<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1997
REGISTRATION NO. 333-30227
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
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 Classification Code Number) Identification Number)
organization)
</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.
================================================================================
<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 JULY 15, 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.
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS* COMPANY+
<S> <C> <C> <C>
Per Share................................ $ $ $
Total++.................................. $ $ $
</TABLE>
- ---------------
* 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
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'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 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. 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 has placed SCREEN systems in clinical laboratories in
Australia which have screened over 25,000 PREP slides in the past 18 months.
The Company submitted a premarket approval application ("PMA") for PREP to
the United States Food and Drug Administration (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. 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.
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 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.
4
<PAGE> 7
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>
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)............ $ (1.73) $ (0.62)
======== ========
Shares used in
computing net loss
per share(4)........ 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>
- ---------------
(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."
5
<PAGE> 8
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 desirable claims. 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 be successful, 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 desirable
claims. 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
itself has only limited experience in submitting or pursuing applications
necessary to gain FDA
6
<PAGE> 9
approval of a PMA. The Company may encounter unanticipated delays or significant
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, desirable claims
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. 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 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."
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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 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
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. 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 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.
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<PAGE> 11
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. Based on the advice of counsel, 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 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.
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<PAGE> 12
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 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.
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<PAGE> 13
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-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
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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 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
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<PAGE> 15
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. There can be no assurance that
the Company will be successful in selling its products to these 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. 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 the event that the Company
is unable to obtain sufficient quantities of such components 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. The Company may seek
to establish relationships with additional suppliers or vendors for components
of its
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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. 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 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 3,249 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 976,601
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 9,585,180 shares of
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<PAGE> 17
Common Stock (including 423,855 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 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
15
<PAGE> 18
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. 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. The Company currently intends to use the net proceeds for sales
and marketing activities, research and development, capital expenditures for
materials and equipment components of PREP, funding of clinical trials in
support of regulatory and reimbursement approvals and for working capital and
general corporate purposes. The Company is not yet able to estimate precisely
the allocation of the proceeds among such uses, and the timing and amount of
expenditures will vary depending upon numerous factors. 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.
16
<PAGE> 19
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.
17
<PAGE> 20
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.
18
<PAGE> 21
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).......... $ (1.73) $ (0.62)
======== ========
Shares used in per
share
calculations(3)... 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.
19
<PAGE> 22
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.
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.
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 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. 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.
20
<PAGE> 23
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. 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.
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.
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 attributable to other operating units within RIAS absorbing a
portion of manufacturing overhead in 1996 that is now incurred solely by the
Company.
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. 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,
21
<PAGE> 24
including a decrease in such sales to LabCorp from $598,000 in 1995 to $299,000
in 1996. 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 $1.3 million and the effect of lower manufacturing volumes on
absorption of fixed costs.
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.
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
$621,000 of PREP and SCREEN systems) in 1994 to $598,000 in 1995. The decrease
in sales to LabCorp 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.
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
22
<PAGE> 25
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 and from inception
through December 31, 1996 were $147,000 and $48,000, respectively.
The Company believes that the anticipated net proceeds from this Offering
together with interest thereon, the Company's existing capital resources, and
anticipated additional debt and lease financing 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. 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.
23
<PAGE> 26
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'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
conventional Pap smear test which contribute to an estimated $5.0 billion of
annual costs associated
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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> 30
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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<PAGE> 31
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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<PAGE> 32
- 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.
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 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.
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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 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
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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 being marketed by 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.
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.
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.
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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 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 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
desirable claims. See "Risk Factors -- Uncertainties Regarding FDA Approval."
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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. 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.
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 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., formerly known as Corning Clinical Laboratories, Inc., and
SmithKline Beecham Clinical Laboratories, account for almost 18 million
conventional Pap smears annually. 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.
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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 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 PREP
for cervical cancer screening. The Company currently manufactures its CytoRich
line of reagents and stains for PREP at its facility in
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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 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.
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 pervasive and continuing
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
could be impaired. Such inability would have a material adverse effect on the
Company's business, financial condition and results of operations.
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.
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
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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.
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
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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 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
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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. Based on the advice of counsel,
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 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
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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 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 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 developments or marketing initiatives may make it more difficult for
the Company to promote PREP in markets in which it competes with Cytyc.
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
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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 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
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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 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.
43
<PAGE> 46
The Company submitted a PMA for PREP to the FDA on May 12, 1997 and the
PREP PMA was accepted for substantive review 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.
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. 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
44
<PAGE> 47
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 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.
There can be no assurance that the Company will meet the FDA's export
requirements or receive 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 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 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 in
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. The current Burlington lease
expires in March 1998 with a renewal extension through March 1999, and the
Company is currently negotiating an extension through March 31, 2005. The new
lease is expected to include 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.
45
<PAGE> 48
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
46
<PAGE> 49
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. 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 1997. A graduate of St. Peter's
College, Mr. Mac Mahon received an M.B.A. in marketing from Fairleigh Dickinson
University.
47
<PAGE> 50
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 price for the Common Stock on the business day immediately
preceding the date of grant, as reported
48
<PAGE> 51
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 $140,000.
(4) Mr. Knesel served as interim President from November 22, 1996 until January
1997. During that period, no executive officer held the title of Chief
Executive Officer.
49
<PAGE> 52
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1996 by the Company to the
Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANT
----------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE
NUMBER OF TOTAL AT ASSUMED ANNUAL RATES
SECURITIES OPTIONS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERMS($)
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 12/1/06 149,999 275,778 468,747
Thomas Gahm, Ph.D............. 135,268 20.5% 0.2033 12/1/06 82,500 151,678 257,812
James W. Geyer, Ph.D.......... 98,376 14.9% 0.2033 12/1/06 60,000 110,311 187,498
</TABLE>
- ---------------
(1) These options become exercisable as to 1/48th of the shares on the first day
of each month following the date of grant. The grant date for Mr. Knesel,
Dr. Gahm and Dr. Geyer was December 1, 1996.
(2) The values in these columns are based on the applicable rate of appreciation
applied to the fair market value of the Common Stock on the date of grant
($0.8132 per share).
(3) The dollar amounts shown in these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and,
therefore, are not intended to forecast possible future appreciation, if
any, in the price of the Common Stock. Actual gains, if any, on stock option
exercises will depend on the future performance of the Common Stock, the
option holder's continued employment through the option period, and the date
on which the options are exercised.
The following table sets forth certain information concerning exercisable
and unexercisable stock options held by the Named Executive Officers as of
December 31, 1996. No shares were acquired on exercise of stock options by any
Named Executive Officers in the last fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END(#) FISCAL YEAR-END($)(1)
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
----------------------------- -------------------------
<S> <C> <C>
Ernest A. Knesel............ 0/245,941 0/149,999
Thomas Gahm, Ph.D. ......... 0/135,268 0/ 82,500
James W. Geyer, Ph.D. ...... 0/ 98,376 0/ 60,000
</TABLE>
- ---------------
(1) There was no public trading market for the Common Stock as of December 31,
1996. These values are calculated based on the fair market value of the
Common Stock on December 31, 1996 ($0.8132) less the applicable exercise
price.
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
50
<PAGE> 53
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 June 30, 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, 86,080 shares of such
restricted stock were vested and options to purchase 108,637 shares of Common
Stock were exercisable as of June 30, 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."
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<PAGE> 54
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").
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. 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, 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 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.
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<PAGE> 55
PRINCIPAL STOCKHOLDERS
The following table and footnotes set forth certain information regarding
the beneficial ownership of the Company's Common Stock as of June 30, 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)............ 1,993,834 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)................. 138,628 1.5 1.1
Thomas Gahm, Ph.D.(10).............. 46,954 * *
James W. Geyer, Ph.D.(11)........... 28,601 * *
William O. Green(12)................ 27,893 * *
Eric W. Linsley(13)................. 29,174 * *
Steven C. McPhail(14)............... 13,527 * *
All current executive officers and
directors as a group (11
persons)(15)...................... 6,376,746 67.3 50.7
</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 June 30, 1997.
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<PAGE> 56
(2) Consists of the following shares and shares that may be acquired within 60
days of June 30, 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 June 30, 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 June 30, 1997
upon the exercise of warrants.
(5) Consists solely of shares described 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 June 30,
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 40,990 shares that may be acquired within 60
days of June 30, 1997 upon the exercise of options.
(10) Includes 22,545 shares that may be acquired within 60 days of June 30, 1997
upon the exercise of options.
(11) Includes 16,396 shares that may be acquired within 60 days of June 30, 1997
upon the exercise of options.
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<PAGE> 57
(12) Includes 7,173 shares that may be acquired within 60 days of June 30, 1997
upon the exercise of options.
(13) Includes 8,454 shares that may be acquired within 60 days of June 30, 1997
upon the exercise of options.
(14) Includes 6,149 shares that may be acquired within 60 days of June 30, 1997
upon the exercise of options.
(15) See notes (2) through (14) above. Includes 313,916 shares that may be
acquired within 60 days of June 30, 1997 upon the exercise of options and
warrants.
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<PAGE> 58
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.
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<PAGE> 59
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
57
<PAGE> 60
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 3,249 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 976,601 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 9,585,180 shares of Common Stock
(including 423,855 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
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<PAGE> 61
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.
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<PAGE> 62
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.
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<PAGE> 63
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.
61
<PAGE> 64
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.
62
<PAGE> 65
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> 66
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> 67
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> 68
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> 69
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> 70
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> 71
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 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
3,689,129 shares of Common Stock.
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> 72
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. 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 $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.
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.
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.
F-8
<PAGE> 73
AUTOCYTE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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>
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.
F-9
<PAGE> 74
AUTOCYTE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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................................................ $ 10,714,116 $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............................................. 10,002,238 3,000,000
----------- ----------
Total liabilities and business equity....................... $ 10,714,116 $4,006,198
=========== ==========
</TABLE>
See accompanying notes.
F-17
<PAGE> 82
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> 83
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> 84
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> 85
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.
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> 86
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.
F-22
<PAGE> 87
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> 88
APPENDIX
Description of Illustration that appears on page 29:
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 31:
[Diagram depicting interaction between the cytotechnologist and SCREEN]
<PAGE> 89
================================================================================
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............................... 6
Use of Proceeds............................ 16
Dividend Policy............................ 16
Capitalization............................. 17
Dilution................................... 18
Selected Financial Data.................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 20
Business................................... 24
Management................................. 46
Certain Transactions....................... 52
Principal Stockholders..................... 53
Description of Capital Stock............... 56
Shares Eligible for Future Sale............ 58
Underwriting............................... 60
Legal Matters.............................. 61
Experts.................................... 61
Additional Information..................... 62
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> 90
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> 91
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 expects to enter into agreements with certain officers and
directors affirming the Registrant's obligation to indemnify them to the fullest
extent permitted by law and providing various other protections.
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> 92
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** Form of Amendment of Certificate of Incorporation.
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+* Redesign and Production Transfer Agreement dated January 12, 1995 between
Tecan AG and RIAS, the Registrant's predecessor.
</TABLE>
II-3
<PAGE> 93
<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.
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.
*Previously filed.
** To be filed by amendment.
Exhibits 10.1 and 10.2 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 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.
II-4
<PAGE> 94
(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> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 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 July 11,
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. 1 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 July 11, 1997
- -------------------------- Director (Principal Executive Officer)
James B. Powell, M.D.
/s/ WILLIAM O. GREEN Chief Financial Officer, and Vice July 11, 1997
- -------------------------- President, Finance and Administration
William O. Green (Principal Financial Officer and
Principal Accounting Officer)
*RICHARD A. CHARPIE Director July 11, 1997
- --------------------------
Richard A. Charpie
*ROBERT E. CURRY Director July 11, 1997
- --------------------------
Robert E. Curry
*THOMAS P. MAC MAHON Director July 11, 1997
- --------------------------
Thomas P. Mac Mahon
*SUSAN E. WHITEHEAD Director July 11, 1997
- --------------------------
Susan E. Whitehead
</TABLE>
*By: /s/ WILLIAM O. GREEN
----------------------------------
William O. Green
Attorney-in-Fact
II-6
<PAGE> 96
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** Form of Amendment of Certificate of Incorporation.
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+* Redesign and Production Transfer Agreement dated January 12, 1995 between
Tecan AG and RIAS, the Registrant's predecessor.
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.
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.
* Previously filed.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 3.7
AMENDED AND RESTATED BY-LAWS
OF
AUTOCYTE, INC.
ARTICLE I
STOCKHOLDERS
SECTION 1. Place of Meetings. All meetings of stockholders shall be
held at such place within or without the State of Delaware as may be designated
from time to time by the Board of Directors or, if not so designated, at the
principal office of the corporation.
SECTION 2. Annual Meeting. The annual meeting of stockholders for
the election of directors and the transaction of such other business as may
properly come before the meeting shall be held on such date and at such hour and
place as the directors or an officer designated by the directors may determine.
If the annual meeting is not held on the date designated therefor, the directors
shall cause the meeting to be held as soon thereafter as convenient.
SECTION 3. Special Meetings. Special meetings of the stockholders
may be called at any time by the President or the Board of Directors.
SECTION 4. Notice of Meetings. Except where some other notice is
required by law, written notice of each meeting of stockholders, stating the
place, date and hour thereof and the purposes for which the meeting is called,
shall be given by or under the direction of the Secretary, not less than 10 nor
more than 60 days before the date fixed for such meeting, to each stockholder
entitled to vote at such meeting of record at the close of business on the day
fixed by the Board of Directors as a record date for the determination of the
stockholders entitled to vote at such meeting or, if no such date has been
fixed, of record at the close of business on the day before the day on which
notice is given. Notice shall be given personally to each stockholder or left at
his or her residence or usual place of business or mailed postage prepaid and
addressed to the stockholder at his or her address as it appears upon the
records of the corporation. In case of the death, absence, incapacity or refusal
of the Secretary, such notice may be given by a person designated either by the
Secretary or by the person or persons calling the meeting or by the Board of
Directors. A waiver of such notice in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent to such notice. Attendance of a person at a meeting of
stockholders shall constitute a waiver of notice of such meeting, except when
the stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders need be
specified in any written waiver of notice. Notice of any meeting of the
stockholders shall be deemed to have been given to any person who may become a
stockholder of record after the
<PAGE> 2
mailing of such notice and prior to such meeting. Except as required by statute,
notice of any adjourned meeting of the stockholders shall not be required.
