1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
Commission file number 0-19749
CHEMTRAK INCORPORATED
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0295388
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
929 EAST ARQUES AVENUE, SUNNYVALE, CA 94086
(Address of principal executive offices) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 773-8156
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001
PAR VALUE
2
Page
----
PART II
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......... F-1 to F-17
PART IV
Item 14: EXHIBITS.............................................
23.1 Consent of Ernst & Young, LLP, Independent Auditors
3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this amendment to its report
on Form 10-K for the year ended December 31, 1996 to be signed on its behalf by
the undersigned, thereunto duly authorized on the 10th day of March, 1998.
CHEMTRAK INCORPORATED
By: /s/ Donald V. Fluken
---------------------------------
Donald V. Fluken
Vice President, Finance
Chief Financial Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Prithipal Singh, Ph.D. Chairman of the Board March 10, 1998
- ----------------------------
Prithipal Singh, Ph.D.
President, Chief Executive
/s/ Edward F. Covell Officer and Director March 10, 1998
- --------------------------- (Principal executive officer)
Edward F. Covell
Vice President Finance,
/s/ Donald V. Fluken Chief Financial Officer and Secretary March 10, 1998
- ------------------------ (Principal financial and
Donald V. Fluken accounting officer)
/s/ * Director
- --------------------------
Malcolm Jozoff
/s/ * Director
- --------------------------
Robert P. Kiley
/s/ * Director
- --------------------------
David Rubinstein
/s/ * Director
- --------------------------
Gordon W. Russell
* /s/ Prithipal Singh, Ph.D.
- ---------------------------- Attorney-in-Fact March 10, 1998
Prithipal Singh, Ph.D.
4
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ChemTrak Incorporated
We have audited the accompanying balance sheets of ChemTrak Incorporated as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ChemTrak Incorporated at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
January 17, 1997
F-1
5
CHEMTRAK INCORPORATED
BALANCE SHEETS
ASSETS
December 31,
----------------------------
1996 1995
------------ ------------
Current assets:
Cash and cash equivalents $ 4,125,000 $ 4,251,000
Short-term investments 567,000 2,003,000
Accounts receivable, net of allowance for
doubtful accounts of $44,000 in 1996 and
$49,000 in 1995 485,000 136,000
Inventories 540,000 434,000
Prepaid expenses and other current assets 320,000 245,000
------------ ------------
Total current assets 6,037,000 7,069,000
Property and equipment, net 2,738,000 3,248,000
Other assets 66,000 66,000
------------ ------------
Total assets $ 8,841,000 $ 10,383,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 289,000 $ 632,000
Accrued payroll and benefits 199,000 121,000
Other accrued liabilities 788,000 258,000
Accrued royalties 105,000 114,000
------------ ------------
Total current liabilities 1,381,000 1,125,000
Accrued rent 295,000 240,000
Convertible debentures 2,135,000 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
5,000,000 authorized; none issued
and outstanding -- --
Common stock, $.001 par value; 40,000,000
shares authorized, 11,707,051 and 9,724,343
shares issued and outstanding in 1996 and
1995, respectively 12,000 10,000
Additional paid-in capital 41,375,000 37,528,000
Deferred compensation (49,000) (38,000)
Accumulated deficit (36,308,000) (28,482,000)
------------ ------------
Total stockholders' equity 5,030,000 9,018,000
------------ ------------
Total liabilities and stockholders' equity $ 8,841,000 $ 10,383,000
============ ============
See accompanying notes.
