<PAGE> 1
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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 June 25, 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 June 25, 1999, 11,518,240 shares of common stock of the Registrant were
outstanding.
<PAGE> 2
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
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 26
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS. 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 27
SIGNATURES 28
</TABLE>
2
<PAGE> 3
CHOLESTECH CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
June 25, 1999 March 26, 1999 (1)
------------- ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,504 $ 5,529
Marketable securities 4,010 3,018
Accounts receivable, net 2,012 2,637
Inventories 4,017 4,532
Prepaid expenses and other current assets 377 140
----------- -----------
Total current assets 16,920 15,856
Property and equipment, net 5,669 5,489
Long-term investments 1,857 2,880
Other assets, net 58 58
----------- -----------
$ 24,504 $ 24,283
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,278 $ 1,433
Accrued payroll and benefits 878 990
Product warranty 91 91
----------- -----------
Total current liabilities 2,247 2,514
----------- -----------
Shareholders' equity:
Preferred stock -- --
Common stock 70,311 70,311
Accumulated other comprehensive income (35) 14
Accumulated deficit (48,019) (48,556)
----------- -----------
Total shareholders' equity 22,257 21,769
----------- -----------
$ 24,504 $ 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
<PAGE> 4
CHOLESTECH CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Thirteen weeks ended
-------------------------
6/25/99 6/26/98
----------- -----------
<S> <C> <C>
Revenues:
Domestic $ 5,061 $ 4,171
International 714 514
----------- -----------
5,775 4,685
Cost of products sold 2,600 1,902
----------- -----------
Gross profit 3,175 2,783
----------- -----------
Operating expenses:
Sales and marketing 1,538 1,628
Research and development 594 699
General and administrative 594 485
Other 46 750
----------- -----------
Total operating expenses 2,772 3,562
----------- -----------
Income (loss) from operations 403 (779)
Interest and other income (expense), net 149 194
----------- -----------
Income (loss) before taxes 552 (585)
Provision for income taxes 16 --
----------- -----------
Net income (loss) $ 536 $ (585)
=========== ===========
Net income (loss) per share:
Basic $ 0.05 $ (0.05)
=========== ===========
Diluted $ 0.05 $ (0.05)
=========== ===========
Shares used to compute net income (loss) per share:
Basic 11,518 11,460
=========== ===========
Diluted 11,546 11,460
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements
4
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CHOLESTECH CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Thirteen weeks ended
----------------------------
June 25, 1999 June 26, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 536 $ (585)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 364 316
Changes in assets and liabilities:
Accounts receivable 625 1,604
Inventories 515 (2,007)
Prepaid expenses and other assets (237) (24)
Other assets -- (2)
Accounts payable and accrued expenses (155) 123
Accrued payroll and benefits (112) (129)
----------- -----------
Net cash provided by (used in) operating activities 1,536 (704)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of marketable securities 4,264 4,826
Purchases of marketable securities (4,282) (3,261)
Purchases of property and equipment (543) (991)
----------- -----------
Net cash provided by (used in) investing activities (561) 574
----------- -----------
Cash flows from financing activities:
Issuance of common stock -- 224
----------- -----------
Net cash provided by financing activities -- 224
----------- -----------
Net change in cash and cash equivalents 975 94
----------- -----------
Cash and cash equivalents at beginning of period 5,529 5,130
----------- -----------
Cash and cash equivalents at end of period $ 6,504 $ 5,224
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements
5
<PAGE> 6
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>
JUNE 25, 1999 MARCH 26, 1999
------------- --------------
<S> <C> <C>
Raw materials $ 1,555 $ 1,598
Work-in-process 1,144 1,398
Finished goods 1,318 1,536
----------- -----------
$ 4,017 $ 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. In computing diluted earnings
per share, the average stock price is used in determining the number of
shares assumed to be repurchased from the exercise of stock options.
6
<PAGE> 7
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 Thirteen Weeks Ended
June 25, 1999 June 26, 1998
------------------------------ -------------------------------
Income Shares Per share Loss Shares Per share
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ 536 11,518 $ 0.05 $ (585) 11,460 $(0.05)
Effect of dilutive
securities -- 28 -- -- -- --
------------------------------ ------------------------ ------
Diluted EPS $ 536 11,546 $ 0.05 $ (585) 11,460 $(0.05)
============================== ===============================
</TABLE>
Due to the loss incurred in the thirteen weeks ended June 26, 1998,
options to purchase shares of common stock were considered antidilutive
and are therefore not included in the loss per share calculation for
that period.