SECTION 5. Stockholder Nominations of Directors. Only persons who
are nominated in accordance with the following procedures shall be eligible for
election as directors at any annual or special meeting. Nominations of persons
for election as directors may be made by or at the direction of the Board of
Directors, or by any stockholder entitled to vote for the election of directors
at the meeting who complies with the notice procedures set forth in this Section
5. Such nominations, other than those made by or at the direction of the Board,
shall be made pursuant to timely notice in writing to the Chairman, if any, the
President, the Secretary or the Treasurer. To be timely, a stockholder's notice
shall be delivered to or mailed and received at the principal executive offices
of the corporation not less than 50 days nor more than 75 days prior to the
meeting; provided, however, that if less than 65 days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be so received not later than the close of
business on the 15th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such stockholder's
notice shall set forth: (a) as to each person whom the stockholder proposes to
nominate for election or re-election as a director, (i) the name, age, business
address and residence address of the person, (ii) the principal occupation or
employment of the person, (iii) the class and number of shares of capital stock
of the corporation which are beneficially owned by the person and (iv) any other
information relating to the person that is required to be disclosed in
solicitations for proxies for election of directors pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended; and (b) as to the
stockholder giving the notice (i) the name and record address of such
stockholder and (ii) the class and number of shares of capital stock of the
corporation which are beneficially owned by such stockholder. No person shall be
eligible for election as a director at any annual or special meeting of
stockholders unless nominated in accordance with the procedures set forth
herein. Nothing in this Section 5 shall be deemed to grant stockholders the
right have such nominations included on the agenda or in the notice or proxy
materials for such meeting except as otherwise required by law.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
SECTION 6. Record Date. The Board of Directors may fix in advance a
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or for the purpose of any other lawful action. Such record date shall not be
more than 60 days nor less than 10 days before the date of such meeting, nor
more than 60 days prior to any other action to which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before
- 2 -
<PAGE> 3
the day on which the meeting is held. The record date for determining
stockholders for any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating to such purpose.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
SECTION 7. Advance Notice of Stockholder-Proposed Business at Annual
Meetings. At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be brought
properly before an annual meeting, business must be either (a) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the President or the Board of Directors, (b) otherwise properly brought before
the meeting by or at the direction of the Board or (c) otherwise properly
brought before the meeting by a stockholder. In addition to any other applicable
requirements, for business to be brought properly before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Chairman, if any, the President, the Secretary or the Treasurer. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation not less than 50 days nor
more than 75 days prior to the meeting; provided, however, that if less than 65
days' notice or prior public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must be so received
not later than the close of business on the 15th day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. A stockholder's notice shall set forth as to each matter
the stockholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and record address of the stockholder proposing such business, (iii) the class
and number of shares of the corporation which are beneficially owned by the
stockholder and (iv) any material interest of the stockholder in such business.
Notwithstanding anything in these by-laws to the contrary, no business
shall be conducted at the annual meeting except in accordance with the
procedures set forth in this Section 6, provided, however, that nothing in this
Section 7 shall be deemed to preclude discussion by any stockholder of any
business properly brought before the annual meeting in accordance with said
procedure; provided, further, that nothing in this Section 7 shall be deemed to
grant stockholders the right have such business included on the agenda or in the
notice or proxy materials for such meeting except as otherwise required by law.
The chairman of an annual meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section 7, and if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.
SECTION 8. Voting List. The officer who has charge of the stock
ledger of the corporation shall make or have made, at least 10 days before every
meeting of stockholders, a complete list of the stockholders, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
- 3 -
<PAGE> 4
during ordinary business hours, for a period of at least 10 days prior to the
meeting, either at a place within the city or other municipality or community
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
section or the books of the corporation, or to vote at any meeting of
stockholders.
SECTION 9. Quorum of Stockholders. At any meeting of the
stockholders, the holders of a majority in interest of all stock issued and
outstanding and entitled to vote upon a question to be considered at the
meeting, present in person or represented by proxy, shall constitute a quorum
for the consideration of such question, but a smaller group may adjourn any
meeting from time to time. When a quorum is present at any meeting, a majority
of the stock represented thereat and entitled to vote shall, except where a
larger vote is required by law, by the Certificate of Incorporation, or by these
by-laws, decide any question brought before such meeting. Any election by
stockholders shall be determined by a plurality of the vote cast by the
stockholders entitled to vote at the election.
SECTION 10. Proxies and Voting. Unless otherwise provided in the
Certificate of Incorporation, each stockholder shall at every meeting of the
stockholders be entitled to one vote in person or by proxy for each share of the
capital stock held of record by such stockholder, but no proxy shall be voted or
acted upon after three years from its date, unless said proxy provides for a
longer period. Persons holding stock in a fiduciary capacity shall be entitled
to vote the shares so held, and persons whose stock is pledged shall be entitled
to vote, unless in the transfer by the pledger on the books of the corporation
the pledgee shall have been expressly empowered to vote thereon, in which case
only the pledgee or the pledgee's proxy may represent said stock and vote
thereon. Shares of the capital stock of the corporation belonging to the
corporation or to another corporation, a majority of whose shares entitled to
vote in the election of directors is owned by the corporation, shall neither be
entitled to vote nor be counted for quorum purposes.
SECTION 11. Conduct of Meeting. Meetings of the stockholders shall
be presided over by one of the following officers in the order of seniority and
if present and acting: the President, a Vice President, the Chairman of the
Board, if any, the Vice Chairman of the Board, if any, or, if none of the
foregoing is in office and present and acting, a chairman to be chosen by the
stockholders. The Secretary of the corporation, if present, or an Assistant
Secretary, shall act as secretary of every meeting, but if neither the Secretary
nor an Assistant Secretary is present the chairman of the meeting shall appoint
a secretary of the meeting.