F-2
6
CHEMTRAK INCORPORATED
STATEMENTS OF OPERATIONS
Years Ended December 31,
----------------------------------------
1996 1995 1994
----------- ----------- -----------
Net revenues:
Product revenue $ 2,463,000 $ 2,171,000 $ 7,780,000
License termination and
conversion fee -- 3,600,000 --
Initial license fee -- 500,000 1,450,000
Funded research and other revenues 598,000 625,000 1,020,000
----------- ----------- -----------
Total net revenues 3,061,000 6,896,000 10,320,000
----------- ----------- -----------
Cost and expenses:
Cost of product sales 3,201,000 3,191,000 5,441,000
Research and development 2,439,000 4,293,000 2,299,000
Marketing, general and administrative 4,431,000 2,941,000 3,888,000
----------- ----------- -----------
Total costs and expenses 10,071,000 10,425,000 11,628,000
----------- ----------- -----------
Operating loss (7,010,000) (3,529,000) (1,308,000)
Interest income, net 59,000 260,000 243,000
Interest expense (875,000) -- --
----------- ----------- -----------
Net loss $(7,826,000) $(3,269,000) $(1,065,000)
=========== =========== ===========
Net loss per share $ (0.77) $ (0.34) $ (0.12)
=========== =========== ===========
Shares used in calculating
per share amounts 10,228,000 9,649,331 9,225,267
=========== =========== ===========
See accompanying notes.
F-3
7
CHEMTRAK INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN DEFERRED ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
---------- ------- ----------- ------------ ------------ -----------
Balance at January 1, 1994.................. 9,210,809 9,000 36,471,000 (100,000) (24,148,000) 12,232,000
Shares issued upon exercise of stock
purchase plan and stock options......... 31,259 128,000 128,000
Amortization of deferred compensation..... 50,000 50,000
Net loss.................................. (1,065,000) (1,065,000)
---------- ------- ----------- --------- ------------ -----------
Balance at December 31, 1994................ 9,242,068 9,000 36,599,000 (50,000) (25,213,000) 11,345,000
Shares issued in conjunction with the
acquisition of CCL...................... 449,986 1,000 900,000 901,000
Shares issued upon exercise of stock
purchase plan and stock options......... 32,289 63,000 63,000
Amortization of deferred compensation and
net issuances/cancellations of certain
stock options........................... (34,000) 12,000 (22,000)
Net loss.................................. (3,269,000) (3,269,000)
---------- ------- ----------- --------- ------------ -----------
Balance at December 31, 1995................ 9,724,343 10,000 37,528,000 (38,000) (28,482,000) 9,018,000
Shares issued upon conversion of
convertible debentures ................. 1,880,718 2,000 3,145,000 3,147,000
Additional paid in capital
related to discount conversion
feature on convertible debentures....... -- -- 539,000 -- -- 539,000
Shares issued upon exercise of stock
purchase plan and stock options......... 101,990 148,000 148,000
Amortization of deferred compensation
and net issuances/cancellations of
certain stock options................... 15,000 (11,000) 4,000
Net loss (7,826,000) (7,857,000)
---------- ------- ----------- --------- ------------ -----------
Balance at December 31, 1996................ 11,707,051 $12,000 $41,375,000 $(49,000) $(36,308,000) $5,030,000
========== ======= =========== ========= ============ ===========
See accompanying notes.
F-4
8
CHEMTRAK INCORPORATED
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
Operating activities:
Net loss .............................................. $(7,826,000) $(3,269,000) $(1,065,000)
Adjustments to reconcile net loss to net cash and
cash equivalents used in operating activities:
Interest expense and financing charges on
Debentures....................................... 1,121,000 -- --
Depreciation and amortization...................... 832,000 1,055,000 817,000
Loss on disposal of fixed assets................... -- 137,000 --
Accrued rent....................................... 55,000 54,000 78,000
Stock option compensation and other................ 4,000 (22,000) 50,000
Purchase of in-process research and development
for common stock................................. -- 901,000 --
Changes in operating assets and liabilities:
Accounts receivable................................ (349,000) 462,000 (316,000)
Inventories........................................ (106,000) 554,000 666,000
Prepaid expenses and other current assets.......... (75,000) (11,000) (37,000)
Other assets....................................... -- -- (9,000)
Accounts payable................................... (343,000) (186,000) 479,000
Accrued payroll and benefits....................... 78,000 (399,000) 210,000
Other accrued liabilities.......................... 521,000 (67,000) 224,000
Deferred revenue................................... -- -- (100,000)
----------- ----------- -----------
Net cash and cash equivalents provided
by (used in) operating activities................ (6,088,000) (791,000) 997,000
----------- ----------- -----------
Investing activities:
Purchase of available for sale securities.......... -- (506,000) (1,486,000)
