<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----- ----
Commission file number 0-22885
TRIPATH IMAGING, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 56-1995728
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
780 Plantation Drive, Burlington, North Carolina 27215
------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(336) 222-9707
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of common stock
as of
Class Outstanding at August 9, 2000
---------------------------- -----------------------------
Common Stock, $.01 par value 28,591,322
<PAGE> 2
TRIPATH IMAGING, INC.
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)............................................. 2
Condensed consolidated balance sheets
June 30, 2000 and December 31, 1999.............................................................. 2
Condensed consolidated statements of operations Three months ended June 30,
2000 and 1999; six months
ended June 30, 2000 and 1999..................................................................... 3
Condensed consolidated statements of cash flows
Six months ended June 30, 2000 and 1999.......................................................... 4
Notes to condensed consolidated financial statements
June 30, 2000.................................................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................. 13
Item 4. Submission of Matters to a Vote of Security Shareholders........................................... 13
Item 6. Exhibits and Reports on Form 8-K................................................................... 14
Signatures................................................................................................... 15
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
TRIPATH IMAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------- -------------
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,393,806 $ 13,962,337
Accounts receivable 8,231,922 5,388,972
Inventory 8,457,834 7,802,907
Other current assets 650,587 916,126
------------- -------------
Total current assets 32,734,149 28,070,342
Customer-use assets 11,483,808 16,111,380
Property and equipment 2,162,938 2,754,812
Deposits and other assets 92,003 294,331
Intangible assets 11,248,641 11,643,113
------------- -------------
Total assets $ 57,721,539 $ 58,873,978
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,804,687 $ 2,536,180
Accrued expenses 4,464,539 4,602,252
Deferred revenue 1,155,464 1,676,180
Current portion of long-term debt 2,517,454 1,917,345
------------- -------------
Total current liabilities 9,942,144 10,731,957
Long-term debt, less current portion 4,596,712 1,020,030
Other long-term liabilities 70,242 96,643
Stockholders' equity:
Common stock, $0.01 par value; 49,000,000 shares authorized;
28,536,977 and 28,107,362 shares issued and outstanding at
June 30, 2000 and December 31, 1999, respectively 285,370 281,074
Additional paid-in capital 218,491,480 214,892,392
Deferred compensation (445,511) (779,645)
Accumulated deficit (175,218,898) (167,368,473)
------------- -------------
Total stockholders' equity 43,112,441 47,025,348
------------- -------------
Total liabilities and stockholders' equity $ 57,721,539 $ 58,873,978
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 4
TRIPATH IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 8,100,608 $ 4,126,037 $ 15,547,424 $ 7,314,697
Cost of sales 4,228,153 2,578,396 7,940,880 4,563,848
------------ ------------ ------------ ------------
Gross profit 3,872,455 1,547,641 7,606,544 2,750,849
Operating expenses:
Research and development 2,199,999 3,479,251 4,456,234 7,065,809
Selling, general and administrative 6,528,939 4,509,923 10,645,862 9,818,658
Nonrecurring expenses -- 3,481,235 -- 3,481,235
------------ ------------ ------------ ------------
8,728,938 11,470,409 15,102,096 20,365,702
------------ ------------ ------------ ------------
Operating loss (4,856,483) (9,922,768) (7,495,552) (17,614,853)
Interest income 212,386 347,604 411,909 713,057
Interest expense (441,213) (105,933) (766,782) (222,561)
------------ ------------ ------------ ------------
Net loss $ (5,085,310) $ (9,681,097) $ (7,850,425) $(17,124,357)
============ ============ ============ ============
Net loss per common share (basic and
diluted) $ (0.18) $ (0.35) $ (0.28) $ (0.65)
============ ============ ============ ============
Weighted-average common
shares outstanding 28,232,587 27,324,283 28,205,673 26,443,734
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 5
TRIPATH IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (7,850,425) $ (17,124,357)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,835,734 4,021,871
Non-cash interest expense 255,738 --
Stock based compensation 1,673,889 7,100
