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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 24, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ______ to _____
Commission file number: 000-20198
CHOLESTECH CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3065493
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3347 INVESTMENT BOULEVARD, HAYWARD, CA 94545
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (510) 732-7200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At September 24, 1999, 11,817,390 shares of common stock of the Registrant were
outstanding.
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CHOLESTECH CORPORATION
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
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. 9
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS. 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 31
SIGNATURES 32
</TABLE>
2
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CHOLESTECH CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
September 24, 1999 March 26, 1999 (1)
------------------ ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,191 $ 5,529
Marketable securities 4,007 3,018
Accounts receivable, net 3,087 2,637
Inventories 3,484 4,532
Prepaid expenses and other current assets 405 140
-------- --------
Total current assets 17,174 15,856
Property and equipment, net 5,870 5,489
Long-term investments 3,847 2,880
Other assets, net 55 58
-------- --------
Total assets $ 26,946 $ 24,283
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,586 $ 1,433
Accrued payroll and benefits 1,078 990
Product warranty 91 91
-------- --------
Total current liabilities 2,755 2,514
-------- --------
Shareholders' equity:
Preferred stock -- --
Common stock 71,505 70,311
Accumulated other comprehensive income (loss) (24) 14
Accumulated deficit (47,290) (48,556)
-------- --------
Total shareholders' equity 24,191 21,769
-------- --------
Total liabilities and shareholders' equity $ 26,946 $ 24,283
======== ========
</TABLE>
(1) The information in this column was derived from the Company's audited
financial statements for the fiscal year ended March 26, 1999.
See Notes to Condensed Financial Statements
3
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CHOLESTECH CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
------------------------- -------------------------
9/24/99 9/25/98 9/24/99 9/25/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Domestic $ 5,371 $ 5,144 $ 10,432 $ 9,315
International 957 963 1,671 1,477
-------- -------- -------- --------
6,328 6,107 12,103 10,792
Cost of products sold 2,593 2,984 5,193 4,886
-------- -------- -------- --------
Gross profit 3,735 3,123 6,910 5,906
-------- -------- -------- --------
Operating expenses:
Sales and marketing 1,666 1,818 3,204 3,446
Research and development 679 729 1,273 1,428
General and administrative 645 646 1,238 1,131
Other 173 (175) 219 575
-------- -------- -------- --------
Total operating expenses 3,163 3,018 5,934 6,580
-------- -------- -------- --------
Income (loss) from operations 572 105 976 (674)
Interest and other income, net 185 218 333 412
-------- -------- -------- --------
Income (loss) before taxes 757 323 1,309 (262)
Provision for income taxes 27 13 43 13
-------- -------- -------- --------
Net income (loss) $ 730 $ 310 $ 1,266 $ (275)
======== ======== ======== ========
Net income (loss) per share:
Basic $ 0.06 $ 0.03 $ 0.11 $ (0.02)
======== ======== ======== ========
Diluted $ 0.06 $ 0.03 $ 0.11 $ (0.02)
======== ======== ======== ========
Shares used to compute net income (loss) per share:
Basic 11,628 11,473 11,573 11,473
======== ======== ======== ========
Diluted 11,969 11,764 11,899 11,473
======== ======== ======== ========
</TABLE>
See Notes to Condensed Financial Statements
4
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CHOLESTECH CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Twenty-six weeks ended
----------------------------------
Sept. 24, 1999 Sept. 25, 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,266 $ (275)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 717 904
Allowance for doubtful accounts 10 (49)
Changes in assets and liabilities:
Accounts receivable (460) 666
Inventories 1,048 (2,348)
Prepaid expenses and other assets (265) (309)
Other assets 3 (1)
Accounts payable and accrued expenses 153 (1,085)
Accrued payroll and benefits 88 (180)
-------- --------
Net cash provided by (used in) operating activities 2,560 (2,677)
-------- --------
Cash flows from investing activities:
Proceeds from sale of marketable securities 9,423 7,799
Purchases of marketable securities (11,417) (5,260)
Purchases of property and equipment (1,098) (1,643)
-------- --------
Net cash provided by (used in) investing activities (3,092) 896
-------- --------
Cash flows from financing activities:
Issuance of common stock 1,194 329
-------- --------
Net cash provided by financing activities 1,194 329
-------- --------
Net change in cash and cash equivalents 662 (1,452)
Cash and cash equivalents at beginning of period 5,529 5,130
-------- --------
Cash and cash equivalents at end of period $ 6,191 $ 3,678
======== ========
</TABLE>
See Notes to Condensed Financial Statements
5
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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 17, 1999. 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 for the fiscal year ended March 26, 1999. The
condensed balance sheet as of March 26, 1999, has been derived from, but
does not include all the disclosures contained in, the audited financial
statements for the year ended March 26, 1999. 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 interim results are not necessarily indicative of the results of
operations for the full fiscal year ending March 31, 2000.
2. BALANCE SHEET DATA
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 25, 1999 MARCH 26, 1999
------------------ --------------
<S> <C> <C>
Raw materials $ 1,403 $ 1,598
Work-in-process 1,138 1,398
Finished goods 943 1,536
------ -----
$3,484 $4,532
====== ======
</TABLE>
3. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing income (loss)
available to common shareholders (numerator) by the weighted average
number of common shares outstanding (denominator) during the period.
Diluted earnings per share gives effect to all potential common stock
outstanding during a period, if dilutive.
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CHOLESTECH CORPORATION
A reconciliation of the basic and diluted earnings per share
calculations follows:
(In thousands, except per share data)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
September 24, 1999 September 24, 1999
----------------------------- -----------------------------
Income Shares Per share Income Shares Per share
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $730 11,628 $0.06 $ 1,266 11,573 $ 0.11
Effect of dilutive
securities 341 -- 326 --
Diluted EPS $730 11,969 $0.06 $ 1,266 11,899 $ 0.11
</TABLE>
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
September 25, 1998 September 25, 1998
----------------------------- -----------------------------
Income Shares Per share Loss Shares Per share
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $310 11,473 $0.03 $ (275) 11,473 $(0.02)
Effect of dilutive
securities 291 -- -- --
Diluted EPS $310 11,764 $0.03 $ (275) 11,473 $(0.02)
</TABLE>
Due to the loss incurred in the twenty-six week period ended September
25, 1998, options to purchase 609,000 shares of common stock were
considered antidilutive and were therefore not included in the loss per
share calculation for that period.
4. BORROWING ARRANGEMENTS
The Company has 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 with the bank
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, 1999. As of September 24, 1999, and September 25, 1998, there were
no borrowings outstanding under the line of credit.
5. NEW ACCOUNTING PRONOUNCEMENTS
During June, 1998, the financial Accounting Standards Board issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
which establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
7
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CHOLESTECH CORPORATION
Company, to date, has not engaged in derivative and hedging activities.
The Company will adopt SFAS No. 133 in fiscal year 2001.
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 (the "Right") one-thousandth of a share of Series A
Participating Preferred Stock at an exercise price of $44.00, 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
Company's outstanding Common Stock. The Rights expire on the earlier of
(i) January 22, 2007, or (ii) redemption or exchange of the Rights.
7. LITIGATION AND OTHER EVENTS
On February 5, 1999, a complaint entitled Ree v. Pinckert, et al., No.
C99-0562 (MMC) was filed in the United States District Court for the
Northern District of California. The Action is a putative class action
and the complaint alleges that Cholestech and an officer, Mr. Pinckert,
violated the federal securities laws by misleading investors during the
time period of July 30, 1997 - June 26, 1998, concerning the Company's
business and its future prospects. On June 24, 1999, plaintiffs filed an
amended complaint, which expanded the putative class period to June 28,
1996, through June 25, 1998. The amended complaint's substantive
allegations and purported causes of action remain based on allegations
that the Company misled shareholders concerning the Company's business
and its future prospects. The complaint does not specify alleged
damages. The Company intends to defend the case vigorously. The Company
does not believe that the defendants in the class action engaged in any
wrongdoing, and that the outcome of this matter will not result in a
material adverse effect, however, there can be no assurance that the
lawsuit will be resolved in the Company's favor. The action is in its
preliminary stages and a trial date has not been set.
The Company is subject to various legal claims and assessments in the
ordinary course of business, none of which are expected by management to
result in a material adverse effect on the financial statements.