4. BORROWING ARRANGEMENTS
The Company has an agreement with its primary 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 March 26, 1999 and March 27, 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
Company, to date, has not engaged in derivative and hedging activities.
The Company will adopt SFAS No. 133, as required, 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
7
<PAGE> 8
CHOLESTECH CORPORATION
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.
In May 1998, the Company settled an outstanding litigation with a former
employee of the Company. In accordance with the settlement, the Company
agreed to a settlement fee of $250,000, or $(.02) per share (diluted),
which was charged to operating income in the quarter ended June 26,
1998.
8
<PAGE> 9
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
System (L-D-X System"), consisting of the L-D-X Analyzer and a variety of single
use test cassettes, which perform 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 June 25, 1999, had an accumulated deficit of $48.0 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, in part, to the Company's loss of a distributor who was to focus on this
market segment. 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.
9
<PAGE> 10
CHOLESTECH CORPORATION
The Company may incur negative cash flows from operations as it expands
manufacturing capacity for existing and new test cassettes, increases product
research and development efforts for new test cassettes, and 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. For
example, the Company has entered the Physician office laboratory ("POL") and
pharmacy markets. In its limited experience, 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.
RESULT OF OPERATIONS
THIRTEEN WEEKS ENDED JUNE 25, 1999 AND JUNE 26, 1998
Revenues. During the thirteen weeks ended June 25, 1999, revenues
increased 23.3% to $5.8 million from $4.7 million in the thirteen weeks ended
June 26, 1998. The increase in revenues primarily reflects an increase in
domestic revenues of $890,000 or 21.4% to $5.1 million from $4.2 million. This
increase reflects higher unit sales of single use test cassettes to health care
providers in the health promotion and POL markets.
International revenues increased by 38.9% or $200,000 from $514,000 to
$714,000 for the thirteen weeks ended June 25, 1999 compared to the same period
in fiscal 1999. Increased sales of single use test cassettes is the primary
source of growth. The Company expects that the dollar amount and proportion of
international revenues may fluctuate from period to period.
Cost of Products Sold. Cost of products sold includes direct labor,
direct material, overhead and royalties. Cost of products sold increased 36.7%
to $2.6 million in the thirteen weeks ended June 25, 1999 from $1.9 million in
the thirteen weeks ended June 26, 1998. Gross margin was 55.0% and 59.4% in the
thirteen weeks ended June 25, 1999 and June 26, 1998, respectively. The
reduction in gross margin as a percentage of revenues was primarily attributable
to lower production rates, compared to the first quarter of fiscal 1999, of
single use test cassettes and L-D-X analyzers which resulted in under absorption
of certain fixed overhead costs.
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 June 25, 1999 and
June 26, 1998 were $103,000 and $131,000, respectively, and were charged to cost
of products sold.
10
<PAGE> 11
CHOLESTECH CORPORATION
Sales and Marketing Expenses. Sales and marketing expense includes
salaries, commissions, bonuses, expenses for outside services related to
marketing programs and travel. Sales and marketing expense decreased 5.5% to
$1.5 million in the thirteen weeks ended June 25, 1999 from $1.6 million in the
thirteen weeks ended June 26, 1998. Sales and marketing expense decreased to
26.6% of revenues in the first quarter of fiscal 2000 from 34.7% in the first
quarter of fiscal 1999. This decrease was primarily attributable to stronger
spending controls, which resulted in a reduction in travel and related expenses.
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
15.0% to $594,000 in the thirteen weeks ended June 25, 1999 from $699,000 in the
thirteen weeks ended June 26, 1998. This decrease was primarily attributable to
a reduction in head count related expenses and the decreased use of consultants.
Research and development expenses as a percentage of revenues decreased to 10.3%
for the thirteen weeks ended June 25, 1999 from 14.9% for the thirteen weeks
ended June 26, 1998.