Loss on disposal of fixed assets 1,190 --
Purchased in-process research and development -- 2,922,000
Accrued interest on securities available-for-sale -- 183,206
Change in operating assets and liabilities:
Accounts receivable (2,842,950) (68,119)
Inventory 1,543,792 (4,468,139)
Accounts payable and other current liabilities (1,379,772) (1,433,847)
Other 467,867 47,329
------------- -------------
Net cash used in operating activities (4,294,937) (15,912,956)
INVESTING ACTIVITIES
Purchases of property and equipment (71,675) (431,738)
Purchases of securities available-for-sale -- (7,199,372)
Maturities of securities available-for-sale -- 6,808,719
Additions to intangible assets (13,901) (4,228,611)
Other -- (3,077)
------------- -------------
Net cash used in investing activities (85,576) (5,054,079)
FINANCING ACTIVITIES
Issuance of common stock under employee stock
purchase plan -- 38,932
Exercise of options and warrants 532,725 109,326
Proceeds from private issuance of stock -- 14,442,688
Proceeds from long-term debt 7,000,000 388,505
Payments on long-term debt (1,682,178) (1,389,725)
Other (38,565) (50,835)
------------- -------------
Net cash provided by financing activities 5,811,982 13,538,891
Net increase (decrease) in cash and cash equivalents 1,431,469 (7,428,144)
Cash and cash equivalents at beginning of period 13,962,337 25,565,974
------------- -------------
Cash and cash equivalents at end of period $ 15,393,806 $ 18,137,830
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 6
TRIPATH IMAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by TriPath Imaging, Inc. ("TriPath" or the "Company") in accordance
with generally accepted accounting principles for interim financial information
and applicable Securities and Exchange Commission regulations for interim
financial information. These financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The balance sheet at December 31, 1999 has
been derived from the audited financial statements at that date, but does not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. The accompanying
unaudited condensed consolidated financial statements reflect all adjustments
(consisting of normal, recurring accruals) which, in the opinion of management,
are necessary for a fair presentation of the results for the interim periods
presented. The results of operations for such periods are not necessarily
indicative of the results expected for the full year or for any future period.
The accompanying financial statements should be read in conjunction with the
Company's audited consolidated financial statements for the year ended December
31, 1999, included in the Company's Annual Report on Form 10-K (File No.
0-22885).
2. MERGER WITH NEOPATH, INC.
On September 30, 1999, AutoCyte, Inc. ("AutoCyte") completed its merger with
NeoPath, Inc. ("NeoPath") in exchange for approximately 13.8 million shares of
AutoCyte common stock. The transaction was structured as a merger (the "Merger")
of a wholly-owned subsidiary of AutoCyte with and into NeoPath. The Merger was a
tax-free reorganization and was accounted for as a pooling of interests in
accordance with Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations", and accordingly the Company has restated all historical financial
data to include historical financial data of NeoPath. In conjunction with the
Merger, AutoCyte changed its name to TriPath Imaging, Inc. On December 31, 1999,
NeoPath was merged with and into TriPath. Reconciliation of results of
operations previously reported by the separate entities prior to the Merger and
as restated for the combined Company follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
------------------ ----------------
<S> <C> <C>
Revenues:
AutoCyte $ 1,186,608 $ 2,349,410
NeoPath 2,939,429 4,965,287
------------- -------------
$ 4,126,037 $ 7,314,697
============= =============
Net Loss:
AutoCyte $ (6,131,593) $ (8,506,837)
NeoPath (3,549,504) (8,617,520)
------------- -------------
$ (9,681,097) $ (17,124,357)
============= =============
Net Loss per common share (basic and diluted):
AutoCyte $ (0.22) $ (0.32)
NeoPath (0.13) (0.33)
------------- -------------
$ (0.35) $ (0.65)
============= =============
</TABLE>
5
<PAGE> 7
TRIPATH IMAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
Raw materials $ 2,553,022 $ 2,371,531
Work in process 1,136,455 1,913,914
Finished goods 4,768,357 3,517,462
------------- -------------
$ 8,457,834 $ 7,802,907
============= =============
</TABLE>
4. NET LOSS PER SHARE OF COMMON STOCK
As the Company incurred losses during all periods presented, the effect of
options, warrants and convertible preferred stock is anti-dilutive and
accordingly, there is no difference between basic and diluted loss per share.
