. COMPUTATION AND PAYMENT. Interest shall be computed on the basis
of a 360-day year, actual days elapsed. Interest shall be payable at the
times and place set forth in the Line of Credit Note.
3. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all
interest due under the Line of Credit by charging Borrower's demand deposit
account number 4187-516166 with Bank, or any other demand deposit account
maintained by Borrower with Bank, for the full amount thereof. Should there
be insufficient funds in any such demand deposit account to pay all such sums
when due, the full amount of such deficiency shall be immediately due and
payable by Borrower.
III. REPRESENTATIONS AND WARRANTIES:
Borrower makes the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this
letter and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of all obligations of Borrower to
Bank subject to this letter.
1. LEGAL STATUS. Borrower is a corporation, duly organized and
existing and in good standing under the laws of the state of California, and
is qualified or licensed to do business in all jurisdictions in which such
qualification or licensing is required or in which the failure to so qualify
or to be so licensed could have a material adverse effect on Borrower.
<PAGE>
Cholestech Corporation
November 19, 1996
Page 3
2. AUTHORIZATION AND VALIDITY. This letter, the Line of Credit Note,
and each other document, contract or instrument deemed necessary by Bank to
evidence any extension of credit to Borrower pursuant to the terms and
conditions hereof, or now or at any time hereafter required by or delivered
to Bank in connection with this letter (collectively, the "Loan Documents")
have been duly authorized, and upon their execution and delivery in
accordance with the provisions hereof will constitute legal, valid and
binding agreements and obligations of Borrower or the party which executes
the same, enforceable in accordance with their respective terms.
3. NO VIOLATION. The execution, delivery and performance by Borrower
of each of the Loan Documents do not violate any provision of any law or
regulation, or contravene any provision of the Articles of Incorporation or
By-Laws of Borrower, or result in a breach of or constitute a default under
any contract, obligation, indenture or other instrument to which Borrower is
a party or by which Borrower may be bound.
4. LITIGATION. There are no pending, or to the best of Borrower's
knowledge threatened, actions, claims, investigations, suits or proceedings
by or before any governmental authority, arbitrator, court or administrative
agency which could have a material adverse effect on the financial condition
or operation of Borrower other than those disclosed by Borrower to Bank in
writing prior to the date hereof.
5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of
Borrower dated June 28, 1996, a true copy of which has been delivered by
Borrower to Bank prior to the date hereof, (a) is complete and correct and
presents fairly the financial condition of Borrower, (b) discloses all
liabilities of Borrower that are required to be reflected or reserved against
under generally accepted accounting principles, whether liquidated or
unliquidated, fixed or contingent, and (c) has been prepared in accordance
with generally accepted accounting principles consistently applied. Since the
date of such financial statement there has been no material adverse change in
the financial condition of Borrower, nor has Borrower mortgaged, pledged,
granted a security interest in or otherwise encumbered any of its assets or
properties except in favor of Bank or as otherwise permitted by Bank in
writing.
6. INCOME TAX RETURNS. Borrower has no knowledge of any pending
assessments or adjustments of its income tax payable with respect to any year.
<PAGE>
Cholestech Corporation
November 19, 1996
Page 4
7. NO SUBORDINATION. There is no agreement, indenture, contract or
instrument to which Borrower is a party or by which Borrower may be bound
that requires the subordination in right of payment of any of Borrower's
obligations subject to this letter to any other obligation of Borrower.
8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter
possess, all permits, consents, approvals, franchises and licenses required
and all rights to trademarks, trade names, patents and fictitious names, if
any, necessary to enable it to conduct the business in which it is now
engaged in compliance with applicable law.
9. ERISA. Borrower is in compliance in all material respects with all
applicable provisions of the Employee Retirement Income Security Act of 1974,
as amended or recodified from time to time ("ERISA"); Borrower has not
violated any provision of any defined employee pension benefit plan (as
defined in ERISA) maintained or contributed to by Borrower (each, a "Plan");
no Reportable Event, as defined in ERISA, has occurred and is continuing with
respect to any Plan initiated by Borrower; Borrower has met its minimum
funding requirements under ERISA with respect to each Plan; and each Plan
will be able to fulfill its benefit obligations as they come due in
accordance with the Plan documents and under generally accepted accounting
principles.
10. OTHER OBLIGATIONS. Borrower is not in default on any obligation
for borrowed money, any purchase money obligation or any other material
lease, commitment, contract, instrument or obligation.
11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in
writing prior to the date hereof, Borrower is in compliance in all material
respects with all applicable federal or state environmental, hazardous waste,
health and safety statutes, and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or
properties, including without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Superfund Amendments
and Reauthorization Act of 1986, the Federal Resource Conservation and
Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of
the same may be amended, modified or supplemented from time to time. None of
the operations of Borrower is the subject of any federal or state
investigation evaluating whether any remedial action involving a material
expenditure is needed to respond to a release of any toxic or hazardous waste
or substance into the environment. Borrower has no material contingent
liability in connection with
<PAGE>
Cholestech Corporation
November 19, 1996
Page 5
any release of any toxic or hazardous waste or substance into the environment.
IV. CONDITIONS:
1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank
to extend any credit contemplated by this letter is subject to fulfillment to
Bank's satisfaction of all of the following conditions:
(a) DOCUMENTATION. Bank shall have received each of the Loan
Documents, duly executed and in form and substance satisfactory to Bank.
(b) FINANCIAL CONDITION. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower, nor any material decline, as determined by Bank, in the market
value of any collateral required hereunder or a substantial or material
portion of the assets of Borrower.
2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to
make each extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:
(a) COMPLIANCE. The representations and warranties contained herein and
in each of the other Loan Documents shall be true on and as of the date of
the signing of this letter and on the date of each extension of credit by
Bank pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date,
no default hereunder, and no condition, event or act which with the giving of
notice or the passage of time or both would constitute such a default, shall
have occurred and be continuing or shall exist.
(b) DOCUMENTATION. Bank shall have received all additional documents
which may be required in connection with such extension of credit.
V. COVENANTS:
Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all
obligations of
<PAGE>
Cholestech Corporation
November 19, 1996
Page 6
Borrower subject hereto, Borrower shall, unless Bank otherwise consents in
writing:
1. PUNCTUAL PAYMENT. Punctually pay all principal, interest, fees or
other liabilities due under any of the Loan Documents at the times and place
and in the manner specified therein.