8
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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", "Year 2000
Compliance", and "Potential Factors Affecting Future Operating Results." These
forward-looking statements include, but are not limited to: (1) the statement
under "General", that the Company may incur negative cash flows as it expands
manufacturing, research and development, sales and marketing, and pursues
regulatory approvals for its products; (2) the statement under "General" that
the Company expects product mix to change from time to time; (3) the statement
in the first paragraph under "Revenues" that the dollar amount and proportion of
international revenues may fluctuate from period to period; (4) the statements
under "Research and Development" that the development of tests for new disease
states and the Company's anticipation that research and development expenditures
will increase; (5) statements under "Income Taxes" regarding the use of
additional tax net operating losses and other tax carryforward amounts, and the
Company's effective tax rate; and (6) the statements in the second and third
paragraphs under "Liquidity and Capital Resources" that the capital expenditures
relating to expansion of manufacturing, research and development, and sales and
marketing, will be substantial, and that the Company's liquid assets, cash from
operations, and available bank funds, will be sufficient to meet its capital
requirements for the foreseeable future.
GENERAL
The Company develops, manufactures and markets the Cholestech L-D-X(R)
System ("L-D-X System"), consisting of the L-D-X Analyzer and a variety of
single use test cassettes, which performs near-patient diagnostic screening and
therapeutic monitoring for the management of prevalent chronic diseases
(preventive care testing). The L-D-X System is capable of measuring multiple
analytes simultaneously with a single drop of whole blood within five minutes.
The Company currently markets the L-D-X System, including the L-D-X analyzer and
a variety of single use test cassettes, to the physician office laboratory
(POL), pharmacy, and health promotion markets in the United States, and
internationally. The Company has experienced significant operating losses and,
as of September 24, 1999, had an accumulated deficit of $47.3 million. The L-D-X
System, including the L-D-X Analyzer -the Company's only product platform- and
single use test cassettes, will continue to account for substantially all of the
Company's revenues for the foreseeable future. In order for the Company to
increase revenues, sustain profitability and maintain positive cash flows from
operations, the L-D-X System must continue to gain market acceptance among
health care providers, particularly in POLs and pharmacies, to which the Company
has made only limited sales to date. The acceptance of the Company's L-D-X
System by the pharmacy market has progressed more slowly than anticipated. This
is due to the issues of third party reimbursement, State Government approval,
and awareness by the pharmacy market that the L-D-X System could add value to
their businesses. The Company is developing certain additional tests designed to
extend the capabilities of the L-D-X System. The Company believes that its
future growth will depend, in part, upon its ability to complete development of
and successfully introduce these new tests.
The Company may incur negative cash flows from operations as it expands
manufacturing capacity for existing and new test cassettes, increases product
research and
9
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CHOLESTECH CORPORATION
development efforts for new test cassettes, expands sales and marketing
activities, and pursues regulatory clearances and approvals. The development and
commercialization of 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.
The Company expects its product mix to change from time to time, and
these changes will affect the Company's revenues and operating results. In the
POL and pharmacy markets, the Company generally has found that these markets use
a higher proportion of lipid profile cassettes for therapeutic monitoring
purposes, which test cassettes typically have higher selling prices and
associated gross margins than the Company's other tests. However, the Company
has also experienced a relatively lower rate of testing per day in these markets
than in the health promotion market.
The Company is currently developing additional tests for diagnostic
screening and therapeutic monitoring of osteoporosis, liver function, and high
cholesterol. These new tests are in various stages 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. The Company believes that revenue growth, if any, and future
operating results will depend, in part, upon completing development of and
successfully introducing these tests. The Company received 510(k) clearance to
market the BUN/Creatinine panel in July, 1997, but was denied clearance from the
CDC for CLIA waived status in March, 1999. The Company is currently reassessing
the best course of action for resubmittal. The Company received 510(k) clearance
to market the Alanine Aminotransferase (ALT) test for liver function in
September, 1999. Subsequently the Company submitted the ALT test to the CDC
seeking CLIA waved status in September, 1999. The Company can not estimate when
the CDC will determine whether to grant CLIA waived status for this test or
whether such waived status will be granted.
RESULT OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 24, 1999, AND SEPTEMBER 25, 1998
AND
TWENTY-SIX WEEKS ENDED SEPTEMBER 24, 1999, AND SEPTEMBER 25, 1998
Revenues. During the thirteen weeks ended September 24, 1999, revenues
increased 3.6% to $6.3 million from $6.1 million in the thirteen weeks ended
September 25, 1998. The increase in revenues primarily reflects an increase in
domestic revenues of $227,000 or 4.4% to $5.4 million from $5.1 million. This
increase reflects a $900,000 increase in sales of single-use test cassettes,
mainly to health care providers in the health promotion and POL markets. This
was partially offset by a $686,000 decrease in sales of L-D-X Analyzers, mainly
to pharmacy market.
International revenues decreased by 0.6% or $6,000 from $963,000 to
$957,000 for the thirteen weeks ended June 25, 1999, compared to the same period
in fiscal 1999. Although the total change was not large, product mix reflected a
change of $181,000 between sales of L-D-X
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CHOLESTECH CORPORATION
Analyzers and single use-test cassettes. The Company expects that the dollar
amount and mix of international revenues may over time fluctuate from period to
period.
During the first twenty-six weeks of fiscal 2000, revenues increased
$1.3 million (12.1%) to $12.1 million from $10.8 million in the first twenty-six
weeks of fiscal 1999. Domestic revenue increased 12.0% from $9.3 million to
$10.4 million compared to the corresponding twenty-six weeks of fiscal 1999. The
increase in revenue can be attributed to higher unit sales of single use test
cassettes to the health promotion and POL markets. During the first twenty-six
weeks of fiscal 2000, international revenues increased $194,000 or 13.1% over
the first twenty-six weeks of fiscal 1999. The international revenue growth was
primarily in the European market. As with the domestic market, sales growth came
predominantly from the sales of single-use test cassettes.
Cost of Products Sold. Cost of products sold includes direct labor,
direct material, overhead and royalties. Cost of products sold decreased 13.1%
to $2.6 million in the thirteen weeks ended September 24, 1999, from $3.0
million in the thirteen weeks ended September 25, 1998. Gross margin was 59.0%
and 51.1% of total revenues in the thirteen weeks ended September 24, 1999, and
September 25, 1998, respectively. The improvement in gross margin as a
percentage of revenues were primarily attributable to a lower headcount for both
direct and indirect workers resulting in lower labor and overhead spending,
compared to the quarter ended September 25, 1999. Additionally, the gross margin
was improved to a lesser extent by an increase in the average sale price for the
single use test cassettes.
For the first twenty-six weeks of fiscal 2000, cost of product sold
increased $307,000 (6.3%) to $5.2 million from $4.9 million for the first
twenty-six weeks of fiscal 1999. The increase in cost of product was attributed
to the higher volume of single-use test cassettes resulting in gross margins of
57.1% and 54.7% in the first twenty-six weeks of fiscal 2000 and 1999,
respectively.
The Company has licensed certain technology used in the manufacture of
its disposable cassette products. The license agreement, which expires in 2006,
requires the Company to pay a royalty of 2.0% on net sales of the applicable
products. Total royalty expenses in the thirteen weeks ended September 24, 1999,
and September 25, 1998, were $102,000 and $101,000, respectively, and were
charged to cost of products sold. Total royalty expenses for the first
twenty-six weeks of fiscal 2000 and the comparable period of fiscal 1999 were
$205,000 and $232,000, respectively, and also were charged to cost of products
sold.
Sales and Marketing Expense. Sales and marketing expense includes
salaries, commissions, bonuses, expenses for outside services related to
marketing programs, and travel. Sales and marketing expense decreased 8.4% to
$1.7 million in the thirteen weeks ended September 24, 1999, from $1.8 million
in the thirteen weeks ended September 26, 1998. Sales and marketing expense
decreased to 26.3% of revenues in the second quarter of fiscal 2000 from 29.8%
in the second quarter of fiscal 1999. This decrease was related to reduced head
count which resulted in lower wage and benefit costs.
For the first twenty-six weeks of fiscal 2000, Sales and marketing
expense was $3.2 million compared to $3.5 million for the first twenty-six weeks
of fiscal 1999. In addition to lower head count, the reduction was obtained
primarily through stronger expense control
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CHOLESTECH CORPORATION
including more selective use of print media and travel. Sales and marketing
expense decreased to 26.5% of revenues for the twenty-six weeks of fiscal 2000
from 31.9% for the first twenty-six weeks of fiscal 1999.