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 submitted Alanine
Aminotransferase (ALT) test for liver function to the FDA seeking 510(k)
clearance in May 1999.
General and Administrative Expense. General and administrative expense
includes compensation, benefits, and expenses for outside services. General and
administrative expense increased 22.5% to $594,000 in the thirteen weeks ended
June 25, 1999 from $485,000 in the thirteen weeks ended June 26, 1998. This
increase resulted primarily from increased head count related expense,
depreciation for computer equipment, and outside services. General and
administrative expenses decreased to 10.3% of revenues in the thirteen weeks
ended June 25, 1999 from 10.4% in the thirteen weeks ended June 26, 1998.
Other. Other expenses for the first thirteen weeks of fiscal 2000 of
$46,000 reflect a non-recurring charge related to the Company's defense of a
recently filed class action lawsuit. During the first thirteen weeks of fiscal
1999 non-recurring charges of $750,000 included approximately $500,000 due to
the cancellation of a proposed common stock offering and $250K due to settlement
of litigation involving a former employee. Actual expenses related to the
Company's withdrawn common stock offering was $325,000 with the $175,000 balance
of the original $500,000 accrual being reversed in Q2 of fiscal 1999.
Interest and other income (expense), net. Interest and other income, net
reflects income from the investment of cash balances and marketable securities.
Interest income declined 23.2%
11
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CHOLESTECH CORPORATION
to $149,000 in the thirteen weeks ended June 25, 1999 from $194,000 in the
thirteen weeks ended June 26, 1998. This decrease was primarily the result of a
reduction in the average amount invested in marketable securities for the
thirteen weeks ended June 25, 1999 compared to same period in fiscal 1999.
Income Taxes. As the Company has significant tax credit carryforwards,
the provision for income taxes for the thirteen weeks ended June 25, 1999
represents the estimated alternative minimum tax. No provision for income taxes
was made in the first quarter ended June 26, 1998 as the Company incurred a net
loss from operations. 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 June 25,1999, the Company raised $70.3 million in net proceeds from equity
financings. As of June 25,1999, the Company had $12.4 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 June 25, 1999, there were no
borrowings outstanding under the line of credit.
During the first quarter of fiscal 2000, a total of $975,000 of net cash
was provided to the Company compared to $94K of net cash provided during the
first quarter of fiscal 1999. All of the cash provided during the first quarter
of fiscal 2000 was from operating activities.
During first quarter of fiscal 2000, the Company provided $1,536,000 in
net cash from operating activities compared to net cash used of $704,000 in the
first quarter of fiscal 1999. The cash provided from operations in the first
quarter of fiscal 2000 was primarily due to net income of $536,000 plus a
reduction in accounts receivable and inventory of $625,000 and $515,000
respectively partially offset by reductions in accounts payable and accrued
payroll of $155,000 and $112,000 respectively. In first quarter of fiscal 1999,
the net loss and inventory purchases were the primary factors contributing to
cash used in operations activities.
12
<PAGE> 13
CHOLESTECH CORPORATION
Net cash used by investing activities was $561,000 in the first quarter
of fiscal 2000, consisting primarily of purchases of property and equipment of
$543,000. In the first quarter of fiscal 1999, the Company provided $574,000 of
net cash from investment activities resulting primarily from the Company's sale
of marketable securities.
There were no financing activities in the first quarter of fiscal 2000.
However during the first quarter of fiscal 1999, $224,000 was provided by the
issuance of Common Stock pursuant to the Company's stock incentive program.
During fiscal 2000, the Company intends to expend approximately $3
million for capital purchases related to expansion of its manufacturing capacity
and research and development. Non-cancelable purchase commitments at June 25,
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 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."
13
<PAGE> 14
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 that 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 current products for Year
2000 dependencies and Year 2000 Compliance. Based on that evaluation the Company
believes its products are Year 2000 compliant. Despite this belief the Company
anticipates that there exists the potential for substantial litigation which may
be brought against vendors of all component products provided by 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.
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
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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.
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 attempting to monitor
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 are not yet completed and the Company expects these efforts to
continue for the foreseeable future. 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 key vendors,
supplies or distributors have systems that are not Year 2000 complaint,
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. The Company currently is
developing a contingency plan to address such an event.
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 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.