ARTICLE II
DIRECTORS
SECTION 1. General Powers. The business and affairs of the
corporation shall be managed by or under the direction of a Board of Directors,
who may exercise all of the
- 4 -
<PAGE> 5
powers of the corporation which are not by law or the Certificate of
Incorporation required to be exercised by the stockholders. In the event of a
vacancy in the Board of Directors, the remaining directors, except as otherwise
provided by law, may exercise the powers of the full Board until the vacancy is
filled.
SECTION 2. Number, Election, Tenure and Qualification. Subject to
any restrictions contained in the Certificate of Incorporation, the number of
directors that shall constitute the Board of Directors shall be fixed by
resolution of the Board of Directors but in no event shall be less than three.
Directors shall be elected in the manner provided in the Certificate of
Incorporation by such stockholders as have the right to vote thereon. The number
of directors may be increased or decreased by action of the Board of Directors.
Directors need not be stockholders of the corporation.
SECTION 3. Enlargement of the Board. Subject to the restrictions
contained in the Certificate of Incorporation, the number of the Board of
Directors may be increased at any time, such increase to be effective
immediately, by vote of a majority of the directors then in office.
SECTION 4. Vacancies. Unless and until filled by the stockholders,
any vacancy in the Board of Directors, however occurring, including a vacancy
resulting from an enlargement of the Board and an unfilled vacancy resulting
from the removal of any director for cause, may be filled in the manner provided
in the Certificate of Incorporation. When one or more directors shall resign
from the Board, effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have the power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective. If at any time there are no directors in
office, then an election of directors may be held in accordance with the General
Corporation Law of the State of Delaware.
SECTION 5. Resignation. Any director may resign at any time upon
written notice to the corporation. Such resignation shall take effect at the
time specified therein, or if no time is specified, at the time of its receipt
by the President or Secretary.
SECTION 6. Removal. Directors may be removed from office only as
provided in the Certificate of Incorporation. The vacancy or vacancies thus
created may be filled by the stockholders at the meeting held for the purpose of
removal or, if not so filled, by the directors in the manner provided in Section
4 of this Article II.
SECTION 7. Committees. The Board of Directors may, by resolution or
resolutions passed by a majority of the whole Board of Directors, designate one
or more committees, each committee to consist of one or more directors of the
corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of
any member of such committee or committees, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of such absent or
disqualified member.
- 5 -
<PAGE> 6
A majority of all the members of any such committee may fix its rules of
procedure, determine its action and fix the time and place, whether within or
without the State of Delaware, of its meetings and specify what notice thereof,
if any, shall be given, unless the Board of Directors shall otherwise by
resolution provide. The Board of Directors shall have the power to change the
members of any such committee at any time, to fill vacancies therein and to
discharge any such committee, either with or without cause, at any time.
Any such committee, unless otherwise provided in the resolution of the
Board of Directors, or in these By-laws, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; but no such committee shall have
such power or authority in reference to amending the Certificate of
Incorporation, adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending a dissolution of the corporation
or a revocation of a dissolution, or amending the By-laws of the corporation,
and, unless the resolution or these By-laws expressly so provide, no such
committee shall have the power or the authority to declare a dividend or to
authorize the issuance of stock.
Each committee shall keep regular minutes of its meetings and make such
reports as the Board of Directors may from time to time request.
SECTION 8. Meetings of the Board of Directors. Regular meetings of
the Board of Directors may be held without call or formal notice at such places
either within or without the State of Delaware and at such times as the Board
may by vote from time to time determine. A regular meeting of the Board of
Directors may be held without call or formal notice immediately after and at the
same place as the annual meeting of the stockholders, or any special meeting of
the stockholders at which a Board of Directors is elected.
Special meetings of the Board of Directors may be held at any place either
within or without the State of Delaware at any time when called by the Chairman
of the Board of Directors, if any, the President, Treasurer, Secretary, or two
or more directors. Reasonable notice of the time and place of a special meeting
shall be given to each director unless such notice is waived by attendance or by
written waiver in the manner provided in these By-laws for waiver of notice by
stockholders. Notice may be given by, or by a person designated by, the
Secretary, the person or persons calling the meeting, or the Board of Directors.
No notice of any adjourned meeting of the Board of Directors shall be required.
In any case it shall be deemed sufficient notice to a director to send notice by
mail at least 72 hours, or by telegram at least 48 hours, before the meeting,
addressed to such director at his or her usual or last known business or home
address.
Directors or members of any committee designated by the directors may
participate in a meeting of the Board of Directors or such committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation by
such means shall constitute presence in person at such meeting
- 6 -
<PAGE> 7
SECTION 9. Quorum and Voting. A majority of the total number of
directors shall constitute a quorum, except that when a vacancy or vacancies
exist in the Board, a majority of the directors then in office (but not less
than one-third of the total number of the directors) shall constitute a quorum.
A majority of the directors present, whether or not a quorum is present, may
adjourn any meeting from time to time. The vote of a majority of the directors
present at any meeting at which a quorum is present shall be the act of the
Board of Directors, except where a different vote is required or permitted by
law, by the Certificate of Incorporation, or by these by-laws.
