- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 1997
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ______ to _____
Commission file number: 000-20198
CHOLESTECH CORPORATION
(Exact name of registrant as specified in its charter)
California 94-3065493
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3347 Investment Boulevard, Hayward, CA 94545
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (510) 732-7200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
At December 26, 1997, 11,314,995 shares of common stock of the Registrant were
outstanding.
<PAGE>
CHOLESTECH CORPORATION
PART I
FINANCIAL INFORMATION
Page
----
ITEM 1. FINANCIAL STATEMENTS.
Condensed Balance Sheets 3
Condensed Statements of Operations 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. 8
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS. 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 23
SIGNATURES 24
2
<PAGE>
CHOLESTECH CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
CONDENSED BALANCE SHEETS
(in thousands)
(unaudited)
<CAPTION>
Assets
December 26, 1997 March 28, 1997 (1)
----------------- ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,514 $ 6,088
Marketable securities 5,541 7,921
Accounts receivable, net 2,624 1,866
Inventories 2,530 2,353
Prepaid expenses and other current assets 218 280
-------- --------
Total current assets 20,427 18,508
Property and equipment, net 3,216 2,399
Other assets, net 73 180
-------- --------
$ 23,716 $ 21,087
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 2,546 $ 1,629
Accrued payroll and benefits 686 527
Product warranty 247 214
-------- --------
Total current liabilities 3,479 2,370
Other liabilities -- 14
-------- --------
Total liabilities 3,479 2,384
-------- --------
Shareholders' equity:
Preferred stock -- --
Common stock 69,499 69,174
Unrealized gains on investments 69 --
Accumulated deficit (49,331) (50,471)
-------- --------
Total shareholders' equity 20,237 18,703
-------- --------
$ 23,716 $ 21,087
======== ========
<FN>
(1) The information in this column was derived from the Company's audited
financial statements for the fiscal year ended March 28, 1997.
See Notes to Condensed Financial Statements
</FN>
</TABLE>
3
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CHOLESTECH CORPORATION
<TABLE>
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
--------------------------- ---------------------------
12/26/97 12/27/96 12/26/97 12/27/96
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Domestic $ 4,856 $ 2,942 $ 13,574 $ 8,085
International 793 227 1,690 900
------------ ------------ ------------ ------------
5,649 3,169 15,264 8,985
Cost of products sold 2,668 1,662 7,364 4,931
------------ ------------ ------------ ------------
Gross profit 2,981 1,507 7,900 4,054
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 1,297 989 3,784 2,858
Research and development 485 365 1,482 818
General and administrative 735 495 1,883 1,374
------------ ------------ ------------ ------------
Total operating expenses 2,517 1,849 7,149 5,050
------------ ------------ ------------ ------------
Income (loss) from operations 464 (342) 751 (996)
Other income, net 133 179 414 185
------------ ------------ ------------ ------------
Income (loss) before taxes 597 (163) 1,165 (811)
Provision for income taxes 13 -- 25 --
------------ ------------ ------------ ------------
Net income (loss) $ 584 $ (163) $ 1,140 $ (811)
============ ============ ============ ============
Basic earnings per common share:
Net income (loss) $ .05 $ (0.01) $ .10 $ (0.08)
============ ============ ============ ============
Weighted average common shares 11,307,794 11,176,669 11,264,564 10,103,329
============ ============ ============ ============
Diluted earnings per common share:
Net income (loss) $ .05 $ (0.01) $ .10 $ (0.08)
============ ============ ============ ============
Weighted average common shares and
equivalents outstanding 12,097,634 11,176,669 11,833,778 10,103,329
============ ============ ============ ============
<FN>
See Notes to Condensed Financial Statements
</FN>
</TABLE>
4
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CHOLESTECH CORPORATION
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Thirty-nine weeks ended
-----------------------
12/26/97 12/27/96
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,140 $ (811)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 679 597
Changes in assets and liabilities:
Accounts receivable (758) (615)
Inventories (177) (635)
Prepaid and other current assets 62 (21)
Other assets 9 (18)
Accounts payable and accrued expenses 941 45
Accrued payroll and benefits 159 (15)
Product warranty 33 25
--------- ---------
Net cash provided by (used in) operating activities 2,088 (1,448)
--------- ---------
Cash flows from investing activities:
Proceeds from sales of marketable securities 22,291 178,364
Purchases of marketable securities (19,842) (181,410)
Purchases of property and equipment (1,398) (811)
--------- ---------
Net cash provided by (used in) investing activities 1,051 (3,857)
--------- ---------
Cash flows from financing activities:
Repayment of long-term debt -- (1,298)
Proceeds from short-term bank borrowing -- 800
Repayment of short-term bank borrowing -- (1,050)
Principal payments on capital leases (38) (41)
Issuance of common stock 325 13,477
--------- ---------
Net cash provided by financing activities 287 11,888
--------- ---------
Net change in cash and cash equivalents 3,426 6,583
Cash and cash equivalents at beginning of period 6,088 361
--------- ---------
Cash and cash equivalents at end of period $ 9,514 $ 6,944
========= =========
Supplemental disclosures of non-cash
financing and investing activities:
Capital lease obligations incurred for
acquisition of property and equipment $ -- $ 46
========= =========
<FN>
See Notes to Condensed Financial Statements
</FN>
</TABLE>
5
<PAGE>
CHOLESTECH CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Interim Results
The interim unaudited financial information of Cholestech Corporation
(the "Company") is prepared in conformity with generally accepted
accounting principles and such principles are applied on a basis
consistent with the audited financial information contained in the
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on June 27, 1997. The financial information included herein
has been prepared by management, without audit by independent
accountants who do not express an opinion thereon, and should be read
in conjunction with the audited financial statements contained in the
Annual Report on Form 10-K. The condensed balance sheet as of March 28,
1997 has been derived from, but does not include all the disclosures
contained in, the audited financial statements for the year ended March
28, 1997. The information furnished includes all adjustments and
accruals consisting only of normal recurring accrual adjustments that
are, in the opinion of management, necessary for a fair presentation of
results for the interim periods. Certain information or footnote
disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles has been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission.
The foregoing interim results are not necessarily indicative of the
results of operations for the full fiscal year ending March 27, 1998.
2. Balance Sheet Data
The components of inventories are as follows (in thousands):
December 26, 1997 March 28, 1997
----------------- --------------
Raw materials $ 893 $ 703
Work-in-process 915 585
Finished goods 722 1,065
------- -------
$2,530 $2,353
======= =======
3. Earnings Per Share
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 129, "Earnings per Share" effective December 26. 1997.
SFAS No. 128 requires the presentation of basic earnings per share
("EPS") and, for companies with complex capital structure (or
potentially dilutive securities, such as convertible debt, options and
warrants), diluted EPS. The Company's earnings per share for the
effects of SFAS No. 128.
Basic net income (loss) per share for the thirteen weeks and
thirty-nine weeks ended December 26, 1997 has been computed using the
weighted average number of outstanding shares of common stock. Diluted
net income per share for thirteen weeks and thirty-nine weeks ended
December 26, 1997 has been computed using the weighted average number
of outstanding shares of common stock and common equivalent shares from
stock options outstanding (when dilutive using the treasury stock
method). Using
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CHOLESTECH CORPORATION
the treasury stock method, common stock options are assumed to be
exercised and the proceeds used to buy back common stock at the
Company's average stock price for the thirteen weeks ended December 26,
1997. Due to the net loss incurred during the thirteen weeks and
Thirty-nine weeks ended December 28, 1996, common stock outstanding
would be antidilutive and are therefore not included in the loss per
share calculation for that period.
A reconciliation of the basic and diluted earnings per share
calculations follows:
<TABLE>
(In thousands except per share data)
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
December 26, 1997 December 26,. 1997
----------------------------------- -------------------------------
Income Shares Per share Income Shares Per share
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $584 11,308 $.05 $1,140 11,265 $.10
Effect of dilutive
securities 790 569
----------------------------------- -------------------------------
Diluted EPS $584 12,098 $.05 $1,140 11,834 $.10
=================================== ===============================
Thirteen Weeks Ended Thirty-nine Weeks Ended
December 26, 1997 December 26,. 1997
----------------------------------- -------------------------------
Income Shares Per share Income Shares Per share
Basic EPS $(163) 11,177 $(0.01) $(811) 10,103 $(0.08)
Effect of dilutive
securities -- --
----------------------------------- -------------------------------
Diluted EPS $(163) 11,177 $(0.01) $(811) 10,103 $(0.08)
=================================== ===============================
</TABLE>
4. Borrowing Arrangements
In December 1997, the Company renewed an agreement with Wells Fargo
Bank for a $3 million revolving line of credit (the "line of credit").