2. ACCOUNTING RECORDS. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently
applied, and permit any representative of Bank, at any reasonable time, to
inspect, audit and examine such books and records, to make copies of the
same, and inspect the properties of Borrower.
3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in form
and detail satisfactory to Bank:
(a) not later than 120 days after and as of the end of each fiscal
year, Borrower's 10-K, to include balance sheet, income statement, statement
of cash flow and all footnotes;
(b) not later than 60 days after and as of the end of each fiscal
quarter, Borrower's 10-Q, to include balance sheet, income statement,
statement of cash flow and all footnotes;
(c) from time to time such other information as Bank may reasonably
requested.
4. COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; and comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower's
continued existence and with the requirements of all laws, rules, regulations
and orders of a governmental agency applicable to Borrower and/or its
business.
5. INSURANCE. Maintain and keep in force insurance of the types and
in amounts customarily carried in lines of business similar to that of
Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance carried with companies and in amounts satisfactory to Bank, and
deliver to Bank from time to time at Bank's request schedules setting forth
all insurance then in effect.
6. FACILITIES. Keep all properties useful or necessary to Borrower's
business in good repair and condition, and from time
<PAGE>
Cholestech Corporation
November 19, 1996
Page 7
to time make necessary repairs, renewals and replacements thereto so that such
properties shall be fully and efficiently preserved and maintained.
7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and
all indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation federal and state income taxes and state and
local property taxes and assessments, except (a) such as Borrower may in good
faith contest or as to which a bona fide dispute may arise, and (b) for which
Borrower has made provision, to Bank's satisfaction, for eventual payment
thereof in the event that Borrower is obligated to make such payment.
8. LITIGATION. Promptly give notice in writing to Bank of any
litigation pending or threatened against Borrower.
9. OTHER INDEBTEDNESS. Not create, incur, assume or permit to exist
any indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, except (a) the liabilities of Borrower to
Bank, and (b) any other liabilities of Borrower existing as of, and disclosed
to Bank prior to, the date hereof.
10. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Not merge into or
consolidate with any other entity; nor make any substantial change in the
nature of Borrower's business as conducted as of the date hereof; nor acquire
all or substantially all of the assets of any other entity; nor sell, lease,
transfer or otherwise dispose of all or a substantial or material portion of
Borrower's assets except in the ordinary course of its business.
11. GUARANTIES. Not guarantee or become liable in any way as surety,
endorser (other than as endorser of negotiable instruments for deposit or
collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security
for, any liabilities or obligations of any other person or entity.
12. LOANS, ADVANCES, INVESTMENTS. Not make any loans or advances to or
investments in any person or entity, except any of the foregoing existing as
of, and disclosed to Bank prior to, the date hereof.
13. DIVIDENDS, DISTRIBUTIONS. Not declare or pay any dividend or
distribution either in cash, stock or any other property on Borrower's stock
now or hereafter outstanding, nor
<PAGE>
Cholestech Corporation
November 19, 1996
Page 8
redeem, retire, repurchase or otherwise acquire any shares of any class of
Borrower's stock now or hereafter outstanding.
14. PLEDGE OF ASSETS. Not mortgage, pledge, grant or permit to exist a
security interest in, or lien upon, all or any portion of Borrower's assets
now owned or hereafter acquired, except any of the foregoing in favor of Bank
or which is existing as of, and disclosed to Bank in writing prior to, the
date hereof.
VI. DEFAULT, REMEDIES:
1. DEFAULT, REMEDIES. Upon the violation of any term or condition of
any of the Loan Documents, or upon the occurrence of any default or defined
event of default under any of the Loan Documents: (a) all indebtedness of
Borrower under each of the Loan Documents, any term thereof to the contrary
notwithstanding, shall at Bank's option and without notice become immediately
due and payable without presentment, demand, protest or notice of dishonor,
all of which are expressly waived by Borrower; (b) the obligation, if any, of
Bank to extend any further credit under any of the Loan Documents shall
immediately cease and terminate; and (c) Bank shall have all rights, powers
and remedies available under each of the Loan Documents, or accorded by law,
including without limitation the right to resort to any or all security for
any credit extended by Bank to Borrower under any of the Loan Documents and
to exercise any or all of the rights of a beneficiary or secured party
pursuant to the applicable law. All rights, powers and remedies of Bank may
be exercised at any time by Bank and from time to time after the occurrence
of any such breach or default, are cumulative and not exclusive, and shall be
in addition to any other rights, powers or remedies provided by law or equity.
2. NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive
or otherwise affect any other or further exercise thereof or the exercise of
any other right, power or remedy. Any waiver, permit, consent or approval of
any kind by Bank of any breach of or default under any of the Loan Documents
must be in writing and shall be effective only to the extent set forth in
such writing.
<PAGE>
Cholestech Corporation
November 19, 1996
Page 9
VII. MISCELLANEOUS:
1. NOTICES. All notices, requests and demands which any party is
required or may desire to give to any other party under any provision of this
letter must be in writing delivered to each party at its address first set
forth above, or to such other address as any party may designate by written
notice to all other parties. Each such notice, request and demand shall be
deemed given or made as follows: (a) if sent by hand delivery, upon delivery;
(b) if sent by mail, upon the earlier of the date of receipt or three (3)
days after deposit in the U.S. mail, first class and postage prepaid; and (c)
if sent by telecopy, upon receipt.
2. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), expended or
incurred by Bank in connection with (a) the negotiation and preparation of
this letter and the other Loan Documents, Bank's continued administration
hereof and thereof, and the preparation of amendments and waivers hereto and
thereto, (b) the enforcement of Bank's rights and/or the collection of any
amounts which become due to Bank under any of the Loan Documents, and (c) the
prosecution or defense of any action in any way related to any of the Loan
Documents, including without limitation, any action for declaratory relief,
whether incurred at the trial or appellate level, in an arbitration
proceeding or otherwise, and including any of the foregoing incurred in
connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
3. SUCCESSORS, ASSIGNMENT. This letter shall be binding upon and
inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however,
that Borrower may not assign or transfer its interest hereunder without
Bank's prior written consent. Bank reserves the right to sell, assign,
transfer, negotiate or grant participations in all or any part of, or any
interest in, Bank's rights and benefits under each of the Loan Documents. In
connection therewith Bank may disclose all documents and information which
Bank now has or hereafter may acquire relating to any credit extended by Bank
to Borrower, Borrower or its business, or any collateral required hereunder.
