<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
SEPTEMBER 30, 1999
TRIPATH IMAGING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-22885 55-1995728
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
780 PLANTATION DRIVE, BURLINGTON, NORTH CAROLINA 27215
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(336) 222-9707
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On September 30, 1999, TriPath Imaging, Inc. ("TriPath"), formerly AutoCyte,
Inc., completed its acquisition of NeoPath, Inc. ("NeoPath"). The acquisition
was structured as a merger (the "Merger") of a wholly owned subsidiary of
TriPath with and into NeoPath pursuant to an Agreement and Plan of Merger dated
as of June 4, 1999. The Merger was a tax-free reorganization and is being
accounted for as a pooling of interests.
As consideration for the Merger, the shareholders of NeoPath received 0.7903
share of common stock, $0.01 par value, of TriPath ("TriPath Common Stock") in
exchange for each of their shares of common stock, $0.01 par value, of NeoPath.
Cash is payable in lieu of any fractional shares of TriPath Common Stock
otherwise issuable in the Merger for a price equal to the fraction times
$5.24375. Outstanding employee and director options and warrants to purchase
shares of NeoPath common stock were automatically converted into TriPath options
and warrants at the same exchange ratio.
The number of shares of TriPath Common Stock and cash in lieu of fractional
shares delivered as the merger consideration was determined through arms-length
negotiation between the parties.
Prior to the Merger, the following relationships existed between TriPath and
NeoPath:
In March 1999, TriPath and NeoPath announced an agreement to pursue a
supplemental study to allow NeoPath to obtain approval from the FDA to use the
AutoPap Primary Screening System to screen PREP slides. This supplement was
submitted to the FDA on September 30, 1999.
In connection with the acquisition by TriPath of the entire intellectual
property estate of Neuromedical Systems, Inc. ("NSI"), which was completed on
May 17, 1999, TriPath succeeded NSI as the plaintiff in certain patent
infringement litigation (the "Patent Litigation") filed by NSI against NeoPath.
The action is currently stayed pending completion of the bankruptcy proceedings
in which NSI is subject. TriPath (as successor to the claim filed by NSI and as
parent of NeoPath) expects to have the Patent Litigation dismissed.
On April 24, 1999, TriPath entered into a purchase and sale agreement with
NeoPath, providing for NeoPath to acquire an undivided interest in the
intellectual property acquired by TriPath from NSI in exchange for $2.2 million
in cash and 1,230,000 shares of NeoPath common stock. TriPath (for itself and as
parent of NeoPath) does not expect to complete this transaction.
Other than described in this report, there was no material relationship between
NeoPath or its shareholders and TriPath or any of its affiliates, directors or
officers, or any associate of a TriPath director or officer.
The assets acquired in the Merger were used by NeoPath in the business of
developing and marketing visual and intelligence technology to increase accuracy
in medical testing. AutoCyte intends that NeoPath, as a wholly owned subsidiary
of TriPath, will operate in the same business.
ITEM 7. FINANCIAL STATEMENT, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired
The following financial statements of NeoPath, Inc., including
independent auditors' report of Ernst & Young LLP, appear as
Exhibit 99.1 to this Current Report on Form 8-K and are
incorporated herein by reference:
Report of Independent Auditors; Balance Sheets as of December
31, 1998 and 1997; Statements of Operations for the Years
Ended December 31, 1998, 1997, and 1996; Statements of
Shareholders' Equity for the Years Ended December 31, 1998,
1997, and 1996; Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996; Notes to Financial
Statements; Unaudited Balance Sheet for the Six Months Ended
June 30, 1999; Unaudited Statement of Operations for the Three
Months Ended June 30, 1999 and 1998 and for the Six Months
Ended June 30, 1999 and 1998; Unaudited Statements of Cash
Flows for the Six Months Ended June 30, 1999 and 1998; and
Notes to Unaudited Financial Statements
-2-
<PAGE> 3
(b) Pro Forma Financial Information.
The following unaudited pro forma combined condensed financial
statements appear as Exhibit 99.2 to this Current Report on
Form 8-K and are incorporated herein by reference:
Introduction to Unaudited Pro Forma Combined Condensed
Financial Statements; Unaudited Pro Forma Combined Condensed
Balance Sheet as of June 30, 1999; Unaudited Pro Forma
Combined Condensed Statement of Operations for the Six Months
Ended June 30, 1999; Unaudited Pro Forma Combined Condensed
Statement of Operations for the Six Months Ended June 30,
1998; Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31, 1998; Unaudited Pro
Forma Combined Condensed Statement of Operations for the Year
Ended December 31, 1997; and Unaudited Pro Forma Combined
Condensed Statement of Operations for the Year Ended December
31, 1996
(c) Exhibits.
2.1 Agreement and Plan of Merger among AutoCyte, Inc.
(now TriPath Imaging, Inc.), Trilogy Acquisition
Corporation and NeoPath, Inc. dated as of June 4,
1999. Previously filed as Exhibit 2.1 to TriPath's
Current Report of Form 8-K dated June 4, 1999
(Commission File No. 0-22885) and incorporated herein
by reference.
23.1 Consent of Ernst & Young LLP, independent auditors of
NeoPath, Inc.
99.1 Financial statements of NeoPath, Inc., including
independent auditors' report of Ernst & Young LLP.
Filed herewith.
99.2 Unaudited pro forma combined condensed financial
statements of AutoCyte, Inc. (now TriPath Imaging,
Inc.) and NeoPath, Inc. Filed herewith.
99.3 Press release dated October 1, 1999. Filed herewith.
-3-
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: October 7, 1999 TRIPATH IMAGING, INC.
By: /s/ Eric W. Linsley
--------------------------------
Eric W. Linsley
Vice President, Finance and
Chief Financial Officer
-5-
<PAGE> 5
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Merger among AutoCyte, Inc. (now TriPath
Imaging, Inc.), Trilogy Acquisition Corporation and NeoPath,
Inc. dated as of June 4, 1999. Previously filed as Exhibit 2.1
to TriPath's Current Report of Form 8-K dated June 4, 1999
(Commission File No. 0-22885) and incorporated herein by
reference.
23.1 Consent of Ernst & Young LLP, independent auditors of
NeoPath, Inc.
99.1 Financial statements of NeoPath, Inc., including independent
auditors' report of Ernst & Young LLP. Filed herewith.
99.2 Unaudited pro forma combined condensed financial statements of
AutoCyte, Inc. (now TriPath Imaging, Inc.) and NeoPath, Inc.
Filed herewith.
99.3 Press release dated October 1, 1999. Filed herewith.
-6-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-41465 and 333-41467) of TriPath Imaging, Inc. (f/k/a
AutoCyte, Inc.) ("TriPath") of our report dated February 9, 1999, with respect
to the consolidated financial statements of NeoPath, Inc. ("NeoPath") included
in NeoPath's Annual Report (Form 10-K) and included in TriPath's Current Report
on Form 8-K filed with the Securities and Exchange Commission on October 7,
1999.
/s/ Ernst & Young LLP
Seattle, Washington
October 7, 1999
<PAGE> 1
Exhibit 99.1
------------
NEOPATH, INC.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
NeoPath, Inc.
We have audited the accompanying balance sheets of NeoPath, Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NeoPath, Inc. as of December
31, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Seattle, Washington
February 9, 1999
<PAGE> 2
NEOPATH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,579,867 $ 3,308,970
Securities available-for-sale............................. 3,374,549 25,409,633
Accounts receivable, net.................................. 3,011,078 3,863,818
Inventories............................................... 6,744,417 7,514,001
Other current assets...................................... 392,415 187,147
------------- ------------
Total current assets........................................ 19,102,326 40,283,569
Fee-per-use systems, net.................................... 14,602,963 8,564,189
Property and equipment, net................................. 3,530,694 5,979,849
Intangible assets, net...................................... -- 3,383,925
Deposits and other assets................................... 913,850 729,280
------------- ------------
Total assets................................................ $ 38,149,833 $ 58,940,812
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,944,252 $ 2,173,179
Salaries and wages payable................................ 1,681,710 2,357,045
Customer deposits......................................... 332,485 431,877
Other accrued liabilities................................. 1,157,077 567,759
Current portion of long-term obligations.................. 2,549,151 80,966
------------- ------------
Total current liabilities................................... 8,664,675 5,610,826
Long-term obligations, less current portion................. 1,257,027 101,872
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none issued and outstanding................ -- --
Common stock, $.01 par value; 40,000,000 shares
authorized; 14,504,623 and 14,389,378 shares issued and
outstanding at December 31, 1998 and 1997,
respectively........................................... 142,057,561 141,057,881
Accumulated deficit....................................... (113,813,699) (87,633,118)
Accumulated other comprehensive loss...................... (15,731) (196,649)
------------- ------------
Total shareholders' equity.................................. 28,228,131 53,228,114
------------- ------------
Total liabilities and shareholders' equity.................. $ 38,149,833 $ 58,940,812
============= ============
</TABLE>
See accompanying notes.