While the agreement is in effect, the Company is required to maintain
on deposit assets with a collective value, as defined in the line of
credit agreement, equivalent to no less than 100% of the outstanding
principle balance. Amounts outstanding under the line of credit bear
interest at the bank's prime rate. The line of credit agreement expires
on November 30, 1998 and is renewable. As of December 26, 1997, there
were no borrowings outstanding under the line of credit.
5. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for the reporting of comprehensive income and its
components in a full set of general purpose financial statements for
fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods for comparative purposes is
7
<PAGE>
CHOLESTECH CORPORATION
required. The Company will adopt SFAS 130 in fiscal 1999 and does not
expect such adoption to have a material effect on the financial
statements.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131, which is effective for fiscal
years beginning after December 15, 1997, revises information regarding
the reporting of certain operating segments. It also establishes
standards for related disclosures about products and services,
geographic areas and major customers. The Company will adopt SFAS 131
in fiscal 1999 and does not expect such adoption to have a material
effect on the financial statements.
6. Shareholder Rights Plan
In January 1997, the Board of Directors approved a shareholder rights
plan under which shareholders of record on March 31, 1997 received a
right to purchase (a "Right") one-thousandth of a share of Series A
Participating Preferred Stock at an exercise price of $44, subject to
adjustment. The Rights will separate from the Common Stock and Rights
certificates will be issued and, will become exercisable upon the
earlier of: (i) 10 days or such later date as may be determined by a
majority of the Board of Directors following a public announcement that
a person or group of affiliated or associated persons has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of
the Company's outstanding Common Stock or (ii) 10 business days
following the commencement of, or announcement of an intention to make,
a tender offer or exchange offer the consummation of which would result
in the beneficial ownership by a person or group of 15% or more of the
outstanding Common Stock of the Company. The Rights expire on the
earlier of (i) January 22, 2007 or (ii) redemption or exchange of the
Rights.
8
<PAGE>
CHOLESTECH CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors discussed herein, under "General" and "Potential Factors Affecting
Future Operating Results." These forward-looking statements include, but are not
limited to, the statement under "General" regarding the Company's expectation of
continuing to incur negative cash flows and regulatory approvals for its
products, the statement under "Sales and Marketing" regarding the Company's
expectation that sales and marketing expenses will increase, the statement under
"Research and Development" regarding the development of tests for new disease
states and the Company's anticipation that research and development expenditures
will increase, and the statement in the third paragraph under "Liquidity and
Capital Resources" regarding the length of time that the Company's resources
will be sufficient to meet its capital requirements.
General
The Company develops, manufactures and markets a proprietary platform
technology - the Cholestech L*D*X(R) System - which in the preventive care
market measures specific analytes to detect various diseases and disorders
within five minutes using a single drop of whole blood. Despite positive
operating income in the first thirty-nine weeks of fiscal 1998, the Company has
experienced significant operating losses prior to this fiscal year and, as of
December 26, 1997, had an accumulated deficit of $49.3 million. The Company is
developing certain additional tests designed to extend the Cholestech L*D*X
System's capabilities. The Company believes that its future growth will depend,
in part, upon its ability to complete development and successfully introduce
these new tests. The Company may incur negative cash flows from operations as it
expands product research and development efforts for new test panels, pursues
regulatory clearances and approvals, expands sales and marketing activities to
address the therapeutic monitoring market, and develops and expands
manufacturing capacity for existing and new test panels. The development and
commercialization of the new tests will require additional development, sales
and marketing, manufacturing and other expenditures. The required level and
timing of such expenditures will have an impact on the Company's ability to
maintain profitability and positive cash flows from operations.
On July 24, 1997, the Food and Drug Administration (FDA) granted
clearance on the Company's notification of intent to market, pursuant to Section
510 (k) of the Food, Drug and Cosmetics Act of 1938, as amended ("Section 510
(k) Notification"), to market a creatinine and blood urea nitrogen ("BUN") test
cassette or renal function panel. The Company believes that these two tests are
among the most commonly ordered blood tests in physician offices. BUN elevations
occur in chronic renal disease as well as urinary tract obstruction. BUN is
useful to monitor hemodialysis and other therapies. Creatinine is a measure of
renal function and is used in combination with blood urea nitrogen tests. In
addition, creatinine is used as a measure of renal blood flow that may have
become reduced due to congestive heart failure or dehydration. Low levels of
creatinine may result from decreased hepatic production in advanced liver
disease. In order to successfully commercialize the creatinine and blood urea
nitrogen test cassette in the United States, the Company believes that it will
be critical to obtain waived classification under the Clinical Laboratory
Improvement Amendments of 1988 ("CLIA"). The Company has submitted an
application to the Centers for Disease Control and Prevention ("CDC") requesting
9
<PAGE>
CHOLESTECH CORPORATION
the creatinine and BUN disposable test be classified as waived under the
requirements of CLIA. There can be no assurance that any new tests developed by
the Company, including the creatinine and blood urea nitrogen tests, will
qualify for the waived classification. Any failure of the new tests to obtain
waived status under the CLIA will adversely impact the Company's ability to
commercialize such tests.
Result of Operations
Thirteen weeks ended December 26, 1997 and December 27, 1996
and
Thirty-nine weeks ended December 26, 1997 and December 27, 1996
Revenues. During the thirteen weeks ended December 26, 1997, revenues
increased $2.5 million (78%) to $5.7 million from $3.2 million in the thirteen
weeks ended December 27, 1996. Domestic revenues increased $1.9 million (65%) to
$4.9 million from $2.9 million in the thirteen weeks ended December 27, 1996.
During the first thirty-nine weeks of fiscal 1998, revenues increased $6.3
million (70%) to $15.3 million from $9.0 million in the first thirty-nine weeks
of fiscal 1997.
Domestic revenues increased $5.5 million (68%) to $13.6 million from
$8.1 million in the first thirty-nine weeks of fiscal 1997. The increase in
domestic revenues reflects a continuing unit increase in sales of the disposable
test cassettes and the Cholestech L*D*X(R) System to hospitals, managed care
organizations, public healtH departments, corporations, physician office
laboratories and other health care providers in the diagnostic screening and
therapeutic monitoring markets. As of December 26, 1997, the Company had shipped
approximately 3,000 Cholestech L*D*X Systems into the physician office
laboratory market.
During the thirteen weeks ended December 26, 1997, international
revenues increased $566,000 (249%) to $793,000 from $227,000 in the thirteen
weeks ended December 27, 1996. During the first thirty-nine weeks of fiscal
1998, international revenues increased $790,000 (88%) to $1.7 million from
$900,000 in the first thirty-nine weeks of fiscal 1997. The increase in
international revenues reflects continued product demand in the European market.
International revenues as a percentage of total revenues increased to 14% during
the thirteen weeks ended December 26, 1997 from 7% in the thirteen weeks ended
December 27, 1996. The increase in international revenues as a percentage of
total revenues reflects product demand in the European market. The Company
expects that international revenue will decline as a percentage of total revenue
in future periods, although the absolute dollar amount of international revenue
may continue to increase from period to period, as the Company continues to
increase sales and marketing efforts in the United States.
Cost of Products Sold. The cost of products sold during the thirteen
weeks ended December 26, 1997 increased $1.0 million (61%) to $2.7 million from
$1.7 million in the thirteen weeks ended December 27, 1996, as unit sales of the
disposable test cassettes and Cholestech L*D*X Systems increased. The gross
margin was 53% and 48% in the thirteen weeks ended December 26, 1997 and
December 27, 1996, respectively. The improvement in the gross margin was
primarily attributable to the growth in the volume of units produced, as the
Company was able to amortize fixed manufacturing expenses over the higher unit
volume, and growth in volume of units sold.
10
<PAGE>
CHOLESTECH CORPORATION
During the first thirty-nine weeks of fiscal 1998, the cost of products
sold increased $2.4 million (49%) to $7.4 million from $4.9 million in the first
thirty-nine weeks of fiscal 1997, as unit sales of disposable test cassettes and
the Cholestech L*D*X Systems increased. Gross margin was 52% and 45% in the
first thirty-nine weeks of fiscal 1998 and 1997, respectively. The improvement
in the gross margin was primarily attributable to the growth in the volume of
units produced, as the Company was able to amortize fixed manufacturing expenses
over the higher unit volume, and growth in volume of units sold.
The Company has obtained the right to use certain technology in the
manufacturing of certain of its products. The related agreement, which expires
in year 2006, requires the Company to pay 2% royalty on net sales of the
applicable products. Total royalty expenses in the thirteen weeks ended December
26, 1997 and December 27, 1996 were $160,000 and $149,000, respectively, and
were charged to cost of products sold. Total royalty expenses for first
thirty-nine weeks of fiscal 1998 and 1997 were $473,000 and $385,000,
respectively, and also were charged to cost of products sold.
Sales and Marketing Expenses. Sales and marketing expenses in the
thirteen weeks ended December 26, 1997 were $1.3 million compared to $989,000
for the same period in fiscal 1997, and $3.8 million for the first thirty-nine
weeks of fiscal 1998 compared to $2.9 million for the first thirty-nine weeks of
fiscal 1997. These increases in sales and marketing expenses were attributable
to continued expansion of the Company's domestic sales and marketing
organization, increased expenses related to the continued penetration in the
physician office 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 23% for the thirteen weeks ended December 26, 1997 from 31% for the same
period in fiscal 1997, and decreased to 25% for the first thirty-nine weeks of
fiscal 1998 from 32% for the first thirty-nine weeks of fiscal 1997. These
decreases as a percentage of revenues occurred, in as much, as certain sales and
marketing costs are fixed in nature and do not increase in proportion with
revenues. The Company currently anticipates that sales and marketing expenses
will continue to increase in absolute dollars in future periods as the Company
expands sales and marketing activities to address the monitoring market, in
particular the physician office laboratory and pharmacy segments.
Research and Development Expenses. Research and development expenses
for the thirteen weeks ended December 26, 1997 were $485,000 compared to
$365,000 for the same period in fiscal 1997, and $1.5 million for the first
thirty-nine weeks of fiscal 1998 compared to $818,000 for the first thirty-nine
weeks of fiscal 1997. The increases in research and development expense were
attributable to continued development of additional tests and an increase in
headcount. Research and development expenses as a percentage of revenues
decreased to 9% for the thirteen weeks ended December 26, 1997 from 12% for the
thirteen weeks ended December 27, 1996. This decrease as a percentage of
revenues occurred due to a faster revenue growth than the Company's ability to
responsibly build research and development infrastructure. Research and
development expenses as a percentage of revenues increased to 10% for the first
thirty-nine weeks of fiscal 1998 from 9% for the first thirty-nine weeks of
fiscal 1997.
The Company is currently developing additional tests to detect and
monitor disease states such as metabolic bone diseases and disorders, liver
function, prostate cancer, cardiovascular
11
<PAGE>
CHOLESTECH CORPORATION
disease and diabetes. Each of these new tests is at an early stage of
development and the Company will be required to undertake time-consuming and
costly development activities and seek regulatory approval for these new tests
before such tests can be marketed. However, the Company believes that its future
revenue growth and profitability will depend, in part, upon its ability to
complete development and successfully introduce new test panels designed to
extend the Cholestech L*D*X(R) System's capabilities to include additional tests
useful in the diagnostic screening and therapeutic monitoring markets. The
Company currently anticipates that research and development expenditures will
increase in future periods as product development and manufacturing scale-up
efforts for new tests increase.
General and Administrative Expenses. General and administrative
expenses for the thirteen weeks ended December 26, 1997 were $735,000 compared
to $495,000 for the same period in fiscal 1997 and $1.9 million for the first
thirty-nine weeks of fiscal 1998 compared to $1.4 million for the first
thirty-nine weeks of fiscal 1997. These increases in general and administrative
expenses resulted primarily from increased investment in the Company's
information systems. General and administrative expenses as a percentage of
revenues decreased to 13% for the thirteen weeks ended December 26, 1997 from
16% for the same period in fiscal 1997, and decreased to 12% for the first
thirty-nine weeks of fiscal 1998 from 15% for the first thirty-nine weeks of
fiscal 1997. These decreases as a percentage of revenues occurred due to a
faster revenue growth than expansion of the Company's administrative functions
and general expenses.
Other Income, Net. Other Income, net consists of interest income earned
on investment of cash, cash equivalents and marketable security balances, offset
in part by interest expense incurred on capital lease financing, and for the
first thirty-nine weeks of fiscal 1997, and other borrowings of the Company. The
Company recorded net interest income of $133,000 in the thirteen weeks ended
December 26, 1997 compared to $179,000 for the same period in fiscal 1997 and
$414,000 for the first thirty-nine weeks of fiscal 1998 compared to $185,000 for
the same period in fiscal 1997. These increases in other income, net reflect
higher interest income earned on investment of cash balances generated from the
Company's public offering of common stock in June 1996 and cash provided by
operations and lower average borrowings outstanding during the thirteen weeks
ended December 26, 1997 and the first thirty-nine weeks of fiscal 1998.
Income Taxes. As the Company has significant net operating loss and tax
credit carryforwards, the provisions for income taxes for the thirteen weeks
ended December 26, 1997 of $13,000 and thirty-nine weeks of fiscal 1998 of
$25,000 represent the estimated alternative minimum tax. Management expects to
utilize additional net operating loss and other tax carryforward amounts to the
extent income is earned during fiscal 1998. Accordingly, the Company's estimated
effective tax rate is expected to remain below the federal statutory rate
throughout fiscal 1998.
New Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board issued Statement No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for the reporting of comprehensive
income and its components in a full set of general purpose financial statements
for fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods for comparative purposes is required.
The Company will adopt SFAS 130 in fiscal 1999 and does not expect such adoption
to have a material effect on the financial statements.
12
<PAGE>
CHOLESTECH CORPORATION
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131, which is effective for fiscal year beginning after
December 15, 1997, revises information regarding the reporting of certain
operating segments. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company will
adopt SFAS 131 in fiscal 1999 and does not expect such adoption to have a
material effect on the financial statements.
Liquidity and Capital Resources
The Company has financed its operations primarily through product sales
and the sale of equity securities. From inception to December 26, 1997, the
Company raised approximately $69.5 million in net proceeds from equity
financings. As of December 26, 1997, the Company had approximately $15.1 million
of cash, cash equivalents and short-term marketable securities and an
accumulated deficit of $49.3 million. In addition, the Company has available a
$3 million revolving bank line of credit agreement. While the agreement is in
effect, the Company is required to maintain on deposit assets with a collective
value, as defined in the line of credit agreement, equivalent to no less than
100% of the outstanding principal balance. Amounts outstanding under the line of
credit bear interest at the bank's prime rate. The line of credit agreement
expires on November 30, 1998 and is renewable. As of December 26, 1997, there
were no borrowings outstanding under the line of credit.
Net cash provided by operating activities was approximately $2.1
million during the first thirty-nine weeks of fiscal 1998 compared to net cash
used by operating activities of $1.5 million during first thirty-nine weeks of
fiscal 1997. In the first thirty-nine weeks of fiscal 1998, net income from
product sales was the primary factor contributing to cash provided by operating
activities. In the first thirty-nine weeks of fiscal 1997, the net loss
increases in accounts receivable and inventory were the factors contributing to
cash used by operating activities. Net cash provided by investing activities of
approximately $1.1 million in the first thirty-nine weeks of fiscal 1998
resulted from proceeds from the sales of marketable securities. In the first
thirty-nine weeks of fiscal 1997, Company's net purchases of marketable
securities and property and equipment were the primary factor contributing to
net cash used by investing activities. Net cash provided by financing activities
in the first thirty-nine weeks of fiscal 1998 was $287,000, reflecting issuance
of Common Stock, primarily pursuant to the employee stock purchase plan and the
stock incentive program but was offset in part by principal payments on capital
leases. Net cash provided by financing activities in the first thirty-nine weeks
of fiscal 1997 was $11.9 million, reflecting issuance of Common Stock, primarily
from the Company's June 1996 public offering, which was offset in part by
principal payments on capital leases, repayment of long-term debt and repayment
of short-term bank borrowings.
