CHOLESTECH CORPORATION - 10-Q Quarterly Report

UNITED STATES OF AMERICA
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 27, 2002

[ ] 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 incorporation or organization)		(I.R.S. Employer Identification No.)

3347 Investment Boulevard, Hayward, CA 94545
(Address of principal executive offices) (Zip Code)

(510) 732-7200
(Registrant’s telephone number, including area code)

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 [ ]

As of October 25, 2002, 13,618,687 shares of the registrant’s common stock were outstanding.

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS.
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
	ITEM 5. OTHER INFORMATION.
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
SIGNATURES
INDEX TO EXHIBITS
EXHIBIT 99.1

CHOLESTECH CORPORATION
INDEX

Page

PART I
FINANCIAL INFORMATION

ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Condensed Consolidated Balance Sheets as of September 27, 2002 and March 29, 2002 3

Condensed Consolidated Statements of Income for the thirteen weeks and twenty-six weeks ended September 27, 2002 and September 28, 2001 4

Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended September 27, 2002 and September 28, 2001 5

Notes to Condensed Consolidated Financial Statements 6

ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 37

ITEM 4.
CONTROLS AND PROCEDURES 38

PART II
OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS 38

ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 40

ITEM 5.
OTHER INFORMATION 40

ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K 41

SIGNATURES 42

CERTIFICATION BY CORPORATE OFFICERS 43

PART I — FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CHOLESTECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)


					Sept. 27, 2002			March 29, 2002(1)

					(unaudited)
Assets
Current assets:
	Cash and cash equivalents				$	7,636		$	8,800
	Marketable securities					7,346			8,227
	Accounts receivable, net					4,523			3,725
	Inventories, net					5,260			4,973
	Prepaid expenses and other current assets					1,821			1,153

		Total current assets				26,586			26,878
Property and equipment, net						7,424			7,650
Long-term investments						10,754			5,080
Goodwill, net						3,143			3,143

		Total assets			$	47,907		$	42,751

Liabilities and Shareholders’ Equity
Current liabilities:
	Accounts payable and accrued expenses				$	3,242		$	2,814
	Accrued payroll and benefits					2,694			3,100
	Other liabilities					101			116

		Total current liabilities				6,037			6,030

Contingencies (note 6)
Shareholders’ equity:
	Common stock					81,714			79,200
	Accumulated other comprehensive income					99			1
	Accumulated deficit					(39,943	)		(42,480	)

			Total shareholders’ equity			41,870			36,721

				Total liabilities and shareholders’ equity	$	47,907		$	42,751

(1)

The information in this column was derived from the Company’s audited consolidated financial statements for the fiscal year ended March 29, 2002.

See Notes to Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)


					Thirteen Weeks Ended				Twenty-Six Weeks Ended

					Sept. 27,		Sept. 28,		Sept. 27,		Sept. 28,
					2002		2001		2002		2001

Revenue:
	Product				$	11,907	$	10,259	$	23,039	$	20,615
	Service					246		1,880		682		3,902

			Total revenue			12,153		12,139		23,721		24,517

Cost of revenue:
	Product					5,245		3,845		9,278		8,231
	Service					230		598		521		1,202

			Total cost of revenue			5,475		4,443		9,799		9,433

Gross profit						6,678		7,696		13,922		15,084

Operating expenses:
	Sales and marketing					3,488		3,879		7,316		7,453
	Research and development					726		637		1,419		1,251
	General and administrative					1,422		1,518		2,760		3,465
	Website and related costs					—		92		—		169

				Total operating expenses		5,636		6,126		11,495		12,338

Income from operations						1,042		1,570		2,427		2,746
Interest and other income, net						131		116		217		237

Income before provisions for income taxes						1,173		1,686		2,644		2,983
Provision for income taxes						49		68		107		120

Net income					$	1,124	$	1,618	$	2,537	$	2,863

Net income per share:
		Basic			$	0.08	$	0.13	$	0.19	$	0.23

		Diluted			$	0.08	$	0.12	$	0.18	$	0.22

Shares used to compute net income per share:
		Basic				13,605		12,458		13,472		12,281