<PAGE>
Cholestech Corporation
November 19, 1996
Page 10
4. ENTIRE AGREEMENT; AMENDMENT. This letter and the other Loan
Documents constitute the entire agreement between Borrower and Bank with
respect to any extension of credit by Bank subject hereto and supersede all
prior negotiations, communications, discussions and correspondence concerning
the subject matter hereof. This letter may be amended or modified only in
writing signed by each party hereto.
5. NO THIRD PARTY BENEFICIARIES. This letter is made and entered into
for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity
shall be a third party beneficiary of, or have any direct or indirect cause
of action or claim in connection with, this letter or any other of the Loan
Documents to which it is not a party.
6. SEVERABILITY OF PROVISIONS. If any provision of this letter shall
be prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or any remaining provisions of
this letter.
7. GOVERNING LAW. This letter shall be governed by and construed in
accordance with the laws of the State of California.
8. ARBITRATION.
(a) ARBITRATION. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in
accordance with the terms of this letter, A "Dispute" shall mean any action,
dispute, claim or controversy of any kind, whether in contract or tort,
statutory or common law, legal or equitable, now existing or hereafter
arising under or in connection with, or in any way pertaining to, any of the
Loan Documents, or any past, present or future extensions of credit and other
activities, transactions or obligations of any kind related directly or
indirectly to any of the Loan Documents, including without limitation, any of
the foregoing arising in connection with the exercise of any self-help,
ancillary or other remedies pursuant to any of the Loan Documents. Any party
may by summary proceedings bring an action in court to compel arbitration of
a Dispute. Any party who fails or refuses to submit to arbitration following
a lawful demand by any other party shall bear all costs and expenses incurred
by such other party in compelling arbitration of any Dispute.
(b) GOVERNING RULES. Arbitration proceedings shall be administered by
the American Arbitration Association ("AAA") or such other administrator as
the parties shall mutually agree upon
<PAGE>
Cholestech Corporation
November 19, 1996
Page 11
in accordance with the AAA Commercial Arbitration Rules. All Disputes
submitted to arbitration shall be resolved in accordance with the Federal
Arbitration Act (Title 9 of the United States Code), notwithstanding any
conflicting choice of law provision in any of the Loan Documents. The
arbitration shall be conducted at a location in California selected by the
AAA or other administrator. If there is any inconsistency between the terms
hereof and any such rules, the terms and procedures set forth herein shall
control. All statutes of limitation applicable to any Dispute shall apply to
any arbitration proceeding. All discovery activities shall be expressly
limited to matters directly relevant to the Dispute being arbitrated.
Judgment upon any award rendered in an arbitration may be entered in any
court having jurisdiction; provided however, that nothing contained herein
shall be deemed to be a waiver by any party that is a bank of the protections
afforded to it under 12 U.S.C. Section 91 or any similar applicable state law.
(c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary
remedies, including without limitation injunctive relief, sequestration,
attachment, garnishment or the appointment of a receiver, from a court of
competent jurisdiction before, after or during the pendency of any
arbitration or other proceeding. The exercise of any such remedy shall not
waive the right of any party to compel arbitration or reference hereunder.
(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive law
applicable to the subject matter of the Dispute. Arbitrators are empowered
to resolve Disputes by summary rulings in response to motions filed prior to
the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may
grant any remedy or relief that a court of the state of California could
order or grant within the scope hereof and such ancillary relief as is
necessary to make effective any award, and (iii) shall have the power to
award recovery of all costs and fees, to impose sanctions and to take such
other actions as they deem necessary to the same extent a judge could
pursuant to the Federal Rules of Civil Procedure, the California Rules of
Civil Procedure or other applicable law. Any Dispute in which the amount in
controversy is $5,000,000 or less shall be decided by a single arbitrator who
shall not render an award of greater than $5,000,000 (including damages,
costs, fees
<PAGE>
Cholestech Corporation
November 19, 1996
Page 12
and expenses). By submission to a single arbitrator, each party expressly
waives any right or claim to recover more than $5,000,000. Any Dispute in
which the amount in controversy exceeds $5,000,000 shall be decided by
majority vote of a panel of three arbitrators; provided however, that all
three arbitrators must actively participate in all hearings and deliberations.
(e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in controversy exceeds $25,000,000,
the arbitrators shall be required to make specific, written findings of fact
and conclusions of law. In such arbitrations (i) the arbitrators shall not
have the power to make any award which is not supported by substantial
evidence or which is based on legal error, (ii) an award shall not be binding
upon the parties unless the findings of fact are supported by substantial
evidence and the conclusions of law are not erroneous under the substantive
law of the state of California, and (iii) the parties shall have in addition
to the grounds referred to in the Federal Arbitration Act for vacating,
modifying or correcting an award the right to judicial review of (A) whether
the findings of fact rendered by the arbitrators are supported by substantial
evidence, and (B) whether the conclusions of law are erroneous under the
substantive law of the state of California. Judgment confirming an award in
such a proceeding may be entered only if a court determines the award is
supported by substantial evidence and not based on legal error under the
substantive law of the state of California.
(f) REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration
if the Dispute concerns indebtedness secured directly or indirectly, in whole
or in part, by any real property unless (i) the holder of the mortgage, lien
or security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or
benefits that might accrue to them by virtue of the single action rule
statute of California, thereby agreeing that all indebtedness and obligations
of the parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If
any such Dispute is not submitted to arbitration, the Dispute shall be
referred to a referee in accordance with California Code of Civil Procedure
Section 638 et seq., and this general reference agreement is intended to be
specifically enforceable in accordance with said Section 638. A referee with
the qualifications required herein for arbitrators shall be selected pursuant
to the AAA's selection procedures.
<PAGE>
Cholestech Corporation
November 19, 1996
Page 13
Judgment upon the decision rendered by a referee shall be entered in the
court in which such proceeding was commenced in accordance with California
Code of Civil Procedure Sections 644 and 645.
