<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 18, 1997
REGISTRATION NO. 333-30227
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
AUTOCYTE, INC.
(Exact name of Registrant as specified in its charter)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 3826 56-1995728
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
112 ORANGE DRIVE, ELON COLLEGE, NORTH CAROLINA 27244 (910) 584-0250
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------
JAMES B. POWELL, M.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AUTOCYTE, INC.
112 Orange Drive
Elon College, North Carolina 27244 (910) 584-0250
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
<TABLE>
<S> <C>
WILLIAM T. WHELAN, ESQ. JONATHAN L. KRAVETZ, ESQ.
PALMER & DODGE LLP MINTZ, LEVIN, COHN, FERRIS,
One Beacon Street GLOVSKY AND POPEO, P.C.
Boston, Massachusetts 02108 One Financial Center
(617) 573-0100 Boston, Massachusetts 02111
(617) 542-6000
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This Prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED AUGUST 18, 1997
3,100,000 SHARES
[AUTOCYTE LOGO]
COMMON STOCK
The 3,100,000 shares of common stock, par value $0.01 per share (the
"Common Stock"), offered hereby (this "Offering") are being offered by AutoCyte,
Inc. ("AutoCyte" or the "Company"). Prior to this Offering, there has been no
public market for the Common Stock. It is currently estimated that the initial
public offering price will be between $12.00 and $14.00 per share. See
"Underwriting" for the factors to be considered in determining the initial
public offering price.
Application has been made to have the Common Stock approved for quotation
on the Nasdaq National Market under the symbol "ACYT."
FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON
STOCK OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 6 TO 16.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS* COMPANY+
<S> <C> <C> <C>
Per Share................................ $ $ $
Total++.................................. $ $ $
</TABLE>
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* The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
+ Before deducting expenses of this Offering payable by the Company estimated to
be $885,000.
++ The Company has granted the Underwriters a 30-day option to purchase up to
465,000 additional shares of Common Stock on the same terms per share solely
to cover over-allotments, if any. If such option is exercised in full, the
total price to public will be $ , the total underwriting discounts
and commissions will be $ and the total proceeds to Company will be
$ . See "Underwriting."
------------------------
The Common Stock is being offered by the Underwriters as set forth under
"Underwriting" herein. It is expected that delivery of the Common Stock offered
hereby will be made at the offices of Dillon, Read & Co. Inc., New York, New
York, on or about , 1997, against payment therefor. The Underwriters
include:
DILLON, READ & CO. INC. UBS SECURITIES
The date of this Prospectus is , 1997
<PAGE> 3
[IMAGE]
AutoCyte(R) and CytoRich(R) are registered trademarks of the Company. All other
trademarks and registered trademarks used in this Prospectus are the property of
their respective owners.
- --------------------------------------------------------------------------------
THE PREP AND SCREEN DEVICES ARE UNDER DEVELOPMENT FOR GYNECOLOGICAL USE AND HAVE
NOT BEEN CLEARED OR APPROVED BY THE FDA FOR COMMERCIAL SALE FOR SUCH USE IN THE
UNITED STATES. THE PROCESS OF OBTAINING FDA CLEARANCE OR APPROVAL MAY BE
LENGTHY, AND THERE CAN BE NO ASSURANCE THAT PREP OR SCREEN WILL BE CLEARED OR
APPROVED FOR GYNECOLOGICAL USE BY THE FDA.
- --------------------------------------------------------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
OVER-ALLOTMENT, STABILIZATION, SYNDICATE COVERING TRANSACTIONS AND IMPOSITION OF
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
[Graphics on 4 page gatefold of Prospectus:
Inside Front Cover:
(i) picture of slide prepared by conventional Pap smear process and magnified
view of portion of such slide next to picture of slide prepared by AutoCyte
PREP and magnified view of portion of such slide with the words "Conventional"
and "AutoCyte PREP" superimposed across the applicable picture; presented
underneath the following: "AutoCyte PREP," "Automated Monolayer Sample
Preparation System," "designed to operate both as an independent sample
preparation system and in conjunction with AutoCyte SCREEN as an integrated
cervical cancer screening system" and
(ii) picture of PREP instrument presented above the following:
Features Benefits
-------- --------
Liquid-based Minimizes lost diagnostic cells and
sample collection results in a more representative sample
Discrete staining function Eliminates cross-contamination among
cell samples
Monolayer slide sample Creates clearer, more homogeneous cell
samples for interpretation and
diagnosis
Batch processing and unattended Produces 48 slides per hour and
PREP instrument operation enhances laboratory productivity
Multiple testing capability May permit additional testing from a
single sample (e.g., HPV testing)
Integration with SCREEN Allows computer assisted analysis
Page 2 and 3 of Inside Front Cover Gatefold:
(i) title stating "AutoCyte PREP and AutoCyte SCREEN, The AutoCyte Integrated
Cervical Cancer Screening System vs. Conventional Pap Smears"; followed by the
words
(ii) "Conventional Pap Smear Process" followed by (a) picture of clinician
smearing sample onto a slide, with the caption "Clinician Collects and Smears
Sample, Many diagnostic cells remain on sampling device, Cell distortion from
air drying, Variability in sample quality"; followed by (b) picture of stained
slide, with the caption "Manual Batch Staining, Inconsistent staining and cell
obscuration, Risk of cross-contamination, Lack of additional testing
capability"; followed by (c) picture of person viewing microscope with caption
"Cytologist Manually Reviews Slide, Obscured cells difficult to interpret,
Productivity constraints, Potential for Fatigue"; followed by (d) picture of
slides in a box with the caption "Slides Manually Archived"; followed by
(iii) the words "AutoCyte Preparation and Screening System" followed by (a)
picture of a collection vial with the caption "Clinician Collects Sample/Places
Sampling Device in Vial, Substantially all diagnostic cells retained in vial of
proprietary preservative fluid, Virtually eliminates air drying"; followed by
(b) picture of slide prepared by PREP with the caption "PREP Prepares Monolayer
Slide, More uniform cell distribution, Standardized, discrete staining,
Additional testing capability"; followed by (c) picture of person viewing SCREEN
monitor preceded by the words "Manual and/or SCREEN System Review" and with the
caption "SCREEN Supports Cytotechnologist Review, Proprietary interactive
computer and Cytotechnologist interpretation, Designed for greater sensitivity
by having dual cytotechnologist and computer diagnoses, Designed to improve
productivity"; followed by picture of computers with the caption "Image
Electronically Archived and/or Transmitted, Supplements manual storage,
Interfaces with Pathology Workstation applications"; followed by
(iv) the following boxed legend: "The PREP and SCREEN devices are under
development for gynecological use and have not been cleared or approved by the
FDA for commercial sale for such use in the United States. The process of
obtaining FDA clearance or approval may be lengthy, and there can be no
assurance that PREP or SCREEN will be cleared or approved for gynecological use
by the FDA."
Inside Back Cover:
(i) picture of example of image of cells as presented by SCREEN preceded by
the title "AutoCyte SCREEN, Automated Image Analysis System, designed as an
interactive support tool for the cytology professional in the screening of
cervical cells"; followed by
(ii) picture of person viewing SCREEN monitor above to the following:
Features Benefits
-------- --------
Dual, interactive computer and Designed for improved diagnostic
cytotechnologist interpretation sensitivity
Complete slide examination on a Designed to reduce cytotechnologist
high throughput basis screening time, thereby increasing
productivity
High resolution computer images
of monolayer slides Enables easier evaluation of
diagnostic cells
Off-the-shelf computer hardware
platform More flexibility and lower cost
components
Integration with PREP
Allows computer assisted analysis of
monolayer slides
followed by
(iii) the following boxed legend: "The PREP and SCREEN devices are under
development for gynecological use and have not been cleared or approved by the
FDA for commercial sale for such use in the United States. The process of
obtaining FDA clearance or approval may be lengthy, and there can be no
assurance that PREP or SCREEN will be cleared or approved for gynecological use
by the FDA."
<PAGE> 5
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. Except as otherwise noted, all information in this Prospectus
(i) assumes no exercise of the Underwriters' over-allotment option, (ii)
reflects a 1-for-2.033 reverse split of the Common Stock effected on June 27,
1997 and (iii) reflects the conversion of all outstanding shares of Series A
Convertible Preferred Stock (the "Series A Preferred Stock") into an aggregate
of 4,881,936 shares of Common Stock effective upon the closing of this Offering.
See "Description of Capital Stock," "Underwriting" and Notes to Financial
Statements. Where the context permits or requires, references to the Company
also include the cytology and pathology automation business as conducted by the
Company's predecessor, Roche Image Analysis Systems, Inc. This Prospectus
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in such
forward-looking statements as a result of certain factors discussed under "Risk
Factors" and elsewhere in this Prospectus.
THE COMPANY
AutoCyte, Inc. ("AutoCyte" or the "Company") develops, manufactures and
markets the only integrated automated sample preparation and image analysis
system to support cytotechnologists and pathologists in cervical cancer
screening. The Company is currently pursuing regulatory approval of its products
for sale in the United States and has begun sales in several foreign countries.
The Company's integrated system is comprised of the AutoCyte PREP ("PREP")
sample preparation system and the AutoCyte SCREEN ("SCREEN") image analysis
system. PREP is a proprietary automated liquid-based sample preparation system
that produces slides with a homogeneous layer, or "monolayer," of cervical
cells. The Company believes PREP will improve laboratory productivity and
significantly reduce interpretation errors by producing cell samples that are
clearer, more uniform and easier to interpret than conventional Pap smear
samples. PREP is designed to operate both as an independent sample preparation
system and in conjunction with SCREEN as part of an integrated diagnostic
system. SCREEN is an automated image analysis system which combines proprietary
imaging technology and classification software with off-the-shelf computer
hardware to screen slides prepared using PREP. SCREEN is designed to be an
interactive support tool for the cytology professional in the primary screening
of cervical cells and may also serve quality control and adjunctive testing
purposes. By designing PREP and SCREEN to function together, AutoCyte has
developed a system which the Company believes will operate with higher
throughput and greater diagnostic sensitivity than the conventional Pap smear
test and other cervical cancer screening systems.
Cervical cancer is the second most common form of cancer among women
throughout the world. The World Health Organization estimates that worldwide
there were approximately 525,000 new cases of cervical cancer and approximately
247,000 deaths attributable to the disease in 1996. The American Cancer Society
estimates that, in the United States, approximately 14,500 new cases will be
diagnosed and 4,800 women will die of cervical cancer in 1997. Because treatment
of cervical cancer at an early stage is very often successful, regular cervical
cancer screening examinations are recommended in the United States and many
foreign countries. The Pap smear test is currently the most widely used
screening test for cervical cancer. It is estimated that clinical laboratories
in the United States perform over 50 million conventional Pap smears annually,
and the Company believes that the annual test volume outside of the United
States is in excess of 50 million.
Notwithstanding the success of the conventional Pap smear in reducing
deaths related to cervical cancer, the test has significant limitations which
result in inaccurate test results and inefficiencies in the health care system.
These limitations include inadequacies in sample collection and slide
preparation, as well as slide detection and interpretation errors, all of which
can lead to false negative and false positive diagnoses. In addition, the
conventional Pap smear slide cannot be used for additional diagnostic tests and
impedes laboratory productivity, increasing testing costs for clinical
laboratories and third-party payors. The Company believes that, in the United
States, these limitations contribute to an estimated $5.0 billion in annual
costs associated with the treatment of advanced precancerous and
- --------------------------------------------------------------------------------
3
<PAGE> 6
cancerous cervical disease. Additional costs are also incurred by third-party
payors due to repeat testing and by clinical laboratories due to litigation
associated with inaccurate diagnoses.
The Company believes that the PREP system will offer advantages relative to
both the conventional Pap smear process and competing monolayer technologies.
The system is designed to provide more complete sample collection, improved
sample quality and enhanced cytotechnologist productivity. The Company places
PREP systems with customers through both sales of the PREP system and rentals
which include minimum monthly purchases of reagents and other disposables. The
Company has placed ten PREP systems for general, commercial cervical cytology
applications in France, Switzerland and Australia which collectively have
produced over 100,000 monolayer slides in the past 18 months. The Company
believes that SCREEN's proprietary, interactive classification approach, which
combines computer analysis with expert review by the cytotechnologist, will
reduce detection and interpretation errors and improve the likelihood of
acceptance by laboratory personnel. The Company places SCREEN instruments
without charge at customer locations and charges customers on a per test basis.
The Company has placed SCREEN systems for general, commercial use in clinical
laboratories in Australia which have screened over 25,000 PREP slides in the
past 18 months.
The Company cannot market the PREP or SCREEN systems in the United States
for use in preparing or screening monolayer slides for cervical cancer until
premarket approval applications ("PMAs") are approved by the United States Food
and Drug Administration (the "FDA"). The Company submitted a PMA for PREP to the
FDA on May 12, 1997. The PREP PMA was accepted for substantive review by the FDA
on June 11, 1997. In notifying the Company that the PREP PMA had been accepted
for such review, the FDA informed the Company that the PMA would not be
submitted to its Medical Devices Advisory Panel for review since information in
the PMA substantially duplicated information previously reviewed by the panel in
a PMA submitted by a different company relating to an alternative monolayer
slide preparation product. An FDA review of a PMA typically takes from one to
two years from the date the PMA is filed, but may take significantly longer if
the FDA requests additional information and any major amendments to the PMA are
filed. While the Company believes that the FDA review of the PREP PMA may be
shorter than is typical because the PMA will not be submitted to its Medical
Devices Advisory Panel and because of the FDA's familiarity with certain
information in the PREP PMA, there can be no assurance that the FDA's review
will not be as long or longer than the typical time period for FDA review or
that the PMA will be approved at all. The Company has also begun clinical trials
for SCREEN and anticipates submitting a PMA for SCREEN to the FDA by late 1997
or early 1998.
The PREP PMA is supported by the clinical testing of 8,983 patients from
eight clinical trial sites. The combined data indicated improvements in specimen
adequacy using PREP relative to the conventional Pap smear by reducing the
number of slides that were unsatisfactory for interpretation or that were
satisfactory but limited by certain factors by 39% and 44%, respectively. The
PREP clinical data also indicated statistically significant improvements
relative to the conventional Pap smear in (i) screening sensitivity (the
detection of disease), (ii) reducing false negative diagnoses (the failure to
detect cancerous or precancerous cells) and (iii) reducing inconclusive
diagnoses. In further analysis of the clinical trial data following submission
of the PMA to the FDA, the Company sought to control for potential
cytotechnologist bias by removing from the analysis all cell samples from
patients known by the cytotechnologist as having a clinical history of
abnormality in a previous Pap smear test. An analysis of the remaining 6,196
cases revealed that, as compared to the conventional Pap smear, PREP indicated
greater screening sensitivity with a 17% improvement in the detection of disease
and an improvement in the rate of false negative diagnoses with a 46% reduction
in such errors by the cytotechnologist.
Autocyte's long-term strategy encompasses an initiative into the broader
pathology automation market. The Company has developed the Pathology
Workstation, a multi-purpose computerized microscope, as a platform for
applications such as image management, archiving and telecommunication and the
automated relocation of cells previously detected and classified by SCREEN. The
marketing and sale of certain applications for the Pathology Workstation,
including diagnostic
4
<PAGE> 7
applications, will require FDA clearance of a premarket notification. Image
storage and archival applications currently being marketed by the Company are
treated as exempt from the premarket notification requirements by the FDA.
Additionally, the Company's research and development programs are focused on (i)
continued enhancement of the PREP instrument, related reagents and disposables
and further automation of the slide preparation and handling process and (ii)
continued development of the next generation SCREEN product.
AutoCyte was formed in October 1996 to acquire the cytology and pathology
automation business then owned by Roche Image Analysis Systems, Inc. ("RIAS"), a
wholly-owned subsidiary of Roche Holding Ltd ("Roche"). Roche had previously
operated such business as part of Roche Biomedical Reference Laboratories, Inc.,
a predecessor company to Laboratory Corporation of America Holdings, the largest
clinical laboratory chain in the United States and formerly a wholly-owned
subsidiary of Roche. The business was acquired from RIAS in November 1996 in
exchange for 3.7 million shares of the Company's Common Stock. Contemporaneously
with this acquisition, Ampersand Ventures and the Sprout Group, together with
certain members of the Company's management and other investors, purchased $9.8
million of redeemable convertible preferred stock of the Company. Included in
the management group making an equity investment in the Company was Dr. James B.
Powell, the Company's Chief Executive Officer and a former President and Chief
Executive Officer of LabCorp and RBL. The PREP, SCREEN and Pathology Workstation
technologies had been under development by RIAS or other Roche affiliates for
several years prior to the acquisition by the Company. From 1990 to 1996, Roche
invested more than $50 million in the cytology and pathology automation
business, including over $30 million since the beginning of 1994. Upon the
closing of this Offering, Roche will own approximately 25% of the outstanding
Common Stock of the Company.
The Company's executive offices are located at 112 Orange Drive, Elon
College, North Carolina 27244, and its telephone number is (910) 584-0250.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......................... 3,100,000 shares
Common Stock to be outstanding after this Offering........... 12,261,325 shares(1)
Use of proceeds.............................................. To fund sales and marketing activities,
research and development, capital
expenditures, clinical trials, working
capital requirements and other general
corporate purposes
Proposed Nasdaq National Market symbol....................... ACYT
</TABLE>
5
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR(2) PRO FORMA
--------------------------------- AUTOCYTE COMBINED
PERIOD FROM PERIOD FROM PREDECESSOR AND SIX MONTHS ENDED
YEARS ENDED JANUARY 1, NOVEMBER 22, AUTOCYTE JUNE 30,
DECEMBER 31, 1996 THROUGH 1996 THROUGH YEAR ENDED -------------------------
------------------ NOVEMBER 21, DECEMBER 31, DECEMBER 31, 1996 1997
1994 1995 1996 1996 1996(3) (PREDECESSOR) (AUTOCYTE)
-------- -------- ------------- ------------- --------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............. $ 3,396 $ 3,396 $ 1,747 $ 129 $ 1,876 $ 909 $ 899
Gross profit (loss)... 796 982 (1,049) 17 (1,032) 197 132
Research and
development......... 3,605 5,074 3,908 451 4,359 1,929 2,274
Selling, general and
administrative...... 8,479 7,895 11,966 494 12,460 3,069 2,930
Operating loss........ (11,288) (11,987) (16,923) (928) (17,851) (4,801) (5,072)
Net loss.............. $(11,288) $(11,987) $(16,923) $ (886) $(17,809) $(4,801) $ (6,344)
======== ======== ======== ====== ======== ======= ========
Net loss per
share(4)............ $(0.09) $ (1.73) $ (0.62)
====== ======== ========
Shares used in
computing net loss
per share(4)........ 10,311 10,311 10,311
====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------
ACTUAL AS ADJUSTED(5)
------- ------------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................................... $ 5,449 $ 42,043
Working capital................................................................. 5,907 42,501
Total assets.................................................................... 9,863 46,457
Redeemable convertible preferred stock.......................................... 9,982 --
Total stockholders' equity (deficit)............................................ (2,058) 44,518
</TABLE>
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(1) Based on the number of shares outstanding at June 30, 1997. Excludes (i)
990,465 shares of Common Stock issuable upon the exercise of options
outstanding at June 30, 1997 at a weighted average exercise price of $0.2033
per share, of which options to purchase 108,637 shares of Common Stock were
exercisable, and (ii) 207,291 shares of Common Stock issuable upon exercise
of warrants outstanding at June 30, 1997 at an exercise price of $2.033, all
of which were exercisable. See "Capitalization," "Management -- Stock Plans"
and Note 8 of Notes to Company's Financial Statements.
(2) Reflects the operations of the cytology and pathology automation business as
conducted by the Company's predecessor, Roche Image Analysis Systems, Inc.
("RIAS").
(3) Reflects the operations of the cytology and pathology automation business as
conducted by RIAS from January 1, 1996 through November 21, 1996 and the
operations of the Company from November 22, 1996 through December 31, 1996.
(4) See Note 9 of Notes to the Company's Financial Statements for information
concerning the computation of net loss per share and shares used in
computing net loss per share.
(5) As adjusted to give effect to sale of the 3,100,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $13.00 per
share and the application of the net proceeds therefrom. Also reflects the
automatic conversion of all outstanding shares of Series A Preferred Stock
into shares of Common Stock contemporaneously with the closing of this
Offering. See "Use of Proceeds" and "Capitalization."
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6
<PAGE> 9
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating an investment in
the Common Stock.
EARLY STAGE OF DEVELOPMENT; LIMITED SALES TO DATE
The Company was formed in October 1996 and on November 22, 1996 acquired
the cytology and pathology automation business as conducted by RIAS, a
wholly-owned subsidiary of Roche Holding Ltd. Following the acquisition, the
Company formed a new management team. Neither of the Company's two principal
products, PREP or SCREEN, has received FDA approval for its principal intended
use. No significant revenues have been generated from sales of those products,
and the Company's Pathology Workstation has produced only limited revenues.
Prior to November 1996, substantially all of the assets and business of the
Company were owned by RIAS, and the business was financed through contributions
of capital by Roche and limited product sales. Since November 1996, the Company
has financed its operations through private sales of equity securities and
limited product sales. To achieve profitable operations, the Company, alone or
with others, must successfully develop, obtain regulatory approval for,
introduce, market and sell products. There can be no assurance that the required
regulatory approvals will be obtained in a timely manner or at all, that the
Company's product candidates can be manufactured at an acceptable cost and with
acceptable quality, that any approved products can be successfully marketed or
that the Company can successfully establish suitable internal financial controls
and other infrastructure necessary to support substantial commercial operations.
The Company's failure to successfully market and sell its products would have a
material adverse effect on the Company's future revenues and profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
UNCERTAINTIES REGARDING FDA APPROVAL
The Company must obtain approval of PMAs by the FDA before the Company's
principal products may be marketed in the United States for their primary
intended use. None of the Company's principal products has yet received such
approval. A failure or delay in receiving any such approval would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company submitted a PMA for PREP to the FDA in May
1997, which was accepted for substantive review by the FDA on June 11, 1997.
Although the FDA informed the Company that the PMA will not be submitted to its
Medical Devices Advisory Panel for review, there can be no assurance that the
FDA will not change its position and require review by the panel, which could
delay FDA review of the PMA. In addition, there can be no assurance that the FDA
will approve the PREP PMA in a timely manner or at all, or that any approval
will include the claims for which the Company is seeking approval. The Company
is currently conducting clinical trials for SCREEN and anticipates submitting a
PMA for SCREEN to the FDA by the end of 1997 or early 1998. There can be no
assurance that these clinical trials will be completed or, if completed, will
show that the device is safe or effective, or that any PMA for SCREEN will be
submitted to the FDA or, if submitted, will be accepted or approved or, if
approved, will be approved in a timely manner, or for the claims for which the
Company seeks approval. The Company anticipates that certain Pathology
Workstation applications may also require FDA approval of PMAs or clearance of
premarket notifications ("510(k)s"). In addition to obtaining approval of the
initial PMA, the FDA's regulations require agency approval of a PMA supplement
for certain changes if they affect the safety and effectiveness of the device,
including, but not limited to: new indications for use; the use of a different
facility or establishment to manufacture, process or package the device; changes
in manufacturing methods or quality control systems; changes in vendors used to
supply components of the device; changes in performance or design
specifications, and certain labeling changes.
The process of obtaining FDA approvals of PMAs for medical devices such as
the Company's products can be time-consuming, expensive and uncertain,
frequently requiring as much as five to seven years or more from the
commencement of clinical trials to the receipt of PMA approval. The Company
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has only limited experience in submitting or pursuing applications necessary to
gain FDA approval of a PMA. The Company may encounter unanticipated delays or
significant unanticipated costs in its efforts to secure necessary approvals,
and there can be no assurance that FDA approval of a PMA will ever be obtained
for any of the Company's principal products for any use or that, if obtained,
the claims for which the Company is seeking approval will be allowed. The
Company's analysis of data obtained from preclinical and clinical studies is
subject to confirmation and interpretation by the FDA. The FDA's statistical
analyses of the Company's data may yield different results, including results
that do not show statistical significance in the FDA's opinion. Such conclusions
by the FDA could delay, limit or prevent approval of a PMA. The studies are also
subject to evaluation by the FDA for compliance with its good clinical practice
("GCP") requirements. The Company has monitored and audited these studies for
compliance with GCP requirements in anticipation of the inspections that the FDA
will conduct prior to any approval of the PMA. The audits identified potential
issues which the Company addressed by adding additional documentation to its GCP
file. There can be no assurance, however, that the FDA will find the clinical
studies to be in sufficient compliance with its GCP requirements and acceptable
to support approval of the PMA for PREP. The facilities at which a device
requiring PMA approval is manufactured are subject to pre-approval inspection by
the FDA for compliance with its quality system regulations, the results of which
inspection could delay, limit or prevent FDA approval of a PMA. The Company has
had its facilities audited for compliance with these requirements in
anticipation of the inspection that the FDA will conduct prior to any approval
of the PMA for PREP. The audit identified issues which the Company is
addressing, principally by adding documentation to its manufacturing and other
files. There can be no assurance, however, that the FDA will find the facilities
to be in compliance with its quality system regulations and acceptable for
approval of the PMA. In addition, United States legislative or administrative
actions also could prevent or delay approval of PMAs for the Company's products.
Even if FDA approval of a PMA is obtained, such approval may include significant
limitations on the indicated uses for which a product may be marketed. A
marketed product also is subject to continual FDA and other regulatory agency
review and regulation. Subsequent discovery of previously unknown problems or
failure to comply with the applicable regulatory requirements can result in,
among other things, fines; the refusal of the FDA to approve PMAs; suspensions
or withdrawals of approvals; product recalls; operating restrictions, including
total or partial suspension of production, distribution, sales and marketing;
injunctions; civil penalties; product seizures and criminal prosecution of the
Company, its officers and its employees. The Company's failure to obtain or
maintain FDA regulatory approval for its products in a timely manner, or at all,
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Government Regulation."
UNCERTAINTY OF MARKET ACCEPTANCE OF THE COMPANY'S PRINCIPAL PRODUCTS
The Company's success and growth will depend primarily on market acceptance
of PREP and SCREEN for their primary intended use in cervical cancer screening
by clinical laboratories, third-party payors and health care providers. Market
acceptance will depend on the Company's ability to demonstrate to these parties
that there are limitations in the conventional Pap smear process of sample
collection, slide preparation and screening, and that AutoCyte's products can
substantially overcome these shortcomings. There can be no assurance that the
Company will be able to successfully demonstrate that use of its products is
cost competitive compared to the use of the conventional Pap smear process.
Recently, other companies have introduced systems for screening conventional Pap
smear slides that such companies claim will substantially improve the likelihood
of an accurate diagnosis. The widespread adoption of such systems could impair
the Company's ability to market the Company's products and could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that clinical laboratories, third-party
payors, and health care providers will choose to accept the Company's products
as a replacement to conventional Pap smear collection and slide preparation
practices or alternative cervical cancer screening systems. Even if the
Company's products were to gain market acceptance, sales of the Company's
products would depend to a large extent on the availability and level of
reimbursement from
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third-party payors, such as private insurance plans, managed care organizations
and Medicare and Medicaid. See "Business -- Marketing and Sales,"
"-- Third-Party Reimbursement" and "-- Competition."
COMPETITION; TECHNOLOGICAL CHANGE
The cervical cancer diagnostic market is comprised of the widely used
conventional Pap smear procedure and alternative technologies, some of which
have already received FDA approval and are, in certain cases, considered
superior to the conventional Pap smear. The Company faces direct competition
from a number of publicly-traded and privately-held companies, including other
manufacturers of monolayer slide preparation and automated screen imaging
systems. The Company competes on the basis of a number of factors in areas in
which the Company currently has limited experience, including manufacturing
efficiency, marketing and sales capabilities and customer service and support.
The Company's products could be rendered obsolete or uneconomical by
technological advances of the Company's current or future competitors, the
introduction and market acceptance of competing products or by other approaches.
Many of the Company's existing and potential competitors have substantially
greater financial, marketing, sales, distribution and technical resources than
the Company, and more experience in research and development, clinical trials,
regulatory matters, customer support, manufacturing and marketing. In addition,
several of these competitors have received third-party reimbursement for their
products. The Company's primary competitor in monolayer slide preparation is
Cytyc Corporation ("Cytyc"). Cytyc's ThinPrep(R) 2000 is currently the only
liquid-based monolayer sample preparation system approved by the FDA for
cervical cytology applications. In automated screening for cervical cancer, the
Company faces direct competition from a number of companies, including NeoPath,
Inc. ("NeoPath") and Neuromedical Systems, Inc., both of which currently market
imaging systems to reexamine or rescreen conventional Pap smear slides
previously diagnosed as negative. There can be no assurance that the Company
will be able to compete successfully against these current or future competitors
or that competition, including the development and commercialization of new
products and technologies, will not have a material adverse effect on the
Company's business, financial condition and results of operations. In June 1997,
Cytyc announced that it had entered into a multi-year agreement for ThinPrep
2000 with Quest Diagnostics, Inc. ("Quest"), one of the three large national
chain laboratories. In November 1996, Cytyc and NeoPath announced the completion
of a joint study of the feasibility of screening cervical specimens using
Cytyc's ThinPrep 2000 in conjunction with NeoPath's AutoPap(R) QC automated
imaging system. The agreement with Quest and the development and
commercialization of a combined product with NeoPath may make it more difficult
for the Company to promote PREP and could have a material adverse affect on the
Company's business, financial condition and results of operations. See
"Business -- Competition."
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE
PROFITABILITY
The Company and its predecessor have incurred substantial losses totaling
$56.5 million through June 30, 1997. The Company's accumulated deficit from
inception through June 30, 1997 of approximately $7.2 million has resulted
primarily from expenses associated with research and development activities,
coordination of clinical trials, preparation and submission of the PMA for PREP
and general and administrative expenses. The Company anticipates that its
research and development and marketing and sales expenses will increase
significantly in the future, and it expects to incur substantial losses over the
next several years. There can be no assurance that the Company will ever be able
to generate significant revenues from the sale of products. Moreover, even if
the Company generates significant product revenues, there can be no assurance
that the Company will be able to achieve or sustain profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON A LIMITED NUMBER OF PRODUCTS
The Company anticipates that sales and rentals of PREP and SCREEN for
cervical cancer screening will account for the substantial majority of the
Company's revenues if and when FDA approvals are obtained. The Company's
long-term success will depend, in significant part, on its ability
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to obtain regulatory approval and achieve market acceptance of PREP and SCREEN
in the United States for cervical cancer screening. There can be no assurance
that the Company will obtain such regulatory approval and achieve market
acceptance for PREP and SCREEN, and the failure to do so would have a material
adverse effect on the Company's business, financial condition and results of
operations.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF AVAILABILITY OF ADDITIONAL FINANCING
Prior to being able to sustain its operations from the sale of its
products, the Company believes that it may require additional funds, through
lease arrangements, debt or equity financings, strategic alliances or otherwise,
to manufacture a sufficient inventory of PREP and SCREEN, finance the placement
of PREP and SCREEN instruments at customer sites, build the sales and marketing
force necessary for market penetration of PREP and SCREEN and other expenses.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the progress and scope of clinical trials; the
timing and costs of filing future regulatory submissions; the timing and costs
required to receive both United States and foreign governmental approvals; the
cost of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights; the extent to which the Company's products gain
market acceptance; the timing and costs of product introductions; the extent of
the Company's ongoing research and development programs; the costs of training
laboratory personnel to become proficient with the use of the Company's
products; and, if necessary once regulatory approvals are received, the costs of
developing marketing and distribution capabilities and manufacturing sufficient
inventories of PREP. There can be no assurance that additional financing will be
available on terms acceptable to the Company, or at all. The Company's inability
to fund its capital requirements would have a material adverse effect on the
Company's business, financial condition and results of operations. To the extent
that additional capital is raised through the sale of equity or securities
convertible into equity, the issuance of such securities could result in
dilution to the Company's existing stockholders. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON PATENTS, COPYRIGHTS, LICENSES AND PROPRIETARY RIGHTS; RISK OF
THIRD-PARTY CLAIMS OF INFRINGEMENT
The Company relies on a combination of patents, trade secrets, copyrights
and confidentiality agreements to protect its proprietary technology, rights and
know-how. The Company holds four issued United States patents and corresponding
foreign patent applications and has one United States patent application
pending, relating to various aspects of the Company's products. There can be no
assurance, however, that pending patent applications will ultimately issue as
patents or that the claims allowed in any of the Company's existing or future
patents will provide competitive advantages for the Company's products or will
not be successfully challenged or circumvented by competitors. Under current
law, patent applications in the United States are maintained in secrecy until
patents are issued, and patent applications in foreign countries are maintained
in secrecy for a period after filing. The right to a patent in the United States
is given to the first to invent, not the first to file a patent application. The
Company cannot be sure that its products or technologies do not infringe patents
that may be granted in the future pursuant to pending patent applications or
that its products do not infringe any patents or proprietary rights of third
parties. The Company is aware that several of its competitors hold several
patents relating to automated screening and other aspects of the Company's
technologies. The Company believes that PREP and SCREEN do not infringe these
third-party patents and that certain of these third-party patents may be
invalid. However, there can be no assurance that a court would rule that the
Company's products do not infringe such third-party patents or would invalidate
such third-party patents. The Company may incur substantial legal fees in
defending against a patent infringement claim or in asserting claims of
invalidity against third parties. In the event that any relevant claims of
third-party patents are upheld as valid and enforceable, the Company could be
prevented from selling its products or could be required to obtain licenses from
the owners of such patents or be required to redesign its products to avoid
infringement. There can be no assurance that such licenses would be available
or, if available, would be on terms acceptable to the Company or that the
Company
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would be successful in any attempt to redesign its products or processes to
avoid infringement. The Company's failure to obtain these licenses or to
redesign its products would have a material adverse effect on the Company's
business, financial condition and results of operations.
There can be no assurance that the obligations of employees of the Company
and third parties with whom the Company has entered into confidentiality
agreements to maintain the confidentiality of trade secrets and proprietary
information will effectively prevent disclosure of the Company's confidential
information or provide meaningful protection for the Company's confidential
information if there is unauthorized use or disclosure, or that the Company's
trade secrets or proprietary information will not be independently developed by
the Company's competitors. The Company also holds unregistered copyrights on
documentation and operating software developed by it for its products. There can
be no assurance that any copyrights owned by the Company will provide
competitive advantages for the Company's products or will not be challenged or
circumvented by its competitors. Litigation may be necessary to defend against
claims of infringement, to enforce patents and copyrights of the Company, or to
protect trade secrets and could result in substantial cost to, and diversion of
efforts by, the Company. There can be no assurance that the Company would
prevail in any such litigation. In addition, the laws of some foreign countries
do not protect the Company's proprietary rights to the same extent as do the
laws of the United States. See "Business -- Patents, Copyrights, Licenses and
Proprietary Rights."
EXTENSIVE GOVERNMENT REGULATION
The Company's medical device products and manufacturing facilities are
subject to stringent regulation by the FDA and by comparable authorities in
other countries. Pursuant to the Federal Food, Drug and Cosmetic Act (the "FDC
Act") and the regulations promulgated thereunder, the FDA regulates the
preclinical and clinical testing, manufacture, labeling, distribution, sale,
marketing, advertising and promotion of medical devices. There can be no
assurance that the Company will be able to obtain necessary regulatory approvals
or comply with regulatory requirements applicable to the Company's products in
the United States or internationally on a timely basis, or at all.