		Diluted				14,263		13,390		14,372		12,836

See Notes to Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


					Twenty-Six Weeks Ended

					Sept. 27, 2002			Sept. 28, 2001

Cash flows from operating activities:
	Net income				$	2,537		$	2,863
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
			Depreciation and amortization			1,244			1,209
			Stock compensation			(63	)		41
			Change in allowance for doubtful accounts			11			47
			Change in inventory reserve			70			—
			Change in allowance for sales returns			36			—
			Changes in assets and liabilities:
				Accounts receivable		(845	)		(1,376	)
				Inventories		(357	)		(1,363	)
				Prepaid expenses and other assets		(666	)		(692	)
				Accounts payable and accrued expenses		428			415
				Payment of legal settlement		—			(855	)
				Accrued payroll and benefits		(406	)		480
				Other liabilities		(15	)		25

				Net cash provided by (used in) operating activities		1,974			794

Cash flows from investing activities:
	Sales and maturities of marketable securities					19,605			10,863
	Purchases of marketable securities					(24,300	)		(11,639	)
	Purchases of property and equipment					(1,020	)		(1,625	)

		Net cash used in investing activities				(5,715	)		(2,401	)

Cash flows from financing activities:
	Purchase of treasury stock					(78	)		—
	Issuance of common stock					2,655			3,017

		Net cash provided by financing activities				2,577			3,017

Net increase (decrease) in cash and cash equivalents						(1,164	)		1,410
Cash and cash equivalents at beginning of period						8,800			4,052

Cash and cash equivalents at end of period					$	7,636		$	5,462

See Notes to Condensed Consolidated Financial Statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    Interim Results

   The interim unaudited financial information of Cholestech Corporation (the “Company”) is prepared in conformity with generally accepted accounting principles in the United States of America. The financial information included herein has been prepared by management, without audit by independent accountants, and should be read in conjunction with the audited consolidated financial statements contained in the Annual Report on Form 10-K for the fiscal year ended March 29, 2002. 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 28, 2003. Certain financial statement items have been reclassified to conform to the current year format.

2.    Balance Sheet Data

   The components of inventories are as follows (in thousands):


	Sept. 27, 2002		March 29, 2002

Raw materials	$	1,565	$	1,573
Work-in-process		2,044		1,613
Finished goods		1,651		1,787

	$	5,260	$	4,973

3.    Derivative Financial Instruments

   Derivative financial instruments are used by the Company in the management of its foreign currency exposures arising from inventory purchases and accounts payable denominated in foreign currencies. The Company does not use derivative financial instruments for trading or speculative purposes.

   The Company uses financial instruments, such as forward exchange contracts, to hedge a portion of certain existing and anticipated foreign currency denominated transactions expected to occur within 12 months. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged. The purpose of the Company’s foreign currency management is to manage the effect of exchange rate fluctuations on certain foreign currency denominated inventory costs and cash flows.

   The Company accounts for its derivative financial instruments in accordance with Statement of Financial Accounting Standards No. 133 (“SFAS No. 133”), Accounting for Derivative

   Instruments and Hedging Activities. All of the Company’s derivative financial instruments are recorded at fair value based upon quoted market prices for comparable instruments. For derivative instruments designated and qualifying as cash flow hedges of anticipated foreign currency denominated transactions, the effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income/(loss) in stockholders’ equity, and is reclassified into earnings when the related inventory is sold and the hedged transaction affects earnings. If the transaction being hedged fails to occur, a forecasted transaction being hedged is no longer expected to occur, or the hedging is determined to be ineffective, the gain or loss on the associated financial instrument is recorded immediately in earnings. For derivative instruments used to hedge existing foreign currency denominated assets or liabilities, the gain or loss on these hedges is recorded immediately in earnings to offset the changes in the fair value of the assets or liabilities being hedged.

   At September 27, 2002, the Company had outstanding forward contracts to purchase £837,000 for approximately $1.3 million. The open contracts mature at various dates through April 17, 2003 and hedge certain forecasted inventory purchases denominated in the British Pound Sterling. The unrealized gains on the forward contracts at September 27, 2002 were $16,000, all of which is expected to be reclassified to earnings within the next 12 months. There was no gain or loss recorded in the period from hedge ineffectiveness or from forecasted transactions no longer expected to occur.