2
<PAGE> 3
NEOPATH, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues......................................... $ 12,078,936 $ 10,824,380 $ 3,061,849
Cost of revenues................................. 6,711,314 4,774,920 1,904,559
------------ ------------ ------------
Gross margin................................... 5,367,622 6,049,460 1,157,290
Operating expenses:
Research and development....................... 11,269,363 14,248,669 11,202,375
Selling, general and administrative............ 17,950,151 17,745,936 11,295,228
Write-off of intangible assets................. 3,084,289 -- --
------------ ------------ ------------
32,303,803 31,994,605 22,497,603
------------ ------------ ------------
Loss from operations............................. (26,936,181) (25,945,145) (21,340,313)
Interest income.................................. 1,008,638 2,399,117 3,741,843
Interest expense................................. (253,038) (50,884) (56,813)
------------ ------------ ------------
Net loss......................................... $(26,180,581) $(23,596,912) $(17,655,283)
============ ============ ============
Basic and diluted net loss per share............. $ (1.81) $ (1.66) $ (1.36)
============ ============ ============
Weighted average common shares outstanding....... 14,467,902 14,197,307 13,029,314
============ ============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
NEOPATH, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
------------------------- OTHER
NUMBER OF DEFERRED ACCUMULATED COMPREHENSIVE
SHARES AMOUNT COMPENSATION DEFICIT INCOME (LOSS) TOTAL
---------- ------------ ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996.... 9,819,487 $ 71,649,971 $(175,782) $ (46,380,923) $ 39,945 $ 25,133,211
Follow on public offering --
common stock, net of
issuance costs of
$4,384,649................ 2,875,000 61,740,351 -- -- -- 61,740,351
Exercise of options and
warrants.................. 957,669 2,889,169 -- -- -- 2,889,169
Amortization of deferred
compensation.............. -- (23,745) 101,536 -- -- 77,791
Unrealized loss on
securities
available-for-sale........ -- -- -- -- (583,103) (583,103)
Net loss.................... -- -- -- (17,655,283) -- (17,655,283)
------------
Comprehensive loss........ (18,238,386)
---------- ------------ --------- ------------- --------- ------------
Balance at December 31,
1996........................ 13,652,156 136,255,746 (74,246) (64,036,206) (543,158) 71,602,136
Exercise of options and
warrants.................. 688,658 3,952,135 -- -- -- 3,952,135
Amortization of deferred
compensation.............. -- -- 74,246 -- -- 74,246
Common stock issued on
purchase of Pathfinder
System product line....... 48,564 850,000 -- -- -- 850,000
Unrealized appreciation on
securities
available-for-sale........ -- -- -- -- 346,509 346,509
Net loss.................... -- -- -- (23,596,912) -- (23,596,912)
------------
Comprehensive loss........ (23,250,403)
---------- ------------ --------- ------------- --------- ------------
Balance at December 31,
1997........................ 14,389,378 141,057,881 -- (87,633,118) (196,649) 53,228,114
Exercise of options and
warrants.................. 56,520 119,752 -- -- -- 119,752
Release of common stock held
in escrow................. 42,050 549,278 -- -- -- 549,278
Issuance of common stock
under employee stock
purchase plan............. 16,675 130,650 -- -- -- 130,650
Stock-based compensation to
consultants............... -- 200,000 -- -- -- 200,000
Unrealized appreciation on
securities
available-for-sale........ -- -- -- -- 180,918 180,918
Net loss.................... -- -- -- (26,180,581) -- (26,180,581)
------------
Comprehensive loss........ (25,999,663)
---------- ------------ --------- ------------- --------- ------------
Balance at December 31,
1998........................ 14,504,623 $142,057,561 $ -- $(113,813,699) $ (15,731) $ 28,228,131
========== ============ ========= ============= ========= ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
NEOPATH, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................. $(26,180,581) $(23,596,912) $(17,655,283)
Adjustments to reconcile net loss to net cash used
in operating activities:
Write-off of intangible assets.................. 3,084,289 -- --
Depreciation and amortization................... 5,699,537 4,326,157 1,994,064
Stock-based compensation........................ 200,000 74,246 77,791
Accrued interest on securities
available-for-sale............................ 562,267 1,152,187 660,623
Net change in operating accounts:
Accounts receivable........................... 852,740 (3,023,562) (840,256)
Inventories and fee-per-use systems........... (7,048,460) (8,243,774) (11,093,253)
Accounts payable and accrued liabilities...... 585,664 1,208,837 1,839,915
Other........................................... (364,591) (594,194) 40,888
------------ ------------ ------------
Net cash used in operating activities.............. (22,609,135) (28,697,015) (24,975,511)
INVESTING ACTIVITIES
Purchases of securities available-for-sale........... (1,743,949) (5,349,511) (75,750,434)
Maturities of securities available-for-sale.......... 23,397,684 29,750,677 43,169,070
Purchase of Pathfinder System product line........... -- (2,696,114) --
Additions to property and equipment.................. (640,689) (950,424) (3,325,122)
Other................................................ (6,756) 3,379 166,396
------------ ------------ ------------
Net cash provided by (used in) investing
activities......................................... 21,006,290 20,758,007 (35,740,090)
FINANCING ACTIVITIES
Proceeds from note payable to bank................... 4,950,000 -- --
Payments on note payable to bank..................... (1,236,369) -- --
Principal payments on obligations under capital
leases............................................. (90,291) (75,558) (193,441)
Payment on short-term note payable issued in purchase
of Pathfinder System product line.................. -- (500,000) --
Exercise of options and warrants..................... 119,752 3,952,135 2,889,169
Issuance of common stock under employee stock
purchase plan...................................... 130,650 -- --
Issuance of common stock, net........................ -- -- 61,740,351
------------ ------------ ------------
Net cash provided by financing activities............ 3,873,742 3,376,577 64,436,079
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents........................................ 2,270,897 (4,562,431) 3,720,478
Cash and cash equivalents:
Beginning of year.................................. 3,308,970 7,871,401 4,150,923
------------ ------------ ------------
End of year........................................ $ 5,579,867 $ 3,308,970 $ 7,871,401
============ ============ ============
NONCASH TRANSACTIONS
AutoPap Systems reclassified to fee-per-use systems,
net................................................ $ 8,745,621 $ 4,152,386 $ 6,563,537
AutoPap Systems reclassified to (from) property and
equipment, net..................................... $ (663,839) $ 2,457,367 $ 729,362
</TABLE>
See accompanying notes.
5
<PAGE> 6
NEOPATH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS NeoPath, Inc. ("NeoPath" or the "Company") develops and markets
visual intelligence technology to increase accuracy in medical testing.
NeoPath's initial products include two automated screening systems that
integrate proprietary high-speed morphology computers, video imaging technology,
and sophisticated image interpretation software to capture and analyze thousands
of microscopic images from a Papanicolaou ("Pap") smear slide for the early
detection of cervical cancer.
The AutoPap(R) 300 QC Automatic Pap Screener System (the "AutoPap QC") is a
rescreening device used for quality control and rescreening of previously
screened Pap smear slides. The AutoPap(R) Primary Screening System (the "AutoPap
Screener") is an enhanced system that classifies up to 25% of such slides as
requiring no further review.
The "AutoPap System" refers to the AutoPap Screener and the AutoPap QC
together.
REVENUES AND MARKETS NeoPath's primary market includes domestic and
foreign clinical laboratories. Domestic revenues are generated primarily through
NeoPath's direct sales activities; international revenues are derived primarily
through distributors. Approximately 19% of NeoPath's revenues in 1998 were from
customers outside of the United States, compared to 51% in 1997 and 45% in 1996.
The Company's four largest customers accounted for 41% of total revenues in
1998, compared to 65% in 1997 and 86% in 1996. The Company recognizes revenue on
either a product sale or fee-per-use basis (subject to service and license
agreements, rental contracts, and minimum payments on certain fee-per-use
contracts). Fee-per-use revenues commence in the month an AutoPap System is
initially placed in commercial use at the customer site. Sales of AutoPap
Systems are generally recognized at date of shipment. In the past three years,
sale revenues (including upgrades) have accounted for 61 to 65% of total
revenues. Remaining revenues consisted primarily of fee-per-use contract
billings.