Proceeds from available for sale securities........ 1,436,000 3,996,000 1,651,000
Acquisition of property and equipment, net......... (322,000) (791,000) (173,000)
----------- ----------- -----------
Net cash and cash equivalents provided
by (used in) investing activities................ 1,114,000 2,699,000 (8,000)
----------- ----------- -----------
Financing activities:
Proceeds from issuance of common stock, net........ 148,000 63,000 128,000
Proceeds from sale of convertible debentures, net.. 4,700,000 -- --
----------- ----------- -----------
4,848,000 63,000 128,000
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents... (126,000) 1,971,000 1,117,000
Cash and cash equivalents at beginning of period....... 4,251,000 2,280,000 1,163,000
----------- ----------- -----------
Cash and cash equivalents at end of period............. $ 4,125,000 $ 4,251,000 $ 2,280,000
=========== =========== ===========
Supplemental disclose of non-cash financing
activities:
Conversion of convertible debentures and accrued
interest to common stock........................... $ 3,686,000 $ -- $ --
=========== =========== ===========
See accompanying notes.
F-5
9
CHEMTRAK INCORPORATED
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
ChemTrak operates in one industry segment and is engaged in the
development, manufacturing and marketing of easy-to-use diagnostic tests for the
worldwide point-of-care markets.
The Company has funded its operations to date through product sales and
public and private equity and debt financings. The Company will require
substantial additional funding during 1997 in order to meet its current budgeted
operating needs and to complete the development and marketing activities in
which it is currently engaging, and to launch these products in the consumer
marketplace. The Company intends to seek additional funding through
collaborative agreements with corporate partners or through additional equity or
debt financings. If the Company is not able to enter into such arrangements
management believes that certain discretionary spending cuts can be implemented
to ensure the continuity of operations through at least the end of 1997. There
can be no assurance that the Company will be able to enter into such
arrangements on acceptable terms, or at all or will be able to successfully
reduce discretionary spending by a sufficient amount on a timely basis.
REVENUE RECOGNITION
Product revenues are generally recognized at the time of shipment to
customers or distributors. Initial license revenues are recorded when earned,
which is upon signing of the license agreement, confirmation of collectibility
and when no future obligations remain. The Company recognizes license
termination and conversion fees when earned, which is upon signing of the
license agreement, confirmation of collectibility and when no future obligation
remains. These fees are recognized as operating income to recover the operating
expenses and inventory costs that have been recorded prior to termination or
conversion of the contract. These operating expenses were incurred by the
Company to build and supply the expected product pipeline as part of the
original license agreement. The Company recognized license termination and
conversion fees of $3,600,000 in 1995. Funded research and other revenues are
recorded upon the completion of specific milestones or when associated
performance obligations are complete.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
CO-OP ADVERTISING AND PROMOTIONAL EXPENSES
The Company expenses co-op advertising and promotional expenses as
incurred.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid investments consisting primarily of
investment grade commercial paper placed with high-quality financial
institutions with original maturities of less than 90 days at the date of
acquisition and insignificant interest rate risks.
SHORT-TERM INVESTMENTS
The Company invests cash in excess of current operating requirements
primarily in highly rated investments. Such investments have maturities of more
than 90 days and yield interest at prevailing interest rates at the time of
acquisition. The Company has classified its entire investment portfolio
including cash equivalents as available-for-sale. Although the Company may not
dispose of all of the securities in its investment portfolio within one year,
the Company's investment portfolio is available for current operations and,
therefore, has been classified as a current asset. Investments in the
available-for-sale category are carried at fair value. At December 31, 1996 and
1995, short-term investments consisted of U.S. government and
agency securities of $567,000 and $2,003,000, respectively.
The Company adopted Statement of Financial Accounting Standards
No. 115 (FAS 115), "Accounting for Certain Investments in Debt and Equity
Securities" for investments held as of or acquired after January 1, 1994. In
accordance with the Statement, prior period financial statements have not been
restated to reflect the change in accounting principle.