(g) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose
the existence, content or results thereof, except for disclosures of
information by a party required in the ordinary course of its business, by
applicable law or regulation, or to the extent necessary to exercise any
judicial review rights set forth herein. If more than one agreement for
arbitration by or between the parties potentially applies to a Dispute, the
arbitration provision most directly related to the Loan Documents or the
subject matter of the Dispute shall control. This arbitration provision
shall survive termination, amendment or expiration of any of the Loan
Documents or any relationship between the parties.
Your acknowledgment of this letter shall constitute acceptance of the
foregoing terms and conditions. Bank's commitment to extend any credit to
Borrower pursuant to the terms of this letter shall terminate on December 16,
1996, unless this letter is acknowledged by Borrower and returned to Bank on
or before that date.
Sincerely,
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By: /s/ Gretchen Sommerfield
------------------------
Gretchen Sommerfield
Assistant Vice President
Acknowledged and accepted as of December 20, 1996:
CHOLESTECH CORPORATION
By: /s/ W.E. Pinckert
-------------------
Warren Pinckert
President
<PAGE>
WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE
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$3,000,000.00 Oakland, California
November 19, 1996
FOR VALUE RECEIVED, the undersigned CHOLESTECH CORPORATION ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION
("Bank") at its office at EAST BAY RCBO, ONE KAISER PLAZA SUITE 860, OAKLAND,
CA 94612, or at such other place as the holder hereof may designate, in
lawful money of the United States of America and in immediately available
funds, the principal sum of $3,000,000.00, or so much thereof as may be
advanced and be outstanding, with interest thereon, to be computed on each
advance from the date of its disbursement as set forth herein.
INTEREST:
(a) INTEREST. The outstanding principal balance of this Note shall
bear interest (computed on the basis of a 360-day year, actual days elapsed)
at a rate per annum equal to the Prime Rate in effect from time to time. The
"Prime Rate" is a base rate that Bank from time to time establishes and which
serves as the basis upon which effective rates of interest are calculated for
those loans making reference thereto. Each change in the rate of interest
hereunder shall become effective on the date each Prime Rate change is
announced within Bank.
(b) PAYMENT OF INTEREST. Interest accrued on this Note shall be payable
on the last day of each month, commencing DECEMBER 31, 1996.
(c) DEFAULT INTEREST. From and after the maturity date of this Note,
or such earlier date as all principal owing hereunder becomes due and payable
by acceleration or otherwise, the outstanding principal balance of this Note
shall bear interest until paid in full at an increased rate per annum
(computed on the basis of a 360-day year, actual days elapsed) equal to 4%
above the rate of interest from time to time applicable to this Note.
BORROWING AND REPAYMENT:
(a) BORROWING AND REPAYMENT. Borrower may from time to time during the
term of this Note borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions of this Note and of any document executed in connection with or
governing this Note; provided however, that the total outstanding borrowings
under this Note shall not at any time exceed the principal amount stated
above. The unpaid principal balance of this obligation at any time shall be
the total amounts advanced hereunder by the holder hereof less the amount of
principal payments made hereon by or for any Borrower, which balance may be
endorsed hereon from time to time by the holder. The outstanding principal
balance of this Note shall be due and payable in full on NOVEMBER 30, 1997.
(b) ADVANCES. Advances hereunder, to the total amount of the principal
sum available hereunder, may be made by the holder at the oral or written
request of (i) WARREN PINCKERT and ANDREA TILLER or/and CECILIA AGUILAR, any
two acting together, who are authorized to request advances and direct the
disposition of any advances until written notice of the revocation of such
authority is received by the holder at the office designated above, or (ii)
any person, with respect to advances deposited to the credit of any account
of any Borrower with the holder, which advances, when so deposited, shall be
conclusively presumed to have been made to or for the benefit of each
Borrower regardless of the fact that persons other than those authorized to
request advances may have authority to draw against such account. The holder
shall have no obligation to determine whether any person requesting an
advance is or has been authorized by any Borrower.
(c) APPLICATION OF PAYMENTS. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof.
EVENTS OF DEFAULT:
The occurrence of any of the following shall constitute an "Event of
Default" under this Note:
(a) The failure to pay any principal, interest, fees or other charges when
due hereunder or under any contract, instrument or document executed in
connection with this Note.
(b) The filing of a petition by or against any Borrower, any guarantor of
this Note or any general partner or joint venturer in any Borrower which is a
partnership or a joint venture (with each such guarantor, general partner and/or
joint venturer referred to herein as a "Third Party Obligor") under any
provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as
amended or recodified from time to time, or under any similar or other law
relating to bankruptcy, insolvency, reorganization or other relief for debtors;
the appointment of a receiver, trustee, custodian or liquidator of or for any
part of the assets or property of any Borrower or Third Party Obligor; any
Borrower or Third Party Obligor becomes insolvent, makes a general assignment
for the benefit of creditors or is generally not paying its debts as they become
due; or any attachment or like levy on any property of any Borrower or Third
Party Obligor.
(c) The death or incapacity of any individual Borrower or Third Party
Obligor, or the dissolution or liquidation
Revolving Line of Credit Note (08/96), Page 1
<PAGE>
of any Borrower or Third Party Obligor which is a corporation, partnership,
joint venture or other type of entity.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under any provisions of any contract, instrument or
document pursuant to which any Borrower or Third Party Obligor has incurred any
obligation for borrowed money, any purchase obligation, or any other liability
of any kind to any person or entity, including the holder.
(e) Any financial statement provided by any Borrower or Third Party
Obligor to Bank proves to be incorrect, false or misleading in any material
respect.
(f) Any sale or transfer of all or a substantial or material part of the
assets of any Borrower or Third Party Obligor other than in the ordinary course
of its business.
(g) Any violation or breach of any provision of, or any defined event of
default under, any addendum to this Note or any loan agreement, guaranty,
security agreement, deed of trust, mortgage or other document executed in
connection with or securing this Note.
MISCELLANEOUS:
(a) REMEDIES. Upon the occurrence of any Event of Default, the holder of
this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, notice of nonperformance, notice of protest, protest or
notice of dishonor, all of which are expressly waived by each Borrower, and the
obligation, if any, of the holder to extend any further credit hereunder shall
immediately cease and terminate. Each Borrower shall pay to the holder
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of the holder's in-house counsel), expended
or incurred by the holder in connection with the enforcement of the holder's
rights and/or the collection of any amounts which become due to the holder under
this Note, and the prosecution or defense of any action in any way related to
this Note, including without limitation, any action for declaratory relief,
whether incurred at the trial or appellate level, in an arbitration proceeding
or otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to any
Borrower or any other person or entity.