The FDC Act strictly prohibits the promotion by a company and any of its
distributors of approved medical devices for unapproved uses. Manufacturers of
medical devices are subject to strict federal regulations regarding validation
and the quality of manufacturing, including compliance with Quality System
("QS," formerly current good manufacturing practice or "GMP") regulations
relating to design, testing, control and documentation, among other things. The
Company's existing and future manufacturing facilities and manufacturing
processes for the Company's products for cervical cancer screening or other
applications will be required to comply with these and all other applicable FDA
regulations, and with regulations imposed by other governments. Ongoing
compliance with QS and other applicable regulatory requirements is monitored
through periodic inspections by state and federal agencies, including the FDA,
and by comparable agencies in other countries. Failure to comply with applicable
United States and international regulatory requirements can result in the
refusal of the relevant government agency to grant premarket approval for
devices, suspension or withdrawal of approval, total or partial suspension of
production, distribution, sales and marketing, fines, injunctions, civil
penalties, recall or seizure of products, and criminal prosecution of a company
and of its officers and employees. Furthermore, changes in existing regulations
or adoption of new regulations or policies could prevent the Company from
obtaining, or affect the cost and timing of, future regulatory approvals or
clearances.
The Company has only limited experience in complying with regulations
governing its products and manufacturing facilities. Monitoring and maintaining
compliance with government regulations will require substantial resources of the
Company and may, at times, divert the attention of employees of the Company from
other functions of the Company's operations. Even a temporary suspension of
production or distribution imposed by regulatory authorities could have a
material adverse effect on the Company as a result of the loss of business
during the period of such suspension and potential damage to the Company's
reputation with its direct customers, third-party payors, the medical community
at
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large and regulatory authorities. The withdrawal of regulatory approval to
market any of the Company's products would have a material adverse effect on the
Company's business, financial condition and results of operations.
The laboratories to which the Company intends to market its products are
subject to extensive regulation under the Clinical Laboratory Improvement
Amendments of 1988 ("CLIA"), which requires laboratories to meet specified
standards in the areas of personnel qualifications, administration,
participation in proficiency testing, patient test management, quality control,
quality assurance and inspections. The Company believes that its products
operate in a manner that will allow laboratories purchasing the Company's
products to comply with CLIA requirements. However, there can be no assurance
that interpretations of current CLIA regulations or future changes in CLIA
regulations would not make compliance by the laboratory difficult or impossible
and therefore have an adverse effect on sales of the Company's products. See
"Business -- Government Regulation."
DEPENDENCE ON THIRD-PARTY REIMBURSEMENT
Sales of the Company's products for cervical cancer screening in the United
States and other countries will depend on the availability of adequate
reimbursement from third-party payors such as private insurance plans, managed
care organizations and Medicare and Medicaid. There is significant uncertainty
concerning third-party reimbursement for the use of any medical device
incorporating new technology. There can be no assurance that third-party payors
will provide such coverage, that reimbursement levels will be adequate, or that
health care providers or clinical laboratories will use the Company's products
for cervical cancer screening in lieu of the conventional Pap smear.
Reimbursement by a third-party payor depends on a number of factors, including
the level of demand by physicians and the payor's determination that the
Company's products represent clinical advances compared to current technology,
and are safe and effective, medically necessary, appropriate for specific
patient populations and cost-effective. Because the up-front, direct costs of
using the Company's products will initially be greater than the cost of the
conventional Pap smear, the Company will need to convince third-party payors
that the overall cost savings to the health care system, resulting from earlier
detection of cervical cancer and reduction of unnecessary biopsies and
colposcopies through improved specimen adequacy and otherwise, will more than
offset the cost of the Company's products. Since reimbursement approval is
required from each payor individually, seeking such approvals is a
time-consuming and costly process which requires the Company to provide
scientific and clinical data to support the use of the Company's products to
each payor separately. There can be no assurance that third-party reimbursement
will be available for PREP or SCREEN or any other products that may be developed
by the Company, or that such third-party reimbursement, if obtained, will be
adequate.
A critical component in the reimbursement decision by most private
insurers, state Medicaid agencies, and the United States Health Care Financing
Administration, which administers Medicare, is the assignment of a Current
Procedural Terminology ("CPT") code which is used in the submission of claims to
insurers for reimbursement for medical services. CPT codes are assigned,
maintained and revised by the CPT Editorial Board administered by the American
Medical Association. The Company is aware that certain clinical laboratories
using other gynecological monolayer systems have received reimbursement from
certain third-party payors using existing CPT codes. The Company believes that
the CPT Editorial Board is considering modifying an existing CPT code or
establishing a separate CPT code which will be broad enough to include the PREP
system. There can be no assurance, however, that the CPT Editorial Board will
modify or establish such a CPT code on a timely basis, if at all. Failure to
secure a modification to an existing code or secure the establishment of a
separate code from the CPT Editorial Board could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company has very limited experience in obtaining reimbursement for its
products in the United States or other countries. In addition, third-party
payors are routinely limiting reimbursement and coverage for medical devices and
in many instances are exerting significant pressure on medical suppliers to
lower their prices. Lack of or inadequate reimbursement by government and other
third-
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party payors for the Company's products would have a material adverse effect on
the Company's business, financial condition and results of operations.
Furthermore, health care reimbursement systems vary from country to country, and
there can be no assurance that third-party reimbursement will be made available
at an adequate level, if at all, for the Company's products under any other
reimbursement system. See "Business -- Third-Party Reimbursement."
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the principal members of its management
and technical staff, the loss of whose services might impede achievement of the
Company's strategic objectives. The Company's success will depend on its ability
to retain key employees and to attract additional qualified employees. In
addition, the Company intends to hire a significant number of additional sales
and marketing and other personnel in late 1997 and thereafter. Competition for
such personnel is intense, and there can be no assurance that the Company will
be able to retain existing personnel or to attract, assimilate or retain
additional highly qualified employees in the future. An inability to hire and
retain qualified personnel in key positions would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Employees" and "Management -- Executive Officers and Directors."
INTERNATIONAL SALES AND OPERATIONS RISKS
The Company is currently selling its products to customers in France,
Switzerland and Australia and intends to substantially expand its international
sales in the future. While the Company is evaluating marketing and sales
channels abroad, including contract sales organizations, distributors and
marketing partners, the Company has very limited foreign sales channels in
place. There can be no assurance that the Company will successfully develop
significant international sales capabilities or that, if the Company establishes
such capabilities, the Company will be successful in obtaining reimbursement or
any regulatory approvals required in foreign countries. International sales and
operations may be limited or disrupted by the imposition of government controls,
export license requirements, political instability, trade restrictions, changes
in tariffs, difficulties in staffing and managing international operations,
changes in applicable laws, less favorable intellectual property laws, longer
payment cycles, difficulties in collecting accounts receivable, fluctuations in
currency exchange rates and potential adverse tax consequences. Foreign
regulatory agencies often establish product standards different from those in
the United States and any inability to obtain foreign regulatory approvals on a
timely basis, if at all, could have a material adverse effect on the Company's
international business operations. Additionally, if significant international
sales occur, the Company's business, financial condition and results of
operations could be adversely affected by fluctuations in currency exchange
rates as well as increases in duty rates. There can be no assurance that the
Company will be able to successfully commercialize its products or any future
products in any foreign market. See "Business -- Marketing and Sales,"
"-- Third-Party Reimbursement" and "-- Government Regulation."
LIMITED MARKETING AND SALES RESOURCES
The Company currently has a limited marketing and sales force. In order to
effectively market the Company's products, the Company will need to
substantially increase its direct sales force. No assurance can be given that
the Company's direct sales force will succeed in promoting the Company's
products to clinical laboratories, health care providers or third-party payors,
or that additional marketing and sales channels will be successfully
established. In addition, due to limited market awareness of the Company's
products, the Company will be required to educate health care providers and
third-party payors regarding the clinical benefits and cost-effectiveness of the
Company's products. There can be no assurance that the Company will be able to
recruit and retain skilled marketing, sales, service or support personnel or
foreign distributors, or that the Company's marketing and sales efforts will be
successful. Failure to successfully expand its marketing and sales capabilities
in the United States and establish its marketing and sales organization
internationally would have a material adverse
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effect on the Company's business, financial condition and results of operations.
The Company's marketing success in the United States and abroad will depend on
whether it can obtain required regulatory approvals, successfully demonstrate
the cost-effectiveness of the Company's products, further develop its direct
sales capabilities and establish arrangements with contract sales organizations,
distributors and marketing partners. Failure by the Company to successfully
market its products would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Marketing and Sales."
RISK ASSOCIATED WITH PRODUCT LIABILITY CLAIMS
The use of the Company's products in clinical trials and the commercial use
of any Company products that receive regulatory approval may expose the Company
to product liability claims. The Company currently has limited product liability
insurance. The medical device industry has experienced increasing difficulty in
obtaining and maintaining reasonable product liability coverage, and substantial
increases in insurance premium costs in many cases have rendered coverage
economically impractical. There can be no assurance that adequate product
liability coverage will be available to the Company when needed at a reasonable
costs or that any product liability claim would not have a material adverse
effect on the Company.
LIMITED NUMBER OF CUSTOMERS
Due in part to a recent trend toward consolidation of clinical
laboratories, the Company expects that the number of potential domestic
customers for its products will decrease and, therefore, it is likely that a
significant portion of the Company's product sales will be concentrated among a
small number of large clinical laboratories. The Company will need to foster an
awareness of and acceptance by these potential customers of the Company's
products and the benefits of those products over the conventional and other
alternative methods of sample collection, slide preparation and cervical cancer
screening. Furthermore, in order to generate demand for the Company's products
among clinical laboratories, the Company will be required to educate physicians
and health care providers regarding the clinical benefits and cost-effectiveness
of the Company's products as well as to demonstrate to such parties that
adequate levels of reimbursement will be available for the Company's products.
The Company's dependence on sales to large laboratories may strengthen the
purchasing leverage of these potential customers. While Roche and its affiliates
(including LabCorp) have been customers for the Company's products, there are no
commitments, agreements or understandings in this regard between the Company and
Roche or any of its affiliates. There can be no assurance that the Company will
be successful in selling its products to large laboratories or that any such
sales will result in sufficient revenue to allow the Company to become
profitable. See "Business -- Marketing and Sales."
LIMITED MANUFACTURING EXPERIENCE
The Company intends to manufacture its CytoRich(R) line of reagents and
stains and assemble or customize certain other components of its PREP, SCREEN
and Pathology Workstation products. The Company has limited commercial scale
manufacturing experience and capabilities and the Company anticipates it will be
required to substantially scale up its manufacturing capabilities and acquire or
rent additional manufacturing facilities. There can be no assurance that the
Company will be able to recruit and retain skilled manufacturing personnel to
establish sufficient manufacturing capability and capacity or manufacture the
Company's products in a timely manner, at a cost or in quantities necessary to
make them commercially viable, in conformance with QS requirements, or in a
manner which otherwise ensures product quality. See "Business -- Manufacturing."
DEPENDENCE ON SINGLE OR LIMITED SOURCE SUPPLIERS
Certain components of PREP and SCREEN are currently provided to the Company
on a single source basis from certain suppliers. In particular, the Company has
agreed to use a sole supplier of
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manufactured plastic components incorporated into its PREP system for the North
American market for a period of at least five years beginning from the first
production shipment date of each component engineered as of July 26, 1993. In
addition, the Company has agreed to allow this supplier to be the sole supplier
for manufactured plastic components for PREP sales beyond the North American
market. The Company's obligation to use this supplier as its sole supplier for
manufactured plastic components is contingent upon this supplier supplying the
Company at prices competitive with those offered by third parties on similar
terms and upon this supplier meeting the Company's quality and production
requirements. The Company believes that this supplier's production will be
sufficient to meet both its present and future requirements for manufactured
plastic components. In the event that the Company is unable to obtain sufficient
quantities of components manufactured by single or limited source suppliers on
commercially reasonable terms, or in a timely manner, the Company would not be
able to manufacture its products on a timely and cost-competitive basis which
would have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, if any of the components of
PREP and SCREEN are no longer available in the marketplace, the Company may be
forced to further develop its technology to incorporate alternate components.
Subject to any contractual limitations on the ability to do so, the Company may
seek to establish relationships with additional suppliers or vendors for
components of its products, although there can be no assurance that it will be
successful in doing so. The incorporation of new components, or replacement
components from alternative suppliers, into the Company's products may require
the Company to submit PMA supplements to, and obtain further regulatory
approvals from, the FDA before marketing the products with the new or
replacement components. There can be no assurance that such development to
incorporate alternative components would be successful or that, if developed by
the Company or licensed from third parties, such alternative components would
receive FDA approval on a timely basis, or at all. See "Business -- Government
Regulation."
CONTROL BY DIRECTORS, OFFICERS AND SIGNIFICANT STOCKHOLDERS
Upon completion of this Offering, the present directors, executive officers
and principal stockholders of the Company and their affiliates will beneficially
own approximately 75% of the outstanding Common Stock of the Company, of which
approximately 25% will be held by RIAS. As a result, these stockholders will be
able to control actions requiring stockholder approval, including the election
of directors and approval of significant corporate transactions. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. See "Principal Stockholders."
ENVIRONMENTAL REGULATION
The Company is subject to a variety of local, state and federal government
regulations relating to the storage, discharge, handling, emission, generation,
manufacture and disposal of toxic, infectious or other hazardous substances used
to manufacture the Company's products. The failure to comply with current or
future regulations could result in the imposition of substantial fines against
the Company, suspension of production, alteration of its manufacturing processes
or cessation of operations. There can be no assurance that the Company will not
be required to incur significant costs to comply with any such laws and
regulations in the future, or that such laws or regulations will not have a
material adverse effect on the Company's business, financial condition and
results of operations. Any failure by the Company to control the use, disposal,
removal or storage of, or to adequately restrict the discharge of, or assist in
the cleanup of, hazardous chemicals or hazardous, infectious or toxic substances
could subject the Company to significant liabilities, including joint and
several liability under certain statutes. The imposition of such liabilities
would have a material adverse effect on the Company's business, financial
condition and results of operations.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Future sales of Common Stock in the public market following this Offering
could adversely affect the market price of the Common Stock. Upon completion of
this Offering, the Company will have
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12,261,325 shares of Common Stock outstanding, assuming no exercise of currently
outstanding options and warrants. Of these shares, the 3,100,000 shares sold in
this Offering (plus any additional shares sold upon exercise of the
Underwriters' over-allotment option) will be freely tradable, without
restriction under the Securities Act of 1933, as amended (the "Securities Act"),
except for shares purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act. The remaining 9,161,325
outstanding shares of Common Stock owned by existing shareholders, together with
990,465 shares and 207,291 shares of Common Stock issuable upon the exercise of
outstanding options and warrants, respectively are deemed "restricted
securities" under Rule 144. Of these restricted securities, approximately 92
shares of Common Stock issuable upon exercise of vested options will be eligible
for sale under Rules 144 and 701 under the Securities Act on the ninety-first
day after the date of this Prospectus. Stockholders of the Company, holding in
the aggregate 9,161,325 shares of Common Stock, warrants to purchase 207,291
shares of Common Stock and options to purchase 991,756 shares of Common Stock
have agreed, subject to certain limited exceptions, not to sell or otherwise
dispose of any of the shares held by them as of the date of this Prospectus for
a period of 180 days after the effective date of the Registration Statement
filed in connection with this Offering (the "lock-up period") without the prior
written consent of the representatives of the Underwriters of this Offering.
However, Dillon, Read & Co. Inc. may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements. At the end of the aforementioned lock-up period, an additional
9,589,197 shares of Common Stock (including 427,872 shares of Common Stock
issuable upon exercise of vested options and outstanding warrants) will be
eligible for immediate resale, subject to compliance with Rules 144 and Rule 701
under the Securities Act. The holders of 9,161,325 shares of Common Stock have
the right in certain circumstances to require the Company to register their
shares under the Securities Act for resale to the public beginning at the end of
the lock-up period. If such holders, by exercising their demand registration
rights, cause a large number of shares to be registered and sold in the public
market, such sales could have an adverse effect on the market price for the
Company's Common Stock. If the Company were required to include in a
Company-initiated registration shares held by such holders pursuant to the
exercise of their piggyback registration rights, such sales may have an adverse
effect on the Company's ability to raise needed capital. In addition,
approximately 90 days after the date of this Prospectus, the Company expects to
file one or more registration statements on Form S-8 registering a total of
approximately 2,186,325 shares of Common Stock subject to outstanding stock
options or reserved for issuance under the Company's Amended and Restated 1996
Equity Incentive Plan and 1997 Director Stock Option Plan. See
"Management -- Director Compensation," "-- Stock Plans," "Shares Eligible for
Future Sale" and "Underwriting."
NO PRIOR PUBLIC MARKET FOR THE COMPANY'S COMMON STOCK; POSSIBLE VOLATILITY OF
SHARE PRICE
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained after this Offering. The initial public offering price will be
determined through negotiations among the Company and the representatives of the
Underwriters based on several factors and may not be indicative of the market
price of the Common Stock after this Offering. The market prices of the capital
stock of medical technology companies have historically been very volatile, and
the market price of the shares of Common Stock may be highly volatile. The
market price of the shares of the Common Stock may be significantly affected by
factors such as the results of clinical trials by the Company or its
competitors, concerns as to the efficacy of products of the Company or its
competitors, actual or anticipated fluctuations in the Company's operating
results, announcements of technological innovations, new products or new
contracts by the Company or its competitors, developments with respect to
patents or proprietary rights, conditions and trends in the medical device and
other technology industries, adoption of new accounting standards affecting such
industries, changes in financial estimates by securities analysts, general
market conditions and other factors. In addition, the stock market has from time
to time experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stock of development
stage companies. These broad market fluctuations may adversely
16
<PAGE> 19
affect the market price of the Common Stock. In the past, following periods of
volatility in the market price of a particular company's securities, class
action securities litigation has often been brought against such company. Such
litigation, if brought against the Company, could result in substantial costs
and a diversion of management's attention and resources and could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Underwriting."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND DELAWARE LAW
The Company's Restated Certificate of Incorporation, as it is proposed to
be amended and restated concurrently with the closing of this Offering (the
"Restated Certificate"), authorizes the Board of Directors to issue, without
stockholder approval, up to 1,000,000 shares of preferred stock ("Preferred
Stock") with voting, conversion and other rights and preferences that could
adversely affect the voting power or other rights of the holders of Common
Stock. The issuance of Preferred Stock or of rights to purchase Preferred Stock
could be used to discourage an unsolicited acquisition proposal. In addition,
the possible issuance of Preferred Stock could discourage a proxy contest, make
more difficult the acquisition of a substantial block of the Company's Common
Stock or limit the price that investors might be willing to pay for shares of
the Company's Common Stock. The Restated Certificate provides for staggered
terms for the members of the Board of Directors. A staggered Board of Directors
and certain provisions of the Company's By-laws (the "By-laws") and of Delaware
law applicable to the Company could delay or make more difficult a merger,
tender offer or proxy contest involving the Company. The Company, for example,
will be subject to Section 203 of the General Corporate Law of Delaware which,
subject to certain exceptions, restricts certain transactions and business
combinations between a corporation and a stockholder owning 15% or more of the
corporation's outstanding voting stock (an "interested stockholder") for a
period of three years from the date the stockholder becomes an interested
stockholder. These provisions may have the effect of delaying or preventing a
change of control of the Company without action by the stockholders and,
therefore, could adversely affect the price of the Company's Common Stock. See
"Management," "Description of Capital Stock -- Preferred Stock" and
"-- Anti-Takeover Measures."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
investment from the initial public offering price in an amount equal to $9.42
per share. Additional dilution will occur upon exercise of outstanding options
and warrants. See "Dilution," "Description of Capital Stock -- Stock Purchase
Warrants" and "Shares Eligible for Future Sale."
ABSENCE OF DIVIDENDS
To date, the Company has neither declared nor paid any cash dividends on
shares of its Common Stock and does not anticipate paying any cash dividends in
the foreseeable future. See "Dividend Policy."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,100,000 shares of
Common Stock offered hereby are estimated to be $36,594,000 ($42,215,850 if the
Underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $13.00 per share, and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company. If the FDA approves the PREP PMA, the Company currently intends
to use the net proceeds approximately as follows: $10.0 million for sales and
marketing activities, $6.0 million for research and development, $4.0 million
for capital expenditures for materials and equipment components of PREP, $2.0
million for funding of clinical trials in support of regulatory and
reimbursement approvals and the remainder for working capital and general
corporate purposes. The timing and
17
<PAGE> 20
amount of expenditures will vary depending upon numerous factors including the
timing of the Company's receipt of FDA approval of its PMA for PREP, the
availability of financing for the Company's anticipated equipment lease and
rental programs, the level of placements of rental PREP systems and Fee-Per-Use
SCREEN systems, the resources required to further develop its marketing and
sales capabilities domestically and internationally, the resources required to
expand manufacturing capacity and the extent to which the Company's products
generate market acceptance and demand. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The Company's Board of Directors and management retain complete
discretion with respect to the allocation of such proceeds and the timing of
expenditures. Although the Company may use a portion of the net proceeds for
possible licensing or acquisition of products and technologies that are
complementary to those of the Company, or acquisitions of businesses that are
complementary to those of the Company, there are no current plans or commitments
in this regard. Pending such uses, the Company plans to invest the net proceeds
in investment grade, interest-bearing securities. The Company intends to invest
and use the proceeds so as not to be considered an "investment company" under
the Investment Company Act of 1940, as amended.
In the next several years, the Company may require additional funds to
support its operating requirements or for other purposes and may seek to raise
such additional funds through equipment lease or debt financing, public or
private equity financing or from other sources. There can be no assurance that
additional financing will be available or that, if available, such financing
would be obtainable on terms favorable to the Company and would not be dilutive
to stockholders. See "Risk Factors -- Future Capital Needs and Uncertainty of
Availability of Additional Financing" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain its future earnings, if any, for
use in its business and therefore does not anticipate paying cash dividends in
the foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company's Board of Directors after taking into account various
factors, including the Company's financial condition, operating results, current
and anticipated cash needs and plans for expansion.
18
<PAGE> 21
CAPITALIZATION
The following table sets forth, as of June 30, 1997, (i) the actual
capitalization of the Company and (ii) the capitalization of the Company on an
as adjusted basis to give effect to the issuance and sale by the Company of
3,100,000 shares of Common Stock (at an assumed initial public offering price of
$13.00 per share and after deducting underwriting discounts and commissions and
estimated offering expenses) and the conversion of all issued and outstanding
shares of Series A Preferred Stock into 4,881,936 shares of Common Stock. This
table should be read in conjunction with the Financial Statements of the Company
and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt(1).................................................. $ -- $ --
------- -------
Redeemable convertible preferred stock.............................. 9,982 --
Stockholders' equity:
Common Stock, $0.01 par value; 20,650,000 shares authorized;
4,279,389 shares issued and outstanding and 12,261,325 shares
issued and outstanding, as adjusted(2)......................... 43 123
Additional paid-in capital........................................ 7,180 53,676
Deferred compensation............................................. (2,052) (2,052)
Accumulated deficit............................................... (7,229) (7,229)
------- -------
Total stockholders' equity (deficit)........................... (2,058) 44,518
------- -------
Total capitalization...................................... $ 7,924 $44,518
======= =======
</TABLE>
- ---------------
(1) The Company established on June 27, 1997 a credit agreement of up to
$8,000,000 with certain existing stockholders. Assuming the closing of this
Offering, the Company does not anticipate making any borrowings under the
credit agreement. The credit agreement will terminate upon the closing of
this Offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Certain Transactions."
(2) Excludes (i) 990,465 shares of Common Stock issuable upon exercise of
options outstanding at June 30, 1997 at a weighted average exercise price of
$0.2033 per share, of which options to purchase 108,637 shares of Common
Stock were exercisable, and (ii) 207,291 shares of Common Stock issuable
upon exercise of warrants outstanding at June 30, 1997 at an exercise price
of $2.033 per share, all of which were exercisable. See "Management -- Stock
Plans" and Note 8 of Notes to the Company's Financial Statements.
19
<PAGE> 22
DILUTION
The Company's net tangible book value as of June 30, 1997 was $7,313,086,
or $0.80 per share of Common Stock. Net tangible book value per share represents
the amount of total tangible assets, less total liabilities, divided by the
number of shares of Common Stock then outstanding after giving effect to the
conversion of all outstanding shares of Series A Preferred Stock into shares of
Common Stock upon the completion of this Offering. After giving effect to the
sale of 3,100,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $13.00 per share and after deduction of underwriting
discounts and commissions and estimated offering expenses payable by the
Company, the adjusted net tangible book value of the Company as of June 30, 1997
would have been $43,907,086, or $3.58 per share of Common Stock. This represents
an immediate increase in net tangible book value of $2.78 per share to existing
investors and an immediate dilution of $9.42 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $13.00
Net tangible book value per share before this Offering....... $0.80
Increase per share attributable to new investors............. 2.78
-----
Adjusted net tangible book value per share after this Offering.... 3.58
------
Dilution per share to new investors............................... $ 9.42
======
</TABLE>
The following table summarizes as of June 30, 1997 the number of shares of
Common Stock purchased from the Company, the total consideration paid to the
Company and the average price paid per share by the existing stockholders and by
investors purchasing shares of Common Stock in this Offering (at the assumed
initial public offering price of $13.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 9,161,325 75% $13,120,000 25% $ 1.43
New investors............... 3,100,000 25 40,300,000 75 13.00
---------- --- ----------- ---
Total.................. 12,261,325 100% $53,420,000 100%
========== === =========== ===
</TABLE>
The foregoing computations assume no exercise of (i) stock options
outstanding at June 30, 1997, at which date there were 990,465 shares of Common
Stock issuable upon exercise of outstanding options at a weighted average
exercise price of $0.2033 per share, of which options to purchase 108,637 shares
of Common Stock were exercisable, and (ii) warrants outstanding at June 30, 1997
to purchase 207,291 shares of Common Stock at an exercise price of $2.033 per
share, all of which were exercisable. See "Management -- Stock Plans." To the
extent such options and warrants are exercised, there will be further dilution
to new investors.
20
<PAGE> 23
SELECTED FINANCIAL DATA
The selected financial data presented below as of December 31, 1994 and
1995 and for the years ended December 31, 1994 and 1995 and for the period from
January 1, 1996 to November 21, 1996 are derived from Financial Statements of
the Company's predecessor, included elsewhere in this Prospectus, which have
been audited by Ernst & Young LLP, independent auditors. The selected financial
data presented below as of December 31, 1996 and for the period from November
22, 1996 to December 31, 1996 are derived from Financial Statements of the
Company, included elsewhere in this Prospectus, which have been audited by Ernst
& Young LLP, independent auditors. The selected financial data as of June 30,
1997 and for each of the six-month periods ended June 30, 1996 and 1997 have
been derived from the Company's (or its predecessor's) unaudited Financial
Statements. In the opinion of management, the unaudited financial statements
include all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the financial position and the results of operations for
these periods. Operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1997. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements, related Notes and other financial
information included herein.
<TABLE>
<CAPTION>
PREDECESSOR(1) AUTOCYTE PRO FORMA
---------------------------------- PERIOD FROM COMBINED
PERIOD FROM NOVEMBER 21, PREDECESSOR AND SIX MONTHS
YEARS ENDED JANUARY 1, 1996 AUTOCYTE ENDED JUNE 30,
DECEMBER 31, 1996 THROUGH THROUGH YEAR ENDED -------------------------
------------------- NOVEMBER 21, DECEMBER 31, DECEMBER 31, 1996 1997
1994 1995 1996 1996 1996(2) (PREDECESSOR) (AUTOCYTE)
-------- -------- ------------ ------------ ---------------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales........... $ 3,396 $ 3,396 $ 1,747 $ 129 $ 1,876 $ 909 $ 899
Gross profit
(loss)............ 796 982 (1,049) 17 (1,032) 197 132
Research and
development....... 3,605 5,074 3,908 451 4,359 1,929 2,274
Selling, general and
administrative.... 8,479 7,895 11,966 494 12,460 3,069 2,930
Operating loss...... (11,288) (11,987) (16,923) (928) (17,851) (4,801) (5,072)
Net loss............ $(11,288) $(11,987) $(16,923) $ (886) $(17,809) $(4,801) $(6,344)
======== ======== ======== ======= ======== ======= =======
Net loss per
share(3).......... $ (0.09) $ (1.73) $ (0.62)
======= ======== =======
Shares used in per
share
calculations(3)... 10,311 10,311 10,311
======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR(1)
------------------------------ AUTOCYTE
DECEMBER 31, ------------------------------
------------------------------ DECEMBER 31, JUNE 30,
1994 1995 1996 1997
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 8 $ 10 $ 9,517 $ 5,449
Working capital.................................. 1,600 3,585 10,673 5,907
Total assets..................................... 10,544 10,714 13,699 9,863
Redeemable convertible preferred stock........... -- -- 9,882 9,982
Total stockholders' equity (deficit)............. 8,966 10,002 2,250 (2,058)
</TABLE>
- ---------------
(1) Reflects the operations of the cytology and pathology automation business as
conducted by RIAS.
(2) Reflects the operations of the cytology and pathology automation business as
conducted by RIAS from January 1, 1996 through November 21, 1996 and the
operations of the Company from November 22, 1996 through December 31, 1996.
(3) See Note 9 of Notes to the Company's Financial Statements for information
concerning the computation of net loss per share and shares used in
computing net loss per share.
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus. The
financial results for the years ended December 31, 1994 and 1995 and for the
period from January 1, 1996 through November 21, 1996 are for the business of
the Company as conducted by the Company's predecessor, the cytology and
pathology automation business of Roche Image Analysis Systems, Inc. ("RIAS").
For purposes of this discussion, information for the year ended December 31,
1996 combines financial results of the Company's predecessor and AutoCyte. The
following discussion contains forward-looking statements that involve risk and
uncertainties. The Company's actual results could differ materially from those
anticipated in such forward-looking statements as a result of certain factors
discussed under "Risk Factors" and elsewhere in this Prospectus.
Background
AutoCyte was formed in October 1996 to acquire the cytology and pathology
automation business then owned by RIAS, a wholly-owned subsidiary of Roche
Holding Ltd. ("Roche"). Roche had previously operated such business as part of
Roche Biomedical Reference Laboratories, Inc., ("RBL"), a predecessor company to
Laboratory Corporation of America, Inc. ("LabCorp"), the largest clinical
laboratory chain in the United States and formerly a wholly-owned subsidiary of
Roche. The business was acquired from RIAS in November 1996 in exchange for 3.7
million shares of the Company's Common Stock. Contemporaneously with this
acquisition, Ampersand Ventures and the Sprout Group, together with certain
members of the Company's management and other investors, purchased $9.8 million
of redeemable convertible preferred stock of the Company. Included in the
management group making an equity investment in the Company was Dr. James B.
Powell, the Company's Chief Executive Officer and a former President and Chief
Executive Officer of LabCorp and RBL.
The PREP, SCREEN and Pathology Workstation technologies had been under
development by RIAS or other Roche affiliates for several years prior to the
acquisition. From 1990 to 1996, Roche invested more than $50 million in the
cytology and pathology automation business, including over $30 million since the
beginning of 1994. At the time of the acquisition in November 1996, clinical
trials for PREP were in progress and had only recently begun for SCREEN.
The Company submitted a PMA for PREP to the FDA on May 12, 1997. The PREP
PMA was accepted for substantive review by the FDA by letter dated June 11,
1997. In this letter, the FDA informed the Company that the PMA would not be
submitted to its Medical Devices Advisory Panel for review since information in
the PMA substantially duplicated information previously reviewed by the panel in
a PMA submitted by a different Company relating to an alternative monolayer
slide preparation product. The Company has begun clinical trials for SCREEN and
anticipates submitting a PMA for SCREEN to the FDA by late 1997 or early 1998.
RIAS began commercial sales of the Pathology Workstation in 1993, and, to
date, the substantial majority of the Company's revenues have been generated by
Pathology Workstation products. RIAS also began commercial sales of PREP in 1993
for non-cervical cytology applications and currently has an installed base of
more than 35 PREP instruments for such applications. The Company has placed 10
PREP systems for cervical cytology applications in France, Switzerland and
Australia which collectively have produced over 100,000 monolayer slides in the
past 18 months. The Company has placed SCREEN systems in clinical laboratories
in Australia which have screened over 25,000 PREP slides in the past 18 months.
The Company's current sales and marketing efforts are primarily focused on the
placement of PREP systems for non-cervical cytology applications in the United
States and cervical cytology applications outside of the United States and, to a
lesser extent, on sales of the Pathology Workstation. The Company is currently
negotiating distribution arrangements which are intended to be the primary
method of commercializing the Pathology Workstation.
22
<PAGE> 25
The Company cannot market the PREP or SCREEN systems in the United States
for use in preparing or screening monolayer slides for cervical cancer until PMA
approvals are received from the FDA. If such approvals are obtained, the Company
intends to focus its marketing efforts on such products for cervical cytology
applications. The Company expects to generate a substantial majority of its
future revenues from the PREP and SCREEN systems. The Company's long-term
revenues and future success are substantially dependent upon its ability to
obtain regulatory approval for, and market and commercialize the PREP and SCREEN
systems for, cervical cancer screening in the United States and abroad.
The Company generates PREP revenue from both system sales and rentals. For
system sales, customers purchase the instrument and make separate purchases of
related reagents and other disposables. For system rentals, the Company places
the PREP instrument at the customer's site, and customers make monthly payments
which include rent and a minimum monthly quantity of reagents and other
disposables. The term of the PREP rentals ranges from month-to-month to three
years. For SCREEN, the Company intends to place instruments without charge at
customer locations and to charge customers on a per test, or Fee-Per-Use
("FPU"), basis. As an important element of its business strategy, the Company
intends to seek third-party financing to support rentals of PREP and placements
of SCREEN. There can be no assurance that the Company will be able to obtain
such financing or, if so, on favorable terms. Failure to obtain such financing
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Sales of the Pathology Workstation and PREP accounted for 96% and 4%,
respectively, of the Company's and RIAS's net sales in 1996 and 98% and 2%,
respectively, of RIAS's net sales in 1995. Sales of the Pathology Workstation,
PREP and SCREEN accounted for 78%, 10% and 12%, respectively, of RIAS's net
sales in 1994.
Future revenues and results of operations may fluctuate significantly from
quarter to quarter and will depend upon, among other factors, the timing and
outcome of the FDA review of PREP PMA submission, the extent to which the
Company's products gain market acceptance, the timing and volume of sales and
rental orders, regulatory and reimbursement matters, progress of the SCREEN
clinical trials, introduction of alternative technologies by competitors,
pricing of competitive products, the cost and effect of promotional discounts
and marketing programs adopted by the Company.
The Company anticipates that if FDA approval is received to market PREP for
gynecological uses, its marketing and sales expenditures will increase
significantly from those experienced by RIAS as the Company markets PREP in the
United States. This increase is expected to be partially offset by a decrease in
marketing and sales expenses outside of the United States as the Company enters
into arrangements with distributors outside of the United States for the sale of
its product. The Company also anticipates that research and development
expenses, both in the areas of product enhancement and new product development,
and manufacturing expenses will also increase as product commercialization
increases. The Company additionally expects to incur compensation expense of
$2.2 million as its deferred compensation balance is amortized.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 (AutoCyte) and June 30, 1996 (Predecessor)
Net sales and gross profit. Net sales decreased by 1% from $909,000 for
the six months ended June 30, 1996 to $899,000 in the same period of 1997. Gross
profit decreased by 33% from $197,000 for the six months ended June 30, 1996 to
$132,000 in the same period of 1997, and gross margin decreased from 22% for the
six months ended June 30, 1996 to 15% in the same period of 1997. The decline in
gross margin was largely attributable to the fact that the Company acquired,
because of its planned growth, certain productive assets that had previously
been used in part by another operating unit within Roche. Thus, the Company
incurred the full cost of these assets during the six months ended June 30, 1997
without experiencing the sales growth to more fully utilize the assets'
capacity. The Company does not believe that the decline in net sales will
continue.
23
<PAGE> 26
Total operating expenses. Total operating expenses increased by 4% from
$5.0 million for the six months ended June 30, 1996 to $5.2 million in the same
period of 1997. Research and development costs increased by 18% from $1.9
million for the six months ended June 30, 1996 to $2.2 million in the same
period of 1997 as a result of costs associated with the PREP clinical trials.
Selling, general and administrative ("SG&A") costs decreased by 5% from $3.1
million for the six months ended June 30, 1996 to $2.9 million in the same
period of 1997 primarily as a result of a reduction of $482,000 in sales and
marketing expenses due to more targeted spending and a reduction in depreciation
of $248,000 due to lower total asset cost. These reductions were partially
offset by equity-related compensation expense of $561,000.
During the six months ended June 30, 1997 the Company granted options under
the 1996 Equity Incentive Plan to acquire 302,012 shares of Common Stock at an
exercise price of $0.2033 per share. The Company also sold to certain members of
management 99,250 shares of Series A Preferred Stock at a price of $1.00756 per
share. The Company recorded $1.4 million of deferred compensation expense and
$427,000 of compensation expense with respect to these transactions. The Company
also recorded $134,000 of amortization of deferred compensation expense during
the period.
Interest expense, including credit agreement commitment fee. On June 27,
1997 the Company issued warrants to acquire 207,291 shares of Common Stock at an
exercise price of $2.033 per share as a commitment fee for a credit agreement
among the Company and certain of its principal stockholders. The Company
recorded $1.5 million of commitment fee expense with respect to this
transaction, all of which was expensed in June 1997. There will be no additional
expenses recorded in connection with this transaction upon termination of the
credit agreement. See " --Liquidity and Capital Resources," "Certain
Transactions" and Note 13 of Notes to the Company's Financial Statements.
Years Ended December 31, 1996 (Pro Forma Combined) and December 31, 1995
(Predecessor)
Net sales and gross profit. Net sales decreased by 45% from $3.4 million
in 1995 to $1.9 million in 1996. This decrease was primarily due to lower sales
of Pathology Workstation related products, including a decrease in such sales to
LabCorp from $598,000 in 1995 to $299,000 in 1996 resulting primarily from a
decrease in sales activity by the Company's predecessor in anticipation of the
acquisition of the cytology and pathology automation business by the Company.
Gross profit decreased by 205% from $982,000 in 1995 to a loss of $1.0 million
in 1996, and gross margin decreased from 29% in 1995 to negative 55% in 1996.
The decrease in gross margin was attributable to the write-off of obsolete
inventory of $1.4 million and the effect of lower manufacturing volumes on
absorption of fixed costs. During 1996, the Company decided to focus on PREP and
SCREEN systems. As a result, certain inventory items were written-down by
approximately $1.4 million to their estimated net realizable values. The Company
does not anticipate further write-downs at this time; however, management
performs a review of inventory items on a quarterly basis to identify potential
inventory obsolescence issues.
Total operating expenses. Total operating expenses increased by 30% from
$13.0 million in 1995 to $16.8 million in 1996. Research and development costs
decreased by 14% from $5.1 million in 1995 to $4.4 million in 1996, as a result
of the purchase of Pathology Workstation product rights for $687,000 which were
expensed as purchased research and development costs in 1995. SG&A costs
increased by 58% from $7.9 million in 1995 to $12.5 million in 1996, primarily
as a result of a write-down of impaired assets in 1996. During 1996, the Company
evaluated the ongoing value of its older model systems and equipment and
determined that assets were impaired and wrote them down to their estimated fair
value. Approximately $2.7 million of equipment, primarily computer hardware, and
$1.2 million of demonstration equipment were written-down.
Years Ended December 31, 1995 and December 31, 1994 (Both Predecessor)
Net sales and gross profit. Net sales were unchanged from 1994 to 1995 at
$3.4 million. Sales to LabCorp decreased by 29% from $845,000 (including
non-recurring sales of $621,000 of PREP, Pathology Workstation products and
SCREEN systems) in 1994 to $598,000 in 1995. Sales to
24
<PAGE> 27
LabCorp in 1995 consisted primarily of disposables for the PREP System that were
purchased by LabCorp in 1994, Pathology Workstation products and SCREEN products
for non-gynecological research and development purposes. The decrease in sales
to LabCorp was primarily a reflection of substantial non-recurring sales in 1994
and was offset by an increase in sales of Pathology Workstation products to
other customers. Gross profit increased by 23% from $796,000 in 1994 to $982,000
in 1995, and gross margin increased from 23% in 1994 to 29% in 1995. The
increase in gross margin was primarily attributable to the change in sales mix
from lower margin general purpose image analysis instruments sold through
distributors to higher margin Pathology Workstation products sold to end-users.
Total operating expenses. Total operating expenses increased by 7% from
$12.1 million in 1994 to $13.0 million in 1995. Research and development costs
increased by 41% from $3.6 million in 1994 to $5.1 million in 1995, as a result
of the aforementioned purchase of product rights charged to research and
development in 1995, an increase in personnel related costs of $553,000 relating
to higher staffing and travel, and an increase of $276,000 for process
automation and clinical trial consulting. SG&A costs decreased by 7% from $8.5
million in 1994 to $7.9 million in 1995, primarily as a result of a write-down
of impaired assets in 1994 of approximately $2.0 million compared to write-downs
of approximately $500,000 in 1995.
INCOME TAXES
The Company has not generated any taxable income to date and, therefore,
has not paid any federal income taxes since its inception. Realization of
deferred tax assets is dependent on future earnings, if any, the timing and
amount of which are uncertain. Accordingly, valuation allowances, in amounts
equal to the net deferred tax assets as of June 30, 1997 and December 31, 1996,
have been established in each period to reflect these uncertainties.
At December 31, 1996, the Company had net operating losses, for tax
purposes, of approximately $1.0 million that may be carried forward to offset
future taxable income. This amount expires in 2011. Utilization of net operating
losses and any tax credit carryforwards are subject to complex treatment under
the Internal Revenue Code of 1986, as amended (the "Code"). Pursuant to Section
382 of the Code, the change in ownership resulting from this Offering and any
other future sale of stock may limit utilization of future losses in any one
year. The Company believes that the sale of Common Stock in this Offering will
not create any immediate limitations on the Company's utilization of net
operating losses.
LIQUIDITY AND CAPITAL RESOURCES
Since formation on October 24, 1996, the Company's expenses have
significantly exceeded its revenues, resulting in an accumulated deficit of $7.2
million as of June 30, 1997. The Company has funded its operations primarily
through the private placement of equity securities, resulting in net proceeds of
$9.9 million, and limited product sales. As of June 30, 1997, the Company had
cash and cash equivalents of $5.4 million. On June 27, 1997, the Company entered
into a credit agreement with Ampersand Ventures, the Sprout Group and Dr. James
B. Powell, the Company's Chief Executive Officer, providing the Company with a
credit agreement for borrowings of up to $8.0 million at an interest rate of
prime plus 1%. As an up-front commitment fee for this credit agreement, the
Company issued to the lenders warrants to purchase 207,291 shares of Common
Stock at an exercise price of $2.033 per share. The Company has agreed to issue
to the lenders warrants for 661,576 additional shares of Common Stock, at an
exercise price of $2.033 per share, on a pro-rata basis if and when funds are
drawn against the credit line. Assuming the closing of this Offering, the
Company does not anticipate making any borrowings under the agreement. The
credit agreement will terminate upon the closing of this Offering.
Cash used in the Company's operations was $4.0 million for the six months
ended June 30, 1997, $447,000 from November 22 (inception) through December 31,
1996, and $10.0 million on a pro forma combined basis for 1996. The Company's
capital expenditures for the six months ended June 30, 1997
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and from inception through December 31, 1996 were $147,000 and $48,000,
respectively. The Company has no material commitments for capital expenditures.
The Company believes that the anticipated net proceeds from this Offering
together with interest thereon, the Company's existing cash, and anticipated
additional debt and lease financing for rental placements of PREP and FPU
placements of SCREEN (if and when FDA approval is received) will be sufficient
to enable the Company to meet its future cash obligations through the next
several years. However, the Company's future liquidity and capital requirements
will depend upon numerous factors, including the timing of the Company's receipt
of FDA approval of its PMA for PREP, the availability of financing for the
Company's anticipated equipment lease and rental programs, the level of
placements of rental PREP systems and FPU SCREEN systems, the resources required
to further develop its marketing and sales capabilities domestically and
internationally, the resources required to expand manufacturing capacity and the
extent to which the Company's products generate market acceptance and demand. In
particular, if the FDA approves the PREP PMA, the Company anticipates that
marketing and sales expenditures for the PREP market launch for gynecological
uses in the United States, capital expenditures associated with placements of
PREP rental units, and expenditures related to manufacturing and other
administrative costs will increase significantly. If the FDA approves the PREP
PMA, the Company currently intends to use the net proceeds approximately as
follows: $10.0 million for sales and marketing activities, $6.0 million for
research and development, $4.0 million for capital expenditures for materials
and equipment components of PREP, $2.0 million for funding of clinical trials in
support of regulatory and reimbursement approvals and the remainder for working
capital and general corporate purposes. There can be no assurance that the
Company will not require additional financing or will not in the future seek to
raise additional funds through bank facilities, debt or equity offerings or
other sources of capital. Additional funding may not be available when needed or
on terms acceptable to the Company, which would have a material adverse effect
on the Company's business, financial condition and results of operations.
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<PAGE> 29
BUSINESS
OVERVIEW
AutoCyte, Inc. ("AutoCyte" or the "Company") develops, manufactures and
markets the only integrated automated sample preparation and image analysis
system to support cytotechnologists and pathologists in cervical cancer
screening. The Company is currently pursuing regulatory approval of its products
for sale in the United States and has begun sales in several foreign countries.
The Company's integrated system is comprised of the AutoCyte PREP ("PREP")
sample preparation system and the AutoCyte SCREEN ("SCREEN") image analysis
system. PREP is a proprietary automated liquid-based sample preparation system
that produces slides with a homogeneous layer, or "monolayer," of cervical
cells. The Company believes PREP will improve laboratory productivity and
significantly reduce interpretation errors by producing cell samples that are
clearer, more uniform and easier to interpret than conventional Pap smear
samples. PREP is designed to operate both as an independent sample preparation
system and in conjunction with SCREEN as part of an integrated diagnostic
system. SCREEN is an automated image analysis system which combines proprietary
imaging technology and classification software with off-the-shelf computer
hardware to screen slides prepared using PREP. SCREEN is designed to be an
interactive support tool for the cytology professional in the primary screening
of cervical cells and may serve quality control and adjunctive testing purposes.
By designing PREP and SCREEN to function together, AutoCyte has developed a
system which the Company believes will operate with higher throughput and
greater diagnostic sensitivity than the conventional Pap smear test and other
cervical cancer screening systems.
CERVICAL CANCER SCREENING MARKET
Cervical cancer is the second most common form of cancer among women
throughout the world. The World Health Organization estimates that worldwide
there were approximately 525,000 new cases of cervical cancer and approximately
247,000 deaths attributable to the disease in 1996. The American Cancer Society
estimates that, in the United States alone, approximately 14,500 new cases of
cervical cancer will be diagnosed and 4,800 women will die of cervical cancer in
1997. The factors associated with the development of cervical cancer are
believed to include sexual activity at an early age, multiple sexual partners, a
history of sexually transmitted disease and cigarette smoking. Recent studies
have also indicated that cervical cancer is linked to the presence of certain
strains of Human Papillomavirus ("HPV").
Cervical cancer is preceded by curable precancerous lesions that progress
without symptoms over a period of years until they become invasive, penetrating
the cervical epithelium (cellular covering) and entering the bloodstream or
lymph system. Treatment of early-stage noninvasive cervical cancer may be
accomplished through various low-risk and low-cost procedures designed to remove
the abnormal cells. Once the cancer reaches the invasive stage, however, the
patient's chances for recovery are diminished, and more radical treatment, such
as a hysterectomy and chemotherapy or radiation therapy, is typically required.
These procedures are costly and may expose the patient to substantial physical
morbidity and psychological stress.
Because treatment of cervical cancer at an early stage is almost always
successful, early detection is critical to medical management of the disease.
Thus, regular cervical screening examinations are recommended in the United
States and many foreign countries. The conventional Pap smear is currently the
most widely used screening test for cervical cancer. This test was developed in
1943 by Dr. George Papanicolaou and has remained virtually unchanged for the
past 50 years. It is estimated that clinical laboratories in the United States
perform over 50 million conventional Pap smears annually. The Company believes
that annual test volume outside of the United States is in excess of 50 million.
In the United States, although widespread and regular use of the
conventional Pap smear has contributed to a greater than 70% decrease in
mortality, the mortality rate from the disease has remained fairly constant
since 1970. The Company believes that there are practical limitations to the
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<PAGE> 30
conventional Pap smear test which contribute to an estimated $5.0 billion of
annual costs associated with the treatment of advanced precancerous and
cancerous cervical disease. Additional costs are also incurred by third-party
payors due to repeat testing and by clinical laboratories due to litigation
associated with inaccurate diagnoses.
THE CONVENTIONAL PAP SMEAR PROCESS
Sample Collection and Slide Preparation
The conventional Pap smear process involves the science of cytology, which
includes the microscopic interpretation of precancerous, malignant and
morphological changes in cells. The conventional Pap smear process begins with
the collection of cervical cells during a gynecological examination. To obtain a
cervical cell sample, a sampling device is used by a clinician to scrape cells
from the surface of the cervix. The sample is then manually smeared onto a clean
microscope slide by the clinician, and the sampling device is discarded. The
clinician must then spray the slide within a few seconds with a fixative agent
to prevent damage to the cell specimen from air drying. The slide is then
submitted to a clinical laboratory. At the laboratory, the slides are manually
or mechanically stained in a batch process typically using common reservoirs of
staining reagents to enhance the visibility and morphologic presentation of the
cells.
Determination of Sample Adequacy
Following staining of the slide sample, a cytotechnologist -- a medical
professional with special training in the examination and interpretation of
human cells -- conducts a microscopic review of a prepared slide to determine
the adequacy of the sample and the presence of abnormal cells. In determining
slide adequacy, cytotechnologists classify each slide into one of three
categories: (i) satisfactory for evaluation, (ii) satisfactory but limited by
certain characteristics ("SBLB") or (iii) unsatisfactory for evaluation. The
percentage of unsatisfactory and SBLB slides varies widely among laboratories.
In the United States, approximately 1% to 2% of all conventional Pap smear
slides are classified as unsatisfactory and as many as 20% to 30% are classified
as SBLB. Frequent reasons for unsatisfactory or SBLB classifications include
excess blood or mucus or the presence of inflammatory cells, all of which
obscure the diagnostic cells of interest, a lack of diagnostic cells and too few
cells per slide.
Manual Slide Interpretation
After determining the adequacy of the slide, the cytotechnologist manually
screens each usable slide with a microscope to differentiate diseased or
abnormal cells from normal cells based on size, shape and structural details of
the cells and their nuclei. Typically, each conventional Pap smear slide is then
classified in accordance with the Bethesda System for Reporting Cervical/Vaginal
Cytological Diagnoses (the "Bethesda System"). The following table summarizes
the Bethesda System classification and other characteristics of all conventional
Pap smear slides prepared annually in the United States:
<TABLE>
<CAPTION>
BETHESDA
SYSTEM APPROXIMATE PRECANCEROUS/ CLINICAL
CLASSIFICATION INCIDENCE INTERPRETATION CANCEROUS ACTION
-------------- ----------- --------------- -------------- ------
<S> <C> <C> <C> <C>
NEGATIVE 92% NORMAL NOT CANCEROUS CONTINUED REGULAR
TESTING
ATYPICAL SQUAMOUS CELLS OF
UNDETERMINED
SIGNIFICANCE/ATYPICAL GLANDULAR
CELLS OF UNDETERMINED
SIGNIFICANCE ("ASCUS/AGUS") 5% EQUIVOCAL UNDETERMINED REPEAT TESTING/
COLPOSCOPY/BIOPSY
LOW-GRADE SQUAMOUS
INTRAEPITHELIAL LESION ("LSIL") 2% ABNORMAL PRECANCEROUS COLPOSCOPY/BIOPSY
HIGH-GRADE SQUAMOUS
INTRAEPITHELIAL LESION ("HSIL") <1% ABNORMAL PRECANCEROUS COLPOSCOPY/BIOPSY
CARCINOMA <1% ABNORMAL CANCEROUS COLPOSCOPY/BIOPSY
</TABLE>
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ASCUS/AGUS slides contain abnormal cells that cannot be fully explained on
the basis of inflammatory or reactive processes, yet lack certain criteria for a
specific abnormal diagnosis. ASCUS/AGUS slides are generally not considered
precancerous. LSIL slides represent the lowest-grade precancerous state, with
cells characterized as exhibiting mild to moderate dysplasia or evidencing signs
of HPV. Dysplasia is a condition characterized by abnormally differentiated
cells that could either progress to a precancerous state or regress to a normal
state. HSIL slides contain precancerous cells characterized as exhibiting more
serious dysplasia or signs of HPV. All ASCUS/AGUS and abnormal slides are
referred to a pathologist for further review and final diagnosis. Women with
abnormal Pap smears may have to return to their physician's office for a repeat
Pap smear or to undergo costly colposcopy and biopsy procedures. A colposcopy
involves the use of a low magnification device by a physician to visually
examine the surface of the cervix. Based on the colposcopy results, a biopsy may
then be performed for a more definitive diagnosis.
LIMITATIONS OF THE CONVENTIONAL PAP SMEAR PROCESS
In spite of the success of the conventional Pap smear in reducing deaths
due to cervical cancer, the test has several limitations, including inadequacies
in sample collection and slide preparation, detection and interpretation errors,
inability to use the patient sample for additional diagnostic tests, and
productivity constraints on laboratories caused by regulatory compliance.
Inadequacies in the sample collection and slide preparation process cause many
inaccurate test results, including false negative and false positive diagnoses.
A false negative diagnosis -- the failure to detect cancerous or precancerous
cells -- may result in the progression of cervical cancer to a later stage of
development before being detected. As a result, more expensive and invasive
courses of therapy are required, and the likelihood of patient survival is
diminished. False negative rates of the conventional Pap smear vary widely among
laboratories, ranging from 5% to 55%, depending on such factors as the skill and
experience of the practitioner who collects the sample and prepares the slide
and the level of training of the cytotechnologist and pathologist who review the
slide.
Studies suggest that approximately 60% of all false negative diagnoses are
attributable to inadequacies in sample collection and slide preparation;
approximately 40% are attributable to slide detection and interpretation errors.
False negative diagnoses have given rise to increasing levels of litigation in
recent years, resulting in significant additional costs to clinical
laboratories. False positive diagnoses -- the mistaken classification of normal
cells as precancerous -- can result in unnecessary retesting, biopsies or other
procedures which are costly, invasive and often painful and stressful for
patients.
Inadequacies in Sample Collection and Slide Preparation
There are a variety of difficulties with the conventional Pap smear methods
of cell collection, cell transfer and slide preparation. A recent study
published in the American Journal of Clinical Pathology reported that, with a
conventional Pap smear, as much as 80% of the sample taken from a patient is not
transferred to the slide and remains on the discarded collection device. Because
the sample cells are not randomized across the collection device, the discarded
portion of the sample may contain abnormal cells necessary for an accurate
diagnosis.
In addition to the problem of cell transfer, the conventional Pap smear
slide preparation process produces inconsistent and non-uniform slides with
extreme variability in quality, often making examination difficult. The poor
quality of slides is often a result of the presence of blood, mucus,
inflammatory cells or other obscuring debris, cell clumping and air-drying of
the cell sample before it is suitably preserved or fixed. Air drying can cause
an artificial distortion in cell size and shape, which are critical indicators
in determining whether abnormalities exist. The conventional Pap smear process
also includes batch staining which may result in cross-contamination among slide
samples.
The Company believes that these sample collection and slide preparation
limitations are responsible for a large percentage of slides being classified as
unsatisfactory and SBLB. Consequently, patients
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are often subjected to the inconvenience of return office visits for repeat
testing and to the anxiety resulting from the inconclusive nature of the initial
test. The Company estimates that annual costs to the United States health care
system of repeat testing due to unsatisfactory and SBLB slides are $50 million
and $750 million, respectively.
Detection and Interpretation Errors
The process of manually screening and interpreting a conventional Pap smear
is complex and tedious, which can lead to detection and interpretation errors.
Cytotechnologists typically review between 50 and 100 Pap smear slides per day.
The review process requires intense visual examination through a microscope of
the slide sample, each of which typically contains 50,000 to 300,000 cervical
cells. This review process is prone to error because of the complexity of
properly evaluating and categorizing subtle changes in the size and/or shape of
cells and their nucleii. The diagnostic cells can often be obscured by cell
clumping and the presence of debris, which increases the possibility that some
percentage of cells, including abnormal cells, will be missed.
Because more than 90% of all conventional Pap smears in the United States
are diagnosed as negative, the process of identifying the abnormal samples
requires constant vigilance. Despite the diligence of cytotechnologists, the
intense level of concentration on such a high volume of cells over long periods
of time results in some risk of fatigue. This fatigue can contribute to the
incidence of false negative and false positive diagnoses.
Lack of Additional Testing Capability
The conventional Pap smear process does not permit additional or adjunctive
testing from the original patient sample. The ability to produce multiple slides
from a single sample could be used by clinical laboratories for follow-up
testing, quality control or proficiency testing. Recent studies have shown that
HPV DNA is present in most cases of HSIL lesions and in more than 90% of cases
of cervical cancer. These studies may suggest HPV testing is a less expensive
and less invasive follow-up procedure for women with a conventional Pap smear
classification of ASCUS/AGUS or LSIL, since 30% to 75% of these patients will
not have lesions that progress to high grade lesions or cancer.
Using the conventional Pap smear process, because the residual cell sample
is not saved, the patient must return to the physician's office to provide a
second sample if additional testing, such as HPV testing, is indicated. The
Company believes that the ability to access residual cellular material from the
original patient sample would allow more cost effective patient management for
inconclusive Pap smear tests.
Limitations on Clinical Laboratory Productivity
In 1988, to address, in part, accuracy and quality control concerns
associated with conventional Pap smears, Congress adopted the Clinical
Laboratory Improvement Amendments of 1988 ("CLIA"). CLIA regulations require
laboratories to rescreen 10% of the slides that are initially classified as
negative. In addition, CLIA regulations currently limit the number of slides
that may be screened per day by a cytotechnologist to 100. As a further quality
control measure, CLIA requires cytology laboratories to perform proficiency
testing and quality control by testing cytotechnologists in order to assure a
minimum level of competence and expertise. Certain states have also adopted
regulations further limiting the number of slides that may be manually examined
per day by a cytotechnologist. Compliance with the quality control provisions of
CLIA has resulted in substantial additional costs to clinical laboratories that
perform conventional Pap smear screening.
EMERGING CERVICAL CANCER SCREENING TECHNOLOGIES
In response to the limitations of the conventional Pap smear process, a
number of products have been developed to improve Pap smear screening and to
provide alternative approaches for cervical
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<PAGE> 33
cancer screening. In general, these products are focused on making the sample
collection process more efficient, improving slide specimen quality and
increasing the accuracy of screening diagnoses.
Automated Monolayer Slide Preparation
Monolayer slides minimize sample collection and slide interpretation
errors. In a monolayer slide preparation, the clinician takes a cell sample from
the cervix in a similar manner to the conventional Pap smear. Instead of
smearing the sample on a slide, the collection device is placed or stirred into
a liquid vial of preservative solution. This captures nearly all of the cells
from the collection device and preserves them, eliminating any obscuration from
air drying. The cervical cells are then separated from the preservative fluid
and deposited in a single, homogeneous layer on the slide. Monolayer slides have
less mucus and other debris that might make the slide difficult to review.
Currently, there is one monolayer preparation system that has been approved by
the FDA.
Automated Slide Screening
Computer imaging technologies are being developed for the primary screening
and quality control rescreening of Pap smears on a high throughput basis. These
computer process technologies typically involve the use of software algorithms
to analyze various characteristics of cell images that have been digitally
captured from a microscope slide. Two such products have received FDA approval
for quality control rescreening and adjunctive testing of conventional Pap smear
slides.
HPV Testing
DNA testing systems have been developed to detect the presence of certain
strains of HPV. DNA HPV testing systems are designed to operate both
independently and as an adjunct to other cervical cancer screening systems.
Studies have shown a strong causal relationship between the presence of HPV and
cervical cancers and its precursors. Testing for HPV can thus be used as a
triage technique to follow up on inconclusive conventional Pap smear tests.
There is one HPV test that has been approved by the FDA.
THE AUTOCYTE SOLUTION
AutoCyte is the first company to develop an integrated sample preparation
and screening system for cervical cancer intended to address the limitations
inherent in the conventional Pap smear process. PREP is a proprietary,
automated, liquid-based sample preparation system that produces slides with a
thin and uniform layer of cervical cells. PREP is designed to operate both as an
independent sample preparation system and in conjunction with SCREEN as part of
an integrated diagnostic system. SCREEN is an automated image analysis system
which combines proprietary imaging technology and classification software with
off-the-shelf computer hardware to screen slides prepared using the PREP system.
SCREEN is designed to be an interactive support tool for the cytology
professional in the primary screening of cervical cells, but may also support
quality control and adjunctive testing applications.
The AutoCyte PREP System
The Company's PREP system consists of a proprietary preservative fluid and
reagents, plastic disposables and automated equipment for preparing a monolayer
of cervical cells on the microscope slide. The PREP slide process begins with
the clinician taking a patient's cervical sample using a conventional collection
device. The clinician then immediately places the collection device in a vial
containing the Company's proprietary CytoRich preservative fluid, thereby
retaining virtually all of the cells from the collection device. After receiving
the vial from the clinician, the laboratory thoroughly mixes the sample,
generating a randomized cell suspension, which is then removed from the vial
using the Company's patented disaggregation syringe device and layered onto a
proprietary liquid density
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reagent in a plastic centrifuge tube. Batch centrifugation is then conducted on
the cell suspension to remove excess blood, inflammatory cells and other debris
from the sample.
Once centrifugation is completed, the lab technician places the tube
containing the separated diagnostic cells onto the automated PREP pipetting
station. PREP then distributes the cells in a thin monolayer on the microscope
slide and discretely stains the slide for subsequent analysis. A PREP slide
typically contains approximately 45,000 cells which are distributed uniformly
over a 13 mm diameter circle. PREP is currently capable of preparing and
discretely staining 48 monolayer slides per hour.
The illustration below depicts the monolayer sample preparation procedure
using the PREP system.
[SEE APPENDIX]
PREP Advantages vs. the Conventional Pap Smear Process
The Company believes that PREP will offer the following advantages over the
conventional Pap smear process:
- More Complete Sample Collection. Because the clinician places the
collection device directly into the PREP vial, the entire patient sample
is contained in the Company's proprietary preservative fluid. As a
result, the subsample on the monolayer preparation is more representative
of the entire patient specimen. As much as 80% of the cervical sample can
be inadvertently discarded after smearing the conventional Pap smear
sample onto the slide.
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- Automated and Discrete Staining Function. PREP includes a discrete, or
individual, slide staining function performed by a computer-controlled
robotic pipetting station. Unlike conventional Pap smear slides that are
often manually stained in a batch process using common reservoirs of
staining reagents, PREP staining reagents are directly applied to
individual slides. As a result, staining reagents are not shared among
slides, which the Company believes should reduce the risk of
cross-contamination among cell samples which can lead to inaccurate
diagnoses.
- Improved Sample Quality. By eliminating variations in preparation
techniques and the fixative spraying step from the sample collection
process, PREP virtually eliminates air-drying, generates a more complete
fixation and provides a more standardized preparation process in a
controlled, laboratory environment. The more uniform cell sample
distribution also reduces cell clumping and obscuring by debris. The
Company believes that PREP's monolayer slides provide cytotechnologists
with samples that are clearer, more representative and easier to diagnose
than conventional Pap smear slides.
- Improved Cytotechnologist Productivity. In the Company's clinical
studies, laboratories using PREP have experienced a greater than 50%
increase in cytotechnologist screening productivity. The impact on
cytotechnologist efficiency is important to clinical laboratories because
of the growing shortage of qualified cytotechnologists in recent years
and the need to create and maintain a desirable working environment for
cytology professionals.
- Multiple Testing Capability. Because the Company's proprietary CytoRich
preservative system enables the patient sample to be preserved for
several months, it permits, if necessary, preparation of several slides
from a single sample. The Company believes that the ability to perform
additional slide-based tests using a single sample, together with the
improved quality of the slide itself, will reduce retesting expenses
typically associated with inconclusive Pap smear tests. The residual
patient sample may also be used for other diagnostic protocols such as
HPV and infectious disease testing.
PREP Advantages vs. Other Automated Sample Preparation Processes
The Company believes that PREP will offer the following advantages over
other automated slide preparation processes:
- Familiarity with Sample Preparation Approach. The PREP centrifugation
and robotic liquid handling techniques are similar to procedures already
in use in clinical laboratories.
- Automated and Discrete Staining Function. Unlike other automated sample
preparation systems that rely on batch staining using common reservoirs
of staining reagents, PREP staining reagents are applied directly to
individual slides. Discrete staining offers several benefits, including a
reduced risk of cross-contamination among cell samples, less degradation
of the staining solution, less staining time and lower costs.
- Improved Sample Quality. The PREP sample is processed through a series
of proprietary liquid-based reagents and centrifuge separation techniques
designed to isolate a high concentration of diagnostic cells. The only
currently FDA approved monolayer slide preparation system relies on
membrane filtration. The Company believes that its cell isolation process
more effectively controls the incidence of infectious agents,
inflammatory cells and other debris that may reduce the performance of
membrane filtration systems. The Company believes that, in populations in
which rates of gynecological infection are high, PREP's separation and
isolation process will result in a more representative slide sample which
should ultimately lead to a reduction in uncertain or incorrect
diagnoses.
- Higher Throughput. PREP has the capacity to produce 48 monolayer slide
preparations per hour, which represents higher throughput than other
available automated slide preparation systems. In addition to this
increased throughput, the PREP processing unit requires less oversight
than other automated systems.
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- Integration with SCREEN. The Company has specifically designed PREP to
function with SCREEN, creating an integrated diagnostic tool which the
Company believes will operate with higher throughput and greater
diagnostic sensitivity than other systems which do not integrate the
slide preparation and screening functions. An FDA review of a PMA
typically takes from one to two years from the date the PMA is filed, but
may take significantly longer if the FDA requests additional information
and any major amendments to the PMA are filed. While the Company believes
that the FDA review of the PREP PMA may be shorter than is typical
because the PMA will not be submitted to its Medical Devices Advisory
Panel and because of the FDA's familiarity with certain information in
the PREP PMA, there can be no assurance that the FDA's review will not be
as long or longer than the typical time period for FDA review or that the
PMA will be approved at all.
The AutoCyte SCREEN System
SCREEN is an automated image analysis system which combines proprietary
imaging technology and classification software with off-the-shelf computer
hardware to screen slides prepared using the PREP system. SCREEN is designed to
function as an interactive support tool for the cytology professional in the
primary screening of cervical cells, but may also serve quality control and
adjunctive testing purposes. SCREEN is designed to use a series of proprietary
algorithms to independently classify cells and present the cytotechnologist with
120 images of the most suspicious cells on the sample slide.
SCREEN is designed to evaluate all areas of the PREP monolayer and presents
high-resolution, color images of suspicious cells in the sample. The
cytotechnologist is then able to undertake an independent analysis of these
selected cells to interpret each slide. Once the cytotechnologist inputs the
image assessment into the computer, SCREEN displays its interpretation for
comparison. Unless SCREEN and the cytotechnologist agree that the slide is
normal, the slide is referred to a senior cytotechnologist or pathologist for
reevaluation. Combining expert human review with unbiased computer
interpretation is a fundamental component of the Company's patented SCREEN
process.
The illustration below depicts the interaction between the cytotechnologist
and SCREEN in the SCREEN system's dual slide classification process.
[See Appendix]
SCREEN Advantages vs. the Conventional Pap Smear Process
The Company believes that its diagnostic system combining PREP and SCREEN
is designed to offer the following advantages over the conventional Pap smear
process:
- More Complete Slide Examination on a High Throughput Basis. SCREEN is
designed to allow the cytotechnologist to review the monoloyer slide in
less than half the time now required for manual screenings of
conventional Pap smear slides.
- Presentation of High Resolution Computer Images. Using the SCREEN
system, cytotechnologists can control and display high resolution cell
images. SCREEN is designed to enable images of cells and abnormalities to
be enlarged and enhanced for easier examination. The system is designed
to identify and select for presentation only those cells that are most
pertinent to the diagnostic process. This process enables
cytotechnologists to concentrate on the most significant
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cells and clusters, thereby reducing the complexity and tedious nature of
manual review. The Company believes that SCREEN will enable
cytotechnologists to reach accurate cell classification decisions more
quickly and efficiently.
- Reduced Compliance Costs to Clinical Laboratories. CLIA allows monolayer
slides which result in cell dispersion on one-half or less of the total
available slide area to be screened at levels higher than the current 100
slide-per-day limit applicable to conventional Pap smear slides.
SCREEN Advantages vs. Other Automated Screening Processes
The Company believes that a diagnostic system combining PREP and SCREEN is
designed to offer the following advantages over other screening systems recently
developed to enhance or replace conventional Pap smear testing:
- Integrated Approach. AutoCyte provides the only automated, integrated
cervical cancer screening system available today. By designing PREP and
SCREEN to work together, the Company has created a system which it
believes will operate with higher throughput and with greater diagnostic
sensitivity than other available systems or combinations of approaches.
- Interactive Approach. AutoCyte's proprietary approach to cervical cancer
screening combines review of high resolution cell images by a
cytotechnologist with SCREEN's independent computer classification of
each sample, resulting in what the Company believes is a more sensitive
detection of sample abnormalities. The integrated PREP and SCREEN system
is a diagnostic support tool designed to interact with cytotechnologists,
not replace them. By offering a system which supports the cytology
professional, AutoCyte believes its system will more readily receive
positive acceptance by laboratories compared to systems which replace or
create additional tasks for the cytotechnologist.
- Cost-Effective Approach. SCREEN uses an off-the-shelf computer hardware
platform which is more flexible and requires less customization than
other automated screening devices. The Company believes that SCREEN's
open hardware configuration, combined with the utilization of PREP's
monolayer slides, will result in a lower cost per test than other
automated screening processes.
AUTOCYTE PRODUCT SYSTEMS
PREP System
The PREP system consists of the CytoRich line of proprietary preservatives
and reagents, a variety of proprietary plastic disposable components, and the
customized PREP instrument. The CytoRich reagents include the preservative
fluid, density reagent and multiple stains. The plastic disposables include the
preservative vial, a patented disaggregating syringe, a slide settling column
and pipette tip. The PREP instrument is a proprietary, computer-controlled
robotic pipetting station that has been specifically engineered for preparing
and discretely staining PREP slides. The instrument can be programmed to apply a
variety of different stains. A centrifuge can be provided by the Company as part
of the system. The PREP system can prepare up to 48 monolayer slide preparations
per hour. The resulting slides have a 13 mm diameter circle of cells in a
discretely stained monolayer containing an average of 45,000 cells per slide.