F-6
10
CHEMTRAK INCORPORATED
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHORT-TERM INVESTMENTS (CONTINUED)
Gross unrealized gains and losses and net realized gains and losses
were not significant at December 31, 1996 or 1995. The cost basis of investments
is adjusted for amortization of premiums and discounts to maturity, which is
included in interest income. The cost of securities sold is based on the
specific identification method.
The maturities of the Company's short-term investments at December 31,
1996 and 1995 are shown as follows:
1996 1995
---------- ----------
Due in 1 year or less $ 567,000 $1,498,000
Due after 1 year through 3 years -- 505,000
---------- ----------
Total debt securities $ 567,000 $2,003,000
========== ==========
INVENTORIES
Inventories are stated at the lower of standard cost (which
approximates actual cost on a first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated using the straight-line method
over the estimated useful lives of the assets (principally five years).
Effective January 1, 1994, the Company changed the amortization period for
leasehold improvements from five years or life of the lease, whichever is
shorter, to 10 years or life of the lease, whichever is shorter. The impact of
the change in estimated useful lives for leasehold improvements results in
decreased annual amortization of $324,000 for periods ending in mid-1998. In
March 1995, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company adopted this
statement during 1996. To date, management has determined that no impairment
loss need be recognized for applicable assets of continuing operations.
The Company classifies acquisitions of property and equipment utilized
in constructing equipment designed for specific products as
construction-in-progress until the time the product has been placed into
service.
NET LOSS PER SHARE
Net loss per share is based on the weighted average number of shares of
common stock outstanding. Stock options and warrants are not included in the
computation since their inclusion would be antidilutive.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to
employees. In most cases the exercise price is equal to the fair value of the
shares at the date of the grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and generally recognizes no compensation expense for the stock option grants.
F-7
11
CHEMTRAK INCORPORATED
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. ACQUISITION OF IN-PROCESS RESEARCH AND DEVELOPMENT
On February 3, 1995, the Company completed the acquisition of Coonan
Clinical Laboratories, Inc. ("CCL") through a merger of CCL into a wholly owned
subsidiary of ChemTrak, which was later dissolved by ChemTrak, in which all of
the outstanding shares of capital stock of CCL were exchanged for 449,986 newly
issued shares of ChemTrak common stock plus $400,000 in cash. The Company
recorded a $1,500,000 charge in 1995 for in-process research and development
which is included in research and development in the Company's statement of
operations. CCL's technology was comprised of efforts associated with a future
filing with the FDA for a home HIV test. CCL was a development stage company
with insignificant net assets and operations which consisted of approximately
$100,000 of research and development expense incurred during 1994 and until the
time of the acquisition.
3. INVENTORIES
Inventories consist of the following:
December 31,
---------------------------
1996 1995
-------- --------
Raw materials $289,000 $145,000
Work-in-process 63,000 41,000
Finished goods 188,000 248,000
-------- --------
$540,000 $434,000
======== ========
F-8
12
CHEMTRAK INCORPORATED
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
4. CUSTOMER INFORMATION
The Company has entered into distribution arrangements with certain
corporate partners. The Company granted certain corporate partners exclusive
distribution rights for select markets, including through December 15, 1995, the
U.S. consumer retail market for the Company's cholesterol products. The Company
has agreed to supply the corporate partners with their product requirements at
contracted selling prices. Under two such agreements the Company has received
funded research payments.
The Company had an arrangement with Direct Access Diagnostics, a
division of Johnson & Johnson, for distribution of the Total Cholesterol Test in
the domestic over-the-counter market in 1994 and most of 1995. This arrangement
was terminated in December of 1995 and the Company received a final payment of
$3.6 million from Direct Access Diagnostics which is included in funded research
and other revenues in the statements of operations. Net sales to Direct Access
Diagnostics represented 71% and 77% of total net sales for the years ended
December 31, 1995 and 1994, respectively. With this agreement terminated, the
Company has directly entered the U.S. retail market and relaunched its Total
Cholesterol Test under the trade name CholesTrak(TM).