The Company intends to expend substantial funds for product research
and development, continued expansion of sales and marketing activities,
expansion of manufacturing capacity, increases in information systems, and other
working capital and general corporate purposes. Although the Company believes
that its cash, cash equivalents and short-term marketable securities balances as
of December 26, 1997, and its available bank line of credit, together with
amounts to be generated from operations, will be sufficient to meet its capital
requirements for the foreseeable future, there can be no assurance that the
Company will not require additional financing or take advantage of favorable
capital markets to secure additional financing. The Company's actual liquidity
and capital requirements will depend upon numerous factors,
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<PAGE>
CHOLESTECH CORPORATION
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.
Potential Factors Affecting Future Operating Results
History of Losses; Uncertainty of Future Profitability. The Company has
experienced significant operating losses prior to this fiscal year and, as of
December 26, 1997, had an accumulated deficit of $49.3 million. The Company may
experience significant fluctuations in revenues and results of operations on a
quarter to quarter basis in the future. Quarterly operating results will
fluctuate due to numerous factors, such as (i) the timing and level of market
acceptance of the Cholestech L*D*X(R) System, particularly with respect to the
therapeutic monitoring market; (ii) the timing of introduction and availability
of new tests; (iii) the timing and level of expenditures associated with new
product development activities; (iv) the timing and level of expenditures
associated with expansion of sales and marketing activities and overall
operations; (v) the Company's ability to cost-effectively expand cassette
manufacturing capacity and maintain consistently acceptable yields in the
manufacture of disposable test cassettes; (vi) the timing of establishment of
strategic distribution arrangements and the success of the activities conducted
under such arrangements; (vii) variations in manufacturing efficiencies; (viii)
changes in demand for its products based on changes in third party
reimbursement, competition, changes in government regulation and other factors;
(ix) the timing of significant orders from and shipments to customers; and (x)
general economic conditions. These factors are difficult to forecast, and these
or other factors could have a material adverse effect on the Company's business,
financial condition and results of operations. Fluctuations in quarterly demand
for products may adversely affect the continuity of the Company's manufacturing
operations, increase uncertainty in operational planning, and/or affect cash
flow from operations. The Company's expenses are based in part on the Company's
expectations as to future revenue levels and to a large extent are fixed in the
short-term. If actual revenues do not meet expectations, the Company's business,
financial condition and results of operations could be materially adversely
affected.
Uncertainty of Market Acceptance of the Cholestech L*D*X System(R). The
Company has generated revenues tO date, primarily from sales of the Cholestech
L*D*X System to hospitals, public health departments, corporate wellness
programs, health promotion service providers, managed care organizations,
community health centers, the military, and others in the diagnostic screening
market and therapeutic monitoring market. In order for the Company to increase
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<PAGE>
CHOLESTECH CORPORATION
revenues, sustain profitability and maintain positive cash flows from
operations, the Cholestech L*D*X System must continue to achieve market
acceptance among health care providers in the therapeutic monitoring market,
particularly physician office laboratories. Physicians and other health care
providers are not likely to use the Cholestech L*D*X System unless they
determine that it is an attractive alternative to other means of diagnostic
screening or therapeutic monitoring of blood detected diseases. Even if the
advantages of the Cholestech 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 Cholestech L*D*X System for any number of reasons. As a result, there can be
no assurance that demand for the Cholestech L*D*X System, particularly in the
therapeutic monitoring market, will be sufficient to allow sustainable profits
from operations.
Dependence on Development and Introduction of New Products. The Company
is in the early stages of developing tests designed to extend the Cholestech
L*D*X System's capability to include additional tests useful to health care
providers, particularly physician office laboratories. The Company believes that
its revenue growth and future profitability will depend, in part, upon its
ability to complete development of and successfully introduce these new tests.
The Company will be required to undertake time-consuming and costly development
activities and seek regulatory approval for these new tests. There can be no
assurance that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of these new
tests, that regulatory clearance or approval of any new tests will be granted by
the FDA or the CDC (for waived status) on a timely basis, if at all, or that the
new tests will adequately meet the requirements of the applicable market or
achieve market acceptance. On July 24, 1997, the FDA approved the Company's
Section 510 (k) Notification to market the Company's creatinine and BUN
disposable test cassette. The Company has submitted a request for waived
classification to the CDC for the use of the creatinine and BUN test cassette
with the L*D*X System. To date, the CDC has not acted upon the Company's
request. In order to successfully commercialize the creatinine and BUN
disposable test cassette in the United States, the Company believes it is
critical to obtain waived status under CLIA. In order to successfully
commercialize any new tests, including the creatinine and BUN disposable test
cassette, the Company will be required to establish and maintain reliable,
cost-efficient, high-volume manufacturing capacity for such tests. The Company
has in the past encountered difficulties in scaling up production of new test
cassettes, including problems involving production yields, quality control and
assurance, variations and impurities in the raw materials and performance of the
manufacturing equipment. If the Company is unable for technological or other
reasons to complete the development, introduction and scale up of manufacturing
of any new tests or if such new tests do not achieve a significant level of
market acceptance, the Company's business, financial condition and results of
operations could be materially adversely affected.
Limited Sales, Marketing and Distribution Experience; Dependence on
Third Party Distributors. In order for the Company to increase revenues and
achieve sustainable profitability, the Cholestech L*D*X System must achieve a
significant degree of market acceptance among health care providers in the
therapeutic monitoring market, particularly physician office laboratories and
retail pharmacies. The Company has only limited experience in marketing and
selling to the monitoring market in the United States. In the last two fiscal
years, the Company has entered into distributor arrangements with three
distributors, Physician Sales and Service, Inc., General Medical, Inc. and
AmeriSource Health Corporation. The Company may be required to enter into
additional distribution arrangements in order to achieve broad
15
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CHOLESTECH CORPORATION
distribution of its products. There can be no assurance that the Company will be
able to enter into and maintain arrangements with additional distributors on a
timely basis, if at all. The Company will be dependent upon these distributors
to assist it in promoting market acceptance. For example, in July 1997 the
Company entered into an agreement with Park-Davis, a division of Warner Lambert
Company, to supply the Cholestech L*D*X System and disposable cassettes to 1,000
physicians investigators to monitor lipid levels of their patients, in a Phase
IV clinical trial. In connection with the clinical trial, one of the Company's
distributors, Physician Sales and Service, Inc. ("PSS") is the servicing agent
of the Cholestech L*D*X Systems used in the clinical trial. The failure of one
of its distributors, such as PSS, to provide an adequate service for the
Company's products to the end user customer could hinder market acceptance of
such products. It is uncertain that these distributors will devote the resources
necessary to provide effective sales and marketing support to the Company. In
addition, the Company's distributors may give higher priority to the products of
other medical suppliers, thus reducing their efforts to sell the Company's
products. If the Company is unable to establish appropriate arrangements with
distributors or if any of the Company's distributors become unwilling or unable
to promote, market and sell the Cholestech L*D*X System and disposable test
cassettes, the Company's business, financial condition and results of operations
would be materially adversely affected.
Risks Associated with Cassette Manufacturing. The Company internally
manufactures all the disposable test cassettes that are components of the
Cholestech L*D*X System. The manufacture of the disposable test cassettes is a
highly complex and precise process. Such manufacturing is sensitive to a wide
variety of factors, including variations and impurities in the raw materials,
difficulties in the manufacturing process, performance of the manufacturing
equipment and the level of contaminants in the manufacturing environment. The
Company has in the past experienced lower than expected production yields that
have adversely affected gross margins and delayed product shipments. The Company
believes that it may be required to expand manufacturing capacity for new and
existing test cassettes. In fiscal 1997, the Company added a second
manufacturing line for dry chemistry cassettes. The Company intends to add a
third manufacturing line for dry chemistry cassettes in late fiscal 1999 to
address potential future constraints on capacity. There can be no assurance that
such expansion of cassette manufacturing capacity can be completed in a timely
fashion, if ever. In addition, the Company will be required to build a new
cassette manufacturing line for the immunoassay test cassettes under
development, such as metabolic bone diseases and disorders. To date, the Company
has not developed the core technologies, processes and production equipment for
an immunoassay cassette manufacturing line. To the extent the Company does not
achieve acceptable manufacturing yields of disposable test cassettes or
experiences product shipment delays, the Company's business, financial condition
and results of operations would be materially adversely affected.