The Company holds a number of patents covering certain components of the PREP
system and the PREP slide preparation process. The Company has placed ten PREP
systems for cervical cytology applications in France, Switzerland and Australia
which collectively have produced over 100,000 monolayer slides in the past 18
months.
SCREEN System
The SCREEN system currently consists of a fully automated microscope, a
high capacity slide handler, an ultra high resolution digital color camera, a
high performance UNIX-based multi-processor and a high resolution monitor. The
SCREEN system uses proprietary cell population histogram
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analysis software. A mechanical counter built into the SCREEN system allows the
Company to monitor the number of slides screened. The SCREEN system has been
specifically designed to process monolayer slides that have been prepared by the
PREP system. The SCREEN system can process slides and render slide
classifications on a continuous basis and is usually operated overnight. Up to
400 PREP slides may be placed onto the fully automated SCREEN instrument for
unattended slide handling, identification and screening. SCREEN currently has
the capacity to process, in unattended operation, over 160 slides per 24-hour
period. The Company has placed SCREEN systems in clinical laboratories in
Australia which have screened over 25,000 PREP slides in the past 18 months.
AutoCyte Pathology Workstation
AutoCyte's long-term product strategy encompasses an initiative into the
broader pathology automation market. The Company believes that market acceptance
of SCREEN will lay a foundation for additional future product lines, including
future applications of the Pathology Workstation. The Pathology Workstation is a
flexible computerized microscope which supports a set of PC-based applications,
such as image telecommunications, archiving, image and patient data management
and other supplemental testing designed to complement and support the SCREEN
system. Applications currently available from the Company include:
- Medical Information and Image Management. The AutoCyte Image Management
System ("AIMS") is an intelligent user interface which organizes images
and data using electronic folders. Diagnostic quality images can be
acquired and stored with patient information. Folders containing both
images and text can be incorporated into reports, or transmitted to a
specialist at a remote site during a telepathology consultation. This
folder concept combined with sophisticated search functionality provides
a powerful tool for managing medical images.
- Telepathology. AutoCyte LINK provides the ability to interactively
capture and transfer diagnostic quality images during an online
telepathology consultation. The system supports remote-consultation,
continuing education and access to opinions from experts in pathology
subspecialties.
- Image Titer. AutoCyte Image Titer enables the quantitative assessment of
anti-nuclear antibodies in a patient's blood specimen. This measurement
is essential in the evaluation of diseases such as lupus, rheumatoid
arthritis and other autoimmune disorders. The patented titration
emulation process is applicable to a wide range of fluorescence-based
serum antibody measurements.
While the Company is not currently actively marketing Pathology Workstation
products, the Company is in the process of negotiating a worldwide distribution
agreement. The Company's strategy includes the development of additional
applications or modules to run on the proprietary Pathology Workstation platform
which support and integrate a systematic approach to diagnostic cytology and
pathology. These modules include quantitative DNA analysis, quantitative
immunocytochemistry, computer assisted tumor grading, fluorescence measurements,
slide mapping and computer supported manual cytology screenings.
NON-GYNECOLOGICAL PRODUCT APPLICATIONS
The Company began limited sales of PREP for non-gynecological cytology
applications in 1993. There are more than 35 PREP systems installed in clinical
laboratories and hospitals worldwide for non-gynecological applications. These
applications relate to cytology preparation from a wide variety of specimen
types, including urine, sputum, plural fluid, spinal fluid, peritoneal fluid and
other body cavity fluids. Cell preparations from bronchial, gastrointestinal and
endometrial brushings and washings as well as fine needle aspiration of specific
organs are also addressed among these applications. The Company has developed
proprietary preservatives that are optimized for these specific
non-gynecological cytology preparations.
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CLINICAL TRIALS AND REGULATORY STATUS
PREP System
Following completion of clinical trials for gynecological applications, the
Company submitted a PMA for PREP to the FDA on May 12, 1997, which was accepted
for substantive review by the FDA on June 11, 1997. Upon accepting the PREP PMA
for substantive review, the FDA informed the Company that the PMA would not be
submitted to its Medical Devices Advisory Panel for review since information in
the PMA substantially duplicated information previously reviewed by the panel in
a PMA submitted by a different company relating to an alternative monolayer
slide preparation product. An FDA review of a PMA typically takes from one to
two years from the date the PMA is filed, but may take significantly longer if
the FDA requests additional information and any major amendments to the PMA are
filed. While the Company believes that the FDA review of the PREP PMA may be
shorter than is typical because the PMA will not be submitted to its Medical
Devices Advisory Panel and because of the FDA's familiarity with certain
information in the PREP PMA, there can be no assurance that the FDA's review
will not be as long or longer than the typical time period for FDA review or
that the PMA will be approved at all.
The PREP clinical trial design followed draft guidelines which had been
prepared by the FDA and the protocol was reviewed by the FDA. The clinical trial
was a double-blinded, matched-pair study in which a conventional Pap smear and a
PREP monolayer slide derived from the same patient sample were reviewed and
compared by different cytotechnologists without knowledge of the other's
interpretation. In the clinical trial, the sample collected from the cervix was
first smeared on a slide to create a conventional Pap smear. The collection
device with residual sample material was then placed in the Company's
proprietary CytoRich preservative fluid for later processing of a PREP slide.
The two slides, prepared from the same sample, were then used to compare PREP to
the conventional Pap smear.
A total of 8,983 patients from eight clinical trial sites were included in
the primary data analysis of the clinical trial. The combined data indicated
improvements in specimen adequacy using PREP relative to the conventional Pap
smear by reducing the number of unsatisfactory and SBLB slides by 39% and 44%,
respectively. The Company believes that PREP would have further reduced
unsatisfactory and SBLB slides if the sampling device had been immersed in the
CytoRich reagent directly, rather than after the preparation of a conventional
Pap smear slide, as was required by the clinical trial protocol.
The PREP clinical data also indicated statistically significant
improvements relative to the conventional Pap smear in (i) screening sensitivity
(the detection of disease classified in the Bethesda System as LSIL or higher),
(ii) reducing false negative diagnoses (the failure to detect cancerous or
precancerous cells) and (iii) reducing inconclusive diagnoses.
In further analysis of the clinical trial data following submission of the
PMA to the FDA, the Company removed from the analysis all cell samples from
patients having a clinical history of abnormality on a previous Pap smear slide.
The Company's approach sought to control for any potential bias that might have
occurred as a result of the reviewing cytotechnologists exercising more than
their usual level of diligence in reviewing slides from patients known by the
cytotechnologist as having a clinical history of abnormality in a previous Pap
smear test. An analysis of the remaining 6,196 cases revealed that, as compared
to the conventional Pap smear, PREP indicated greater screening sensitivity with
a 17% improvement in the detection of disease (LSIL or higher classification in
the Bethesda System) and an improvement in the rate of false negative diagnoses
with a 46% reduction in such errors by the cytotechnologist.
The Company's analysis of data obtained from clinical studies is subject to
confirmation and interpretation by the FDA which could delay, limit or prevent
FDA approval of a PMA. The Company excluded approximately 1,350 specimens from
the PREP clinical trial as noncompliant with protocol criteria. Based on its
internal review of these excluded specimens, the Company believes that the
inclusion of these specimens in the trial data would not have materially
affected the data analysis or
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other information included in the PREP PMA submission. If, however, the FDA were
to determine that these specimens should be included in the FDA's statistical
calculations, the PREP PMA and other claims may have to be revised. See "Risk
Factors -- Uncertainty Regarding FDA Approval" and "-- Extensive Government
Regulation."
SCREEN System
In October 1996, the Company began blinded clinical trials for SCREEN. This
clinical trial involves rescreening PREP slides from the PREP clinical trial
sites using the SCREEN system and comparing these results with the results from
a manual review of the PREP slides. The Company expects to complete this
clinical trial for primary screening and adjunctive testing and submit a PMA for
SCREEN to the FDA by the end of 1997 or early 1998. There can be no assurance
that this clinical trial will be completed or that any PMA for SCREEN will be
submitted to the FDA or if submitted will be accepted for substantive review or,
if accepted, will be approved by the FDA in a timely manner, or at all, or for
the claims for which the Company seeks approval. See "Risk Factors --
Uncertainties Regarding FDA Approval."
Pathology Workstation
The Company has received FDA clearance of premarket notification ("510(k)")
covering Image Titer, an application for the Pathology Workstation currently
being sold by the Company. The Company believes that it will need to obtain
clearance of 510(k)s or approval of PMAs in the United States to market certain
additional Pathology Workstation applications currently being developed.
MARKETING AND SALES
Automated slide preparation and screening products have recently been
introduced into the cervical cancer screening market and the Company expects
that it will benefit from the increased awareness and acceptance of these new
technologies. AutoCyte's systems are already in various stages of evaluation and
use in major universities and laboratories in several countries. The Company
began limited commercial sales of PREP for use in non-gynecological applications
in 1993 and currently has installed over 35 PREP systems throughout the world.
The first commercial use of both PREP and SCREEN for cervical cancer screening
has begun in Australian laboratories.
The Company generates PREP revenue from both system sales and rentals. For
system sales, customers purchase the instrument and make separate purchases of
related reagents and other disposables. For system rentals, the Company places
the PREP instrument at the customer's site, and customers make monthly payments
which include rent and a minimum monthly quantity of reagents and other
disposables. The term of the PREP rentals ranges from month-to-month to three
years. For SCREEN, the Company intends to place instruments without charge at
customer locations and to charge customers on a per test, or Fee-Per-Use
("FPU"), basis. As an important element of its business strategy, the Company
intends to seek third-party financing to support rentals of PREP and placements
of SCREEN. There can be no assurance that the Company will be able to obtain
such financing or, if so, on favorable terms.
The principal markets for the non-gynecological applications of PREP are
clinical laboratories in the United States, and for the Pathology Workstation
pathology and immunology laboratories and pathology research laboratories
worldwide. PREP is currently being marketed for non-gynecological applications
directly through the Company's own sales force. The Company anticipates that the
Pathology Workstation will be sold through distributors and a series of OEM
vendors who are expected to integrate certain of the workstation software into
their own products.
Marketing Strategy
The Company expects to commence marketing PREP and SCREEN in the United
States for cervical cancer screening when and if FDA approval for cervical
cancer screening is obtained. PREP is
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designed to be sold as either a stand-alone system or as an integrated system
with SCREEN. The Company intends to achieve market acceptance of PREP alone and
then to target its PREP customer base for its initial marketing efforts of
SCREEN. The Company's marketing strategy is to achieve broad market acceptance
for the integrated PREP and SCREEN system for cervical cancer screening. In
implementing this strategy, the Company will address the needs of the
constituencies described below.
Large clinical laboratories. Conventional Pap smear testing has become a
concentrated market in the United States. The Company believes that three major
clinical laboratories, Laboratory Corporation of America Holdings, Quest
Diagnostics, Inc. ("Quest"), formerly known as Corning Clinical Laboratories,
Inc., and SmithKline Beecham Clinical Laboratories, account for almost 18
million conventional Pap smears annually. In June 1997, Cytyc announced that it
had entered into a multi-year agreement for ThinPrep 2000 with Quest. See "Risk
Factors -- Competition; Technological Change." Other large testing laboratories,
which the Company believes perform more than 10 million conventional Pap smears
in the United States annually, account for another 20% of the market,
concentrating approximately 55% of cervical cancer test volume among a
relatively small number of large laboratories. AutoCyte believes that PREP's
high throughput will enable the Company to market PREP successfully to this
concentrated market segment and that pressures associated with rising health
care costs, rising litigation costs and the limited supply of qualified
cytotechnologists will facilitate adoption of PREP and SCREEN by the large
laboratory market. Large clinical laboratories have used centrifuges and
liquid-based analytical techniques for a variety of applications and,
accordingly, the Company believes that the familiar nature of its underlying
technologies will enable its products to be more readily accepted in the market
than products based on other technologies. Due to the concentrated nature of the
large clinical laboratory market, the Company believes that a relatively small
number of employees will be able to effectively market the Company's systems to
these customers.
Medium and small clinical laboratories. The Company also intends to devote
a substantial portion of its marketing resources to targeting medium and small
clinical laboratories. Hospital consolidation, and particularly the
consolidation of laboratories of the larger hospitals, is creating a new medium
sized customer for the Company's products. The Company expects that the medium
and small clinical laboratory segment of the market generally will utilize the
Company's equipment rental program.
Third-party payors. To achieve market acceptance for its products, the
Company will need to ensure that the use of its products is supported by
third-party payors. The Company will promote the clinical and economic benefits
of its PREP and SCREEN systems to national managed care providers, major private
insurers and other third-party payors. The Company's cervical cancer screening
system will initially be more expensive than conventional Pap smear testing on a
per test variable cost basis. Because the up-front, direct costs of using the
Company's products will be greater than the cost of the Pap smear, the Company
will need to convince third-party payors that the overall cost savings,
resulting from earlier detection of cervical cancer, reduction of unnecessary
biopsies and colposcopies, improved specimen adequacy and otherwise, will more
than offset the cost of the Company's products. At least two of the Company's
competitors have achieved third-party reimbursement for products which are
similar to PREP and SCREEN. See "-- Third-Party Reimbursement."
Health care providers. The Company intends to promote the clinical and
economic benefits of PREP and SCREEN directly to gynecologists and primary care
physicians. AutoCyte's sales and marketing program will include a significant
educational effort to communicate the advantages of its integrated cervical
cancer screening system to the medical community.
Marketing and Sales Organization
The Company currently employs 14 persons worldwide to market, sell and
provide after sale support of its products. The Company anticipates that its
worldwide base of employees to market, sell and provide after-sale support of
its products will grow to 35 to 40 persons by the end of 1998.
In the United States, the Company plans to market its cervical cancer
screening system through a direct sales force, if PMA approvals are obtained.
The majority of the direct sales organization will
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focus on the laboratory market to achieve appropriate market penetration,
acceptance and availability of the Company's products. A smaller, specialized
sales force will focus all efforts on managed care and other third-party payor
organizations to achieve appropriate reimbursement levels and to create demand
for the products. Finally, the Company will consider co-marketing agreements
with sales organizations of major reference laboratories and pharmaceutical
manufacturers (with an emphasis on women's health care products) to market its
products directly to health care providers.
In international markets the Company markets and sells its products through
distributors. To support these efforts, the Company employs six people,
consisting of sales professionals, supporting product managers and after sales
support personnel located in Europe, Japan and Australia. The Company
anticipates that these distributor organizations will ultimately assume
responsibility for all sales and after sales support activities as well as a
portion of the Company's marketing activities. Both large distribution
organizations with products focused on the clinical diagnostic market and
smaller distribution organizations with products focused specifically on the
cytology market are being considered.
After-sale support services, including customer training, product
installation, telephone technical support and repair service will be offered
directly to customers in the United States. Personnel providing these services
will be located both at the Company's headquarters and in select major
metropolitan areas. Internationally, the Company plans to provide these services
through distributor organizations.
MANUFACTURING
The Company believes that its existing manufacturing and assembly processes
are adequate to meet the near-term, full-scale production requirements of its
PREP System for cervical cancer screening. The Company currently manufactures
its CytoRich line of reagents and stains for PREP at its facility in Burlington,
North Carolina. The Company also assembles, tests and packages components of the
PREP system at the Burlington facility. The Company purchases the PREP
instruments from a single OEM supplier in Europe and purchases several
disposable items used with PREP, including glass slides, centrifuge tubes,
pipette tips, settling chambers and other disposable components, from certain
third-party vendors. The Company's OEM supplier and, in some cases, its vendors
are currently sole suppliers. The Company has agreed to use a sole supplier of
manufactured plastic components incorporated into its PREP system for the North
American market for a period of at least five years beginning from the first
production shipment date of each component engineered as of July 26, 1993. In
addition, the Company has agreed to allow this supplier to be the sole supplier
for manufactured plastic components for PREP sales beyond the North American
market. The Company's obligation to use this supplier as its sole supplier for
manufactured plastic components is contingent upon this supplier supplying the
Company at prices competitive with those offered by third parties on similar
terms and upon this supplier meeting the Company's quality and production
requirements. The Company believes that this supplier's production will be
sufficient to meet both its present and future requirements for manufactured
plastic components. Subject to any contractual limitations upon its ability to
do so, the Company may seek to establish relationships with additional suppliers
or vendors for components of its products, although there can be no assurance
that it will be successful in doing so. The incorporation of new components, or
replacement components from alternative suppliers, into the Company's products
may require the Company to submit PMA supplements to, and obtain further
regulatory approvals from, the FDA before marketing the products with the new or
replacement components.
The Company intends to assemble, test and package its SCREEN system at the
Burlington facility. The SCREEN system is composed of a sophisticated automated
microscope, a robotic slide handler, a digital color camera, a computer and
other related components. The Company is reliant upon sole-source vendors for a
variety of these components. The Company intends to minimize this reliance by
qualifying other vendors with the FDA, although there can be no assurance that
the Company will be successful in doing so.
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The Company currently has only limited manufacturing and assembly
capabilities for SCREEN. The Company believes that it will have adequate
manufacturing capacity for SCREEN in place by the time the Company anticipates
receiving FDA approval of a PMA for the product. The Company has limited
experience manufacturing PREP reagents and stains and assembling SCREEN
instrumentation. There can be no assurance that the Company will be able to
manufacture and supply PREP reagents and stains or assemble SCREEN
instrumentation in a timely manner or at a cost or in quantities necessary to
make them commercially viable. The Company has no experience in managing
problems that might result from manufacturing commercial quantities of its
products, such as instrument reliability, production costs or component quality.
The Company also anticipates that it will require additional manufacturing
capacity for reagents used in its PREP product by the end of 1999. An inability
by the Company to increase its manufacturing capacity when required, or to
contract with third parties for the manufacture of its products on commercially
viable terms, would adversely effect the Company's business, financial condition
and results of operations.
The Company's manufacturing process is subject to extensive regulation by
the FDA, including the FDA's Quality System ("QS," formerly current good
manufacturing practice, or "GMP") requirements. Failure to comply with such
requirements would materially impair the Company's ability to achieve or
maintain commercial-scale production. If the Company is unable to achieve
full-scale production capability, acceptance by the market of PREP and SCREEN
would be impaired. Any such impaired market acceptance would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors -- Uncertainty Regarding FDA Approval" and "--
Extensive Government Regulations".
In addition to QS manufacturing requirements, the Company may be required
to meet certain requirements relating to ISO 9001 certification and other
European regulatory requirements. A European CE certification is also required
in order to successfully sell PREP and SCREEN in Europe. Although the OEM
supplier of PREP instrumentation has ISO 9001 certification and has obtained CE
certification for PREP, the Company does not currently have either ISO 9001
certification or a CE mark for either PREP or SCREEN. Although the Company is in
the process of pursuing a CE mark in Europe and intends to pursue ISO 9001
certification for PREP and SCREEN, there can be no assurance that it will be
successful in obtaining these certifications.
The Company currently assembles the Pathology Workstation product at its
Burlington facility and believes it has sufficient capacity to meet anticipated
customer demand for this product. The Company is currently negotiating a
worldwide distribution agreement for this product and expects that in the future
the Pathology Workstation will be sold through distributors and OEM vendors who
are expected to integrate certain of the workstation software into their own
products.
RESEARCH AND DEVELOPMENT
The Company's research and development programs are currently focused on
(i) continued enhancement of the PREP instrument, related reagents and
disposables and further automation of the PREP slide preparation and handling
process, (ii) continued development of the next generation SCREEN product
("SCREEN II") and (iii) development of additional Pathology Workstation
applications to address the needs of the broader pathology automation market.
Enhancements to PREP under development are particularly focused on
increasing the efficiency and cost effectiveness of the system, including the
introduction of a front-end automated slide processor and improved functionality
of its CytoRich line of reagents and preservatives.
SCREEN II is designed to increase throughput, incorporate more
off-the-shelf components and facilitate slide handling. SCREEN II will rely on
an enhanced proprietary algorithm classification technology and will be designed
to have increased information management and storage capabilities. The Company
is developing SCREEN II to include networking and sophisticated database
capabilities.
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The Company is continuing to develop additional applications to run on its
Pathology Workstation platform. These applications include quantitative image
analysis, tumor grading and slide management. One image analysis application
performs a quantitative analysis of DNA, nuclear texture and morphology to
assess the aggressiveness of various types of tumors. Another image analysis
application, immunocytochemistry, performs quantitative analysis of hormone
receptors and proliferation markers in histological sections and single cell
preparations. The tumor grading application is designed to evaluate the
arrangement of tumor cells within sections, much the same way that tissue
sections are evaluated and graded by a pathologist. The slide manager module
facilitates slide mapping and computer assisted manual cytology screening and
cell relocation.
There can be no assurance that any product enhancement or development
project undertaken by the Company either currently or in the future will be
successfully completed, receive regulatory approvals or be successfully
commercialized. The failure of any such enhancement or project to be completed,
approved or commercialized could prevent the Company from successfully competing
in its targeted markets and could have a material adverse effect on the
Company's business, financial condition and results of operations.
As of June 30, 1997, the Company had 34 employees engaged in research and
development. The Company's expenditures for research and development were
approximately $3.6 million, $5.1 million, $4.4 million and $2.3 million for the
years ended December 31, 1994, 1995 and 1996 (pro forma combined) and the six
months ended June 30, 1997, respectively.
THIRD-PARTY REIMBURSEMENT
Successful commercialization of PREP and SCREEN for cervical cancer
screening in the United States and other countries will depend on the
availability of reimbursement from third-party payors such as private insurers
and managed care organizations. Because the up-front, direct costs of using the
Company's products will be greater than the cost of the conventional Pap smear,
the Company will need to convince third-party payors that the overall cost
savings to the health care system, resulting from earlier detection of cervical
cancer, reduction of unnecessary biopsies and colposcopies, improved specimen
adequacy and otherwise, will more than offset the cost of the Company's
products. The Company intends to focus on obtaining coverage and reimbursement
from major national and regional managed care organizations and insurance
carriers throughout the United States. Most third-party payor organizations
independently evaluate new diagnostic procedures by reviewing the published
literature and the Medicare coverage and reimbursement policy on the specific
diagnostic procedure. To assist third-party payors in their respective
evaluations of PREP and SCREEN, the Company intends to provide scientific and
clinical data to support its claims of the safety and efficacy of the Company's
products. The Company expects to focus on disease detection and cost savings
benefits in seeking to obtain reimbursement for PREP and SCREEN for cervical
cancer screening.
A critical component in the reimbursement decision by most private insurers
and the United States Health Care Financing Administration, which administers
Medicare, is the assignment of a Current Procedural Terminology ("CPT") code
which is used in the submission of claims to insurers for reimbursement for
medical services. CPT codes are assigned, maintained and revised by the CPT
Editorial Board administered by the American Medical Association. The Company is
aware that certain clinical laboratories using other gynecological monolayer
systems have received reimbursement from certain third-party payors using
existing CPT codes. The Company believes that the CPT Editorial Board is
considering modifying an existing CPT code or establishing a separate CPT code
which will be broad enough to include PREP. There can be no assurance that the
CPT Editorial Board will modify or establish such a CPT code on a timely basis,
if at all. Failure to secure a modification to an existing code or to establish
a separate code from the CPT Editorial Board could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has very limited experience in obtaining reimbursement for its
products in the United States or other countries. In addition, third-party
payors are routinely limiting reimbursement
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and coverage for medical devices and in many instances are exerting significant
pressure on medical suppliers to lower their prices. Lack of or inadequate
reimbursement by government and other third-party payors for the Company's
products would have a material adverse effect on the Company's business,
financial condition and results of operations. Further, outside of the United
States, health care reimbursement systems vary from country to country, and
there can be no assurance that third-party reimbursement will be made available
at an adequate level, if at all, for PREP or SCREEN under any other
reimbursement system.
Although several of the Company's competitors have already received
reimbursement approval for their products, there is significant uncertainty
concerning third-party reimbursement for the use of any medical device
incorporating new technology. Reimbursement by a third-party payor depends on a
number of factors, including the level of demand by health care providers and
the payor's determination that the use of PREP and SCREEN represents a clinical
advance compared to current technology and is safe and effective, medically
necessary, cost-effective and appropriate for specific patient populations.
Since reimbursement approval is required from each payor individually, seeking
such approvals is a time-consuming and costly process which requires the Company
to provide scientific and clinical data to support the use of PREP and SCREEN to
each payor separately. There can be no assurance that third-party payors will
provide such coverage or coverage for any other products developed by the
Company, that reimbursement levels will be adequate or that health care
providers or clinical laboratories will use PREP and SCREEN for cervical cancer
screening in lieu of the conventional Pap smear method.
Recent health care cost containment initiatives in the United States that
have focused on reduction in reimbursement levels may effect the Company
negatively. However, emphasis on preventive measures to reduce the overall costs
to the health care system could lead to more frequent testing for cervical
cancer and use of PREP and SCREEN if approved by the FDA. The Company is unable
to predict the outcome or the effect on its business of the current health care
reform debate.
PATENTS, COPYRIGHTS, LICENSES AND PROPRIETARY RIGHTS
The Company relies on a combination of patents, trade secrets, copyrights
and confidentiality agreements to protect its proprietary technology, rights and
know-how. The Company holds four issued United States patents as well as
corresponding foreign patent applications, and has one United States patent
application that has been allowed but not issued, relating to various aspects of
its PREP and SCREEN technologies. These patents cover system components, such as
the disaggregation syringe, as well as the PREP process and the interactivity of
the cytotechnologist with the SCREEN system. The Company has also filed one
patent application which is pending in the United States and numerous patent
applications which are pending abroad. There can be no assurance, however, that
the claims allowed in any of the Company's existing or future patents will
provide competitive advantages for the Company's products or will not be
successfully challenged or circumvented by competitors. Under current law,
patent applications in the United States are maintained in secrecy until patents
are issued and patent applications in foreign countries are maintained in
secrecy for a period after filing. The right to a patent in the United States is
attributable to the first to invent, not the first to file a patent application.
The Company cannot be sure that its products or technologies do not infringe
patents that may be granted in the future pursuant to pending patent
applications or that its products do not infringe any patents or proprietary
rights of third parties. The Company is aware that several of its competitors
hold several patents relating to automated slide preparation and screening. The
Company believes that PREP and SCREEN do not infringe these third-party patents
and that certain of these third-party patents may be invalid. However, there can
be no assurance that a court would rule that the Company's products do not
infringe such third-party patents or would invalidate such third-party patents.
The Company may incur substantial legal fees in defending against a patent
infringement claim or in asserting claims of invalidity against third parties.
In the event that any relevant claims of third-party patents are upheld as valid
and enforceable, the Company could be prevented from selling its products or
could be required to obtain licenses from the owners of such patents or be
required to redesign its products to avoid infringement. There can be no
assurance that such licenses would be
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<PAGE> 46
available or, if available, would be on terms acceptable to the Company or that
the Company would be successful in any attempt to redesign its products or
processes to avoid infringement. The Company's failure to obtain these licenses
or to redesign its products would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company has entered into confidentiality agreements with all of its
employees and several of its consultants and third-party vendors. There can be
no assurance that the obligations of employees of the Company and third parties
with whom the Company has entered into confidentiality agreements to maintain
the confidentiality of trade secrets and proprietary information will
effectively prevent disclosure of the Company's confidential information or
provide meaningful protection for the Company's confidential information if
there is unauthorized use or disclosure, or that the Company's trade secrets or
proprietary information will not be independently developed by the Company's
competitors. The Company also holds unregistered rights to copyrights on
documentation and operating software developed by it for the PREP and SCREEN
systems. There can be no assurance that any copyrights owned by the Company will
provide competitive advantages for the Company's products or will not be
challenged or circumvented by its competitors. Litigation may be necessary to
defend against claims of infringement, to enforce patents and copyrights of the
Company, or to protect trade secrets and could result in substantial cost to,
and diversion of effort by, the Company. There can be no assurance that the
Company would prevail in any such litigation. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights to the same
extent as do the laws of the United States.
COMPETITION
The cervical cancer screening market is comprised of the conventional Pap
smear process and certain technologies which have been introduced in recent
years or are currently under development to provide improvements over the
conventional Pap smear process. The Company's competitors in the development and
commercialization of alternative cervical cancer screening technologies include
both publicly traded and privately held companies. The alternative technologies
known to the Company have focused on improvements in slide sample preparation,
the development of automated, computerized screening systems and adjunctive
testing technologies. To date, the Company knows of no competitor which has
developed an integrated sample preparation and image analysis system, such as
PREP and SCREEN, which have been designed to function together. Nevertheless,
some competitors' products have already received FDA approval and are being
marketed in the United States. In addition, certain of the Company's competitors
have substantially greater financial, marketing, sales, distribution and
technical resources than the Company, and more experience in research and
development, clinical trials, regulatory matters, customer support,
manufacturing and marketing. In addition, some of these companies may have
received third-party reimbursement for their products. The Company believes that
its products will compete on the basis of a number of factors, including slide
specimen adequacy, screening sensitivity, ease of use, efficiency, cost to
customers and nature of claims allowed by the FDA. While the Company believes
that its products will have competitive advantages based on some of these
factors, there can be no assurance that various competitors' products will not
have competitive advantages based on other factors that, when coupled with the
earlier market entry of some products, will adversely effect the market
acceptance of PREP and SCREEN. Moveover, there can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competition, including the development and commercialization
of new products and technologies, will not have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
products could be rendered obsolete or uneconomical by technological advances of
the Company's current or potential competitors, the introduction and market
acceptance of competing products or by other approaches.
The Company's primary competitor in monolayer slide preparation is Cytyc
Corporation ("Cytyc"). Cytyc's system, the ThinPrep(R) 2000, is based on a
membrane-filtration separation system rather than the centrifugation approach
used in PREP. ThinPrep 2000 is the only monolayer sample preparation system
approved by the FDA for cervical cytology applications. It is also used for non-
gynecological applications. The FDA has allowed Cytyc's claim that ThinPrep 2000
sample preparation
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<PAGE> 47
is "significantly more effective in detecting LSIL and more severe lesions than
the conventional Pap smear in a variety of patient populations." Cytyc also has
FDA-approved claims that specimen quality with the ThinPrep 2000 system is
significantly improved over that of conventional Pap smear preparation in a
variety of patient populations. There can be no assurance that the FDA will
approve the Company's PMA for PREP, or, if approved, that the FDA will allow
desirable claims. In June 1997, Cytyc announced that it had entered into a
multi-year agreement for ThinPrep 2000 with Quest, one of the three large
national chain laboratories. In addition, in October of 1996, Cytyc announced a
non-exclusive co-marketing agreement with Digene Corporation, which has
developed a product that detects the presence or absence of HPV in precancerous
cervical lesions. Cytyc has also recently announced that it is developing a
higher throughput version of its ThinPrep 2000 system and that it has entered
into a multi-year sales and marketing agreement with a large pharmaceutical
company for the ThinPrep 2000. Cytyc's successful implementation of any of the
foregoing arrangements or marketing initiatives may make it more difficult for
the Company to promote PREP in markets in which it competes with Cytyc. See
"Risk Factors -- Competition; Technological Change."
In automated screening the Company faces direct competition primarily from
two companies, NeoPath, Inc. ("NeoPath") and Neuromedical Systems, Inc. ("NSI"),
both of which currently market imaging systems to reexamine or rescreen
conventional Pap smears previously diagnosed as negative. NeoPath is marketing
an imaging system designed to enhance quality control in connection with the
rescreening of the 10% of the slides that are initially classified as negative,
as required by CLIA. NSI is marketing an adjunctive screening system to
supplement primary slide screening. The Company believes that these rescreening
systems, without further adaptation and FDA approval, could not be used with
PREP and, therefore, if either of such systems is installed at or used by
hospitals and reference laboratories, the Company's ability to market its
products to such hospitals and laboratories could be materially adversely
affected. The Company is also aware that NeoPath is developing an automated
primary screening device. If either NeoPath or NSI receives FDA approval of its
current system or any future product as a primary screening system to replace
some or all of the manual screening of conventional Pap smears, marketing of
these systems for such purpose could have a material adverse effect on the
Company's business, financial condition and results of operations.
In November 1996, Cytyc and NeoPath announced the completion of a joint
study of the feasibility of screening cervical specimens using the ThinPrep 2000
in conjunction with NeoPath's AutoPap(R) QC automated screening device. The
development and commercialization of such a combined product could have a
material adverse affect on the Company's business, financial condition and
results of operations.
GOVERNMENT REGULATION
The manufacture and sale of medical diagnostic devices are subject to
extensive governmental regulation in the United States and in other countries.
PREP and SCREEN are regulated for cervical cytology applications in the United
States as medical devices by the FDA under the Federal Food, Drug and Cosmetic
Act (the "FDC Act") and require premarket approval by the FDA prior to
commercial distribution. In addition, certain modifications to medical devices,
their manufacture or their labeling also are subject to FDA review and approval
before marketing. Pursuant to the FDC Act, the FDA regulates the preclinical and
clinical testing, manufacture, labeling, distribution, sales, marketing,
advertising and promotion of medical devices in the United States. Noncompliance
with applicable requirements, including good clinical practice requirements, can
result in the refusal of the government to grant premarket approval for devices,
suspension or withdrawal of clearances or approvals, total or partial suspension
of production, distribution, sales and marketing, fines, injunctions, civil
penalties, recall or seizure of products, and criminal prosecution of a company
and its officers and employees.
Medical devices are classified into one of three classes, Class I, II or
III, on the basis of the controls deemed by the FDA to be necessary to
reasonably ensure their safety and effectiveness. Class I devices are subject to
general controls (e.g., labeling, premarket notification and adherence to GMPs).
Class II devices are subject to general controls and to special controls (e.g.,
performance standards, post-market surveillance, patient registries and other
FDA guidelines). Generally, Class III devices are
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<PAGE> 48
those that must receive premarket approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life-supporting and implantable devices)
and also include most devices that were not on the market before May 28, 1976
("new medical devices") and for which the FDA has not made a finding of
"substantial equivalence" based on a premarket notification ("510(k)"). Class
III devices usually require clinical testing and FDA approval prior to marketing
and distribution. The FDA also has the authority to require clinical testing of
Class I and Class II devices. The Company's PREP and SCREEN products, when
intended for gynecological use, are regulated as Class III medical devices.
If human clinical trials of a device are required and the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or
distributor of the device) is required to file an investigational new device
("IDE") application prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal
and laboratory testing. If the IDE application is approved by the FDA (or the
FDA does not notify the sponsor 30 days after receipt of the application that
the trials may not begin) and one or more appropriate institutional review
boards ("IRBs") approves the study protocol, clinical trials may begin at a
specified number of investigational sites with a specific number of patients, as
approved by the FDA. If the device presents a "nonsignificant risk" to the
patient, such as the Company's PREP and SCREEN products when intended for
gynecological use, or is an exempt diagnostic device, a sponsor may begin the
clinical trial after obtaining approval for the study from one or more
appropriate IRBs, but FDA approval is not required unless the FDA notifies the
sponsor that an IDE application is required. Sponsors of clinical trials are
permitted to sell devices distributed in the course of the study provided the
price charged does not exceed recovery of the cost of manufacture, research,
development and handling. An IDE supplement must be submitted to, and approved
by, the FDA (or the FDA does not notify the sponsor 30 days after receipt of the
supplement that the change may not be implemented) before a sponsor or an
investigator may make a change to the investigational plan that may affect its
scientific soundness or the rights, safety or welfare of human subjects. The FDA
has the authority to re-evaluate, alter, suspend or terminate clinical testing
based on its assessment of data collected throughout the trials.