(b) OBLIGATIONS JOINT AND SEVERAL. Should more than one person or
entity sign this Note as a Borrower, the obligations of each such Borrower
shall be joint and several.
(c) GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the state of California.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
first written above.
CHOLESTECH CORPORATION
By: /s/ W.E. Pinckert
----------------------------
WARREN PINCKERT
PRESIDENT
Revolving Line of Credit Note (08/96), Page 2
<PAGE>
WELLS FARGO BANK GENERAL PLEDGE AGREEMENT
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1. GRANT OF SECURITY INTEREST. For valuable consideration, the
undersigned CHOLESTECH CORPORATION, or any of them ("Debtor"), hereby
assigns, transfers to and pledges with WELLS FARGO BANK, NATIONAL ASSOCIATION
("Bank"), and grants to Bank a security interest in, all money and property
this day delivered to and deposited with Bank, together with all other money
or property heretofore delivered or which shall hereafter be delivered to or
come into the possession, custody or control of Bank in any manner or for any
purpose whatsoever during the existence of this Agreement (collectively
called "Collateral"), and whether held in a general or special account or
deposit for safekeeping or otherwise, together with whatever is receivable or
received when any of the Collateral or proceeds thereof are sold, collected,
exchanged or otherwise disposed of, whether such disposition is voluntary or
involuntary, including without limitation, (a) all rights to payment,
including returned premiums, with respect to any insurance relating to any of
the foregoing, (b) all rights to payment with respect to any cause of action
affecting or relating to any of the foregoing, and (c) all stock rights,
rights to subscribe, stock splits, liquidating dividends, cash dividends,
dividends paid in stock, new securities or other property of any kind which
Debtor is or may hereafter be entitled to receive on account of any
securities pledged hereunder, including without limitation, stock received by
Debtor due to stock splits or dividends paid in stock or sums paid upon or in
respect of any securities pledged hereunder upon the liquidation or
dissolution of the issuer thereof (hereinafter called "Proceeds"), and in the
event that Debtor receives any such Proceeds, Debtor will hold the same in
trust on behalf of and for the benefit of Bank and will immediately deliver
all such Proceeds to Bank in the exact form received, with the endorsement of
Debtor if necessary and/or appropriate undated stock powers duly executed in
blank, to be held by Bank as a part of the Collateral, subject to all terms
hereof. Security interest limited to $3,000,000 principal plus interest.
2. OBLIGATIONS SECURED. The obligations secured hereby are the payment
and performance of: (a) all present and future indebtedness of Debtor to Bank;
(b) all obligations of Debtor and rights of Bank under this Agreement; and (c)
all present and future obligations of Debtor to Bank of other kinds. The word
"Indebtedness" is used herein in its most comprehensive sense and includes any
and all advances, debts, obligations and liabilities of Debtor, or any of them,
heretofore, now or hereafter made, incurred or created, whether voluntary or
involuntary and however arising, whether due or not due, absolute or contingent,
liquidated or unliquidated, determined or undetermined, and whether Debtor may
be liable individually or jointly, or whether recovery upon such indebtedness
may be or hereafter becomes unenforceable.
3. TERMINATION. This Agreement will terminate upon the performance of
all obligations of Debtor to Bank, including without limitation, the payment
of all indebtedness of Debtor to Bank, and the termination of all commitments
of Bank to extend credit to Debtor, existing at the time Bank receives
written notice from Debtor of the termination of this Agreement.
4. OBLIGATIONS OF BANK.
(a) Bank has no obligation to make any loans hereunder. Any money
received by Bank in respect of the Collateral may be deposited, at Bank's
option, into a non-interest bearing account over which Debtor shall have no
control, and the same shall, for all purposes, be deemed Collateral hereunder.
(b) Bank's obligation with respect to Collateral and Proceeds in its
possession shall be strictly limited to the duty to exercise reasonable care in
the custody and preservation of such Collateral and Proceeds, and such duty
shall not include any obligation to ascertain or to initiate any action with
respect to or to inform Debtor of maturity dates, conversion, call or exchange
rights, or offers to purchase the Collateral or Proceeds, or any similar
matters, notwithstanding Bank's knowledge of the same. Bank shall have no duty
to take any steps necessary to preserve the rights of Debtor against prior
parties, or to initiate any action to protect against the possibility of a
decline in the market value of the Collateral or Proceeds. Bank shall not be
obligated to take any action with respect to the Collateral or Proceeds
requested by Debtor unless such request is made in writing and Bank determines,
in its sole discretion, that the requested action would not unreasonably
jeopardize the value of the Collateral and Proceeds as security for the
indebtedness. Bank may at any time deliver the Collateral and Proceeds, or any
part thereof, to any Debtor, and the receipt thereof by any Debtor shall be a
complete and full acquittance for the Collateral and Proceeds so delivered, and
Bank shall thereafter be discharged from any liability or responsibility
therefor.
5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to
Bank that: (a) Debtor is the owner and has possession or control of the
Collateral and Proceeds; (b) Debtor has the right to pledge the Collateral and
Proceeds; (c) all Collateral and Proceeds are genuine, free from liens, adverse
claims, setoffs, default, prepayment, defenses and conditions precedent of any
kind or character, except, the lien created hereby or as otherwise agreed to by
Bank, or heretofore disclosed by Debtor to Bank, in writing; (d) all statements
contained herein and, where applicable, in the Collateral are true and complete
in all material respects; (e) no financing statement covering any of the
Collateral or Proceeds, and naming any secured party other than Bank, is on file
in any public office; and (f) specifically with respect to Collateral and
Proceeds consisting of investment securities, instruments, chattel paper,
documents, contracts, insurance policies or any like property, (i) all persons
appearing to be obligated thereon have authority and capacity to contract and
are bound as they appear to be, and (ii) the same comply with applicable laws
concerning form, content and manner of preparation and execution.