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. 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 Cholestech
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 physician office laboratories (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.
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CHOLESTECH CORPORATION
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 June 25,
1999, had an accumulated deficit of $48.0 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 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:
o The timing and level of market acceptance of the L-D-X System;
o The timing of the introduction and availability of new tests;
o The timing and level of expenditures associated with development
activities;
o The timing and level of expenditures associated with expansion of sales
and marketing activities and overall operations;
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CHOLESTECH CORPORATION
o The Company's ability to reduce cost of cassette manufacturing
o Variations in manufacturing efficiencies;
o The timing of establishment, or loss, of strategic distribution
arrangements and the success of the activities conducted under such
arrangements;
o Changes in demand for its products based on changes in third party
reimbursement, competition, changes in government regulation and other
factors;
o The timing of significant orders from and shipments to customers;
o Product pricing and discounts;
o Variations in the mix of products sold; and
o 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. 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 of 1999. 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 BUN/Creatinine
product. In order to successfully commercialize the BUN/Creatinine 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
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CHOLESTECH CORPORATION
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 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. 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. See "Business--Products Under Development," "--Manufacturing" and
"--Government Regulation."
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 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
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CHOLESTECH CORPORATION
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.
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
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CHOLESTECH CORPORATION
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 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
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CHOLESTECH CORPORATION
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 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
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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 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 BIN/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.
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CHOLESTECH CORPORATION
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.
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
23
<PAGE> 24
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.
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
24
<PAGE> 25
CHOLESTECH CORPORATION
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 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
25
<PAGE> 26
CHOLESTECH CORPORATION
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.
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.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks due primarily to changes in
interest rates. The Company does not use derivatives to alter the interest rate
characteristics of its investment securities. The Company has no holdings of
derivative or commodity instruments and does not transact business in foreign
currencies.
The fair value of the Company's investment portfolio or related interest
income would not be significantly impacted by changes in interest rates since
the investment maturates are short and the interest rates are primarily fixed.
26
<PAGE> 27
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.
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.
No matters were submitted to a vote of the security holders
during the thirteen weeks ended June 25, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
(b)
<TABLE>
<S> <C>
10.22 Employment Agreement between Registrant and Andrea J.
Tiller dated November 14, 1996.
10.23 Employment Agreement between Registrant and Robert J.
Dominici dated July 15, 1998.
</TABLE>
27
<PAGE> 28
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 August 3, 1999 /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)
28
<PAGE> 29
CHOLESTECH CORPORATION
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
10.22 Employment Agreement between Registrant and Andrea J.
Tiller dated November 14, 1996.
10.23 Employment Agreement between Registrant and Robert J.
Dominici dated July 15, 1998.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.22
November 14, 1996
Andrea J. Tiller
Dear Andrea:
I know I speak for our Board of Directors, as well as the entire team, in
extending our invitation to join Cholestech on December 2, 1996, as our Vice
President of Finance and Chief Financial Officer. I would like to formalize our
discussions about cash compensation, benefits, and equity opportunity, as
follows:
CASH COMPENSATION
o Salary of $125,000 base per annum to be reviewed each February
beginning 1998.
o You will participate in the Management Incentive Program when it
is established.
o You will be given an six-month severance package, effective 90
days after your start date.
BENEFITS
Participation in Cholestech Associates' benefits package which includes:
o Medical and dental plan
o Life insurance at one time your annual salary
o Long-term disability
o Sixteen (16) days of Personal Time Off (PTO) the first year
o Ten (10) paid holidays per year
o Participation in Cholestech's 401(k) Retirement Savings Plan
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.
EQUITY
Incentive Stock Options for 60,000 shares of common stock to be granted
at the next meeting of our Board of Directors. The stock price will be
the closing price on the NASDAQ as of that date. After one year of
employment you will be eligible to exercise 25% of your incentive stock
option shares, and thereafter an additional 6.25% of the shares per
quarter over the second through fourth years of employment.
<PAGE> 2
All new Associates are required to sign an "Employment, Confidential
Information, Invention Assignment, and Arbitration Agreement" prepared by our
attorneys as a condition of employment. Review the enclosed Employment,
Confidential Information, Invention Assignment, and Arbitration Agreement form.