Total export sales, primarily to European customers, were approximately
$360,000, $417,000 and $1,850,000 in 1996, 1995 and 1994 respectively.
The Company performs ongoing credit evaluations of its customers and
in some cases requires letters of credit for its export sales. Generally, no
collateral is required and credit losses have historically been within
managements' expectations. The Company recorded bad debt provisions of $4,000 in
1996, zero in 1995 and $63,000 in 1994.
F-9
13
CHEMTRAK INCORPORATED
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
5. PROPERTY AND EQUIPMENT
Property and equipment balances are stated at cost and comprise the following:
December 31,
-------------------------------
1996 1995
----------- -----------
Machinery and equipment $ 3,830,000 $ 3,826,000
Furniture and fixtures 173,000 170,000
Leasehold improvements 2,798,000 2,799,000
Construction-in-progress 946,000 629,000
----------- -----------
7,747,000 7,424,000
Less accumulated depreciation and amortization (5,009,000) (4,176,000)
----------- -----------
$ 2,738,000 $ 3,248,000
=========== ===========
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities comprise the following:
December 31,
-------------------------------
1996 1995
----------- -----------
Co-op advertising and promotion $237,000 $ --
Accrued professional fees 155,000 88,000
Reporting and printing 112,000 106,000
Other 284,000 64,000
------- -------
$788,000 $258,000
======= =======
7. COMMITMENTS AND CONTINGENCIES
LICENSES
The Company has entered into license agreements that allow the Company
to use certain technologies in its products. The agreements require the Company
to pay royalties based upon sales of the subject products with aggregate
royalties ranging from 5.5% to 6.0% of sales of the subject products. The
agreements expire upon the expiration of the related patents and are cancelable
by the Company upon six to twelve months written notice.
LITIGATION
The Company is a party to various legal actions (including patent
claims) that have occurred in the normal course of business. In the opinion of
management, the outcomes of these actions will not have a material effect on the
financial position, cash flows or results of operations of the Company.
F-10
14
CHEMTRAK INCORPORATED
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES
The Company leases facilities and equipment under noncancelable lease
agreements. The Company's facility lease expires in June 2002. Future minimum
lease payments at December 31, 1996, were as follows:
Operating Lease
-------------------
1997 $ 650,000
1998 683,000
1999 683,000
2000 789,000
2001 789,000
Thereafter 394,000
----------
Total minimum lease payments $3,988,000
==========
In August 1996, the Company subleased a portion of its facilities to a third
party through September 1997. Sublease rental income was $64,000 for the year
ended December 31, 1996. Aggregate future minimum rentals to be received under
the noncancelable sublease total approximately $128,000 at December 31, 1996.
Rent expense was approximately $667,000, in each 1996 and 1995 and $634,000 for
the year ended December 31, 1994.
F-11
15
CHEMTRAK INCORPORATED
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
8. CONVERTIBLE DEBENTURES
In May 1996, the Company issued $5,000,000 of convertible debentures
resulting in net proceeds to the company of $4,700,000 after deducting selling
commissions. The debentures, which are due in May 1998, are convertible into
Common Stock at the lower of 110% of the average closing prices during the
ten-day trading period ending with the initial debenture funding date, or 82.5
percent of the similarly-defined average ten-day market price ending with the
conversion date. The Company has the option to convert the amount of periodic
interest due on the convertible debentures, computed at the rate of 7.5% per
annum, into common stock of the Company in lieu of cash payments. Through
December 31, 1996, all interest obligations on the debentures have been settled
by the issuance of common stock.
As of December 31, 1996, total principal of $3,082,000 had been
converted into approximately 1,800,000 shares of common stock and approximately
100,000 shares were issued to settle interest obligations. As part of its
compensation for the sale of the convertible debentures, the placement agent
received $300,000 and a warrant to purchase 83,500 shares of the Company's
common stock at $5.00 per share. The Company attributed a value of $67,000 to
the Warrant which has been recorded as additional interest paid in capital.