Research and Development Expenses. Research and development expense
includes salaries, bonuses, expenses for outside services, supplies, and
depreciation of capital equipment. Research and development expense decreased
6.9% to $679,000 in the thirteen weeks ended September 24, 1999, from $729,000
in the thirteen weeks ended September 25, 1998. This decrease was due to a
reduction in head count and related benefits costs. Research and development
expenses as a percentage of revenues decreased to 10.7% for the thirteen weeks
ended September 24, 1999, from 11.9% for the thirteen weeks ended June 26, 1998.
Research and development expenses for the first twenty-six weeks of
fiscal 2000 were $1.3 million compared to $1.4 million for the first twenty-six
weeks of fiscal 1999. The decline in head count resulting in lower wage and
benefits cost were the prime cause of decreased spending. Research and
development expenses as a percentage of revenues decreased to 10.5% for the
first twenty-six weeks of fiscal 2000 from 13.2% for the same twenty-six weeks
of fiscal 1999.
General and Administrative Expense. General and administrative expense
includes compensation, benefits, and expenses for outside services. General and
administrative expense remained constant at approximately $646,000 for both the
thirteen weeks ended September 24, 1999, and the thirteen weeks ended September
25, 1998. General and administrative expenses decreased to 10.2% of revenues in
the thirteen weeks ended September 24, 1999, from 10.6% in the thirteen weeks
ended September 25, 1998.
General and administrative expense for the first twenty-six weeks of
fiscal 2000 were $1.2 million compared to $1.1 million for the same period in
fiscal 1999. The increase relates to additional outside services. General and
administrative expenses decreased to 10.2% of revenues in the first twenty-six
weeks of fiscal 2000 from 10.5% in the same period in fiscal 1999.
Other. Other expense for the second quarter of fiscal 2000 was $173,000
compared to a credit of $175,000 for the respective quarter of fiscal 1999. The
fiscal 2000 second quarter reflects charges related to the Company's defense of
the recently filed putative class action lawsuit and a charge relating to the
amendment of certain outstanding employee stock options to increase their term
by two years. The credit in the second quarter of fiscal 1999 resulted from
Company management's negotiating a cost reduction in expenses associated with
its withdrawn public stock offering.
Interest and other income, net. Interest and other income, net reflects
income from the investment of cash balances and marketable securities. Interest
income declined 15.1% to $185,000 in the thirteen weeks ended September 24,
1999, from $218,000 in the thirteen weeks ended September 25, 1998. This
decrease was equally the result of a reduction in the average amount invested in
marketable securities and a decline in yield.
Interest income declined by 19.2% to $333,000 in the first twenty-six
weeks of fiscal 2000 from $412,000 for the same period in fiscal 1999. The
reduction was attributed to both a lower investment value and lower yields due
to investment instrument mix.
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CHOLESTECH CORPORATION
Income Taxes. As the Company has significant tax credit carryforwards,
the provision for income taxes for the thirteen weeks ended September 24, 1999,
and September 25, 1998, represents 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 2000.
Accordingly, the Company's estimated effective tax rate is expected to remain
below the federal statutory rate throughout fiscal 2000.
New Accounting Pronouncements. During June, 1998, the Financial
Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company, to date, has not engaged in derivative and hedging activities. The
Company will adopt SFAS No. 133, as required, in fiscal year 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the sale of
equity securities and from positive cash flows from operations. From inception
to September 24, 1999, the Company raised $71.5 million in net proceeds from
equity financings. As of September 24, 1999, the Company had $14.0 million of
cash, cash equivalents and marketable securities. In addition to these amounts,
the Company has available a $3.0 million revolving bank line of credit
agreement. While the agreement is in effect, the Company is required to 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, 1999. As of September 24, 1999,
there were no borrowings outstanding under the line of credit.
During the first twenty-six weeks of fiscal 2000, the Company provided
$2.6 million in net cash from operating activities compared to net cash used of
$2.7 million in the first twenty-six weeks of fiscal 1999. The net cash provided
from operations in the first twenty-six weeks of fiscal 2000 was primarily due
to net income of $1.3 million adjustments for non-cash items including $717,000
for depreciation and amortization and $1.0 million for decreased inventories. In
the corresponding twenty-six weeks of fiscal 1999, at net loss of $275,000 plus
adjustments for non-cash items including $2.3 million for increased inventories
and $1.1 million for decreases in accounts payable were the primary factor
contributing to cash used in operations activities.
Net cash used by investing activities was $3.1 million in the first
twenty-six weeks of fiscal 2000, consisting primarily of net purchases of
marketable securities totaling $2.0 million and purchase of equipment totaling
$1.1 million. For the twenty-six weeks of fiscal 1999, the Company provided $2.5
million of net cash from the sale of marketable securities and purchased $1.6
million of equipment.
Proceeds from the Company's stock option incentive program sales
provided $1.2 million in the first twenty-six weeks of fiscal 2000. For the
corresponding twenty-six weeks of fiscal
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CHOLESTECH CORPORATION
1999, $329,000 was provided by the issuance of Common Stock pursuant to the
Company's stock incentive program.
Over the balance of fiscal 2000, the Company intends to expend
approximately $2.2 million for capital purchases related to expansion of its
manufacturing capacity and research and development. Non-cancelable purchase
commitments at September 24, 1999, were not material.
The Company believes that cash, cash equivalents, marketable securities,
cash flows anticipated to be generated by future operations, and available bank
borrowing under an existing line of credit will be sufficient to meet its
operating requirements for the foreseeable future. Despite this belief, however,
the Company may require additional financing. For example, the Company may be
required to expend greater than anticipated funds if unforeseen difficulties
arise in expanding manufacturing capacity for existing cassettes or in the
course of completing required additional development, obtaining necessary
regulatory approvals, obtaining waived status under the Clinical Laboratory
Improvement Amendments of 1988 ("CLIA") or introducing or scaling up
manufacturing for new tests.
The Company's future liquidity and capital requirements will depend upon
numerous additional factors, including: the cost and timing of expansion of
manufacturing capacity, the number and type of new tests the company seeks to
develop; the successes of these development efforts; the costs and timing of
expansion of sales and marketing activities; the extent to which the Company's
existing and new products gain market acceptance; competing technological and
market developments; the progress of commercialization efforts of the Company's
distributors; the cost 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 debt, public or private financing,
collaborative relationships or arrangements. However, the Company may not be
successful in obtaining necessary funds. Even if the Company does raise funds,
any additional equity financing may be dilutive to shareholders, and debt
financing may involve restrictive covenants that limit the manner in which the
Company may be operated. 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 on acceptable terms when needed could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "--Potential Factors Affecting Future Operating Results--Possible Future
Capital Requirements; Uncertainty of additional Funding."
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CHOLESTECH CORPORATION
YEAR 2000 COMPLIANCE
Cholestech has an ongoing program of assessing the extent to which its
internal systems and products evaluate date information ("Year 2000
dependencies"), and, if so, whether they can properly process and evaluate dates
on or after the Year 2000 (whether they are "Year 2000 compliant"). The Company
is taking remedial action where its systems and products are not year 2000
compliant. The Company is also evaluating contingency plans for continuing
operations if Year 2000 problems arise despite its steps to avoid them. The
Company expects these activities to continue throughout calendar 1999.
The Company believes that it has identified the Year 2000 dependencies
in its internal systems. It has examined all critical systems including
manufacturing, sales, development, communications, and financial systems. It has
also examined its non-computer electronic devices that contain microprocessors
and are critical to the Company's operations (for example, telephones,
manufacturing machinery, and security systems). As these dependencies have been
identified, Cholestech has been taking the remedial measures it believes are
necessary for its internal systems to be Year 2000 compliant. These measures
have included establishing a Year 2000 Task Force, increased
awareness/communication of the Year 2000 issues, inventorying the Company's
systems and equipment, assessment of the inventory and implementation and review
of remediated systems and equipment. The Company is not currently aware of any
Year 2000 dependencies in its internal systems that could have a material impact
on its business should the Company fail to make such systems Year 2000
compliant. The Company is also not aware of any material operational issues or
costs associated with preparing its internal systems for the Year 2000. However,
no assurances can be given that Cholestech will not experience unanticipated
material costs caused by undetected errors or defects in its internal systems.
Delays in implementation of new information systems and a failure to identify
and remediate all of its Year 2000 dependencies could result in material adverse
consequences to the Company's business, financial conditions, and results of
operations.
Cholestech has also taken measures to ensure that its products are Year
2000 compliant, including an evaluation of all of it's products for Year 2000
dependencies and Year 2000 compliance. Based on that evaluation, the Company
believes its products, are Year 2000 compliant.
The L-D-X System contains software that may be used to integrate test
results with an end user's medical records system. It is likely that, commencing
in the Year 2000 or before, the functionality of certain medical records systems
will be adversely affected when one or more component products of such systems
are unable to process four digit characters representing years and, therefore,
the medical records system would not be Year 2000 compliant. At this time, the
Company believes that its products are Year 2000 compliant. The Company has not,
and does not plan to, poll all of its customers to determine whether they are
using the L-D-X System with other systems that are not Year 2000 compliant. If a
significant portion of the Company's customers were to be unable to integrate
L-D-X System data with their other information systems, such customers may stop
using the L-D-X System. This would materially and adversely effect the Company's
business, financial condition, and results of operations.
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CHOLESTECH CORPORATION
Additionally, parties with whom the Company does business may not be in
Year 2000 compliance, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Cholestech is
working with the key suppliers of products and services as well as distributors
of the Company's products to determine whether their systems, products, and
services are Year 2000 compliant. The Company is also monitoring their progress
toward Year 2000 compliance. This investigational and monitoring process has
included questionnaires that the Company has sent to the organizations with
which the Company conducts a material amount of business. These efforts will
continue into the year 2000. Despite this effort the Company anticipates that
there exists the potential for substantial litigation which may be brought
against vendors of component products provided to the Company. The Company
believes that any such claims, with or without merit, could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
At this point in time, nearly all of the sole source and key suppliers
have made representations of being year 2000 compliant, and the Company has an
adequate inventory to bridge any short-term delivery problems. Even if the
Company identifies Year 2000 dependency problems in its key vendors or
suppliers, there can be no assurance that such dependencies will be remediated.
If any of the Company's sole source and key vendors, suppliers, or distributors
have systems that are not Year 2000 compliant, Cholestech may be prevented from
manufacturing and/or distributing its products for a significant period of time.
The Company may not be able to establish alternative business relationships in a
timely fashion, on acceptable terms, or at all. This could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
Cholestech has incurred and will incur various costs to conduct testing
and modification of its products and to provide customer support services
regarding Year 2000 issues. It also anticipates that these costs will continue
through calendar year 1999. To date, the costs incurred and anticipated costs
related to the Company's Year 2000 readiness program have been immaterial. This
estimate is based on a current assessment and is subject to change as the
Company's Year 2000 readiness program progresses. If any litigation arises from
Year 2000 dependency issues that we have not identified, cost relating to such
issues could extend into calendar year 2000 and beyond.
Cholestech believes that the purchasing patterns of its customers and
potential customers may also be affected by the Year 2000 issues as they expend
significant resources to bring their current software systems into Year 2000
compliance. These expenditures could result in reduced funds available to
purchase products such as those offered by the Company. Should there be a major
failure in many customers' software systems, purchases could be delayed or
eliminated. Additionally, payments could potentially be late or lost. This would
result in reduced operating income, reduced cash flow, and inventory exposure.
This could have a material adverse effect on the Company's business, operating
results, or financial condition.
POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS
UNCERTAINTY OF MARKET ACCEPTANCE OF THE L-D-X SYSTEM. The L-D-X System,
including the L-D-X Analyzer (the Company's only product platform) and single
use test cassettes, will continue to account for substantially all of the
Company's revenues for the foreseeable future. In order for the Company to
increase revenues, sustain profitability, and
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CHOLESTECH CORPORATION
maintain positive cash flows from operations, the L-D-X System must continue to
gain market acceptance among health care providers, particularly POLs and
pharmacies, to which the Company has made only limited sales to date. In
particular, adoption of the preventive care testing model promoted by the
Company in the pharmacy market has remained at very low levels. Awareness of the
availability of the Company's technology remains at predominantly low levels in
both the physician and pharmacy customer groups. Physicians, pharmacists, and
other health care providers are not likely to use the L-D-X System unless they
determine that it is an attractive alternative to other means of diagnostic
screening or therapeutic monitoring of chronic diseases. Such determination will
depend, in part, upon the L-D-X System's accuracy, ease of use, rapid test time,
reliability and cost effectiveness, as well as the availability, and amount of
third party reimbursement.
Even if the advantages of the L-D-X System in diagnosing and monitoring
patients with chronic diseases are established, health care providers may elect
not to purchase and use the L-D-X System for any number of reasons. For example,
physicians and other health care providers may not change their established
means of having such tests performed or may not make the necessary investment to
purchase the L-D-X Analyzer. In addition, the growing prevalence of managed care
may adversely affect the POL market. A growing number of physicians are salaried
employees and have no financial incentive to perform testing. Many managed care
organizations have contracts with laboratories, which require participating or
employed physicians to send patient specimens to contracted laboratories.
Finally, physicians are under growing pressure by Medicare and other third party
payors to limit their testing to "medically necessary" tests. Market acceptance
of the L-D-X System by pharmacists will in part depend on the continued
availability and amount of reimbursement to them for performing tests on the
L-D-X System. Additionally, market acceptance issues such as awareness,
adoption, reimbursement, distribution, pricing, and education have kept sales to
pharmacists at a significantly low level to date relative to the size of the
available market.
Even if the Company is successful in continuing to place L-D-X Analyzers
at POLs, pharmacies, and other near-patient testing sites, there can be no
assurance that placement of L-D-X Analyzers will result in sustained demand for
the Company's single use test cassettes. As a result, there can be no assurance
that demand for the L-D-X System will be sufficient to sustain revenues and
profits from operations. Because the L-D-X System currently represents the
Company's sole product focus, the Company could be required to cease operations
if the L-D-X System does not achieve and maintain a significant level of market
acceptance.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY; FLUCTUATIONS IN
OPERATING RESULTS. Historically, the Company has experienced significant
operating losses and negative cash flows from operations and, as of September
24, 1999, had an accumulated deficit of $47.3 million. The Company's first
profitable quarter was the first quarter of fiscal 1998, and its first
profitable year was fiscal 1998, however, the Company recorded a net loss of
$73,000 for fiscal 1999. The Company's ability to return to its recent
profitability and positive cash flows from operations will depend, in part, upon
continued commercialization of existing product offerings, of which there can be
no assurance. The Company's ability to return to profitability and positive cash
flows from operations will also depend upon the level and timing of research and
development expenditures and the Company's ability to complete the development
of and successfully introduce and market additional tests. The Company may
experience significant
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CHOLESTECH CORPORATION
fluctuations in revenues and results of operations on a quarter to quarter basis
in the future. Quarterly operating results will fluctuate due to numerous
factors, including:
- The timing and level of market acceptance of the L-D-X System;
- The timing of the introduction and availability of new tests;
- The timing and level of expenditures associated with development
activities;
- The timing and level of expenditures associated with expansion
of sales and marketing activities and overall operations;
- The Company's ability to reduce cost of cassette manufacturing
- Variations in manufacturing efficiencies;
- The timing of establishment, or loss, of strategic distribution
arrangements and the success of the activities conducted under
such arrangements;
- Changes in demand for its products based on changes in third
party reimbursement, competition, changes in government
regulation and other factors;
- The timing of significant orders from and shipments to
customers;
- Product pricing and discounts;
- Variations in the mix of products sold; and
- General economic conditions.
These factors are difficult to predict, 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 the Company's
products may adversely affect the continuity of the Company's manufacturing
operations, increase uncertainty in operational planning and/or affect cash
flows 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. As a result, if actual revenues do not meet expectations, the
Company's ability to adjust spending levels in the short term will be limited
and its business, financial condition, and results of operations could be
materially adversely affected. In addition, as a result of these fluctuations,
it is likely that in some future period the Company's results will not meet the
expectations of public market security analysts or investors. In such event, the
trading price of the Common Stock could be materially adversely affected.
DEPENDENCE ON DEVELOPMENT, INTRODUCTION AND MARKET ACCEPTANCE OF NEW
TESTS. The Company is at various stages of development of tests designed to
extend the capabilities of the L-D-X System. The Company believes that its
revenue growth and future operating results 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,
sales and marketing, manufacturing, and other activities, as well as 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 CLIA waived status) on a timely basis, or at all, that the new
tests will adequately meet the requirements of the applicable market or achieve
market acceptance or that the Company will be able to achieve and maintain cost
efficient, high volume manufacturing capacity for any new tests.
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CHOLESTECH CORPORATION
In July, 1997, the FDA approved the Company's request for clearance to
market the Company's BUN/Creatinine single use test cassette pursuant to Section
510(k) of the FDC Act. In December, 1997, the Company submitted to the CDC a
request for CLIA waiver for the use of the BUN/Creatinine test cassette with the
L-D-X System. The CDC rejected the Company's request in March, 1999. The Company
received 510(k) clearance to market the Alanine Aminotransferase (ALT) test for
liver function in September, 1999. The Company submitted an application in
September, 1999, to the CDC seeking CLIA waived status. Because the CDC's
evaluation of applications for CLIA waived status is not based upon precisely
defined, objectively measurable criteria, the Company cannot predict the
likelihood of obtaining waived status in the future for the ALT product. To
successfully commercialize the ALT test cassette or other future tests 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
BUN/Creatinine 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 raw
materials and performance of the manufacturing equipment.
In May, 1996, the Company entered into a development, marketing and
licensing agreement with Metra Biosystems, acquired by Qundel Corporation in
July 1999, to develop an immunoassay cassette incorporating Metra Biosystems'
bone resorption technology to be used on the L-D-X System. Metra Biosystems is
obligated to purchase $750,000 of additional shares of Common Stock at the then
current market price upon the completion of specified milestones by the Company
unless Metra Biosystems exercises its right to terminate the agreement, which it
may do at any time. To date the Company and Metra have not been able to complete
the development work contemplated under the agreement and are discussing what
steps they should take in the future. There can be no assurance that Metra
Biosystems will not terminate the agreement or that Metra Biosystems will
purchase any additional Common Stock.
If the Company is unable, for technological or other reasons, to
complete the development, introduction, and scale up of manufacturing of any new
tests, if the Company fails to obtain regulatory approval for any such tests on
a timely basis, or if such new tests do not achieve a significant level of
market acceptance, the Company's business, financial conditional and results of
operations could be materially adversely affected.
RISKS ASSOCIATED WITH CASSETTE MANUFACTURING. The Company internally
manufactures all of the single use test cassettes that are used with the L-D-X
Analyzer. The manufacture of the test cassettes is a highly complex and precise
process. Such manufacturing is sensitive to a wide variety of factors, including
raw material variations and impurities, manufacturing process variances,
manufacturing equipment performance, and manufacturing environment contaminants.
The Company has in the past experienced lower than expected manufacturing yields
that have adversely affected gross margins and delayed product shipments. To the
extent that the Company does not maintain acceptable manufacturing yields of
test cassettes or experiences product shipment delays, the Company's business,
financial condition and results of operations would be materially adversely
affected. The Company's cassette manufacturing lines
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CHOLESTECH CORPORATION
would be costly and time consuming to repair or replace if their operation were
interrupted. As the Company's production levels have increased, the Company has
been required to use its machinery more hours per day and the down time
resulting from equipment failure has increased. The custom nature of much of the
Company's manufacturing equipment increases the time required to remedy
equipment failures and replace equipment. Furthermore, the Company has a limited
number of employees dedicated to the operation and maintenance of the cassette
manufacturing equipment, the loss of whom could impact the Company's ability to
effectively operate and service such equipment. The interruption of cassette
manufacturing operations or the loss of employees dedicated to the cassette
manufacturing facility could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company
manufactures all of the cassettes at its Hayward, California manufacturing
facility, and any prolonged inability to utilize such facility as a result of
earthquake, fire or otherwise would have a material adverse effect on the
Company's business, financial condition, and results of operations.
The Company believes that it will be required to reduce manufacturing
costs for new and existing test cassettes. The Company currently operates two
manufacturing lines for dry chemistry cassettes. The Company is currently
planning and building a third manufacturing line that the Company anticipates
will become fully operational in early fiscal 2001. There can be no assurance
that the new cassette manufacturing line can be completed in a timely fashion,
if ever, or that the Company would not need to implement cassette manufacturing
cost reduction programs sooner. In addition, the custom nature of much of the
Company's manufacturing equipment increases the time required to plan and build
new manufacturing lines. The Company may be required to build a new cassette
manufacturing line in order to manufacture the immunoassay test cassettes under
development. To date, the Company has not developed the processes and production
equipment necessary for an immunoassay cassette manufacturing line. Failure to
reduce manufacturing costs for dry chemistry tests, or to successfully develop
an immunoassay cassette manufacturing line and achieve acceptable yields, could
lead to an inability to cost effectively satisfy customer orders and could have
a material adverse effect on the Company's business, financial condition, and
results of operations.
DEPENDENCE ON SUPPLIERS. Single source vendors currently provide certain
subassemblies, components and raw materials used in the manufacture of the
Company's products. Any supply interruption in a single source subassembly,
component, or raw material could have a material adverse effect on the Company's
ability to manufacture products until a new source of supply is identified and
qualified. There can be no assurance that the Company will be successful in
qualifying additional sources of supply on a timely basis, or at all, and
failure to do so could have a material adverse effect on the Company's business,
financial condition and results of operations. 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.
Because the Company is a small customer of many of its suppliers and purchases
its subassemblies, components, and materials on a purchase order basis, rather
than pursuant to long term commitments, there can be no assurance that the
Company's suppliers will devote adequate resources to supplying the Company's
needs. Any interruption or reduction in the future supply of any subassemblies,
components, or raw materials currently obtained from single or limited sources
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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CHOLESTECH CORPORATION
NEED TO MANAGE EXPANDING OPERATIONS. If the Company is successful in
achieving and maintaining market acceptance for the L-D-X System, the Company
will be required to expand its operations, particularly in the areas of sales
and marketing and manufacturing. As the Company expands its operations in these
areas, such expansion will likely result in new and increased responsibilities
for management personnel and place significant strain upon the Company's
management, operating and financial systems and resources. To accommodate any
such growth and compete effectively, the Company will be required to implement
and improve its information systems, procedures and controls, and to expand,
train, motivate, and manage its work force. There can be no assurance that the
Company's personnel, systems, procedures and controls will be adequate to
support the Company's future operations. Any failure to implement and improve
the Company's operational, financial, and management systems or to expand,
train, motivate, or manage employees as required by future growth, if any, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE; DEPENDENCE ON
THIRD PARTY DISTRIBUTORS. In order for the Company to increase revenues and
sustain profitability, the L-D-X System must achieve a significant degree of
market acceptance among health care providers and third party payors. The
Company has only limited experience in marketing and selling to the therapeutic
monitoring market in the United States and relies on third party distributors in
this market. There can be no assurance that the Company will be able to maintain
its existing distribution relationships. Distribution agreements with
Amerisource and Bergen Brunswig Drug Company, both national distributors to the
pharmacy market, have been cancelled due to contractual performance issues. The
Company also will be required to enter into additional distribution arrangements
in order to achieve broader distribution of its products, particularly into the
pharmacy market. There can be no assurance that the Company will be able to
enter into and maintain such arrangements on a timely basis, if at all. The
Company is dependent upon such distributors to assist it in promoting market
acceptance of the L-D-X System. It is uncertain whether 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 do not
promote, market, and sell the L-D-X Analyzer and single use test cassettes, the
Company's business, financial condition, and results of operations could be
materially adversely affected.
UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT. In the United States,
health care providers that purchase products such as the L-D-X System generally
rely on third party payors, including private health insurance plans, federal
Medicare, state Medicaid, and managed care organizations, to reimburse all or
part of the cost of the procedure in which the product is being used. 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
tests performed with the L-D-X System and related treatment will be available
from government health authorities, private health insurers and other third
party payors. Third party payors can affect the pricing or the relative
attractiveness of the Company's products by regulating the maximum amount of
reimbursement provided for testing services. Reimbursement is currently not
available for certain uses of the Company's products in particular
circumstances. As a general rule, third party
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CHOLESTECH CORPORATION
reimbursement is available if a physician has been involved in the decision to
perform the test involving the Company's products. For example, if a physician
prescribes a drug that requires therapeutic monitoring, the use of the Company's
products in performing such tests will be reimbursable.
In the health promotion market, use of the Company's products for
diagnostic screening in health promotion clinics is generally subject to
reimbursement. However, diagnostic screening preformed in corporate wellness
programs and at fitness centers is likely not subject to reimbursement. Third
party payors are increasingly scrutinizing and challenging the prices charged
for medical products and services. Decreases in reimbursement amounts for tests
performed using the Company's products may decrease the amounts that physicians
and other practitioners are able to charge patients, which in turn may adversely
affect the Company's ability to sell its products on a profitable basis. In
addition, certain health care providers are moving toward a managed care system
in which such providers contract to provide comprehensive health care for a
fixed cost per patient. Managed care providers are attempting to control the
cost of health care by authorizing fewer elective procedures, such as the
screening of blood for chronic diseases.