6. COVENANTS OF DEBTOR.
(a) Debtor Agrees in general: (i) to pay indebtedness secured hereby when
due; (ii) to indemnify Bank against all losses, claims, demands, liabilities and
expenses of every kind caused by property subject hereto; (iii) to pay all
<PAGE>
costs and expenses, including reasonable attorneys' fees, incurred by Bank in
the perfection and preservation of the Collateral or Bank's interest therein
and/or the realization, enforcement and exercise of Bank's rights, powers and
remedies hereunder; (iv) to permit Bank to exercise its powers; (v) to execute
and deliver such documents as Bank deems necessary to create, perfect and
continue the security interests contemplated hereby; and (vi) not to change its
chief place of business or the places where Debtor keeps any of the Collateral
or Debtor's records concerning the Collateral and Proceeds without first giving
Bank written notice of the address to which Debtor is moving same.
(b) Debtor agrees with regard to the Collateral and Proceeds, unless Bank
agrees otherwise in writing: (i) not to permit any lien on the Collateral or
Proceeds, except in favor of Bank; (ii) not to withdraw any funds from any
deposit account pledged to Bank hereunder; (iii) not to sell, hypothecate or
otherwise dispose of, nor permit the transfer by operation of law of, any of the
Collateral or Proceeds or any interest therein; (iv) to keep, in accordance with
generally accepted accounting principles, complete and accurate records
regarding all Collateral and Proceeds, and to permit Bank to inspect the same
and make copies thereof at any reasonable time: (v) if requested by Bank, to
receive and use reasonable diligence to collect Proceeds, in trust and as the
property of Bank, and to immediately endorse as appropriate and deliver such
Proceeds to Bank daily in the exact form in which they are received together
with a collection report in form satisfactory to Bank; (vi) not to commingle
Collateral or Proceeds, or collections thereunder, with other property; (vii) in
the event Bank elects to receive payments of Proceeds hereunder, to pay all
expenses incurred by Bank in connection therewith, including expenses of
accounting, correspondence, collection efforts, filing, recording, record
keeping and expenses incidental thereto; (viii) to provide any service and do
any other acts which may be necessary to keep all Collateral and Proceeds free
and clear of all defenses, rights of offset and counterclaims; and (ix) if the
Collateral or Proceeds consists of securities and so long as no Event of Default
exists, to vote said securities and to give consents, waivers and ratifications
with respect thereto, provided that no vote shall be cast or consent, waiver or
ratification given or action taken which would impair Bank's interest in the
Collateral and Proceeds or be inconsistent with or violate any provisions of
this Agreement.
7. POWERS OF BANK. Debtor appoints Bank its true attorney-in-fact to
perform any of the following powers, which are coupled with an interest, are
irrevocable until termination of this Agreement and may be exercised from time
to time by Bank's officers and employees, or any of them, whether or not Debtor
is in default: (a) to perform any obligation of Debtor hereunder in Debtor's
name or otherwise (b) to notify any person obligated on any security, instrument
or other document subject to this Agreement of Bank's rights hereunder, (c) to
collect by legal proceedings or otherwise all dividends, interest, principal or
other sums now or hereafter payable upon or on account of the Collateral or
Proceeds; (d) to enter into any extension, reorganization, deposit, merger or
consolidation agreement, or any other agreement relating to or affecting the
Collateral or Proceeds, and in connection therewith to deposit or surrender
control of the Collateral and Proceeds, to accept other property in exchange for
the Collateral and Proceeds, and to do and perform such acts and things as Bank
may deem proper, with any money or property received in exchange for the
Collateral or Proceeds, at Bank's option, to be applied to the indebtedness or
held by Bank under this Agreement; (e) to make any compromise or settlement Bank
deems desirable or proper in respect of the Collateral and Proceeds; (f) to
insure, process and preserve the Collateral and Proceeds; (g) to exercise all
rights, powers and remedies which Debtor would have, but for this Agreement,
with respect to all Collateral and Proceeds subject hereto: and (h) to do all
acts and things and execute all documents in the name of Debtor or otherwise,
deemed by Bank as necessary, proper and convenient in connection with the
preservation, perfection or enforcement of its rights hereunder. To effect the
purposes of this Agreement or otherwise upon instructions of Debtor, or any of
them, Bank may cause any Collateral and/or Proceeds to be transferred to Bank's
name or the name of Bank's nominee. If an Event of Default has occurred and is
continuing, any or all Collateral and/or Proceeds consisting of securities may
be registered, without notice, in the name of Bank or its nominee, and
thereafter Bank or its nominee may exercise, without notice, all voting and
corporate rights at any meeting of the shareholders of the issuer thereof, any
and all rights of conversion, exchange or subscription, or any other rights,
privileges or options pertaining to such Collateral and/or Proceeds, all as if
it were the absolute owner thereof. The foregoing shall include, without
limitation, the right of Bank or its nominee to exchange, at its discretion, any
and all Collateral and/or Proceeds upon the merger, consolidation,
reorganization, recapitalization or other readjustment of the issuer thereof, or
upon the exercise by the issuer thereof or Bank of any right, privilege or
option pertaining to any shares of the Collateral and/or Proceeds, and in
connection therewith, the right to deposit and deliver any and all of the
Collateral and/or Proceeds with any committee, depository, transfer agent,
registrar or other designated agency upon such terms and conditions as Bank may
determine. All of the foregoing rights, privileges or options may be exercised
without liability on the part of Bank or its nominee except to account for
property actually received by Bank, Bank shall have no duty to exercise any of
the foregoing, or any other rights, privileges or options with respect to the
Collateral or Proceeds and shall not be responsible for any failure to do so or
delay in so doing.
8. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Debtor
agrees to pay, prior to delinquency, all insurance premiums, taxes, charges,
liens and assessments against the Collateral and Proceeds, and upon the failure
of Debtor to do so, Bank at its option may pay any of them and shall be the sole
judge of the legality or validity thereof and the amount necessary to discharge
the same. Any such payments made by Bank shall be obligations of Debtor to
Bank, due and payable immediately upon demand, together with interest at a rate
determined in accordance with the provisions of Section 15 herein, and shall be
secured by the Collateral and Proceeds, subject to all terms and conditions of
this Agreement.
9. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "Event of Default" under this Agreement: (a) any default in the
payment or performance of any obligation, or any defined event of default, under
(i) any contract or instrument evidencing any indebtedness, or (ii) any other
agreement between any Debtor and Bank, including without limitation any loan
agreement, relating to or executed in connection with any indebtedness; (b) any
representation or warranty made by any Debtor herein shall prove to be incorrect
in any material respect when made; (c) any Debtor shall fail to observe or
perform any obligation or agreement contained
<PAGE>
herein; (d) any attachment or like levy on any property of any Debtor; and (e)
Bank in good faith, believes any or all of the Collateral and/or Proceeds to be
in danger of misuse, dissipation, commingling, loss, theft, damage or
destruction, of otherwise in jeopardy or unsatisfactory in character or value.
10. REMEDIES. Upon the occurrence of any Event of Default, Bank shall
have the right to declare immediately due and payable all or any indebtedness
secured hereby and to terminate any commitments to make loans or otherwise
extend credit to Debtor. Bank shall have all other rights, powers, privileges
and remedies granted to a secured party upon default under the California
Uniform Commercial Code or otherwise provided by law, including without
limitation, the right to contact all persons obligated to Debtor on any
Collateral or Proceeds and to instruct such persons to deliver all Collateral
and/or Proceeds directly to Bank. All rights, powers, privileges and remedies
of Bank shall be cumulative. No delay, failure or discontinuance of Bank in
exercising any right, power, privilege or remedy hereunder shall affect or
operate as a waiver of such right, power, privilege or remedy; nor shall any
single or partial exercise of any such right, power, privilege or remedy
preclude, waive or otherwise affect any other or further exercise thereof or the
exercise of any other right, power, privilege or remedy. Any waiver, permit,
consent or approval of any kind by Bank of any default hereunder, or any such
waiver of any provisions or conditions hereof, must be in writing and shall be
effective only to the extent set forth in writing. It is agreed that public or
private sales, for cash or on credit, to a wholesaler or retailer or investor,
or user of property of the types subject to this Agreement, or public auction,
are all commercially reasonable since differences in the sales prices generally
realized in the different kinds of sales are ordinarily offset by the
differences in the costs and credit risks of such sales.
While an Event of Default exists: (a) Bank may, at any time and at Banks sole
option, liquidate any time deposits pledged to Bank hereunder, whether or not
said time deposits have matured and notwithstanding the fact that such
liquidation may give rise to penalties for early withdrawal of funds; (b) Debtor
will not dispose of any of the Collateral or Proceeds except on terms approved
by Bank: (c) Bank may appropriate the Collateral and apply all Proceeds toward
repayment of the indebtedness in such order of application as Bank may from time
to time elect; and (d) at Bank's request, Debtor will assemble and deliver all
Collateral and Proceeds, and books and records pertaining thereto, to Bank at a
reasonably convenient place designated by Bank. For any Collateral or Proceeds
consisting of securities, Bank shall have no obligation to delay a sale of any
portion thereof for the period of time necessary to permit the issuer thereof to
register such securities for public sale under any applicable state or Federal
law, even if the issuer thereof would agree to do so.
11. DISPOSITION OF COLLATERAL AND PROCEEDS. Upon the transfer of all or
any part of the Indebtedness, Bank may transfer all or any part of the
Collateral or Proceeds and shall be fully discharged thereafter from all
liability and responsibility with respect to any of the foregoing so
transferred, and the transferee shall be vested with all rights and powers of
Bank hereunder with respect to any of the foregoing so transferred; but with
respect to any Collateral or Proceeds not so transferred Bank shall retain all
rights, powers, privileges and remedies herein given. Any proceeds of any
disposition of any of the Collateral or Proceeds, or any part thereof, may be
applied by Bank to the payment of expenses incurred by Bank in connection with
the foregoing, including reasonable attorneys' fees, and the balance of such
proceeds may be applied by Bank toward the payment of the Indebtedness in such
order of application as Bank may from time to time elect.
12. STATUTE OF LIMITATIONS. Until all indebtedness shall have been paid
in full and all commitments by Bank to extend credit to Debtor have been
terminated, the power of sale and all other rights, powers, privileges and
remedies granted to Bank hereunder shall continue to exist and may be exercised
by Bank at any time and from time to time irrespective of the fact that the
indebtedness or any part thereof may have become barred by any statute of
limitations, or that the personal liability of Debtor may have ceased, unless
such liability shall have ceased due to the payment in full of all indebtedness
secured hereunder.
13. MISCELLANEOUS. (a) The obligations of Debtor are joint and several;
(b) Debtor hereby waives any right (i) to require Bank to make any presentment
or demand, or give any notice of nonpayment or nonperformance, protest, notice
of protest or notice of dishonor hereunder, (ii) to direct the application of
payments or security for Indebtedness of Debtor or indebtedness of customers of
Debtor, or (iii) to require proceedings against others or to require exhaustion
of security; and (c) Debtor hereby consents to extensions, forbearances or
alterations of the terms of Indebtedness, the release or substitution of
security, and the release of any guarantors: provided however, that in each
instance, Bank believes in good faith that the action in question is
commercially reasonable in that it does not unreasonably increase the risk of
nonpayment of the Indebtedness to which the action applies. Until all
Indebtedness shall have been paid in full, no Debtor shall have any right of
subrogation or contribution, and each Debtor hereby waives any benefit of or
right to participate in any of the Collateral or Proceeds or any other security
now or hereafter held by Bank.
14. NOTICES. All notices, requests and demands required under this
Agreement must be in writing, addressed to Bank at the address specified in any
other loan documents entered into between Debtor and Bank and to Debtor at the
address of its chief executive office (or personal residence, if applicable)
specified below or to such other address as any party may designate by written
notice to each other party, and shall be deemed to have been given or made as
follows: (a) if personally delivered, upon delivery; (b) if sent by mail, upon
the earlier of the date of receipt or 3 days after deposit in the U.S. mail,
first class and postage prepaid; and (c) if sent by telecopy, upon receipt.
15. COSTS, EXPENSES AND ATTORNEYS' FEES. Debtor shall pay to Bank
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), expended or
incurred by Bank in exercising any right, power, privilege or remedy conferred
by this Agreement or in the enforcement thereof, whether incurred at the trial
or appellate level, in an arbitration proceeding or otherwise, and including any
of the foregoing
<PAGE>
incurred in connection with any bankruptcy proceeding (including without
limitation, any adversary proceeding, contested matter or motion brought by Bank
or any other person) relating to Debtor or in any way affecting any of the
Collateral or Bank's ability to exercise any of its rights or remedies with
respect thereto. All of the foregoing shall be paid by Debtor with interest
from the date of demand until paid in full at a rate per annum equal to the
greater of ten percent (10%) or the Prime Rate in effect from time to time. The
"Prime Rate" is a base rate that Bank from time to time establishes and which
serves as the basis upon which effective rates of interest are calculated for
those loans making reference thereto.
16. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding upon
and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties, and may be amended or
modified only in writing signed by Bank and Debtor.
17. OBLIGATIONS OF MARRIED PERSONS. Any married person who signs this
Agreement as Debtor hereby expressly agrees that recourse may be had against his
or her separate property for all his or her indebtedness to Bank secured by the
Collateral and Proceeds under this Agreement.
18. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall
be held to be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or any remaining provisions
of this Agreement.
19. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the state of California.
Debtor warrants that its chief executive office (or personal residence, if
applicable) is located at the following address:
3347 INVESTMENT BLVD., HAYWARD, CA 94545
IN WITNESS WHEREOF, this Agreement has been duly executed as of NOVEMBER
19, 1996.
CHOLESTECH CORPORATION
By: /s/ W.E. Pinckert
------------------------------
WARREN PINCKERT
PRESIDENT
<PAGE>
ADDENDUM TO GENERAL PLEDGE AGREEMENT
THIS ADDENDUM is attached to and made a part of that certain General
Pledge Agreement ("Agreement") executed by CHOLESTECH CORPORATION ("Debtor"),
as of November 19, 1996, in favor of WELLS FARGO BANK, NATIONAL ASSOCIATION
("Bank").
Debtor acknowledges and agrees as follows:
1. COLLATERAL. Notwithstanding any reference in the Agreement to a
transfer, pledge or delivery to Bank, or a deposit with Bank, of the
Collateral and Proceeds defined in paragraph 1 of the Agreement, and
notwithstanding any reference in the Agreement to the possession, custody or
control by Bank of the Collateral or Proceeds, said Collateral includes
without limitation: (a) all securities (whether certificated or
uncertificated), bonds, documents, instruments, money, notes, repurchase
agreements, general intangibles, and all other property of whatever nature or
description, whether tangible or intangible, now or hereafter held on account
of or for Debtor in Debtor's Liquidity Management Account Number 358210114
with Bank ("Account"); (b) the Account itself and all replacements and
substitutions therefor; and (c) Proceeds of all of the foregoing; provided
however, that notwithstanding the generality of the foregoing, the term
"Collateral" does not include any and Bank disclaims a security interest in
all WF Securities or Collective
<PAGE>
Investment Funds (as hereinafter defined) now or hereafter in the Account.
2. SECURITY INTEREST. In accordance with and subject to the
provisions of the Agreement, and to secure the obligations described therein,
Debtor grants and transfers to Bank a security interest in all of the
Collateral described in the Agreement and paragraph 1 of this Addendum.
3. ACCOUNT ACTIVITY. So long as no default exists with respect to the
indebtedness secured hereby, Debtor may sell, exchange, transfer or otherwise
dispose of assets in and withdraw assets from the Account, provided however
that the Collateral Value of the Account, as hereinafter defined, shall at
all times be equal to or greater than one hundred percent (100%) of the
outstanding principal balance of the indebtedness secured hereby.
In the event that the Collateral Value of the Account should, for any
reason and at any time, be less than the required amount, Debtor shall
promptly either make a principal reduction on the indebtedness secured
hereby, or pledge to Bank and deposit in the Account additional assets, of a
nature satisfactory to Bank, in either case, sufficient such that the
Collateral Value of the Account achieves the required amount.
4. PRIORITY. The terms of this Addendum override and take precedence
over any provision to the contrary in any other
-2-
<PAGE>
agreement or other documentation relative to the opening and maintenance of
the Account.
5. DEFINED TERMS. All terms defined in the Agreement and used herein
shall have the same meaning when used in this Addendum, "WF SECURITIES" means
stock, securities or obligations of Wells Fargo & Company or of any affiliate
thereof (as the term affiliate is defined in Section 23A of the Federal
Reserve Act (12 USC 371 (c), as amended from time to time). "COLLECTIVE
INVESTMENT FUNDS" means a collective investment fund as described in 12 CFR
9.18 and includes without limitation a collective investment fund maintained
by Bank's Trust Department, "COLLATERAL VALUE OF THE ACCOUNT" means the sum
of:
(i) 100% of the face amount of cash and cash equivalents in the Account;
(ii) 90% of the market value of obligations in the Account of the United
States of America, but not to exceed the face amount;
(iii) 90% of the market value of commercial paper in the Account rated
at least A1 by a nationally recognized rating agency, but not to
exceed the face amount;
(iv) 85% of the market value of corporate bonds in the Account (excluding
convertible bonds) rated at least AA
-3-
<PAGE>
by a nationally recognized rating agency, but not to exceed the face
amount;
(v) 75% of the market value of corporate and municipal bonds in the
Account (excluding convertible bonds and those described in (iv))
rated at least BBB by a nationally recognized rating agency, but not
to exceed the face amount;
with market value, in all instances, determined by Bank in its sole discretion
and excluding from such computation all WF Securities, Collective Investment
Funds or any other assets in which Bank does not have a first priority perfected
security interest now or hereafter in the Account.
6. NEGATIVE PLEDGE. So long as Bank retains a security interest in the
Collateral, Debtor shall not further pledge, encumber, grant or permit to exist
a security interest in or lien upon any assets now or hereafter in the Account,
including without limitation, WF Securities or Collective Investment Funds.
7. INVESTMENT MANAGER. This Addendum constitutes an instruction and
authorization by Debtor to Debtor's investment manager/adviser to abide by the
terms hereof, and following written instructions from Bank, to manage the
Account in accordance with Bank's instructions.
-4-
<PAGE>
IN WITNESS WHEREOF, the Debtor has executed this Addendum as of the same
date as the Agreement.
Acknowledged as of 12/20/96:
--------
/s/ Gretchen Sommerfield
---------------------------
CHOLESTECH CORPORATION
By: Gretchen Sommerfield
---------------------------
By: /s/ W.E. Pinckert
------------------------------
Warren Pinckert Title: AVP
--------------------
President
-5-
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<PERIOD-END> DEC-27-1996
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0
0
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