The Company has determined that its previously reported operating
results and balance sheet data for the three-month periods ended June 30, 1996
and September 30, 1996 require adjustment. Revisions to these quarters have
been made to reflect recent Securities and Exchange guidance relating to debt
that is convertible to equity at a discount to market. The accompanying
financial statements reflect deemed non-cash interest expense of $875,000
($656,250 and $218,750 in the quarters ended June 30, 1996 and September 30,
1996, respectively).
F-12
16
CHEMTRAK INCORPORATED
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
9. STOCKHOLDERS' EQUITY
STOCK OPTIONS
The 1988 Stock Plan authorizes the Board of Directors to grant options
for the purchase of the Company's common stock to directors, officers, employees
and consultants. The Company has authorized 983,333 shares of common stock for
grant under the plan. Options are generally granted at an exercise price of no
less than the fair market value per share on the date of grant. The options
generally become exercisable over a three-year period and have a maximum term of
ten years from date of grant.
In 1992, the Board of Directors, with the approval of the Shareholders
of ChemTrak Incorporated, adopted the 1992 Non-Employee Directors' Stock Option
Plan authorizing 50,000 shares of common stock for grant on a formula basis to
members of the Board of Directors. Options are granted at an exercise price that
is no less than the fair market value per share on the date of grant. The
options are exercisable ratably over a four-year period.
The 1993 Equity Incentive Plan approved 450,000 shares of common stock
for options, generally to be granted at no less than the fair market value per
share on the date of grant. The options will generally become exercisable over a
three year period commencing one year from the grant date and may remain
outstanding for a ten year period. The Company may also grant stock bonuses and
stock appreciation rights under the plan.
The options outstanding, as well as the options granted, exercised and
canceled, are summarized for each of the above plans in the table below. In
addition, the weighted average prices for options outstanding each year and the
option prices for shares granted, exercised and cancelled are shown.
Shares
Available Number of Weighted Avg.
for Grant Shares Exercise Price
---------- --------- --------------
Balance December 31, 1993 514,873 763,231 $4.70
Granted (263,500) 263,500 $5.07
Exercised -- (9,992) $2.20
Canceled 25,250 (25,250) $4.36
-----------------------------------------------------
Options at December 31, 1994 276,623 978,989 $4.84
Granted (821,600) 821,600 $1.83
Exercised -- (2,888) $2.08
Canceled 750,088 (750,088) $4.52
-----------------------------------------------------
Options at December 31, 1995 205,111 1,047,613 $2.71
Granted (450,941) 450,941 $2.99
Exercised -- (69,287) $1.35
Canceled 297,226 (297,226) $2.95
-----------------------------------------------------
Options at December 31, 1996 51,396 1,132,041 $2.84
=====================================================
F-13
17
CHEMTRAK INCORPORATED
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
9. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
The range of exercise prices for options outstanding at December 31,
1996 was $0.75 to $9.75. The range of exercise prices for options is wide due
primarily to fluctuations in the price of the Company's stock over the period of
grants.
The following table summarizes information about stock options
outstanding at December 31, 1996:
Weighted
Average Weighted
Number Remaining Average
Range of Outstanding at Contractual Life Exercise Number Weighted
Exercise Prices 12/31/96 (Yrs) Price Exercisable Average
- --------------- -------------- ---------------- -------- ----------- --------
$0.75 - $2.125 521,325 8.77 $1.47 301,485 $1.38
$2.25 - $4.75 564,716 7.82 $3.81 272,132 $3.83
$5.00 - $9.75 46,000 6.68 $6.69 25,713 $8.82
--------- ----- ------- -----
1,132,041 $2.84 599,330 $2.81
STOCK-BASED COMPENSATION
As permitted under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (FASB 123), the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25) in accounting for stock-based awards to employees. Under APB 25, the
Company generally recognizes no compensation expense with respect to such
awards.