SECTION 10. Compensation. The Board of Directors may fix fees for
their services and for their membership on committees, and expenses of
attendance may be allowed for attendance at each meeting. Nothing herein
contained shall be construed to preclude any director from serving the
corporation in any other capacity as an officer, agent or otherwise, and
receiving compensation therefor.
SECTION 11. Action Without Meeting. Any action required or permitted
to be taken at any meeting of the Board of Directors, or of any committee
thereof, may be taken without a meeting, and without notice, if a written
consent thereto is signed by all members of the Board of Directors, or of such
committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the Board of Directors or such committee.
ARTICLE III
OFFICERS
SECTION 1. Titles. The officers of the corporation shall consist of
a President, a Secretary, a Treasurer, and such other officers with such other
titles as the Board of Directors shall determine, including without limitation a
Chairman of the Board, a Vice Chairman of the Board, and one or more Vice
Presidents, Assistant Treasurers, or Assistant Secretaries.
SECTION 2. Election and Term of Office. The officers of the
corporation shall be elected annually by the Board of Directors at its first
meeting following the annual meeting of the stockholders. Each officer shall
hold office until his or her successor is elected and qualified, unless a
different term is specified in the vote electing such officer, or until his or
her earlier death, resignation or removal.
SECTION 3. Qualification. Unless otherwise provided by resolution of
the Board of Directors, no officer, other than the Chairman or Vice Chairman of
the Board, need be a director. No officer need be a stockholder. Any number of
offices may be held by the same person, as the directors shall determine.
SECTION 4. Removal. Any officer may be removed, with or without
cause, at any time, by resolution adopted by the Board of Directors.
- 7 -
<PAGE> 8
SECTION 5. Resignation. Any officer may resign by delivering a
written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt or at
such later time as may be specified therein.
SECTION 6. Vacancies. The Board of Directors may at any time fill
any vacancy occurring in any office for the unexpired portion of the term and
may leave unfilled for such period as it may determine any office other than
those of President, Treasurer and Secretary.
SECTION 7. Powers and Duties. The officers of the corporation shall
have such powers and perform such duties as are specified herein and as may be
conferred upon or assigned to them by the Board of Directors, and shall have
such additional powers and duties as are incident to their office except to the
extent that resolutions of the Board of Directors are inconsistent therewith.
SECTION 8. President and Vice Presidents. The President shall be the
chief executive officer of the corporation, shall preside at all meetings of the
stockholders and the Board of Directors unless a Chairman or Vice Chairman of
the Board is elected by the Board, empowered to preside, and present at such
meeting, shall have general and active management of the business of the
corporation and general supervision of its officers, agents and employees, and
shall see that all orders and resolutions of the Board of Directors are carried
into effect.
In the absence of the President or in the event of his or her inability or
refusal to act, the Vice President if any (or in the event there be more than
one Vice President, the Vice Presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. The Board of Directors may assign to any Vice President the title of
Executive Vice President, Senior Vice President or any other title selected by
the Board of Directors.
SECTION 9. Secretary and Assistant Secretaries. The Secretary shall
attend all meetings of the Board of Directors and of the stockholders and record
all the proceedings of such meetings in a book to be kept for that purpose,
shall give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors, shall maintain a stock ledger and
prepare lists of stockholders and their addresses as required and shall have
custody of the corporate seal which the Secretary or any Assistant Secretary
shall have authority to affix to any instrument requiring it and attest by any
of their signatures. The Board of Directors may give general authority to any
other officer to affix and attest the seal of the corporation.
The Assistant Secretary if any (or if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors or if
there be no such determination, then in the order of their election) shall, in
the absence of the Secretary or in the event of the Secretary's inability or
refusal to act, perform the duties and exercise the powers of the Secretary.
SECTION 10. Treasurer and Assistant Treasurers. The Treasurer shall
have the custody of the corporate funds and securities, shall keep full and
accurate accounts of receipts
- 8 -
<PAGE> 9
and disbursements in books belonging to the corporation and shall deposit all
moneys and other valuable effects in the name and to the credit of the
corporation in such depositories as may be designated by the Board of Directors.
The Treasurer shall disburse the funds of the corporation as may be ordered by
the Board of Directors or the President, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or whenever they may require it, an account of all
transactions and of the financial condition of the corporation.
The Assistant Treasurer if any (or if there be more than one, the
Assistant Treasurers in the order determined by the Board of Directors or if
there be no such determination, then in the order of their election) shall, in
the absence of the Treasurer or in the event of his or her inability or refusal
to act, perform the duties and exercise the powers of the Treasurer.
SECTION 11. Bonded Officers. The Board of Directors may require any
officer to give the corporation a bond in such sum and with such surety or
sureties as shall be satisfactory to the Board of Directors upon such terms and
conditions as the Board of Directors may specify, including without limitation a
bond for the faithful performance of the duties of such officer and for the
restoration to the corporation of all property in his or her possession or
control belonging to the corporation.
SECTION 12. Salaries. Officers of the corporation shall be entitled
to such salaries, compensation or reimbursement as shall be fixed or allowed
from time to time by the Board of Directors.