PLEASE WAIT TO SIGN THIS AGREEMENT IN THE PRESENCE OF A CHOLESTECH VICE
PRESIDENT OR HUMAN RESOURCE PERSONNEL.
Andrea J. Tiller
November 14, 1996
Page Two
Andrea, we are exited at the prospect of having you join us as Vice President of
Finance and Chief Financial Officer. Please feel free to call me with any
questions or comments you might have about the offer and to discuss.
I look forward to working with you and having you as a key member of the
Cholestech senior management team.
Best regards, Accepted by:
/s/ Warren E. Pinckert II /s/ Andrea J. Tiller
- ------------------------------- -------------------------------
Warren E. Pinckert II Andrea J. Tiller
President and Chief Executive Officer
November 15, 1996
-------------------------------
Date
cc: Jack Castello
Terry Thomas
Enclosure: Employment, Confidential Information, Invention Assignment,
and Arbitration Agreement
<PAGE> 1
EXHIBIT 10.23
July 15, 1998
Robert J. Dominici
Dear Robert:
I am pleased to offer you a position with Cholestech Corporation (the "Company")
as an EXECUTIVE VICE PRESIDENT, commencing on JULY 20, 1998. Areas of
responsibility will include Marketing, Sales and Business Development. You will
receive a monthly salary of $13,750.00, which will be paid semi-monthly in
accordance with the Company's normal payroll procedures. You will be eligible
for the Management Incentive Bonus Program. This plan includes a potential award
rate of 32.5% of base salary for "On Target Performance" and 48.75% for "Maximum
Performance". Performance to be defined based on 30% for profit, 50% direct
responsibilities and 20% discretionary. First year is on a prorated basis as a
percent of the year employment.
As a Company Associate, you are also 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 an incentive stock option entitling you to purchase up to
250,000 shares priced at the close of business on the day you accept this offer.
Accelerated vesting will apply to 100,000 options upon successful completion of
the J&J-Merck Project. Completion definition to be defined. Should the J&J-Merck
Project 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 Plan and Stock Option Agreement, including vesting requirements.
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.
In the event that Cholestech terminates your employment, without cause, you will
be paid an amount equal to one year's salary, at the rate of salary in effect
immediately prior to such termination and any bonus earned during your
employment (minus applicable withholding). Your stock option vesting will also
be accelerated for a year from 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.
Robert J. Dominici
<PAGE> 2
July 15, 1998
Page Two
For us to comply with the federal immigration law, you will be required to
provide to the Company documentary evidence of your identity and eligibility for
employment in the United States. Such documentation must be provided to us
within three (3) business days of your date of hire.
All new Associates are required to sign an "Employment, Confidential
Information, Invention Assignment, and Arbitration Agreement" as a condition of
employment. Please review the enclosed Employment, Confidential Information,
Invention Assignment, and Arbitration Agreement. This letter, along with the
agreement relating to proprietary rights between you and the Company, set forth
the terms of your employment with the Company and supersede 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.
Kindly acknowledge your acceptance of this offer by signing and returning this
letter and the Employment, Confidential Information, Invention Assignment, and
Arbitration Agreement to the Human Resources Department. A duplicate original of
the offer letter is enclosed for your records.
We 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
15th day of July, 1998.
/s/ Robert J. Dominici
- -------------------------------
Robert J. Dominici
Enclosures: Duplicate Original Letter
Employment, Confidential Information, Invention Assignment,
and Arbitration Agreement
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> MAR-28-1999
<PERIOD-END> JUN-25-1999
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<SECURITIES> 4,010
<RECEIVABLES> 2,087
<ALLOWANCES> 75
<INVENTORY> 4,017
<CURRENT-ASSETS> 377
<PP&E> 12,373
<DEPRECIATION> 6,704
<TOTAL-ASSETS> 24,504
<CURRENT-LIABILITIES> 2,247
<BONDS> 0
0
0
<COMMON> 70,311
<OTHER-SE> (48,054)
<TOTAL-LIABILITY-AND-EQUITY> 24,504
<SALES> 5,775
<TOTAL-REVENUES> 5,775
<CGS> 2,600
<TOTAL-COSTS> 5,326
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<INCOME-TAX> 16
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