Generally, before a new medical device can be introduced into the market,
the manufacturer must obtain FDA clearance of a 510(k) or approval of a
premarket approval application, unless the device is exempt from the requirement
of such clearance or approval. A 510(k) clearance will be granted if the
submitted information establishes that the device is "substantially equivalent"
to a legally marketed Class I or II medical device or to a legally marketed
Class III device that does not itself require an approved PMA prior to marketing
(a "predicate device"). A 510(k) must contain information to support a claim of
substantial equivalence, which may include laboratory test results or the
results of clinical studies of the device in humans. Such studies can take years
to complete, analyze, and prepare for submission to the FDA. Commercial
distribution of a device for which a 510(k) is required may begin only after the
FDA issues an order finding the device to be "substantially equivalent" to a
predicate device. The FDA has recently been requiring a more rigorous
demonstration of "substantial equivalence" than in the past and is more likely
to require the submission of data from one or more human clinical trials. It
generally takes from five to twelve months from the date of submission to obtain
510(k) clearance from the FDA, but it may take longer, and 510(k) clearance may
never be obtained.
No law or regulation specifies the time limit by which the FDA must respond
to a 510(k) premarket notification. An FDA order may declare that the device is
"substantially equivalent" to another legally marketed device and allow the
proposed device to be marketed in the United States. The FDA, however, may
determine that the proposed device is not "substantially equivalent" or require
further information, including clinical data, to make a determination of
substantial equivalence. Such determinations or requests for additional
information could prevent or delay market introduction of the product that is
the subject of the 510(k) premarket notification.
A PMA for a device must be filed with and approved by the FDA before
marketing of the device may begin if the device is not found by the FDA to be
"substantially equivalent" to a predicate device. A PMA must be supported by
valid scientific evidence that typically includes extensive data, including data
from preclinical testing and human clinical trials to demonstrate the safety and
effectiveness of the
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device. The FDA ordinarily requires the performance of at least two independent,
statistically significant human clinical trails that must demonstrate the safety
and effectiveness of the device in order to obtain FDA approval of the PMA. The
PMA must also contain the results of all relevant bench tests, laboratory and
animal studies, a complete description of the device and its components, and a
detailed description of the methods, facilities and controls used to manufacture
the device. In addition, the submission must include the proposed labeling and
promotional labeling.
Upon receipt of the PMA, the FDA makes a threshold determination as to
whether the application is sufficiently complete to permit a substantive review.
If the FDA so determines, the FDA will accept the PMA for filing and begin an
in-depth review of it. An FDA review of a PMA typically takes from one to two
years from the date the PMA application is filed, but may take significantly
longer if the FDA requests additional information and any major amendments to
the PMA are filed. The review time is often significantly extended by requests
from the FDA for more information or clarification of information already
provided in the submission. During the review period, an advisory committee,
including clinicians, may be convened to review and evaluate the application and
provide recommendations to the FDA as to whether the PMA should be approved. The
FDA is not bound by the recommendation of the advisory committee. The FDA will
usually inspect the applicant's manufacturing facility to ensure compliance with
QS requirements prior to approval of a PMA. The FDA also may conduct bioresearch
monitoring inspections of the clinical trial sites and the PMA applicant to
ensure data integrity, and that the studies were conducted in compliance with
the applicable FDA regulations.
If the FDA's evaluations of the clinical study sites' compliance with GCP
requirements and the QS compliance of the manufacturing facilities are
acceptable, the FDA will issue either an approval letter (order) or an
"approvable letter" containing a number of conditions that must be met in order
to secure approval of a PMA. When and if those conditions have been fulfilled to
the satisfaction of the FDA, the agency will issue an order approving the PMA,
authorizing commercial marketing of the device for certain indications. If the
FDA's evaluation of the PMA, the clinical study sites or the manufacturing
facilities are not favorable, the FDA will deny approval of the PMA or issue a
"not approvable letter." The FDA may also determine that additional preclinical
testing or human clinical trials are necessary, in which case approval of the
PMA could be delayed for several years while additional testing or trials are
conducted and submitted in an amendment to the PMA. The IDE/PMA process is
expensive, uncertain and lengthy (typically taking five to seven years or more
to complete), and a number of devices for which FDA approval has been sought by
other companies have never been approved for marketing. There can be no
assurance that the Company will be able to obtain necessary regulatory approvals
for any proposed future products in a timely manner or at all. Delays in receipt
of approvals, failure to receive approvals, the loss of previously received
approvals, or failure to comply with existing or future regulatory requirements,
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The FDA's regulations require agency approval of a PMA supplement for
certain changes if they affect the safety and effectiveness of the device,
including, but not limited to, new indications for use; labeling changes; the
use of a different facility or establishment to manufacture, process, or package
the device; changes in vendors supplying components for the device; changes in
manufacturing methods or quality control systems; changes in performance or
design specifications; and certain labeling changes. Any such change will
require FDA approval of an PMA supplement before marketing.
The Company submitted a PMA for PREP to the FDA on May 12, 1997 and the
PREP PMA was accepted for substantive review by the FDA by letter dated June 11,
1997. In accepting the PREP PMA for such review, the FDA indicated to the
Company that no review of the PMA by the FDA's Medical Devices Advisory Panel
would be required. The Company is currently conducting clinical trials for
SCREEN and anticipates submitting a PMA to the FDA by late 1997 or early 1998.
The Company anticipates that other applications for use on its Pathology
Workstation will require FDA clearance of 510(k)s or approval of PMAs. There can
be no assurance that FDA or other necessary approvals will be obtained on a
timely basis or at all or, if obtained, that desirable claims will be allowed.
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PREP and SCREEN and any other products manufactured or distributed by the
Company pursuant to an approved PMA application and supplements (or to 510(k)
clearances) will be subject to pervasive and continuing regulation by the FDA,
including record-keeping requirements and reporting of adverse experience with
the use of the device. Device manufacturers are required to register their
establishments and list their devices with the FDA. The FDC Act requires that
medical devices be manufactured in accordance with the FDA's QS (formerly GMP)
regulations. These regulations require, among other things, that (i) the
manufacturing process be regulated, controlled and documented by the use of
written procedures, and (ii) the ability to produce devices which meet the
manufacturer's specifications be validated by extensive and detailed testing of
every aspect of the process. The regulations also require investigation of any
deficiencies in the manufacturing process or in the products produced and
detailed record keeping. Manufacturing facilities are subject to FDA inspection
on a periodic basis to monitor compliance with QS requirements. If violations of
the applicable regulations are noted during FDA inspections of manufacturing
facilities, the FDA can prohibit further manufacturing, distribution, sale and
marketing of the devices until the violations are cured. On October 7, 1996, the
FDA published a revision of its GMP requirements, incorporating them into the QS
regulations. The QS regulations require, among other things, preproduction
design controls, purchasing controls, and maintenance of service records. The QS
regulations took effect on June 1, 1997, except that the FDA has stated that as
long as manufacturers are taking reasonable steps to come into compliance with
the design control requirements, the FDA will not initiate action (including
enforcement cases) based on a failure to comply with these requirements before
June 1, 1998. The QS regulations are expected to increase the cost of complying
with the FDA GMP and related requirements. Other applicable requirements include
the FDA's medical device (manufacturer) reporting regulation, which requires
that the device manufacturer provide information to the FDA on deaths or serious
injuries alleged to have been associated with the use of its marketed devices,
as well as product malfunctions that would likely cause or contribute to a death
or serious injury if the malfunction were to recur. Product labeling and
promotional activities are also subject to scrutiny by the FDA and, in certain
instances, by the Federal Trade Commission. Products may only be promoted by the
Company and any of its distributors for their approved indications. No assurance
can be given that modifications to the labeling which may be required by the FDA
in the future will not adversely affect the Company's ability to market or sell
PREP, SCREEN or other products of the Company.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future, or that such laws or regulations will not have a
material adverse effect upon the Company's business, financial condition and
results of operations.
Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain approval by a foreign country may be longer or shorter
than that required for FDA approval, and the requirements may differ. No
assurance can be given that such foreign regulatory approvals will be granted on
a timely basis, or at all. The Company has been advised by various parties,
including consultants engaged by the Company and foreign distributors, that no
regulatory approvals for a device analogous to FDA approval of a PMA are
currently required by any country where the Company currently sells PREP or
SCREEN. Such approval requirements may be imposed in the future. Export sales of
investigational devices that are subject to PMA or IDE application requirements
and have not received FDA marketing approval generally may be subject to FDA
export permit requirements depending upon, among other things, the purpose of
the export (investigational or commercial), the country to which the device is
intended for export, and on whether the device has valid marketing authorization
in a country listed in the FDA Export Reform and Enhancement Act of 1996, e.g.,
any member country of the European Union and certain other countries including
but not limited to Australia, Canada, Israel, Japan, New Zealand, and South
Africa. In order to obtain such a permit, when one is required, the Company must
provide the FDA with documentation from the medical device regulatory authority
of the country in which the
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purchaser is located, stating that the device has the approval of the country.
In addition, the FDA must find the exportation of the device is not contrary to
the public health and safety of the country in order for the Company to obtain
the permit. The Company received an FDA permit to export PREP and SCREEN to all
foreign countries in which the Company is currently selling these products and
where such a permit was required. There can be no assurance that the Company
will meet the FDA's export requirements or receive additional FDA export
approval when such approval is necessary, or that countries to which the devices
are to be exported will approve the devices for import. Failure of the Company
to meet the FDA's export requirements or obtain FDA export approval when
required to do so, or to obtain approval for import, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The laboratories that would purchase the Company's PREP and SCREEN products
are subject to extensive regulation under CLIA, which requires laboratories to
meet specified standards in the areas of personnel qualifications,
administration, participation in proficiency testing, patient test management,
quality control, quality assurance and inspections. The Company believes that
its PREP and SCREEN products operate in a manner that will allow laboratories
using the products to comply with CLIA requirements. However, there can be no
assurance that interpretations of current CLIA regulations or future changes in
CLIA regulations would not make compliance by the laboratory difficult or
impossible and therefore have an adverse effect on sales of the Company's
products.
PRODUCT LIABILITY
Commercial use of any Company products may expose the Company to product
liability claims. The Company currently carries $2,000,000, limited to
$1,000,000 per occurrence, in general liability (including product liability)
insurance coverage. The Company believes that this amount is adequate to meet
its present needs. The medical device industry has experienced increasing
difficulty in obtaining and maintaining reasonable product liability coverage,
and substantial increases in insurance premium costs in many cases have rendered
coverage economically impractical. To date, the Company has not experienced
difficulty obtaining an amount of insurance coverage commensurate with its level
of sales. As the Company's sales expand, however, there can be no assurance that
the Company's existing product liability insurance will be adequate or that
additional product liability insurance will be available to the Company at a
reasonable cost, or that any product liability claim would not have a material
adverse effect on the Company's business, financial condition and results of
operations.
FACILITIES
The Company currently leases a total of 13,500 square feet of space,
devoted to administrative, research and development and engineering functions,
at 112 Orange Drive, Elon College, North Carolina under a lease expiring on
December 31, 1997, but renewable until April 24, 2000. The Company also
currently leases a 20,000 square foot manufacturing facility at 780 Plantation
Drive in Burlington, North Carolina. In addition to manufacturing, the
Burlington facility houses the Company's systems integration support, product
warehousing and shipping and receiving operations. In July 1997, the Company
entered into an extension of the Burlington lease through July 2004. The new
lease includes a 23,000 square foot addition to the Burlington facility which
will permit the Company to consolidate all of its operations in a single
facility. The Company anticipates that the addition will be ready for occupancy
in the second quarter of 1998.
EMPLOYEES
As of June 30, 1997 the Company employed 71 persons on a full-time basis.
The Company believes that its relations with its employees are good. None of the
Company's employees is a party to a collective bargaining agreement. See
"Management -- Executive Officers and Directors."
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of June 30, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- --- -----------------------------------------
<S> <C> <C>
James B. Powell, M.D. 58 President, Chief Executive Officer and
Director
Ernest A. Knesel 51 Executive Vice President
Thomas Gahm, Ph.D. 41 Vice President of Computer Science
James W. Geyer, Ph.D. 52 Vice President of Laboratory Science
William O. Green 39 Chief Financial Officer, Vice President
of Finance and Treasurer
Eric W. Linsley 35 Vice President of Operations and Business
Development
Steven C. McPhail 43 Vice President of Sales and Marketing
Richard A. Charpie, Ph.D.(1)(2) 45 Chairman of the Board
Robert E. Curry, Ph.D.(1)(2) 50 Director
Thomas P. Mac Mahon(1) 50 Director
Susan E. Whitehead(2) 43 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
JAMES B. POWELL, M.D. has served as a director of the Company since
November 1996 and as its President and Chief Executive Officer since January
1997. Prior to joining AutoCyte, Dr. Powell served as the President and Chief
Executive Officer of Laboratory Corporation of America Holdings ("LabCorp") from
May 1995 until January 1997. From 1982 until May 1995, Dr. Powell served as
President of Biomedical Reference Laboratories/Roche Biomedical Laboratories,
Inc. ("RBL"), the predecessor to both LabCorp and RIAS, which he co-founded. He
continues to serve on the board of directors of LabCorp, a publicly traded
company. Dr. Powell received a B.A. from Virginia Military Institute and an M.D.
from Duke University, and is board certified in anatomical and clinical
pathology.
ERNEST A. KNESEL has served as Executive Vice President of the Company
since November 1996. Previously, Mr. Knesel was a founder of RIAS and served as
President of RIAS from May 1989 until joining AutoCyte. Mr. Knesel also was a
co-founder of RBL, for which he served as Senior Vice President and was
responsible for Scientific Affairs from June 1969 until 1993. Mr. Knesel
received a B.S. in medical technology and an M.S. in biochemistry from Fairleigh
Dickinson University.
THOMAS GAHM, PH.D. has served as Vice President of Computer Science of the
Company since November 1996. Previously, he served RIAS and RBL in the same
capacity since August 1993. From 1983 to 1993, Dr. Gahm was a Scientific Advisor
and Project Coordinator of Kontron Electronics, Image Analysis Division, where
he focused on the commercial development of microscopic image analysis. Dr. Gahm
received an engineering degree from the University of Stuttgart (Institute of
Physical Electronics) and a Ph.D. from the Medical and Technical University of
Hannover.
JAMES W. GEYER, PH.D. has served as Vice President of Laboratory Science of
the Company since November 1996. From 1991 until November 1996, Dr. Geyer served
RIAS in the same capacity. He also served as Vice President of Product
Development for RBL from 1991 until 1994. In September 1986, Dr. Geyer founded
Genetic Design Inc. ("GDI"), a genetic testing laboratory, and served as Vice
President of Scientific Affairs of GDI until it was acquired by Genzyme
Corporation in 1991. From 1975 until 1986, Dr. Geyer served as Vice President of
Research and Development at RBL. Dr. Geyer
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<PAGE> 53
received a Ph.D. in immunology and microbiology and an M.S. in biochemistry,
both from Wayne State University School of Medicine.
WILLIAM O. GREEN joined the Company as Controller in January 1997 and
became Chief Financial Officer in April 1997. Prior to joining AutoCyte, Mr.
Green served from 1994 to 1996 as Vice President and Chief Financial Officer of
CORPEX Technologies, Inc. ("CORPEX"), a specialty chemical company. Prior to
joining CORPEX, Mr. Green held various positions at Mann Industries, Inc.,
("Mann"), a privately held manufacturer of technical man-made fibers and yarns,
from 1989 to 1993, serving most recently as Chief Operating Officer from 1992 to
1993. On September 16, 1993, Mann filed for receivership and subsequently was
liquidated. From 1981 to 1989, Mr. Green worked as a certified public accountant
at Arthur Andersen & Co. (now Arthur Andersen LLP). He received a B.S. in
business administration from the University of North Carolina, Chapel Hill.
ERIC W. LINSLEY has served as Vice President of Operations and Business
Development of the Company since May 1997. Prior to joining AutoCyte, Mr.
Linsley was a partner with Ampersand Ventures ("Ampersand"), a venture capital
firm, from 1991 to May 1997, and, in connection with such position, served as
interim management in operating and financial roles for various industrial
products and health care companies. From 1989 to 1991, Mr. Linsley was a
management consultant with Bain & Co. In 1988, he served in the same capacity
with McKinsey & Co. He also has worked as a certified public accountant with
Arthur Andersen LLP from 1984 to 1987. He received a B.A. from Trinity College,
an M.S. in accounting from New York University and an M.B.A. from the Wharton
School at the University of Pennsylvania.
STEVEN C. MCPHAIL has served as Vice President of Sales and Marketing of
the Company since May 1997. Prior to joining AutoCyte, Mr. McPhail served as
Vice President of Sales and Marketing from January 1992 to May 1997 for DYNEX
Technologies, Inc. ("DYNEX"), a division of Thermo BioAnalysis Corporation and a
manufacturer of microtiter technology products serving both clinical and
research laboratory customers. Prior to joining DYNEX, Mr. McPhail served in
sales and marketing positions from 1981 to 1992 with Abbott Laboratories
Diagnostics Division. He received a B.S. in biology from San Diego State
University.
RICHARD A. CHARPIE, PH.D. has served as Chairman of the Board of the
Company since November 1996. Dr. Charpie is the Managing General Partner of
Ampersand and all of its affiliated partnerships. He founded Ampersand in 1988
as a spin-off from PaineWebber Incorporated. Dr. Charpie is currently a director
of several privately held companies. Dr. Charpie holds an M.S. in physics and a
Ph.D. in applied economics and finance, both from the Massachusetts Institute of
Technology.
ROBERT E. CURRY, PH.D. has served as a director of the Company since
November 1996. Dr. Curry joined the Sprout Group ("Sprout"), a submanager of
various venture capital funds within the Donaldson, Lufkin & Jenrette
organization, as a general partner of several of the partnerships comprising
Sprout in May 1991 and is currently a divisional Vice President of DLJ Capital
Corporation, a wholly-owned subsidiary of Donaldson, Lufkin & Jenrette, Inc.
Prior to joining Sprout, Dr. Curry served in various capacities with Merrill
Lynch R&D Management and Merrill Lynch Venture Capital from 1984, including as
President of both organizations from January 1990 to May 1991. Previously, Dr.
Curry was a Vice President of Becton Dickinson from May 1980 to July 1984, and
General Manager of Bio-Rad Laboratory Inc.'s Diagnostics Systems Division from
August 1976 to May 1980. He currently is a director of Biocircuits Corporation,
Diatide, Inc. and Photon Technology International, Inc. Dr. Curry received a
B.S. from the University of Illinois, and an M.S. and Ph.D. in chemistry from
Purdue University.
THOMAS P. MAC MAHON has served as a director of the Company since November
1996. Mr. Mac Mahon succeeded Dr. Powell as President and Chief Executive
Officer of LabCorp in January 1997 and also serves as Chairman of the Board of
LabCorp. Mr. Mac Mahon served as Senior Vice President of Hoffmann-La Roche Inc.
from 1993 to January 1997 and President of Roche Diagnostics Group and a
Director and member of the Executive Committee of Hoffmann-La Roche Inc. from
1988 to January
51
<PAGE> 54
1997. A graduate of St. Peter's College, Mr. Mac Mahon received an M.B.A. in
marketing from Fairleigh Dickinson University.
SUSAN E. WHITEHEAD has served as a director of the Company since March
1997. Currently, Ms. Whitehead is Acting Chair of the Whitehead Institute for
Biomedical Research, a trustee of the Massachusetts Institute of Technology, and
Vice-Chair of the Horizons Initiative, a Boston-based group focused on the needs
of homeless children. From 1989 to October 1995, Ms. Whitehead was an attorney
in private practice in Boston, Massachusetts. From 1982 until 1987, she served
as a prosecutor in New York City. Ms. Whitehead received a J.D. from Cardozo
School of Law, and a B.S. from Cornell University.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Company's Restated Certificate, to be filed concurrently with the
closing of this Offering, provides for a classified board of directors
consisting of three classes, with each class being as nearly equal in number as
possible. The term of one class expires and their successors are elected for a
term of three years at each annual meeting of the Company's stockholders. The
Company has designated one class I director (James B. Powell), two class II
directors (Richard A. Charpie and Robert E. Curry) and two class III directors
(Thomas P. Mac Mahon and Susan E. Whitehead). These class I, class II and class
III directors will serve until the annual meeting of stockholders to be held in
1998, 1999 and 2000, respectively, and until their respective successors are
duly elected and qualified, or until their earlier resignation or removal. The
Restated Certificate provides that directors may be removed only for cause by a
majority of stockholders. See "Description of Capital Stock -- Anti-Takeover
Measures."
Each officer serves at the discretion of the Board of Directors. There are
no family relationships among any of the directors or executive officers.
BOARD COMMITTEES
The Company has standing Audit and Compensation Committees of the Board of
Directors. The Audit Committee is currently composed of Dr. Charpie, Dr. Curry
and Ms. Whitehead. The primary function of the Audit Committee is to assist the
Board of Directors in the discharge of its duties and responsibilities by
providing the Board with an independent review of the financial health of the
Company and of the reliability of the Company's financial controls and financial
reporting systems. The Audit Committee reviews the general scope of the
Company's annual audit, the fee charged by the Company's independent accountants
and other matters relating to internal control systems.
The Compensation Committee of the Board of Directors determines the
compensation to be paid to all executive officers of the Company, including the
Chief Executive Officer. The Compensation Committee's duties include the
administration of the Company's Amended and Restated 1996 Equity Incentive Plan.
The Compensation Committee is currently composed of Dr. Charpie, Dr. Curry and
Mr. Mac Mahon.
DIRECTOR COMPENSATION
Directors currently receive no compensation for their service on the
Company's Board of Directors except pursuant to the 1997 Director Stock Option
Plan (the "Director Plan"), adopted by the Board of Directors and stockholders
of the Company in June 1997. All of the directors who are not employees of the
Company (the "Eligible Directors") are currently eligible to participate in the
Director Plan. There are 100,000 shares of Common Stock reserved for issuance
under the Director Plan. Commencing after the closing of this Offering, upon the
election or reelection of an Eligible Director, such director will be
automatically granted an option to purchase 10,000 shares of Common Stock (the
"Option") with an exercise price equal to the market value on the grant date.
Each Option becomes exercisable with respect to 2,000 shares on each anniversary
of the date of grant for a period of five years, provided that the optionee is
still a director of the Company at the opening of business on such date. The
Options have a term of ten years. The exercise price for the Options is equal to
the last sale
52
<PAGE> 55
price for the Common Stock on the business day immediately preceding the date of
grant, as reported on the Nasdaq National Market. The exercise price may be paid
in cash or shares of Common Stock, or a combination of both.
On March 25, 1997, Ms. Whitehead was granted an option to purchase 4,918
shares of Common Stock in connection with becoming a director of the Company.
These options vested immediately and have an exercise price of $0.2033 per
share.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid for services rendered in the fiscal year ended December 31, 1996 to the
Company's three most highly compensated executive officers whose total salary
and bonus for such fiscal year exceeded $100,000 (together, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------------------------------
SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY UNDERLYING OPTIONS(#) COMPENSATION(2)
- -------------------------------------- ------------ --------------------- ---------------
<S> <C> <C> <C>
James B. Powell, M.D. ................ $ -- -- $ --
President and Chief Executive
Officer(3)
Ernest A. Knesel...................... 193,931 245,941 22,771
Executive Vice President(4)
Thomas Gahm, Ph.D. ................... 159,509 135,268 6,775
Vice President of Computer Science
James W. Geyer, Ph.D. ................ 124,672 98,376 4,186
Vice President of Laboratory Science
</TABLE>
- ---------------
(1) The amounts shown represent amounts paid by RIAS, the Company's predecessor,
for services performed from January 1, 1996 to November 21, 1996, and
amounts paid by the Company for services performed from November 22, 1996 to
December 31, 1996.
(2) All amounts shown in this column represent payments made by RIAS in
connection with the formation of the Company for accrued vacation time with
RIAS.
(3) Dr. Powell joined the Company as President and Chief Executive Officer in
January 1997. His base salary for 1997 is $140,000.
(4) Mr. Knesel served as interim President from November 22, 1996 until January
1997. During that period, no executive officer held the title of Chief
Executive Officer.
53
<PAGE> 56
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1996 by the Company to the
Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANT
----------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE
NUMBER OF TOTAL AT ASSUMED ANNUAL RATES
SECURITIES OPTIONS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERMS($)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -------------------------------
GRANTED(#)(1) FISCAL YEAR ($/SHARE) DATE 0%(2) 5%(2)(3) 10%(2)(3)
------------- ------------ ----------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Ernest A. Knesel............ 245,941 37.3% 0.2033 12/1/06 3,147,233 5,157,956 8,242,799
Thomas Gahm, Ph.D........... 135,268 20.5% 0.2033 12/1/06 1,730,984 2,836,885 4,533,555
James W. Geyer, Ph.D........ 98,376 14.9% 0.2033 12/1/06 1,258,888 2,063,174 3,297,106
</TABLE>
- ---------------
(1) These options, each granted on December 1, 1996, become exercisable as to
1/48th of the shares on the first day of each month following the date of
grant. As of August 1, 1997, these options were exercisable with respect to
the following numbers of shares: Mr. Knesel, 40,990 shares; Dr. Gahm, 22,545
shares; and Dr. Geyer 16,396 shares. The Company has not granted any
additional options to the Named Executive Officers during 1997. The Company
has, however, granted options with respect to an aggregate of 282,831 shares
of Common Stock to three additional executive officers identified in the
Principal Stockholder table who joined the Company during 1997 as follows:
William O. Green, 49,187 shares; Eric W. Linsley, 135,268 shares; and Steven
C. McPhail, 98,376 shares. These options also become exercisable as to
1/48th of the shares on the first day of each month following the date of
grant and as of August 1, 1997, were exercisable with respect to the
following numbers of shares: Mr. Green, 7,173 shares; Mr. Linsley, 8,454
shares; and Mr. McPhail, 6,149 shares.
(2) The values in these columns are based on the applicable rate of appreciation
applied to an assumed offering price of the Common Stock of $13.00 per
share.
(3) The dollar amounts shown in these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and,
therefore, are not intended to forecast possible future appreciation, if
any, in the price of the Common Stock. Actual gains, if any, on stock option
exercises will depend on the future performance of the Common Stock, the
option holder's continued employment through the option period, and the date
on which the options are exercised.
The following table sets forth certain information concerning exercisable
and unexercisable stock options held by the Named Executive Officers as of
December 31, 1996. No shares were acquired on exercise of stock options by any
Named Executive Officers in the last fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END(#) FISCAL YEAR-END($)(1)
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
----------------------------- -------------------------
<S> <C> <C>
Ernest A. Knesel............ 0/245,941 0/3,147,233
Thomas Gahm, Ph.D. ......... 0/135,268 0/1,730,984
James W. Geyer, Ph.D. ...... 0/ 98,376 0/1,258,888
</TABLE>
- ---------------
(1) There was no public trading market for the Common Stock as of December 31,
1996. These values are calculated based on an assumed offering price of the
Common Stock of $13.00 per share less the applicable exercise price.
54
<PAGE> 57
STOCK PLANS
Amended and Restated 1996 Equity Incentive Plan. The Company's 1996 Equity
Incentive Plan was adopted in November 1996 and amended and restated in June
1997 (as amended and restated, the "Equity Plan"). The Equity Plan is designed
to provide the Company flexibility in awarding equity incentives by providing
for multiple types of incentives that may be awarded. The purpose of the Equity
Plan is to attract and retain key personnel of the Company and to enable them to
participate in the long-term growth of the Company. The Equity Plan provides for
the grant of stock options (incentive and nonstatutory), stock appreciation
rights, performance shares, restricted stock or stock units for the purchase of
an aggregate of 2,086,325 shares of Common Stock, subject to adjustment for
stock-splits and similar capital changes. Awards under the Equity Plan can be
granted to officers, employees, directors and other individuals as determined by
the committee of the Board of Directors which administers the Equity Plan, each
of whose members is a "non-employee director" within the meaning of Rule 16b-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Compensation Committee of the Board of Directors administers the Equity Plan.
The Compensation Committee selects the participants and establishes the terms
and conditions of each option or other equity right granted under the Equity
Plan, including the exercise price, the number of shares subject to options or
other equity rights and the time at which such options become exercisable. The
exercise price of all "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code, granted under the Equity Plan must be at least
equal to 100% of the fair market value of the option shares on the date of
grant. The term of any incentive stock option granted under the Equity Plan may
not exceed ten years.
As of August 1, 1997, options to purchase an aggregate of 991,848 shares of
Common Stock had been granted under the Equity Plan. In addition, 590,260 shares
of Common Stock had been issued as restricted stock under the Equity Plan. As of
such date, no options have been exercised, and options to purchase an aggregate
of 1,383 shares have been cancelled. All such restricted stock and 990,465 of
such options were outstanding as of such date. Of these, 110,674 shares of such
restricted stock were vested and options to purchase 149,395 shares of Common
Stock were exercisable as of August 1, 1997. No stock appreciation rights or
awards other than option grants and restricted stock have been granted under the
Equity Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Richard A. Charpie, Ph.D.,
Robert E. Curry, Ph.D. and Thomas P. Mac Mahon. Mr. Mac Mahon succeeded Dr.
Powell as President and Chief Executive Officer of LabCorp. Dr. Powell is
currently a director of LabCorp. See "Certain Transactions."
55
<PAGE> 58
CERTAIN TRANSACTIONS
References to the Company's Common Stock and Series A Preferred Stock in
this section are presented without giving effect to the 1-for-2.033 reverse
split of the Company's Common Stock effective on June 27, 1997.
In November 1996, in connection with the Company's formation, the Company
issued 7,500,000 shares of Common Stock to RIAS in exchange for substantially
all of RIAS's assets used in connection with the cytology and pathology
automation business, including but not limited to certain patents, trademarks,
contracts and equipment. Simultaneously therewith, the Company sold: (i) an
aggregate of 1,662,437 shares of Series A Preferred Stock at a purchase price of
$1.00756 per share to certain purchasers affiliated with the Company, including
1,315,062 shares to Dr. Powell, 198,500 shares to Mr. Knesel, 99,250 shares to
Mr. Mac Mahon and 49,625 shares to Dr. Gahm; (ii) an aggregate of 3,970,000
shares of Series A Preferred Stock at a purchase price of $1.00756 per share to
Ampersand Specialty Materials and Chemicals III Limited Partnership and
Laboratory Partners I Limited Partnership (collectively, with their respective
companion funds, the "Ampersand Funds"); and (iii) an aggregate of 3,970,000
shares of Series A Preferred Stock at a purchase price of $1.00756 per share to
Sprout Capital VII, L.P., DLJ First ESC L.L.C., DLJ Capital Corporation and the
Sprout CEO Fund, L.P. (the "Sprout Funds"). Holders of the Series A Preferred
Stock are entitled to certain rights, including a preference upon liquidation of
the Company, redemption rights, a right to elect two directors to the Company's
Board of Directors and other special voting rights, registration rights, rights
of first refusal and other rights. Upon the consummation of this Offering, all
of the issued and outstanding shares of Series A Preferred Stock will convert
into Common Stock and all of the foregoing rights and privileges (other than the
registration rights with respect to converted Common Stock described elsewhere
in this Prospectus) will terminate.
The November 1996 transaction also included the issuance and sale of
1,200,000 shares of Common Stock at a purchase price of $0.10 per share to Dr.
Powell. These shares are subject to the Company's option to repurchase any
unvested shares if Dr. Powell ceases to be employed by the Company. The shares
vest over a period of four years with 1/48th of the shares vesting each month.
In November 1996, Allemanni, LLC, an affiliate of Dr. Powell ("Allemanni"),
purchased 1,300,000 shares of Common Stock from RIAS at a purchase price of
$1.00 per share. In December 1996, Allemanni purchased an additional 99,250
shares of Series A Preferred Stock from the Company at a purchase price of
$1.00756 per share.
The Company has entered into certain ongoing arrangements with LabCorp, a
public company of which Dr. Powell formerly was President and Chief Executive
Officer and currently is a director and of which Mr. Mac Mahon currently is
Chairman of the Board, President and Chief Executive Officer, for selling its
products to LabCorp. In 1996, LabCorp purchased approximately $299,000 worth of
products from RIAS and the Company, both for its own use and for placement with
its hospital laboratory customers. The Company currently expects that LabCorp's
purchases of its products in 1997 will exceed 5% of the Company's consolidated
gross revenues for 1996.
The Company has continuing arrangements with LabCorp (i) for leasing a
portion of LabCorp's facility in Elon College, North Carolina and (ii) for
providing cytology services in support of the Company's clinical trials. In
1996, RIAS and the Company paid LabCorp approximately $109,800 and $36,700,
respectively, under each of these arrangements.
On June 27, 1997, the Company entered into a credit agreement with the
Ampersand Funds, the Sprout Funds and Allemanni (the "Lenders"). The agreement
provides the Company with access to funds of up to $8,000,000 at an interest
rate equal to the prime rate established by Fleet National Bank plus one
percent. In consideration of this credit agreement, the Company issued to the
Lenders warrants to purchase an aggregate of 421,429 shares of its Common Stock
at an exercise price of $1.00 per share, consisting of warrants to purchase
139,157 shares issued to Allemanni, warrants to purchase 141,136 shares issued
to the Ampersand Funds and warrants to purchase 141,136 shares issued to the
Sprout Funds. The Company is obligated to issue warrants with respect to an
additional 1,344,984 shares of Common Stock to the Lenders on a pro rata basis,
based on the amount drawn on the credit
56
<PAGE> 59
agreement. There is currently no outstanding balance under the credit agreement.
The Company has the right to accelerate the expiration date of all outstanding
warrants to the closing of this Offering and intends to do so. The credit
agreement will terminate upon the closing of this Offering.
57
<PAGE> 60
PRINCIPAL STOCKHOLDERS
The following table and footnotes set forth certain information regarding
the beneficial ownership of the Company's Common Stock as of August 1, 1997 by
(i) persons known by the Company to beneficially own 5% or more of the Company's
Common Stock, (ii) the Named Executive Officers, (iii) each director of the
Company and (iv) all current executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED
NUMBER OF SHARES ----------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING
- ------------------------------------ --------------------- --------------- --------------
<S> <C> <C> <C>
Roche Image Analysis Systems,
Inc. ............................. 3,049,680 33.3% 24.9%
1080 U.S. Highway 202
Somerville, NJ 08876-3771
Ampersand Specialty Materials and
Chemicals III Limited Partnership
and certain related entities(2)... 2,022,199 21.9 16.4
55 William Street, Suite 240
Wellesley, MA 02181-4003
Sprout Capital VII, L.P. and certain
related entities(3)............... 2,022,198 21.9 16.4
3000 Sand Hill Road
Bldg 4, Suite 270
Menlo Park, CA 94025-7114
Allemanni, LLC(4)................... 1,993,835 21.6 16.2
2307 York Road
Burlington, NC 27215
James B. Powell, M.D.(5)............ 1,993,835 21.6 16.2
Richard A. Charpie, Ph.D.(6)........ 2,022,199 21.9 16.4
Robert E. Curry, Ph.D.(7)........... 2,022,198 21.9 16.4
Thomas P. Mac Mahon................. 48,819 * *
Susan E. Whitehead(8)............... 4,918 * *
Ernest A. Knesel(9)................. 148,876 1.6 1.2
Thomas Gahm, Ph.D.(10).............. 52,590 * *
James W. Geyer, Ph.D.(11)........... 32,700 * *
William O. Green(12)................ 29,943 * *
Eric W. Linsley(13)................. 34,810 * *
Steven C. McPhail(14)............... 17,626 * *
All current executive officers and
directors as a group (11
persons)(15)...................... 6,408,514 67.4 50.8
</TABLE>
- ---------------
* Indicates less than 1%.