ARTICLE IV
STOCK
SECTION 1. Certificates of Stock. One or more certificates of stock,
signed by the Chairman or Vice Chairman of the Board of Directors or by the
President or Vice President and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary, shall be issued to each stockholder
certifying, in the aggregate, the number of shares owned by the stockholder in
the corporation. Any or all signatures on any such certificate may be
facsimiles. In case any officer, transfer agent or registrar who shall have
signed or whose facsimile signature shall have been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if he or she were such officer, transfer agent or registrar at the date of
issue.
Each certificate for shares of stock which are subject to any restriction
on transfer pursuant to the Certificate of Incorporation, the By-laws,
applicable securities laws, or any agreement among any number of stockholders or
among such holders and the corporation shall have conspicuously noted on the
face or back of the certificate either the full text of the restriction or a
statement of the existence of such restriction.
SECTION 2. Transfers of Shares of Stock. Subject to the
restrictions, if any, stated or noted on the stock certificates, shares of stock
may be transferred on the books of the
- 9 -
<PAGE> 10
corporation by the surrender to the corporation or its transfer agent of the
certificate representing such shares properly endorsed or accompanied by a
written assignment or power of attorney properly executed, and with such proof
of authority or the authenticity of signature as the corporation or its transfer
agent may reasonably require. The corporation shall be entitled to treat the
record holder of stock as shown on its books as the owner of such stock for all
purposes, including the payment of dividends and the right to vote with respect
to that stock, regardless of any transfer, pledge or other disposition of that
stock, until the shares have been transferred on the books of the corporation in
accordance with the requirements of these By-laws.
SECTION 3. Lost Certificates. A new certificate of stock may be
issued in the place of any certificate theretofore issued by the corporation and
alleged to have been lost, stolen, destroyed, or mutilated, upon such terms in
conformity with law as the Board of Directors shall prescribe. The directors
may, in their discretion, require the owner of the lost, stolen, destroyed or
mutilated certificate, or the owner's legal representatives, to give the
corporation a bond, in such sum as they may direct, to indemnify the corporation
against any claim that may be made against it on account of the alleged loss,
theft, destruction or mutilation of any such certificate, or the issuance of any
such new certificate.
SECTION 4. Fractional Share Interests. The corporation may, but
shall not be required to, issue fractions of a share. If the corporation does
not issue fractions of a share, it shall (1) arrange for the disposition of
fractional interests by those entitled thereto, (2) pay in cash the fair value
of fractions of a share as of the time when those entitled to receive such
fractions are determined or (3) issue scrip or warrants in registered or bearer
form which shall entitle the holder to receive a certificate for a full share
upon the surrender of such scrip or warrants aggregating a full share. A
certificate for a fractional share shall, but scrip or warrants shall not unless
otherwise provided therein, entitle the holder to exercise voting rights, to
receive dividends thereon, and to participate in any of the assets of the
corporation in the event of liquidation. The Board of Directors may cause scrip
or warrants to be issued subject to the conditions that they shall become void
if not exchanged for certificates representing full shares before a specified
date, or subject to the conditions that the shares for which scrip or warrants
are exchangeable may be sold by the corporation and the proceeds thereof
distributed to the holders of scrip or warrants, or subject to any other
conditions which the Board of Directors may impose.
SECTION 5. Dividends. Subject to the provisions of the Certificate
of Incorporation, the Board of Directors may, out of funds legally available
therefor, at any regular or special meeting, declare dividends upon the common
stock of the corporation as and when they deem expedient.
- 10 -
<PAGE> 11
ARTICLE V
INSURANCE
SECTION 1. Indemnification. The corporation shall, to the full
extent permitted by the General Corporation Law of the State of Delaware, as
amended from time to time, the Certificate of Incorporation, and any agreement
of the Corporation, indemnify each person whom it may indemnify pursuant
thereto.
SECTION 2. Insurance. The corporation shall have power to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation 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
corporation would have the power to indemnify such person against such liability
under the provisions of the General Corporation Law of the State of Delaware.
ARTICLE VI
GENERAL PROVISIONS
SECTION 1. Fiscal Year. Except as otherwise designated from time to
time by the Board of Directors, the fiscal year of the corporation shall begin
on the first day of January and end on the last day of December.
SECTION 2. Corporate Seal. The corporate seal shall be in such form
as shall be approved by the Board of Directors. The Secretary shall be the
custodian of the seal. The Board of Directors may authorize a duplicate seal to
be kept and used by any other officer.
SECTION 3. Certificate of Incorporation. All references in these
By-laws to the Certificate of Incorporation shall be deemed to refer to the
Certificate of Incorporation of the corporation, as in effect from time to time.
SECTION 4. Execution of Instruments. The Chairman and Vice Chairman
of the Board of Directors, if any, the President, any Vice President, and the
Treasurer shall have power to execute and deliver on behalf and in the name of
the corporation any instrument requiring the signature of an officer of the
corporation, including deeds, contracts, mortgages, bonds, notes, debentures,
checks, drafts, and other orders for the payment of money. In addition, the
Board of Directors may expressly delegate such powers to any other officer or
agent of the corporation.