Highly Competitive Industry; Rapid Technological Change. The diagnostic
screening and therapeutic monitoring markets in which the Company competes are
intensely competitive. The Company's competition consists mainly of independent
clinical laboratories and hospital-based laboratories, as well as manufacturers
of bench top and other point of care testing systems. In order to achieve market
acceptance for the Cholestech L*D*X System(R), the Company will be required to
demonstrate that the Cholestech L*D*X System is an attractivE alternative to the
clinical laboratory and hospital-based laboratory, as well as bench top and
diagnostic systems. This will require physicians to change their established
means of having such tests performed. The Company expects that the
reclassification of the Cholestech L*D*X System as waived under CLIA will result
in competitors seeking to develop products that qualify for waived
16
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CHOLESTECH CORPORATION
classification. If the BUN/Creatinine disposable test cassette is not granted
waived status, there can be no assurance that the Company will be able to obtain
waived status, that if such status is not obtained, the BUN/Creatinine cassette
will achieve market acceptance or that competitors will not obtain waived status
for a similar product. The Company expects that such competitors will compete
intensely to maintain and increase their market shares. There can be no
assurance that the Company's competitors will not succeed in CLIA waived status
for their products or in developing or marketing technologies or products that
are more effective and commercially attractive than the Company's current or
future products, or that would render the Company's technologies and products
obsolete or noncompetitive. There can be no assurance that the Cholestech L*D*X
System will be able to compete with the testing services provided by these
laboratories and analyzers.
Dependence on Proprietary Technology, Uncertainty of Patent and
Proprietary Technology Protection, Dependence on License of Technology of Third
Parties. The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its technology, and
operate without infringing the proprietary rights of others. Cholestech has
eight United States patents and one foreign issued patent and is currently
pursuing several patent applications with certain foreign patent offices. There
can be no assurance that any of the Company's pending patent applications will
result in the issuance of any patents, or that, if issued, any assurance that
any patents issued to the Company will not be challenged, invalidated or
circumvented in the future or that the rights created thereunder will provide a
competitive advantage. The medical products industry has been characterized by
extensive litigation regarding patents and other intellectual property rights.
There can be no assurance that the Company will not in the future become subject
to patent infringement claims and litigation or interference proceedings
conducted in the United States Patent and Trademark Office to determine the
priority of inventions. An adverse determination in litigation or interference
proceedings to which the Company may become a party could subject the Company to
significant liabilities to third parties or require the Company to seek licenses
from parties which may not be available on commercially reasonable terms.
Government Regulation. The manufacture and sale of diagnostic products,
including the Cholestech L*D*X System, are subject to extensive regulation by
numerous governmental authorities, principally the FDA and corresponding state
and foreign regulatory agencies. The Company will not be able to commence
marketing or commercial sales in the United States of any of the new tests until
it receives clearance or approval from the FDA. Additionally, certain material
changes to medical products already cleared or approved by the FDA are also
subject to further FDA review and clearance or approval. The loss of previously
obtained clearances, or failure to comply with existing or future regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations. In general, the Company intends
to develop and market tests that will require 510(k) clearance. It generally
takes from four to twelve months from the date of submission to obtain 510(k)
clearance, but it can take longer. In addition, certain of the Company's
products under development, such as the PSA test, may require submission of a
pre-market approval ("PMA") application which is much longer and more costly
process and involves the submission of extensive supporting data and clinical
information. A PMA application may be submitted to the FDA only after clinical
trials and the required patient follow-up for a particular test are successfully
completed. Upon filing of a PMA application, the FDA commences a review process
that generally takes one to three years from the date on which the PMA
application is accepted for filing, but may take significantly longer. There can
be no assurance that the Company's products under development will require
17
<PAGE>
CHOLESTECH CORPORATION
only 510(k) clearance rather than the more lengthy PMA application. A
requirement that the Company file a PMA application for new test would
significantly delay the Company's ability to market such a test and
significantly increase the costs of development.
The European Union ("EU") has promulgated rules which require that
medical products receive the right to affix the CE mark, a symbol of adherence
to quality assurance standards and compliance with applicable EU regulations.
Cholestech's products are covered by the In Vitro Diagnostics Directive that
becomes effective July 1, 1998. The Company has completed all the testing
necessary to comply with applicable safety regulations, and expects to receive
the appropriate certifications, relative to those regulations, by the end of
March 1998. While the Company intends to satisfy the requisite policies and
procedures that will permit it to affix the CE mark to its products, there can
be no assurance that the Company will be successful in meeting the European
certification requirements, and failure to receive the right to affix the CE
mark will prohibit the company from selling its products in member countries of
the EU.
The time required to obtain approval for sale in foreign countries may
be longer or shorter than that required for FDA approval and the requirements
may differ. Export sales of investigational devices that are subject to PMA and
investigational device exemption requirements and have not received FDA
marketing approval are subject to FDA export requirements. In accordance with
the FDA Export Reform & Enforcement Act of 1996, such devices may be exported to
any country provided that the device has marketing authorization in one of the
countries identified in the Act. If the device has no such marketing
authorization and is intended for marketing, approval must be obtained from the
FDA to export to any country. In order to obtain export approval, the Company
may be required to provide the FDA with documentation from the medical device
regulatory authority of the country in which the study is to be conducted or the
purchaser is located, stating that the exportation of the device has the
approval of the country. In addition, the FDA must find that exportation of the
device is not contrary to the public health and safety of the country in order
for the Company to obtain the permit. The Company has obtained such required
approvals for each of its currently marketed products and expects to apply for
such approvals for the BUN/Creatinine test and additional tests as they are
developed.
The use of Cholestech's products and those of its competitors is also
affected by CLIA and related federal and state regulations, which provide for
regulation of laboratory testing, as well as the laws and regulations of foreign
countries. The scope of these regulations includes quality control, proficiency
testing, personnel standards and federal inspections. For example, in the United
States CLIA categorizes tests as "waived," or as being "moderately complex" or
"highly complex," on the basis of specific criteria. In January 1996, the
Cholestech L*D*X System(R) and the TC, HDL, triglycerides and glucose tests in
any combination werE reclassified as waived under CLIA. In order to successfully
commercialize the tests that are currently under development, the Company
believes that it will be critical to obtain waived classification for such
tests. There can be no assurance that any new tests developed by the Company
will qualify for the waived classification, including the BUN/Creatinine
disposable test cassette. Any failure of the new tests to obtain waived status
CLIA will adversely impact the Company's ability to commercialize such tests,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
Uncertainty Relating to Third Party Reimbursement. In the United
States, health care providers, such as hospitals and physicians, that purchase
products such as the Company's
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CHOLESTECH CORPORATION
Cholestech L*D*X System and disposable test cassettes, generally rely on third
party payers, principally private health insurance plans, federal Medicare and
state Medicaid, to reimburse all or part of the cost of the procedure in which
the product is being used. The Company's ability to commercialize its products
successfully in the United States will depend in part on the extent to which
reimbursement for the costs of such products and related treatment will be
available from government health authorities, private health insurers and other
organizations. Such third party payers can affect the pricing or the relative
attractiveness of the Company's products by regulating the maximum amount of
reimbursement provided by such payers for testing services. Reimbursement is
currently not available for certain uses of the Company's products. For example,
the cost of the Cholestech L*D*X System is generally not subject to
reimbursement by government and other third party payers. In addition, the tests
performed by public health departments, corporate wellness programs and other
large volume users in the screening market are generally not subject to
reimbursement. In addition, certain health care providers are moving towards a
managed care system in which such providers contract to provide comprehensive
health care for a fixed cost per patient. Failure by physicians and other users
to obtain reimbursement from third party payers, or changes in government and
private third party payers' policies toward reimbursement of test employing the
Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations. Given the efforts to
control and reduce health care costs in the United States in recent years, there
can be no assurance that currently available levels of reimbursement will
continue to be available in the future for the Company's existing products or
products under development.