CASH EQUIVALENTS Short-term investments with a purchased maturity of three
months or less are considered to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
SECURITIES AVAILABLE-FOR-SALE NeoPath's investment portfolio is classified
as available-for-sale, and such securities are stated at fair value, with the
unrealized gains and losses included in other comprehensive income or loss.
Interest earned on securities available-for-sale is included in interest income.
The amortized cost of investments in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization and
accretion are included in interest income. The cost of securities sold is
calculated using the specific identification method.
INVENTORIES Inventories are valued at the lower of cost or market (first
in, first out basis).
FEE-PER-USE SYSTEMS AutoPap Systems manufactured for fee-per-use
placements are carried in inventories until the AutoPap Systems are shipped, at
which time they are reclassified to fee-per-use systems (non-current assets).
Fee-per-use systems are depreciated on a straight-line basis over an estimated
useful life of four years.
NeoPath purchases all components for the AutoPap System from outside
vendors, including certain components from sole-source or single vendors. The
establishment of additional or replacement sources of supply for the AutoPap
System could require regulatory approval. In addition, a vendor's inability to
supply acceptable components in a timely manner and in the quantity required
could delay or halt the Company's manufacture of its products.
6
<PAGE> 7
NEOPATH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost, less
accumulated depreciation and amortization. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the related assets,
ranging from three to seven years. Leasehold improvements are amortized over the
lesser of their estimated useful lives or the term of the lease.
ASSET IMPAIRMENT In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," the Company recognizes impairment
losses on long-lived assets used in operations when indicators of impairment are
present and the discounted cash flows estimated to be generated by those assets
are less than the assets' carrying amounts. During 1998, the Company recognized
such a loss for the write down of intangible assets related to the Pathfinder
System product line (see Note 4). There were no such losses recognized in 1997
or 1996.
STOCK-BASED COMPENSATION NeoPath has elected to follow the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations in accounting for its
stock options. Because the exercise price of the Company's stock options
generally equals the market price of the underlying stock on the date of grant,
no corresponding compensation expense has been recognized since NeoPath's
initial public stock offering. (See Note 7 for SFAS No. 123 "Accounting for
Stock-Based Compensation" pro forma disclosures.)
In accordance with applicable accounting standards, NeoPath recognizes
compensation expense for options and warrants granted to consultants in lieu of
cash payment.
ADVERTISING EXPENSES Advertising expenses are expensed as incurred. Total
advertising expenses incurred during 1998, 1997, and 1996 were $1.1 million,
$0.7 million, and $0.3 million, respectively.
BASIC AND DILUTED NET LOSS PER SHARE Basic and diluted net loss per share
is computed based on the weighted average number of shares of common stock
outstanding. Because NeoPath's stock options and warrants are not dilutive (due
to net losses) there is no difference between basic net loss per share and
diluted net loss per share.
COMPREHENSIVE INCOME As of January 1, 1998, NeoPath adopted SFAS No. 130,
"Reporting Comprehensive Income." Statement 130 established new rules for the
reporting and display of comprehensive income or loss and its components;
however, the adoption of this Statement had no impact on the Company's operating
results or shareholders' equity. Statement 130 requires unrealized gains or
losses on the Company's securities available-for-sale, which prior to adoption
were reported within shareholders' equity, to be included in other comprehensive
income or loss. Statement 130 also requires presentation of accumulated other
comprehensive income or loss separately in shareholders' equity; accordingly,
prior year financial statements have been reclassified to conform to these
requirements.
BUSINESS SEGMENTS NeoPath currently operates in a single business
segment -- clinical laboratories -- and management evaluates its operating
performance based on this single segment.
CONCENTRATIONS OF CREDIT RISK The Company invests its excess cash in
accordance with guidelines that limit the credit exposure to any one financial
institution and to any one type of investment. The guidelines also specify that
the financial instruments are issued by institutions with strong credit ratings.
The securities are generally not collateralized and mature within two years.
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.
7
<PAGE> 8
NEOPATH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale consist of the following:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31, 1998 COST GAINS LOSSES FAIR VALUE
- ----------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Corporate bonds................... $ 3,390,280 $5,608 $ (21,339) $ 3,374,549
=========== ====== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31, 1997 COST GAINS LOSSES FAIR VALUE
- ----------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Corporate bonds................... $17,888,047 $ 835 $(112,479) $17,776,403
Government bonds.................. 7,718,235 -- (85,005) 7,633,230
----------- ------ --------- -----------
$25,606,282 $ 835 $(197,484) $25,409,633
=========== ====== ========= ===========
</TABLE>
There were realized gains of $5,092 and realized losses of $43,472 on sales
of securities available-for-sale for the year ended December 31, 1998. There
were no realized gains or losses on sales of securities available-for-sale for
the years ended December 31, 1997 and 1996. The net adjustment for unrealized
holding gains and losses on securities available-for-sale, included in other
comprehensive income or loss, was a gain of $180,918 in 1998, a gain of $346,509
in 1997, and a loss of $583,103 in 1996. The fair value of securities
available-for-sale maturing within one year totals $1,282,882. The fair value of
securities available-for-sale maturing between one and two years totals
$2,091,667. The Company considers all securities available-for-sale as available
for use in current operations.
NOTE 3 BALANCE SHEET INFORMATION
Detailed balance sheet data is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Accounts receivable
Receivables............................................... $3,477,196 $4,363,818
Allowance for doubtful accounts........................ (466,118) (500,000)
---------- ----------
$3,011,078 $3,863,818
========== ==========
Inventories
Raw materials............................................. $2,093,748 $3,819,830
Work-in-process........................................... 2,365,472 1,061,900
Finished goods............................................ 2,285,197 2,632,271
---------- ----------
$6,744,417 $7,514,001
========== ==========
</TABLE>
8
<PAGE> 9
NEOPATH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Finished goods consist of AutoPap Systems that will be reclassified to
fee-per-use systems (non-current assets) when placed in commercial use, AutoPap
Systems to be sold, and AutoPap Systems used internally on a temporary basis.
<TABLE>
<S> <C> <C>
Fee-per-use systems
Systems................................................. $18,249,245 $10,628,468
Accumulated depreciation............................. (3,646,282) (2,064,279)
----------- -----------
$14,602,963 $ 8,564,189
=========== ===========
Property and equipment
Laboratory and other equipment.......................... $ 7,987,377 $ 8,206,222
Furniture and fixtures.................................. 1,156,863 1,108,168
Leasehold improvements.................................. 1,222,093 1,210,930
----------- -----------
Total property and equipment......................... 10,366,333 10,525,320
Accumulated depreciation and amortization............... (6,835,639) (4,545,471)
----------- -----------
$ 3,530,694 $ 5,979,849
=========== ===========
</TABLE>
At December 31, 1998 and 1997, the Company held equipment under capitalized
leases with an original cost of $317,594 and $373,432, and a net book value of
$73,172 and $147,219, respectively.
<TABLE>
<S> <C> <C>
Intangible assets
Intangible assets......................................... $ -- $3,759,917
Accumulated amortization............................... $ -- (375,992)
---------- ----------
$ -- $3,383,925
========== ==========
</TABLE>
NOTE 4 PATHFINDER SYSTEM PRODUCT LINE
In the quarter ended December 31, 1998, NeoPath wrote off $3.1 million of
intangible assets related to the Pathfinder System product line. The write-off
did not involve any cash expenditure. NeoPath acquired the Pathfinder System
product line in June 1997 for an initial purchase price of $4.1 million. The
initial purchase price included cash of $2.7 million (including
transaction-related expenses), a $500,000 short-term note paid in October 1997,
and 48,564 shares of NeoPath common stock. In addition, certain shares of
NeoPath common stock were issued and were held in escrow until April 1998, when
the Company released the remaining 42,050 shares, which added approximately
$550,000 to Pathfinder intangible assets. As a result of the purchase, NeoPath
recognized $4.3 million in intangible assets that were to be amortized over five
years. As a result of continuing low sales levels of Pathfinder Systems, and
related losses attributable directly to the Pathfinder product line, the Company
identified indications of impairment in the fourth quarter of 1998 and later
decided to discontinue immediate continued development and commercialization of
this product line. The Company then compared the carrying value of these
intangible assets to expected future cash flows applicable to the Pathfinder
product and, as a result, wrote off the remaining balance of intangible assets.