SECTION 5. Voting of Securities. Except as the directors may
otherwise designate, the President or Treasurer may waive notice of, and act as,
or appoint any person or persons to act as, proxy or attorney-in-fact for this
corporation (with or without power of
- 11 -
<PAGE> 12
substitution) at any meeting of stockholders or shareholders of any other
corporation or organization the securities of which may be held by this
corporation.
SECTION 6. Evidence of Authority. A certificate by the Secretary, or
an Assistant Secretary, or a temporary secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
corporation shall, as to all persons who rely on the certificate in good faith,
be conclusive evidence of that action.
SECTION 7. Transactions with Interested Parties. No contract or
transaction between the corporation and one or more of the directors or
officers, or between the corporation and any other corporation, partnership,
association, or other organization in which one or more of the directors or
officers are directors or officers, or have a financial interest, shall be void
or voidable solely for that reason, or solely because the director or officer is
present at or participates in the meeting of the Board of Directors or a
committee of the Board of Directors which authorizes the contract or transaction
or solely because the vote of any such director is counted for such purpose, if:
(1) The material facts as to the relationship or interest and as to the
contract or transaction are disclosed or are known to the Board of Directors or
the committee, and the Board or committee in good faith authorizes the contract
or transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(2) The material facts as to the relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation as of the
time it is authorized, approved or ratified by the Board of Directors, a
committee of the Board of Directors, or the stockholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
SECTION 8. Books and Records. The books and records of the
corporation shall be kept at such places within or without the State of Delaware
as the Board of Directors may from time to time determine.
ARTICLE VII
AMENDMENTS
SECTION 1. By the Board of Directors. These By-laws may be altered,
amended or repealed or new by-laws may be adopted by the affirmative vote of a
majority of
- 12 -
<PAGE> 13
the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present.
SECTION 2. By the Stockholders. These By-laws may be altered,
amended or repealed or new by-laws may be adopted by the affirmative vote of the
holders of a majority of the shares of the capital stock of the corporation
issued and outstanding and entitled to vote at any regular meeting of
stockholders, or at any special meeting of stockholders provided notice of such
alteration, amendment, repeal or adoption of new by-laws shall have been stated
in the notice of such special meeting.
- 13 -
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF PRO FORMA NET LOSS PER SHARE
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 22,
1996
(INCEPTION)
THROUGH SIX MONTHS
DECEMBER 31, ENDED JUNE
1996 30, 1997
-------------- ----------
<S> <C> <C> <C>
Historical weighted average common shares outstanding (1) .......... 4,279,389 4,279,389
Series A redeemable convertible preferred stock, assumed
converted to common stock at consummation of the planned initial
public offering (1) (2) ............................................ 4,881,936 4,881,936
Common stock equivalents for options and warrants
outstanding (1) (2) (3) ............................................ 1,149,850 1,149,850
----------- -----------
Shares used in computing pro forma net loss per share .............. 10,311,175 10,311,175
=========== ===========
Net loss for period ................................................ $ (885,760) $(6,343,511)
=========== ===========
Pro forma net loss per share ....................................... $ (0.09) $ (0.62)
=========== ===========
</TABLE>
- ----------
(1) All common stock, redeemable convertible preferred stock, options and
warrants have been adjusted for a 1-for-2.033 reverse common stock split
effective June 27, 1997.
(2) Issuance of redeemable convertible preferred stock, options, warrants and
other potentially dilutive securities, at prices below the expected public
offering price during the twelve month period preceding the planned
offering, have been included as common stock equivalents as if they had
been issued as common stock at the Company's inception.
(3) The repurchase price for all periods used in computing the proceeds
received under the treasury stock approach is the estimated initial public
offering price.
Page 1
<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. 1 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
July 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 1-MO 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> NOV-22-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 9,517,274 5,449,119
<SECURITIES> 0 0
<RECEIVABLES> 778,617 476,484
<ALLOWANCES> 17,500 74,100
<INVENTORY> 1,911,406 1,901,915
<CURRENT-ASSETS> 12,239,005 7,845,691
<PP&E> 1,499,732 1,646,470
<DEPRECIATION> 39,800 240,383
<TOTAL-ASSETS> 13,698,937 9,863,003
<CURRENT-LIABILITIES> 1,566,494 1,938,692
<BONDS> 0 0
9,882,000 9,982,000
0 0
<COMMON> 42,794 42,794
<OTHER-SE> 2,207,649 (2,100,483)
<TOTAL-LIABILITY-AND-EQUITY> 13,698,937 9,863,003
<SALES> 129,189 898,695
<TOTAL-REVENUES> 129,189 898,695
<CGS> 111,826 766,689
<TOTAL-COSTS> 111,826 766,689
<OTHER-EXPENSES> 935,554 5,147,434
<LOSS-PROVISION> 10,000 56,600
<INTEREST-EXPENSE> 0 1,475,142
<INCOME-PRETAX> (885,760) (6,343,511)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (885,760) (6,343,511)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (885,760) (6,343,511)
<EPS-PRIMARY> (.09) (.62)
<EPS-DILUTED> (.09) (.62)
</TABLE>