In addition, market acceptance of the Company's products in
international markets is dependent, in part, upon the availability of
reimbursement within prevailing health care payment systems. Reimbursement and
health care payment systems in international markets vary significantly by
country, and include both government sponsored health care and private
insurance.
Dependence on Suppliers. Single-source vendors currently provide
certain key components and raw materials used in the manufacturing of the
Company's products. Any supply interruption in a single-source component or raw
material would have a material adverse effect on the Company's ability to
manufacture products until a new source of supply was qualified. There can be no
assurance that the Company will be successful in qualifying additional sources
on a timely basis or at all, which would have a material adverse effect on the
Company's business. In addition, an uncorrected impurity or supplier's variation
in a raw material, either unknown to the Company or incompatible with the
Company's manufacturing process, could have a material adverse effect on the
Company's ability to manufacture products. Also, because the Company is a small
customer of many of its suppliers, there can be no assurance that suppliers will
devote adequate resources to supplying the Company's needs. Any interruption or
reduction in the future supply of any key components or raw materials currently
obtained from single or limited sources could have a material adverse effect on
the Company's business, operating results and financial condition in any given
period.
Dependence on Retention and Attraction of Key Employees. The Company's
success depends in significant part upon the continued service of certain key
scientific, technical, regulatory and managerial personnel, and its continuing
ability to attract and retain additional highly qualified scientific, technical,
clinical, regulatory and managerial personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to retain
such personnel or that it can attract or retain other highly qualified
scientific, technical, clinical, regulatory and managerial personnel in the
future, including key sales and marketing
19
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CHOLESTECH CORPORATION
personnel. The loss of key personnel or the inability to hire or retain
qualified personnel could have a material adverse effect upon the Company's
business, financial condition and results of operations.
Risk of Product Liability; Product Liability Insurance May Be
Insufficient or Unavailable. Sale of the Company's products entails risk of
product liability claims. The medical testing industry has historically been
litigious, and the Company faces financial exposure to product liability claims
in the event that use of its products result in personal injury. The Company
also faces the possibility that defects in the design or manufacture of its
products might necessitate a product recall. The Company currently maintains
product liability insurance with coverage limits of $5.0 million per occurrence
and $5.0 million annually in the aggregate and there can be no assurance that
the coverage limits of the Company's insurance policies will be adequate. Such
insurance is expensive, difficult to obtain and may not be available in the
future on acceptable terms, or at all. No assurance can be given that product
liability insurance can be maintained in the future at a reasonable cost or in
sufficient amounts to protect the Company against losses due to liability. In
addition, a product liability claim in excess of relevant insurance coverage or
product recall could have a material adverse effect on the Company's business,
financial condition and results of operations.
Issuance of Preferred Stock Could Delay or Prevent Corporate Takeover.
The Board of Directors has the authority to issue up to 5,000,000 shares of
non-designated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without any further vote or action by
the shareholders. To date, the Board of Directors has designated 25,000 shares
as Series A Participating Preferred Stock in connection with the Company's
Shareholder Rights Plan. The issuance of Preferred Stock under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company or otherwise adversely affecting the rights of the
holders of Common Stock.
On January 22, 1997, pursuant to a Preferred Shares Rights Agreement
(the "Rights Agreement") between the Company and ChaseMellon Shareholder
Services, LLC (the "Rights Agent"), the Company's Board of Directors declared a
dividend of one right (a "Right") to purchase on one-thousandth share of the
Company's Series A Participating Preferred Stock ("Series A Preferred") for each
outstanding share of Common Stock of the Company. The dividend was payable on
March 31, 1997 (the "Record Date") to stockholders of record as of the close of
business on that day. Each Right entitles the registered holder to purchase from
the Company on one-thousandth of a share of Series A Preferred at an exercise
price of $44.00 (the "Purchase Price"), subject to adjustment. The Rights
approved by the Board are designed to protect and maximize the value of the
outstanding equity interests in the Company in the event of an unsolicited
attempt by an acquirer to take over the Company, in a manner or on terms not
approved by the Board of Directors. The Rights have been declared by the Board
in order to deter coercive tactics, including a gradual accumulation of shares
in the open market of a 15% or greater position to be followed by a merger or a
partial or two-tier tender offer that does not treat all stockholders equally.
The Rights should not interfere with any merger, or business combination
approved by the Board of Directors. However, the Rights may have the effect of
rendering more difficult or discouraging an acquisition of the Company deemed
undesirable by the Board of Directors. The Rights may cause substantial dilution
to a person or group that attempts to acquire the Company on terms or in a
manner not approved by the Company's Board of Directors, except pursuant to an
offer conditioned upon the negation, purchase or redemption of the Rights.
20
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CHOLESTECH CORPORATION
Potential Volatility of Stock Price. The market price of shares of the
Company's Common Stock, like that of the common stock of many other medical
products and technology companies, has in the past been, and is likely in the
future to continue to be highly volatile. Factors such as fluctuations in the
Company's operating results, announcements of technological innovations or new
commercial products by the Company or competitors, government regulation,
changes in the current structure of the health care financing and payment
systems, developments in or disputes regarding patent or other proprietary
rights, economic and other external factors and general market conditions may
have a significant effect on the market price of the Common Stock. Moreover, the
stock market has from time to time experienced extreme price and volume
fluctuations, which have particularly affected the market prices for medical
products and high technology companies and which have often been unrelated to
the operating performance of such companies. These broad market fluctuations, as
well as general economic, political and market conditions may adversely affect
the market price of the Company's Common Stock. In the past, following periods
of volatility in the market price of a company's stock, securities class action
litigations have occurred against the issuing company. There can be no assurance
that such litigation will not occur in the future with respect to the Company.
Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
on the Company's business, operating results and financial condition. Any
adverse determination in such litigation could also subject the Company to
significant liabilities.
Absence of Dividends. The Company has not paid any cash dividends since
inception and does not anticipate paying cash dividends in the foreseeable
future.
Year 2000 Issue. The Company's Cholestech L*D*X(R) System contains
software that may be used to integrate test results to an end-user's medical
records systems. It is likely that, commencing in the year 2000, the
functionality of certain medical records systems will be adversely affected when
one or more component products of the system is unable to process four-digit
characters representing years and, therefore, the system would not be in "Year
2000 compliance." Although the Company believes its products are in Year 2000
compliance, there can be no assurance that the Company's fully compliant
products will be able to function properly when integrated with other vendor's
non-compliant component products. The inability of the Company's Cholestech
L*D*X(R) System to properly manage and manipulate data related to the Year 2000
could result in a material adverse affect on the Company's business, financial
condition and results of operations, including increased warranty costs,
customer satisfaction issues and potential lawsuits.
Although the Company's products are Year 2000 compliant, the Company
anticipates that substantial litigation may be brought against vendors of all
component products, including the Company, that operate in connection with
medical records systems. The Company believes that any such claims, with or
without merit, could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company has identified Year 2000 dependencies in the Company's
systems and has implemented changes to its internal information systems to make
them Year 2000 compliant. While the Company currently expects that the Year 2000
will not pose significant operational problems, delays in the implementation of
new information systems, or a failure to fully identify all Year 2000
dependencies in the Company's systems could have a material adverse
consequences, including delays in the delivery or sale of products.
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CHOLESTECH CORPORATION
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders during the
quarter ended December 26, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.17.4 Revolving Line of Credit Note effective
November 30,1997 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 quarter ended December 26, 1997.
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CHOLESTECH CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHOLESTECH CORPORATION
Date February 9, 1998 /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)
23
WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE
- --------------------------------------------------------------------------------
$3,000,000.00 Oakland, California
November 30, 1997
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 850, 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, 1997.
(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.
(d) Collection of Payments. Borrower authorizes Bank to collect all
interest and fees due hereunder by charging Borrower's demand deposit account
number 4187-516166 with Bank, or any other demand deposit account maintained by
any 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.
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, 1998.
(b) Advances. Advances hereunder, to the total amount of the principal surm
available hereunder, may be made by the holder at the oral or written request of
(i) WARREN PINCKERT and/or ANDREA TILLER and/or CEClLIA AGUILAR, any two acting
together who are authorized to request advances and direct the disposition of
any avances 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.