Pathfinder product sales accounted for 3% of total revenues in each of the two
years ended December 31, 1998 and 1997.
NOTE 5 LONG-TERM OBLIGATIONS AND COMMITMENTS
NOTE PAYABLE TO BANK In April 1998, NeoPath entered into a loan agreement
with a bank pursuant to which the Company could borrow amounts based on the
manufacturing cost of AutoPap Systems placed on fee-per-use contracts.
Accordingly, in June 1998, NeoPath borrowed $5.0 million under the loan
agreement. The bank debt is secured by substantially all of NeoPath's assets,
excluding
9
<PAGE> 10
NEOPATH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
intellectual property, and amounts are repaid over 24 months from the date of
each drawdown. In addition, NeoPath must comply with certain financial
covenants. As of December 31, 1998, the bank facility was secured by $2.0
million in restricted cash in an interest-bearing account with the bank. The
restricted cash is included in cash and cash equivalents on the balance sheet.
Borrowings under this agreement bear interest at the bank's prime rate plus 1
percent per annum (8.75% at December 31, 1998).
LEASE AGREEMENTS NeoPath leases certain property and equipment under
capital leases pursuant to master equipment lease agreements. Under such
agreements, the Company entered into multiple capital leases for property and
equipment. The agreements included lease terms ranging from 36 to 60 months and
purchase options at the end of each lease. Interest rates on capitalized leases
approximate 10%.
The Company leases office and operating facilities under operating leases
expiring in January 1999 through August 2007, with various renewal options, and
other leased items through 2002. Operating lease expense was $833,590 in 1998,
compared to $831,983 in 1997, and $620,895 in 1996.
Minimum future payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
LEASES
NOTE PAYABLE --------------------
TO BANK CAPITAL OPERATING
------------ ------- ---------
<S> <C> <C> <C>
1999.............................................. $2,475,000 $80,168 $806,807
2000.............................................. 1,238,631 19,050 31,328
2001.............................................. -- -- 31,328
2002.............................................. -- -- 31,328
2003.............................................. -- -- 31,328
Thereafter........................................ -- -- 44,926
---------- ------- --------
Total minimum payments............................ 99,218 $977,045
========
Less amount representing interest................. 6,671
-------
Present value of minimum payment.................. 3,713,631 92,547
Current portion................................... 2,475,000 74,151
---------- -------
Long-term obligations, less current portion....... $1,238,631 $18,396
========== =======
</TABLE>
NOTE 6 INCOME TAXES
As of December 31, 1998, the Company had net operating loss carryforwards
of approximately $111.5 million and research and development credit
carryforwards of approximately $3.4 million for federal income tax purposes,
which expire between 2004 and 2013. Due to the issuance and sale of shares of
preferred stock prior to 1995 and the Company's initial public offering
completed in 1995, the Company incurred "ownership changes" pursuant to
applicable regulations in effect under the Internal Revenue Code of 1986, as
amended. Therefore, the Company's use of losses incurred through the date of
these ownership changes will be limited during the carryforward period. The
Company estimates that the use of approximately $28.0 million of losses incurred
prior to one or more of the ownership changes would be limited in the
carryforward periods. To the extent that any single-year loss is not utilized to
the full amount of the limitation, such unused loss is carried over to
subsequent years until the earlier of its utilization or the expiration of the
relevant carryforward period. Approximately $5.1 million of the net operating
loss carryforward is attributed to the deduction for stock options, the tax
effect of which will be credited to common stock when recognized.
10
<PAGE> 11
NEOPATH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the tax basis of assets and liabilities and the corresponding financial
statement amounts. Significant components of the Company's deferred income tax
assets (liabilities) at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net operating loss carryforwards........................ $ 37,904,000 $ 29,416,000
Research and development credits........................ 3,377,000 2,374,000
Amortization and write-off of intangible assets......... 1,331,000 85,000
Research and development costs.......................... 335,000 548,000
Allowance for doubtful accounts......................... 243,000 238,000
Deferred compensation................................... 192,000 168,000
Accrued vacation........................................ 155,000 219,000
Charitable contribution carryforwards................... 126,000 125,000
Other................................................... 475,000 387,000
Property and equipment.................................. (501,000) 97,000
Valuation allowance..................................... (43,637,000) (33,657,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
Due to the uncertainty of the Company's ability to generate taxable income
to realize its deferred tax assets, a valuation allowance has been established
for financial reporting purposes equal to the amount of the net deferred tax
assets. The Company's valuation allowance increased $10.0 million and $9.5
million for the years ended December 31, 1998 and 1997, respectively.
NOTE 7 SHAREHOLDERS' EQUITY
COMMON STOCK On February 9, 1999, NeoPath completed a $14.5 million
private equity transaction in which the Company issued 2.9 million shares of
common stock to investors at a price of $5.00 per share. In connection with the
financing, NeoPath issued to Invemed Associates, Inc., a related party,
five-year warrants to purchase 100,000 shares of common stock at an exercise
price of $5.89 per share.
STOCK OPTION PLANS The Company has two stock option plans that provide for
option grants to employees, directors, and others. The options generally vest
over four years or as otherwise determined by the plan administrator. Options to
purchase shares expire no later than ten years after the date of grant.
In May 1998, Neopath's Board of Directors approved a plan to allow all
Company personnel the opportunity to surrender previously granted stock options
in exchange for a new option at the current market price. In total, 1,357,836
options were surrendered and canceled; a corresponding number of new options
were issued with an exercise price of $13.00 per share.
11
<PAGE> 12
NEOPATH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- -------- ------- --------
<S> <C> <C> <C> <C>
Balance, January 1, 1996................. 1,027,242 $ 6.59 483,974 $ 1.66
======= ======
Granted............................. 838,218 22.91
Exercised........................... (195,429) 2.60
Canceled............................ (65,811) 10.66
---------- ------
Balance, December 31, 1996............... 1,604,220 15.39 524,318 $ 5.12
======= ======
Granted............................. 845,025 16.46
Exercised........................... (225,165) 2.07
Canceled............................ (285,532) 20.18
---------- ------
Balance, December 31, 1997............... 1,938,548 16.68 655,156 $13.56
======= ======
Granted............................. 1,785,083 12.35
Exercised........................... (51,904) 1.73
Canceled............................ (1,808,561) 18.01
========== ======
Balance, December 31, 1998............... 1,863,166 $11.64 839,279 $11.16
========== ====== ======= ======
Available for grant at December 31,
1998................................... 1,065,020
==========
</TABLE>
Outstanding and exercisable stock options by price range as of December 31,
1998 are as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE AVERAGE SHARES AVERAGE
RANGE OF EXERCISE PRICE AS OF REMAINING EXERCISE AS OF EXERCISE
PER SHARE DEC. 31, 1998 TERM (YEARS) PRICE DEC. 31, 1998 PRICE
- ----------------------- ------------- ------------ -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$ 0.60 - $ 1.20 35,463 4.24 $ 1.15 34,713 $ 1.15
1.80 - 2.40 136,939 5.53 2.38 136,939 2.38
4.00 - 6.00 103,128 9.68 4.64 13,178 4.28
6.50 - 9.00 57,676 9.58 6.88 1,979 8.77
11.25 - 12.69 51,500 8.36 11.86 16,000 11.25
13.00 - 13.00 1,385,129 9.41 13.00 558,775 13.00
13.75 - 23.63 93,331 7.70 19.61 77,695 19.09
--------- ---- ------ ------- ------
$ 0.60 - $23.63 1,863,166 8.93 $11.64 839,279 $11.16
========= ==== ====== ======= ======
</TABLE>
Pro forma information regarding net loss and net loss per share is required
by SFAS 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS 123. The fair value
for these options was estimated at the date of grant using a Black-Scholes
multiple option pricing model with the following weighted-average assumptions
for 1998, 1997, and 1996, respectively: risk-free interest rates of 5.18%,
6.08%, and 6.01%; dividend yields of 0%; volatility factors of the expected
market price of the Company's common stock of 0.8992, 0.6589, and 0.5512; and a
weighted-average expected life of the option of 1.47, 1.47, and 1.46 years after
vest date.
The Black-Scholes option value model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models
12
<PAGE> 13
NEOPATH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
require the input of highly subjective assumptions, including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma net loss........................... $(32,951,440) $(27,930,575) $(20,717,024)
Pro forma basic and diluted net loss per
share...................................... (2.28) (1.97) (1.59)
</TABLE>
SFAS No. 123 pro forma disclosures above are not necessarily indicative of
future pro forma disclosures because of the manner in which SFAS 123
calculations are phased in over time.