(1) Reflects the conversion, prior to or contemporaneously with the closing of
this Offering, of all outstanding shares of Series A Preferred Stock of the
Company into an aggregate of 4,881,936 shares of Common Stock. The number
of shares of Common Stock deemed outstanding after this Offering includes
the 3,100,000 shares of Common Stock of the Company being offered for sale
in this Offering. The persons and entities named in the table have sole
voting and investment power with respect to the shares beneficially owned
by them, except as noted below. Share numbers include shares of Common
Stock issuable pursuant to the outstanding options and warrants that may be
exercised within the 60-day period following August 1, 1997.
58
<PAGE> 61
(2) Consists of the following shares and shares that may be acquired within 60
days of August 1, 1997 upon the exercise of warrants: 1,561,246 shares and
a warrant to purchase 55,503 shares held by Ampersand Specialty Materials
and Chemicals III Limited Partnership ("ASMC III"); 25,386 shares and a
warrant to purchase 902 shares held by Ampersand Specialty Materials and
Chemicals III Companion Fund Limited Partnership ("ASMC III C.F."); 256,302
shares and a warrant to purchase 9,111 shares held by Laboratory Partners I
Limited Partnership("Lab Partners I"); and 109,844 shares and a warrant to
purchase 3,905 shares held by Laboratory Partners Companion Fund Limited
Partnership ("Lab Partners C.F."). ASMC-III MCLP LLP is the general partner
of ASMC III Management Company Limited Partnership, which itself is the
general partner of both ASMC III and ASMC III C.F. and has voting and
investment control over the shares held by those two entities. Ampersand
Lab Partners MCLP LLP is the general partner of Ampersand Lab Partners
Management Company Limited Partnership, which itself is the general partner
of both Lab Partners I and Lab Partners C.F. and has voting and investment
control over the shares held by those two entities.
(3) Consists of the following shares and shares that may be acquired within 60
days of August 1, 1997 upon the exercise of warrants: 1,698,713 shares and
a warrant to purchase 60,390 shares held by Sprout Capital VII, L.P.
("Sprout"); 195,277 shares and a warrant to purchase 6,942 shares held by
DLJ First ESC, L.L.C. ("DLJ First"); 39,055 shares and a warrant to
purchase 1,388 shares held by DLJ Capital Corporation ("DLJ Capital"); and
19,732 shares and a warrant to purchase 701 shares held by The Sprout CEO
Fund, L.P. ("Sprout CEO"). DLJ Capital is the managing corporation of
Sprout and the general partner of Sprout CEO and has voting and investment
control over the shares held by those two stockholders. DLJ LBO Plans
Management Corporation ("DLJ LBO") is the manager of DLJ First and has
voting and investment control over the shares held by DLJ First.
(4) Includes 68,449 shares that may be acquired within 60 days of August 1,
1997 upon the exercise of warrants.
(5) Consists solely of shares held of record by Allemanni, LLC and as described
further in note (4). Dr. Powell is the manager of Allemanni, LLC and has
voting and investment control over the shares held by that entity. Dr.
Powell disclaims beneficial ownership of such shares except to the extent
of his pecuniary interest.
(6) Consists solely of shares described in note (2). Dr. Charpie is a general
partner of ASMC-III MCLP LLP and Ampersand Lab Partners MCLP LLP and thus
may be considered the beneficial owner of the shares described in note (2).
Dr. Charpie disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest.
(7) Consists solely of shares described in note (3). Dr. Curry is a divisional
Vice President of DLJ Capital and acts as attorney-in-fact for DLJ LBO with
respect to its investment in the Company, and thus may be considered the
beneficial owner of the shares described in note (3). Dr. Curry disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest.
(8) Consists of 4,918 shares that may be acquired within 60 days of August 1,
1997 upon the exercise of options.
(9) Includes 97,638 shares held by LE'BET, LLC ("LE'BET"). Mr. Knesel is the
general manager of LE'BET and has voting and investment control over the
shares held by that entity. Mr. Knesel disclaims beneficial ownership of
such shares. Also includes 51,238 shares that may be acquired within 60
days of August 1, 1997 upon the exercise of options.
(10) Includes 28,181 shares that may be acquired within 60 days of August 1,
1997 upon the exercise of options.
(11) Includes 20,495 shares that may be acquired within 60 days of August 1,
1997 upon the exercise of options.
59
<PAGE> 62
(12) Includes 9,223 shares that may be acquired within 60 days of August 1, 1997
upon the exercise of options.
(13) Includes 14,090 shares that may be acquired within 60 days of August 1,
1997 upon the exercise of options.
(14) Includes 10,248 shares that may be acquired within 60 days of August 1,
1997 upon the exercise of options.
(15) See notes (2) through (14) above. Includes 345,684 shares that may be
acquired within 60 days of August 1, 1997 upon the exercise of options and
warrants.
60
<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of
20,650,000 shares of Common Stock, $0.01 par value per share, and 9,925,000
shares of Series A Preferred Stock, $0.01 par value per share. Upon the closing
of this Offering, and after giving effect to the amendment and restatement of
the Company's Certificate of Incorporation, the authorized capital stock of the
Company will consist of 20,650,000 shares of Common Stock and 1,000,000 shares
of Preferred Stock. Prior to this Offering, there were outstanding an aggregate
of (i) 4,279,389 shares of Common Stock and (ii) 9,925,000 shares of Series A
Preferred Stock, which shares will automatically convert into an aggregate of
4,881,936 shares of Common Stock upon the closing of this Offering. As of the
date of this Prospectus, the Company had 22 stockholders. Upon the closing of
this Offering, the Company will have 12,261,325 shares of Common Stock and no
shares of Preferred Stock outstanding.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, (i) the provisions of the Company's Restated Certificate of
Incorporation (the "Restated Certificate") and Amended and Restated By-laws (the
"By-laws") (each as filed and effective, respectively, on or before the closing
of this Offering and included as exhibits to the Registration Statement) and
(ii) the provisions of applicable law.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on matters to be
voted upon by the stockholders. There are no cumulative voting rights. Holders
of Common Stock are entitled to receive dividends if, as and when declared by
the Board of Directors out of funds legally available therefor. See "Dividend
Policy." Upon the liquidation, dissolution or winding up of the Company, holders
of Common Stock are entitled to share ratably in the assets of the Company
available for distribution to its stockholders, subject to the preferential
rights of any then outstanding shares of Preferred Stock. No shares of Preferred
Stock will be outstanding immediately following the closing of this Offering.
The Common Stock outstanding upon the effective date of the Registration
Statement, and the shares offered by the Company hereby, upon issuance and sale,
will be fully paid and nonassessable.
PREFERRED STOCK
The Company is currently authorized to issue 9,925,000 shares of Series A
Preferred Stock. Upon the consummation of the Offering, all of the issued and
outstanding shares of Series A Preferred Stock will be converted into an
aggregate of 4,881,936 shares of Common Stock. Immediately following such
conversion, all currently outstanding shares of Series A Preferred Stock will be
cancelled, retired and eliminated from the Company's authorized shares of
capital stock, and the number of authorized shares of Preferred Stock will be
decreased to 1,000,000 shares.
Upon consummation of the Offering, the Company's Board of Directors will
have the authority to issue up to 1,000,000 shares of Preferred Stock in one or
more series and to fix the relative rights, preferences, privileges,
qualifications, limitations and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The Company believes that the power
to issue Preferred Stock will provide flexibility in connection with possible
corporate transactions. The issuance of Preferred Stock could adversely affect
the voting power of the holders of Common Stock and restrict their rights to
receive payment upon liquidation and could have the effect of delaying,
deferring or preventing a change in control of the Company. See "Description of
Capital Stock -- Anti-Takeover Provisions." The Company has no present plans to
issue any shares of Preferred Stock.
61
<PAGE> 64
STOCK PURCHASE WARRANTS
As a commitment fee in connection with the establishment of a revolving
line of credit, the Company issued warrants to purchase an aggregate of 207,291
shares of Common Stock to the Ampersand Funds, the Sprout Funds and Allemanni.
These warrants have an exercise price of $2.033 per share, are immediately
exercisable in full and expire on June 27, 2007. The Company may accelerate the
expiration of these warrants to the closing date of this Offering and intends to
do so.
ANTI-TAKEOVER MEASURES
In addition to the Board of Directors' ability to issue shares of Preferred
Stock, the Restated Certificate and the By-laws contain several other provisions
that are commonly considered to discourage unsolicited takeover bids. The
Restated Certificate includes a provision classifying the Board of Directors
into three classes with staggered three-year terms. The Restated Certificate
also includes a provision prohibiting stockholder action by written consent
except as otherwise provided by law. Under the Restated Certificate and By-laws,
the Board of Directors may enlarge the size of the Board and fill any vacancies
on the Board. The Restated Certificate requires the approval of the holders of
at least 66 2/3% of the outstanding capital stock of the Company prior to (i)
the merger of the Company into another entity, (ii) the sale or disposition of
all or substantially all of the Company's assets, (iii) the issuance or transfer
by the Company of its securities having a market value in excess of $500,000 and
(iv) engaging in any other business combination transaction unless, in each
case, such transaction has been approved by a majority of the Board of
Directors. Further, provisions of the By-laws and the Restated Certificate
provide that the stockholders may amend the By-laws or certain provisions of the
Restated Certificate only with the affirmative vote of 66 2/3% of the Company's
capital stock. The By-laws provide that nominations for directors may not be
made by stockholders at any annual or special meeting unless the stockholder
intending to make a nomination notifies the Company of its intention a specified
period in advance and furnishes certain information. The By-laws also provide
that special meetings of the Company's stockholders may be called only by the
President or the Board of Directors and require advance notice of business to be
brought by a stockholder before the annual meeting.
Upon the consummation of the Offering made hereby, the Company will be
subject to the provisions of Section 203 of the Delaware General Corporation
Law, a law regulating corporate takeovers (the "Anti-Takeover Law"). In certain
circumstances, the Anti-Takeover Law prevents certain Delaware corporations,
including those whose securities are listed on the Nasdaq National Market, from
engaging in a "business combination" (which includes a merger or sale of more
than ten percent of the corporation's assets) with an "interested stockholder"
(a stockholder who owns 15% or more of the corporation's outstanding voting
stock) for three years following the date on which such stockholder became an
"interested stockholder" subject to certain exceptions, unless the transaction
is approved by the board of directors and the holders of at least 66 2/3% of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder). The statutory ban does not apply if, upon consummation
of the transaction in which any person becomes an interested stockholder, the
interested stockholder owns at least 85% of the outstanding voting stock of the
corporation (excluding shares held by persons who are both directors and
officers or by certain employee stock plans). A Delaware corporation subject to
the Anti-Takeover Law may "opt out" of the Anti-Takeover Law with an express
provision either in its certificate of incorporation or by-laws resulting from a
stockholders' amendment approved by at least a majority of the outstanding
voting shares; such an amendment is effective following expiration of twelve
months from adoption. The Company has not "opted out" of the Anti-Takeover Law.
The foregoing provisions of the Restated Certificate and By-laws and
Delaware law could have the effect of discouraging others from attempting
hostile takeovers of the Company and, as a consequence, they may also inhibit
temporary fluctuations in the market price of the Common Stock that might result
from actual or rumored hostile takeover attempts. Such provisions may also have
the effect of preventing changes in the management of the Company. It is
possible that such provisions could make
62
<PAGE> 65
it more difficult to accomplish transactions which stockholders may otherwise
deem to be in their best interests.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company. Its telephone number is (212) 936-5100.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 12,261,325 shares
of Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment option or of any other outstanding options and warrants. Of these
shares, the 3,100,000 shares sold in this Offering (plus any additional shares
sold upon exercise of the Underwriters' over-allotment option) will be freely
tradable, without restriction or further registration under the Securities Act,
except for shares purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act.
The remaining 9,161,325 outstanding shares of Common Stock owned by
existing stockholders together with 990,465 shares and 207,291 shares of Common
Stock issuable upon the exercise of outstanding options and warrants,
respectively, are deemed "restricted securities" under Rule 144. These may not
be resold, except pursuant to an effective registration statement or an
applicable exemption from registration. Of these restricted securities,
approximately 92 shares of Common Stock issuable upon exercise of vested options
will be eligible for sale under Rules 144 and 701 on the ninety-first day after
the date of this Prospectus. Stockholders of the Company, holding in the
aggregate 9,161,325 shares of Common Stock, warrants to purchase 207,291 shares
of Common Stock and options to purchase 991,756 shares of Common Stock have
agreed to enter into the 180-day lock-up agreements described below. At the end
of such 180-day period, an additional 9,589,197 shares of Common Stock
(including 427,872 shares of Common Stock issuable upon the exercise of vested
options and outstanding warrants) will be eligible for sale under Rules 144 and
701. The remaining Restricted Shares will become eligible from time to time
thereafter upon the expiration of the minimum one-year holding period prescribed
by Rule 144 and, in the case of shares of Common Stock issuable upon the
exercise of options, subject to vesting.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
Restricted Shares for at least one year from the later of the date such
Restricted Shares were acquired from the Company and (if applicable) the date
they were acquired from an affiliate, is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock or the average weekly trading volume
in the public market during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain requirements as to the manner and
notice of sale and the availability of public information concerning the
Company. All sales of shares of the Company's Common Stock, including Restricted
Shares, held by affiliates of the Company must be sold under Rule 144, subject
to the foregoing volume limitations and other restrictions.
The Company's executive officers and directors and all of its existing
stockholders, warrantholders and certain optionholders have agreed, subject to
certain limited exceptions, not to offer, sell, contract to sell, pledge, grant
any option to purchase, transfer, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or warrants or other rights to
purchase or acquire shares of Common Stock for a period of 180 days after the
effective date of the Registration Statement filed in connection with the
Offering without the prior written consent of Dillon, Read & Co. Inc.
The Company plans to file registration statements under the Securities Act
to register approximately 2,086,325 shares of Common Stock issuable under the
Equity Plan and 100,000 shares of Common Stock issuable under the Director Plan,
90 days after the date of this Prospectus. Upon
63
<PAGE> 66
registration, such shares will be eligible for immediate resale upon exercise,
subject to lock-up restrictions described above and, in the case of affiliates,
to the volume, manner of sale and notice requirements of Rule 144.
No prediction can be made as to the effect, if any, that market sales of
additional shares or the availability of such additional shares for sale will
have on the market price of the Common Stock. Nevertheless, sales of substantial
amounts of Common Stock in the public market may have an adverse impact on the
market price for the Common Stock. See "Risk Factors -- Dilution."
REGISTRATION RIGHTS
The holders of the 9,161,325 shares of Common Stock and Common Stock to be
issued on conversion of the Series A Preferred Stock (the "Registrable Shares")
are entitled to certain rights with respect to registration of the Registrable
Shares under the Securities Act beginning at the end of the lock-up period. If
the Company proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other security holders, such
holders are entitled to notice of such registration and are entitled to include
such Registrable Shares in the registration. The rights are subject to certain
conditions and limitations, among them, the right of the underwriters of a
registered offering to limit the number of shares included in such registration.
Holders of Registrable Shares benefiting from these rights may also require the
Company to file at its expense a registration statement under the Securities Act
with respect to their shares of Common Stock and, subject to certain conditions
and limitations, the Company is required to use its best efforts to effect such
registration. Furthermore, such holders may, subject to certain conditions and
limitations, require the Company to file additional registration statements on
Form S-3 with respect to such Registrable Shares. Such holders waived their
right to have shares of Common Stock registered under the Securities Act as part
of this Offering.
64
<PAGE> 67
UNDERWRITING
The names of the Underwriters of the shares of Common Stock offered hereby
and the aggregate number of shares which each has severally agreed to purchase
from the Company, subject to the terms and conditions specified in the
Underwriting Agreement, are as follows:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------------------------------------------------------ ----------------
<S> <C>
Dillon, Read & Co. Inc......................................
UBS Securities LLC..........................................
---------
Total............................................... 3,100,000
=========
</TABLE>
The Managing Underwriters are Dillon, Read & Co. Inc. and UBS Securities
LLC.
If any shares of Common Stock offered hereby are purchased by the
Underwriters, all such shares will be so purchased. The Underwriting Agreement
contains certain provisions whereby if any Underwriter defaults in its
obligation to purchase such shares and if the aggregate obligations of the
Underwriters so defaulting do not exceed 10% of the shares offered hereby, the
remaining Underwriters, or some of them, must assume such obligations.
The shares of Common Stock offered hereby are being initially offered
severally by the Underwriters for sale at the price set forth on the cover page
hereof, or at such price less a concession not to exceed $ per share on
sales to certain dealers. The Underwriters may allow, and such dealers may
reallow, a concession not to exceed $ per share to certain other dealers.
The offering of the shares of Common Stock is made for delivery when, as, and if
accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any order for the purchase of the shares of Common
Stock offered hereby. After the initial public offering of the Common Stock, the
price to the public, the concession and the reallowance may be changed by the
Managing Underwriters.
The Company has granted to the Underwriters an option to purchase up to an
additional 465,000 shares of Common Stock on the same terms per share. If the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
proportion of the aggregate shares so purchased as the number of shares to be
purchased by it shown in the above table bears to the total number of shares in
such table. The Underwriters may exercise such option on or before the thirtieth
day from the date of the Underwriting Agreement and only to cover
over-allotments, if any, in connection with the Offering.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
The Company, its executive officers and directors and all of its existing
stockholders, warrantholders and certain of its optionholders have agreed,
subject to certain limited exceptions, not to offer, sell, contract to sell,
pledge, grant any option to purchase, transfer, or otherwise dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or warrants or other rights
to purchase or acquire shares of Common Stock for a period of 180 days after the
effective date of the Registration Statement filed in connection with the
Offering without the prior written consent of Dillon, Read & Co. Inc.
65
<PAGE> 68
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock, including over-allotment, stabilization, syndicate covering
transactions and imposition of penalty bids. In an over-allotment, the
Underwriters would allot more shares of Common Stock to their customers in the
aggregate than are available for purchase by the Underwriters under the
Underwriting Agreement. Stabilizing means the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing or maintaining the
price of a security. In a syndicate covering transaction, the Underwriters would
place a bid or effect a purchase to reduce a short position created in
connection with the Offering. Pursuant to a penalty bid, Dillon, Read & Co.
Inc., on behalf of the Underwriters, would be able to reclaim a selling
concession from an Underwriter if shares of Common Stock originally sold by such
Underwriter are purchased in syndicate covering transactions. These transactions
may result in the price of the Common Stock being higher than the price that
might otherwise prevail in the open market. These transactions may be effected
on the Nasdaq National Market, in the over-the-counter market or otherwise, and,
if commenced, may be discontinued at any time.
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiations among the Company and the Managing Underwriters. Among the
principal factors to be considered in determining the initial public offering
price are prevailing market and general economic conditions, the
price-to-earnings ratios of other publicly traded companies, projected revenues
and earnings of the Company, the current financial position of the Company,
estimates of the business potential of the Company, the present state of the
Company's development, the Company's management and other factors deemed
relevant. Additionally, consideration will be given to the general state of the
securities market, the market conditions for new issues of securities and the
demand for securities of comparable companies at the time the Offering was made.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Palmer & Dodge LLP, Boston, Massachusetts. Certain legal
matters are being passed upon for the Underwriters by Mintz, Levin, Cohn,
Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts.
EXPERTS
The financial statements of AutoCyte, Inc. at December 31, 1996 and for the
period from November 22, 1996 (inception) to December 31, 1996 and of the
Cytology and Pathology Automation Business of Roche Image Analysis Systems, Inc.
as of December 31, 1995 and November 21, 1996 and for the years ended December
31, 1994 and 1995 and for the period from January 1, 1996 to November 21, 1996
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The statements in the Prospectus under the captions "Risk
Factors -- Dependence on Patents, Copyrights, Licenses and Proprietary Rights;
Risk of Third-Party Claims of Infringement," and "Business -- Patents,
Copyrights, Licenses and Proprietary Rights" have been reviewed and approved by
Bell, Seltzer, Park & Gibson, as experts on such matters, and are included in
this Prospectus in reliance on that review and approval.
66
<PAGE> 69
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act, with respect to the shares of Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules thereto. All statements made in this Prospectus regarding the contents
of any contract, agreement or other document filed as an exhibit to the
Registration Statement are not necessarily complete and are qualified by
reference to the copy of such document filed as an exhibit to the Registration
Statement. The Registration Statement can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and also will be available for
inspection and copying at the following regional offices of the Commission: New
York Regional Office, 7 World Trade Center, New York, New York 10048, and
Chicago Regional Office, Suite 1400, Northwest Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661-2511 and at the Commission website located at
(http://www.sec.gov). Copies of such material also can be obtained from the
Commission at prescribed rates through its Public Reference Section at 450 Fifth
Street, N.W., Washington, D.C. 20549.
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors and will
make available copies of quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
67
<PAGE> 70
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AUTOCYTE, INC.
PERIOD FROM NOVEMBER 22, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
Report of Independent Auditors........................................................ F-2
AUDITED FINANCIAL STATEMENTS
Balance Sheets........................................................................ F-3
Statements of Operations.............................................................. F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity
(Deficit)........................................................................... F-5
Statements of Cash Flows.............................................................. F-6
Notes to Financial Statements......................................................... F-7
CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.
YEARS ENDED DECEMBER 31, 1994 AND 1995, AND THE PERIOD FROM JANUARY 1, 1996 THROUGH
NOVEMBER 21, 1996
Report of Independent Auditors........................................................ F-16
AUDITED FINANCIAL STATEMENTS
Balance Sheets........................................................................ F-17
Statements of Operations.............................................................. F-18
Statements of Cash Flows.............................................................. F-19
Notes to Financial Statements......................................................... F-20
</TABLE>
F-1
<PAGE> 71
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
AutoCyte, Inc.
We have audited the accompanying balance sheet of AutoCyte, Inc. as of
December 31, 1996, and the related statements of operations, redeemable
convertible preferred stock and stockholders' equity and cash flows for the
period from November 22, 1996 (inception) through 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 audit.
We conducted our audit 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 audit provides 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 AutoCyte, Inc. at December
31, 1996, and the results of its operations and its cash flows for the period
from November 22, 1996 (inception) through December 31, 1996 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Raleigh, North Carolina
June 13, 1997
F-2
<PAGE> 72
AUTOCYTE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
REDEEMABLE
CONVERTIBLE
PREFERRED STOCK
AND STOCKHOLDERS'
EQUITY
DECEMBER 31, JUNE 30, JUNE 30, 1997
1996 1997 (NOTE 2)
------------ ----------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 9,517,274 $ 5,449,119
Accounts receivable, less allowance for doubtful
accounts of $17,500 and $74,100 at December
31, 1996 and June 30, 1997, respectively...... 761,117 402,384
Inventory........................................ 1,911,406 1,901,915
Other current assets............................. 49,208 92,273
----------- -----------
Total current assets.......................... 12,239,005 7,845,691
Property and equipment............................. 1,459,932 1,406,087
Deferred offering costs............................ -- 611,225
----------- -----------
Total assets.................................. $13,698,937 $ 9,863,003
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................. $ 227,521 $ 302,828
Accrued payroll and related benefits............. 117,615 180,571
Other accrued expenses........................... 1,221,358 1,455,293
----------- -----------
Total current liabilities..................... 1,566,494 1,938,692
Redeemable convertible preferred stock............. 9,882,000 9,982,000 --
Stockholders' equity (deficit):
Common stock, $0.01 par value; 20,500,000 and
20,650,000 shares authorized at December 31,
1996 and June 30, 1997, respectively;
4,279,389 shares issued and outstanding at
December 31, 1996 and June 30, 1997 and
9,161,325 shares issued and outstanding pro
forma......................................... 42,794 42,794 $ 91,613
Additional paid-in capital....................... 3,857,956 7,180,378 17,113,559
Deferred compensation............................ (764,547) (2,051,590) (2,051,590)
Accumulated deficit.............................. (885,760) (7,229,271) (7,229,271)
----------- ----------- -----------
Total stockholders' equity (deficit).......... 2,250,443 (2,057,689) $ 7,924,311
----------- ----------- ===========
Total liabilities and stockholders' equity
(deficit)................................... $13,698,937 $ 9,863,003
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 73
AUTOCYTE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 22,
1996 SIX MONTHS
(INCEPTION) ENDED JUNE 30,
THROUGH -----------------------------
DECEMBER 31, 1996 1997
1996 (PREDECESSOR) (AUTOCYTE)
------------ ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Net sales.......................................... $ 129,189 $ 908,984 $ 898,695
Cost of goods sold................................. 111,826 712,215 766,689
---------- ----------- -----------
Gross profit.................................. 17,363 196,769 132,006
Operating expenses:
Research and development......................... 451,814 1,928,965 2,273,858
Selling, general and administrative.............. 493,740 3,068,835 2,930,176
---------- ----------- -----------
945,554 4,997,800 5,204,034
---------- ----------- -----------
Operating loss..................................... (928,191) (4,801,031) (5,072,028)
Interest income.................................... 42,431 -- 203,659
Interest expense, including credit agreement
commitment fee................................... -- -- 1,475,142
---------- ----------- -----------
Net loss...................................... $ (885,760) $(4,801,031) $(6,343,511)
========== =========== ===========
Pro forma net loss per share....................... $ (0.09) $ (0.62)
========== ===========
Shares used in computing pro forma net loss per
share............................................ 10,311,175 10,311,175
========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 74
AUTOCYTE, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL COMPENSATION DEFICIT EQUITY (DEFICIT)
----------- ------- ---------- ------------ ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at inception............. $ -- $ -- $ -- $ -- $ -- $ --
Net assets acquired in exchange
for common stock............... -- 36,891 2,963,109 -- -- 3,000,000
Issuance of common stock......... -- 5,903 114,097 -- -- 120,000
Issuance of redeemable
convertible preferred stock.... 9,882,000 -- -- -- -- --
Deferred compensation............ -- -- 780,750 (780,750) -- --
Amortization of deferred
compensation................... -- -- -- 16,203 -- 16,203
Net loss for period.............. -- -- -- -- (885,760) (885,760)
---------- ---------------------------------------------------------------------
Balance at December 31, 1996..... 9,882,000 42,794 3,857,956 (764,547) (885,760) 2,250,443
Issuance of redeemable
convertible preferred stock and
stock options.................. 100,000 -- 426,800 -- -- 426,800
Issuance of warrants............. -- -- 1,475,002 -- -- 1,475,002
Deferred compensation............ -- -- 1,420,620 (1,420,620) -- --
Amortization of deferred
compensation................... -- -- -- 133,577 -- 133,577
Net loss for period.............. -- -- -- -- (6,343,511) (6,343,511)
---------- ---------------------------------------------------------------------
Balance at June 30, 1997
(unaudited).................... $9,982,000 $42,794 $7,180,378 $(2,051,590) $ (7,229,271) $(2,057,689)
========== ======= ========== =========== ============= ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 75
AUTOCYTE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 22,
1996 SIX MONTHS
(INCEPTION) ENDED JUNE 30,
THROUGH --------------------------
DECEMBER 31, 1996 1997
1996 (PREDECESSOR) (AUTOCYTE)
------------ ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $ (885,760) $(4,801,031) $(6,343,511)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation................................. 39,797 741,560 200,954
Issuance of preferred stock and stock options
for services rendered..................... -- -- 426,800
Issuance of warrants as consideration for
credit agreement.......................... -- -- 1,475,002
Amortization of deferred compensation........ 16,203 -- 133,577
Changes in operating assets and liabilities:
Accounts receivable.......................... (48,792) 87,513 358,733
Inventory.................................... (128,674) 62,415 9,491
Other current assets......................... 65 21,711 (43,065)
Deferred offering costs...................... -- -- (611,225)
Accounts payable............................. 225,511 (142,572) 75,307
Accrued payroll and related benefits......... 117,615 -- 62,956
Other accrued expenses....................... 217,170 (31,156) 233,935
----------- ----------- -----------
Net cash used in operating activities..... (446,865) (4,061,560) (4,021,046)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............ (47,889) (179,381) (147,109)
Net cash acquired in acquisition of business... 10,028 -- --
----------- ----------- -----------
Net cash used in investing activities..... (37,861) (179,381) (147,109)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock......... 120,000 -- --
Proceeds from the issuance of redeemable
convertible preferred stock, net of issuance
costs...................................... 9,882,000 -- 100,000
Advances from Roche............................ -- 4,286,751 --
----------- ----------- -----------
Net cash provided by financing
activities.............................. 10,002,000 4,286,751 100,000
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... 9,517,274 45,810 (4,068,155)
Cash and cash equivalents at beginning of period.... -- 9,530 9,517,274
----------- ----------- -----------
Cash and cash equivalents at end of period.......... $ 9,517,274 $ 55,340 $ 5,449,119
=========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 76
AUTOCYTE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION PERTAINING TO THE SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1997 IS
UNAUDITED)
1. THE COMPANY
AutoCyte, Inc. ("AutoCyte" or the "Company"), a Delaware Corporation, was
formed on October 24, 1996 to acquire the cytology and pathology automation
business (the "Business") then owned by Roche Image Analysis Systems, Inc.
("RIAS"), a wholly-owned subsidiary of Roche Holding Ltd ("Roche"). The Company
develops, manufactures and markets the only integrated sample preparation and
automated image analysis system to support cytologists in cervical cancer
screening. The Company's integrated system is comprised of the AutoCyte PREP
("PREP") automated sample preparation system and the AutoCyte SCREEN ("SCREEN")
automated image analysis system. The Company will also continue to market and
further develop other pathology automation products previously commercialized by
RIAS.
On November 22, 1996, the Company entered into a Contribution Agreement
with Roche and RIAS whereby the Company acquired the net assets and liabilities
of the cytology and pathology automation business of RIAS in exchange for
7,500,000 (3,689,129 on a post-split basis) shares of Common Stock valued at
$3.0 million. The transaction was accounted for as a purchase transaction in
accordance with APB 16.
Revenues from sales of products have not generated sufficient cash to
support the Company's operations. Both the Company and its predecessor have
incurred substantial losses. The Company has funded its operations primarily
through the private sale of equity securities, and the predecessor's operations
were funded by Roche. The Company continues to be subject to certain risks and
uncertainties common to early stage medical device companies including the
uncertainty of availability of additional financing, extensive government
regulation, uncertainty of market acceptance of its PREP and SCREEN systems
which are still under development, limited manufacturing, marketing and sales
experience, uncertainty of future profitability and the uncertainty of United
States Food and Drug Administration ("FDA") approval of its products.
The Company must obtain FDA approval in order to market its products in the
United States for their principal intended use. Generally, before a new medical
device can be introduced into the market in the United States, the manufacturer
must obtain FDA approval of a premarket approval application ("PMA") or FDA
clearance of a 510(k) premarket notification. Each of the Company's two
principal products, PREP and SCREEN, are subject to the PMA process; however,
neither has yet received such approval. The Company's failure to obtain or
maintain FDA regulatory approval for its products would have a material adverse
effect on the Company's business, financial condition and results of operations.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of 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.
Concentrations of Credit Risk
The Company's principal financial instrument subject to potential
concentration of credit risk is unsecured accounts receivable. The Company
provides an allowance for doubtful accounts equal to the estimated losses to be
incurred in the collection of accounts receivable.
F-7
<PAGE> 77
AUTOCYTE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
Revenue is recognized from product sales and rentals. Product sales revenue
is recognized when products are shipped, and product rental revenue is
recognized as earned.
Product Warranty
The Company's products generally carry a one-year warranty against defects.
The Company provides for estimated warranty costs in the period the related
sales are made. As of December 31, 1996 and June 30, 1997, the warranty reserve
amounted to $198,813 and $197,400, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost is
determined using the average cost method. Net realizable value of inventory is
reviewed in detail each quarter, with consideration given to deterioration,
obsolescence and other factors in evaluating net realizable value.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives (three to five years)
of the individual assets. Depreciation expense amounted to $39,797 during the
period from November 22, 1996 (inception) to December 31, 1996 and $741,560 and
$200,954 during the six month periods ended June 30, 1996 and 1997,
respectively.
Included in property and equipment is demonstration equipment, which
consists of units being used for demonstration purposes by salespeople; being
evaluated by clinics, laboratories, hospitals, doctors offices or universities;
or being used in clinical trials. A listing of all demonstration equipment is
reviewed quarterly by the Company, and, based on various factors, including
whether or not the Company continues to market the products being demonstrated,
asset impairment reserves are established as necessary.
Deferred Offering Costs
The Company has capitalized deferred offering costs. Upon completion of an
offering, the costs will be netted against the proceeds of the offering.
Research and Development Costs
Research and development costs are charged to operations as incurred.
Income Taxes
The Company accounts for income taxes using the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities.
Interim Financial Information (Unaudited)
The statements of operations and cash flows for the six-month periods ended
June 30, 1997 and 1996 are unaudited and reflect all adjustments (consisting of
normal recurring adjustments) which are,
F-8
<PAGE> 78
AUTOCYTE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
in the opinion of management, necessary for a fair presentation of results of
operations and cash flows. The June 30, 1996 unaudited financial information
reflects the operations of the cytology and pathology automation business as
conducted by the Company's predecessor, RIAS.
Pro Forma Presentation of Redeemable Convertible Preferred Stock and
Shareholders' Equity (Unaudited)
The Company has issued and outstanding redeemable convertible preferred
stock which automatically converts into common stock with the closing of an
initial public offering of the Company's common stock. The pro forma
presentation in the accompanying balance sheet gives effect to the conversion of
the preferred stock on the assumption that the Company will become a public
entity and the conditions for conversion, as described in Note 8, will be
satisfied.
Stock-Based Compensation
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25. "Accounting for Stock Issued to Employees"
("APB 25"). Under APB 25, no compensation expense is recognized for stock or
stock options issued at fair value. For stock options granted at exercise prices
below the deemed fair value, the Company records deferred compensation expense
for the difference between the exercise price of the shares and the deemed fair
value. The resulting deferred compensation expense is amortized ratably over the
vesting period of the individual options.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), which provides an alternative to APB 25 in
accounting for stock-based compensation issued to employees. SFAS 123 provides
for a fair value-based method of accounting for employee stock options and
similar equity instruments. However, for companies that continue to account for
stock-based compensation arrangements under APB 25, SFAS 123 requires disclosure
of the pro forma effect on net income (loss) and earnings (loss) per share as if
the fair value based method prescribed by SFAS 123 had been applied. The
disclosure requirements are effective for fiscal years beginning after December
1, 1995, or upon initial adoption of the statement, if earlier. The Company
continues to account for stock based compensation arrangements under APB No. 25
and has adopted the pro forma disclosure requirements of SFAS 123 (Note 8).