<PAGE>
(c) The death or incapacity of any individual Borrower or Third Party
Obligor, or the dissolution or liquidation 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) Goveminq 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/ Warren Pinckert
---------------------------
WARREN PINCKERT
PRESIDENT
<PAGE>
November 30, 1997
Warren Pinckert, President
Cholestech Corporation
3347 Investment Blvd.
Hayward, CA. 94545
Dear Mr. Pinckert:
This letter is to confirm the changes agreed upon between Wells Fargo Bank,
National Association ("Bank") and Cholestech Corporation ("Borrower") to the
terms and conditions of that certain letter agreement between Bank and Borrower
dated as of November 19, 1996, as amended from time to time (the "Agreement").
For valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Bank and Borrower hereby agree that the Agreement shall be amended
as follows to reflect said changes.
1. The Agreement is hereby amended by deleting "November 30, 1997" as the
last day on which Bank will make advances under the Line of Credit, and by
substituting for said date "November 30, 1998," with such change to be effective
upon the execution and delivery to Bank of a promissory note substantially in
the form of Exhibit A attached hereto (which promissory note shall replace and
be deemed the Line of Credit Note defined in and made pursuant to the Agreement)
and all other contracts, instruments and documents required by Bank to evidence
such change.
2. Except as specifically provided herein, all terms and conditions of the
Agreement remain in full force and effect, without waiver or modification. All
terms defined in the Agreement shall have the same meaning when used herein.
This letter and the Agreement shall be read together, as one document.
3. Borrower hereby remakes all representations and warranties contained in
the Agreement and reaffirms all covenants set forth therein. Borrower further
certifies that as of the date of Borrower's acknowledgment set forth below there
exists no default or defined event of default under the Agreement or any
promissory note or other contract, instrument or document executed in connection
therewith, nor any condition, act or event
<PAGE>
Cholestech Corporation
November 30, 1997
Page 2
which with the giving of notice or the passage of time or both would constitute
such a default or defined event of default.
Your acknowledgment of this letter shall constitute acceptance of the
foregoing terms and conditions.
Sincerely,
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By: /s/ Patricia L. Dorsey
------------------------
PATRICIA L. DORSEY
VICE PRESIDENT
Acknowledged and accepted as of December 1, 1997:
By: /s/ Warren Pinckert
----------------------
WARREN PINCKERT
PRESIDENT
<PAGE>
SECURITIES ACCOUNT CONTROL AGREEMENT
WELLS FARGO BANK (Wells Fargo Bank Intermediary)
- --------------------------------------------------------------------------------
THIS SECURITIES ACCOUNT CONTROL AGREEMENT (this "Agreement") is entered into as
of November 30, 1997, by and among CHOLESTECH CORPORATION ("Customer"), WELLS
FARGO BANK (TEXAS), NATIONAL ASSOCIATION, acting through its Investment Group
("Intermediary"), and WELLS FARGO BANK, NATIONAL ASSOCIATION, acting through its
East Bay RCBO Office ("Secured Party").
RECITALS
A. Customer maintains that certain INVESTMENT MANAGEMENT Account No.
358210114 (the "Securities Account") with Intermediary pursuant to an agreement
between Intermediary and Customer dated as of December 2, 1996, and governed by
the laws of the State of California (the "Account Agreement"), and Customer has
granted to Secured Party a security interest in the Securities Account and all
financial assets and other property now or at any time hereafter held in the
Securities Account. Security interest limited to $3,000,000 plus interest.
B. Secured Party, Customer and Intermediary have agreed to enter into this
Agreement to perfect Secured Party's security interests in the Collateral, as
defined below.
NOW, THEREFORE, in consideration of their mutual covenants and promises, the
parties agree as follows:
1. DEFINITIONS. As used herein:
(a) the term "Collateral" shall mean: (i) the Securities Account; (ii) all
financial assets credited to the Securities Account; (iii) all security
entitlements with respect to the financial assets credited to the Securities
Account; (iv) any and all other investment property or assets maintained or
recorded in the Securities Account; and (v) all substitutions for, and proceeds
of the sale or other disposition of, any of the foregoing, including without
limitation, cash proceeds; and
(b) the terms "investment property," "entitlement order," "financial asset"
and "security entitlement" shall have the respective meanings set forth in the
California Uniform Commerical Code. The parties hereby expressly agree that all
property, including without limitation, cash, certificates of deposit and mutual
funds, at any time held in the Securities Account is to be treated as a
"financial asset".
2. AGREEMENT FOR CONTROL. Intermediary is authorized by Customer and agrees
to comply with all entitlement orders originated by Secured Party with respect
to the Securities Account, and all other requests or instructions from Secured
Party regarding disposition and/or delivery of the Collateral, without further
consent or direction from Customer or any other party.
3. CUSTOMER'S RIGHTS WITH RESPECT TO THE COLLATERAL.
(a) Until Intermediary is notified otherwise by Secured Party: (i)
Customer, or any party authorized by Customer to advise or otherwise act with
respect to the Securities Account, may give trading instructions to Intermediary
with respect to Collateral in the Securities Account; and (ii) Intermediary may
distribute to Customer or any other party in accordance with Customer's
directions that portion of the Collateral which consists of interest and/or cash
dividends earned on financial assets maintained in the Securities Account.
(b) Without Secured Party's prior written consent, except to the extent
permitted by Section 3(a) hereof: (i) neither Customer nor any party other than
Secured Party may withdraw any Collateral from the Securities Account; and (ii)
Intermediary will not comply with any entitlement order or request to withdraw
any Collateral from the Securities Account given by any party other than Secured
Party.
(c) Upon receipt of either written or oral notice from Secured Party: (i)
Intermediary shall promptly cease complying with entitlement orders and other
instructions concerning the Collateral, including the Securities Account, from
all parties other than Secured Party; and (ii) Intermediary shall not make any
further distributions of any Collateral to any party other than Secured Party,
nor permit any further voluntary changes in the financial assets.
4. INTERMEDIARY'S ACKNOWLEDGMENTS. Intermediary acknowledges that:
(a) The Securities Account is maintained with Intermediary solely in
Customer's name.
(b) Intermediary has no knowledge of any claim to, security interest in or
lien upon any of the Collateral, except: (i) the security interests in favor of
Secured Party; and (ii) Intermediary's liens securing fees and charges, or
payment for open trade commitments, as described in Section 4(c) hereof.
(c) Any claim to, security interest in or lien upon any of the Collateral
which Intermediary now has or at any time hereafter acquires shall be junior and
subordinate to the security interests of Secured Party in the Collateral, except
for Intermediary's liens securing: (i) fees and charges owed by Customer with
respect to the operation of the Securities Account; and (ii) payment owed to
Intermediary for open trade commitments for purchases in and for the Securities
Account.
5. AGREEMENTS OF INTERMEDIARY AND CUSTOMER. Intermediary and Customer agree
that:
(a) Intermediary shall flag its books, records and systems to reflect
Secured Party's security interests in the Collateral, and shall provide notice
thereof to any party making inquiry as to Customer's accounts with Intermediary
to whom Intermediary is legally required or permitted to provide information.
(b) Intermediary shall send copies of all statements relating to the
Securities Account simultaneously to Customer and Secured Party.
(c) Intermediary shall promptly notify Secured Party if any other party
asserts any claim to, security interest in or lien upon any of the Collateral,
and Intermediary shall not enter into any control, custodial or other similar
agreement with any other party that would create or acknowledge the existence of
any such other claim, security interest or lien.
(d) Without Secured Party's prior written consent, Intermediary and
Customer shall not amend, modify or terminate the Account Agreement, other than:
(i) amendments to reflect ordinary and reasonable changes in Intermediary's fees
and charges for handling the Securities Account; and (ii) operational changes
initiated by Intermediary as long as they do not alter any of Secured Party's
rights hereunder.
6. MISCELLANEOUS.
(a) This Agreement shall not create any obligation or duty of Intermediary
except as expressly set forth herein.
(b) In the event of any conflict between this Agreement and the Account
Agreement or any other agreement between Intermediary and Customer, the terms of
this Agreement shall control.