The weighted average fair value for options granted during 1998, 1997, and
1996 using the Black-Scholes multiple option pricing model is $6.99, $8.81, and
$10.86, respectively.
WARRANTS In 1998, NeoPath issued a warrant to a consultant to purchase
60,000 shares of NeoPath common stock at $4.31 per share, which was the closing
price of the Company's common stock on the date of the initial agreement. The
Company also issued a comparable stock option grant to the same consultant. As a
result, in 1998 the Company recognized $200,000 in non-cash expenses related to
the consulting agreement and will continue to recognize non-cash expenses during
the one-year agreement.
Common stock warrants outstanding at December 31, 1998 totaled 278,910 at a
weighted average exercise price per share of $6.86. These warrants expire at
various dates through 2004.
During 1998, warrants were exercised to purchase 4,616 shares of NeoPath's
common stock. During 1997, warrants were exercised to purchase 463,493 shares of
the Company's common stock, of which 13,273 shares were issued through "net
exercise" rights, for which the Company received no proceeds. Such rights allow
the warrant holder to exercise the warrant and "pay" the warrant price through
the intrinsic value of the warrants; therefore, fewer shares of common stock are
issued as a result. During 1996, warrants were exercised to purchase 762,240
shares of the Company's common stock, of which 346,468 shares were issued
through net exercise rights. The remaining warrants outstanding as of December
31, 1998 have net exercise rights.
COMMON STOCK RESERVED At December 31, 1998, common stock was reserved for
the following purposes:
<TABLE>
<S> <C>
Stock options............................................. 2,928,186
Common stock warrants..................................... 278,910
Employee stock purchase plan.............................. 133,325
---------
3,340,421
=========
</TABLE>
NOTE 8 EMPLOYEE BENEFITS
The Company has a retirement plan covering substantially all employees that
provides for voluntary salary deferral contributions on a pre-tax basis in
accordance with Section 401(k) of the Internal Revenue Code of 1986, as amended.
To date, the Company has made no contributions to the plan.
13
<PAGE> 14
NEOPATH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In May 1997, NeoPath's shareholders approved the 1997 Employee Stock
Purchase Plan (the "ESPP") and authorized the issuance of up to 150,000 shares
of the Company's common stock under the plan. The ESPP permits eligible
employees of the Company to purchase common stock at not less than 85% of fair
market value as defined in the ESPP through payroll deductions of up to 15% of
their compensation, provided that no employee may purchase common stock worth
more than $25,000 in any calendar year. Participants are required to hold ESPP
stock for a minimum of six months following the purchase date. The ESPP will
expire in 2007.
NOTE 9 LITIGATION
On July 15, 1996, Neuromedical Systems, Inc. ("Neuromedical") filed a
lawsuit against NeoPath in the United States District Court for the Southern
District of New York. The complaint alleges patent infringement, unfair
competition, false advertising, and related claims. On September 5, 1996,
NeoPath filed its answer and counter claims. In May 1998, a judge in the United
States District Court for the Southern District of New York denied
Neuromedical's motion for a preliminary injunction against the Company. The
parties have agreed to dismiss their claims and counter claims on all but the
patent issues, and Neuromedical accordingly served an amended complaint on July
27, 1998 asserting only patent infringement claims. This lawsuit is still in the
discovery stage, and a trial date has not been set. The Company believes it has
a strong position in this action and continues to defend itself vigorously.
On March 31, 1997, the Company filed a patent infringement lawsuit against
Neuromedical in the United States District Court for the Western District of
Washington. The complaint alleges patent infringement and seeks permanent
injunctions against Neuromedical. In March and April 1998 this lawsuit was
amended, and NeoPath filed an additional related patent lawsuit against
Neuromedical. Neuromedical filed a motion for summary judgment, which the court
denied in April 1998. In October 1998, Neuromedical filed another motion for
summary judgment that the court denied. The Company expects trial on the first
Washington lawsuit to begin in 1999. The second Washington lawsuit is currently
in the discovery stage.
14
<PAGE> 15
NEOPATH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,320,707 $ 5,579,867
Securities available-for-sale............................. 3,589,939 3,374,549
Accounts receivable, net.................................. 3,017,766 3,011,078
Inventories............................................... 8,912,247 6,744,417
Other current assets...................................... 421,677 392,415
------------- -------------
Total current assets........................................ 22,262,336 19,102,326
Fee-per-use systems, net.................................... 15,087,925 14,602,963
Property and equipment, net................................. 2,543,302 3,530,694
Deposits and other assets................................... 802,769 913,850
------------- -------------
Total assets................................................ $ 40,696,332 $ 38,149,833
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,494,461 $ 2,944,252
Salaries and wages payable................................ 887,477 1,681,710
Customer deposits......................................... 265,217 332,485
Other accrued liabilities................................. 1,592,981 1,157,077
Current portion of long-term obligations.................. 2,534,170 2,549,151
------------- -------------
Total current liabilities................................... 6,774,306 8,664,675
Long-term obligations, less current portion................. 31,255 1,257,027
Shareholders' equity:
Common stock.............................................. 156,329,799 142,057,561
Accumulated deficit....................................... (122,431,241) (113,813,699)
Accumulated other comprehensive loss...................... (7,787) (15,731)
------------- -------------
Total shareholders' equity.................................. 33,890,771 28,228,131
------------- -------------
Total liabilities and shareholders' equity.................. $ 40,696,332 $ 38,149,833
============= =============
</TABLE>
See accompanying notes.
15
<PAGE> 16
NEOPATH, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues............................. $ 2,939,429 $ 4,308,465 $ 4,965,287 $ 7,871,156
Cost of revenues..................... 1,587,985 2,371,840 2,752,375 4,412,600
----------- ----------- ----------- ------------
Gross margin....................... 1,351,444 1,936,625 2,212,912 3,458,556
Operating expenses:
Research and development........... 2,362,183 2,911,427 4,780,220 5,957,243
Selling, general and
administrative.................. 2,631,579 5,329,589 6,190,285 9,835,832
----------- ----------- ----------- ------------
4,993,762 8,241,016 10,970,505 15,793,075
----------- ----------- ----------- ------------
Loss from operations................. (3,642,318) (6,304,391) (8,757,593) (12,334,519)
Interest income...................... 163,717 267,302 300,961 633,076
Interest expense..................... (70,903) (15,288) (160,888) (24,567)
----------- ----------- ----------- ------------
Net loss............................. $(3,549,504) $(6,052,377) $(8,617,520) $(11,726,010)
=========== =========== =========== ============
Basic and diluted net loss per
share.............................. $ (0.20) $ (0.42) $ (0.51) $ (0.81)
=========== =========== =========== ============
Weighted average common shares
Outstanding........................ 17,420,160 14,468,686 16,804,161 14,442,269
=========== =========== =========== ============
</TABLE>
See accompanying notes.
16
<PAGE> 17
NEOPATH, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (8,617,520) $(11,726,010)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 2,885,176 2,790,942
Stock-based compensation.................................. 7,100 --
Accrued interest on securities available-for-sale......... 183,206 360,694
Net change in operating accounts:
Accounts receivable.................................... (6,688) (1,008,775)
Inventories and fee-per-use systems.................... (4,479,262) (1,474,927)
Accounts payable and accrued liabilities............... (2,165,388) (563,874)
Other.................................................. 102,460 (922,894)
------------ ------------
Net cash used in operating activities....................... (12,090,916) (12,544,844)
INVESTING ACTIVITIES
Purchases of securities available-for-sale.................. (7,199,372) (202,310)
Sales and maturities of securities available-for-sale....... 6,808,719 12,934,765
Additions to property and equipment......................... (58,591) (531,042)
Other....................................................... (3,077) --
------------ ------------
Net cash (used in) provided by investing activities......... (452,321) 12,201,413
FINANCING ACTIVITIES
Proceeds from private equity transaction, net............... 14,442,688 --
Proceeds from note payable to bank.......................... -- 4,950,000
Payments on note payable to bank............................ (1,237,500) --
Issuance of common stock under employee stock purchase
plan...................................................... 38,932 70,482
Exercise of options and warrants............................ 73,518 76,660
Principal payments on obligations under capital leases...... (33,561) (37,656)
------------ ------------
Net cash provided by financing activities................... 13,284,077 5,059,486
------------ ------------
Net increase in cash and cash equivalents................... 740,840 4,716,055
Cash and cash equivalents:
Beginning of period....................................... 5,579,867 3,308,970
------------ ------------
End of period............................................. $ 6,320,707 $ 8,025,025
============ ============
NONCASH TRANSACTIONS AND SUPPLEMENTAL DISCLOSURES
AutoPap Systems reclassified to fee-per-use systems, net.... $ 2,426,091 $ 441,736
</TABLE>
See accompanying notes.