3. SALES AND ACCOUNTS RECEIVABLE
The Company operates in a single industry and is engaged in the development
and sale of cytology and pathology automation systems for use in clinical
laboratory testing. Revenues from significant customers, those representing 10%
or more of total revenues for the respective periods, are summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 22,
1996
(INCEPTION)
THROUGH SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1996 1997
------------ --------------- ------------
(PREDECESSOR) (AUTOCYTE)
<S> <C> <C> <C>
Customer 1.................... 70.4% -- 19.5%
Customer 2.................... -- 26.9% --
Customer 3.................... -- -- 15.1%
Customer 4.................... -- 14.3% --
Customer 5.................... -- -- 14.4%
</TABLE>
F-9
<PAGE> 79
AUTOCYTE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company sells its products to international customers. These sales
represented 35.3% of sales for the six months ended June 30, 1997 and were less
than 10% of total sales for the other periods presented.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
----------- ----------
<S> <C> <C>
Demonstration equipment......................... $ 975,000 $1,071,171
Machinery and equipment......................... 299,097 295,727
Furniture, fixtures and improvements............ 75,000 79,874
Computer equipment and software................. 150,635 199,698
---------- ----------
$1,499,732 $1,646,470
Less accumulated depreciation................... (39,800) (240,383)
---------- ----------
$1,459,932 $1,406,087
========== ==========
</TABLE>
5. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
----------- ----------
<S> <C> <C>
Raw materials................................... $ 787,050 $ 598,559
Finished goods.................................. 1,124,356 1,303,356
---------- ----------
$1,911,406 $1,901,915
========== ==========
</TABLE>
6. LEASES
The Company leases its office and manufacturing facilities under two
separate operating leases which expired on April 30, 1997 and March 31, 1997,
respectively (Note 10). At December 31, 1996, future minimum payments under
these leases amounted to $62,957. Rent expense amounted to $25,245 during the
period from November 22, 1996 (inception) to December 31, 1996 and $208,140 and
$146,544 during the six-month periods ended June 30, 1996 and 1997,
respectively. Effective April 1, 1997, the Company extended the manufacturing
facility lease for an additional one-year term at a rate of $8,610 per month.
Effective May 1, 1997, the Company extended the office lease until December 31,
1997 at a rate of $9,281 per month.
7. INCOME TAXES
At December 31, 1996 and June 30, 1997, the Company has cumulative net
operating loss carryforwards available to offset future taxable income of
approximately $1,011,000 and $5,076,000, respectively, which expire in the years
2011 and 2012, respectively. Deferred income 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.
F-10
<PAGE> 80
AUTOCYTE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Components of deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
<S> <C> <C>
Deferred tax assets:
Inventory............................... $ 1,232,000 $ 1,194,000
Property & equipment.................... 1,992,000 1,690,000
Intangible assets....................... 690,000 658,000
Net operating loss carryforwards........ 390,000 2,370,000
Other................................... 84,000 106,000
------------ -----------
Total deferred tax asset..................... 4,388,000 6,018,000
Valuation allowance for deferred tax asset... (4,388,000) (6,018,000)
------------ -----------
Net deferred taxes........................... $ 0 $ 0
============ ===========
</TABLE>
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Redeemable Convertible Preferred Stock
The Company's redeemable convertible preferred stock consists of Series A
Convertible Preferred Stock (the "Series A Preferred Stock"), $0.01 par value,
9,925,000 shares authorized, 9,825,750 and 9,925,000 shares issued and
outstanding at December 31, 1996 and June 30, 1997, respectively. The Series A
Preferred Stock is convertible at the option of the holder on a 1-for-2.033
basis into shares of Common Stock. Additionally, each share of Series A
Preferred Stock will automatically convert into Common Stock upon the closing of
an initial public offering of the Company's Common Stock resulting in gross
proceeds to the Company of at least $30 million. An amendment to this provision
was subsequently approved by the stockholders of the Company on July 10, 1997
(Note 13). As of December 31, 1996 and June 30, 1997, there were 4,881,936
shares of Common Stock reserved for future issuance in the event of a conversion
of the Series A Preferred Stock.
Each holder of Series A Preferred Stock is entitled to the number of votes
equal to the number of whole shares of Common Stock into which the shares of
Series A Preferred Stock held by such holder are convertible. The Company cannot
declare or pay any distributions on shares of Common Stock until the holders of
the Series A Preferred Stock then outstanding have first received a distribution
equal to the product of (i) the per share amount of the dividends or other
distributions to be declared, paid or set aside for the Common Stock, multiplied
by (ii) the number of whole shares of Common Stock into which the Series A
Preferred Stock is then convertible.
On November 22 in each of 2001, 2002 and 2003, each holder of Preferred
Stock may cause the Company to redeem up to 33.3%, 50% and 100%, respectively,
of the shares of Preferred Stock held by such holder on such date at an initial
redemption price equal to the issuance price of $1.00756 per share. The
redemption price is subject to adjustment in the event of a stock split, stock
dividend, combination, reorganization, or other similar event involving a change
in the Preferred Stock.
Reverse Stock Split
On June 24, 1997, the Company's Board of Directors approved a 1-for-2.033
reverse stock split of the Company's Common Stock effective on June 27, 1997,
the date of stockholder approval of an amendment to the Company's Certificate of
Incorporation to effect the reverse stock split. All common share, option and
warrant data have been restated to reflect the split.
F-11
<PAGE> 81
AUTOCYTE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Equity Incentive Plan
At inception, the Company adopted the 1996 Equity Incentive Plan (the
"Plan") under which incentive and nonstatutory stock options, stock appreciation
rights and restricted stock may be granted to employees or consultants of the
Company. Generally, options and restricted stock grants vest ratably over a
48-month term. Stock options expire ten years from the date of grant.
A summary of activity under the Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER OF EXERCISE AVERAGE
FOR GRANT SHARES PRICE FAIR VALUE
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Shares reserved.......................... 1,512,543 -- $ -- $ --
Restricted stock granted................. (590,260) -- -- --
Options granted.......................... (689,836) 689,836 0.2033 0.8132
--------- ------- ------- -------
Balance at December 31, 1996.................. 232,447 689,836 0.2033 0.8132
Shares reserved.......................... 573,782 -- -- --
Options granted.......................... (302,012) 302,012 0.2033 5.0057
Options cancelled........................ 1,383 (1,383) 0.2033 0.8132
--------- ------- ------- -------
Balance at June 30, 1997...................... 505,600 990,465 $0.2033 $2.0898
========= ======= ======= =======
</TABLE>
At December 31, 1996, no options were exercisable, and all outstanding
options had a remaining contractual life of 120 months.
At inception, the Company sold 590,260 shares of restricted Common Stock
with a deemed fair value of $0.8132 per share to the Company's CEO at a price of
$0.2033 per share. Under the terms of the restricted stock purchase agreement,
the shares vest ratably over a 48-month term and are subject to repurchase by
the Company at the issuance price if the CEO ceases to be employed by the
Company.
SFAS 123
The Company has adopted the disclosure-only provisions of SFAS 123. In
accordance with SFAS 123, the fair value of each option grant was determined by
using the Black-Scholes option-pricing model with the following weighted average
assumptions; dividend yield of 0.00%; risk free interest rate of 6.56%;
volatility factor of the expected market price of the Company's Common Stock of
0.60; and an expected option life of 48 months. Had compensation cost for the
Company's stock options been determined based on the fair value at the date of
grant consistent with the provisions of SFAS 123, the Company's net loss and net
loss per share would not have differed materially from those amounts reported in
the consolidated statements of operations; therefore, supplemental pro forma
information has not been separately disclosed, as permitted by SFAS 123.
F-12
<PAGE> 82
AUTOCYTE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Common Stock Reserved for Future Issuance
The Company has reserved authorized shares of Common Stock for future
issuance as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
<S> <C> <C>
Outstanding stock options....................... 689,836 990,465
Possible future issuance under equity incentive
plan.......................................... 232,447 505,600
Redeemable convertible preferred stock.......... 4,881,936 4,881,936
--------- ---------
Total shares reserved........................... 5,804,219 6,378,001
========= =========
</TABLE>
Deferred Compensation
The Company recorded deferred compensation of $780,750 during the period
from November 22, 1996 (inception) to December 31, 1996 and $1,420,620 during
the six-month period ended June 30, 1997, for the difference between the
exercise price and the deemed fair value of the Company's common stock option
and restricted stock grants. The amount is being amortized over the vesting
period of the individual options, generally 48 months. Amortization of deferred
compensation totaled $16,203 and $133,577 during the period from November 22,
1996 (inception) to December 31, 1996 and during the six-month period ended June
30, 1997, respectively.
9. LOSS PER SHARE OF COMMON STOCK
Pro forma net loss per share of common stock and historical net loss per
share of common stock computed in accordance with Accounting Principles Board
Opinion No. 15, "Earnings Per Share" ("APB 15") are computed using the weighted
average number of shares of common stock and the dilutive effect of common stock
equivalents outstanding. The pro forma calculation assumes the conversion of all
the outstanding shares of Preferred Stock.
In accordance with Securities and Exchange Commission requirements, all
issuances of the Company's common stock options, convertible preferred stock and
other potentially dilutive securities, at prices below the expected initial
public offering price during the twelve month period preceding the planned
offering, have been included in the pro forma and historical calculations as
common stock equivalents as if they had been issued at the Company's inception
(using the treasury stock method and the estimated initial public offering
price). Application of these SEC requirements causes the pro forma and
historical loss per share calculations to result in equivalent amounts for all
periods presented.
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share,"
("SFAS 128") which requires public companies to report basic and diluted
earnings (loss) per share using the calculation methodologies set forth in the
statement. SFAS 128 is effective for years ended after December 15, 1997; thus
this pronouncement will be adopted by the Company for its fiscal year ended
December 31, 1997. Application of this pronouncement, and continuing the
application of SEC requirements as discussed in the preceding paragraph, would
not materially change the pro forma or historical loss per share amounts for the
periods presented.
10. RELATED PARTY TRANSACTIONS
The Company rents its office facilities from Laboratory Corporation of
America Holdings, Inc. ("LabCorp"), a public company partially owned by Roche of
which AutoCyte's President and Chief Executive Officer is a Director. Total rent
paid to LabCorp amounted to $11,600 during the period from November 22, 1996
(inception) to December 31, 1996 and $54,600 and $55,688 during the six-month
periods ended June 30, 1996 and 1997, respectively.
F-13
<PAGE> 83
AUTOCYTE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. RETIREMENT PLAN
The Company has a qualified 401(k) retirement plan (the "Plan").
Substantially all full-time employees are eligible to participate and
participants may contribute from 1% to 15% of their compensation to the Plan.
The Company matches 50% of each participant's contribution up to 6% of the
employees' compensation, and may make additional matching contributions at the
discretion of management, not to exceed 15% of the employees compensation. Total
expense for the plan was $5,572 and $40,175 during the period from November 22,
1996 (inception) to December 31, 1996 and during the six-month period ended June
30, 1997, respectively.
12. PRO FORMA COMBINED RESULTS OF OPERATIONS
The pro forma combined results of operations as if AutoCyte had acquired
the predecessor entity on January 1, 1996 and had been in operation for the
entire year as a combined entity would have been as follows:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM YEAR
JANUARY 1, NOVEMBER 22, ENDED
1996 TO 1996 TO DECEMBER 31,
NOVEMBER 21, DECEMBER 31, 1996
1996 1996 (PRO FORMA
(PREDECESSOR) (AUTOCYTE) COMBINED)
------------ ------------ ------------
<S> <C> <C> <C>
Sales.......................................... $ 1,747,209 $ 129,189 $ 1,876,398
Cost of goods sold............................. 2,796,802 111,826 2,908,628
------------ --------- ------------
Gross profit (loss)............................ (1,049,593) 17,363 (1,032,230)
Operating expenses:
Research and development.................. 3,907,682 451,814 4,359,496
Selling, general and administrative....... 11,965,813 493,740 12,459,553
------------ --------- ------------
15,873,495 945,554 16,819,049
------------ --------- ------------
Operating loss................................. (16,923,088) (928,191) (17,851,279)
Interest income................................ -- 42,431 42,431
------------ --------- ------------
Net loss....................................... $(16,923,088) $(885,760) $(17,808,848)
============ ========= ============
Pro forma combined net loss per share.......... $ (1.73)
============
Shares used in computing pro forma combined net
loss per share............................... 10,311,175
============
</TABLE>
- ---------------
13. SUBSEQUENT EVENTS (UNAUDITED)
Sale of Redeemable Convertible Preferred Stock
On May 19, 1997, the Company sold to certain employees an additional 99,250
shares of Series A Preferred Stock with the same features and preferences as
discussed more fully in Note 8, at a purchase price of $1.00756 per share. The
Company has estimated that the compensation expense related to the sale of these
shares at less than the deemed fair value to be approximately $397,000, all of
which was expensed at the time of sale.
Equity Incentive Plan/Director Stock Option Plan
In May and June, 1997, the Company's Board of Directors approved the
authorization of an additional 573,782 shares of Common Stock to be reserved for
issuance under the Amended and Restated 1996 Equity Incentive Plan.
Additionally, the Board of Directors approved the adoption of the 1997 Director
Stock Option Plan and reserved 100,000 shares of Common Stock for future
issuance under the plan.
F-14
<PAGE> 84
AUTOCYTE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Credit Agreement
On June 27, 1997, the Company entered into a credit agreement with certain
of its institutional stockholders and the Company's CEO. The agreement provides
the Company with access to a credit line of up to $8,000,000 at an interest rate
of prime plus 1%. As consideration for this credit agreement, the Company issued
warrants to purchase 207,291 shares of its Common Stock at an exercise price of
$2.033 per share. The warrants were immediately exercisable, and expire ten
years from the date of issuance. At the Company's election, the expiration date
of the warrants accelerates to the closing date of the Company's initial public
offering. The Company estimated the expense associated with the warrant issuance
to be approximately $1,475,000, all of which was expensed at the time of
issuance.
The Company has also agreed to issue to the lenders warrants for 661,576
additional Common Shares at an exercise price of $2.033 per share, issuable on a
pro-rata basis as funds are drawn against the credit agreement. Assuming the
closing of this Offering, the Company does not anticipate making any borrowings
under the arrangement. The credit arrangement will terminate upon the closing of
this Offering.
Amendment to Redeemable Convertible Preferred Stock Terms
On July 10, 1997, the Board of Directors and stockholders of the Company
approved an amendment to the Company's Restated Certificate of Incorporation
which would eliminate the requirement that an initial public offering of the
Company's Common Stock result in gross proceeds to the Company of at least $30
million in order to trigger an automatic conversion of the Series A Preferred
Stock. The amendment provides that any initial public offering of the Company's
Common Stock will cause a conversion of the Series A Preferred Stock provided
that the offering is approved by a pricing committee of the Company's Board of
Directors comprised of representatives of holders of a majority of the Series A
Preferred Stock. The pricing committee of the Company's Board of Directors
consists of representatives of holders of a majority of the Series A Preferred
Stock.
F-15
<PAGE> 85
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
AutoCyte, Inc.
We have audited the accompanying balance sheets of the Cytology and
Pathology Automation Business of Roche Image Analysis Systems, Inc. (the
"Business") as of December 31, 1995 and November 21, 1996, and the related
statements of operations and cash flows for the years ended December 31, 1994
and 1995 and for the period from January 1, 1996 to November 21, 1996. These
financial statements are the responsibility of the Business'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 the Cytology and Pathology
Automation Business of Roche Image Analysis Systems, Inc. at December 31, 1995
and November 21, 1996, and the results of its operations and its cash flows for
the years ended December 31, 1994 and 1995 and for the period from January 1,
1996 to November 21, 1996 in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Raleigh, North Carolina
June 13, 1997
F-16
<PAGE> 86
CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 21,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................... $ 9,530 $ 10,028
Accounts receivable, net....................................... 744,288 712,325
Inventory...................................................... 3,508,756 1,782,732
Other current assets........................................... 34,575 49,273
---------- ----------
Total current assets........................................ 4,297,149 2,554,358
Property and equipment, net of accumulated depreciation of
$4,448,000 and $5,732,000 at December 31, 1995 and November 21,
1996, respectively............................................. 6,416,967 1,451,840
---------- ----------
Total assets................................................ $0,714,116 $4,006,198
========== ==========
LIABILITIES AND BUSINESS EQUITY
Current liabilities:
Accounts payable............................................... $ 411,647 $ 2,010
Accrued expenses............................................... 300,231 1,004,188
---------- ----------
Total current liabilities................................... 711,878 1,006,198
Business equity............................................. 0,002,238 3,000,000
---------- ----------
Total liabilities and business equity....................... $0,714,116 $4,006,198
========== ==========
</TABLE>
See accompanying notes.
F-17
<PAGE> 87
CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31, 1996 TO
----------------------------- NOVEMBER 21,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales to LabCorp and its predecessor....... $ 844,593 $ 598,174 $ 297,047
Net sales to third parties..................... 2,551,717 2,797,656 1,450,162
------------ ------------ ------------
3,396,310 3,395,830 1,747,209
Cost of goods sold............................. 2,599,859 2,413,886 2,796,802
------------ ------------ ------------
Gross profit (loss)....................... 796,451 981,944 (1,049,593)
Operating expenses:
Research and development..................... 3,604,898 5,073,764 3,907,682
Selling, general and administrative.......... 8,479,057 7,895,394 11,965,813
------------ ------------ ------------
12,083,955 12,969,158 15,873,495
------------ ------------ ------------
Net loss.................................. $(11,287,504) $(11,987,214) $(16,923,088)
============ ============ ============
</TABLE>
See accompanying notes.
F-18
<PAGE> 88
CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31, 1996 TO
----------------------------- NOVEMBER 21,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................. $(11,287,504) $(11,987,214) $(16,923,088)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation........................... 1,915,481 2,242,320 1,359,527
Asset impairment write-down............ 1,980,596 506,241 5,256,680
Changes in operating assets and
liabilities:
Accounts receivable.................... 1,916,368 105,938 31,963
Inventory.............................. (162,485) (1,208,216) 403,810
Other current assets................... 105,086 (15,150) (14,698)
Accounts payable....................... (477,270) 157,953 417
Accrued expenses....................... 384,384 (1,024,112) 293,903
------------ ------------ ------------
Net cash used in operating
activities........................ (5,625,344) (11,222,240) (9,591,486)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...... (1,702,032) (1,800,295) (328,866)
------------ ------------ ------------
Net cash used in investing
activities........................ (1,702,032) (1,800,295) (328,866)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from Roche...................... 7,329,932 13,023,796 9,920,850
------------ ------------ ------------
Net cash provided by financing
activities........................ 7,329,932 13,023,796 9,920,850
------------ ------------ ------------
Net increase in cash and cash equivalents..... 2,556 1,261 498
Cash and cash equivalents at beginning of
period...................................... 5,713 8,269 9,530
------------ ------------ ------------
Cash and cash equivalents at end of period.... $ 8,269 $ 9,530 $ 10,028
============ ============ ============
</TABLE>
See accompanying notes.
F-19
<PAGE> 89
CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 21, 1996
1. DESCRIPTION OF THE BUSINESS
The Cytology and Pathology Automation Business (the "Business") of Roche
Image Analysis Systems, Inc. ("RIAS") was engaged in the manufacturing and
marketing of automated pathology workstations, and in the development and
marketing of an integrated sample preparation and automated image analysis
system to support cytologists in cervical cancer screening. The Business
represents the predecessor entity of AutoCyte, Inc. ("AutoCyte"), a company
formed in October 1996 to acquire the Business including its two principal
product candidates, the AutoCyte PREP ("PREP") sample preparation system and the
AutoCyte SCREEN ("SCREEN") automated image analysis system. In addition to this
Business, RIAS, a wholly-owned subsidiary of Roche Holding Ltd ("Roche"), was
also engaged in the sale of human leukocyte antigen ("HLA") kits used for
paternity testing. The HLA business was not acquired by AutoCyte and is thus not
included in these predecessor entity financial statements.
On November 22, 1996, RIAS entered into a Contribution Agreement with
AutoCyte and Roche whereby AutoCyte acquired the net assets and liabilities of
the Business for 3,689,129 shares of AutoCyte common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared as if the Business
had existed as a separate, stand-alone entity during the periods presented and
include the historical assets, liabilities, revenues and expenses that are
directly related to the Business's operations. However, these financial
statements are not necessarily indicative of the financial position and results
of operations which would have occurred had the Business been an independent
company.
Use of Estimates
The preparation of 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.
Concentrations of Credit Risk
The Business's principal financial instrument subject to potential
concentration of credit risk is unsecured accounts receivable. The Business
provides an allowance for doubtful accounts equal to the estimated losses to be
incurred in the collection of accounts receivable.
Revenue Recognition
Revenue from product sales is recognized when products are shipped.
Cash and Cash Equivalents
The Business considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Product Warranty
The Business's products generally carry a one year warranty against
defects. The Business provides for estimated warranty costs in the period the
related sales are made.
F-20
<PAGE> 90
CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Impairment of Long-Lived Assets
The Business adopted the Financial Accounting Standards Board Statement No
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of"
("SFAS 121") in the first quarter of 1996. During 1996, the Business decided to
focus on its newer generation PREP and SCREEN systems. Accordingly, the Business
evaluated the ongoing value of the older model systems and other equipment
included in property and equipment. Based on this evaluation, the Business
determined that assets with a carrying amount of approximately $5.4 million were
impaired and wrote them down by $3.9 million to their estimated fair value. Fair
value was based on the estimated price at which the assets could be sold.
Additionally, the Business performed similar evaluations of fair values in 1995
and 1994 and wrote-down certain demonstration equipment and other equipment by
approximately $500,000 and approximately $2 million, respectively.
Income Taxes
The results of the Business's operations were included in the consolidated
income tax returns of its parent company. No provision for income taxes has been
included in these financial statements since the Business's significant
operating losses would have precluded recording any deferred tax assets if the
Business was a stand-alone taxpayer.
Business Equity
Because the Business operated as part of a wholly-owned subsidiary of
Roche, its equity accounts have been combined and presented as "Business Equity"
which includes net amounts advanced to the Business by Roche (Note 7).
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost is
determined using the average cost method. Consideration is given to
deterioration, obsolescence and other factors in evaluating net realizable
value.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives (three to five years)
of the individual assets. Depreciation expense amounted to $1,915,481,
$2,242,320 and $1,359,527 during 1994, 1995 and the period from January 1, 1996
to November 21, 1996, respectively.
Included in property and equipment is demonstration equipment, which
consists of units being used for demonstration purposes by salespeople; being
evaluated by clinics, laboratories, hospitals, doctors offices or universities;
or being used in clinical trials. As this equipment will likely not be sold
within the next year, the amounts are recorded as a component of property and
equipment rather than inventory, and are being depreciated over their estimated
useful life of four years.
Research and Development Costs
Research and development costs are charged to operations as incurred.
Advertising Expense
The cost of advertising is expensed as incurred. Advertising expense
amounted to $302,444, $478,662 and $405,572 during 1994, 1995 and the period
from January 1, 1996 to November 21, 1996, respectively.
F-21
<PAGE> 91
CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. SALES AND ACCOUNTS RECEIVABLE
The Business operates in a single industry and is engaged in the development and
sale of cytology and pathology automation systems for use in clinical laboratory
testing. Revenues from significant customers, those representing 10% or more of
total revenues for the respective periods, are summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED JANUARY 1,
DECEMBER 31, 1996 TO
--------------------------- NOVEMBER 21,
1994 1995 1996
---------- ---------- ------------
<S> <C> <C> <C>
Customer 1............................... 24.9% 17.6% 17.0%
Customer 2............................... 19.5 -- --
Customer 3............................... -- -- 13.7
</TABLE>
The Business sells its products to international customers, however, these
sales accounted for less than 10% of total sales during all periods presented.
4. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 21,
1995 1996
------------ ------------
<S> <C> <C>
Raw materials................................. $1,119,173 $ 802,580
Finished goods................................ 2,389,583 980,152
---------- ----------
$3,508,756 $1,782,732
========== ==========
</TABLE>
During 1996, the Business decided to focus on PREP and SCREEN systems. As a
result, certain inventory items were written down by approximately $1.4 million
to their estimated net realizable values.
5. LEASES
The Business leases its office and manufacturing facilities and certain
equipment under operating leases. Rent expense amounted to $391,684, $480,725
and $421,812 during 1994, 1995 and during the period from January 1, 1996 to
November 21, 1996, respectively.
6. CORPORATE ALLOCATIONS
Roche provided substantial services to the Business, including, but not
limited to, general administration, treasury, tax, financial reporting, payroll
administration, insurance, human resources and legal functions. Roche has
traditionally charged the Business for certain of these services through
corporate allocations which were generally based on a percent of sales. The
amount of corporate allocations was dependent upon the total amount of
anticipated allocable costs incurred by Roche, less amounts charged as a
specific cost or expense rather than by allocation. The amounts allocated are
not necessarily indicative of amounts that would have been incurred by the
Business had it operated on a stand-alone basis. Management believes that the
method of expense allocation is reasonable.
F-22
<PAGE> 92
CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. BUSINESS EQUITY
A summary of the Business equity account activity is as follows:
<TABLE>
<CAPTION>
ADVANCES ACCUMULATED
FROM ROCHE DEFICIT TOTAL
------------- ------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1993.......... $ 22,044,244 $ (9,121,016) $ 12,923,228
Advances from Roche.............. 7,329,932 -- 7,329,932
Net loss for year................ -- (11,287,504) (11,287,504)
----------- ------------ ------------
Balance at December 31, 1994.......... 29,374,176 (20,408,520) 8,965,656
Advances from Roche.............. 13,023,796 -- 13,023,796
Net loss for year................ -- (11,987,214) (11,987,214)
----------- ------------ ------------
Balance at December 31, 1995.......... 42,397,972 (32,395,734) 10,002,238
Advances from Roche.............. 9,920,850 -- 9,920,850
Net loss for period.............. -- (16,923,088) (16,923,088)
----------- ------------ ------------
Balance at November 21, 1996.......... $ 52,318,822 $(49,318,822) $ 3,000,000
=========== ============ ============
</TABLE>
8. RELATED PARTY TRANSACTIONS
The Business entered into certain product sale arrangements with Laboratory
Corporation of America Holdings or its predecessor ("LabCorp"), a public company
partially owned by Roche. Sales to LabCorp amounted to $844,593, $598,174 and
$297,047 during 1994, 1995 and during the period from January 1, 1996 to
November 21, 1996, respectively.
Additionally, the Business rented its office facility from LabCorp. Rent
paid to LabCorp amounted to $96,000, $102,500 and $100,000 during 1994, 1995 and
during the period from January 1, 1996 to November 21, 1996, respectively.
F-23
<PAGE> 93
APPENDIX
Description of Illustration that appears on page 32:
1. [Drawing of two 2. [Drawing of two 3. [Drawing of two vials
vials, one with vials and two and two syringes
sampling device] syringes] in centrifuge tube]
The collection device The vial is vortexed to The vial and the syringe
with the cell sample randomize the cell sample, together are placed in a
is placed into a vial then the disaggregating centrifuge tube where the
of CytoRich syringe is placed in the cell sample is layered
preservative fluid. vial. onto a density reagent.
4. [Drawing of the centrifuge 5. [Drawing of settling column
tube containing fluid and containing sample]
sample]
The syringe is removed and the tube The concentrated cells are resus-
is centrifuged, removing debris and pended in deionized water. A cell
excess inflammatory cells. The sample is placed into a settling
diagnostic cells are concentrated column with additional fluid and
in the bottom of the tube the cells are allowed to settle.
The resulting monolayer slide is
then stained.
Description of Illustration that appears on page 34:
[Diagram depicting interaction between the cytotechnologist and SCREEN]
<PAGE> 94
============================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY OR UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, SHARES OF COMMON STOCK IN
ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER
OR SOLICITATION IN SUCH JURISDICTION OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 7
Use of Proceeds............................ 17
Dividend Policy............................ 18
Capitalization............................. 19
Dilution................................... 20
Selected Financial Data.................... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 22
Business................................... 27
Management................................. 50
Certain Transactions....................... 56
Principal Stockholders..................... 58
Description of Capital Stock............... 61
Shares Eligible for Future Sale............ 63
Underwriting............................... 65
Legal Matters.............................. 66
Experts.................................... 66
Additional Information..................... 67
Index to Financial Statements.............. F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
============================================================
============================================================
[AUTOCYTE LOGO]
------------------------
3,100,000 SHARES
COMMON STOCK
PROSPECTUS
, 1997
------------------------
DILLON, READ & CO. INC.
UBS SECURITIES
============================================================
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the expenses of issuance and distribution of the Common
Stock registered hereunder on Form S-1 other than underwriting discounts and
commissions:
<TABLE>
<S> <C>
SEC registration fee...................................... $ 15,125
Nasdaq listing fee........................................ $ 50,000
NASD filing fee........................................... $ 5,500
Blue Sky fees and expenses................................ $ 5,000
Printing and engraving expenses........................... $100,000
Accounting fees and expenses.............................. $250,000
Legal fees and expenses................................... $435,000
Transfer Agent and Registrar fees......................... $ 2,000
Miscellaneous expenses.................................... $ 22,375
--------
Total................................................ $885,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law grants the Registrant
the power to indemnify each person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by reason of the fact
that he is or was a director, officer, employee or agent of the Registrant, or
is or was serving at the request of the Registrant as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with any such action, suit or proceeding if (i) he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Registrant and (ii) with respect to any criminal action or
proceeding, he had no reasonable cause to believe his conduct was unlawful,
provided, however, no indemnification shall be made in connection with any
proceeding brought by or in the right of the Registrant where the person
involved is adjudged to be liable to the Registrant to the amendment except to
the extent approved by a court.
Article NINTH of the Registrant's Restated Certificate of Incorporation
provides that a director shall not be personally liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent that the elimination or limitation of liability is not
permitted under the Delaware General Corporation Law as in effect when such
liability is determined.
Article TENTH of the Registrant's Restated Certificate of Incorporation
provides that the Registrant shall, to the fullest extent permitted by the
Delaware General Corporation Law, as amended from time to time, indemnify each
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding by reason of the
fact that he is or was, or has agreed to become a director or officer of the
Registrant, or is or was serving, or has agreed to serve, at the request of the
Registrant, as a director, officer or trustee of, or in a similar capacity with,
another corporation, partnership, joint venture, trust or other enterprise. The
indemnification provided for in Article TENTH is expressly not exclusive of any
other rights to which those seeking indemnification may be entitled under any
law, agreement or vote of stockholders or disinterested directors or otherwise,
and shall inure to the benefit of the heirs, executors and administrators of
such persons. Article TENTH further permits the Board of Directors to authorize
the grant of indemnification rights to other employees and agents of the
Registrant and such rights may be equivalent to, or greater or less than, those
set forth in Article TENTH.
II-1
<PAGE> 96
Article V, Section 1 of the Registrant's Amended and Restated By-laws
provides that the Registrant shall, to the full extent permitted by the Delaware
General Corporation Law, as amended from time to time, and the certificate of
incorporation, indemnify each person whom it may indemnify pursuant thereto.
Article V, Section 2 of the Registrant's By-Laws provides that the
Registrant shall have the power to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Registrant, or is or was serving at the request of the Registrant as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against such person and
incurred by such person in any such capacity or arising out of such person's
status as such whether or not the Registrant would have the power to indemnify
such person against such liability under the provisions of the General
Corporation Law of the State of Delaware.
The Registrant's Restated Certificate of Incorporation provides that
directors of the Registrant will not be personally liable to the Registrant or
its stockholders for monetary damages for breach of fiduciary duty as a
director, whether or not an individual continues to be a director at the time
such liability is asserted, except for liability (i) for any breach of the
director's duty of loyalty to the Registrant or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derives an
improper personal benefit.
The Registrant has entered into agreements with all of its directors and
all of its executive officers affirming the Registrant's obligation to indemnify
them to the fullest extent permitted by law and providing various other
protections.
The Registrant carries Directors' and Officers' insurance covering its
directors and officers against certain liabilities they may incur when acting in
their capacity as directors or officers of the Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since 1996, the Registrant has sold and issued the following unregistered
securities (references to the Company's Common Stock and Series A Preferred
Stock in this item are presented without giving effect to the 1-for-2.033
reverse split of the Company's Common Stock effective on June 27, 1997):
On November 22, 1996, the Registrant sold an aggregate of 7,500,000 shares
of Common Stock to RIAS in exchange for substantially all of RIAS's assets used
in connection with the cytology and pathology automation business.
Simultaneously therewith, the Registrant also sold: (i) an aggregate of
1,697,175 shares of Series A Preferred Stock at an aggregate price of $1,710,000
to certain purchasers affiliated with the Registrant; (ii) an aggregate of
89,325 shares of Series A Preferred Stock at an aggregate price of $90,000 to
certain purchasers affiliated with RIAS or its affiliates; (iii) an aggregate of
3,970,000 shares of Series A Preferred Stock at an aggregate price of $4,000,000
to Ampersand Specialty Materials and Chemicals III Limited Partnership and
Laboratory Partners I Limited Partnership (collectively, with their companion
funds, the "Ampersand Funds"); and (iv) an aggregate of 3,970,000 shares of
Series A Preferred Stock at an aggregate price of $4,000,000 to Sprout Capital
VII, L.P., DLJ First ESC L.L.C., DLJ Capital Corporation and the Sprout CEO
Fund, L.P. (the "Sprout Funds").
The transaction on November 22, 1996 also included the issuance and sale of
1,200,000 shares of Common Stock at an aggregate price of $120,000 to Dr.
Powell.
On December 19, 1996, the Registrant sold an aggregate of 99,250 shares of
Series A Preferred Stock at an aggregate price of $100,000 to Dr. Powell.
On May 19, 1997, the Registrant sold an aggregate of 99,250 shares of
Series A Preferred Stock at an aggregate price of $100,000 to certain purchasers
affiliated with the Registrant.
II-2
<PAGE> 97
On June 27, 1997, the Registrant issued warrants to purchase an aggregate
of 421,429 shares of Common Stock at an exercise price of $1.00 per share to
certain principal stockholders as a commitment fee in connection with the
establishment of a credit agreement.
Since its inception, the Registrant has issued options to purchase an
aggregate of 2,016,500 shares of Common Stock under the AutoCyte, Inc. 1996
Equity Incentive Plan, exercisable at a weighted average price of $0.10 per
share. No options have been exercised.
No underwriter was engaged in connection with the foregoing issuance of
securities. The above described issuances of Common Stock, Series A Preferred
Stock, options to purchase Common Stock and warrants to purchase Common Stock
were made in reliance upon Section 4(2) of the Securities Act of 1933, as
amended (the "Act"), as transactions not involving any public offering and Rule
701 promulgated thereunder. The Company has reason to believe that all of the
foregoing purchasers were familiar with or had access to information concerning
the operations and financial conditions of the Company, and all of those
individuals were acquiring the shares for investment and not with a view to the
distribution thereof. At the time of issuance, all of the foregoing shares of
Common Stock and Series A Preferred Stock were deemed to be restricted
securities for purposes of the Act and the certificates representing such
securities bore legends to that effect.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following Exhibits are filed herewith:
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Certificate of Amendment of Certificate of Incorporation of the Registrant,
dated November 22, 1996.
3.3* Certificate of Amendment of Certificate of Incorporation of the Registrant,
dated June 27, 1997.
3.4* Certificate of Amendment of Certificate of Incorporation of the Registrant,
dated June 27, 1997.
3.5* Form of Restated Certificate of Incorporation of Registrant, as proposed to
be amended and restated.
3.6* By-Laws of the Registrant.
3.7* Form of Amended and Restated By-laws of Registrant, as proposed to be amended
and restated.
3.8* Amendment of Certificate of Incorporation of the Registrant, dated July 15,
1997.
4.1* Specimen of Common Stock Certificate.
4.2* Form of Warrant to Purchase Common Stock
5.1* Opinion of Palmer & Dodge LLP with respect to the legality of the securities
being registered.