Pro forma information regarding net income and earnings per share is
required by FASB 123 for awards granted after December 31, 1994 as if the
Company had accounted for its stock-based awards to employees under the fair
value method of FASB 123. The fair value of the Company's stock-based awards to
employees was estimated using a Black-Scholes option pricing model. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes model requires the input of highly
subjective assumptions including the expected price volatility. Because the
Company's stock-based awards to employees have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair
value of the Company's stock-based awards to employees was estimated assuming
no expected dividends and the following weighted-average assumptions:
18
CHEMTRAK INCORPORATED
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
9. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
Options ESPP
---------------- --------------
1996 1995 1996 1995
Expected life (years) 5.0 5.0 0.5 0.5
Risk-free interest rate 6.5% 6.6% 5.6% 6.0%
Expected volatility 0.85 0.85 0.85 0.85
For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period
(for options) and the six-month purchase period (for stock purchases under the
ESPP). The Company's pro forma information follows:
Net loss As reported $7,826,000 $3,269,000
Pro forma 8,053,000 3,471,000
Primary loss per share As reported $(0.77) $(0.34)
Pro forma (0.79) (0.36)
Because FASB 123 is applicable only to awards granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
approximately 1999.
The weighted-average fair value of options whose exercise price equals
the market price on the date of grant was $2.04 and $1.10 per share during 1996
and 1995, respectively. The weighted-average fair value of options whose
exercise price is less than the market price on the grant date was $3.40 and
$1.90 per share during 1996 and 1995, respectively.
EMPLOYEE STOCK PURCHASE PLAN
In December 1991, the Company adopted the 1991 Employee Stock Purchase
Plan (the "Purchase Plan") and 200,000 shares of common stock were reserved for
issuance under the Purchase Plan. The Purchase Plan is intended to qualify under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code").
F-15
19
CHEMTRAK INCORPORATED
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
9. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
The Purchase Plan is administered by the Board of Directors or a
committee appointed by the Board of Directors. The Purchase Plan permits
eligible employees to purchase common stock through payroll deductions not to
exceed 15% of an employee's compensation and at a price equal to 85% of the
lower of the fair market value of the common stock as of the first day or as of
the last day of each six-month offering period. Under the Purchase Plan, 32,703,
29,401, and 21,399 shares were issued in 1996, 1995 and 1994, respectively.
DEFERRED COMPENSATION
For certain options granted, the Company recognizes as compensation for
accounting purposes, the excess of the deemed value of the common stock issuable
upon exercise of such options over the aggregate exercise price of these
options. The deferred compensation is being amortized ratably over the vesting
period of such options. The amount charged to operations was $19,000, $61,000
and $50,000 in 1996, 1995 and 1994, respectively.
10. INCOME TAXES
The Company has no tax provision for the years ended December 31, 1996,
1995 and 1994. A reconciliation of the income tax provision at the U.S. federal
statutory rate (34%) to the income tax provision at the effective tax rate is as
follows:
Years Ended December 31,
-------------------------------------------
1996 1995 1994
----------- ----------- ---------
Income taxes computed at the
federal statutory rate $(2,661,000) $(1,111,000) $(880,000)
Operating losses not utilized 2,661,000 1,111,000 880,000
----------- ----------- ---------
$ -- $ -- $ --
=========== =========== =========
As of December 31, 1996, the Company has federal and state net
operating loss carryforwards of approximately $31,000,000 and $9,000,000,
respectively. The federal net operating loss carryforwards will expire in the
years 2002 through 2011, and the state net operating loss carryforwards will
expire in the years 1997 through 2000. The Company has federal and state
research and experimentation credits of approximately $700,000 and $300,000,
respectively, that will expire in the years 2004 through 2011.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
F-16
20
CHEMTRAK INCORPORATED
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1996
10. INCOME TAXES (CONTINUED)
Deferred taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes consisted of the following at:
December 31,
------------------------------------------------
1996 1995 1994
------------ ------------ ------------
Deferred tax assets:
Net operating losses $ 11,093,000 $ 9,270,000 $ 7,910,000
Research credit carryforwards 991,000 1,022,000 837,000
Other individually immaterial items 2,193,000 1,559,000 2,077,000
------------ ------------ ------------
Total deferred tax assets 14,277,000 11,851,000 10,824,000
Valuation allowance (14,277,000) (11,851,000) (10,824,000)
------------ ------------ ------------
Total net deferred tax assets $ -- $ -- $ --
============ ============ ============
F-17
21
EXHIBIT INDEX
EXHIBIT
NUMBER
2.1 Agreement and Plan of Reorganization among the Registrant, ChemTrak
Acquisition Subsidiary, Inc., Coonan Clinical Laboratories, Inc. and
Stephen J. Coonan, dated December 21, 1994, as amended January 20,
1995. (6)
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
(1)