17
<PAGE> 18
NEOPATH, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
NeoPath, Inc. ("NeoPath" or the "Company") in accordance with generally accepted
accounting principles for interim financial information and according to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (which include only normal recurring adjustments)
considered necessary for a fair presentation have been included. The balance
sheet at December 31, 1998 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The results of operations for the three-month and
six-month periods ended June 30, 1999, are not necessarily indicative of results
to be expected for the entire year ending December 31, 1999 or for any other
fiscal period. For further information, refer to the financial statements and
footnotes thereto incorporated by reference in the Company's Form 10-K for the
year ended December 31, 1998.
NOTE 2 -- REVENUE RECOGNITION
The Company recognizes revenue on either a product sale or fee-per-use
basis. Sales of AutoPap(R) Systems are generally recognized at date of shipment
and are subject to continuing service and license agreements for which revenue
is recognized over the corresponding contract period. Fee-per-use revenue
commences in the month an AutoPap System is initially placed in commercial use
at a customer site and consists of per-slide monthly billings, fixed rental
billings, and minimum payments due on certain fee-per-use contracts. Fee-per-use
revenue is recognized as earned.
NOTE 3 -- COMPREHENSIVE NET LOSS
Components of comprehensive net loss, as defined by applicable accounting
and reporting standards, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
----------- ------------
<S> <C> <C>
Net loss......................................... $(3,549,504) $ (6,052,377)
Unrealized gain on Securities
available-for-sale............................. 15,115 41,507
----------- ------------
Comprehensive net loss........................... $(3,534,389) $ (6,010,870)
=========== ============
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1999 1998
----------- ------------
<S> <C> <C>
Net loss......................................... $(8,617,520) $(11,726,010)
Unrealized gain on Securities
available-for-sale............................. 7,944 103,024
----------- ------------
Comprehensive net loss........................... $(8,609,576) $(11,622,986)
=========== ============
</TABLE>
18
<PAGE> 19
NEOPATH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 4 -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
Raw materials.................................. $3,202,689 $2,093,748
Work-in-process................................ 1,732,102 2,365,472
Finished goods................................. 3,977,456 2,285,197
---------- ----------
$8,912,247 $6,744,417
========== ==========
</TABLE>
NOTE 5 -- PRIVATE EQUITY TRANSACTION
On February 9, 1999, NeoPath completed a $14.5 million private equity
transaction in which the Company issued 2.9 million shares of common stock to
investors at a price of $5.00 per share. In connection with the financing,
NeoPath issued to Invemed Associates, Inc., a related party, five-year warrants
to purchase 100,000 shares of common stock at an exercise price of $5.89 per
share. On February 12, 1999, NeoPath filed a shelf registration statement on
Form S-3 that will, when declared effective by the Securities and Exchange
Commission, allow resale of the newly issued shares. NeoPath must use its best
efforts to keep this registration statement effective for two years. Because the
registration statement was not declared effective within 120 days of the
transaction closing, the agreement specified that the purchase price would be
reduced by 2 percent. As a result, NeoPath recognized a liability of $290,000 as
of June 30, 1999.
NOTE 6 -- AGREEMENT TO ACQUIRE TECHNOLOGY RIGHTS
On March 26, 1999, AutoCyte, Inc. announced an agreement to purchase
certain Neuromedical, Inc. technology, including patent rights, for $4.0 million
in cash and 1.4 million shares of AutoCyte common stock. On April 26, 1999,
NeoPath and AutoCyte announced an agreement whereby NeoPath may acquire an
undivided interest in the intellectual property estate of Neuromedical that
AutoCyte had agreed to acquire. Subject to certain conditions, NeoPath will pay
AutoCyte $2.2 million in cash and issue AutoCyte 1.2 million shares of NeoPath
common stock at the later of the transaction closing date or September 1, 1999.
On May 18, 1999, AutoCyte announced that it had completed its acquisition of the
Neuromedical technology.
NOTE 7 -- AGREEMENT TO MERGE WITH AUTOCYTE
On June 4, 1999, NeoPath and AutoCyte agreed to a merger in which a wholly
owned subsidiary of AutoCyte will merge with NeoPath, and NeoPath will become a
wholly owned subsidiary of AutoCyte. On the effective date of the merger, each
issued and outstanding share of NeoPath common stock will automatically convert
into the right to receive 0.7903 shares of AutoCyte common stock. AutoCyte will
pay cash in lieu of issuing fractional shares of AutoCyte common stock.
Outstanding employee and director options and certain warrants to purchase
shares of NeoPath common stock will be converted to AutoCyte options and
warrants at the same exchange ratio. The parties expect the merger to be a
tax-free reorganization and to be accounted for as a pooling of interests.
Completion of the acquisition is subject to approval by AutoCyte's and NeoPath's
shareholders and to other customary closing conditions.
NOTE 8 -- LITIGATION
On July 15, 1996, Neuromedical Systems, Inc. filed a lawsuit against
NeoPath in the United States District Court for the Southern District of New
York. The complaint alleged patent infringement, unfair
19
<PAGE> 20
NEOPATH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
competition, false advertising, and related claims and requested monetary
damages and injunctive relief. On September 5, 1996, NeoPath filed its answer
and counter claims. In May 1998, a judge in the United States District Court for
the Southern District of New York denied Neuromedical's motion for a preliminary
injunction against the Company. The parties agreed to dismiss their claims and
counterclaims on all but the patent issues, and Neuromedical accordingly served
an amended complaint on July 27, 1998 asserting only patent infringement claims.
Virtually all of NeoPath's domestic revenues, which represented 90 percent of
total revenues in the six months ended June 30, 1999, are derived from products
that incorporate technology covered by this patent. NeoPath believes it has a
strong position in this action, and will defend itself vigorously against these
claims. On March 26, 1999, Neuromedical announced that it had filed a voluntary
chapter 11 petition for bankruptcy. On April 6, 1999, the court removed the case
from its active docket pending further developments in Neuromedical's bankruptcy
proceedings.
On March 31, 1997, NeoPath filed a patent infringement lawsuit against
Neuromedical in the United States District Court for the Western District of
Washington. The complaint alleges patent infringement and seeks permanent
injunctions against Neuromedical. In March and April 1998 this lawsuit was
amended, and NeoPath filed an additional related patent lawsuit against
Neuromedical. Neuromedical filed a motion for summary judgment, which the court
denied in April 1998. In October 1998, Neuromedical filed another motion for
summary judgment that the court denied. By court order on March 30, 1999,
proceedings have been stayed pending resolution of Neuromedical's bankruptcy
proceedings. Furthermore, the court ordered that these cases be removed from the
court's active caseload.
NeoPath's intellectual property acquisition agreement with AutoCyte
provides that the patent infringement litigation between NeoPath and
Neuromedical will be terminated.
NOTE 9 -- RECLASSIFICATIONS
Certain prior-period amounts have been reclassified to conform to the
current-period presentation.
20
<PAGE> 1
Exhibit 99.2
------------
AUTOCYTE AND NEOPATH
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
and explanatory notes are presented to show the impact on the historical
financial position and results of operations of AutoCyte assuming the proposed
business combination of AutoCyte and NeoPath, which is expected to be accounted
for using the pooling of interests method of accounting, had occurred. Both
AutoCyte and NeoPath have a calendar year end.
In the proposed NeoPath business combination, each outstanding share of
NeoPath common stock will be exchanged for 0.7903 shares of AutoCyte common
stock. Based on a total of approximately 17,440,000 shares of NeoPath common
stock outstanding on June 30, 1999, AutoCyte would issue approximately
13,783,000 shares of AutoCyte common stock. AutoCyte will pay cash in lieu of
fractional shares. AutoCyte also will convert any remaining unexercised NeoPath
stock options into AutoCyte stock options at the exchange ratio.