(c) All notices, requests and demands which any party is required or may
desire to give to any other party under any provision of this Agreement must be
in writing (unless otherwise specifically provided) and delivered to each party
at the address or facsimile number set forth below its signature, or to such
other address or facsimile number 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: (i) if sent by hand delivery, upon delivery; (ii) if sent by
facsimile, upon receipt; and (iii) 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.
(d) This Agreement shall be binding upon and inure to the benefit of the
heirs, executors, administrators, legal representatives, successors and assigns
of the parties. This Agreement may be amended or modified only in writing signed
by all parties hereto.
(e) This Agreement shall terminate upon Intermediary's receipt of written
notice from Secured Party expressly stating that Secured Party no longer claims
any security interest in the Collateral.
(f) This Agreement shall be governed by and construed in accordance with
the laws of the State of California.
SEE PAGE 3 OF AGREEMENT FOR SIGNATURES
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.
WELLS FARGO BANK (TEXAS), WELLS FARGO BANK,
NATIONAL ASSOCIATION, NATIONAL ASSOCIATION,
acting through its acting through its
Investment Group East Bay RCBO Office
By: By: /s/ Patricia L. Dorsey
---------------------------- ----------------------------
ROD OCMOND
ACCOUNT ADMINISTRATOR Title: Vice President
-------------------------
By:
----------------------------
JOHN VASCONCELLOS
VICE PRESIDENT
Address: 525 MARKET STREET, 10TH FL. Address: One Kaiser Plaza Suite 850
SAN FRANCISCO, CA 94105 Oakland, CA 94612
FAX No.: (415) 396-7179 FAX No.: (510) 839-2296
CHOLESTECH CORPORATION
By: /s/ Warren Pinckert
-----------------------
WARREN PINCKERT
PRESIDENT
Address: 3347 INVESTMENT BLVD.
HAYWARD, CA 94545-3808
FAX No.: (510) 732-7227
<PAGE>
ADDENDUM TO SECURITY AGREEMENT: SECURITIES ACCOUNT
THIS ADDENDUM is attached to and made a part of that certain Security
Agreement: Securities Account executed by CHOLESTECH CORPORATION ("Debtor") in
favor of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"), dated as of November
30, 1997 (the "Agreement ").
The following provisions are hereby incorporated into the Agreement:
1. Securities Account Activity. So long as no Event of Default exists,
Debtor, or any party authorized by Debtor to act with respect to the Securities
Account, may (a) receive payments of interest and/or cash dividends earned on
financial assets maintained in the Securities Account, and (b) trade financial
assets maintained in the Securities Account. Without Bank's prior written
consent, except as permitted by the preceding sentence, neither Debtor nor any
party other than Bank may withdraw or receive any distribution of any Collateral
from the Securities Account. The Collateral Value of the Securities Account
shall at all times be equal to or greater than $3,000,000.00. In the event that
the Collateral Value of the Securities Account should, for any reason and at any
time, be less than the required amount, Debtor shall promptly make a principal
reduction on the Indebtedness, or deposit into the Securities Account additional
assets, of a nature satisfactory to Bank, in either case, sufficient such that
the Collateral Value of the Securities Account achieves the required amount.
2. "Collateral Value of the Securities Account" means the percentage set
forth below for each type of investment property held in the Securities Account
at the time of computation:
(a) 100% of the face amount of cash and cash equivalents;
(b) 90% of the market value of obligations of the United States of
America, but not to exceed the face amount;
(c) 90% of the market value of commercial paper rated at least A1 by
a nationally recognized rating agency, but not to exceed the face
amount;
(d) 85% of the market value of corporate and municipal bonds
(excluding convertible bonds) rated at least AA by a nationally
recognized rating agency, but not to exceed the face amount;
(e) 75% of the market value of corporate and municipal bonds
(excluding convertible bonds and those described in (d) above)
rated at least BBB by a nationally
<PAGE>
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 and Common Trust Funds.
3. Exclusion from Collateral. Notwithstanding anything herein to the
contrary, the terms "Collateral" and "Proceeds" do not include, and Bank
disclaims a security interest in all WF Securities and Common Trust Funds now or
hereafter maintained in the Securities Account.
4. "Common Trust Funds" means common trust funds as described in 12 CFR
9.18 and includes, without limitation, common trust funds maintained by Bank for
the exclusive use of its fiduciary clients.
5. "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).
IN WITNESS WHEREOF, this Addendum has been executed as of the same date as
the Agreement.
CHOLESTECH CORPORATION WELLS FARGO BANK
NATIONAL ASSOCITATION
By: /s/ Warren Pinckert By: /s/ Patricia L. Dorsey
--------------------------- ----------------------------
Warren Pinckert Patricia L. Dorsey
President Vice President
-2-
<PAGE>
SECURITY AGREEMENT
WELLS FARGO BANK SECURITIES ACCOUNT
- --------------------------------------------------------------------------------
1. GRANT OF SECURITY INTEREST. For valuable consideration, the undersigned
CHOLESTECH CORPORATION, or any of them ("Debtor"), hereby grants and transfers
to WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") a security interest in (a)
Debtor's INVESTMENT MANAGEMENT Account No. 358210114 (the "Securities Account")
maintained with WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, acting through
its Investment Group ("Intermediary"), (b) all financial assets credited to the
Securities Account, (c) all security entitlements with respect to the financial
assets credited to the Securities Account, and (d) any and all other investment
property or assets maintained or recorded in the Securities Account (with all
the foregoing defined as "Collateral"), 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, (i) all rights to payment, including
returned premiums, with respect to any insurance relating to any of the
foregoing, (ii) all rights to payment with respect to any cause of action
affecting or relating to any of the foregoing, and (iii) 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"). Except as otherwise expressly permitted
herein, in the event 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 part of the Collateral, subject to all
terms hereof. As used herein, the terms "security entitlement," "financial
asset" and "investment property" shall have the respective meanings set forth in
the California Uniform Commercial Code. Security Interest limited 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. 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.
5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Bank
that: (a) Debtor is the sole owner of the Collateral and Proceeds; (b) Debtor
has the right to grant a security interest in 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; (f) no person or entity, other than Debtor, Bank and Intermediary, has
any interest in or control over the Collateral; and (g) 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 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 personal residence, if applicable) 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.
<PAGE>
(b) Debtor agrees with regard to the Collateral and Proceeds, unless Bank
agrees otherwise in writing: (i) not to permit any security interest in or lien
on the Collateral or Proceeds, except in favor of Bank and except liens in favor
of Intermediary to the extent expressly permitted by Bank in writing; (ii) not
to hypothecate or permit the transfer by operation of law of any of the
Collateral or Proceeds or any interest therein; (iii) 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; (iv) 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; (v) 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; (vi) 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 (vii) 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 interests in the
Collateral and Proceeds or be inconsistent with or violate any provisions of
this Agreement. Debtor further agrees that any party now or at any time
hereafter authorized by Debtor to advise or otherwise act with respect to the
Securities Account shall be subject to all terms and conditions contained herein
and in any control, custodial or other similar agreement at any time in effect
among Bank, Debtor and Intermediary relating to the Collateral.
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 hereof, 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, (ii) any other
agreement between any Debtor and Bank, including without limitation any loan
agreement, relating to or executed in connection with any Indebtedness, or (iii)
any control, custodial or other similar agreement in effect among Bank, Debtor
and Intermediary relating to the Collateral; (b) any representation or warranty
made by any Debtor herein shall prove to be incorrect, false or misleading in
any material respect when made; (c) any Debtor shall fail to observe or perform
any obligation or agreement contained 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, or 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 Commerical
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) Debtor will not dispose of any
of the Collateral or Proceeds except on terms approved by Bank; (b) 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;
(c) Bank may take any action with respect to the Collateral contemplated by any
control, custodial or other similar agreement then in effect among Bank, Debtor
and Intermediary; and (d) at Bank's request, Debtor will assemble and deliver
all books and records pertaining to the Collateral or Proceeds 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 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 Califomia
20. ADDENDUM. Additional terms and conditions relating to the Securities
Account are set forth in an Addendum attached hereto and incorporated herein by
this reference.
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
30, 1997.
CHOLESTECH CORPORATION
By: /s/ Warren Pinckert
---------------------
WARREN PINCKERT
PRESIDENT
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