3.2 Bylaws of the Registrant. (1)
4.1 Reference is made to Exhibits 3.1 and 3.2.
10.1 Form of Indemnification Agreement entered into between the Registrant
and its directors and officers, with related schedule. (1)
10.2+ 1988 Stock Option Plan, as amended. (2)
10.3+ Form of Incentive Stock Option under the Option Plan, as amended. (1)
10.4+ Form of Non-Qualified Stock Option under the Option Plan, as amended.
(1)
10.5 Form of Notice of Exercise under the Option Plan, as amended. (1)
10.6 Investor Rights Agreement between the Registrant and the Series A
Purchasers, the Series C Purchasers, the Series D Purchasers,
Interhealth, and two of the Registrant's founders, dated June 4,
1991. (1)
10.10* Distribution Agreement between the Registrant and A. Menarini SRL,
dated as of July 1991. (1)
10.11* Letter from the Registrant to The Boots Company PLC, dated December
5, 1991, and letter from The Boots Company PLC to the Company, dated
October 24, 1991. (1)
10.15 Lease Agreement between the Registrant and PM-DE, dated as of January
23, 1992. (1) (7)
10.16+ 1991 Employee Stock Purchase Plan. (1)
10.17+ 1992 Non-Employee Directors' Stock Option Plan ("Directors' Plan").
(3)
10.18+ Form of Non-Statutory Option under the Directors' Plan. (3)
10.24* Agreement between the Registrant and Miles Inc., dated April 22,
1993. (4)
22
10.31 1993 Equity Incentive Plan. (5)
10.35* Distribution and Supply Agreement, dated as of March 1, 1995 between
the Registrant and Astra Merck Inc. (8)
10.36** Distribution Agreement between ChemTrak and Helena laboratories
(Canada) Ltd. dated April 25, 1996 (the "Helena Agreement").
10.37** Agreement between ChemTrak and Organon Teknika B.V., dated
December 1, 1996 (the "Teknika Agreement").
10.38** Development and Distribution Agreement between ChemTrak and
Selfcare, Inc., dated December 31, 1996 (the "Selfcare Agreement").
23.1 Consent of Ernst & Young LLP, Independent Auditors.
25.1 Power of Attorney. Reference is made to page 24. (3)
27.1 Financial Data Schedule
- --------------------------------------------------------------------------------
* Confidential treatment granted for portions of this document.
** Confidential treatment has been requested for portions of this
document.
+ Compensatory Plan.
(1) Incorporated by reference to the indicated exhibit in the
Registrant's Registration Statement on Form S-1 (File
No. 33--44673), as amended.
(2) Incorporated by reference to the indicated exhibit in the
Registrant's Registration Statement on Form S-8 (File No. 33-55326).
(3) Incorporated by reference to the indicated exhibit in the
Registrant's Registration Statement on Form S-8 (File No. 33-55324).
(4) Incorporated by reference to the indicated exhibit in the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993.
(5) Incorporated by reference to the indicated exhibit in the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.
(6) Incorporated by reference to the indicated exhibit in the
Registrant's Registration Statement on Form S-3 (File No. 33-90324).
(7) Lease assigned to MP Arques, Inc. as part of the purchase of the
property from PM-DE.
(8) Incorporated by reference to the indicated exhibit in the
Registrant's Registration Statement on Form 10-K for the fiscal
year ended December 31, 1995.