The unaudited pro forma combined condensed balance sheet reflects the
combined historical balance sheets of AutoCyte and NeoPath at June 30, 1999. The
unaudited pro forma combined condensed statements of operations for the years
ended December 31, 1998, 1997 and 1996 and for the six months ended June 30,
1999 and 1998 reflect the combined historical operating results of AutoCyte and
NeoPath for such periods. The historical operating results of AutoCyte for the
year ended December 31, 1996 reflect the operations of its predecessor from
January 1, 1996 through November 21, 1996 and the operations of AutoCyte from
November 22, 1996 (inception) through December 31, 1996.
The unaudited pro forma combined condensed results presented do not reflect
any incremental direct costs, potential cost savings or revenue enhancements
which may result from the consolidation of certain operations of AutoCyte and
NeoPath. Therefore, the unaudited pro forma combined condensed statements of
operations may not be indicative of the results of future operations. No
assurances can be given with respect to the ultimate level of cost savings
and/or revenue enhancements that may be realized following consummation of the
proposed transaction.
The unaudited pro forma combined condensed financial data are not
necessarily indicative of the results that would have been obtained had the
business combination occurred prior to the dates presented. The unaudited pro
forma combined condensed financial data should be read in conjunction with the
related historical financial statements and notes thereto of AutoCyte and
NeoPath appearing in this joint proxy statement/prospectus.
<PAGE> 2
AUTOCYTE AND NEOPATH
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
HISTORICAL
---------------------------- PRO FORMA AUTOCYTE AND NEOPATH
AUTOCYTE NEOPATH ADJUSTMENTS PRO FORMA
------------ ------------- ------------- --------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and
securities
available-for-sale........... $ 11,817,123 $ 9,910,646 $ -- $ 21,727,769
Accounts receivable............. 980,642 3,017,766 -- 3,998,408
Inventory....................... 3,229,746 8,912,247 -- 12,141,993
Other current assets............ 409,011 421,677 -- 830,688
------------ ------------- ------------- -------------
Total current assets.... 16,436,522 22,262,336 -- 38,698,858
Customer use assets............. 858,917 15,087,925 -- 15,946,842
Property and equipment.......... 1,742,712 2,543,302 -- 4,286,014
Deposits and other assets....... -- 802,769 -- 802,769
Intangible assets............... 13,348,886 -- -- 13,348,886
------------ ------------- ------------- -------------
Total assets............ $ 32,387,037 $ 40,696,332 $ -- $ 73,083,369
============ ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 1,853,503 $ 1,494,461 $ 2,600,000(1) $ 5,947,964
Accrued expenses................ 655,517 2,480,458 -- 3,135,975
Deferred revenue................ 415,693 265,217 -- 680,910
Current portion of long-term
debt......................... 284,557 2,534,170 -- 2,818,727
------------ ------------- ------------- -------------
Total current
liabilities........... 3,209,270 6,774,306 2,600,000 12,583,576
Long-term debt, less current
portion......................... 833,300 -- -- 833,300
Other long-term liabilities....... 87,240 31,255 -- 118,495
Stockholders' equity:
Common stock...................... 142,864 156,329,799 (156,191,969)(2) 280,694
Additional paid-in capital........ 59,068,268 -- 156,191,969(2) 215,260,237
Deferred compensation............. (1,449,134) -- -- (1,449,134)
Accumulated deficit............... (29,504,771) (122,439,028) (2,600,000)(1) (154,543,799)
------------ ------------- ------------- -------------
Total stockholders'
equity................ 28,257,227 33,890,771 (2,600,000) 59,547,998
------------ ------------- ------------- -------------
Total liabilities and
stockholders'
equity................ $ 32,387,037 $ 40,696,332 $ -- $ 73,083,369
============ ============= ============= =============
</TABLE>
- ---------------
(1) To accrue additional non-recurring direct transaction costs (as currently
estimated by management), which are anticipated to be incurred in connection
with the NeoPath transaction.
(2) To reflect that each outstanding share of NeoPath common stock will be
exchanged for 0.7903 shares of AutoCyte common stock. Based on a total of
approximately 17,440,000 shares of NeoPath common stock outstanding on June
30, 1999. AutoCyte would issue approximately 13,783,000 shares of AutoCyte
common stock in the merger. AutoCyte will pay cash in lieu of fractional
shares.
2
<PAGE> 3
AUTOCYTE AND NEOPATH
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
HISTORICAL
------------------------- PRO FORMA AUTOCYTE AND NEOPATH
AUTOCYTE NEOPATH ADJUSTMENTS(1) PRO FORMA
----------- ----------- -------------- --------------------
<S> <C> <C> <C> <C>
Sales............................... $ 2,349,410 $ 4,965,287 $ -- $ 7,314,697
Cost of sales....................... 1,811,473 2,752,375 -- 4,563,848
----------- ----------- ------------- ------------
Gross profit........................ 537,937 2,212,912 -- 2,750,849
Operating Expenses
Research and development.......... 2,285,589 4,780,220 -- 7,065,809
Selling, general, and
administrative................. 3,628,373 5,694,641 -- 9,323,014
Nonrecurring expenses............. 3,481,235 495,644 -- 3,976,879
----------- ----------- ------------- ------------
9,395,197 10,970,505 -- 20,365,702
----------- ----------- ------------- ------------
Operating loss.................... (8,857,260) (8,757,593) -- (17,614,853)
Interest income................... 412,096 300,961 -- 713,057
Interest expense.................. (61,673) (160,888) -- (222,561)
----------- ----------- ------------- ------------
Net loss.......................... $(8,506,837) $(8,617,520) $ -- $(17,124,357)
=========== =========== ============= ============
Net loss per common share (basic and
diluted).......................... $ (0.65) $ (0.65)
=========== ============
Weighted-average common shares
outstanding....................... 13,163,406 26,443,734
=========== ============
</TABLE>
- ---------------
(1) Additional non-recurring direct transaction costs of approximately
$2,600,000 (as currently estimated by management), are anticipated to be
incurred in connection with the NeoPath transaction. Such costs will be
expensed as incurred, and have not been reflected in the unaudited pro forma
combined condensed statement of operations.
AUTOCYTE AND NEOPATH
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
HISTORICAL
-------------------------- PRO FORMA AUTOCYTE AND NEOPATH
AUTOCYTE NEOPATH ADJUSTMENTS PRO FORMA
----------- ------------ ------------- --------------------
<S> <C> <C> <C> <C>
Sales.............................. $ 2,279,518 $ 7,871,156 $ -- $ 10,150,674
Cost of sales...................... 1,481,306 4,412,600 -- 5,893,906
----------- ------------ ------------- ------------
Gross profit....................... 798,212 3,458,556 -- 4,256,768
Operating Expenses
Research and development......... 2,273,333 5,957,243 -- 8,230,576
Selling, general, and
administrative................ 3,841,632 9,835,832 -- 13,677,464
----------- ------------ ------------- ------------
6,114,965 15,793,075 -- 21,908,040
----------- ------------ ------------- ------------
Operating loss................... (5,316,753) (12,334,519) -- (17,651,272)
Interest income.................. 721,672 633,076 -- 1,354,748
Interest expense................. (7,831) (24,567) -- (32,398)
----------- ------------ ------------- ------------
Net loss......................... $(4,602,912) $(11,726,010) $ -- $(16,328,922)
=========== ============ ============= ============
Net loss per common share (basic
and diluted)..................... $ (0.36) $ (0.68)
=========== ============
Weighted-average common shares
outstanding...................... 12,637,903 24,051,628
=========== ============
</TABLE>
3
<PAGE> 4
AUTOCYTE AND NEOPATH
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL
--------------------------- PRO FORMA AUTOCYTE AND NEOPATH
AUTOCYTE NEOPATH ADJUSTMENTS PRO FORMA
------------ ------------ ------------- --------------------
<S> <C> <C> <C> <C>
Sales............................. $ 4,769,686 $ 12,078,936 $ -- $ 16,848,622
Cost of sales..................... 2,982,198 6,711,314 -- 9,693,512
------------ ------------ ------------- ------------
Gross profit...................... 1,787,488 5,367,622 -- 7,155,110
Operating Expenses
Research and development........ 4,700,003 11,269,363 -- 15,969,366
Selling, general, and
administrative............... 7,457,968 17,950,151 -- 25,408,119
Write-off of intangible
assets....................... -- 3,084,289 -- 3,084,289
------------ ------------ ------------- ------------
12,157,971 32,303,803 -- 44,461,774
------------ ------------ ------------- ------------
Operating loss.................. (10,370,483) (26,936,181) -- (37,306,664)
Interest income................. 1,301,078 1,008,638 -- 2,309,716
Interest expense................ (20,667) (253,038) -- (273,705)
------------ ------------ ------------- ------------
Net loss........................ $ (9,090,072) $(26,180,581) $ -- $(35,270,653)
============ ============ ============= ============