The Company is unable to predict what changes will be made in the
reimbursement methods utilized by third party payors. Inability of health care
providers to obtain reimbursement from third party payors or changes in
government and third party payors' policies toward reimbursement of tests
employing the Company's products could have a material adverse effect on the
Company's business, financial condition and results of operations. Additionally,
the Company believes that the overall escalating cost of medical products and
services has led to and will continue to lead to increased pressures on the
health care industry, both domestic and international, to reduce the cost of
products and services, including products offered by the Company.
Market acceptance of the Company's products in international markets is
also 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. There can be no
assurance that third party reimbursement and coverage will be available or
adequate in either United States or international markets, that current
reimbursement amounts will not be decreased in the future or that future
legislation, regulation, or reimbursement policies of third party payors will
not otherwise adversely affect demand for the Company's products or the
Company's ability to sell its products on a profitable basis, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Political, economic and regulatory influences are pushing the health
care industry in the United States to fundamental change. The Company
anticipates that Congress, state legislatures and the private sector will
continue to review and assess alternative health care delivery and payment
systems. Potential approaches that have been considered include mandated basic
health care benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, the creation of large insurance purchasing groups, price controls and
other fundamental changes to the health care delivery system. Legislative debate
is expected to continue in the future, and market forces are expected to demand
reduced costs. The Company cannot predict what impact the adoption of any
federal
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CHOLESTECH CORPORATION
or state health care reform measures, future private sector reform or market
forces may have on its business.
GOVERNMENT REGULATION. The manufacture and sale of diagnostic products,
including the L-D-X System, are subject to extensive regulation by numerous
governmental authorities, principally the FDA and corresponding state and
foreign regulatory agencies. The Company will not be able to commence marketing
or commercial sales in the United States of any of the new tests it is
developing until it receives clearance or approval from the FDA. The process of
obtaining FDA and other required regulatory clearances and approvals is lengthy,
expensive and uncertain. As a result, there can be no assurance that any of the
Company's new tests under development, even if successfully developed, will ever
obtain such clearance or approval.
Additionally, certain material changes to medical products already
cleared or approved by the FDA are also subject to further FDA review and
clearance or approval. The loss of previously obtained clearances, or failure to
comply with existing or future regulatory requirements, could have a material
adverse effect on the Company's business, financial condition and results of
operations. The L-D-X Analyzer and all existing test cassettes required
clearance pursuant to a 510(k) clearance. Medical devices are subject to
continual review, and later discovery of previously unknown problems with a
cleared product may result in restrictions on the product's marketing or
withdrawal of the product from the market.
In general, the Company intends to develop and market tests that will
require 510(k) clearance. It generally takes from four to twelve months from the
date of submission to obtain 510(k) clearance, but it may take longer. The
Company does not believe that its products under development will require
submission of a Pre-Market Approval ("PMA") application. However, if a future
product were to require submission of a PMA application, regulatory approval of
such product would involve a much longer and more costly process than a 510(k)
clearance and would involve the submission of extensive supporting data and
clinical information. A PMA application may be submitted to the United States
Food and Drug Administration ("FDA") only after clinical trials and the required
patient follow-up for a particular test are successfully completed. Upon filing
of a PMA application, the FDA commences a review process that generally takes
one to three years from the date on which the PMA application is accepted for
filing, but may take significantly longer. There can be no assurance that the
Company's products under development will require only 510(k) clearance rather
than the more lengthy and costly PMA approval. A requirement that the Company
file a PMA application for any new test would significantly delay the Company's
ability to market such test and significantly increase the costs of development.
The European Union ("EU") has promulgated rules that require that
devices such as those developed, manufactured and sold by the Company receive
the right to affix the CE mark, a symbol of adherence to applicable EU
directives. The Company has completed all the testing necessary to comply with
applicable regulations to currently be eligible for self certification and
currently has the right, as self-certified under the product testing
requirements, to affix the CE mark to its products. The Company's products will
be covered by the In Vitro Diagnostics Directives that have not yet been
officially published or adopted. While the Company intends to satisfy the
requisite policies and procedures that will permit it to continue to affix the
CE mark to its products in the future, there can be no assurance that the
Company will be successful in meeting the EU certification requirements, and
failure to receive the right to affix the CE mark
23
<PAGE> 24
CHOLESTECH CORPORATION
may prohibit the Company from selling its products in EU member countries and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The use of the Company's products and those of its competitors is also
affected by federal and state regulations, which provide for regulation of
laboratory testing, as well as by the laws and regulations of foreign countries.
The scope of these regulations includes quality control, proficiency testing,
personnel standards and 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 L-D-X Analyzer
and the Company's total cholesterol, HDL (high density lipoproteins),
Triglycerides and glucose tests in any combination were classified as waived
under CLIA. The Company received 510(k) clearance to market the BUN/Creatinine
panel in July, 1997, but was denied clearance from the CDC for CLIA waived
status in March, 1999. In order to successfully commercialize the tests that are
currently under development, the Company believes that it will be critical to
obtain waived classification for such tests under CLIA. There can be no
assurance that any new tests developed by the Company will qualify for CLIA
waived classification. Any failure of the new tests to obtain waived status
under CLIA will adversely impact the Company's ability to commercialize such
tests, which could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that any future amendment of CLIA or the promulgation of additional
regulations impacting laboratory testing will not have an adverse effect on the
Company's ability to market the L-D-X System. For example, if CLIA regulations
were modified in a manner that reduced regulatory requirements and burdens faced
by competitive products, certain competitive advantages of the L-D-X System's
waived status could be reduced or eliminated.
The Company's manufacturing processes, as well as, in certain instances,
those of its contract manufacturers, are subject to stringent federal, state and
local regulations governing the use, generation, manufacture, storage, handling
and disposal of certain materials and wastes. The Company and its contract
manufacturers must economically manufacture products in compliance with federal,
state and foreign regulations regarding the manufacture of health care products
and diagnostic devices, including QSR, and other foreign regulations and state
and local health, safety and environmental regulations, which include testing,
control and documentation requirements. Failure to comply with QSR,
ISO9001/EN46001 requirements and other applicable regulatory requirements by the
Company and in certain ISO9001/EN46001 certification regulations circumstances,
its contract manufacturers, including marketing products for unapproved uses,
could result in, among other things, warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, refusal of the government to grant pre-market clearance or
pre-market approval for devices, withdrawal of approvals and criminal
prosecution. Changes in existing regulations or adoption of new governmental
regulations or policies could prevent or delay regulatory approval of the
Company's products. There can be no assurance that the Company will not be
required to incur significant costs in the future in complying with
manufacturing and environmental regulations.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; UNCERTAINTY OF PATENT AND
PROPRIETARY TECHNOLOGY PROTECTION; DEPENDENCE ON LICENSING OF TECHNOLOGY FROM
THIRD PARTIES. The Company's ability to compete effectively will depend in part
on its ability to develop and maintain the proprietary aspects of its technology
and operate without infringing the proprietary rights of others. The Company has
nine United States patents and has filed patent applications
24
<PAGE> 25
CHOLESTECH CORPORATION
relating to its technology internationally under the Patent Cooperation Treaty
and individual foreign patent applications. There can be no assurance that any
of the Company's pending patent applications will result in the issuance of any
patents, or that, if issued, any such patents will offer protection against
competitors with similar technology. There can be no assurance that any patents
issued to the Company will not be challenged, invalidated or circumvented in the
future or that the rights created thereunder will provide a competitive
advantage. In addition, there can be no assurance that competitors, many of
which have substantially greater resources than the Company and have made
substantial investments in competing technologies, will not seek to apply for
and obtain patents covering technologies that are more effective than the
Company's technologies, that would render the Company's technologies or products
obsolete or uncompetitive or that would prevent, limit or interfere with the
Company's ability to make, use or sell its products either in the United States
or in international markets.
The medical products industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. There can
be no assurance that the Company will not in the future become subject to patent
infringement claims and litigation or interference proceedings conducted in the
United States Patent and Trademark Office ("USPTO") to determine the priority of
inventions. The defense and prosecution of intellectual property suits, USPTO
interference proceedings and related legal and administrative proceedings are
both costly and time consuming. Litigation may be necessary to enforce any
patents issued to the Company, to protect trade secrets or know-how owned by the
Company or to determine the enforceability, scope and validity of the
proprietary rights of others. Any litigation or interference proceedings will
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties or require
the Company to seek licenses from third parties which may not be available on
commercially reasonable terms or at all.
The Company's current products incorporate technologies which are the
subject of patents issued to, and patent applications filed by, others. The
Company is currently in discussions with Roche Diagnostics regarding potential
infringement and licensing agreement of a European patent.