10.1* Amended and Restated 1996 Equity Incentive Plan (including forms of incentive
stock option certificate and nonstatutory stock option certificate).
10.2* 1997 Director Stock Option Plan (including form of director nonstatutory
stock option certificate).
10.3* Lease Agreement dated as of March 10, 1993 by and between Carolina Hosiery
Mills, Inc. and Roche Biomedical Laboratories, Inc., the predecessor of the
Registrant's predecessor (including notices of renewal thereof dated December
27, 1995 and March 24, 1997).
10.4* Lease Agreement dated April 25, 1995 by and between Roche Biomedical
Laboratories, Inc. and Roche Image Analysis Systems, Inc. ("RIAS"), the
Registrant's predecessor (including renewals thereof dated January 10, 1996
and March 18, 1997).
10.5 [Reserved]
</TABLE>
II-3
<PAGE> 98
<TABLE>
<S> <C>
10.6+ OEM Supply Agreement dated January 13, 1995 between Tecan AG and RIAS, the
Registrant's predecessor.
10.7+ Amendment to the OEM Supply Agreement dated October 14, 1996 between Tecan AG
and RIAS, the Registrant's predecessor.
10.8 Agreement dated July 26, 1993 by and between Technical Precision Plastics,
Inc. and RIAS, the Registrant's predecessor.
10.9* Registration Rights Agreement dated as of November 22, 1996 by and among the
Registrant and the individuals and entities listed on Exhibit A thereto
(including amendment thereof dated June 26, 1997).
10.10* Contribution Agreement dated as of November 22, 1996 by and among HLR
Holdings Inc., RIAS and the Registrant.
10.11* Form of Indemnification Agreement.
10.12* Lease Agreement dated as of July 28, 1997 by and between Carolina Hosiery
Mills, Inc. and the Registrant.
11.1* Computation of Pro Forma Net Loss per Share.
23.1* Consent of Palmer & Dodge LLP (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
23.3* Consent of Bell, Seltzer, Park & Gibson.
24.1* Power of Attorney (included in signature page of the Registrant's
Registration Statement on Form S-1 filed on June 27, 1997 (File No.
333-30227)).
24.2* Certified resolutions of the Registrant authorizing power of attorney.
27.1* Financial Data Schedule.
</TABLE>
- ---------------
+ Certain confidential material contained in the document has been omitted and
filed separately with the Securities and Exchange Commission pursuant to Rule
406 of the Securities Act of 1933, as amended. Omitted information is
identified with asterisks in the appropriate places in the agreement.
* Previously filed.
Exhibits 10.1, 10.2 and 10.11 are management contracts or compensatory
plans, contracts or arrangements in which executive officers or directors of the
Registrant participate.
(b) Financial Statement Schedules
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under "Item
14-Indemnification of Directors and Officers" above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to
II-4
<PAGE> 99
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be a part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
II-5
<PAGE> 100
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to its Registration Statement (File No.
333-30227) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Elon College, State of North Carolina, on August 18,
1997.
AUTOCYTE, INC.
By: *JAMES B. POWELL, M.D.
------------------------------------
James B. Powell, M.D.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to its Registration Statement (File No. 333-30227) has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------- ---------------------------------------- ----------------
<C> <S> <C>
*JAMES B. POWELL, M.D. President, Chief Executive Officer and August 18, 1997
- -------------------------- Director (Principal Executive Officer)
James B. Powell, M.D.
/s/ WILLIAM O. GREEN Chief Financial Officer, and Vice August 18, 1997
- -------------------------- President, Finance and Administration
William O. Green (Principal Financial Officer and
Principal Accounting Officer)
*RICHARD A. CHARPIE Director August 18, 1997
- --------------------------
Richard A. Charpie
*ROBERT E. CURRY Director August 18, 1997
- --------------------------
Robert E. Curry
*THOMAS P. MAC MAHON Director August 18, 1997
- --------------------------
Thomas P. Mac Mahon
*SUSAN E. WHITEHEAD Director August 18, 1997
- --------------------------
Susan E. Whitehead
</TABLE>
*By: /s/ WILLIAM O. GREEN
----------------------------------
William O. Green
Attorney-in-Fact
II-6
<PAGE> 101
EXHIBIT INDEX
The following Exhibits are filed herewith:
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Certificate of Amendment of Certificate of Incorporation of the Registrant,
dated November 22, 1996.
3.3* Certificate of Amendment of Certificate of Incorporation of the Registrant,
dated June 27, 1997.
3.4* Certificate of Amendment of Certificate of Incorporation of the Registrant,
dated June 27, 1997.
3.5* Form of Restated Certificate of Incorporation of Registrant, as proposed to
be amended and restated.
3.6* By-Laws of the Registrant.
3.7* Form of Amended and Restated By-laws of Registrant, as proposed to be amended
and restated.
3.8* Amendment of Certificate of Incorporation of the Registrant, dated July 15,
1997.
4.1* Specimen of Common Stock Certificate.
4.2* Form of Warrant to Purchase Common Stock
5.1* Opinion of Palmer & Dodge LLP with respect to the legality of the securities
being registered.
10.1* Amended and Restated 1996 Equity Incentive Plan (including forms of incentive
stock option certificate and nonstatutory stock option certificate).
10.2* 1997 Director Stock Option Plan (including form of director nonstatutory
stock option certificate).
10.3* Lease Agreement dated as of March 10, 1993 by and between Carolina Hosiery
Mills, Inc. and Roche Biomedical Laboratories, Inc., the predecessor of the
Registrant's predecessor (including notices of renewal thereof dated December
27, 1995 and March 24, 1997).
10.4* Lease Agreement dated April 25, 1995 by and between Roche Biomedical
Laboratories, Inc. and Roche Image Analysis Systems, Inc. ("RIAS"), the
Registrant's predecessor (including renewals thereof dated January 10, 1996
and March 18, 1997).
10.5 [Reserved]
10.6+ OEM Supply Agreement dated January 13, 1995 between Tecan AG and RIAS, the
Registrant's predecessor.
10.7+ Amendment to the OEM Supply Agreement dated October 14, 1996 between Tecan AG
and RIAS, the Registrant's predecessor.
10.8 Agreement dated July 26, 1993 by and between Technical Precision Plastics,
Inc. and RIAS, the Registrant's predecessor.
10.9* Registration Rights Agreement dated as of November 22, 1996 by and among the
Registrant and the individuals and entities listed on Exhibit A thereto
(including amendment thereof dated June 26, 1997).
10.10* Contribution Agreement dated as of November 22, 1996 by and among HLR
Holdings Inc., RIAS and the Registrant.
10.11* Form of Indemnification Agreement.
10.12* Lease Agreement dated as of July 28, 1997 by and between Carolina Hosiery
Mills, Inc. and the Registrant.
11.1* Computation of Pro Forma Net Loss per Share.
23.1* Consent of Palmer & Dodge LLP (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
23.3* Consent of Bell, Seltzer, Park & Gibson.
</TABLE>
<PAGE> 102
<TABLE>
<S> <C>
24.1* Power of Attorney (included in signature page of the Registrant's
Registration Statement on Form S-1 filed on June 27, 1997 (File No.
333-30227).
24.2* Certified resolutions of the Registrant authorizing power of attorney.
27.1* Financial Data Schedule.
</TABLE>
- ---------------
+ Certain confidential material contained in the document has been omitted and
filed separately with the Securities and Exchange Commission pursuant to Rule
406 of the Securities Act of 1933, as amended. Omitted information is
identified with asterisks in the appropriate places in the agreement.
* Previously filed.
<PAGE> 1
"Portions of this agreement have been deleted pursuant to a request for
confidential treatment. Such portions are indicated by asterisks."
EXHIBIT 10.6
TECAN
OEM SUPPLY AGREEMENT
This agreement, made and entered into this January 13, 1995
between
TECAN AG
Feldbachstrasse 80
CH-8634 Hombrechtikon
SWITZERLAND
(hereinafter referred to as "TECAN")
and
ROCHE IMAGE ANALYSIS SYSTEMS
a Division of Roche Biomedical Laboratories, Inc.
231 Maple Avenue
Burlington, North Carolina 77215-5848
USA
(hereinafter referred to as "ROCHE")
Whereas, TECAN has developed a RSP (Robotic Sample Processor) which is
manufactured and sold to ROCHE as CYTO-RICH(TM) PREPARATION SYSTEM, hereafter
called "Product".
Whereas, ROCHE will sell the Product world-wide under its name and its Trademark
with its sales force and through its distributors, but will sell product solely
in combination with disposable reagents.
Whereas ROCHE will subcontract to TECAN or it's distributors on-site warranty
and service of Product.
<PAGE> 2
"Portions of this agreement have been deleted pursuant to a request for
confidential treatment. Such portions are indicated by asterisks."
Now, therefore, in consideration of the mutual covenants hereinafter expressed,
the parties agree as follows:
1. DEFINITIONS
1.1 "Contract Year" shall mean a period of twelve (12) successive calendar
months during the term of this agreement or any extension thereof, the
first contract year to commence as of January 1st, 1995.
1.2 "Product" means the CYTO-RICH PREPARATION SYSTEM, as described in
Exhibit A.
1.3 "Affiliates" shall mean distributors owned by ROCHE or TECAN.
1.4 "Application" means the use of the Product, in particular the Quad-Arm
(or direct derivatives), for the preparation of cytology or histology
samples for diagnostic purposes.
2. DEVELOPMENT AND EXCLUSIVITY
2.1 TECAN shall modify the Product for ROCHE as per the specifications in
Exhibit A, to become a OEM instrument of ROCHE. The specifications
comply with the project book Ver. 1.0.
2.2 TECAN agrees not to offer directly on the basis of an OEM, PL-, or
Semi-PL-Agreement to any third party any device similar to the Product
and intended for the Application, provided that ROCHE buys from TECAN
at least the following numbers of units of the Product:
YEAR UNITS
1995 *** See Page 8
1996 ***
1997 ***
1998 ***
1999 ***
*** units over 5 years (80% achievement of the original forecast of
*** units)
ROCHE understands that TECAN might sell individual units to end-users
that may be used for purpose similar to the Application.
2.3 TECAN will supply ROCHE with the most current Integrator software
releases and furthermore confirms that the Integrator software will be
available and supported over the life cycle of the Product.
2.4 Roche assumes all responsibility for the application software
development, documentation, installation and after sales support.
<PAGE> 3
"Portions of this agreement have been deleted pursuant to a request for
confidential treatment. Such portions are indicated by asterisks."
3. PURCHASE OF PRODUCT, QUANTITIES AND PRICING
3.1 Subject to the terms and conditions of this agreement, ROCHE shall
purchase, and TECAN shall sell to ROCHE the Product. ROCHE shall
purchase yearly a minimum quantity of the Product hereunder in
accordance with the price schedule on Exhibit B.
3.2 For the first 12 months period ROCHE is deemed to be in the 50-99 units
price bracket. If ROCHE is over-or underachieving the target of 50-99
units, ROCHE is either reimbursed or invoiced according to the
following scheme (example):
Over achievement: Purchase of 110 units per year TECAN shall
reimburse 110 times **********************
Under achievement: Purchase of 30 units per year TECAN shall invoice
30 times ********************
The 10 units purchased at the end of 1994 from TUS are included in the
purchase quantity defining the price bracket for 1995.
3.3 For each year ROCHE and TECAN agree on the minimum quantity of units to
be purchased by ROCHE in the next 12 months period. This number
determines the valid price bracket for the next 12 months period. The
new minimum quantity has to be negotiated 60 days before the expiration
date of each 12 months period.
3.4 The prices of the Product as stated in Exhibit B are valid for the
first 12 months period, starting from January 1st, 1995 and ending on
December 31, 1995.
Prices for the following 12 months period change pursuant to the
increase in production costs for TECAN. New prices have to be
negotiated 60 days before the expiration date of each 12 months period.
4. PURCHASE AND DELIVERY, PAYMENT AND SHIPMENT
4.1 In the first month of each quarter, ROCHE will order the quantities
which will be delivered during the quarter (the Shipping Schedule) and
will forecast for the following 9 months (the Production Schedule). The
Production Schedule is to be used for planning purposes only, and
summarizes the next 9 months forecast activity. The Shipping Schedule
indicates order numbers, quantities and delivery times. The Shipping
Schedule is a committed delivery for ROCHE by TECAN.
ROCHE may order Products in excess of the Shipping Schedule at any
time. TECAN will commit best efforts to meet this supply requirement.
Each purchase order of the Shipping Schedule shall contain a
description of the Products purchased, quantity purchased, routing
instructions, destination, delivery date and confirmation price. TECAN
agrees to accept telegraphic or telefaxed purchase orders.
<PAGE> 4
ROCHE will send the respective written purchase orders within 2 weeks
after sending the telegraphic or telefaxed purchase orders. TECAN will
meet and supply all Shipping Schedule requirements in accordance with
the delivery date(s) set forth in the applicable purchase order for
each Shipping Schedule, except in those cases where ROCHE fails to
follow the procedure set forth in Section 4.1.
4.2 According to the release point of the Product the payment shall be in
USD (for United States) or in CHF (for non US) deliveries. Payment
shall be net in the respective currency within 60 days from the date of
invoice. Delays in payment will result in the usual and applicable
interest rates.
4.3 The exchange rate for deliveries is set to CHF 1.30/USD. Exchange rate
fluctuations between the CHF and USD will be checked twice annually and
the exchange-risk is split 50:50 by ROCHE and TECAN. TECAN shall
invoice/issue credit note to ROCHE of 50% of the exchange rage
fluctuation influence on the ordered and paid instruments in USD
semi-annually. For the calculation basis we use the average exchange
rate of the previous 6 months.
4.4 Prices are quoted ex works. For deliveries to the U.S. Tecan US will
forward ROCHE the occurring CIF-costs.
4.5 Delivery times: ca. 6-8 weeks after receipt of ROCHE's Shipping
Schedule.
4.6 TECAN will ship the Product FCA Zurich airport or FCA Durham, North
Carolina depending on the release point. Shipment is done via common
carriers solely selected by ROCHE. All freight (and as applicable
world-wide duty) charges shall be paid by ROCHE. Title and risk of loss
or damage of any items delivered hereunder shall pass to ROCHE upon
delivery to the common carrier pursuant to the respective Incoterms
rules (1990).
4.7 Ordering, shipment and further logistics of the Hettich centrifuge is
co-ordinated by ROCHE. TECAN's sole responsibility regarding the
centrifuge is the warranty of the centrifuge.
5. PRODUCT CHANGES
5.1 TECAN may, from time to time, modify or update the Products, spare
parts or accessory material. All changes, having an effect on the
functionality of the Product shall be announced in writing. In these
cases, ROCHE shall have the right to reject the changes within 30 days,
in writing, with the exception of changes which are required by law.
5.2 The accepted changes shall be added as an amendment to the
specification in Exhibit A.
5.3 Enhancements in the Product, spare parts and accessory materials are
subject to TECAN's price policy.
<PAGE> 5
5.4 Any major changes in the application software or the documentation
governing control of the Product shall be forwarded to the responsible
product manager/sales engineer at TECAN to guarantee the compliance of
the Product with the specifications in Exhibit A.
6. LEGAL AND REGULATORY RESPONSIBILITY AND LABELLING
6.1 Any product and spare parts and all documents or other items relating
hereto supplied by TECAN under this agreement shall be manufactured
(or, as applicable, prepared) in accordance with the specifications and
manufacturing practices generally accepted in its business domain.
7. QUALITY CONTROL
Every Product and spare parts shall be subject to a quality control
inspection by TECAN and non-conforming products shall not be shipped by
TECAN.
8. INSTALLATION, TRAINING, WARRANTY AND SERVICE
8.1 ROCHE will install the Product (and the Hettich centrifuge), train
customers of ROCHE with regard to the Product. TECAN will warrant the
Product (and the Hettich centrifuge) in all countries where TECAN has
its own Affiliates (Exhibit C). In countries where TECAN is represented
through an independent distributor, TECAN will do its best effort to
provide ROCHE and its distributors and customers the same after sales
support.
8.2 For service calls within the warranty period which are not related to
the Product (e.g. application software, application in general, PC or
system) TECAN's representative will charge ROCHE the incurred expenses.
8.3 If TECAN's independent distributors do not collaborate in the way
foreseen in Section 8.1 of this Agreement, TECAN offers to train
ROCHE's local distributor at TECAN AG's location free of charge. Travel
and lodging costs have to be borne by ROCHE.
8.4 The following training is provided by TECAN to ROCHE or its
distributors free of charge on a yearly basis at either TECAN CH, TECAN
US or TECAN JAPAN premises:
# Training/Year Duration
Service/Operation 2 2-3 days
8.5 TECAN warrants each Product for a period of twelve (12) months from the
date of shipment in the sense that such Product is free from defects in
workmanship and materials and is manufactured in complete conformity
with the specifications under this agreement. Disposable parts of the
Product, i.e. valves, tips, fittings, tubings and syringes, are
excluded from any warranty.
<PAGE> 6
8.6 After the warranty period TECAN or its distributors, respectively,
offer ROCHE or ROCHE's distributors or customers, service according to
the terms specified in Exhibit D. In all other countries conditions
have to be negotiated on a local level.
8.7 ROCHE hereby indemnifies and agrees to hold TECAN harmless from and
against all claims and liabilities resulting from ROCHE's or its
distributors failure to maintain the Product according to the generally
accepted rules in the industry.
8.8 TECAN represents and warrants that Product, spare parts and accessory
materials shall be delivered free of any rights of any third party.
TECAN has good title to and has full power to sell Product, spare parts
and accessory materials to ROCHE hereunder for ROCHE's unrestricted
world-wide marketing, distribution and sale.
8.9 For a period of seven (7) years from the date of delivery of the last
unit Product shipped hereunder, TECAN agrees to maintain the ability to
deliver spare parts. The supply of service and spare parts after the
warranty period will be done on a local level between the customer of
ROCHE, respectively ROCHE and TECAN's local distributor.
8.10 ROCHE shall be responsible for its own insurance coverage against third
party claims and liabilities (including but not limited to product
liability and consequential damages).
9. TERM OF AGREEMENT
This agreement shall commence upon its execution and shall be effective
until December 31, 1995 (the initial term). This agreement shall
automatically be renewed for additional one-year terms subject to
either party's right to terminate this agreement by giving the other
party at least hundred-twenty (120) days written notice subject to
article 12 prior to the expiration date of the initial term and
thereafter to the anniversary date. (12.1)
10. TERMINATION
Both parties agree to do their best to settle any dispute arising from
this agreement amicably.
11. CONFIDENTIAL INFORMATION
Each party understands that during the course of its association with
the other, it may acquire or have access to information that is
confidential and of great value to the other ("confidential
information").
Therefore, each party ("receiving party") agrees that during the term
of this Agreement and a period of three (3) years after termination of
this agreement, it shall not use (except for the purposes set forth in
this agreement) or disclose the confidential information of the other
("the disclosing party") without the disclosing party's prior
<PAGE> 7
written consent and each party agrees that it will impose the same
obligations on its employees who have access to such confidential
information to the extent permitted by law.
12. MISCELLANEOUS PROVISIONS
12.1 All written notices and demands required or permitted to be given or
made pursuant to this agreement shall be in English and shall
conclusively be presumed for all purposes of this agreement to be given
or made at the time the notice or demand is personally given or made,
or at the time it is sent by registered mail, or fax or courier
addressed as follows:
If to ROCHE: If to TECAN:
ROCHE IMAGE ANALYSIS SYSTEMS TECAN AG
112 Orange Drive Feldbachstrasse 80
Elon College, North Carolina 27244 8634 Hombrechtikon
USA SWITZERLAND
Or to such other address as to which either party may advise the other
in writing that notices should be sent.
12.2 This agreement shall be binding upon and relate to the benefit of the
parties hereto, their successors and assignees. This agreement shall be
assignable by either party only with the prior written consent of the
other, except that either party may assign this agreement without the
consent of the other to a wholly owned subsidiary or to the purchaser
or all its stock or assets of its business to which this agreement
relates.
This Agreement supersedes earlier contracts between TECAN's Affiliates
and ROCHE regarding the Product.
13. GOVERNING LAW AND ARBITRATION CLAUSE
13.1 This agreement shall be governed by, and construed in accordance with,
the laws of Switzerland.
<PAGE> 8
13.2 Any disputes or controversies arising out of or in connection with this
agreement, including disputes on its conclusion, binding effect,
amendment and termination, shall be resolved to the exclusion of the
ordinary courts by a sole arbitrator in accordance with the
International Arbitration Rules of the Zurich Chamber of Commerce.
Arbitration shall be conducted in the English language.
Hombrechtikon, January 13, 1995 Elon College,
TECAN AG ROCHE IMAGE ANALYSIS
SYSTEMS
/s/Chris Radloff /s/ Felix Hofsetter /s/ J. Racine
- ---------------------------------------------- -----------------------
Chris Radloff Felix Hofstetter Jerome Racine
S&M Manager F&A Manager General Manager
Addendum to Article 2.2
The ten units purchased at the end of 1995 from TUS are included in the purchase
quantity specified for 1995.
<PAGE> 9
EXHIBIT A
(this is an extract from the Project Book, all information in the Project Book
supersedes the information in this exhibit)
ROCHE CYTO-RICH PREPARATION SYSTEM Part. No. _______ includes:
Description: Part Number:
1 Specimen tray
1 RSP 5051 including: 505100
1 1000 (micron symbol)l DiTi C option 520041
1 Additional 465 Dilutor 520022
4 5 ml syringes 300206
1 QUAD ______
1 Alignment rack for QUAD ______
1 Waste station including: ______
1 Tip rack ______
1 Waste / wash station ______
1 Tip loading rack ______
1 Slide rack adapter plate ______
4 Slide rack ______
1 Vacuum pump set including: ______
1 Waste bottle ______
1 Tubing Kit ______
1 Tube evacuator ______
1 Tubing Kit ______
1 Solenoid Valve Kit ______
1 Operating manual ______
1 Misc. hardware set including: ______
1 1 to 4 distribution block (Vacuum) ______
1 Special tubing guide ______
1 Waste bottle ______
The Cyto-Rich system does not include the controlling PC, nor the application
software written in Integrator.
The ROCHE CYTO-RICH PREPARATION SYSTEM is white including the safety guard and
instead of the TECAN-Logo the ROCHE-Label is placed.
<PAGE> 10
"Portions of this agreement have been deleted pursuant to a request for
confidential treatment. Such portions are indicated by asterisks."
EXHIBIT B
Price list of Products for 1995
PRODUCT PRICE BRACKET PRICE PER UNIT
CHF
25 - 49 ********
50 - 99 ********
> 100 ********
Prices are valid for purchase quantity within a 12 months period. The exchange
rate for 1995 is set to CHF 1.30/USD for deliveries to the U.S.
Prices include service and support duties as specified in article 9.1.
<PAGE> 11
EXHIBIT C
Countries where TECAN is represented through it's own Affiliates:
United Kingdom
France
Germany
Italy
Japan
Singapore
Switzerland
Austria
U.S.A.
<PAGE> 12
"Portions of this agreement have been deleted pursuant to a request for
confidential treatment. Such portions are indicated by asterisks."
EXHIBIT D
Conditions for subcontracting service in countries where TECAN is represented
through its own Affiliates. Service contracts are in the respective language of
the country.
******************************************************************************
******************************************************************************
************************
SERVICE CONTRACT WILL COVER:
- - Interaction within 1 - 3 days, depending on the country
- - Parts, labour and travelling
- - 2 preventative maintenance visits per year
SERVICE CONTRACT DOES NOT COVER:
- - Disposables (valves, tips and tubings)
- - Faults occurred due to a misuse of equipment
- - ROCHE's application software and ROCHE's confirmed reagent related problems
<PAGE> 1
"Portions of this agreement have been deleted pursuant to a request for
confidential treatment. Such portions are indicated by asterisks."
EXHIBIT 10.7
TECAN
AMENDMENT TO THE OEM SUPPLY AGREEMENT
DATED JANUARY 13, 1995
This agreement, made and entered into this October 14, 1996.
between
TECAN AG
Feldbachstrasse 80
CH-8634 Hombrechtikon
SWITZERLAND
(hereinafter referred to as "TECAN")
and
AUTOCYTE INC.
112 Orange Drive
Elon College, North Carolina 27244
USA
formerly
ROCHE IMAGE ANALYSIS SYSTEMS
(a Division of Roche Biomedical Laboratories, Inc.)
231 Maple Avenue
Burlington, North Carolina 77215-5848
USA
(hereinafter referred to as "AUTOCYTE")
In view of the recent changes in Ownership and the name change of RIAS to
AutoCyte Inc. the following articles of the OEM Supply Agreement, dated January
13, 1995, will be amended as follows:
<PAGE> 2
"Portions of this agreement have been deleted pursuant to a request for
confidential treatment. Such portions are indicated by asterisks."
\2. DEVELOPMENT AND EXCLUSIVITY
In view of the delayed market introduction of CytoRich, TECAN agrees
to modify Article 2.2 as follows:
2.2 TECAN agrees not to offer directly on the basis of an OEM, PL-, or
Semi-PL- Agreement to any third party any device similar to the
Product and intended for the Application, provided that AUTOCYTE buys
from TECAN at least the following numbers of units of the Product:
PERIOD UNITS
mid 1996 - mid 1997 ***
mid 1997 - mid 1998 ***
mid 1998 - mid 1999 ***
mid 1999 - mid 2000 ***
mid 2000 - mid 2001 ***
mid 2001 - mid 2002 ***
mid 2002 - mid 2003 ***
*** units over life cycle (80% achievement of the modified forecast
of May 1996).
AUTOCYTE understands that TECAN might sell individual units to
end-users that may be used for purpose similar to the Application.
Tecan acknowledges that it has no authority to and will not sell
slide platters or any specific CytoRich components to any other
party. /s/ EQK
Of the 10 units for the first period (mid 96 - mid 97) five (5) will
have to be ordered in 1996 and shipped and invoiced before 31st
December 1996 together with five (5) Upgrade kits. The balance will
be ordered in 1997. Any increase in number of ordered instruments is
acceptable.
3. PURCHASE OF PRODUCT, QUANTITIES AND PRICING
NO CHANGE
4. DEVELOPMENT AND EXCLUSIVITY
4.1 - 4.2 NO CHANGE
4.3 The exchange rate for deliveries from October 1996 until December 31,
1997 is set to CHF 1.25/USD, (New Exchange rate)
Exchange rate fluctuations between the CHF and USD will be checked
twice annually and the exchange-risk is split 50:50 by AUTOCYTE and
TECAN. TECAN shall invoice/issue credit note to AUTOCYTE of 50% of
the exchange rate fluctuation influence on the ordered and paid
instruments in USD semi-annually. For the calculation basis we use
the average exchange rate of the previous 6 months.
4.4 Prices are quoted FOB Zurich airport.
<PAGE> 3
4.5 Delivery times: ca. 8 - 10 weeks after receipt of AUTOCYTE's Shipping
Schedule.
4.6 TECAN will ship the Product FOB Zurich airport. Shipment is done via
common carriers solely selected by AUTOCYTE. All freight (and as
applicable world-wide duty) charges shall be paid by AUTOCYTE. Title
and risk of loss or damage of any items delivered hereunder shall
pass to AUTOCYTE upon delivery to the common carrier pursuant to the
respective Incoterms rules (1990).
4.7 STRICKEN.
8. INSTALLATION, TRAINING, WARRANTY AND SERVICE
8.1 AUTOCYTE will install the Product and train customers of AUTOCYTE
with regard to the Product.
8.2 For service calls within the warranty period which are not related to
the Product (e.g. application software, application in general, PC or
system) TECAN's representative will charge AUTOCYTE the incurred
expenses.
8.3 STRICKEN.
8.4 STRICKEN.
8.5 TECAN warrants each Product for a period of twelve (12) months from
the date of installation at AutoCyte, trade exhibition or the
customer confirmed by the returned installation report or date of
shipment if an installation report has not been received within 90
days of shipment, in the sense that such Product is free from defects
in workmanship and materials and is manufactured in complete
conformity with the specifications under this agreement. Disposable
parts or parts in contact with liquids of the Product, i.e. valves,
tips, fittings, tubings and syringes, are excluded from any warranty.
8.6 After the warranty period TECAN or its distributors, respectively,
offer AUTOCYTE or AUTOCYTE's distributors or customers, service
contracts, conditions of which have to be negotiated on a local
level.
8.7 NO CHANGE
8.8 NO CHANGE
8.9 For a period of seven (7) years from the date of delivery of the last
unit Product shipped hereunder, TECAN agrees to maintain the ability
to deliver spare parts. The supply of service and spare parts after
the warranty period will be done on a local level according to
negotiated conditions as described in Article 8.6 above.
8.10 NO CHANGE
<PAGE> 4
9 to 11: NO CHANGE
12. MISCELLANEOUS PROVISIONS
12.1 All written notices and demands required or permitted to be given or
made pursuant to this agreement shall be in English and shall
conclusively be presumed for all purposes of this agreement to be
given or made at the time the notice or demand is personally given or
made, or at the time it is sent by registered mail, or fax or courier
addressed as follows:
If to AUTOCYTE: If to TECAN:
AUTOCYTE, INC. TECAN AG
112 Orange Drive Feldbachstrasse 80
Elon College, North Carolina 27244 8634 Hombrechtikon
USA SWITZERLAND
Or to such other address as to which either party may advise the
other in writing that notices should be sent.
12.2 This agreement shall be binding upon and relate to the benefit of the
parties hereto, their successors and assignees. This agreement shall
be assignable by either party only with the prior written consent of
the other, except that either party may assign this agreement without
the consent of the other to a wholly owned subsidiary or to the
purchaser of all its stock or assets of its business to which this
agreement relates.
This Agreement supersedes earlier contracts between TECAN's
Affiliates and ROCHE or AUTOCYTE INC. respectively regarding the
Product.
Hombrechtikon, October 14, 1996 Elon College, Nov 4, 1996
TECAN AG AUTOCYTE INC.
/s/ B. Lindemann /s/ Felix Hofstetter /s/ Ernest A. Knesel
- ---------------------------------------------- ------------------------
B. Lindemann Felix Hofstetter President
S&M Manager F&A Manager
<PAGE> 5
"Portions of this agreement have been deleted pursuant to a request for
confidential treatment. Such portions are indicated by asterisks."
EXHIBIT B (AMENDED)
Price list of Products for 1996 - 1997
<TABLE>
<CAPTION>
Product Price Bracket Price per Unit Price per Unit
CHF USD (@ 1.25)
<S> <C> <C>
<25 *******-- *******--
26 - 50 *******-- *******--
51 - 99 *******-- *******--
> 100 *******-- *******--
</TABLE>
Prices are valid for purchase quantity within a 12 months period. The bracket
set for 1996 - 1997 is for less than 25 complete instruments.
The exchange rate for 1996 - 1997 is set to CHF 1.25/USD for deliveries to the
U.S.
Prices include no service and no support duties as specified in article 8.1
(amended)
EXHIBIT C: STRICKEN
EXHIBIT D: STRICKEN
<PAGE> 1
EXHIBIT 10.8
TECHNICAL PRECISION PLASTICS, INC.
- --------------------------------------------------------------------------------
AGREEMENT
This AGREEMENT is made and shall be effective this 26th day of July ,
1993, by and between Technical Precision Plastics, Inc. having administrative
offices at 1411 Dogwood Way, Mebane, NC, 27302 (hereinafter "TPP") and Roche
Image Analysis Systems (RIAS), a subsidiary of Roche Biomedical Laboratories,
Inc. having offices at 231 Maple Avenue, Burlington, NC, 27215 (hereinafter
"Roche");
WHEREAS, TPP possesses certain information relating to plastic
manufacturing ("Plastics") and Roche possesses certain know-how regarding
cytology preparation and automation ("Cytoprep"); and
WHEREAS, TPP and Roche desire to develop Roche's Cytoprep technology
applications using plastic disposables.
NOW, THEREFORE, for and in consideration of the mutual covenant
contained herein, TPP and Roche do hereby agree as follows:
1. The "Technology" shall mean any and all information, technical or
non-technical, know-how data whether in written or oral form, disclosed by Roche
to TPP, which relates to Cytology preparation and automation using Cytoprep
Technology.
2. Roche warrants that it has the full and unconditional right to
disclose the Technology, free of charge, to TPP.
3. TPP agrees not to use the received Technology for any other purpose
other than its evaluation and determination of its interest in collaborating in
developing "plastic disposables" for use with the Technology for Roche; and TPP
will treat the received Technology as if it were its own proprietary information
and will not disclose it to any third party without the written consent of
Roche.
4. All persons receiving the Technology on behalf of TPP under the
Agreement must assume in writing the same confidentiality and non-use
obligations as are set forth in this Agreement. TPP shall be responsible for
assuring that such persons comply with this paragraph prior to review of the
Technology.
5. TPP agrees that it will not directly or indirectly or in any way
market any product using the Technology except under a subsequent and separate
written agreement executed by authorized representatives of Roche.
<PAGE> 2
6. TPP acknowledges Roche's exclusive ownership of the specific
Cytoprep product designs and the tools and molds purchased by Roche for
manufacturing such product.
7. In recognition of research and development work done by TPP for the
design of all plastic components related to the Cytoprep Technology, Roche
agrees to use TPP as the sole source for such manufactured plastic components
for its North American Market relating to Cytoprep Technology for a period of at
least five (5) years beginning from the first production shipment date on each
component engineered as of this date. Should Roche in the future decide to
manufacture beyond the North American market, TPP would have the option to
manufacture in the related locations. This commitment shall be binding on Roche
provided that TPP agrees to supply Roche at a competitive price that would be
available to Roche from a third party manufacturer. If, during the terms of this
agreement, Roche informs TPP in writing that Roche has received a bona fide
lower offer from another manufacturer for product of equal quality to the
present product and such offer covers the period of time remaining on the full
term of this agreement, then TPP shall have 90 days from written notice to meet
such lower price. In the event TPP elects not to meet such lower price, then
this agreement can be kept in effect by TPP and Roche mutually agreeing on
higher price than the then competitive offer. But, in absence of such mutual
agreement, this Agreement shall be terminated at the end of 90 days.
This commitment shall be valid as long as TPP meets Roche quality and production
requirements. These requirements, which have not yet been defined, will be
mutually agreed upon by both parties and become a part of this Agreement.
Roche agrees to give TPP written notice of such failure and 60 days to remedy
the failure. If the problem is not eliminated within 60 days, Roche will be free
to obtain Cytoprep products from another source.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
fully executed by their authorized representatives in duplicate:
ROCHE IMAGE ANALYSIS SYSTEMS
By: /s/ Ernest A. Knesel Jr.
- ----------------------------
Title: Sr. V.P.
- ----------------------------
Date: 7-22-93
- ----------------------------
TECHNICAL PRECISION PLASTICS, INC.
By: /s/ James M. Piermarini
- ----------------------------
Title: President
- ----------------------------
Date: 7-26-93
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to (i) the use of our report dated June 13, 1997,
with respect to the financial statements of AutoCyte, Inc. as of December 31,
1996 and for the period from November 22, 1996 through December 31, 1996, and
(ii) the use of our report dated June 13, 1997, with respect to the financial
statements of the Cytology and Pathology Automation Business of Roche Image
Analysis Systems, Inc., as of December 31, 1995 and November 21, 1996 and for
the years ended December 31, 1994 and 1995 and for the period from January 1,
1996 through November 21, 1996 in Amendment No. 3 to the Registration Statement
(Form S-1 No. 333-30227) and related Prospectus of AutoCyte, Inc. for the
registration of 3,565,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
Raleigh, North Carolina
August 18, 1997