Net loss per common share (basic
and diluted).................... $ (0.72) $ (1.46)
============ ============
Weighted-average common shares
outstanding..................... 12,664,223 24,098,206
============ ============
</TABLE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL
--------------------------- PRO FORMA AUTOCYTE AND NEOPATH
AUTOCYTE NEOPATH ADJUSTMENTS PRO FORMA
------------ ------------ ------------- --------------------
<S> <C> <C> <C> <C>
Sales............................. $ 2,667,837 $ 10,824,380 $ -- $ 13,492,217
Cost of sales..................... 1,952,691 4,774,920 -- 6,727,611
------------ ------------ ------------- ------------
Gross profit...................... 715,146 6,049,460 -- 6,764,606
Operating Expenses
Research and development........ 4,461,881 14,248,669 -- 18,710,550
Selling, general, and
administrative............... 6,532,551 17,745,936 -- 24,278,487
------------ ------------ ------------- ------------
10,994,432 31,994,605 -- 42,989,037
------------ ------------ ------------- ------------
Operating loss.................. (10,279,286) (25,945,145) -- (36,224,431)
Interest income................. 772,563 2,399,117 -- 3,171,680
Interest expense................ (1,478,150) (50,884) -- (1,529,034)
------------ ------------ ------------- ------------
Net loss........................ $(10,984,873) $(23,596,912) $ -- $(34,581,785)
============ ============ ============= ============
Net loss per common share (basic
and diluted).................... $ (1.59) $ (1.91)
============ ============
Weighted-average common shares
outstanding..................... 6,903,290 18,123,422
============ ============
</TABLE>
4
<PAGE> 5
AUTOCYTE AND NEOPATH
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HISTORICAL
--------------------------- PRO FORMA AUTOCYTE AND NEOPATH
AUTOCYTE(1) NEOPATH ADJUSTMENTS PRO FORMA
------------ ------------ ------------- --------------------
<S> <C> <C> <C> <C>
Sales............................. $ 1,876,398 $ 3,061,849 $ -- $ 4,938,247
Cost of sales..................... 2,908,824 1,904,559 -- 4,813,383
------------ ------------ ------------- ------------
Gross profit...................... (1,032,426) 1,157,290 -- 124,864
Operating Expenses
Research and development........ 4,365,600 11,202,375 -- 15,567,975
Selling, general, and
administrative............... 12,490,482 11,295,228 -- 23,785,710
------------ ------------ ------------- ------------
16,856,082 22,497,603 -- 39,353,685
------------ ------------ ------------- ------------
Operating loss.................... (17,888,508) (21,340,313) -- (39,228,821)
Interest income................... 42,431 3,741,843 -- 3,784,274
Interest expense.................. -- (56,813) -- (56,813)
------------ ------------ ------------- ------------
Net loss(2)....................... $(17,846,077) $(17,655,283) $ -- $(35,501,360)
============ ============ ============= ============
</TABLE>
- ---------------
(1) Reflects the operations of AutoCyte's predecessor from January 1, 1996
through November 21, 1996 and the operations of AutoCyte from November 22,
1996 (inception) through December 31, 1996.
(2) Net loss per share is not disclosed since AutoCyte's predecessor operated as
a wholly owned subsidiary of Roche Holding Ltd. prior to the formation of
Autocyte in November 1996.
5
<PAGE> 1
Exhibit 99.3
------------
FOR IMMEDIATE RELEASE
- ---------------------
AUTOCYTE AND NEOPATH COMPLETE MERGER; THE NEW COMPANY TO BE RENAMED TRIPATH
IMAGING, INC.
BURLINGTON, N.C., October 1/PR Newswire/ -- AutoCyte, Inc. (Nasdaq: ACYT) today
announced that it has completed its previously announced merger with NeoPath,
Inc. (Nasdaq: NPTH), effective September 30, 1999. In connection with the
merger, AutoCyte will issue approximately 13.8 million shares of common stock,
based on the exchange ratio of .7903 shares of AutoCyte stock for each share of
NeoPath stock.
The AutoCyte shareholders have approved changing the name of the new company to
TriPath Imaging, Inc. ("TriPath"). A new trading symbol (Nasdaq: TPTH) has been
reserved and will become active when the name change is effected.
Dr. James B. Powell, President and CEO of TriPath, stated, "This is a very
important day for the shareholders of AutoCyte and NeoPath and for women's
healthcare. TriPath will be dedicated to commercializing a new paradigm for
cervical cancer screening. We believe that a system approach to cervical cancer
screening is imperative for improving patient outcomes and for lowering
screening costs. By combining our thin-layer slide preparation technology with
computerized cell image analysis, we believe TriPath has the potential to offer
a cervical cancer screening system that cannot be matched by our competition."
Dr. Powell continued, "Our initial primary product platforms will consist of the
AutoCyte PREP System(TM) ("PREP") for thin-layer sample preparations, and the
AutoPap(R) Primary Screening System ("AutoPap") for computerized image analysis
of conventional Pap smears. As previously announced, we will also be submitting
to the FDA a PMA supplement requesting approval to screen PREP slides on the
AutoPap. Such a combined system, if approved by the FDA, would allow TriPath to
offer the first comprehensive, automated product line in the cervical cancer
screening industry."
Dr. Alan C. Nelson, Chairman Elect of TriPath, stated, "The TriPath product
platforms are protected by over 100 issued and pending patents originally
developed by AutoCyte, NeoPath and Neuromedical Systems. We believe this patent
estate represents a formidable barrier to competition in the cell analysis
field. In addition, this intellectual property represents a critical springboard
into other market opportunities. For example, we believe location guided
screening ("LGS") will soon be a major market opportunity with the large
clinical laboratories. We intend to complete the development of our prototype
LGS devices, which are protected by the TriPath patents, and to begin clinical
studies as soon as is practicable."
Dr. Nelson concluded, "There are also other potential applications for this
patented foundation technology. While, in the short term, TriPath will remain
focused on cervical cancer screening, we have already begun development work to
screen for lung cancer. The recently announced research project with Bayer
Diagnostics is focused on combining Bayer's proprietary molecular probes with
TriPath's automated cell analysis technology to detect patients at risk of
getting lung cancer. The TriPath computerized cell analysis technology may also
be applied to melanoma, leukemia, and several other cancers. We believe such
broad applications would significantly expand our market opportunities."
TriPath Imaging develops, manufactures and markets products to improve cancer
screening. Improved slide preparation technology is delivered through the
AutoCyte PREP System(TM), a proprietary automated liquid-based cytology sample
preparation system that produces representative slides with a homogeneous,
thin-layer of cervical cells, and is one of only two sample preparation systems
approved by the FDA as a replacement for the conventional Pap smear. TriPath
delivers visual intelligence technology to increase accuracy and productivity in
medical testing through the AutoPap(R) Primary Screening System, which utilizes
proprietary technology to distinguish between normal Pap smears and those that
have the highest likelihood of abnormality. In May 1998,
<PAGE> 2
AutoPap was approved by the U.S. Food and Drug Administration as the first fully
automated device for primary screening of Pap smear slides. TriPath has
completed a clinical trial for the screening of PREP slides by the AutoPap(R)
Primary Screening System and expects to submit this supplement to the FDA in the
second half of 1999.
Forward-looking statements in this release are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Investors
are cautioned that statements in this press release which are not strictly
historical statements constitute forward-looking statements which involve risks
and uncertainties including, without limitation, risks associated with
uncertainties regarding FDA approval, uncertainties regarding market acceptance
and additional cost, risks associated with technological change, the Company's
history of operating losses and the uncertainty of future profitability,
dependence on a limited number of products, dependence on third-party
reimbursement, limited marketing and sales experience, limited number of
customers and lengthy sales cycle, risks of adverse changes in general economic
conditions, and in the healthcare industry specific risks associated with
competition and competitive pricing pressures, and other risks detailed in the
Company's filings with the Securities and Exchange Commission.
Contact: Dr. James B. Powell, President and Chief Executive Officer, or Eric W.
Linsley, Chief Financial Officer, AutoCyte, Inc., 800-426-2176
NOTE TO INVESTORS AND EDITORS: AutoCyte's press releases are available on the
Internet through PR Newswire's web site at http://www.prnewswire.com. The
releases are also available at no charge through PR Newswire's Company News
On-Call fax service at 800-758-5804, extension 116041.