The Company has obtained licenses for certain of these technologies. The
Company may in the future be required to obtain licenses for new products. There
can be no assurance that the Company will be able to obtain licenses for
technology patented by others on commercially reasonable terms, or at all, that
it will be able to develop alternative approaches if unable to obtain licenses
or that the Company's current and future licenses will be adequate for the
operation of the Company's business. The failure to obtain such licenses or
identify and implement alternative approaches could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company also relies upon trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position, and no
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its right to its trade secrets, any of which could
25
<PAGE> 26
CHOLESTECH CORPORATION
have a material adverse effect on the Company's business, financial condition
and results of operations.
HIGHLY COMPETITIVE INDUSTRY; RAPID TECHNOLOGICAL CHANGE. The markets for
diagnostic screening and therapeutic monitoring in which the Company operates
are intensely competitive. The Company's competition consists mainly of clinical
and hospital laboratories, as well as manufacturers of bench top analyzers. In
order to achieve market acceptance for the L-D-X System, the Company will be
required to demonstrate that the L-D-X System is an attractive alternative to
bench top analyzers as well as to clinical and hospital laboratories. This will
require physicians to change their established means of having such tests
performed. There can be no assurance that the L-D-X System will be able to
compete with these other testing services and analyzers. In addition, companies
having a significant presence in the market for therapeutic monitoring, such as
Abbott Laboratories, Clinical Diagnostic Systems, a division of Johnson &
Johnson and formerly a division of Eastman Kodak Company, and Roche Boehringer
Mannheim, have developed or are developing analyzers designed for near-patient
testing. These competitors have substantially greater financial, technical,
research and other resources and larger, more established marketing, sales,
distribution and service organizations than the Company. In addition, such
competitors offer broader product lines than the Company, have greater name
recognition than the Company, and offer discounts as a competitive tactic. In
addition, several smaller companies are currently making or developing products
that compete or will compete with those of the Company.
The Company expects that its competitors will compete intensely to
maintain and increase market share and seek to develop similar multi-analyte
tests that qualify for CLIA waiver. There can be no assurance that these
competitors will not succeed in obtaining CLIA waived status for their products
or in developing or marketing technologies or products that are more effective
and commercially attractive than the Company's current or future products, or
that would render the Company's technologies and products obsolete or
noncompetitive. The Company's current and future products must compete
effectively with the existing and future products of the Company's competitors
primarily on the basis of ease of use, breadth of tests available, market
presence, cost effectiveness, precision, accuracy, immediacy of results and the
ability to perform tests near the patient, to test multiple analytes from a
single sample and to conduct tests without a skilled technician or pre-treating
blood. There can be no assurance that the Company will have the financial
resources, technical expertise or marketing, distribution or support
capabilities to compete successfully in the future or, if the Company does have
such resources and capabilities, that it will employ them successfully.
DEPENDENCE ON ATTRACTION AND RETENTION 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 personnel in those
areas. 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 personnel in the future, including key sales and
marketing 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.
26
<PAGE> 27
CHOLESTECH CORPORATION
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 results in personal injury or improper
diagnosis. The Company also faces the possibility that defects in the design or
manufacture of its products might necessitate a product recall. There can be no
assurance that the Company will not experience losses due to product liability
claims or recalls in the future.
The Company currently maintains product liability insurance, but there
can be no assurance that the coverage limits of the Company's insurance policies
will be adequate. Such insurance is expensive and difficult to obtain, and no
assurance can be given that product liability insurance can be maintained in the
future on acceptable terms, in sufficient amounts to protect the Company against
losses due to product liability, or at all. Inability to maintain insurance at
an acceptable cost or to otherwise protect against potential product liability
could prevent or inhibit the continued commercialization of the Company's
products. In addition, a product liability claim in excess of relevant insurance
coverage or a product recall could have a material adverse effect on the
Company's business, financial condition and results of operations.
POSSIBLE FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING.
The Company intends to expend substantial funds for capital equipment related to
the expansion of its manufacturing capacity, research and development, including
expansion of its product line and enhancement of its current products, expansion
of sales and marketing activities and other working capital and general
corporate purposes. Although the Company believes that the Company's cash, cash
equivalents, marketable securities, cash flow anticipated to be generated by
future operations, and available bank borrowings under an existing line of
credit will be sufficient to meet its operating requirements for the foreseeable
future, there can be no assurance that the Company will not require additional
financing. For example, the Company may be required to expend greater than
anticipated funds if unforeseen difficulties arise in expanding manufacturing
capacity for existing cassettes or in the course of completing required
additional development, obtaining necessary regulatory approvals, obtaining
waived status under CLIA or introducing or scaling up manufacturing for new
tests. The Company's future liquidity and capital requirements will depend upon
numerous additional factors, including: the costs and timing of expansion of
manufacturing capacity; the number and type of new tests the Company seeks to
develop; the success of these development efforts; the costs and timing of
expansion of sales and marketing activities; the extent to which the Company's
existing and new products gain market acceptance; competing technological and
market developments; the progress of commercialization efforts of the Company's
distributors; the costs involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims and other intellectual property rights; developments
related to regulatory and third party reimbursement matters and CLIA; and other
factors. In the event that additional financing is needed, the Company may seek
to raise additional funds through public or private financing, collaborative
relationships or other arrangements. Any additional equity financing may be
dilutive to shareholders, and debt financing, if available, may involve
restrictive covenants. Collaborative arrangements, if necessary to raise
additional funds, may require the Company to relinquish its rights to certain of
its technologies, products or marketing territories. The failure of the Company
to raise capital on acceptable terms 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
27
<PAGE> 28
CHOLESTECH CORPORATION
required, will be available on satisfactory terms, or at all. See "--Liquidity
and Capital Resources."
ANTI-TAKEOVER PROVISIONS. The Company's Board of Directors (the "Board")
has the authority to issue up to 5,000,000 shares of preferred stock and to
determine the rights, preferences, privileges and restrictions of such shares
without any further vote or action by the Company's shareholders. To date, the
Board has designated 25,000 shares as Series A Participating Preferred Stock
("Series A Preferred") in connection with the Company's Preferred Share Purchase
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.
Pursuant to the Company's Preferred Shares Rights Agreement (the "Rights
Agreement") each share of Common Stock carries a right (a "Right") which
entitles the registered holder to purchase from the Company one-thousandth of a
share of Series A Preferred at an exercise price of $44.00, subject to
adjustment. The Rights 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 acquiror to take over the Company, in a manner or on terms not
approved by the Board. 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 shareholders equally. The Rights
should not interfere with any merger or other business combination approved by
the Board. However, the Rights may have the effect of rendering more difficult
or discouraging an acquisition of the Company deemed undesirable by the Board.
The Rights may cause substantial dilution to a person or group attempting to
acquire the Company on terms or in a manner not approved by the Board, except
pursuant to an offer conditioned upon the negation, purchase or redemption of
the Rights.
POTENTIAL VOLATILITY OF STOCK PRICE. The market price of the 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 its competitors, government regulation, changes in
the current structure of the health care financing and payment systems and
developments in or disputes regarding patent or other proprietary rights 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 Common Stock. In the past, following periods of
volatility in the market price of a company's stock, securities class action
suits have been filed 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, financial condition and results of operations. Any
adverse determination in such litigation could also subject the Company to
significant liabilities.
28
<PAGE> 29
CHOLESTECH CORPORATION
ABSENCE OF DIVIDENDS. The Company has never declared or paid any
cash dividends since its inception. The Company currently expects to retain
future earnings, if any, to finance the growth and development of its business
and, therefore, does not anticipate declaring or paying any cash dividends in
the foreseeable future.
29
<PAGE> 30
CHOLESTECH CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On February 5, 1999, a complaint entitled Ree v. Pinckert, et
al., No. C99-0562 (MMC) was filed in the United States District Court
for the Northern District of California. The Action is a putative class
action and the complaint alleges that Cholestech and an officer, Mr.
Pinckert, violated the federal securities laws by misleading investors
during the time period of July 30, 1997 - June 26, 1998, concerning the
Company's business and its future prospects. On June 24, 1999,
plaintiffs filed an amended complaint, which expanded the putative class
period to June 28, 1996, through June 25, 1998. The amended complaint's
substantive allegations and purported causes of action remain based on
allegations that the Company misled shareholders concerning the
Company's business and its future prospects. The complaint does not
specify alleged damages. The Company intends to defend the case
vigorously. The Company does not believe that the defendants in the
class action engaged in any wrongdoing, and that the outcome of this
matter will not result in a material adverse effect, however, there can
be no assurance that the lawsuit will be resolved in the Company's
favor. The action is in its preliminary stages and a trial date has not
been set.
On August 9, 1999, Cholestech filed in the United States
District Court for the Southern District of Indiana a complaint entitled
Cholestech Corporation v. Polymer Technology Systems, Inc. and Tracy
Thompson, No. IP99-1223-C T/G. Cholestech's complaint and substantive
causes of action were based on its allegations that Mr. Thompson, a
former Cholestech employee, disclosed, and/or was likely to disclose,
certain confidential and proprietary information of Cholestech to
Polymer and that Polymer was misappropriating this information. On
August 19, 1999, Polymer and Thompson ("plaintiffs") filed in the Marion
County Superior Court in Indianapolis, Indiana, a complaint entitled
Polymer Technology Systems, Inc. and Tracy Thompson v. Cholestech No.
49D02-9908-CP-001134 ("state court action"). In their complaint,
plaintiffs sought a declaration from the court that the information
Cholestech sought to protect in the federal court action does not
constitute a trade secret.
By mutual agreement of the parties, Cholestech voluntarily
dismissed its federal court action, and on September 1, 1999, filed a
counterclaim against the plaintiffs in the state court action. In its
counterclaim, Cholestech reasserted its allegations that Thompson was
unlawfully disclosing Cholestech's trade secrets to Polymer and that
Polymer was misappropriating this information.
On September 24, 1999, plaintiff filed a reply to Cholestech's
counterclaims, and further filed additional causes of action against
Cholestech. Plaintiffs' additional substantive causes of action are
based on plaintiffs' allegations that Cholestech engaged in unfair
competition, intentionally interfered with Polymer's employment contract
with Thompson, and instituted its counterclaims for improper purposes.
Plaintiffs further allege that Cholestech impermissibly "blacklisted"
Thompson in violation of Indiana statutory law. Plaintiffs do not allege
specific damages. Cholestech has filed replies in which it denied
plaintiffs' additional causes of action. Cholestech intends to
vigorously
30
<PAGE> 31
CHOLESTECH CORPORATION
defend itself against plaintiffs' causes of action. The state court
action is in the discovery stage. A trial date on plaintiffs' additional
causes of action has not been set
The Company is subject to other claims and legal actions in the
ordinary course of business, none of which are expected to result in a
material adverse outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 19, 1999, the Company held its 1999 Annual Meeting of
Shareholders. The following is a brief description of each matter voted upon at
the meeting and a statement of the number of votes cast for, against or withheld
and the number of abstentions and the number of broker non-votes with respect to
each matter.
1. The shareholders elected the following Directors:
<TABLE>
<CAPTION>
Nominee In Favor Withheld
---------------------- ---------- --------
<S> <C> <C>
Dr. Harvey S. Sadow 10,313,483 165,211
Warren E. Pinckert, II 10,322,322 156,372
Joseph Buchman, M.D. 10,337,346 141,348
John L. Castello 10,345,345 133,349
John H. Landon 10,344,105 134,589
Larry Y. Wilson 10,347,575 131,119
</TABLE>
2. The shareholders ratified the appointment of
PriceWaterhouseCoopers LLP as independent public accountants of
the Company for the fiscal year ending March 26, 1999.
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Vote
---------- ------- ------- ---------------
<S> <C> <C> <C>
10,412,242 43,441 23,011 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
(b)
10.24 Employment Agreement between Registrant Jeffrey
S. Aroy dated September 3, 1999.
27.01 Financial Data Schedule
31
<PAGE> 32
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 11/4/99 /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)
32
<PAGE> 33
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
10.24 Employment Agreement between Registrant Jeffrey S.
Aroy dated September 3, 1999.
27.01 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.24
September 3, 1999
Jeffrey S. Aroy
Dear Jeff:
I am pleased to offer you a position with Cholestech Corporation (the "Company")
as the CORPORATE VICE PRESIDENT, commencing on SEPTEMBER 15, 1999. You will
receive a monthly salary of $13,333.33, which will be paid semi-monthly in
accordance with the Company's normal payroll procedures. You will also be
eligible to participate in Cholestech's Management Incentive Bonus Program. As a
Company Associate, you will be eligible to participate in our Associate benefits
package which includes medical/dental insurance, life insurance, long term
disability insurance, and a 401(k) retirement plan in addition to sixteen (16)
days of Personal Time Off the first year and ten (10) paid holidays. You should
note that the Company may modify salaries and/or benefits from time to time as
it deems necessary. Information regarding these programs and other Company
benefits along with guidelines concerning employment are contained in the
Cholestech Associate package, which is issued at the time employment commences.
You will be granted a non-qualified stock option entitling you to purchase up to
200,000 shares priced at the close of business on at the close of business on
the date of hire. Accelerated vesting will apply to two 50,000 blocks of options
(100,000 total). Each block of separate options will vest upon completion of a
milestone tied separately to that block. You and I will mutually agree to these
milestones. Should the milestones be delayed the vesting will occur according to
the standard vesting plan. Such options shall be subject to the terms and
conditions of the Company's Stock Option Plans and Stock Option Agreement,
including vesting requirements.
The Company is excited about your joining and looks forward to a beneficial and
fruitful relationship. Nevertheless, you should be aware that your employment
with the Company is for no specified period and constitutes at-will employment.
As a result, you are free to resign at any time, for any reason or for no
reason. Similarly, the Company is free to conclude its employment relationship
with you at any time, with or without cause, and with or without notice. If
Cholestech terminates your employment without cause, you will be eligible to
receive a severance amount equal to six months salary, at the rate of salary in
effect immediately prior to such termination and any bonus earned during your
employment (minus applicable withholding). Additionally, if the Company
terminates your employment without cause, your stock option vesting may be
accelerated for six months from the date of termination. You may exercise the
vested options according to the terms and conditions of the Company's Stock
Option Plan and Stock Option Agreement. Please note that these provisions
concerning severance pay and stock options do not change your at-will employment
status and are contingent upon your execution of a severance agreement and
release, which will be presented to you at such time.
Jeffrey S. Aroy
September 3, 1999
<PAGE> 2
Page Two
All Associates are required to sign an "Employment, Confidential Information and
Invention Assignment Agreement" and the "Arbitration Agreement" as a condition
of employment. Please review the enclosed Employment, Confidential Information
and Invention Assignment Agreement and the Arbitration Agreement. The
Employment, Confidential Information and Invention Assignment Agreement which
requires, among other provisions, the assignment of patent rights to any
invention made during your employment at the Company, and non-disclosure of
proprietary information. The Arbitration Agreement provides that in the event of
any dispute or claim relating to or arising out of our employment relationship,
you and the Company agree that all such disputes shall be fully and finally
resolved by binding arbitration. This letter, along with these agreements set
forth the terms of your employment with the Company and supersedes any prior
representations or agreements, whether written or oral. This letter may not be
modified or amended except by a written agreement, signed by both parties.
Please feel free to call me with any questions or comments you might have about
the offer.
Please acknowledge your acceptance of this offer by signing and returning this
letter, the Employment, Confidential Information and Invention Assignment
Agreement, and the Arbitration Agreement to the Human Resources Department. A
duplicate original of the offer letter is enclosed for your records.
I look forward to working with you at Cholestech Corporation.
Sincerely,
/s/ WARREN E. PINCKERT II
Warren E. Pinckert II
President and Chief Executive Officer
ACCEPTED AND AGREED TO this
7 day of September , 1999 .
- ------------------------------
/s/ JEFFREY S. AROY
- -----------------------
Jeffrey S. Aroy
Enclosures: Duplicate Original Letter
Employment, Confidential Information and Invention Assignment
Agreement
Arbitration Agreement
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> MAR-28-1999
<PERIOD-END> SEP-24-1999
<CASH> 6,191
<SECURITIES> 4,007
<RECEIVABLES> 3,171
<ALLOWANCES> 85
<INVENTORY> 3,484
<CURRENT-ASSETS> 17174
<PP&E> 12,920
<DEPRECIATION> 7,050
<TOTAL-ASSETS> 26,946
<CURRENT-LIABILITIES> 2,755
<BONDS> 0
0
0
<COMMON> 71,505
<OTHER-SE> (47,314)
<TOTAL-LIABILITY-AND-EQUITY> 24,191
<SALES> 12,103
<TOTAL-REVENUES> 12,103
<CGS> 5,193
<TOTAL-COSTS> 10,909
<OTHER-EXPENSES> 219
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,308
<INCOME-TAX> 43
<INCOME-CONTINUING> 1,266
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,266
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.11
</TABLE>