5. TRANSACTION, INTEGRATION AND RESTRUCTURING COSTS
In connection with the Merger, certain expenses of the transaction, costs to
integrate the two organizations, and expenses associated with the restructuring
of the Company's business have been accrued and recorded as an expense. The
following table presents the components of the expense recorded and the amounts
paid through June 30, 2000:
<TABLE>
<CAPTION>
TOTAL EXPENSE PAID TO DATE
------------- -------------
<S> <C> <C>
Cash Expenses:
Transaction and professional fees $ 2,554,314 $ 1,898,845
Personnel separation costs 1,098,540 729,632
Other costs 553,000 471,772
------------- -------------
4,205,854 $ 3,100,249
=============
Non-cash Expenses:
Write-off of assets 4,239,489
-------------
Total Expenses $ 8,445,343
=============
</TABLE>
Transaction costs are comprised of amounts owed to investment bankers and
advisors for services rendered in conjunction with the Merger. Personnel
separation costs reflect severance payments to be made to employees terminated
as a result of the Merger. The non-cash write-off of assets primarily relates to
property and equipment and the core technology acquired from Neuromedical
Systems, Inc. ("NSI") in May 1999 deemed to have become redundant or obsolete as
a result of the Merger. Other costs include integration costs directly related
to the Merger and other costs resulting from actions taken to merge the
operations.
6
<PAGE> 8
TRIPATH IMAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. LONG-TERM DEBT
In February 2000, the Company obtained a subordinated term loan from a syndicate
of lenders of up to $7,000,000 to finance operations. As of June 30, 2000, the
entire $7,000,000 loan was outstanding, including a current portion of
$2,014,053 and a long-term portion of $4,985,947. The loan, which is
collateralized by substantially all of the assets of the Company, accrues
interest at a rate equal to the U.S. Treasury Note plus 8%. Accrued interest is
due monthly for the first six months of each draw, at which time the outstanding
principal balance becomes payable over a thirty month term. In connection with
this term loan, the Company issued to the lenders warrants to purchase 223,253
shares of the Company's Common Stock. Using a Black-Scholes pricing model, these
warrants were valued as of June 30, 2000 at $1,141,016, which represents
non-cash debt issuance costs. These warrants, which expire in 2010, were
recorded as additional paid-in capital and the resulting debt issuance costs are
being amortized to interest expense over the three-year term of the loan. These
warrants have a weighted average exercise price of $4.70 and were exercisable
upon issuance.
7. LINE OF CREDIT
In February 2000, the Company obtained a $5,000,000 working capital line of
credit. The outstanding balance is limited to an amount equal to 80% of eligible
accounts receivable. The line of credit commitment expires in January 2001. At
June 30, 2000, there was no outstanding balance on the line of credit. This line
bears interest at the bank's prime rate plus 1% and is collateralized by
substantially all of the assets of the Company. The line of credit carries
customary covenants, including the maintenance of a minimum modified current
ratio and other requirements.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
TriPath develops, manufactures and markets products to improve cervical cancer
screening. Improved slide preparation technology is delivered through the
AutoCyte PREP System(TM) ("PREP"), a proprietary automated thin-layer 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 U.S. Food and Drug Administration ("FDA") as
a replacement for the conventional Pap smear. TriPath also delivers visual
intelligence technology to increase accuracy and productivity in medical testing
through the AutoPap(R) Primary Screening System ("AutoPap"), which utilizes
proprietary technology to distinguish between normal Pap smears and those that
have the highest likelihood of abnormality. In May 1998, AutoPap was approved by
the FDA as the first and only fully automated device for primary screening of
conventional Pap smear slides. On October 6, 1999, TriPath announced submission
of a supplement to the FDA for the screening of PREP slides by the AutoPap. The
supplement is currently under review by the FDA. In July 2000, Dr. Paul R.
Sohmer was named to the Board of Directors.
TriPath generates PREP revenue from the sale or rental of PREP systems and the
sale of the related test kits, comprised of proprietary reagents and other
disposables. For system sales, customers purchase the PREP instrument and make
separate purchases of test kits. For system rentals, customers pay a fixed
monthly fee for the equipment and make separate purchases of test kits. The
Company also has an Integrated Purchase Option ("IPO") program whereby the PREP
instrument is placed at the customer's site free of charge, and the customer
pays a higher per-test price for the reagents and disposables. Each PREP system
placed typically provides a recurring revenue stream as the customers process
the test kits sold by the Company.
TriPath generates AutoPap revenue from the sale of AutoPap systems or on a
fee-per-use basis. Fee-per-use revenue commences in the month a 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.
The Company's strategy is to maximize the number of instruments placed with
customers and thereby increase its ongoing, higher margin reagent and
fee-per-use revenue streams. As an important element of this strategy, the
Company has entered into an agreement with a finance company to support the
placement of PREP rental and IPO systems and AutoPap fee-per-use systems.
TriPath's future revenues and the results of operations may change significantly
from quarter to quarter and will depend on many factors, including:
- the extent to which the Company's products gain market acceptance;
- the timing and volume of system placements;
- regulatory and reimbursement matters;
- introduction of alternative technologies by competitors;
- pricing of competitive products; and
- the cost and effect of promotional discounts and marketing programs we
adopt.
Having received FDA approval to market PREP for gynecological uses, TriPath
expects marketing and sales expenditures to increase significantly. TriPath also
anticipates that manufacturing expenses will increase as product
commercialization increases.
8
<PAGE> 10
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues - Revenues for the second quarter of 2000 were $8.1 million, a 96%
increase over revenues of $4.1 million in the second quarter of 1999. The
increase was primarily due to a $1.7 million increase in PREP revenue, a $1.1
million increase in AutoPap fee-per-use and related revenue, and a $0.8 million
increase in AutoPap instrument sales. The increase in PREP revenue was primarily
attributable to domestic sales of PREP in the second quarter of 2000, consisting
of both instrument sales and the sale of test kits, following FDA approval of
PREP in late June 1999. The increase in AutoPap fee-per-use and related revenue
is due to an increase in utilization of the installed base of active fee-per-use
AutoPap instruments and the addition of AutoPap usage contracts with guaranteed
minimum payments. The remaining increase is attributable to a $394,000 increase
in revenues from the Company's other product lines, primarily Pathology
Workstation products.
Gross Margin - Gross margin for the second quarter of 2000 was 48%, an increase
from 38% in the corresponding period of 1999. This increase was primarily
attributable to a greater portion of revenues consisting of higher margin PREP
sales and international AutoPap instrument sales than the corresponding quarter
in 1999.
Research and Development - Research and development expenses include salaries
and benefits of scientific, engineering and regulatory personnel, costs related
to clinical studies and submissions to the FDA, testing equipment, relevant
consulting services and components for prototypes. Research and development
expenses for the second quarter of 2000 were $2.2 million, a 37% reduction from
$3.5 million in the second quarter of 1999. This decrease was primarily
attributable to decreased net development costs on additional AutoPap
applications, and an overall reduction in redundant research and development
efforts that were eliminated as part of the Merger. The second quarter of 1999
included $275,000 in severance related expenses resulting from a 33% headcount
reduction which occurred in June 1999.
Selling, General and Administrative - Selling, general and administrative
expenses include salaries and benefits of sales, marketing, and administrative
personnel, non-patent legal expenses and certain facility costs. Selling,
general and administrative expenses for the second quarter of 2000 were $6.5
million, a 45% increase from $4.5 million in the second quarter of 1999. This
increase is primarily due to a one-time non-cash compensation charge of $1.7
million related to the repricing of stock options and increased legal fees
related to current lawsuits. These increases were partially offset by a 37%
reduction of personnel and elimination of other redundant functions and expenses
resulting from the Merger.
Interest Income and Expense - Interest income for the second quarter of 2000 was
$212,000, a 39% decrease from $348,000 during the second quarter of 1999,
primarily attributable to the lower average cash balance during 2000. Interest
expense increased 317% from $106,000 in the second quarter of 1999 to $441,000
in the second quarter of 2000. This increase is due to a higher balance of
outstanding debt in the first quarter of 2000 as compared to the first quarter
of 1999. Also, in connection with the $7,000,000 term debt obtained in the first
quarter of 2000, the Company issued warrants to acquire 223,253 shares of Common
Stock at a weighted average exercise price of $4.70 per share as a commitment
fee. The value of the warrants was recorded as debt issuance costs and
additional paid in capital and is being amortized to interest expense over the
term of the debt. The Company recognized $143,000 of this commitment fee as a
non-cash charge to interest expense in the second quarter of 2000.
9
<PAGE> 11
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues - Revenues for the first six months of 2000 were $15.5 million, a 113%
increase over revenues of $7.3 million in the corresponding period in 1999. The
increase was primarily due to a $3.3 million increase in PREP revenue, a $2.4
million increase in AutoPap fee-per-use and related revenue, and a $2.3 million
increase in revenue from AutoPap instrument sales. The increase in PREP revenue
was primarily attributable to domestic sales of PREP in the first half of 2000,
consisting of both instrument sales and the sale of test kits, following FDA
approval of PREP in late June 1999. The increase in AutoPap fee-per-use and
related revenue is due to an increase in utilization of the installed base of
active fee-per-use AutoPap instruments and the addition of AutoPap usage
contracts with guaranteed minimum payments. The remaining increase is
attributable to a $236,000 increase in revenues from the Company's other product
lines, primarily Pathology Workstation products.
Gross Margin - Gross margin for the first six months of 2000 was 49%, an
increase from 38% in the corresponding period of 1999. This increase was
primarily attributable to a greater portion of revenues consisting of higher
margin PREP sales and international AutoPap instrument sales than the
corresponding quarter in 1999.
Research and Development - Research and development expenses include salaries
and benefits of scientific, engineering and regulatory personnel, costs related
to clinical studies and submissions to the FDA, testing equipment, relevant
consulting services and components for prototypes. Research and development
expenses for the first six months of 2000 were $4.5 million, a 37% reduction
from $7.1 million in the corresponding period of 1999. This decrease was
primarily attributable to decreased net development costs on additional AutoPap
applications, and an overall reduction in redundant research and development
efforts that were eliminated as part of the Merger. The first half of 1999
included $275,000 in severance related expenses resulting from a 33% headcount
reduction which occurred in June 1999.
Selling, General and Administrative - Selling, general and administrative
expenses include salaries and benefits of sales, marketing, and administrative
personnel, non-patent legal expenses and certain facility costs. Selling,
general and administrative expenses for the first six months of 2000 were $10.6
million, an 8% increase from $9.8 million in the corresponding period of 1999.
This increase is primarily due to the one-time, non-cash compensation charge of
$1.7 million related to repricing of stock options and increased legal costs.
This increase is partially offset by a 37% reduction of personnel and
elimination of other redundant functions and expenses resulting from the Merger.
Interest Income and Expense - Interest income for the first half of 2000 was
$412,000, a 42% decrease from $713,000 during the first half of 1999, primarily
attributable to the lower average cash balance during 2000. Interest expense
increased 245% from $223,000 in the first half of 1999 to $767,000 in the first
half of 2000. This increase is due to a higher balance of outstanding debt in
the first quarter of 2000 as compared to the first quarter of 1999. Also, in
connection with the $7,000,000 term debt obtained in the first quarter of 2000,
the Company issued warrants to acquire 223,253 shares of Common Stock at a
weighted average exercise price of $4.70 per share as a commitment fee. The
value of the warrants was recorded as debt issuance costs and additional paid in
capital and is being amortized to interest expense over the term of the debt.
The Company recognized $255,000 of this commitment fee as a non-cash charge to
interest expense in the first half of 2000.
10
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, TriPath had $15.4 million in cash and cash equivalents,
compared with $14.0 million at December 31, 1999. Historically, TriPath's
expenses have significantly exceeded its revenues, resulting in an accumulated
deficit of $175.2 million as of June 30, 2000. TriPath has funded its operations
primarily through the private placement and public sale of equity securities,
and through debt facilities and product revenues.
Cash used in operations was $4.3 million during the six months ended June 30,
2000 and $15.9 million during the corresponding period of 1999. Negative
operating cash flow during both periods was caused primarily by operating
losses. Capital expenditures were $72,000 during the six months ended June 30,
2000 and $432,000 during the corresponding period of 1999. TriPath has no
material commitments for capital expenditures.
In February 2000, the Company closed on an agreement for a $7.0 million
subordinated debt facility. The loan, which is collateralized by substantially
all of the assets of the Company, accrues interest at a rate equal to the U.S.
Treasury Note plus 8%. As of June 30, 2000, the entire $7.0 million was
outstanding.
In February 2000, the Company obtained a $5.0 million working capital facility
from a bank. This line bears interest at the bank's prime rate plus 1% and is
collateralized by substantially all of the assets of the Company. At June 30,
2000, there was no outstanding balance on the line of credit.
TriPath believes that its existing cash and existing debt and lease financing
for internal use assets, rental and IPO placements of PREP and fee-per-use
placements of AutoPap will be sufficient to enable it to meet its future cash
obligations at least through 2000. TriPath's future liquidity and capital
requirements will depend upon numerous factors, including:
- the level of placements of PREP systems and AutoPap systems;
- the resources required to further develop TriPath's marketing and sales
capabilities domestically and internationally; and
- the resources required to expand manufacturing capacity and the extent
to which the Company's products generate market acceptance and demand.
In particular, TriPath anticipates that marketing and sales expenditures for
PREP for gynecological uses in the United States and expenditures related to
manufacturing and other administrative costs will increase significantly.
TriPath cannot guarantee that it 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 TriPath needs it or on terms TriPath finds acceptable. TriPath's
failure to obtain funding would have a material adverse effect on its business,
financial condition and results of operations.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
This report contains forward looking statements which are made under the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
Company's operating results and financial condition have varied and may in the
future vary significantly depending on a number of factors. The statements
contained in this report which are not strictly historical information,
including, without limitation, statements regarding the receipt of regulatory
approvals, implementation of the Company's full-scale marketing and sales
activities, management's plans and objectives for future operations, product
plans and performance, management's assessment of market factors, as well as
statements regarding the strategy and plans of the Company, constitute forward
looking statements which involve
11
<PAGE> 13
risks and uncertainties. The following factors, among others, could cause actual
results to differ materially from those contained in forward-looking statements
made in this report and presented elsewhere by management from time to time: the
risk of loss of the Cytyc infringement lawsuit, the Company's early stage of
development, uncertainties regarding product regulatory clearance, FDA approval
of and reimbursement for the use of AutoPap with PREP, the ability to attain or
maintain required compliance with regulations governing manufacturing of medical
diagnostic devices, uncertainty of market acceptance of the Company's principal
products, competition and technological change, history of operating losses,
accumulated deficit and uncertainty of future profitability, dependence on a
limited number of products, the possibility of future capital needs and the
uncertainty of availability of additional financing, dependence on patents,
copyrights, licenses and proprietary rights, risk of third-party claims of
infringement, dependence on third-party reimbursement, international sales and
operations risks, limited marketing and sales resources, risk associated with
product liability claims, limited number of potential customers, limited
manufacturing experience, dependence on single or limited-source suppliers, and
ability to retain key personnel. Such factors, among others, are described in
greater detail in Exhibit 99.1 to the Company's Annual Report on Form 10-K (File
No. 0-22885) under the heading "Important Factors Regarding Forward-Looking
Statements." These factors may have a material adverse effect upon the Company's
business, results of operations and financial conditions. Because of these and
other factors, past financial performance should not be considered an indication
of future performance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
TriPath's financial results and cash flows are subject to fluctuation due to
changes in interest rates primarily from its investment of available cash
balances in highly rated institutions. TriPath maintains a short-term investment
portfolio consisting of highly liquid investments with maturities of three
months or less, classified as cash equivalents. TriPath's current policies do
not allow it to use interest rate derivative instruments to manage exposure to
interest rate changes. TriPath does not expect its operating results, cash
flows, or securities available-for-sale to be affected to any significant degree
by a sudden change in market interest rates.
12
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 13, 1999, Cytyc Corporation ("Cytyc") filed suit against TriPath in
the United States District Court for the District of Delaware. The complaint
alleges that the Company's CytoRich(R) proprietary preservative fluid infringes
Cytyc's patent titled "Cell Preservative Solution." The complaint seeks a
determination that TriPath is infringing Cytyc's patent and an injunction
preliminarily and permanently enjoining and restraining TriPath from further
infringing Cytyc's patent. The complaint also seeks treble damages, plus
interest, in an amount to be determined, as well as costs and reasonable
attorneys fees. On October 18, 1999, TriPath filed its response denying Cytyc's
claims. On December 6, 1999, the Company demanded Cytyc withdraw its motion for
preliminary injunction. On December 7, 1999, Cytyc complied with this request
and withdrew their motion for preliminary injunction. On March 10, 2000, the
Company filed a motion for summary judgement. On May 15, 2000 the Company filed
a motion requesting to assert additional defenses and counterclaims including
anticompetitive conduct in violation of the antitrust and unfair competition
laws and the Lanham Act. On June 30, 2000, the Court denied the Company's motion
to assert new defenses and counterclaims. The parties continue to proceed with
discovery in this matter.
On May 12, 2000, Cytyc filed suit against TriPath in the United States District
Court for the District of Massachusetts. The complaint alleges that the Company
has distributed and continues to distribute false and/or misleading information
to current and potential purchasers of Cytyc's products. The complaint seeks
monetary and injunctive relief. On June 2, 2000, the Company filed a Motion to
Transfer or Stay. On June 5, 2000, the Court granted the Company's Motion to
Stay. TriPath has not answered the complaint because the case is currently
stayed pursuant to Court order entered on June 5, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS:
At the Annual Meeting of Stockholders held on June 1, 2000, the Company's
stockholders voted as follows:
(a) To elect Thomas A. Bonfiglio, M.D., David A. Thompson, and Haywood D.
Cochrane, Jr. to the Board of Directors, each to serve a three-year term.
<TABLE>
<CAPTION>
Nominee Vote "FOR" Vote Withheld
<S> <C> <C>
Thomas A. Bonfiglio, M.D. 23,113,913 918,397
David A. Thompson. 23,113,913 918,397
Haywood D. Cochrane, Jr. 23,112,886 919,424
</TABLE>
There were no broker non-votes or abstentions with respect to this matter.
The terms in office of James B. Powell, M.D., Alan C. Nelson, Ph.D., Richard A.
Charpie and Robert E. Curry continued after the meeting.
13
<PAGE> 15
(b) To amend the Company's Amended and Restated 1996 Equity Incentive Plan
(the "Plan") to increase the number of shares of Common Stock available
for issuance pursuant to awards under the Plan by 1,585,000 shares from
2,986,325 to 4,571,325 shares.
<TABLE>
<S> <C>
Total Vote For the Proposal: 14,105,635
Total Vote Against the Proposal: 2,600,793
Abstentions: 49,384
Broker Non-Votes: 7,276,498
</TABLE>
(c) To amend the Company's 1997 Director Stock Option Plan (the "Director
Plan") to (i) increase the number of shares of Common Stock available
for issuance pursuant to awards under the Director Plan by 200,000
shares from 100,000 to 300,000 shares, (ii) alter the existing
eligibility requirements, and (iii) amend the size and vesting schedule
of the automatic grants to newly elected and re-elected directors.
<TABLE>
<S> <C>
Total Vote For the Proposal: 16,279,555
Total Vote Against the Proposal: 433,564
Abstentions: 42,693
Broker Non-Votes: 7,276,498
</TABLE>
(d) To ratify the selection by the Board of Directors of Ernst & Young LLP
as the Company's independent auditors for the fiscal year ending
December 31, 2000.
<TABLE>
<S> <C>
Total Vote For the Proposal: 23,979,218
Total Vote Against the Proposal: 23,161
Abstentions: 29,931
Broker Non-Votes: --
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits. See exhibit index on page 16.
(b) Reports on Form 8-K. None.
14
<PAGE> 16
TRIPATH IMAGING, INC.
FORM 10-Q
JUNE 30, 2000
SIGNATURE
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 thereunto duly authorized.
TRIPATH IMAGING, INC.
DATE: August 14, 2000 BY: /s/ James D. Everhart
--------------------------------
James D. Everhart
Duly Authorized Officer and
Principal Financial Officer
15
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
27 Financial Data Schedule (for EDGAR filing purposes only). Filed herewith.
</TABLE>
16