4.    Earnings Per Share

   Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all potential common stock outstanding during a period, if dilutive.

   A reconciliation of the basic and diluted earnings per share calculations follows:


	(In thousands, except per share data)
	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	Sept. 27, 2002						Sept. 27, 2002

	Net						Net
	Income		Shares		Per Share		Income		Shares		Per Share

Basic EPS	$	1,124		13,605	$	0.08	$	2,537		13,472	$	.019
Effect of dilutive Securities		—		658		—		—		900		(0.01	)

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents


		Page

PART I	FINANCIAL INFORMATION




ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)




	Condensed Consolidated Balance Sheets as of September 27, 2002 and March 29, 2002		3




	Condensed Consolidated Statements of Income for the thirteen weeks and twenty-six weeks ended September 27, 2002 and September 28, 2001		4




	Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended September 27, 2002 and September 28, 2001		5




	Notes to Condensed Consolidated Financial Statements		6




ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		13




ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		37




ITEM 4.	CONTROLS AND PROCEDURES		38




PART II	OTHER INFORMATION




ITEM 1.	LEGAL PROCEEDINGS		38




ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		40




ITEM 5.	OTHER INFORMATION		40




ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K		41




	SIGNATURES		42




	CERTIFICATION BY CORPORATE OFFICERS		43

1.		Interim Results

		The interim unaudited financial information of Cholestech Corporation (the “Company”) is prepared in conformity with generally accepted accounting principles in the United States of America. The financial information included herein has been prepared by management, without audit by independent accountants, and should be read in conjunction with the audited consolidated financial statements contained in the Annual Report on Form 10-K for the fiscal year ended March 29, 2002. 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 28, 2003. Certain financial statement items have been reclassified to conform to the current year format.

2.		Balance Sheet Data

		The components of inventories are as follows (in thousands):

3.		Derivative Financial Instruments

		Derivative financial instruments are used by the Company in the management of its foreign currency exposures arising from inventory purchases and accounts payable denominated in foreign currencies. The Company does not use derivative financial instruments for trading or speculative purposes.

		The Company uses financial instruments, such as forward exchange contracts, to hedge a portion of certain existing and anticipated foreign currency denominated transactions expected to occur within 12 months. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged. The purpose of the Company’s foreign currency management is to manage the effect of exchange rate fluctuations on certain foreign currency denominated inventory costs and cash flows.

		The Company accounts for its derivative financial instruments in accordance with Statement of Financial Accounting Standards No. 133 (“SFAS No. 133”), Accounting for Derivative

		Instruments and Hedging Activities. All of the Company’s derivative financial instruments are recorded at fair value based upon quoted market prices for comparable instruments. For derivative instruments designated and qualifying as cash flow hedges of anticipated foreign currency denominated transactions, the effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income/(loss) in stockholders’ equity, and is reclassified into earnings when the related inventory is sold and the hedged transaction affects earnings. If the transaction being hedged fails to occur, a forecasted transaction being hedged is no longer expected to occur, or the hedging is determined to be ineffective, the gain or loss on the associated financial instrument is recorded immediately in earnings. For derivative instruments used to hedge existing foreign currency denominated assets or liabilities, the gain or loss on these hedges is recorded immediately in earnings to offset the changes in the fair value of the assets or liabilities being hedged.

		At September 27, 2002, the Company had outstanding forward contracts to purchase £837,000 for approximately $1.3 million. The open contracts mature at various dates through April 17, 2003 and hedge certain forecasted inventory purchases denominated in the British Pound Sterling. The unrealized gains on the forward contracts at September 27, 2002 were $16,000, all of which is expected to be reclassified to earnings within the next 12 months. There was no gain or loss recorded in the period from hedge ineffectiveness or from forecasted transactions no longer expected to occur.

4.		Earnings Per Share

		Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all potential common stock outstanding during a period, if dilutive.

		A reconciliation of the basic and diluted earnings per share calculations follows: