SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
___________________________
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1996 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission File Number: 0-25210
NeoPath, Inc.
(Exact name of registrant as specified in its charter)
Washington 91-1436093
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8271 - 154th Avenue NE, Redmond, Washington 98052
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 869-7284
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
[ ]
Aggregate market value of voting stock held by non-
affiliates of the registrant as of February 28, 1997 was
$189,718,059.
Number of shares of Common Stock outstanding as of
February 28, 1997: 13,730,440 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1996 Annual Report to Shareholders
are incorporated by reference into Part II.
Part III is incorporated by reference to the
definitive Proxy Statement to be filed in connection with
the Company's Annual Meeting of Shareholders to be held on
May 22, 1997.
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PART I
Item 1. BUSINESS
The following Business section contains "forward looking
statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking
statements are subject to certain risks, uncertainties and
other factors that may cause actual results, performance and
achievements to differ materially from historical results or
those anticipated. See "Factors Affecting Future Results
and Forward-Looking Statements."
The Company
NeoPath, Inc. (the "Company" or "NeoPath"), a Washington
Corporation incorporated in 1989, develops and markets
products that automate the interpretation of medical images.
The Company's initial products are two automated screening
systems that integrate proprietary high-speed image
processing computers, video imaging technology and
sophisticated image interpretation software to capture and
analyze thousands of microscopic images from a Papanicolaou
("Pap") smear slide. In September 1995, the United States
Food and Drug Administration (the "FDA") cleared for
commercial use the Company's first product, the AutoPap 300
QC Automatic Pap Screener System (the "AutoPap QC"). During
the first quarter of 1996, the Health Care Financing
Administration officially allowed clinical laboratories to
use the AutoPap QC in the quality control review of Pap
smear slides that have been initially screened by
cytologists as normal. The decision allows AutoPap QCs to
replace the federally mandated rescreening requirements. As
a result of these approvals, NeoPath transitioned from a
"development stage" company to a commercial entity, with the
Company's first product revenues recognized in 1996.
NeoPath is seeking FDA approval for the Company's second
product, the AutoPap Automatic Pap Screener System (the
"AutoPap Screener" and, in combination with the AutoPap QC,
the "AutoPap System"). On September 27, 1996 a Hematology
and Pathology Devices Advisory Panel recommended that the
FDA not approve, at that time, the supplement to the
Company's premarket approval ("PMA") submission for the use
of the AutoPap Screener as a primary screener of Pap smear
slides pending the completion of additional premarket
studies. The FDA subsequently followed the Panel's
recommendation. The Company is performing additional
clinical studies, as requested by the FDA, and plans to
resubmit this matter to the FDA in 1997.
The Company believes that the AutoPap System can
facilitate the earlier and more accurate detection of
precancerous cervical conditions and cervical cancer,
thereby decreasing the morbidity and mortality rates for
cervical cancer.
Background
Cancer of the Uterine Cervix
Cancer of the uterine cervix is one of the most common
cancers among women throughout the world, with approximately
500,000 new cases reported each year. The American Cancer
Society projected that, in the United States in 1996,
approximately 14,500 new cases of cervical cancer would be
diagnosed and approximately 4,800 women would die of
cervical cancer. Almost all deaths due to cervical cancer
could be prevented with early-stage detection and treatment.
Cancer of the uterine cervix is preceded by a precancerous,
curable stage that generally progresses without symptoms
over a period of years until it reaches an invasive stage.
Treating uterine cervical cancer after it has reached the
invasive stage becomes more difficult and expensive, and may
not be successful. Industry sources have estimated that, of
the approximately 50 million Pap tests conducted annually in
the United States, approximately 2.5 million, or 5%, are
diagnosed with precancerous conditions or cancer.
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The Pap Test
The Pap test, developed in the 1940s by Dr. George N.
Papanicolaou, is a screening procedure for the early
detection of precancerous and cancerous conditions of the
uterine cervix. The Pap test was designed to identify
abnormalities that may progress to cervical cancer, thereby
facilitating early medical intervention. If early detection
is made, treatment is relatively inexpensive and almost
always successful. To obtain a Pap smear, a gynecologist or
general practitioner scrapes the surface of a woman's
uterine cervix to collect a sample of cells. The specimen is
smeared onto a microscope slide and preserved with a
fixative agent such as alcohol. This Pap smear, along with
patient information, is then sent to a clinical laboratory
for further preparation, screening and diagnosis.
At the laboratory, the specimen, which typically consists
of 50,000 to 300,000 cervical cells, is stained to highlight
important cellular features and sealed with a protective
coverslip. The Pap smear is then placed under a microscope
and examined by a cytotechnologist for signs of abnormality.
Cytotechnologists, medical professionals with special
training in cytology (the study of cells), generally require
five to ten minutes to screen each Pap smear and complete
related paperwork. Typically, about 90% to 95% of all Pap
smears are classified as normal. In the remaining cases, a
cytotechnologist has detected a suspicious condition that
must be reviewed by a senior cytotechnologist. Those slides
confirmed to have signs of precancerous conditions or
cancer, typically about 5% of all cases, are referred to a
cytopathologist, who carefully reviews the Pap smear and
makes a final diagnosis.
Despite the acknowledged success of the Pap test, there
are certain limitations in the current method of human Pap
smear review. Pap smears are subject to a highly variable
false-negative rate (the percentage of abnormal smears that
are misclassified as normal). In certain laboratories, this
false-negative rate may exceed 25% (that is, one of four
abnormal Pap smears may be misclassified as normal). Partly
because physical and mental stress escalates with the number
of Pap smears examined, thereby increasing the risk of false-
negatives, federal regulations promulgated under the
Clinical Laboratory Improvement Amendments of 1988 ("CLIA")
limit the number of slides (gynecological and
nongynecological) that a cytotechnologist may screen each
day to no more than 100. As an additional quality control
measure, the CLIA regulations also require that laboratories
rescreen a minimum of 10% of all Pap smears initially
classified as normal.
Treatment
In the United States, each Pap smear slide is typically
classified in accordance with The Bethesda System for
Reporting Cervical/Vaginal Cytologic Diagnoses. Any slide
classified as other than negative is considered abnormal and
may be precancerous or cancerous. Abnormalities evident in
Pap smears may indicate various conditions ranging, for
example, from atypical squamous cells of undetermined
significance ("ASCUS") and atypical glandular cells of
undetermined significance ("AGUS"), both commonly referred
to as "atypia," and low-grade squamous intraepithelial
lesions ("LSILs") to high-grade squamous intraepithelial
lesions ("HSILs") and cancer. A woman whose Pap smear
indicates the presence of HSILs or cancer will typically
receive a colposcopic examination, and if necessary, a
biopsy. Treatment of early-stage noninvasive cervical
cancer, which is relatively curable, may be accomplished by
epithelial treatment in which the cancerous tissue is
removed, for example, by electrocautery. Once the cancer
reaches an invasive stage, the patient's chances for
recovery are diminished and typically require treatment such
as radiation therapy, surgery, or chemotherapy.
Market
The Company believes that clinical analysis of Pap smears
currently represents the largest nonautomated clinical
laboratory procedure. Industry statistics indicate that U.S.
clinical laboratories process over 50 million Pap smears
annually. The Company believes that laboratories outside the
United States process more than 60 million Pap smears
annually. Pap smears are processed in hospital-based and
independent clinical laboratories.
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Laboratories that fail to accurately identify Pap smears
that contain indications of precancerous conditions or
cancer may be subject to malpractice suits. Because federal
law requires all Pap smears to be retained by laboratories
for five years, these laboratories face significant exposure
to liability. The Company believes that use of its AutoPap
System will substantially improve the current standard of
practice, thereby assisting those laboratories that use the
AutoPap System to reduce their exposure to such liability.
In addition, in recent years there has been an increasing
focus on improving the quality of women's healthcare. The
Company believes that the AutoPap System will allow
laboratories to better detect precancerous cervical
conditions and cervical cancer, thereby improving the
standard of care for their female patients. Earlier
detection will facilitate more timely treatment and will
lower risks of morbidity and mortality.
Products
NeoPath's initial products are the AutoPap QC and the
AutoPap Screener, which employ identical hardware
components. The AutoPap Screener, however, contains
upgraded software features that allow it to perform primary
screening, as well as quality-control rescreening. The
AutoPap QC has been cleared by the FDA for commercial use in
the United States. The Company is performing additional
clinical studies to support the supplement to the Company's
PMA submission for the AutoPap Screener. In January 1997,
the Company introduced its next-generation AutoPap System
which incorporates new diagnostic algorithms that operate in
coordination with the original AutoPap Screener algorithms
to improve diagnostic accuracy. The Company is using the
next-generation AutoPap System in its current clinical
trials.
The Company will limit the use of the AutoPap Screener to
clinical trials and to commercial use in those foreign
countries in which such use is approved, unless and until it
is cleared by the FDA for commercial use in the United
States. The AutoPap System is approved for primary
screening and quality control in Japan, Canada, Australia,
New Zealand and The Netherlands. See "Governmental
Regulation."
The AutoPap System is designed to be used on-site by
general laboratory personnel and to be compatible with a
wide range of staining procedures and all standard glass
microscope slides. Thus, most laboratories should not find
it necessary to change their current Pap smear preparation
procedures to implement use of the AutoPap System. The
AutoPap System currently requires use of glass coverslips,
which are widely used by most laboratories and provide
consistent optical characteristics. Currently, each AutoPap
System analyzes a Pap smear in approximately the same time
as a cytotechnologist. The AutoPap System, which holds
approximately 300 Pap smear slides at a time, is easy to
load and is designed to operate continuously and with
minimal intervention for up to 24 hours per day. The
Company provides each clinical laboratory with on-site
training, system documentation, a comprehensive quality
assurance program and ongoing customer and technical
support.
The Company believes that its automated medical image-
interpretation technology has substantial application in
other diagnostic tests that involve microscopic analysis of
biological specimens on glass slides, such as sputum, blood,
tissue or urine samples. In addition, the Company has
identified several other potential applications for its
technology, including automated image interpretation for
lung, breast, bladder and skin cancers. The Company believes
that the technology embodied in the hardware platform of the
AutoPap System is appropriate for other applications
involving analysis of cellular images on microscope slides.
Developing systems for such applications primarily involves
adapting software algorithms developed for the analysis of
Pap smears to the analysis of other tissue specimens. The
Company continues to evaluate the indications on which it
may focus future development efforts.
The Company's research and development expenses were $11.2
million, $9.4 million, and $9.2 million in the years ended
December 31, 1996, 1995, and 1994, respectively.
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AutoPap 300 QC Automatic Pap Screener System
The AutoPap QC is designed to rescreen Pap smears that
have been previously screened and classified as normal by a
cytotechnologist. Its purpose is to improve detection of
false-negatives and, thereby, improve laboratory accuracy.
The AutoPap QC analyzes Pap smears originally classified as
normal and adequate for analysis. Those Pap smears that the
AutoPap QC classifies as showing the highest potential for
abnormality are identified as requiring additional review by
a cytotechnologist qualified to perform quality control. The
AutoPap QC is intended for use as both a quality-control and
an adjunct rescreening device for previously screened Pap
smears. This flexibility will allow laboratories either to
implement the AutoPap QC into their quality-control
procedures or to offer Pap smear rescreening by the AutoPap
QC as an additional service for those women who seek an
additional review of their Pap smears.
Preclinical and clinical trials demonstrated that the
AutoPap QC, operating in a quality-control mode, showed up
to a five-fold improvement in the detection of false
negative slides over a 10% random selection method. By the
same standard, the AutoPap QC achieved up to an eight-fold
improvement in the detection of biopsy-confirmed HSIL and
cancer slides. The Company believes that the substantial
improvement over current methodology demonstrated by the
AutoPap QC can result in consistent earlier detection of
precancerous conditions and cancer, thereby facilitating
more timely treatment and reducing the risk of morbidity and
mortality.
Currently, most laboratories that have not adopted AutoPap
technology satisfy CLIA quality control regulations by
manually rescreening a minimum of 10%, randomly selected, of
all Pap smears initially classified as normal. Because the
AutoPap QC automatically rescreens substantially all Pap
smears initially classified as normal and provides the
laboratory with an enriched sample of Pap smear slides
determined most likely to exhibit abnormality, the Company
believes that use of the AutoPap QC will result in a
substantial improvement over random selection in identifying
false-negatives. During the first quarter of 1996, HCFA
officially allowed clinical laboratories to use the AutoPap
QC in the quality control review of Pap smear slides that
have been initially screened by cytologists as normal. CLIA
regulations also require rescreening of slides from patients
or groups of patients that are identified as having a high
probability of developing cervical cancer based on available
patient information. The AutoPap QC is not intended to
replace a laboratory's current practices regarding
rescreening Pap smears of these "high-risk" patients.
The Company believes that, compared to current methods,
the AutoPap QC enables clinical laboratories to detect
precancerous cervical conditions and cervical cancer
substantially earlier and more consistently, thereby
decreasing the laboratory's false-negative rate and
demonstrating the laboratory's commitment to achieving the
highest standard of practice. This improvement over current
rescreening methods should increase healthcare providers'
ability to treat precancerous cervical conditions and
cervical cancer, thus reducing the instances in which women
will require treatments such as hysterectomies or
chemotherapy, or die. The AutoPap QC also provides
laboratories with the capacity to monitor and evaluate
clinical laboratory processes and cytotechnologist
proficiency, thereby improving the laboratory's overall
performance on all initial Pap smear screening.
AutoPap Automatic Pap Screener System
NeoPath believes that if FDA clearance for commercial use
is received, the AutoPap Screener will become the Company's
principal product for the Pap smear screening market. By
reducing the number of Pap smears requiring cytotechnologist
review, the AutoPap Screener increases the number of Pap
smears a laboratory can process, potentially reducing the
per-slide processing cost while maintaining or improving
overall laboratory accuracy.
Unlike the AutoPap QC, the AutoPap Screener is designed
for use as a primary screener for Pap smears. The AutoPap
Screener could screen all of the laboratory's Pap smears and
classify them according to the level of detected abnormality
such as (a) normal and needing no further review or (b)
potentially abnormal and selected for review by a
cytotechnologist. Normal Pap smears would pass directly to
the laboratory's archive. The second group, consisting of
the remaining Pap smears, would be reviewed by the
laboratory's cytotechnologists according to normal
laboratory procedures. The threshold for classifying Pap
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smears as normal and needing no human review will be
established for each laboratory during System installation.
Because the AutoPap Screener is an upgrade, designed to
incorporate the features of the AutoPap QC, the AutoPap
Screener allows the laboratory to continue to perform its
AutoPap QC-assisted quality-control rescreening without
having to process Pap smear slides twice through the AutoPap
System.
Because of the AutoPap Screener's ability to act as a
primary Pap smear screener, the Company intends to charge
higher fee-per-use and sale prices for use of the AutoPap
Screener than for the AutoPap QC. The AutoPap Screener has
not been cleared for commercial use in the United States.
The Company is conducting clinical trials of the AutoPap
Screener and, if appropriate data is obtained, plans to
submit a revised PMA supplement to the FDA in 1997. Because
the AutoPap Screener classifies a portion of Pap smears as
requiring no human intervention or review, there can be no
assurance that the FDA review process for the AutoPap
Screener will not be longer and more extensive than it was
for the AutoPap QC, or that the FDA will grant market
clearance of the AutoPap Screener. See "Governmental
Regulation."
Marketing and Sales
The AutoPap QC is the only fully automated Pap smear
rescreening device to receive regulatory clearance for
marketing in the United States. The AutoPap QC has been
cleared by the FDA for commercial use in both a quality-
control rescreening mode and an adjunct rescreening mode.
The Company believes that use of the AutoPap QC and, upon
its commercial introduction, the AutoPap Screener, may serve
to distinguish its customers' laboratories as providing a
higher quality of Pap smear screening compared to those
laboratories that have not adopted use of the AutoPap
System.
NeoPath's primary market includes domestic and foreign
clinical laboratories. The Company markets the AutoPap QC
in North America through its direct sales force and markets
the AutoPap System internationally primarily through
relationships with independent distributors. The Company's
four largest customers accounted for 86% of total
1996 revenues, and foreign product placements accounted for
45% of total 1996 revenues. The Company's market
research indicates that over 35% of all U.S. Pap smears are
screened by the three largest laboratories, including
SmithKline Beecham Clinical Laboratories, Quest Diagnostics
Incorporated, and Laboratory Corporation of America, each of
which operates multiple laboratory facilities nationwide.
The Company has AutoPap QCs placed under contract with each
of these three large laboratory corporations. However,
Unilab Corporation, with 13 AutoPap QCs, represents the
Company's largest single-site contract signed to date.
In March 1997, NeoPath received approval from the Japanese
Ministry of Health and Welfare to market the AutoPap System
as a primary screener. NeoPath distributes AutoPap Systems
in Japan through an agreement with Nikon Corporation whereby
Nikon markets products to customers and handles maintenance
and service. NeoPath provides training for Nikon sales
personnel and service engineers, who in turn train Japanese
customers. The Japanese market, with approximately 12
million Pap smear tests conducted annually, is second only
to the United States in current screening volume.
The Company has also received regulatory approvals to
export and market the AutoPap System in Canada, Australia,
New Zealand and The Netherlands. The Company intends to
increase its marketing efforts in Europe and other
international locations in 1997.
NeoPath is compensated on either a sale or fee-per-use
basis (subject to certain license agreements and minimum
payments). Under its fee-per-use program, the Company
retains ownership of AutoPap Systems placed at customer
sites and assesses customers a charge for each Pap smear
slide analyzed. The Company's product placements have
primarily consisted of fee-per-use contracts in the United
States and sales contracts internationally. The Company
anticipates that future product placements will continue to
consist of a mixture of fee-per-use and sale contracts.
The Company installs the AutoPap System at customer
laboratories. By providing this on-site service, the
Company believes that clinical laboratories will be better
able to integrate use of the AutoPap System into their
normal workflow. Installing the AutoPap System on site also
allows clinical laboratories to maintain control over
patient specimens and associated data, minimize slide
handling and avoid delays in reporting their test results.
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Subject to obtaining FDA clearance for commercialization
of the AutoPap Screener, the Company anticipates being able
to upgrade an AutoPap QC to an AutoPap Screener in the
field. As the Company's product development efforts improve
the performance and functionality of the AutoPap System, the
Company intends, subject to obtaining applicable regulatory
approvals, to market upgraded product versions to its
customers. The Company has not yet determined how it will
charge for its upgrade packages, but anticipates that
certain upgrades will result in increases in its fee-per-use
and sale pricing.
Manufacturing
The Company's manufacturing operations are located at its
headquarters in Redmond, Washington and consist of final
assembly, integration and testing of electronic, mechanical
and optical components and modules comprising the AutoPap
System. In its manufacturing process, the Company is
required to meet and adhere to all applicable requirements
of U.S. and international regulatory agencies, including
Good Manufacturing Practices ("GMP") regulations, as
promulgated by the FDA. As part of the FDA regulatory
process, the Company's manufacturing processes and
facilities are subject to periodic FDA GMP inspections and
may be subject to further periodic inspections by U.S. and
foreign regulatory agencies. See "Governmental Regulation."
During 1996, the Company expanded its manufacturing
capabilities and produced a total of 66 AutoPap Systems in
the Company's first full year as a commercial entity.
The Company purchases all components for the AutoPap
System from outside vendors. A major component of the
AutoPap System, the slide tray motion system, is supplied by
a sole-source vendor. Certain other components, such as the
video cameras, are currently supplied by a single vendor,
and components provided by additional or replacement
suppliers would require some modification to be incorporated
into the AutoPap System. The establishment of additional or
replacement sources of supply for many AutoPap System
components cannot be accomplished quickly, and substitution
of components could require regulatory approval, the receipt
of which cannot be assured. Accordingly, a vendor's
inability to supply acceptable components in a timely manner
and in the quantity required could delay the Company's
manufacture of, or cause the Company to cease manufacturing,
its products. Any such delay or cessation could have a
material adverse effect on the Company.
Core Technology
The Company's core technology consists of a means for
acquiring high-quality images through an integrated high-
speed video microscope, comprehensive image interpretation
software to accurately analyze images and classify cells and
slides, and high-speed custom field-of-view ("FOV")
computers to run the software at high speed. This
technology is able to automatically analyze and extract
important features of cellular material and to classify a
specimen based on those features.
High-Speed Video Microscope
To capture high-quality images, the Company has designed a
high-speed video microscope consisting of an integrated
mechanical/optical system with a custom microscope and video
cameras that focus, capture and digitize images from a Pap
smear. The microscope and three video cameras are
stationary while the platform holding the Pap smear is
moved, which allows the camera system to scan the Pap smear
in a continuous, systematic motion. The Pap smear is
illuminated by high-intensity, narrowband light from a
strobe that enhances image contrast and freezes each image
without interrupting the motion of the platform holding the
Pap smear.
The mechanical/optical system is controlled by a custom-
designed image capture and focus module that incorporates
specialized integrated circuits and software. This module
calibrates the image acquisition system, automatically
focuses the system to obtain diagnostically relevant images
and adjusts for the non-uniform cell distributions of a
conventional Pap smear. The image capture and focus module
also digitizes images, evaluates image quality, decides
whether to accept or reject the image for analysis and
identifies the location of a rejected image for a repeat
scan.
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The mechanical/optical system generally scans the slide in
three separate operations. First, it performs a setup,
which consists of locating the slide, identifying the
coverslip area and mapping three-dimensional surface
irregularities of the Pap smear. The system then captures
low-magnification images from the slide in a systematic scan
of the slide coverslip area. Finally, using information
from the low-magnification scan, the system captures high-
magnification images from those areas of the slide having
the greatest diagnostic interest.
Image-Interpretation Software
NeoPath's image-interpretation software integrates a
series of image-interpretation algorithms to examine slide
images and select and analyze those that are the most
relevant indicators of normality and abnormality. An image-
interpretation algorithm consists of multiple-step
mathematical and algorithmic processes that detect and
classify an object or collection of objects based on shape,
structure, optical density, contextual features and other
visible characteristics. The process executed by the image-
interpretation software consists of five steps: selecting
images from a slide, segmenting the images into objects,
measuring object features, classifying objects and
classifying the slide.
Selection of Images. By analyzing images from a low-
magnification scan of the slide coverslip area, algorithms
first identify the areas most likely to contain cellular
material of diagnostic significance. This information then
guides the high-speed video microscope to analyze the
locations of greatest diagnostic interest in a separate
high-magnification scan. The AutoPap System also
accumulates and stores information gathered in this first
step for later use in the slide classification process.
Segmentation Into Objects. In the high-magnification
scan, the AutoPap System locates and segments the well-
defined cells or group of cells in each image into
objects, while excluding from further analysis poorly
defined objects and obvious artifacts (blood, mucus, dust
particles and similar matter).
Measurement of Object Features. Once objects or groups
of objects are segmented from other elements of the image,
algorithms measure up to 100 features from each object.
Features are characteristics of the objects that
independently or in combination provide effective
discrimination among normal cells, artifacts and abnormal
cells. The algorithms discriminate on the basis of five
general categories of features: density, texture, size,
shape and context. Density features are measures of the
optical density of various portions of the cell, such as
the cytoplasm and nucleus, and the ratios of these
densities to each other. Texture is a localized measure of
optical density variation. Size features refer to the
physical areas of the segmented objects and their ratios
to each other. Shape features measure the boundary
complexity of the segmented objects, can differentiate
cell types, and are used to discriminate among isolated
and overlapping objects. Context compares an object to its
surroundings and the proximity of objects to each other.
Classification of Objects. Using the measured object
features, a series of algorithms then classifies the
objects contained in the images. Each classification
algorithm contains multiple stages that proceed from
easily identifiable objects to increasingly difficult
objects, adding more features at each level of
classification. Three complementary algorithms are used
to analyze the cells and cell groupings that could
indicate normality and abnormality: the single-cell
algorithm, the group algorithm and the thick-group
algorithm. An "anomaly likelihood" value is computed at
various steps of the classification process in which pre-
defined thresholds are applied to provide "alarms," which
identify objects that have a higher likelihood of being
abnormal cells. The results of the three algorithms are
integrated to achieve high overall classification
accuracy.
Classification of the Slide. All the gathered and
analyzed information from objects is compiled in a series
of scores that are used to classify the slide for purposes
of quality-control rescreening, adjunct rescreening or
primary screening. Other algorithms evaluate the
suitability of the slide for machine processing (quality
of staining, adequacy of cell collection, presentation of
material on the slide and image quality) and determine the
probable presence of certain important cellular material
such as endocervical, endometrial and squamous cells.
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Field-of-View Computer
Image-interpretation algorithms are implemented in
computer programs that must be executed by a high-speed
computing system. These algorithms must be run for each Pap
smear image, a process requiring significant computing
power. To address this requirement, NeoPath developed
specialized FOV computers, which are powerful image
processors that contain application-specific integrated
circuits and other processing components. The execution
speed of NeoPath's image-interpretation software is
accelerated through the use of these special-purpose
computers. The Company estimates that one FOV can perform
elemental pixel operations at a rate exceeding 1.6 billion
per second and at proportionately higher rates when several
FOVs are linked to run in parallel. The Company's current
configuration for the AutoPap System contains 15 FOVs, and
it expects that future versions will be faster (thus an
AutoPap System may require fewer FOVs). The FOVs are fully
programmable and can be programmed to execute algorithms for
other applications.
Patents and Proprietary Rights
Because of the substantial length of time and expense
associated with bringing new products through development
and regulatory approval to the marketplace, the medical
device industry places considerable importance on obtaining
patent protection and protecting trade secrets for new
technologies, products and processes. Accordingly, the
Company files patent applications to protect technologies
that it believes are significant to the development of its
business. The Company holds 19 U.S. patents and has 24
additional U.S. patent applications pending. The patents
and patent applications relate to various aspects of the
Company's high-speed image-interpretation technology. The
Company has also applied for patent protection for certain
aspects of its technology in foreign countries. The Company
intends to continue to pursue patent protection where it is
available and cost-effective, both in the United States as
well as in other countries.
The medical device industry has been characterized by
extensive litigation regarding patents and other
intellectual property rights, and the Company may institute
or otherwise be involved in such litigation to enforce its
patents, protect its trade secrets or know-how, challenge
the validity of proprietary rights of others or defend
against its alleged infringement of proprietary rights of
others. In July 1996, a patent infringement action was
filed against the Company. See "Item 3. Legal Proceedings"
and "Factors Affecting Future Results and Forward-Looking
Statements - Dependence on Patents and Proprietary Rights;
Risk of Third-Party Claims of Infringement."
NeoPath relies on a combination of patents, trade secrets
and confidentiality agreements to protect its proprietary
technology, rights and know-how. The Company's policy is to
have each employee enter into a confidentiality agreement
containing provisions prohibiting disclosure of confidential
information to anyone outside the Company. These provisions
also require disclosure to the Company of ideas,
developments, discoveries or inventions conceived during
employment, and assignment to the Company of proprietary
rights to such matters related to the business and
technology of the Company.
The Company has two registered trademarks in the United
States, Canada, France, the Benelux countries, Germany, The
United Kingdom, Italy and Spain for "NeoPath" and "AutoPap."
The Company also has registered trademarks for "AutoReview"
and "PapMap" in the United States, and "NeoPath" in
Australia. NeoPath has applied for registration of its
trademarks in several other foreign countries.
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Third-Party Reimbursement
Some private third-party medical insurance providers and
governmental agencies offer reimbursement for laboratory
testing associated with routine medical examinations,
including Pap smears. In the United States, many Pap smears
are currently paid for by the patient, and the level of
reimbursement by those third-party payors that provide
reimbursement varies considerably. Third-party payors,
including Medicare and Medicaid, Blue Cross/Blue Shield,
private health insurance, health administration authorities
in foreign countries and other organizations, may affect the
pricing or relative attractiveness of the Company's products
and services by regulating the maximum amount of
reimbursement provided by such payors or by not providing
any reimbursement. Restrictions on reimbursement may limit
the price that the Company can charge for AutoPap System
screening or reduce the demand for AutoPap System screening.
In addition, if there is no provision for reimbursement of
the AutoPap System screening, or if the level of
reimbursement is significantly below the amount laboratories
charge patients to perform AutoPap System screening, the
size of the potential market available to the Company would
likely be reduced. There can be no assurance that costs
associated with AutoPap System screening will ever become
reimbursable or that the level of reimbursement to clinical
laboratories for AutoPap System screening will achieve or be
maintained at levels necessary to permit the Company to
generate substantial revenue. In the international market,
reimbursement by private third-party medical insurance
providers, including governmental insurers and providers,
varies by country. In certain countries, the Company's
ability to achieve significant market penetration may depend
on whether third-party or governmental reimbursement is
available. The Company intends to focus on obtaining
coverage and reimbursement from major national and regional
third-party payors in the United States.
Governmental Regulation
United States
The AutoPap QC and the AutoPap Screener are medical
devices subject to extensive regulation in the United States
by the FDA and by other federal, state and local
authorities. The FDA regulates the research, development,
clinical studies, manufacturing, packaging, labeling,
distribution, promotion and postmarket surveillance of
medical devices in the United States. Preclinical and
clinical trials of medical devices must be conducted in
conformity with all applicable FDA regulations. In
addition, state and local permits may be required under
regulations relating to clinical activities.
Under the Federal Food, Drug, and Cosmetic Act, the
AutoPap System is a Class III medical device, subject to
stringent FDA review to ensure that the device is safe and
effective before commencement of marketing, sales and
distribution in the United States. After completing clinical
trials with respect to the AutoPap QC, the Company submitted
a PMA application supported by extensive data, including
preclinical and clinical trial data, to demonstrate the
safety and effectiveness of the AutoPap QC for specified
uses. As part of the PMA application, the Company submitted
a full description of the AutoPap QC and its components, a
full description of the methods, facilities and controls
used for manufacturing, and proposed labeling. PMA reviews
by the FDA generally take at least two years from the date
of filing to complete. The Company filed a PMA application
for the AutoPap QC on February 24, 1995 and received FDA
clearance for commercial marketing on September 29, 1995.
During 1996, the Company submitted a supplement to its PMA
submission to use the AutoPap Screener as a primary screener
of Pap smear slides. The FDA has not granted current
approval, but instead requested additional data. As a
result, the Company is conducting additional clinical trials
of the AutoPap Screener and, if appropriate data is
obtained, plans to submit to the FDA a revised PMA
supplement in 1997. Because the AutoPap Screener classifies
a portion of Pap smears as requiring no human intervention
or review, there can be no assurance that the FDA review
process for the AutoPap Screener will not be longer and more
extensive than it was for the AutoPap QC, or that the FDA
will grant clearance of the AutoPap Screener for commercial
use.
Once a PMA application receives FDA approval and the
Company commences marketing the applicable product, it is
required to register with the FDA and to submit device
listing information for products in commercial distribution.
In addition, the FDA may impose certain post-approval
requirements in a PMA approval order at the time of
approval, with which NeoPath would be required to comply.
In
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conjunction with FDA approval of the PMA application with
respect to the AutoPap QC, the Company's manufacturing
operations are subject to FDA GMP inspection. The Company
will continue to be inspected on a routine basis by the FDA
for compliance with GMP regulations with respect to
manufacturing, testing, distribution, storage and control
activities. Labeling and promotional activities are also
regulated by the FDA. The Company is required to establish
and maintain a system for tracking AutoPap Systems through
the chain of distribution and to conduct postmarket
surveillance, and will be required to provide periodic
reports containing safety and effectiveness information.
In addition, the Medical Device Reporting ("MDR")
regulations obligate medical device companies such as
NeoPath to provide information to the FDA whenever there is
evidence to reasonably suggest that a device may have caused
or contributed to a death or serious injury, or
malfunctioned and the device or a similar device marketed by
the company would be likely to cause or contribute to a
death or serious injury if the malfunction were to recur.
If, as a result of FDA inspections, MDR reports or
information derived from any other source, the FDA believes
that the Company is not in compliance with the law, it can
take one or more of the following actions: refuse to review
or clear applications to market the Company's product in the
United States or to allow the Company to enter into
government supply contracts; withdraw previously approved
applications; require notification to users regarding newly
found risks; request repair, refund or replacement of faulty
devices; request corrective advertisements, recalls or
temporary marketing suspension; or institute legal
proceedings to detain or seize products, enjoin future
violations or assess criminal penalties against the Company,
its officers or employees. Civil penalties for Food, Drug,
and Cosmetic Act violations may be assessed by the FDA in
lieu of or in addition to instituting other legal action.
Any such action by the FDA could result in disruption of the
Company's operations for an indeterminate period of time.
Various states in which the Company's products may be sold
in the future may impose additional regulatory requirements.
International Markets
A Class III medical device that has not been approved for
marketing in the United States may be exported for sale only
after the FDA has determined that the exportation of the
device is not contrary to public health and safety and that
the Company has received approval of the country to which
the device is intended for export. Approval of a device by a
comparable regulatory authority of a non-U.S. country must
generally be obtained prior to applying to the FDA for
clearance to export and commence marketing in that country.
Sales of medical devices outside of the United Sates are
subject to foreign regulatory requirements that vary widely
from country to country.
The Company has received the necessary regulatory
clearances from the FDA and the necessary regulatory
approvals from the Japanese Ministry of Health and Welfare,
the Canadian Health Protection Branch, The Netherlands'
Ministry of Health, Welfare and Sport, the Australian
Therapeutic Goods Association and the New Zealand Ministry
of Health to export the AutoPap System to, and market it for
commercial use in, Japan, Canada, The Netherlands, Australia
and New Zealand. NeoPath intends to pursue additional
product registrations in other foreign countries.
The Company's products are subject to a variety of
regulations in Europe. In vitro diagnostic medical devices,
including the AutoPap System, are not currently subject to
medical device directives issued by the European Union
("EU"). The Company anticipates that the EU will finalize a
directive for in vitro diagnostic medical devices that would
establish a basis for harmonized regulation of such devices
among EU member states. NeoPath would be subject to this
directive, including any established deadlines for
compliance. If enacted, the directive would apply only to
member states of the EU and the European Economic Area.
Other European countries, however, may enact national laws
that would conform to the directive. Member states of the
EU and the European Economic Area may enact requirements in
addition to those imposed by the directive. Some European
countries have established national regulations relating to
in vitro diagnostic medical devices. EU directives and
national laws impose requirements for electrical safety and
electromagnetic compatibility that apply to the AutoPap
System. NeoPath is currently performing the requisite
testing procedures and related documentation to apply the
European "CE" mark, and the Company intends to complete the
requirements by mid 1997. There can be no assurance that
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NeoPath will obtain the CE mark in 1997 or that the AutoPap
System or any other product that the Company may develop
will obtain any required regulatory clearance or approval on
a timely basis, if at all.
Regulation of Cervical Pap Smear Analysis
Pursuant to CLIA, Congress directed the Department of
Health and Human Services to promulgate regulations designed
to improve the quality of biomedical analytic services,
particularly the examination of Pap smears. CLIA
regulations require clinical laboratories to rescreen at
least 10% of the Pap smears classified on initial manual
screen as normal, which Pap smears must include normal cases
selected at random from the laboratory's total caseload, as
well as from patients or groups of patients that are
identified as having a high probability of developing
cervical cancer based on available patient information. The
AutoPap QC is not intended to replace a laboratory's current
practices regarding rescreening Pap smears of these "high-
risk" patients.
In addition, laboratories may be subject to state
regulation, inspection and licensing. In recent years, a
few states, including New York and California, have adopted
regulations that limit the number of slides that may be
manually examined by a cytotechnolgist within a given period
of time. There can be no assurance that states will not
directly regulate the AutoPap QC in the future. The Company
cannot predict the effect, if any, that such regulation may
have on its business or operations.
Competition
Competition in the medical device industry is intense, and
the industry is characterized by rapid product development
and technological change. The AutoPap System competes with
existing manual methods of screening Pap smears through
human review as well as with certain semi-automated systems.
To compete effectively, the AutoPap System must demonstrate
comparable or better accuracy relative to human review of
Pap smears. The Company is currently aware of two direct
competitors: AutoCyte, Inc. ("AutoCyte"), which has focused
on the development of a semi-automated system to prepare and
analyze monolayer Pap smears (a potential alternative to
conventional Pap smears) and Neuromedical Systems, Inc.
("NSI"), which is engaged in marketing a device for the semi-
automated rescreening of conventional Pap smears.
The Company believes that AutoCyte is conducting clinical
trials of a system for the production and automated analysis
of monolayer slides. NSI is marketing its semi-automated
Pap smear rescreening device as an adjunct to human Pap
smear screening. NSI's system is a computerized image
processing service provided to laboratories. According to
NSI, clinical laboratories will request NSI to perform its
supplemental procedures when specifically requested by
clinicians, patients or third-party providers. Pap smears
diagnosed by a laboratory as "negative" (i.e., "normal") on
an initial manual inspection and any subsequent quality-
control rescreening would be sent by laboratory personnel to
NSI scanning centers. The NSI system creates a color video
picture of each of the 128 images of the Pap smear slide
deemed by the NSI system to be most likely to be abnormal.
These images are recorded on a digital tape cassette that,
together with the patient's Pap smear slide, is returned to
the clinical laboratory. Trained laboratory personnel then
evaluate each of the 128 video pictures for each Pap smear
slide. If the cytotechnologist believes that there might be
an abnormality indicated on NSI's images of the Pap smear,
then a cytotechnologist would manually rescreen the Pap
smear slide using a microscope.
In addition to direct competition, the Company faces
indirect competition through companies that manufacture thin
layer slide preparation systems and devices that automate
various aspects of cytology. In May 1996, Cytyc, Inc.
received PMA approval from the FDA to market its ThinPrep
System for cervical cancer screening as a replacement for
the conventional Pap smear method. In November 1996,
NeoPath announced that it had completed a joint study with
Cytyc in which, using the existing AutoPap algorithms,
ThinPrep-prepared slides were processed on the AutoPap
System. The results of the preliminary study support the
AutoPap's ability to accurately process monolayer-prepared
Pap smears, and the Company expects to pursue regulatory
approval to process Pap smears prepared via thin layer slide
preparation systems.
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The Company believes that the AutoPap QC and, subject to
the Company's obtaining requisite regulatory approvals, the
AutoPap Screener, will compete on the bases of accuracy and
effectiveness, cost (including both charges by the Company
to the laboratory and the laboratory's labor and overhead
costs for its cytotechnologists), convenience to the
laboratory, perception among influential cytopathologists
and laboratories and processing speed and reliability. If
the AutoPap Screener is approved for commercialization in
the United States, the Company believes that it will enable
the Company's customer laboratories to increase the number
of Pap smears processed while maintaining or improving
accuracy and allow them to focus their cytotechnologists'
attention on the careful review of Pap smears that are most
likely to contain meaningful indication of abnormality.
There can be no assurance that the Company's competitors
will not develop new technologies and products that will
compete with, or will prove to be more effective than, the
AutoPap System. Furthermore, although the Company is
currently aware of only two direct competitors, there can be
no assurance that others will not purchase or develop
technologies that would compete with the AutoPap System or
render it obsolete. Competitors may manufacture, market and
sell their products or services more successfully than the
Company, which could have an adverse effect on the Company's
business and results of operation.
Employees
At December 31, 1996, the Company employed 185 full-time
equivalent personnel, including 72 in research and
development and regulatory; 50 in administration, customer
service and support, and sales and marketing; and 63 in
manufacturing. None of the Company's employees are
represented by a union or other bargaining group. The
Company believes its relationship with its employees is
good.
Factors Affecting Future Results and Forward-Looking
Statements
The preceding "Business" section contains "forward-
looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-
looking statements reflect the Company's current views
with respect to future events and financial performance.
These forward-looking statements are subject to certain
risks, uncertainties and other factors that may cause the
Company's actual results, performance and achievements to
differ materially from historical results or those
anticipated. The words "plan," "expect," "anticipate,"
"believe" and similar expressions identify forward-
looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements. The
Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a
result of new information, future events, or otherwise.
Factors that could cause actual results to differ
materially from historical results or those anticipated
include, without limitation, the items that follow.
Limited Operating History; History of Losses
The Company has a limited operating history and, prior
to 1996, was focused primarily on product development,
obtaining regulatory approvals and establishing
manufacturing capability. NeoPath began recognizing
product revenues in 1996.
The Company has incurred substantial losses since its
inception and, as of December 31, 1996, the Company had
an accumulated deficit of $64.6 million. The Company
expects continued losses in 1997 as it continues to
expand its sales, marketing, and customer service and
support capabilities and continues its research and
development activities (including additional clinical
studies). There can be no assurance that the Company
will achieve profitability or that the Company will not
be required to seek additional capital. There can be no
assurance that adequate funding will be available, if
needed, or on terms acceptable by the Company.
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Uncertainty of Market Acceptance; Market Consolidation
The Company's success and growth depend on market
acceptance of the AutoPap System among clinical
laboratories, healthcare providers, third-party
healthcare payors and patients, of which there can be no
assurance. The Company's success also depends on
customers' acceptance of NeoPath's fee-per-use and sale
programs. Even if the Company's products were to gain
market acceptance, the amount of revenue to be derived by
the Company from the AutoPap System would depend to some
extent on the availability of reimbursement from third-
party healthcare payors such as government and private
insurance plans. There can be no assurance that the
medical community or third-party healthcare payors will
accept an automated Pap smear rescreening system to
supplement or replace current laboratory Pap smear review
practices. Moreover, due in part to a continued trend
toward consolidation of clinical laboratories, the
Company expects that the number of potential domestic
customers for its products will decrease. Due to the
relative size of the largest U.S. laboratories, the
Company is likely to have a significant proportion of its
sales concentrated among a relatively small number of
customers. These factors may increase the Company's
dependence on sales to the largest clinical laboratories
and the bargaining leverage of those potential customers.
Uncertainty of Product Regulatory Clearance
The manufacture and sale of medical diagnostic devices
intended for commercial use are subject to extensive
governmental regulation in the United States. Similar
requirements are imposed by comparable governmental
agencies in certain other countries. The Company's
initial product, the AutoPap QC, has been cleared for
commercialization in the United States. Both AutoPap
Systems have been cleared for commercial marketing in
Japan, Canada, Australia, New Zealand and The
Netherlands. Before any U.S. commercial sales of the
Company's second product, the AutoPap Screener, can
commence, additional clinical testing and FDA clearance
are required. The Company is conducting clinical trials
of the AutoPap Screener and, if appropriate data is
obtained, plans to submit a revised PMA supplement to the
FDA in 1997. There can be no assurance, however, that
the Company's clinical trials will support a revised
submission, or that the Company will file a PMA
supplement in 1997, if at all. Moreover, the FDA review
process can be lengthy and unpredictable. There can be
no assurance that applicable governmental regulatory
agencies in the United States and elsewhere will approve
the AutoPap Screener for commercial use on a timely
basis, if at all. If clearance to market is granted,
there can be no assurance that it will cover all the
clinical indications for which the Company seeks
clearance or that it will not contain significant
limitations, which may include warnings, precautions or
contraindications, or requests for postmarket studies.
Additional regulatory requirements could be imposed by
legislation or regulation. The Company may also
encounter delays or rejections of its regulatory
applications based on changes in applicable regulatory
policies or regulations. Although the FDA has inspected
the Company's manufacturing operations with respect to
the AutoPap QC for compliance with GMP, the Company's
manufacturing processes remain subject to GMP regulation
and inspection.
Limited Marketing, Sales and Service Experience; Risks
Inherent in International Transactions
The Company intends to market, sell, service and
support the AutoPap System in countries where it has
obtained regulatory approval through a combination of a
direct sales force (primarily in North America) and
independent foreign distributors. The Company has
limited marketing, sales and service experience, and
there can be no assurance that the Company will be able
to recruit and retain skilled sales, marketing, service
or support personnel or foreign distributors, or that the
Company's marketing and sales efforts will be successful.
With regard to distribution arrangements for the
placement of AutoPap Systems, the Company will depend on
the efforts of third parties. There can be no assurance
that such efforts will be successful. In addition, a
number of risks are inherent in international
transactions, including regulatory delays or disapprovals
with respect to the Company's products, government
controls, export license requirements, political
instability, price controls, trade restrictions, changes
in tariffs or difficulties with foreign distributors.
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Sole or Limited Source of Supply; Governmental Regulation
of Manufacturing
The Company purchases all components for the AutoPap
System from outside vendors. A major component of the
AutoPap System, the slide tray motion system, is supplied
by a sole-source vendor. Certain other components, such
as the video cameras, are currently supplied by a single
vendor, and components provided by additional or
replacement suppliers would require some modification to
be incorporated into the AutoPap System. The
establishment of additional or replacement sources of
supply for many AutoPap System components cannot be
accomplished quickly, and substitution of components
could require regulatory approval, the receipt of which
cannot be assured. Accordingly, a vendor's inability to
supply acceptable components in a timely manner and in
the quantity required could delay the Company's
manufacture of, or cause the Company to cease
manufacturing, its products. Any such delay or cessation
could have a material adverse effect on the Company.
Manufacturers of medical diagnostic devices are subject
to strict federal regulations regarding validation and
the quality of manufacturing, including periodic FDA
inspections of the manufacturing facilities of diagnostic
device manufacturers to determine compliance with GMP
regulations. The Company's manufacturing operations,
including any expansion of such operations, will continue
to be required to comply with these and all other
applicable regulations, and with applicable regulations
imposed by other governments. The Company's failure to
comply with GMP regulations could result in civil or
criminal penalties or enforcement proceedings being
imposed on the Company, including the recall of a product
or a "cease distribution" order requiring the Company to
stop placing its products in service or selling its
products, as the case may be. Similar results could
occur if the Company were to violate foreign regulations.
There can be no assurance that the Company will be able
to attain or maintain compliance with GMP requirements.
Failure to maintain compliance with the applicable
manufacturing requirements of various regulatory agencies
would have a material adverse effect on the Company.
Competition
Competition in the medical device industry is intense, and
the industry is characterized by rapid product development
and technological change. The AutoPap System competes with
existing manual methods of screening Pap smears through
human review as well as with certain semi-automated systems.
To compete effectively, the AutoPap System must demonstrate
comparable or better accuracy relative to human review of
Pap smears. The Company is currently aware of two direct
competitors: AutoCyte, which has focused on the development
of a semi-automated system to prepare and analyze monolayer
Pap smears (a potential alternative to conventional Pap
smears) and NSI, which is engaged in marketing a device for
the semi-automated rescreening of conventional Pap smears.
In addition to direct competition, the Company faces
indirect competition through companies that manufacture thin
layer slide preparation systems and devices that automate
various aspects of cytology. In May 1996, Cytyc, Inc.
received PMA approval from the FDA to market its ThinPrep
System for cervical cancer screening as a replacement for
the conventional Pap smear method.
The Company believes that the AutoPap QC and, subject to
the Company's obtaining requisite regulatory approvals, the
AutoPap Screener, will compete on the bases of accuracy and
effectiveness, cost (including both charges by the Company
to the laboratory and the laboratory's labor and overhead
costs for its cytotechnologists), convenience to the
laboratory, perception among influential cytopathologists
and laboratories and processing speed and reliability.
There can be no assurance that the Company's competitors
will not develop new technologies and products that will
compete with, or will prove to be more effective than, the
AutoPap System. Furthermore, although the Company is
currently aware of only two direct competitors, there can be
no assurance that others will not purchase or develop
technologies that would compete with the AutoPap System or
render it obsolete. Competitors may manufacture, market and
sell their products or services more successfully than the
Company, which could have an adverse effect on the Company's
business and results of operation. See "Business -
Competition."
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Dependence on Reimbursement; Potential Effect of
Healthcare Reform
Various third-party healthcare payors in the United
States, including Medicare, Medicaid, managed care
organizations and private insurance companies, are
increasingly sensitive to containing healthcare costs and
have focused on new technology as being a primary factor
in increased healthcare costs. There can be no assurance
that third-party healthcare payors will provide
reimbursement for procedures performed by the AutoPap
System or that such reimbursement will be obtained in a
timely manner or will be adequate. If Pap tests
conducted using the AutoPap System are not approved for
adequate levels of reimbursement, the Company's ability
to commercialize the AutoPap System would be adversely
affected. In addition, there can be no assurance that
future healthcare legislation or other changes in the
administration or interpretation of government healthcare
or third-party reimbursement programs will not have a
material adverse effect on the Company. Foreign
countries have various healthcare reimbursement systems,
and there can be no assurance that third-party
reimbursement will be made available for the AutoPap
System under any foreign reimbursement system.
Dependence on Single Product Line
To date, the Company has concentrated its efforts
primarily on development of the AutoPap System and has
performed only limited research on other applications of
its core technology. Accordingly, the Company will
depend on the successful development and marketing of the
AutoPap System to generate revenues. There can be no
assurance that the AutoPap System will be successfully
commercialized.
Product Liability
The commercial screening of Pap smears has been
characterized by significant malpractice litigation. As
a result, the Company faces risk of exposure to product
liability, errors and omissions or other claims if use of
the AutoPap System or other products that may be
developed by the Company is alleged to have resulted in a
false-negative diagnosis. Although the Company currently
has product liability insurance, the medical device
industry has experienced increasing difficulty in
obtaining and maintaining reasonable product liability
coverage, and substantial increases in insurance premium
costs in many cases have rendered coverage economically
impractical. There can be no assurance that product
liability insurance will continue to be available to the
Company when needed at a reasonable cost, that insurance
coverage obtained by the Company will be adequate or that
any product liability claim would not have a material
adverse effect on the Company.
Dependence on Patents and Proprietary Rights; Risk of Third-
Party Claims of Infringement
NeoPath relies on a combination of patents, trade
secrets and confidentiality agreements to protect its
proprietary technology, rights and know-how. The Company
holds 19 U.S. patents and has 24 additional U.S. patents
pending. There can be no assurance that pending patent
applications will ultimately issue as patents or, if
patents do issue, that the claims allowed will be
sufficiently broad to protect what the Company believes
to be its proprietary rights. In addition, there can be
no assurance that issued patents or pending applications
will not be challenged or circumvented by competitors, or
that the rights granted thereunder will provide
competitive advantages to the Company. There can be no
assurance that the obligations of employees of the
Company and third parties with whom the Company has
entered into confidentiality agreements to maintain the
confidentiality of trade secrets and proprietary
information will effectively prevent disclosure of the
Company's confidential information or provide meaningful
protection for the Company's confidential information if
there is unauthorized use or disclosure, or that the
Company's trade secrets or proprietary information will
not be independently developed by NeoPath's competitors.
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On July 15, 1996, Neuromedical Systems, Inc. filed a
lawsuit against NeoPath, Inc. 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, the Company filed its answer and
counter claims. The Company believes it has a strong
position in this action and is defending itself
vigorously. There can be no assurance as to the outcome
of this litigation.
Dependence on Key Personnel
The Company is highly dependent on the principal
members of its management and scientific staff, the loss
of whose services might impede achievement of its
strategic or research and development objectives. The
Company's success will depend on its ability to retain
key employees and to attract additional qualified
employees. Competition among medical device companies
for highly skilled scientific and management personnel is
intense, and the failure to recruit such personnel or the
loss of existing personnel could have a material adverse
effect on the Company. The Company does not carry key
person life insurance on its executives or other key
personnel.
Highly Volatile Stock Price; Potential Fluctuations in
Future Quarterly Results
The market price of shares of the Company's Common
Stock, like that of the common stock of many other
medical device companies, may be highly volatile.
Factors such as the results of the Company's sales and
marketing programs, clinical trials by the Company or its
competitors, concern as to the safety or efficacy of the
Company's products or its competitors, announcements of
technological innovations or new products by the Company
or its competitors, governmental regulation, healthcare
legislation, developments in patent or other proprietary
rights of the Company or its competitors, fluctuations in
the Company's operating results, and general market and
economic conditions are likely to have a significant
impact on the future price of the Common Stock.
The Company expects that its operating results will
fluctuate significantly from quarter to quarter in the
future and will depend on a number of factors, many of
which are outside of the Company's control. These
factors include: the rate and extent of market
acceptance of the AutoPap System; the mixture of fee-per-
use and sale contracts; the rate and size of expenditures
incurred as NeoPath expands its domestic and foreign
marketing and sales programs and continues its research
and development efforts; the timing of approvals for
AutoPap reimbursement; the timing of domestic and foreign
regulatory approvals; and the introduction and market
acceptance of competing products or technologies.
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Item 2.PROPERTIES
The Company leases approximately 53,000 square feet of
office and manufacturing space in Redmond, Washington under
operating leases expiring in May 1998 through January 2000,
with various renewal options. Under a sublease, the Company
intends to lease an additional 16,000 square feet of space
starting April 1, 1997. Management believes that the
Redmond facility and other available office space is
adequate for the Company's current needs. Management also
believes that additional space is available in the area,
should it be needed.
Item 3. LEGAL PROCEEDINGS
On July 15, 1996, Neuromedical Systems, Inc. filed a
lawsuit against NeoPath, Inc. 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, the
Company filed its answer and counter claims. The Company
believes it has a strong position in this action and is
defending itself vigorously.
Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders
during the fourth quarter of 1996.
Page 17
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The information required by Item 5 is hereby
incorporated by reference to the Company's 1996 Annual
Report to Shareholders, page 41.
Item 6. SELECTED FINANCIAL DATA
The information required by Item 6 is hereby
incorporated by reference to the Company's 1996 Annual
Report to Shareholders, page 19.
Item 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by Item 7 is hereby
incorporated by reference to the Company's 1996 Annual
Report to Shareholders, pages 20-23.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is hereby
incorporated by reference to the Company's 1996 Annual
Report to Shareholders, pages 24-40.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Page 18
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby
incorporated by reference to the section entitled "Election
of Directors and Management Information" in the Company's
definitive Proxy Statement relating to its 1997 annual
meeting of Shareholders (the "Proxy Statement"). Such Proxy
Statement will be filed within 120 days of the Company's
last fiscal year end, December 31, 1996.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby
incorporated by reference to the section entitled "Executive
Compensation" in the Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by Item 12 is hereby
incorporated by reference to the section entitled "Security
Ownership of Certain Beneficial Owners and Management" in
the Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby
incorporated by reference to the section entitled " Certain
Relationships and Related Transactions" in the Proxy
Statement.
Page 19
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) Index to list of documents filed as part of this
report.
1. Financial Statements
The following financial statements of NeoPath, Inc.
are included in Item 8 by reference to the Company's
1996 Annual Report to Shareholders:
Annual Report
Page #
Balance Sheets at December 31, 1996 and 1995 24
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 25
Statements of Shareholders' Equity for the year ended
December 31, 1996, 1995 and 1994 26-27
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 28-29
Notes to Financial Statements 30-38
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they
were not applicable.
3. Exhibits
3.1 (1) Articles of Incorporation of the
registrant
3.2 (1) Bylaws of the registrant
10.1 NeoPath, Inc. 1989 Stock Option Plan, as
Amended and Restated on December 10, 1996
10.2 NeoPath, Inc. Stock Option Plan for
Nonemployee Directors, as Amended and Restated
on February 27, 1997
10.3 (1) Form of Indemnification Agreement
for officers and directors of the registrant
10.4 (1) Consolidated Amended and Restated
Shareholders Agreement dated March 27, 1992,
by and among NeoPath, Inc. and the
Shareholders listed on Exhibit A thereto and
First Amendment to Consolidated Amended and
Restated Agreement dated January 14, 1994
Page 20
<PAGE>
10.6 (5) First Amendment to Lease by and
between Teachers Insurance & Annuity
Association and NeoPath, Inc. dated February
16, 1995, Second Amendment to Lease by and
between Teachers Insurance & Annuity and
NeoPath, Inc. dated November 21, 1995 and
Letter from Teachers Insurance & Annuity
dated December 15, 1995
10.7 (5) Sublease (Tunturi, Inc./NeoPath)
dated December 22, 1995 by and between
NeoPath, Inc. and Tunturi, Inc.
10.8 (1) Form of Agreement regarding
clinical study of the AutoPap 300 QC System:
Confidentiality of Records and
Indemnification
10.9 (1) Agreement by and between NeoPath,
Inc. and Kyto Diagnostic, L.P. regarding
clinical study of the AutoPap 300 QC System:
Confidentiality of Records and
Indemnification
10.10 (1) Product Development and Supply
Agreement between Applied Precision, Inc. and
NeoPath, Inc. dated January 1, 1992
10.13 (1) Master Equipment Lease Line dated
August 6, 1994 between First Portland
Technology Corp. and NeoPath, Inc.
10.14 (2) Master Equipment Lease by and
between NeoPath, Inc. and Haworth Leasing
dated January 31, 1995
10.15 (3) Master Equipment Lease between
NeoPath, Inc. and Pacific Office Automation
dated March 16, 1995
10.17 (4) NeoPath, Inc. Proposal to
SmithKline Beecham Clinical Laboratories
dated as of October 4, 1995, countersigned by
SmithKline Beecham Clinical Laboratories on
October 4, 1995
10.18 (4) NeoPath, Inc. Proposal to Corning
Clinical Laboratories Inc. executed as of
October 11, 1995, countersigned by Corning
Clinical Laboratories on October 13, 1995
10.19 (4) Master Equipment Lease by and between
NeoPath, Inc. and Pacific Office Automation
dated as of September 30, 1995
10.20 (6) NeoPath, Inc. Proposal to
SmithKline Beecham Clinical Laboratories,
accepted May 9, 1996
10.21 (6) NeoPath, Inc. Proposal to
Laboratory Corporation of America Holdings,
accepted May 15, 1996
10.22 (6) NeoPath, Inc. Amended and Restated
Proposal to Kaiser IMMC Agreement No. 0249,
accepted June 25, 1996
10.23 Form of Senior Management Employment
Agreement
10.24* International Distribution Agreement
between NeoPath, Inc. and Nikon Corporation,
dated as of December 19, 1996
11.1 Computation of net loss per share
13.1 1996 Annual Report to Shareholders
Page 21
<PAGE>
23.1 Consent of Ernst & Young LLP, Independent
Auditors
27 Financial Data Schedule
_____________________________
* Confidential treatment requested
(1) Filed as an exhibit to the registrant's
Registration Statement on Form S-1 (File No.
33-86822) and incorporated herein by
reference.
(2) Filed as an exhibit to the registrant's
Report on form 10-Q filed on March 29, 1995
and incorporated herein by reference.
(3) Filed as an exhibit to the registrant's
Report on Form 10-Q filed on August 10, 1995
and incorporated herein by reference.
(4) Filed as an exhibit to the registrant's
Report on Form 10-Q filed on November 14,
1995 as amended on December 12, 1995 and
incorporated herein by reference.
(5) Filed as an exhibit to the registrant's
Registration Statement on Form S-1 (File No.
33-80377) and incorporated herein by
reference.
(6) Filed as an exhibit to the registrant's
Report on Form 10-Q filed on August 14, 1996
and incorporated herein by reference.
(b) Reports on Form 8-K:
None
Page 22
<PAGE>
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, thereunto duly
authorized in the City of Redmond, State of Washington on
the 27th day of March, 1997.
NEOPATH, INC.
By: /s/ ALAN C. NELSON
---------------------
Alan C. Nelson, Ph.D.
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities indicated below on this 27th day of March, 1997.
Signature Title
/s/ ALAN C. NELSON President, Chief
- ------------------------- Executive Officer and Director
Alan C. Nelson, Ph.D. (Principal Executive Officer)
/s/ ROBERT C. BATEMAN Corporate Controller and
- ----------------------- Corporate Secretary
Robert C. Bateman (Acting Chief Accounting Officer)
/s/ WALTER L. ROBB Chairman of the Board
- --------------------
Walter L. Robb, Ph.D.
/s/ ALAN D. FRAZIER Director
- --------------------
Alan D. Frazier
/s/ CRISTINA H. KEPNER Director
- -----------------------
Cristina H. Kepner
/s/ C. RICHARD KRAMLICH Director
- ------------------------
C. Richard Kramlich
/s/ DAVID A. THOMPSON Director
- ----------------------
David A. Thompson
/s/ GAIL R. WILENSKY Director
- ---------------------
Gail R. Wilensky
Page 23
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
NEOPATH, INC.
VALUATION AND QUALIFYING ACCOUNTS
Balance Charged Charged Balance
at to to at
Beginning Costs & Other End of
Description of Period Expenses Accounts Deductions Period
- ------------------------------- --------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1996 $ -- $ 175,000 $ -- $ -- $ 175,000
Year ended December 31, 1995 -- -- -- -- --
Year ended December 31, 1994 -- -- -- -- --
</TABLE>
Page 24
<PAGE>
NEOPATH, INC.
INDEX TO EXHIBITS
Exhibit No. Description
3.1 (1) Articles of Incorporation of the
registrant
3.2 (1) Bylaws of the registrant
10.1 NeoPath, Inc. 1989 Stock Option Plan,
as Amended and Restated on December 10, 1996
10.2 NeoPath, Inc. Stock Option Plan for
Nonemployee Directors, as Amended and Restated
on February 27, 1997
10.3 (1) Form of Indemnification Agreement
for officers and directors of the registrant
10.4 (1) Consolidated Amended and Restated
Shareholders Agreement dated March 27, 1992,
by and among NeoPath, Inc. and the
Shareholders listed on Exhibit A thereto and
First Amendment to Consolidated Amended and
Restated Agreement dated January 14, 1994
10.6 (5) First Amendment to Lease by and
between Teachers Insurance & Annuity
Association and NeoPath, Inc. dated February
16, 1995, Second Amendment to Lease by and
between Teachers Insurance & Annuity and
NeoPath, Inc. dated November 21, 1995 and
Letter from Teachers Insurance & Annuity
dated December 15, 1995
10.7 (5) Sublease (Tunturi, Inc./NeoPath)
dated December 22, 1995 by and between
NeoPath, Inc. and Tunturi, Inc.
10.8 (1) Form of Agreement regarding
clinical study of the AutoPap 300 QC System:
Confidentiality of Records and
Indemnification
10.9 (1) Agreement by and between NeoPath,
Inc. and Kyto Diagnostic, L.P. regarding
clinical study of the AutoPap 300 QC System:
Confidentiality of Records and
Indemnification
10.10 (1) Product Development and Supply
Agreement between Applied Precision, Inc. and
NeoPath, Inc. dated January 1, 1992
10.13 (1) Master Equipment Lease Line dated
August 6, 1994 between First Portland
Technology Corp. and NeoPath, Inc.
10.14 (2) Master Equipment Lease by and
between NeoPath, Inc. and Haworth Leasing
dated January 31, 1995
10.15 (3) Master Equipment Lease between
NeoPath, Inc. and Pacific Office Automation
dated March 16, 1995
10.17 (4) NeoPath, Inc. Proposal to
SmithKline Beecham Clinical Laboratories
dated as of October 4, 1995, countersigned by
SmithKline Beecham Clinical Laboratories on
October 4, 1995
Page 25
<PAGE>
10.18 (4) NeoPath, Inc. Proposal to Corning
Clinical Laboratories Inc. executed as of
October 11, 1995, countersigned by Corning
Clinical Laboratories on October 13, 1995
10.19 (4) Master Equipment Lease by and between
NeoPath, Inc. and Pacific Office Automation
dated as of September 30, 1995
10.20 (6) NeoPath, Inc. Proposal to
SmithKline Beecham Clinical Laboratories,
accepted May 9, 1996
10.21 (6) NeoPath, Inc. Proposal to
Laboratory Corporation of America Holdings,
accepted May 15, 1996
10.22 (6) NeoPath, Inc. Amended and Restated
Proposal to Kaiser IMMC Agreement No. 0249,
accepted June 25, 1996
10.23 Form of Senior Management Employment Agreement
10.24* International Distribution Agreement
between NeoPath, Inc. and Nikon Corporation,
dated as of December 19, 1996
11.1 Computation of net loss per share
13.1 1996 Annual Report to Shareholders
23.1 Consent of Ernst & Young LLP, Independent
Auditors
27 Financial Data Schedule
_____________________________
* Confidential treatment requested
(1) Filed as an exhibit to the registrant's
Registration Statement on Form S-1 (File No.
33-86822) and incorporated herein by
reference.
(2) Filed as an exhibit to the registrant's
Report on form 10-Q filed on March 29, 1995
and incorporated herein by reference.
(3) Filed as an exhibit to the registrant's
Report on Form 10-Q filed on August 10, 1995
and incorporated herein by reference.
(4) Filed as an exhibit to the registrant's
Report on Form 10-Q filed on November 14,
1995 as amended on December 12, 1995 and
incorporated herein by reference.
(5) Filed as an exhibit to the registrant's
Registration Statement on Form S-1 (File No.
33-80377) and incorporated herein by
reference.
(6) Filed as an exhibit to the registrant's
Report on Form 10-Q filed on August 14, 1996
and incorporated herein by reference.
Page 26
<PAGE>
NEOPATH, INC.
1989 STOCK OPTION PLAN
As Amended and Restated on December 10, 1996
Section 1. Purpose
The purpose of the NeoPath, Inc. 1989 Stock Option Plan
(this "Plan") is to provide a means whereby selected
employees, directors, officers, agents, consultants, advisors
and independent contractors of NeoPath, Inc. (the "Company"),
or of any parent or subsidiary (as defined in subsection 5.8
and referred to hereinafter as "related corporations")
thereof, may be granted incentive stock options and/or
nonqualified stock options to purchase the Common Stock (as
defined in Section 3) of the Company, in order to attract and
retain the services or advice of such employees, directors,
officers, agents, consultants, advisors and independent
contractors and to provide added incentive to such persons by
encouraging stock ownership in the Company.
Section 2. Administration
This Plan shall be administered by the Board of Directors
of the Company (the "Board") or a committee or committees
(which term includes subcommittees) appointed by, and
consisting of two or more members of, the Board. The
administrator of this Plan shall hereinafter be referred to as
the "Plan Administrator." So long as the Company's common
stock (the "Common Stock") is registered under Section 12(b)
or 12(g) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Board shall consider, in selecting
the Plan Administrator and the membership of any committee
acting as Plan Administrator of this Plan with respect to any
persons subject or likely to become subject to Section 16
under the Exchange Act, the provisions regarding (a) "outside
directors," as contemplated by Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), and (b)
"nonemployee directors," as contemplated by Rule 16b-3 under
the Exchange Act. The Board may delegate the responsibility
for administering this Plan with respect to designated classes
of eligible participants to different committees, subject to
such limitations as the Board deems appropriate.
The members of any committee serving as Plan
Administrator shall be appointed by the Board for such term as
the Board may determine. The Board may
from time to time remove members from, or add members to, the committee.
Vacancies on the committee, however caused, shall be filled by
the Board.
Page 1
<PAGE>
2.1 Procedures
The Board shall designate one of the members of the Plan
Administrator as chairman. The Plan Administrator may hold
meetings at such times and places as it shall determine. The
acts of a majority of the members of the Plan Administrator
present at meetings at which a quorum exists, or acts reduced
to or approved in writing by all Plan Administrator members,
shall be valid acts of the Plan Administrator.
2.2 Responsibilities
Except for the terms and conditions explicitly set forth
in this Plan, the Plan Administrator shall have the authority,
in its discretion, to determine all matters relating to the
options to be granted under this Plan, including selection of
the individuals to be granted options, the number of shares to
be subject to each option, the exercise price, and all other
terms and conditions of the options. Grants under this Plan
need not be identical in any respect, even when made
simultaneously. The interpretation and construction by the
Plan Administrator of any terms or provisions of this Plan or
any option issued hereunder, or of any rule or regulation
promulgated in connection herewith, shall be conclusive and
binding on all interested parties, so long as such
interpretation and construction with respect to incentive
stock options correspond to the requirements of Section 422 of
the Code, the regulations thereunder and any amendments
thereto.
2.3 Rule 16b-3 Compliance and Bifurcation of Plan
Notwithstanding anything in this Plan to the contrary,
the Board, in its absolute discretion, may bifurcate this Plan
so as to restrict, limit or condition the application of any
provision of this Plan to participants who are subject to
Section 16 of the Exchange Act without so restricting,
limiting or conditioning this Plan with respect to other
participants.
Section 3. Shares Subject to This Plan
The shares subject to this Plan shall be the Common
Stock, currently authorized but unissued or subsequently
acquired by the Company. Subject to adjustment as provided in
Section 7, the aggregate amount of Common Stock to be
delivered upon the exercise of all options granted under this
Plan shall not exceed 2,750,000 shares. If any option granted
under this Plan shall expire or be surrendered,
exchanged for another option, canceled or terminated for any reason without
having been exercised in full, the unpurchased shares subject
thereto shall thereupon again be available for purposes of
this Plan, including for replacement options which may be
Page 2
<PAGE>
granted in exchange for such expired, surrendered, exchanged,
canceled or terminated options.
Section 4. Eligibility
An incentive stock option may be granted only to an
individual who, at the time the option is granted, is an
employee of the Company or a related corporation. A
nonqualified stock option may be granted to any employee,
director, officer, agent, consultant, advisor or independent
contractor of the Company or any related corporation, whether
an individual or an entity. Any party to whom an option is
granted under this Plan shall be referred to hereinafter as an
"Optionee."
Section 5. Terms and Conditions of Options
Options granted under this Plan shall be evidenced by
written agreements which shall contain such terms, conditions,
limitations and restrictions as the Plan Administrator shall
deem advisable and which are not inconsistent with this Plan.
Notwithstanding the foregoing, options shall include or
incorporate by reference the following terms and conditions:
5.1 Number of Shares and Price
The maximum number of shares that may be purchased
pursuant to the exercise of each option and the price per
share at which such option is exercisable (the "exercise
price") shall be as established by the Plan Administrator;
provided, however, that the maximum number of shares with
respect to which an option or options may be granted to any
Optionee in any one fiscal year of the Company shall not
exceed 400,000 shares (the "Maximum Annual Optionee Grant").
The Plan Administrator shall act in good faith to establish an
exercise price which shall be not less than the fair market
value per share of the Common Stock at the time the option is
granted with respect to incentive stock options and also
provided that, with respect to incentive stock options granted
to greater than 10% shareholders, the exercise price shall be
as required by subsection 6.1.
5.2 Term and Maturity
Subject to the restrictions contained in Section 6 with
respect to granting incentive stock options to greater than
10% shareholders, the term of each incentive stock option
shall be as established by the Plan Administrator and, if not so
established, shall be 10 years from the date it is granted
but in no event shall it exceed 10 years. The term of each
nonqualified stock option shall be as established by the Plan
Administrator and, if not so established, shall be 10 years.
To ensure that the Company or a related corporation will
achieve the purpose and receive the benefits
Page 3
<PAGE>
contemplated by
this Plan, any option granted to any Optionee hereunder shall,
unless the condition of this sentence is waived or modified in
the agreement evidencing the option or by resolution adopted
at any time by the Plan Administrator, be exercisable
according to the following schedule:
For options granted prior to December 10, 1996
Period of Optionee's
Continuous Relationship
With the Company or Related Portion of Total Option
Corporation From the Date Which Is Exercisable
the Option Is Granted
- --------------------------- ------------------------
after 1 year 25%
each month completed an additional 1/36th
thereafter of the remaining 75%
after 4 years 100%
For options granted after December 9, 1996:
Period of Optionee's
Continuous Relationship
With the Company or Related Portion of Total Option
Corporation From the Date Which Is Exercisable
the Option Is Granted
- --------------------------- -----------------------
after 1 year* 25%
each year completed
thereafter an additional 25%
after 4 years 100%
________________
*For options granted to new employees, the period shall be
from grant date to 1 year after date of employment
5.3 Exercise
Subject to the vesting schedule described in
subsection 5.2, each option may be exercised in whole or in
part at any time and from time to time; provided, however,
that only whole shares will be issued pursuant to the exercise
of any option. An
Option shall be exercised by delivery to
the Company of notice of the number of shares with respect to
which the option is exercised, together with payment of the
exercise price.
Page 4
<PAGE>
5.4 Payment of Exercise Price
Payment of the option exercise price shall be made in
full at the time the notice of exercise of the option is
delivered to the Company and shall be in cash, bank certified
or cashier's check, or personal check (unless at the time of
exercise the Plan Administrator in a particular case
determines not to accept a personal check) for the shares
being purchased.
The Plan Administrator can determine at any time before
exercise that additional forms of payment will be permitted.
To the extent permitted by applicable laws and regulations
(including, but not limited to, federal tax and securities
laws and regulations and state corporate law), and unless the
Plan Administrator in its sole discretion determines
otherwise, an option may be exercised by a combination of cash
and/or check and one or both of the following additional
forms:
(a) tendering (either actually or by attestation)
shares of Common Stock of the Company held by an Optionee
having a fair market value equal to the exercise price, such
fair market value to be determined in good faith by the Plan
Administrator; provided, however, that payment in stock held
by an Optionee shall not be made unless the stock shall have
been owned by the Optionee for a period of at least six months
(or any shorter period necessary to avoid a charge to the
Company's earnings for financial accounting purposes); or
(b) delivery of a properly executed exercise
notice, together with irrevocable instructions to a broker,
all in accordance with the regulations of the Federal Reserve
Board, to promptly deliver to the Company the amount of sale
or loan proceeds to pay the exercise price and any federal,
state or local withholding tax obligations that may arise in
connection with the exercise.
In addition, the exercise price for shares purchased
under an option may be paid, either singly or in combination
with one or more of the alternative forms of payment
authorized by this Section 5.4, by (y) delivery of a full-
recourse promissory note executed by the Optionee; provided
that (i) such note delivered in connection with an incentive
stock option shall, and such note delivered in connection with
a nonqualified stock option may, in the sole discretion of the
Plan Administrator, bear interest at a rate specified by the
Plan Administrator but in no case less than the rate required
to avoid imputation of interest (taking into account any
exceptions to the imputed interest rules) for federal income
tax purposes, (ii) the Plan Administrator in
its sole discretion shall specify the term and other provisions of such
note at the time an incentive stock option is granted or at
any time prior to exercise of a nonqualified stock option,
(iii) the Plan Administrator may require that the Optionee
pledge to the Company for the purpose of securing the payment
of such note the shares of Common
Page 5
<PAGE>
Stock to be issued to the
Optionee upon exercise of the option and may require that the
certificate representing such shares be held in escrow in
order to perfect the Company's security interest, and (iv) the
Plan Administrator in its sole discretion may at any time
restrict or rescind this right upon notification to the
Optionee; or (z) such other consideration as the Plan
Administrator may permit.
5.5 Withholding Tax Requirement
At its discretion, the Company may require an Optionee
receiving shares of Common Stock to reimburse the Company for
any taxes required by any government to be withheld by the
Company or otherwise deducted and paid with respect to an
option, and may withhold any distribution in whole or in part
until the Company is so reimbursed. In lieu thereof, the
Company shall have the right to withhold from any cash or
other amounts due or to become due from the Company to the
Optionee an amount equal to such taxes. The Company may also
retain and withhold or the Optionee may elect, unless the Plan
Administrator determines otherwise, to have the Company retain
and withhold a number of shares having a market value not less
than the amount of such taxes required to be withheld by the
Company to reimburse the Company for any such taxes and cancel
(in whole or in part) any such shares so withheld.
5.6 Holding Periods
5.6.1 Securities and Exchange Act Section 16
If an individual subject to Section 16 of the Exchange
Act sells shares of Common Stock obtained upon the exercise of
a stock option within six months after the date the option was
granted, such sale may result in short-swing profit liability
under Section 16(b) of the Exchange Act.
5.6.2 Taxation of Stock Options
In order to obtain certain tax benefits afforded to
incentive stock options under Section 422 of the Code, an
Optionee must hold the shares issued upon the exercise of an
incentive stock option for two years after the date of grant
of the option and one year from the date of exercise. An
Optionee may be subject to the alternative minimum tax at the
time of exercise of an incentive stock option.
The Plan Administrator may require an Optionee to give
the Company prompt notice of any disposition of shares
acquired by the exercise of an incentive stock option prior to
the expiration of such holding periods.
Page 6
<PAGE>
Tax advice should be obtained by an Optionee when
exercising any option and prior to the disposition of the
shares issued upon the exercise of any option.
5.7 Transferability of Options
Options granted under this Plan and the rights and
privileges conferred hereby may not be transferred, assigned,
pledged or hypothecated in any manner (whether by operation of
law or otherwise) other than by will or by the applicable laws
of descent and distribution and shall not be subject to
execution, attachment or similar process. During an
Optionee's lifetime, any options granted under this Plan are
personal to him or her and are exercisable solely by such
Optionee or a permitted assignee or transferee of such
Optionee (as provided below). Any attempt to transfer,
assign, pledge, hypothecate or otherwise dispose of any option
under this Plan or of any right or privilege conferred hereby,
contrary to the Code or to the provisions of this Plan, or the
sale or levy or any attachment or similar process upon the
rights and privileges conferred hereby shall be null and void.
Notwithstanding the foregoing, to the extent permitted by
Section 422 of the Code, the Plan Administrator may permit an
Optionee to (i) during the Optionee's lifetime, designate a
person who may exercise the option after the Optionee's death
by giving written notice of such designation to the Company
(such designation may be changed from time to time by the
Optionee by giving written notice to the Company revoking any
earlier designation and making a new designation) or
(ii) transfer the option and the rights and privileges
conferred hereby; provided, however, that any option so
assigned or transferred shall be subject to all the same terms
and conditions contained in the instrument evidencing the
award.
5.8 Termination of Relationship
If the Optionee's relationship with the Company or any
related corporation ceases for any reason, then the portion of
the Optionee's option that is not exercisable at the time of
such cessation shall terminate immediately upon such
cessation, unless the Plan Administrator determines otherwise.
If the Optionee's relationship with the Company or any related
corporation ceases for any reason other than termination for
cause, death or total disability, and unless by its terms the
option sooner terminates or expires, then the Optionee may
exercise, for a three-month period, that portion of the
Optionee's option which is exercisable at the time of such
cessation, but the Optionee's option shall terminate at the
end of such period following such cessation as to all shares
for which it has not theretofore been exercised, unless such
provision is waived in the agreement evidencing the option, or
at any time prior to the expiration of the option, by the Plan
Administrator in its sole discretion. If, however, in the
case of an incentive stock option, the Optionee does not
exercise the Optionee's option within three months after
cessation of employment, the option will no longer qualify as
an incentive stock option under the Code.
Page 7
<PAGE>
If an Optionee is terminated for cause, each option
granted hereunder shall automatically terminate as of the
first discovery by the Company of any reason for termination
for cause, and such Optionee shall thereupon have no right to
purchase any shares pursuant to such option. "Termination for
cause" shall mean dismissal for dishonesty, conviction or
confession of a crime (except minor violations), fraud,
misconduct or disclosure of confidential information. If an
Optionee's relationship with the Company or any related
corporation is suspended pending an investigation of whether
or not the Optionee shall be terminated for cause, the
Optionee's rights under each option granted hereunder likewise
shall be suspended during the period of investigation.
If an Optionee's relationship with the Company or any
related corporation ceases because of a total disability, the
portion of the Optionee's option that is exercisable at the
time of such cessation shall not terminate or, in the case of
an incentive stock option, cease to be treated as an incentive
stock option until the end of the 12-month period following
such cessation (unless by its terms it sooner terminates or
expires). As used in this Plan, the term "total disability"
refers to a mental or physical impairment of the Optionee
which is expected to result in death or which has lasted or is
expected to last for a continuous period of 12 months or more
and which causes the Optionee to be unable, in the opinion of
the Company and two independent physicians, to perform his or
her duties for the Company and to be engaged in any
substantial gainful activity. Total disability shall be
deemed to have occurred on the first day after the Company and
the two independent physicians have furnished their opinion of
total disability to the Plan Administrator.
The Plan Administrator, in its absolute discretion, may
determine all questions of whether particular leaves of
absence constitute a termination of services; provided,
however, that with respect to incentive stock options, such
determination shall be subject to any requirements contained
in the Code. The foregoing notwithstanding, with respect to
incentive stock options, employment shall not be deemed to
continue beyond the first 90 days of such leave, unless the
Optionee's reemployment rights are guaranteed by statute or by
contract.
As used herein, the term "related corporation," when
referring to a subsidiary corporation, shall mean any
corporation (other than the Company) in, at the time of
the granting of the option, an unbroken chain of corporations
ending with the Company, if stock possessing 50% or more of
the total combined voting power of all classes of stock of
each of the corporations other than the Company is owned by
one of the other corporations in such chain. When referring
to a parent corporation, the term "related corporation" shall
mean any corporation in an unbroken chain of corporations
ending with the Company if, at the time of the granting of the
option, each of the corporations other than the Company owns
stock possessing 50% or more
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of the total combined voting
power of all classes of stock in one of the other corporations
in such chain.
5.9 Death of Optionee
If an Optionee dies while he or she has a relationship
with the Company or any related corporation or within the
three-month period (or 12-month period in the case of totally
disabled Optionees) following cessation of such relationship,
any option held by such Optionee to the extent that the
Optionee would have been entitled to exercise such option, may
be exercised within one year after his or her death by the
personal representative of his or her estate or by the person
or persons to whom the Optionee's rights under the option
shall pass (i) by will or by the applicable laws of descent
and distribution or (ii) by a designation or transfer pursuant
to Section 5.7.
5.10 No Status as Shareholder
Neither the Optionee nor any party to which the
Optionee's rights and privileges under the option may pass
shall be, or have any of the rights or privileges of, a
shareholder of the Company with respect to any of the shares
issuable upon the exercise of any option granted under this
Plan unless and until such option has been exercised.
5.11 Continuation of Relationship
Nothing in this Plan or in any option shall confer upon
any Optionee any right to continue in the employ or other
relationship of the Company or of a related corporation, or to
interfere in any way with the right of the Company or of any
such related corporation to terminate his or her employment or
other relationship with the Company at any time.
5.12 Modification and Amendment of Option
Subject to the requirements of Code Section 422 with
respect to incentive stock options and to the terms and
conditions and within the limitations of this Plan, the Plan
Administrator may modify or amend any outstanding option
granted under this Plan. The modification or amendment of an
outstanding option shall not, without the consent of the
Optionee, impair or diminish any of his or her rights or any
of the obligations of the Company under such option. Except
as otherwise provided in this Plan, no outstanding option
shall be terminated without the consent of the Optionee.
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5.13 Limitation on Value for Incentive Stock Options
As to all incentive stock options granted under the terms
of this Plan, to the extent that the aggregate fair market
value of the shares (determined at the time the incentive
stock option is granted) with respect to which incentive stock
options are exercisable for the first time by the Optionee
during any calendar year (under this Plan and all other
incentive stock option plans of the Company, a related
corporation or a predecessor corporation) exceeds $100,000,
such options shall be treated as nonqualified stock options.
The previous sentence shall not apply if the Internal Revenue
Service issues a public rule, issues a private ruling to the
Company, any Optionee or any legatee, personal representative
or distributee of an Optionee or issues regulations changing
or eliminating such annual limit.
Section 6. Greater Than 10% Shareholders
6.1 Exercise Price and Term of Incentive Stock
Options
If an incentive stock option is granted under this Plan
to any employee who owns more than 10% of the total combined
voting power of all classes of stock of the Company or any
related corporation, the term of such incentive stock options
shall not exceed five years and the exercise price shall be
not less than 110% of the fair market value of the shares at
the time the incentive stock option is granted. This
provision shall control notwithstanding any contrary terms
contained in an option agreement or any other document.
6.2 Attribution Rule
For purposes of subsection 6.1, in determining stock
ownership, an employee shall be deemed to own the shares
owned, directly or indirectly, by or for his or her brothers,
sisters, spouse, ancestors and lineal descendants. Shares
owned, directly or indirectly, by or for a corporation,
partnership, estate or trust shall be deemed to be owned
proportionately by or for its shareholders, partners or
beneficiaries. If an employee or a person related to the
employee owns an unexercised option or warrant to purchase
shares of the Company, the shares subject to that portion of
the option or warrant which is unexercised shall not be
counted in determining stock ownership. For purposes of this
Section 6, shares owned by an employee shall include all shares
actually issued and outstanding immediately before the
grant of the incentive stock option to the employee.
Section 7. Adjustments Upon Changes in Capitalization
The aggregate number and class of shares for which
options may be granted under this Plan, the Maximum Annual
Optionee Grant set forth in Section 5.1, the
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number and class
of shares covered by each outstanding option and the exercise
price per share thereof (but not the total price), shall all
be proportionately adjusted for any increase or decrease in
the number of issued shares of Common Stock of the Company
resulting from a split-up or consolidation of shares or any
like capital adjustment, or the payment of any stock dividend.
7.1 Effect of Liquidation or Reorganization
7.1.1 Cash, Stock or Other Property for Stock
Except as provided in subsection 7.1.2, upon a merger
(other than a merger of the Company in which the holders of
shares of Common Stock immediately prior to the merger have
the same proportionate ownership of shares of Common Stock in
the surviving corporation immediately after the merger),
consolidation, acquisition of property or stock, separation,
reorganization (other than a mere reincorporation or the
creation of a holding company) or liquidation of the Company,
as a result of which the shareholders of the Company receive
cash, stock or other property in exchange for or in connection
with their shares of Common Stock, any option granted
hereunder shall terminate, but the Optionee shall have the
right immediately prior to any such merger, consolidation,
acquisition of property or stock, separation, reorganization
or liquidation to exercise such Optionee's option in whole or
in part whether or not the vesting requirements set forth in
the option agreement have been satisfied.
7.1.2 Conversion of Options on Stock for Stock
Exchange
If the shareholders of the Company receive capital stock
of another corporation ("Exchange Stock") in exchange for
their shares of Common Stock in any transaction involving a
merger (other than a merger of the Company in which the
holders of Common Stock immediately prior to the merger have
the same proportionate ownership of Common Stock in the
surviving corporation immediately after the merger),
consolidation, acquisition of property or stock, separation or
reorganization (other than a mere reincorporation or the
creation of a holding company), all options granted hereunder
shall be converted into options to purchase shares of Exchange
Stock unless the Company and the corporation issuing the
Exchange Stock, in their sole discretion, determine that any
or all such options granted hereunder shall not be
converted into options to purchase shares of Exchange Stock but instead
shall terminate in accordance with the provisions of
subsection 7.1.1. The amount and price of converted options
shall be determined by adjusting the amount and price of the
options granted hereunder in the same proportion as used for
determining the number of shares of Exchange Stock the holders
of the shares of Common Stock receive in such merger,
consolidation, acquisition of property or stock, separation or
reorganization. The converted options shall be fully vested
whether or not the vesting
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requirements set forth in the
option agreement have been satisfied provided that such
acceleration will not occur if, in the opinion of the
Company's outside accountants, such acceleration would render
unavailable "pooling of interests" accounting treatment for
any reorganization, merger or consolidation of the Company for
which pooling of interests accounting treatment is sought by
the Company.
Upon a merger of the Company in which the holders of
Common Stock immediately prior to the merger have the same
proportionate ownership of common stock in the surviving
corporation immediately after the merger, a mere
reincorporation or the creation of a holding company, each
option outstanding under this Plan shall be assumed or an
equivalent option shall be substituted by the successor
corporation or a parent or subsidiary of such corporation, and
the vesting schedule set forth in the instrument evidencing
the option shall continue to apply to such assumed or
equivalent option.
7.2 Fractional Shares
In the event of any adjustment in the number of shares
covered by any option, any fractional shares resulting from
such adjustment shall be disregarded and each such option
shall cover only the number of full shares resulting from such
adjustment.
7.3 Determination of Board to Be Final
All Section 7 adjustments shall be made by the Board, and
its determination as to what adjustments shall be made, and
the extent thereof, shall be final, binding and conclusive.
Unless an Optionee agrees otherwise, any change or adjustment
to an incentive stock option shall be made in such a manner so
as not to constitute a "modification" as defined in Code
Section 425(h) and so as not to cause his or her incentive
stock option issued hereunder to fail to continue to qualify
as an incentive stock option as defined in Code
Section 422(b).
Section 8. Securities Regulation
Shares shall not be issued with respect to an option
granted under this Plan unless the exercise of such option and
the issuance and delivery of such shares
pursuant thereto shall comply with all relevant provisions of law, including,
without limitation, any applicable state securities laws, the
Securities Act of 1933, as amended, the Exchange Act, the
rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the shares may
then be listed, and shall be further subject to the approval
of counsel for the Company with respect to such compliance,
including the availability, if applicable, of an exemption
from registration for the issuance and sale of any shares
hereunder. Inability of the
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Company to obtain, from any
regulatory body having jurisdiction, the authority deemed by
the Company's counsel to be necessary for the lawful issuance
and sale of any shares hereunder or the unavailability of an
exemption from registration for the issuance and sale of any
shares hereunder shall relieve the Company of any liability in
respect of the nonissuance or sale of such shares as to which
such requisite authority shall not have been obtained.
As a condition to the exercise of an option, the Company
may require the Optionee to represent and warrant at the time
of any such exercise that the shares are being purchased only
for investment and without any present intention to sell or
distribute such shares if, in the opinion of counsel for the
Company, such a representation is required by any relevant
provision of the aforementioned laws. At the option of the
Company, a stop-transfer order against any shares of stock may
be placed on the official stock books and records of the
Company, and a legend indicating that the stock may not be
pledged, sold or otherwise transferred, unless an opinion of
counsel is provided (concurred in by counsel for the Company)
stating that such transfer is not in violation of any
applicable law or regulation, may be stamped on stock
certificates in order to assure exemption from registration.
The Plan Administrator may also require such other action or
agreement by the Optionees as may from time to time be
necessary to comply with the federal and state securities
laws. THIS PROVISION SHALL NOT OBLIGATE THE COMPANY TO
UNDERTAKE REGISTRATION OF THE OPTIONS OR STOCK HEREUNDER.
Should any of the Company's capital stock of the same
class as the stock subject to options granted hereunder be
listed on a national securities exchange, all stock issued
hereunder if not previously listed on such exchange shall be
authorized by that exchange for listing thereon prior to the
issuance thereof.
Section 9. Amendment and Termination
9.1 Board Action
The Board may at any time suspend, amend or terminate
this Plan, provided that, to the extent required for
compliance with Section 422 of the Code or by any
applicable law or regulation, the Company's shareholders must approve any
amendment which will:
(a) increase the total number of shares that may be
issued under this Plan;
(b) modify the class of participants eligible for
participation in this Plan; or
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(c) otherwise require shareholder approval under
any applicable law or regulation.
Such shareholder approval must be obtained (i) within
12 months of the adoption by the Board of such amendment.
Any amendment made to this Plan since its original
adoption which would constitute a "modification" to incentive
stock options outstanding on the date of such amendment, shall
not be applicable to such outstanding incentive stock options,
but shall have prospective effect only, unless the Optionee
agrees otherwise.
9.2 Automatic Termination
Unless sooner terminated by the Board, this Plan shall
terminate ten years from the earlier of (a) the date on which
this Plan is adopted by the Board or (b) the date on which
this Plan is approved by the shareholders of the Company. No
option may be granted after such termination or during any
suspension of this Plan. The amendment or termination of this
Plan shall not, without the consent of the option holder,
alter or impair any rights or obligations under any option
theretofore granted under this Plan.
Section 10. Effectiveness of This Plan
This Plan shall become effective upon adoption by the
Board so long as it is approved by the Company's shareholders
at any time within 12 months of such adoption of this Plan or,
if earlier, and to the extent required for compliance with
Rule 16b-3 under the Exchange Act, at the next annual meeting
of shareholders after adoption by the Board.
Original Plan adopted by the Board on May 23, 1989 and
approved by the shareholders on May 30, 1989. Plan was
amended on March 15, 1991, July 15, 1991, and November 18,
1991. Plan amended and restated on March 27, 1992, on
January 22, 1993 and on August 19, 1993; restated by the Board
on October 26, 1994 and approved by the shareholders on
November 17, 1994; amended and restated by
the Board on April 25, 1996 and approved by the Company's shareholders on
June 25, 1996. Amended and restated by the Board on
December 10, 1996.
Page 14
NEOPATH, INC.
STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS
As Amended and Restated on February 27, 1997
SECTION 1 PURPOSES
The purpose of the NeoPath, Inc. Stock Option Plan for
Nonemployee Directors (this "Plan") is to attract and retain the
services of experienced and knowledgeable nonemployee directors
for NeoPath, Inc. (the "Company") and to provide added incentive
to such directors by providing an opportunity for stock ownership
in the Company.
SECTION 2 ADMINISTRATION
The administrator of this Plan (the "Plan Administrator")
shall be the Board of Directors of the Company (the "Board").
Subject to the terms of this Plan, the Plan Administrator shall
have the power to construe the provisions of this Plan, to
determine all questions arising thereunder and to adopt and amend
such rules and regulations for the administration of this Plan as
it may deem desirable. No member of the Plan Administrator shall
participate in any vote by the Plan Administrator on any matter
materially affecting the rights of any such member under this
Plan.
SECTION 3 SHARES SUBJECT TO THE PLAN
Subject to adjustment in accordance with Section 6 hereof,
the total number of shares of the Company's common stock (the
"Common Stock") for which options may be granted under this Plan
is 400,000 as such Common Stock was constituted on the effective
date of this Plan (the "Shares"). The Shares shall be shares
currently authorized but unissued or subsequently acquired by the
Company and shall include shares representing the unexercised
portion of any option granted under this Plan which expires or
terminates without being exercised in full.
SECTION 4 ELIGIBILITY
Each member of the Board elected or appointed (and each
person who has been nominated for election at the Annual Meeting
immediately prior to which options are to be granted pursuant to
this Plan) who is not otherwise an employee of the Company or any
parent or subsidiary corporation (an "Eligible Director") shall
be eligible to participate in this Plan. Subsequent to
February 27, 1997, each Eligible Director (other
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than a director whose term expires on the date of the Annual Meeting prior to
which an option is to be granted pursuant to this Plan and who
has not been nominated for reelection at such Annual Meeting)
will be granted an option to purchase 7,000 shares of Common
Stock annually during his or her term of office on the last
business day prior to each Annual Meeting of
Shareholders (as described in the Company's Bylaws, the "Annual
Meeting"). Notwithstanding the foregoing, if an Eligible
Director is first elected or appointed by the Board on a date
other than the date of an Annual Meeting, such Eligible Director
shall receive a pro rata portion of such annual grant on the date
of such initial election or appointment determined by reference
to the number of calendar quarters by which the Eligible
Director's initial election or appointment, precedes the quarter
in which the next Annual Meeting is scheduled to occur, as
follows: nothing in the same quarter as the Annual Meeting, an
option to purchase 1,750 shares of Common Stock in the first
quarter preceding the Annual Meeting, an option to purchase
3,500 shares of Common Stock in the second quarter preceding
the Annual Meeting and an option to purchase 5,250 shares of
Common Stock in the third quarter preceeding the Annual Meeting.
SECTION 5 TERMS AND CONDITIONS OF OPTIONS
Each option granted to an Eligible Director under this Plan
and the issuance of Shares thereunder shall be subject to the
following terms:
5.1 Option Agreement
Each option shall be evidenced by an option agreement (an
"Agreement") duly executed on behalf of the Company. Each
Agreement shall comply with and be subject to the terms and
conditions of this Plan. Any Agreement may contain such other
terms, provisions and conditions not inconsistent with this Plan
as may be determined by the Plan Administrator.
5.2 Option Exercise Price
The option exercise price for an option shall be the closing
price, or if there is no closing price, the mean between the high
and the low sale price of shares of Common Stock on the NASDAQ
Stock Market on the day the option is granted or, if no Common
Stock was traded on such date, on the next succeeding day on
which Common Stock is so traded.
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5.3 Vesting and Exercisability
Each option granted to an Eligible Director shall vest and
become exercisable in full on the day immediately prior to the
Annual Meeting next following the date of grant (disregarding the
Annual Meeting being held immediately after the date of grant).
5.4 Time and Manner of Exercise of Option
Each option may be exercised in whole or in part at any time
and from time to time; provided, however, that no fewer than 20%
of the Shares purchasable under the option (or the remaining
Shares then purchasable under the option, if less than 20%) may
be purchased upon any exercise of any option hereunder and that
only whole Shares will be issued pursuant to the exercise of any
option.
Any option may be exercised by giving written notice, signed
by the person exercising the option, to the Company stating the
number of Shares with respect to which the option is being
exercised, accompanied by payment in full for such Shares, which
payment may be in whole or in part (a) in cash or by check,
(b) in shares of Common Stock already owned for at least six
months by the person exercising the option, valued at fair market
value at the time of such exercise, or (c) by delivery of a
properly executed exercise notice, together with irrevocable
instructions to a broker, to properly deliver to the Company the
amount of sale or loan proceeds to pay the exercise price, all in
accordance with the regulations of the Federal Reserve Board.
5.5 Term of Options
Each option shall expire ten years from the date of the
granting thereof, but shall be subject to earlier termination as
follows:
(a) In the event that an Optionee ceases to be a
director of the Company for any reason other than the death of
the Optionee, the unvested portion of the options granted to such
Optionee shall terminate immediately and the vested portion of
the options granted to such Optionee may be exercised by him or
her only within twelve months after the date such Optionee ceases
to be a director of the Company.
(b) In the event of the death of an Optionee, whether
during the Optionee's service as a director or during the twelve-
month period referred to in Section 5.5(a), the unvested portion
of the options granted to such Optionee shall terminate
immediately and the vested portion of the options granted to such
Optionee shall be exercisable, and such options shall expire
unless exercised within twelve months after the date of the
Optionee's death, by the legal representatives or the estate of
such Optionee, by any person or persons whom the Optionee shall
have designated in writing
on forms prescribed by and filed with
the Company or, if no such designation has been
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made, by the
person or persons to whom the Optionee's rights have passed by
will or the laws of descent and distribution.
5.6 Transferability
During an Optionee's lifetime, an option may be exercised
only by the Optionee or a permitted assignee or transferee.
Options granted under this Plan and the rights and privileges
conferred thereby shall not be subject to execution, attachment
or similar process and may not be transferred, assigned, pledged
or hypothecated in any manner (whether by operation of law or
otherwise) other than (a) by will or by the applicable laws of
descent and distribution or (b) by gift or other transfer to
either (i) a spouse or other immediate family member or (ii) any
trust or partnership in which the original Optionee or such
person's spouse or other immediate family member has a
substantial beneficial interest; provided, however, that any
option so assigned or transferred shall be subject to all the
same terms and conditions contained in the instrument evidencing
the award. An Optionee may also designate in writing during the
Optionee's lifetime a beneficiary to receive and exercise options
in the event of the Optionee's death (as provided in
Section 5.5(b)). Any attempt to transfer, assign, pledge,
hypothecate or otherwise dispose of any option under this Plan or
of any right or privilege conferred thereby, contrary to the
provisions of this Plan, or the sale or levy or any attachment or
similar process upon the rights and privileges conferred hereby,
shall be null and void.
5.7 Holding Period
If an individual subject to Section 16 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") sells
shares of Common Stock obtained upon the exercise of a stock
option within six months after the date the option was granted,
such sale may result in short-swing profit liability under
Section 16(b) of the Exchange Act.
5.8 Participant's or Successor's Rights as Shareholder
Neither an Optionee nor the Optionee's successor in interest
shall have any rights as a shareholder of the Company with
respect to any Shares subject to an option granted to such person
until such person becomes a holder of record of such Shares.
5.9 Limitation as to Directorship
Neither this Plan, nor the granting of an option, nor any
other action taken pursuant to this Plan shall constitute or be
evidence of any agreement or understanding, express or implied,
that an Optionee has a right to continue as a director for any
period of time or at any particular rate of compensation.
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5.10 Regulatory Approval and Compliance
The Company shall not be required to issue any certificate
or certificates for Shares upon the exercise of an option granted
under this Plan, or record as a holder of record of Shares the
name of the individual exercising an option under this Plan,
without obtaining to the complete satisfaction of the Plan
Administrator the approval of all regulatory bodies deemed
necessary by the Plan Administrator, and without complying, to
the Plan Administrator's complete satisfaction, with all rules
and regulations under federal, state or local law deemed
applicable by the Plan Administrator.
SECTION 6 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
6.1 Recapitalization
The aggregate number and class of shares for which options
may be granted under this Plan, the number and class of shares
covered by each outstanding option and the exercise price per
share thereof (but not the total price), shall all be
proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock of the Company resulting
from a split or consolidation of shares or any like capital
adjustment, or the payment of any stock dividend.
6.2 Effect of Liquidation, Reorganization or Change in
Control
6.2.1 Cash, Stock or Other Property for Stock
Except as provided in subsection 6.2.2, upon a merger (other
than a merger of the Company in which the holders of shares of
Common Stock immediately prior to the merger have the same
proportionate ownership of shares of Common Stock in the
surviving corporation immediately after the merger),
consolidation, acquisition of property or stock, separation,
reorganization (other than a mere reincorporation or the creation
of a holding company) or liquidation of the Company, as a result
of which the shareholders of the Company receive cash, stock or
other property in exchange for or in connection with their shares
of Common Stock, each option shall terminate, but the Optionee
shall have the right immediately prior to any such merger,
consolidation, acquisition of property or stock, reorganization
or liquidation to exercise such option in whole or in part
whether or not the vesting requirements set forth in the option
agreement have been satisfied.
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6.2.2 Conversion of Options on Stock for Stock
Exchange
If the shareholders of the Company receive capital stock of
another corporation ("Exchange Stock") in exchange for their
shares of Common Stock in any transaction involving a merger,
consolidation, acquisition of property or stock, or
reorganization, all options shall be converted into options to
purchase shares of Exchange Stock unless the Company and the
corporation issuing the Exchange Stock, in their sole discretion,
determine that any or all such options shall not be converted
into options to purchase shares of Exchange Stock but instead
shall terminate in accordance with the provisions of sub
section 6.2.1. The amount and price of converted options shall
be determined by adjusting the amount and price of the options
granted hereunder in the same proportion as used for determining
the number of shares of Exchange Stock the holders of shares of
the Common Stock receive in such merger, consolidation,
acquisition of property or stock, or reorganization.
6.3 Fractional Shares
In the event of any adjustment in the number of shares
covered by any option, any fractional shares resulting from such
adjustment shall be disregarded and each such option shall cover
only the number of full shares resulting from such adjustment.
SECTION 7 EXPENSES
All costs and expenses of the adoption and administration of
this Plan shall be borne by the Company; none of such expenses
shall be charged to any Optionee.
SECTION 8 COMPLIANCE WITH RULE 16b-3
It is the intention of the Company that this Plan comply in
all respects with the requirements for a "formula plan" within
the meaning attributed to that term for purposes of Rule 16b-3
promulgated under Section 16(b) of the Exchange Act. Therefore,
if any Plan provision is later found not to be in compliance with
such requirements, that provision shall be deemed null and void,
and in all events this Plan shall be construed in favor of its
meeting such requirements.
SECTION 9 AMENDMENT AND TERMINATION
The Board may amend, terminate or suspend this Plan at any
time, in its sole and absolute discretion; provided, however,
that if required to qualify this Plan as a formula plan for
purposes of Rule 16b-3 promulgated under Section 16(b) of the
Exchange Act,
no amendment may be made more than once every six
months that would change the
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amount, price, timing or vesting of
the options, other than to comply with changes in the Internal
Revenue Code of 1986, as amended, or the rules and regulations
thereunder; provided further that no amendment that would:
(a) materially increase the number of Shares that may
be issued under this Plan, or
(b) otherwise require shareholder approval under any
applicable law or regulation
shall be made without the approval of the Company's shareholders.
SECTION 10 EFFECTIVE DATE AND DURATION
This Plan shall be effective on February 2, 1995, the fifth
trading day after the effective date of the Company's
registration statement filed by the Company under the Securities
Act of 1933, as amended, in connection with the Company's initial
underwritten public offering. A "trading day" shall be a day on
which Shares of Common Stock are traded on the Nasdaq Stock
Market. This Plan shall continue in effect until it is
terminated by action of the Board or the Company's shareholders,
but such termination shall not affect the then-outstanding terms
of any options.
Plan originally adopted by the Company's Board of Directors
on October 26, 1994 and approved by the Company's shareholders on
November 17, 1994. Plan was amended and restated by the Board on
April 25, 1996 and approved by the Company's shareholders on June
25, 1996. Amended and restated by the Board of Directors on
February 27, 1997.
Page 7
SENIOR MANAGEMENT EMPLOYMENT AGREEMENT
______________________________________________________________
SENIOR MANAGEMENT EMPLOYMENT AGREEMENT, dated the 27th
day of February, 1997, between NEOPATH, INC., a Washington
corporation (the "Company"), and _________________
("Executive").
RECITALS
A. Executive is currently employed by the Company or
one of its Subsidiaries.
B. The Board of Directors of the Company (the "Board")
has determined that it is appropriate to reinforce the
continued attention and dedication of certain members of the
Company's management, including Executive, to their assigned
duties without distraction in potentially disturbing
circumstances arising from the possibility of a Change in
Control of the Company, as defined in Schedule A attached
hereto.
AGREEMENTS
NOW, THEREFORE, in consideration of the covenants and
agreements hereinafter set forth, the Company and Executive
agree as follows:
1. Definitions
Terms capitalized in this Agreement which are not
otherwise defined shall have the meanings assigned to such
terms in Schedule A attached hereto.
2. Employment Following a Change in Control.
Once a Change in Control has occurred, no termination of
Executive's employment with the Company, other than on account
of death, shall be effective unless the party causing such
termination of employment provides the other party 30 days'
prior written notice of such termination, which shall indicate
those specific provisions in this Agreement relied upon and
which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for the termination
of Executive's employment constituting a Termination, if any,
under the provision so indicated.
3. Benefits Upon Change in Control
Executive shall be entitled to the following payments and
benefits following a Change in Control, whether or not a
Termination occurs:
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<PAGE>
(a) Salary and Benefits. Executive shall (i) receive an
annual base salary no less than the Executive's annual base
salary in effect immediately prior to the date that the Change
in Control occurs, including any salary which has been earned
but deferred, and an annual bonus equal to at least the
average of the two annual bonuses paid to Executive in the two
years prior to the Change in Control, and (ii) be entitled to
participate in all employee expense reimbursement, incentive,
savings and retirement plans, practices, policies and programs
(including any Company plan qualified under Section 401(a) of
the Code) available to other peer executives of the Company
and its Subsidiaries, but in no event shall the benefits
provided to Executive under this item (ii) be less favorable,
in the aggregate, than the most favorable of those plans,
practices, policies or programs in effect immediately prior to
the date that the Change in Control occurs.
(b) Welfare Benefits. The Company shall at the
Company's expense (except for the amount, if any, of any
required employee contribution which would have been necessary
for Executive to contribute as an active employee under the
plan or program as in effect on the date of the Change in
Control) continue to cover Executive (and his or her
dependents) under, or provide Executive (and his or her
dependents) with insurance coverage no less favorable than,
the Company's life, disability, health, dental and any other
employee welfare benefit plans or programs, as in effect on
the date of the Change in Control (such benefits, the "Welfare
Benefits").
(c) Death of Executive. In the event of
Executive's death prior to Termination, but while employed by
the Company or any Subsidiary, as the case may be, his or her
spouse, if any, or otherwise the personal representative of
his or her estate shall be entitled to receive (i) Executive's
salary at the rate then in effect through the date of death,
as provided under the Company's pay policy, and (ii) any
Accrued Benefits for the periods of service prior to the date
of death.
(d) Disability of Executive. In the event of
Executive's Disability prior to Termination, but while
employed by the Company or any Subsidiary, as the case may be,
Executive shall be entitled to receive (i) his or her salary
at the rate then in effect through the date of the
determination of Disability, as provided under the Company's
pay policy, (ii) any Accrued Benefits for the periods of
service prior to the date of the determination of Disability,
(iii) payments under the Company's short and long term
disability plans following the determination of Disability,
and (iv) Welfare Benefits for a period of one year following
the determination of Disability.
(e) Cause; Upon Expiration of This Agreement; Other
Than for Good Reason. If Executive's employment shall be
terminated by the Company for Cause or upon expiration of this
Agreement or by Executive other than for Good Reason,
Executive shall be entitled to receive only (i) his or her
salary at the rate then in effect through the date of such
termination, as provided under the Company's pay
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<PAGE>
policy, and (ii) any Accrued Benefits for the periods of
service prior to the date of such termination.
(f) Withholding. All payments under this Section 3
are subject to applicable federal and state payroll
withholding or other applicable taxes.
4. Payments and Benefits Upon Termination
Executive shall be entitled to the following payments and
benefits following Termination:
(a) Termination Payment. Subject to Section 4(b),
in recognition of past services to the Company by Executive,
the Company shall make a lump sum payment in cash to Executive
as severance pay within ten (10) business days following the
date of Termination equal to two times the sum of:
(i) Executive's annual base salary in effect immediately prior
to the date that either a Change in Control shall occur or
such date of Termination, whichever salary is higher; plus
(ii) Executive's target bonus for the current fiscal year as
determined by the Compensation Committee; provided, however,
that if Termination occurs prior to the determination of such
target bonus for a fiscal year, such bonus shall be the target
bonus for the prior fiscal year.
(b) Termination Benefits; Certain Additional
Payments by the Company.
(i) Then the payments to Executive under
Section 4(a) shall be increased (such increase, a "Gross-Up
Payment"), but only to the extent necessary to ensure that,
after payment by the Executive of all taxes (including any
interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes and Excise Tax
imposed upon the Gross-Up Payment, the Executive retains an
amount of the Gross-Up Payment equal to such Excise Tax. The
foregoing calculations shall be made by the Company and
Executive. If no agreement on the calculations is reached
within ten (10) business days after the date of Termination,
then the accounting firm which regularly audits the financial
statements of the Company (the "Auditors") shall review the
calculations, and report their determination of the amount due
to both Executive and the Company within thirty (30) days of
the Termination. The determination of such firm shall be
conclusive and binding on all parties and the expense for such
accountants shall be paid by the Company. Pending such
determination, the Company shall continue to make all other
required payments to Executive at the time and in the manner
provided herein.
(ii) As a result of the uncertainty in the
application of Section 280G and Section 4999 of the Code, it
is possible that the Company will make a
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<PAGE>
Payment (including a Gross-Up Payment) under this Agreement
that should not have been made (an "Overpayment") or that the
Company will fail to make a payment (including a Gross-Up
Payment) under this Agreement that should have been made (an
"Underpayment"). If the Company and Executive, or, if no
agreement is reached by the Company and Executive, the
Auditors, determine that Overpayment has been made, such
Overpayment shall be treated for all purposes as a loan to the
Executive which he shall repay to the Company, together with
interest at the applicable federal rate provided for in
section 7872(f)(2)(A) of the Code. If the Company and
Executive, or, if no agreement is reached by the Company and
Executive, the Auditors, determine that an Underpayment has
occurred, such Underpayment shall promptly be paid by the
Company to Executive, together with interest at the applicable
federal rate provided for in section 7872(f)(2)(A) of the
Code. The Company and Executive agree to give each other
prompt written notice of any information or taxing authority
inquiry that could reasonably result in the determination that
an Overpayment or Underpayment has been made.
(c) Accrued Benefits. Within ten (10) business
days following the date of Termination, the Company shall make
a lump sum payment in cash to Executive in the amount of any
Accrued Benefits for the periods of service prior to the date
of Termination.
(d) Welfare Benefits. The Company shall, at its
sole option and expense (except for the amount, if any, of any
required employee contribution that would have been necessary
for Executive to contribute as an active employee under the
plan or program as in effect on the date of Termination)
either (i) continue to cover Executive (and his or her
dependents) under, or provide Executive (and his or her
dependents) with Welfare Benefits (as in effect on the date of
the Change in Control or, at the option of Executive, on the
date of Termination) for a period of two years following the
date of Termination, or (ii) pay Executive a lump sum cash
payment within ten (10) business days following the date of
Termination equal to the then-present value of the cost to the
Company of such Welfare Benefits; provided, however, that if
Executive is provided by another employer during such two-year
period with benefits substantially comparable to the Welfare
Benefits, the benefits provided by the Company shall, unless a
lump sum payment has been made by the Company (in which case
Executive shall not, for any reason, be required to return any
part of such payment), be reduced by the benefits provided by
such other employer, but only to the extent of, and with
respect to, the Welfare Benefits otherwise payable by the
Company to Executive.
(e) Death of Executive. In the event of
Executive's death subsequent to Termination and prior to
receiving all benefits and payments provided for by this
Section 4, such benefits and payments shall be paid to his or
her spouse, if
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<PAGE>
any, or otherwise to the personal representative of his or her
estate, unless Executive has otherwise directed the Company in
writing prior to his or her death.
(f) Exclusive Source of Severance Pay. Benefits
provided hereunder shall replace the amount of any severance
payments to which Executive would otherwise be entitled under
any severance plan or policy generally available to employees
of the Company.
(g) Nonsegregation. No assets of the Company need
be segregated or earmarked to represent the liability for
benefits payable hereunder. The rights of any person to
receive benefits hereunder shall be only those of a general
unsecured creditor.
(h) Withholding. All payments under this Section 4
are subject to applicable federal and state payroll
withholding or other applicable taxes.
5. Noncompetition
(a) Noncompetition. In the event that, after a
change in Control, Executive's employment is terminated by the
Company or by Executive for any reason, and provided that any
payments due Executive upon such termination are paid when
due, then for a period of one year after such termination,
Executive shall not engage in any activities (including,
without limitation, activities for any subsequent employer of
Executive) directly competitive with the business of the
Company.
(b) Company Remedy. In the event of any breach by
Executive of the obligations set forth in Section 5(a), the
Company shall be entitled to recover an amount equal to the
total of all amounts paid to Executive pursuant to Sections
4(a) and 4(b) of this Agreement in addition to any other
remedies available to the Company at law or in equity.
6. Arbitration
Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by
arbitration in Seattle, Washington, in accordance with the
Rules of the American Arbitration Association then in effect.
Judgment may be entered on the arbitrator's award in any
jurisdiction.
7. Conflict in Benefits
This Agreement is not intended to and shall not adversely
affect, limit or terminate any other agreement or arrangement
between Executive and the Company presently in effect or
hereafter entered into, including any employee benefit plan
under which Executive is entitled to benefits.
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<PAGE>
8. Term, Termination and Amendment
(a) The initial term of this Agreement shall be from the
date hereof until the anniversary date of this Agreement. On
each such annual anniversary date, this Agreement shall
automatically be renewed for a period of one year, unless 60
days prior to such anniversary date the Company shall give
notice to Executive that the Agreement is terminated or
amended, provided that no Change in Control has occurred prior
to such anniversary. Notwithstanding such termination, the
Company shall remain liable for any rights or payments arising
prior to such termination to which Executive is entitled under
this Agreement. During each such one year term, this
Agreement may not be amended or terminated except by written
agreement between Executive and the Company.
(b) In the event of a Change in Control, unless earlier
terminated as provided herein, this Agreement shall continue
in effect for a period of two years from the date of the
Change in Control at which time this Agreement shall expire.
For a two-year period following a Change in Control, (i) this
Agreement may not be terminated, and (ii) no amendment or
other action of the Board which adversely affects the rights
of Executive hereunder is valid and enforceable without the
prior written consent of Executive. After the two-year period
from the date of the Change in Control, the Board may
terminate or amend this Agreement without the prior written
consent of Executive.
9. Miscellaneous
(a) Amendment. This Agreement may not be amended
except by written agreement between Executive and the Company.
(b) No Mitigation. All payments and benefits to
which Executive is entitled under this Agreement shall be made
and provided without offset, deduction or mitigation on
account of income Executive could or may receive from other
employment or otherwise, except as provided in Section 4(d)
and Section 5(b) hereof.
(c) Employment Not Guaranteed. Nothing contained
in this Agreement, and no decision as to the eligibility for
benefits or the determination of the amount of any benefits
hereunder, shall give Executive any right to be retained in
the employ of the Company or rehired, and the right and power
of the Company to dismiss or discharge any employee for any
reason is specifically reserved. Except as expressly provided
herein, no employee or any person claiming under or through
him or her shall have any right or interest herein, or in any
benefit hereunder.
(d) Legal Expenses. In connection with any
litigation, arbitration or similar proceeding, whether or not
instituted by the Company or Executive, with
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<PAGE>
respect to the interpretation or enforcement of any provision
of this Agreement, the prevailing party shall be entitled to
recover from the other party all costs and expenses, including
reasonable attorneys' fees and disbursements, in connection
with such litigation, arbitration or similar proceeding. The
Company shall pay prejudgment interest on any money judgment
obtained by Executive as a result of such proceedings,
calculated at the published commercial interest rate of
Seattle-First National Bank for its best customers, as in
effect from time to time from the date that payment should
have been made to Executive under this Agreement.
(e) Notices. Any notices required under the terms
of this Agreement shall be effective when mailed, postage
prepaid, by certified mail and addressed to, in the case of
the Company:
NeoPath, Inc.
8271 - 154th Avenue NE
Redmond, WA 98052
Attention: Chief Executive Officer
and to, in the case of Executive:
____________________________
____________________________
Either party may designate a different address by giving
written notice of change of address in the manner provided
above.
(f) Waiver; Cure. No waiver or modification in
whole or in part of this Agreement, or any term or condition
hereof, shall be effective against any party unless in writing
and duly signed by the party sought to be bound. Any waiver
of any breach of any provision hereof or any right or power by
any party on one occasion shall not be construed as a waiver
of, or a bar to, the exercise of such right or power on any
other occasion or as a waiver of any subsequent breach. Other
than a breach of the provisions of Section 5, any breach of
this Agreement may be cured by the breaching party within ten
days of the date that such breaching party shall have received
written notice of such breach from the party asserting such
breach.
(g) Binding Effect; Successors. Subject to the
provisions hereof, nothing in this Agreement shall prevent the
consolidation of the Company with, or its merger into, any
other corporation, or the sale by the Company of all or
substantially all of its properties and assets, or the
assignment of this Agreement by the Company in connection with
any of the foregoing actions. This Agreement shall be binding
upon, inure to the benefit of and be enforceable by the
Company and Executive and their
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<PAGE>
respective heirs, legal representatives, successors and
assigns. If the Company shall be merged into or consolidated
with another entity, the provisions of this Agreement shall be
binding upon and inure to the benefit of the entity surviving
such merger or resulting from such consolidation. The Company
shall require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company,
including the successor to all or substantially all of the
business or assets of any Subsidiary, division or profit
center of the Company, to expressly assume and agree to
perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no
such succession had taken place. The provisions of this
Section 9(g) shall continue to apply to each subsequent
employer of Executive hereunder in the event of any subsequent
merger, consolidation or transfer of assets of such subsequent
employer.
(h) Separability. Any provision of this Agreement
which is held to be unenforceable or invalid in any respect in
any jurisdiction shall be ineffective in such jurisdiction to
the extent that it is unenforceable or invalid without
affecting the remaining provisions hereof, which shall
continue in full force and effect. The enforceability or
invalidity of a provision of this Agreement in one
jurisdiction shall not invalidate or render unenforceable such
provision in any other jurisdiction.
(i) Controlling Law. This Agreement shall be
governed by and construed in accordance with the laws of the
state of Washington applicable to contracts made and to be
performed therein.
IN WITNESS WHEREOF, the Company and Executive have
executed this Agreement as of the day and year first above
written.
NEOPATH, INC.
By:
______________________________
Alan C. Nelson
Title:President & Chief Executive Officer
EXECUTIVE:
______________________________
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<PAGE>
Schedule A
CERTAIN DEFINITIONS
As used in this Agreement, and unless the context
requires a different meaning, the following terms have the
meanings indicated:
"Accrued Benefits" means the aggregate of any
compensation previously deferred by Executive (together with
any accrued interest or earnings thereon), any accrued
vacation pay and, if the date of Termination occurs after the
end of a Fiscal Year for which a bonus is payable to
Executive, such bonus, in each case to the extent previously
earned and not paid.
"Base Amount" shall mean the "base amount" of Executive
as defined in Section 280G of the Code.
"Cause" means (a) willful misconduct on the part of
Executive that has a materially adverse effect on the Company
and its Subsidiaries, taken as a whole, (b) Executive's
engaging in conduct which could reasonably result in his or
her conviction of a felony or a crime against the Company or
involving substance abuse, fraud or moral turpitude, or which
would materially compromise the Company's reputation, as
determined in good faith by a written resolution duly adopted
by the affirmative vote of not less than two-thirds of all of
the directors who are not employees or officers of the
Company, or (c) unreasonable refusal by Executive to perform
the duties and responsibilities of his or her position in any
material respect. No action, or failure to act, shall be
considered "willful" if it is done by Executive in good faith
and with reasonable belief that his or her action or omission
was in the best interests of the Company.
"Change in Control" means, and shall be deemed to occur
upon the happening of, any one of the following:
(a) The occupying of a majority of the seats (other than
vacant seats) on the Board by individuals who were neither
nominated or appointed by a majority of the Incumbent
Directors;
(b) The acquisition, directly or indirectly, by any
Person of beneficial ownership of 15% or more of the combined
voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of
directors, which acquisition is not approved in advance by a
majority of the Incumbent Directors;
(c) The first purchase of the Company's Common Stock
pursuant to a tender or exchange offer (other than a tender or
exchange offer made by the Company);
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<PAGE>
(d) The approval by the stockholders of the Company of a
reorganization, merger or consolidation or sale of
substantially all of the assets of the Company (an
"Acquisition Transaction") unless, following such Acquisition
Transaction, all or substantially all of the individuals and
entities who were the beneficial owners of the outstanding
voting securities of the Company immediately prior to such
Acquisition Transaction beneficially own, directly or
indirectly, more than 50% of the then outstanding voting
securities of the corporation resulting from such Acquisition
Transaction (including, without limitation, a corporation
which as a result of such transaction owns the Company or all
or substantially all of the Company's assets either directly
or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such
Acquisition Transaction of the outstanding voting securities
of the Company; or
(e) Approval by the stockholders of the Company of a
liquidation or dissolution of the Company.
(f) For purposes of this definition, (i) the terms
"beneficial owner" and "beneficial ownership" shall have the
meanings set forth in Rules 13d-3 and 13d-5 of the General
Rules and Regulations promulgated under the Exchange Act, and
the term "voting securities" shall mean the voting securities
of a corporation entitled to vote generally in the election of
directors.
"Code" means the Internal Revenue Code of 1986, as
amended.
"Disability" means that (a) a person has been
incapacitated by bodily injury or physical or mental disease
so as to be prevented thereby from performance of his or her
duties with the Company for 120 days in any 12-month period,
and (b) such person is disabled for purposes of any and all
of the plans or programs of the Company or any Subsidiary that
employs Executive under which benefits, compensation or awards
are contingent upon a finding of disability. The
determination with respect to whether Executive is suffering
from such a Disability will be determined by a mutually
acceptable physician or, if there is no physician mutually
acceptable to the Company and Executive, by a physician
selected by the then Dean of the University of Washington
Medical School.
"Exchange Act" means the Securities Exchange Act of 1934,
as amended.
"Excise Tax" means the excise tax, including any interest
or penalties thereon, imposed on Executive by Section 4999 of
the Code.
"Fiscal Year" means the 12-month period ending on
December 31 in each year (or such other fiscal year period
established by the Board).
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<PAGE>
"Good Reason" means, without Executive's express written
consent:
(a) (i) the assignment to Executive of duties, or
limitation of Executive's responsibilities,
inconsistent with Executive's title, position,
duties, responsibilities and status with the Company
Executive as such duties and responsibilities
existed immediately prior to the date of the Change
in Control, or (ii) removal of Executive from, or
failure to re-elect Executive to, Executive's
positions with the Company or any Subsidiary that
employs Executive immediately prior to the Change in
Control, except in connection with the involuntary
termination of Executive's employment by the Company
for Cause or as a result of Executive's death or
Disability;
(b) failure by the Company to pay, or reduction by the
Company of, Executive's annual base salary, as
reflected in the Company's payroll records for
Executive's last pay period immediately prior to the
Change in Control;
(c) failure by the Company to pay, or reduction by the
Company of, Executive's bonus;
(d) the relocation of the principal place of Executive's
employment to a location that is more than 25 miles
further from Executive's principal residence than
such principal place of employment immediately prior
to the Change in Control; or
(e) the breach of any material provision of this
Agreement by the Company, including, without
limitation, failure by the Company to bind any
successor to the Company to the terms and provisions
of this Agreement in accordance with Section 10(g).
"Gross-Up Payment" shall have the meaning set forth in
Section 4(b).
"Incumbent Director" means a member of the Board who has
been either (a) nominated by a majority of the directors of
the Company then in office or (b) appointed by directors so
nominated, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board.
"Parachute Payment" means any payment deemed to
constitute a "parachute payment" as defined in Section 280G of
the Code.
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<PAGE>
"Person" means any individual, entity or group (as such
term is used in Section 13(d)(3) or 14(d)(2) of the Exchange
Act).
"Subsidiary" means an Person controlled by the Company
directly, or indirectly through one or more intermediaries.
"Termination" means, following the occurrence of any
Change in Control by the Company, (a) the involuntary
termination of the employment of Executive for any reason
other than death, Disability or for Cause or (b) the
termination of employment by Executive for Good Reason.
"Welfare Benefits" shall have the meaning set forth in
Section 3(b).
Page 12
INTERNATIONAL DISTRIBUTOR AGREEMENT
between
NeoPath, Inc.
and
Nikon Corporation
Dated as of December 19, 1996
<PAGE>
CONTENTS
Article 1. Authority of Nikon 1
1.1 Appointment 1
1.2 Customer Pricing 1
1.3 Exclusivity 1
1.4 Independent Contractor 2
Article 2. Purchase and Sale of Products 2
2.1 Initial Purchase and Sale of QC Systems 2
2.2 Purchase and Sale of Additional Products 3
2.3 Upgrade of QC Systems 3
2.4 Title 3
Article 3. Leasing of Products 4
3.1 Orders of Leased Products 4
3.2 Cancellation of Orders 4
3.3 User Agreements 4
3.4 Risk of Loss 6
3.5 Title 6
Article 4. Delivery of Products 6
4.1 General 6
4.2 Delays in Delivery 7
4.3 Transportation Costs 8
4.4 Transfers 8
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<PAGE>
Article 5. Services of Nikon 8
5.1 Description 8
5.2 Reports 11
5.3 Qualified Personnel 12
Article 6. Services and Support by NeoPath 12
6.1 Dedication of Support Team 12
6.2 Technical Training 12
6.3 Sales Training 13
6.4 Direct Customer Software Support 13
6.5 Product Improvements, Etc. 13
6.6 Marketing and Service Materials 14
Article 7. Pricing and Payment 14
7.1 Products Purchased by Nikon 14
7.2 Products Leased by Nikon 14
7.3 Services and Support by NeoPath 15
7.4 Payment 15
7.5 Late Payment 15
7.6 Taxes 15
7.7 Modifications for Increased Supplier
Costs 16
7.8 Additional Price Modifications 16
Article 8. Product Warranty, Liability and
Indemnity 17
8.1 Limited Warranty and Remedy 17
8.2 Product Liability Indemnification 18
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<PAGE>
8.3 Infringement Indemnification 19
8.4 Disclaimer and Release 21
Article 9. Protection of Proprietary Rights 21
9.1 Reservation 21
9.2 Software 21
9.3 Securing Rights in the Territories 22
9.4 Product Markings 22
9.5 Trademarks, Etc. 22
9.6 Third Party Infringement 22
9.7 Third-Party Claims Against the Products 23
9.8 Nikon Improvements 23
9.9 Protection of Confidential Information 24
Article 10.Additional Responsibilities of Nikon 24
10.1 Territorial Restriction 24
10.2 Taxes, Withholding, Etc. in Japan or Any
Other Territory 25
10.3 Noncompete 25
10.4 Authorized Use of NeoPath Systems and
NeoPath Technology 25
10.5 Indemnification 25
10.6 No Unauthorized Representations or
Warranties 26
10.7 Compliance with Laws 26
10.8 No Government Representation 27
10.9 No Conflict of Interest 27
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<PAGE>
Article 11.Limitations of Liability 27
11.1 Force Majeure 27
11.2 Limitation of Consequential Damages 27
11.3 Additional Limitations of NeoPath's
Liability 28
Article 12.Term and Termination 28
12.1 Term 28
12.2 Termination After Five Years 28
12.3 Termination for Failure to Meet [*] of
Quota for Japan 29
12.4 Partial Termination for Failure to Meet
[*] of Quota for any Other Territory 29
12.5 Termination for Material Breach or
Default 29
12.6 Termination for Act of Insolvency 30
12.7 Effect of Termination 30
Article 13.Resolution of Disputes 31
13.1 General 31
13.2 Unassisted Settlement 31
13.3 Arbitration 32
Article 14.Miscellaneous 33
14.1 Notices 33
14.2 Assignment 33
14.3 Nonwaiver 34
14.4 Severability 34
14.5 Applicable Law 34
[*] Confidential treatment requested
Page iv
<PAGE>
14.6 Entire Agreement 35
Page v
<PAGE>
NEOPATH, INC.
INTERNATIONAL DISTRIBUTOR AGREEMENT
This Agreement, dated as of December 19, 1996, is made
and entered into by and between: NeoPath, Inc., a corporation
duly organized and existing under the laws of the State of
Washington, U.S.A. ("NeoPath"); and Nikon Corporation, a
corporation duly organized and existing under the laws of
Japan ("Nikon"). The definitions of certain terms used in
this Agreement are set forth in the attached Schedule No. 1
which is incorporated herein by this reference.
Article 1. Authority of Nikon
1.1 Appointment
NeoPath hereby appoints Nikon, and Nikon hereby accepts
NeoPath's appointment, as an authorized distributor of
Products in the Territories during the Term, all subject to
and in accordance with the provisions of this Agreement.
1.2 Customer Pricing
The prices, payment terms and similar provisions
applicable to amounts payable by the Customer to Nikon for any
Products or related services made available to the Customer
through Nikon will be established by Nikon in its sole
discretion and are not subject to any review, approval or
other action by NeoPath. Any prices, payment terms or similar
provisions recommended by NeoPath are provided solely for
Nikon's information.
1.3 Exclusivity
So long as the number of NeoPath Systems distributed in
any Territory by Nikon under this Agreement equals or exceeds
the Quotas for such Territory, then NeoPath will not appoint
any Third Party to, and will not by itself, promote, market or
distribute NeoPath Systems in such Territory during the Term
other than in connection with this Agreement. The foregoing
will not be interpreted or construed to prohibit or restrict
NeoPath's activities, acting in coordination with Nikon, to
facilitate Nikon's efforts to promote, market and distribute
Products under this Agreement (including, without limitation,
providing technical support, conducting market surveys and
contacting Customers or potential Customers in the
Territories). If the number of NeoPath Systems distributed in
any Territory by Nikon under this Agreement in any
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<PAGE>
Year after 1996 does not equal or exceed the applicable Quota for such
Year, then NeoPath may terminate Nikon's exclusivity as to
such Territory (without terminating the Term) by giving Nikon
written notice of such termination specifying the affected
Territory within ninety (90) days after the end of the Year in
which distributions did not equal or exceed the applicable
Quota. Unless otherwise agreed upon by the Parties in
writing, any such termination will be effective immediately
upon Nikon's receipt of NeoPath's notice of the termination.
1.4 Independent Contractor
Nikon is an independent contractor, not an agent,
franchisee, or representative of NeoPath. Except as otherwise
specifically provided for in this Agreement or any applicable
Schedule, Nikon will perform all of the Services and its other
obligations under this Agreement at its own expense. Nikon is
not authorized to, and will not attempt to, create or assume
any obligation or liability, express or implied, in the name
or otherwise on behalf of NeoPath. Without limiting the
generality of the foregoing, Nikon will not enter into any
contract, agreement or other commitment, make any warranty or
guarantee, or incur any obligation or liability in the name or
otherwise on behalf of NeoPath.
Article 2. Purchase and Sale of Products
2.1 Initial Purchase and Sale of QC Systems
Upon execution of this Agreement, Nikon will purchase
from NeoPath, and NeoPath will sell to Nikon, [*] QC
Systems for a purchase price of [*]
each. Nikon acknowledges receipt of two (2) of
the [*] QC Systems being purchased under this paragraph.
NeoPath acknowledges receipt of the purchase price for one of
the QC Systems already delivered to Nikon (i.e., as an advance
under a letter agreement between the Parties, dated June 11,
1996). Nikon will pay NeoPath for the other QC System already
delivered to Nikon within forty-five (45) days after execution
of this Agreement. NeoPath will deliver the [*]
additional QC Systems to be purchased under this paragraph
within [*] days after the date this Agreement is
signed by both Parties. Nikon will pay NeoPath the purchase
price for each of the [*] additional QC Systems to be
purchased under this paragraph on or before the later of
[*] or forty-five (45) days after delivery of the
applicable QC System and receipt of NeoPath's invoice for
purchase price of the same.
[*] Confidential treatment requested
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2.2 Purchase and Sale of Additional Products
Nikon will complete, sign and submit to NeoPath a written
order for any additional Products that Nikon desires to
purchase from NeoPath under this Agreement. NeoPath will sell
and deliver to Nikon, and Nikon will purchase, accept delivery
of and pay for in accordance with paragraph 7.1, any
additional Products shipped or otherwise delivered by NeoPath
pursuant to orders submitted to and accepted by NeoPath
pursuant to this paragraph. Unless otherwise agreed by
NeoPath, Nikon will submit any order under this paragraph at
least one hundred twenty (120) days prior to the date upon
which Nikon desires delivery of the Product which Nikon
desires to purchase pursuant to the order. Each of Nikon's
orders will be in a form acceptable to NeoPath and will
specify the quantity of each type of Product ordered, the
applicable purchase prices, and shipping instructions (e.g.,
requested carrier, shipping date, shipping destination and
insurance). Each of Nikon's orders under this paragraph will
be subject to acceptance by NeoPath. Promptly after receipt
of any order from Nikon, NeoPath will notify Nikon of its
acceptance or rejection thereof and, if rejected, the reasons
for the rejection.
2.3 Upgrade of QC Systems
Upon Nikon's request and in no event later than the
second anniversary of the date of this Agreement, NeoPath will
upgrade each of the [*] QC Systems purchased by Nikon
pursuant to paragraphs 2.1 to Screener Systems for [*]
each. Unless otherwise
agreed by the Parties, Nikon will pay for each upgrade within
forty-five (45) days after completion of the upgrade and
receipt of NeoPath's invoice for the same. Unless and until
upgraded in accordance with this paragraph, Nikon will not use
or permit the use of any QC System as a Screener System.
2.4 Title
Title to Products purchased by Nikon under this Article 2
will pass to Nikon upon the later of:
(a) NeoPath's delivery of the applicable Product;
or
(b) NeoPath's receipt of full payment of the
purchase price for the applicable Product.
[*] Confidential treatment requested
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Article 3. Leasing of Products
3.1 Orders of Leased Products
Nikon will complete, sign and submit to NeoPath a written
order for any Products that Nikon desires to lease from
NeoPath under this Agreement. NeoPath will lease and deliver
to Nikon, and Nikon will lease, accept delivery of and pay for
in accordance with paragraph 7.2, any Product shipped or
otherwise delivered by NeoPath pursuant to orders submitted to
and accepted by NeoPath pursuant to this paragraph. Unless
otherwise agreed by NeoPath, Nikon will submit any order under
this paragraph at least one hundred twenty (120) days prior to
the date upon which Nikon desires delivery of the Product
which Nikon desires to lease pursuant to the order. Each of
Nikon's orders will be in a form acceptable to NeoPath and
will specify the Product ordered, the applicable lease
payments, the applicable Lease Term, the location at which the
Product is to be installed and operated throughout the Lease
Term, the name, address and telephone number of the Customer
to which the Product is to be subleased or rented by Nikon,
and shipping instructions (e.g., requested carrier, shipping
date, shipping destination and insurance). Each of Nikon's
orders under this paragraph will be subject to acceptance by
NeoPath. Promptly after receipt of any order from Nikon,
NeoPath will notify Nikon of its acceptance or rejection
thereof and, if rejected, the reasons for the rejection.
3.2 Cancellation of Orders
If the Customer cancels its order to Nikon for any
Product ordered by Nikon under this Article 3, then Nikon may
cancel its order to NeoPath for such Product, provided that
Nikon gives NeoPath written notice of such cancellation at
least sixty (60) days prior to the delivery date specified in
the applicable order from Nikon to NeoPath.
3.3 User Agreements
Unless otherwise agreed by the Parties, each User
Agreement will conform, in form and content, substantially to
the form of User Agreement attached to this Agreement or such
other form of User Agreement as may be agreed upon by the
Parties after the date of this Agreement. Unless otherwise
agreed by NeoPath, each User Agreement will require the
Customer to:
(a) use the Product only for the purposes specified
in and otherwise in strict accordance with the applicable
specifications, instructions, manuals and other
documentation which are provided by, or which conform to
the documentation provided by, NeoPath;
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(b) keep the Product in the Customer's sole
possession and control throughout the Lease Term at the
location specified in Nikon's order, provided that the
Customer may move the Product to another location in the
Territory upon the prior written consent of Nikon and
notice to NeoPath;
(c) provide Nikon and NeoPath access to the Product
during the Customer's normal business hours for
installation, inspection, testing, maintenance, repair or
removal (i.e., at the end of the applicable Lease Term)
of the Product and other reasonable purposes;
(d) not make any alterations or modifications to
any Product without the prior written consent of Nikon
and NeoPath;
(e) not disassemble, decompile or reverse engineer
any Product, any part or component of any Product or any
software included in any Product;
(f) obtain maintenance and repairs for the Product
as recommended in the applicable specifications,
instructions, manuals and other documentation provided
by, or conforming to the documentation provided by,
NeoPath;
(g) not authorize anyone other than the Customer's
personnel and other personnel authorized or approved by
Nikon or NeoPath to install, operate, maintain, repair or
service the Product;
(h) acknowledge NeoPath's ownership of the Product
and related proprietary rights, as between Customer and
NeoPath;
(i) acknowledge that NeoPath has not made any
representation or warranty to the Customer and that the
Customer will look solely to Nikon with respect to any
representation or warranty made with respect to the
Product;
(j) not remove, obscure or alter any label, decal,
plate, plaque, tag or other notice of NeoPath's ownership
of the Product and related proprietary rights;
(k) keep the Product free and clear of all security
interests, mortgages, deed of trust, liens, encumbrances
and other claims arising by or through Customer;
(l) protect the Product from casualty, damage,
theft and loss throughout the Lease Term; and
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(m) surrender and deliver the Product to Nikon or
NeoPath at the end of the Lease Term in good operating
condition and state of repair, subject to ordinary wear
and tear.
3.4 Risk of Loss
At the end of the applicable Lease Term, Nikon will
surrender and deliver any Product leased under this Article 3
as directed by NeoPath and in good operating condition and
state of repair, subject to ordinary wear and tear. Nikon
assumes and will bear all risk of casualty, damage, theft or
loss with respect to any such Product from delivery by NeoPath
under this Agreement until such Product is returned to NeoPath
or its designee after the end of the Lease Term. Nikon will
immediately notify NeoPath of any such casualty, damage, theft
or loss and bear the cost to repair or replace any such
Product. Nikon will secure and maintain, or cause the
Customer to secure and maintain, "all risk" or equivalent
insurance, in an amount not less than full replacement value,
covering any casualty, damage, theft or loss of any such
Product. All such insurance will name NeoPath as an
additional insured. Nikon will deliver to NeoPath such
certificates of insurance and other evidence of such insurance
(such as copies of the applicable insurance policies) as
NeoPath may reasonably request.
3.5 Title
NeoPath reserves ownership of any Product leased to Nikon
under this Article 3 and related proprietary rights. Nikon
will not remove, obscure or alter any label, decal, plate,
plaque, tag or other notice of NeoPath's ownership of the
Product or related proprietary rights. Nikon will keep the
Product free and clear of all security interests, mortgages,
deeds of trust, liens, encumbrances, and other claims arising
by or through Nikon. Nikon will take such additional action
(including, but not limited to, the execution, acknowledgment,
delivery, filing or recording of separate documents) as
NeoPath may reasonably request to effect, perfect or evidence
NeoPath's ownership of any Product leased to Nikon under this
Article 3, the lease of such Product under this Article 3 or
NeoPath's assignment or other transfer of its interests in
such Product or lease (e.g., for financing purposes), in each
case at NeoPath's expense.
Article 4. Delivery of Products
4.1 General
NeoPath will deliver Products in accordance with orders
submitted by Nikon and accepted by NeoPath pursuant to
Article 2 or 3 of this Agreement. All orders
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submitted by Nikon under this Agreement are subject to acceptance by
NeoPath in writing within thirty (30) days after receipt of
the applicable order. NeoPath may accept any order in whole
or in part. Except as otherwise provided in paragraphs 4.2.3
and 4.2.4, the Parties may not modify, rescind or cancel any
accepted order, in whole or in part, without mutual written
consent.
4.2 Delays in Delivery
4.2.1 NeoPath will promptly notify Nikon of any
delay in delivery, the anticipated duration of the delay and
any required change in the delivery date.
4.2.2 If NeoPath does not deliver a Product
subject to a Government Order on or prior to the delivery date
specified in the applicable order submitted by Nikon and
accepted by NeoPath under this Agreement, as such date may be
adjusted pursuant to paragraph 11.1, then NeoPath will
reimburse Nikon, promptly upon Nikon's request, for any
penalty for late delivery actually paid by Nikon to the
Customer as a requirement of the Government Order, provided
that the nature of the order as a Government Order and the
requirement and amount of the penalty for late delivery is
disclosed in the order submitted by Nikon to NeoPath for the
applicable Product.
4.2.3. If (i) NeoPath does not deliver a Product
prior to the expiration of thirty (30) days after the delivery
date specified in the applicable order submitted by Nikon and
accepted by NeoPath under this Agreement, as such date may be
adjusted pursuant to paragraph 11.1, and (ii) the Customer
cancels its order to Nikon for such Product as a result of
NeoPath's delay in delivery, then Nikon may (in addition to
any remedies under paragraph 4.2.2) cancel the order as to
such Product by giving NeoPath written notice of such
cancellation, provided that:
(a) the Customer's right to cancel its order to
Nikon on account of any such delay is disclosed in the
order submitted by Nikon to NeoPath for the applicable
Product; and
(b) Nikon gives NeoPath written notice of such
cancellation prior to Nikon's receipt of a copy of the
applicable airway bill, bill of lading or other evidence
of shipment of the applicable Product.
4.2.4 If NeoPath does not deliver a Product prior to
the expiration of sixty (60) days after the delivery date specified
in the applicable order submitted by Nikon and accepted by NeoPath
under this Agreement, as such date may be adjusted pursuant to
paragraph 11.1, then Nikon may (in
addition to any remedies under paragraph 4.2.2 or 4.2.3)
cancel the order as to such Product, in its discretion, by
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giving NeoPath written notice of such cancellation prior to
Nikon's receipt of a copy of the applicable airway bill, bill
of lading or other evidence of shipment of the applicable
Product.
4.3 Transportation Costs
Unless otherwise agreed by the Parties (e.g., in the
applicable order), NeoPath will deliver all Products under
this Agreement FOB carrier at Seattle-Tacoma International
Airport (SeaTac) or the Port of Seattle, whichever is
specified in the applicable order. Nikon will be responsible
for all transportation costs from the FOB point (including,
but not limited to, shipping charges, premiums for freight
insurance, inspection fees, customs, duties, import or export
fees, assessments, and all other costs incurred in
transporting the Products to the shipping destination). Nikon
will promptly reimburse NeoPath for any such costs paid by
NeoPath. Nikon will be responsible for any claims against the
carrier arising from or relating to shipment after delivery by
NeoPath the FOB point.
4.4 Transfers
Nikon will not, and will not permit any Customer to, ship
or otherwise transfer any Product to a location outside the
country to which the Product is shipped by NeoPath. If Nikon
or any Customer transfers any Product to a location other than
the location to which it is shipped by NeoPath, Nikon will
give NeoPath a minimum of five days advance written notice
thereof (including the date of the transfer, the address and
telephone number of the new location and the name, address and
telephone number of the individual under whose direction the
Product is used at such location).
Article 5. Services of Nikon
5.1 Description
The Parties will consult and cooperate in connection with
the development and implementation of periodic plans for the
promotion, marketing, distribution, maintenance, repair and
servicing of NeoPath Systems in the Territories during the
Term. Each Party will use its best efforts to carry out and
fulfill its responsibilities under such plans. Without
limitation of the foregoing, Nikon will perform the following
Services for the promotion, marketing and distribution of
Products for use in the Territories:
5.1.1 Nikon will secure and maintain any and all
registrations, permits, licenses, approvals, certificates and
other governmental actions required to import, promote,
market, distribute and use Products in any Territory under
applicable law.
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Unless otherwise directed by NeoPath, Nikon
will provide to NeoPath copies of all registrations, permits,
licenses, approvals, certificates, correspondence and other
documentation related to any such action. Further, unless
otherwise agreed by NeoPath or required by applicable law,
Nikon will use its best efforts to provide NeoPath with a copy
of any application or other documents to be filed by Nikon
with any governmental authority with respect to any Product at
least ten (10) days prior to filing by Nikon (e.g., so as to
give NeoPath a reasonable opportunity to review and comment
upon such documentation prior to filing). Unless otherwise
required by applicable law, Nikon may apply for, obtain and
hold any such registration, permit, license, approval,
certificate or other governmental action in Nikon's own name
during the Term. If and to the extent permitted by applicable
law, NeoPath may, at its option, apply for, obtain and hold,
in its own name, a parallel, back-up, contingent or duplicate
of any registration, permit, license, approval, certificate or
other governmental action obtained or held in Nikon's name.
Unless otherwise agreed by Nikon or required by applicable
law, NeoPath will use its best efforts to provide Nikon with a
copy of any application or other documents to be filed with
any governmental authority in the Territory with respect to
any Product at least ten (10) days prior to filing of NeoPath
(e.g., so as to give Nikon a reasonable opportunity to review
and comment upon such documentation prior to filing). Without
limitation of the foregoing, Nikon will have the primary
responsibility for completing any field tests and clinical
trials required for any registration, permit, license,
certification or other governmental action to be applied for,
obtained or held by Nikon or NeoPath in connection with the
importation, promotion, marketing, distribution or use of any
Product in any Territory.
5.1.2 During the testing or performance evaluation
of any Product or any addition, improvement or modification to
any Product, Nikon will use its best efforts to collect and
transmit to NeoPath in a timely manner such information and
data from any laboratories or others located in any Territory
that may be involved in such test and evaluation as NeoPath
may reasonably request.
5.1.3 Nikon will use its best efforts to actively
promote and market Products throughout the Territories.
Without limiting the generality of the foregoing:
(a) Nikon will conduct regular promotional,
advertising and other marketing efforts in each Territory
for the Products;
(b) Nikon will participate in and promote Products
at local and regional trade shows, conventions and other
like events in each Territory; and
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(c) Nikon will respond promptly to leads or
referrals furnished by NeoPath.
5.1.4 Nikon will assist NeoPath in the translation
of any promotional literature, marketing materials, manuals
and other Product documentation into the language(s) used in
any Territory. Unless otherwise agreed by the Parties,
NeoPath will own the copyright and any other intellectual
property rights in any such translation. Nikon will make
available to potential Customers promotional literature, data,
information and other items furnished or approved by NeoPath
to assist Nikon's promotion, marketing and sale of Products.
In addition, Nikon will develop its own promotional and
marketing materials for the Products based upon data and
information obtained through Nikon's promotional and marketing
activities in the Territories. Nikon will furnish copies of
such promotional and marketing materials, together with the
data and information upon which they are based, upon NeoPath's
request and will not distribute any such materials, data or
information to any Customer, potential Customer or other Third
Party unless and until approved by NeoPath, which approval
will not be unreasonably withheld or delayed. NeoPath will
approve or otherwise respond to any promotional or marketing
materials submitted by Nikon for approval under this paragraph
within seven (7) days after receipt by NeoPath. Nikon will
not use or distribute any other promotional or marketing
materials for the Products without the prior written approval
of NeoPath.
5.1.5 Nikon will maintain a staff of competent
sales personnel. Nikon will ensure that such personnel are
thoroughly familiar with the specifications, functions and
features of the Products. Nikon will require such staff to
study the Product materials furnished by NeoPath to Nikon and
to participate in Product training programs offered by Nikon,
NeoPath or others.
5.1.6 Nikon will keep and maintain complete and
accurate records of each sale or other distribution of any
Product sold or distributed by Nikon (e.g., showing the date
of sale, name and address of the Customer and the Product
serial number). Nikon will provide NeoPath with such
summaries, reports and copies of such records as NeoPath may
reasonably request.
5.1.7 Nikon will cooperate and coordinate with
NeoPath and Customers with regard to the training of Customers
and potential Customers in the use and operation of Products
in any Territory. Without limitation of the foregoing, Nikon
will provide appropriate training for all Customers in any
Territory.
5.1.8 Nikon will cooperate and coordinate with
NeoPath and Customers in connection with the maintenance,
repair and servicing of Products in the Territory.
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Without limitation of the foregoing, Nikon will provide for the
effective and efficient maintenance, repair and servicing of
Products (both in and out of warranty) in the Territories
throughout the Term and the fulfillment and satisfaction of
all warranties made by Nikon to Customers with respect to any
Product distributed by Nikon under this Agreement.
5.1.9 Nikon will investigate and report to NeoPath
all complaints received by Nikon with regard to any Product
(including, but not limited to, warranty claims). Nikon will
give immediate attention to and will use its best efforts to
promptly, courteously and equitably respond to, adjust and
settle all complaints received by Nikon from any Customer,
potential Customer or anyone else arising out of or in
connection with Nikon's distribution of any Product or the
performance of any Services. Nikon will promptly notify
NeoPath of all such complaints and any action taken (or to be
taken) in connection therewith. In handling any complaints,
Nikon will use its best efforts to maintain and promote good
public relations for NeoPath.
5.1.10 Nikon will use its best efforts to promptly
notify NeoPath of any inquiry (e.g., other than a purchase
order or potential purchase order) received by Nikon from the
public, any governmental authority, any trade association or
any news media, publication or reporter concerning any Product
or NeoPath and of Nikon's response to any such inquiry.
5.1.11 Nikon will cooperate and assist NeoPath in
executing any recall of any Product in any Territory and will
initiate and keep all records requested by NeoPath with
respect to any recall.
5.1.12 Nikon will conduct its business and
activities in such a manner so as to promote a good image and
public relations for the Products and NeoPath. Without
limiting the generality of the foregoing, Nikon will not:
(a) engage in any unfair or deceptive trade
practice involving any Product; or
(b) make any false, misleading or disparaging
representations or statements with regard to any Product
or NeoPath.
5.2 Reports
Promptly after the commencement of each Quarter, Nikon
will provide NeoPath with a report which summarizes the
Services performed by Nikon under section 5.1 during the
previous Quarter, the Services performed or planned by Nikon
under section 4.1 for the current and subsequent Quarters and
a forecast of orders
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under Articles 2 and 3 for Products to be
delivered in each of the next twelve (12) months. Such
forecast of orders for the Products for the current and
subsequent Quarters will be deemed to be confirmed firm orders
by Nikon. The forecast for the third and fourth Quarters as
specified in the report will be deemed to be estimated numbers
and will not be deemed to be firm orders. The reports will be
in such form and detail as specified by NeoPath. Nikon will
promptly furnish NeoPath such additional information regarding
the Services and the distribution of Products under this
Agreement as NeoPath may reasonably request.
5.3 Qualified Personnel
Nikon will ensure that all persons performing Services
are properly qualified and experienced to perform the same.
Article 6. Services and Support by NeoPath
6.1 Dedication of Support Team
Within ninety (90) days after the execution of this
Agreement, NeoPath will dedicate a team of employees at its
facilities in King County, Washington, U.S.A., to provide
technical, engineering and clinical support to Nikon for the
Territory. Throughout the Term, NeoPath's dedicated support
team will provide to Nikon consultation, technical assistance
and other support for Products distributed by Nikon under this
Agreement. Without limitation of the foregoing, NeoPath will:
(a) maintain a telephone number for Nikon to call
for support services;
(b) provide remote support services between 8:00
a.m. and 5:00 p.m. Pacific Time U.S.A., Monday through
Friday, excluding holidays, with pager back-up during
other hours; and
(c) provide emergency support services on an "as
needed" basis in any Territory, provided that Nikon pays
or reimburses any expenses incurred to provide such
services (including, without limitation, travel, lodging
and meal expenses).
6.2 Technical Training
During the Term, NeoPath will make available to Nikon
such training with respect to the maintenance, repair and
support of Products as it makes generally available to its
international distributors. Such training will be made
available at
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NeoPath's facilities in Redmond, Washington,
U.S.A. or another location designated by NeoPath. Nikon will
bear any expense incurred for its employees or other
representatives to participate in such training (including,
but not limited to, travel, lodging and meal expenses).
6.3 Sales Training
During the Term, NeoPath will make available to Nikon
such training with regard to the use, promotion, sales and
marketing of Products as it generally makes available to its
international distributors. Such training will be made
available at NeoPath's facilities in Redmond, Washington,
U.S.A., or another location designated by NeoPath. Nikon will
bear any expense incurred for its employees or other
representatives to participate in such training (including,
without limitation, travel, lodging and meal expenses).
6.4 Direct Customer Software Support
Upon Nikon's request, NeoPath will provide remote
Software support directly to Customers in the Territory;
provided that the Customer provides a telecommunication line
for remote access by NeoPath. Such support will include:
(a) diagnosis, troubleshooting and consultation
regarding any failure of the Software to operate
substantially in accordance with NeoPath's published
specifications;
(b) correction of bugs, errors and defects in the
Software;
(c) making updates and upgrades available to the
Customers; and
(d) such other support as may be specified in any
applicable Schedule.
NeoPath will promptly notify Nikon of any remote access by
NeoPath showing the date of such access, the name and address
of the Customer, and NeoPath's action taken in connection
therewith. Nikon will require each Customer to provide a
telecommunication line for remote access by Nikon and NeoPath
for the provision of Software support and monitoring of the
applicable NeoPath System.
6.5 Product Improvements, Etc.
NeoPath will promptly disclose to Nikon any improvements,
enhancements or other changes to any Products offered by
NeoPath during the Term to its other customers and
distributors. NeoPath will provide such technical and other
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information relating to any such improvement, enhancement or
change as Nikon may reasonably request for its review and
evaluation of the improvement, enhancement or change. Upon
Nikon's request, NeoPath will negotiate in good faith for the
addition of such improvement, enhancement or change to the
Products subject to this Agreement (including any modification
to the pricing schedules applicable to such Products). This
paragraph will not be interpreted or construed to require
NeoPath to disclose or make available to Nikon any
improvement, enhancement, change or information, if and to the
extent the same would violate any duty or obligation owing by
NeoPath to any Third Party (e.g., with respect to any custom
improvement, enhancement or change made by NeoPath for a
specific customer or distributor). Further, this paragraph
will not be interpreted or construed to require NeoPath to
disclose or make available to Nikon any improvement,
enhancement or change which does not apply to the use of
NeoPath Systems for the review, analysis or categorization of
cervical Pap smear slides.
6.6 Marketing and Service Materials
NeoPath will, at Nikon's request from time to time, make
available to Nikon, [*], reasonable quantities of
such promotional literature for the marketing of Products
(including pamphlets, leaflets, catalogues, brochures, and the
like) as NeoPath may from time to time make available to its
other distributors in the United States or other territories
or use in its own direct marketing of the Products from time
to time. NeoPath shall also provide Nikon, [*],
with such service manuals, parts lists and other service-
related information as NeoPath may from time to time provide
to its other distributors in the United States or other
territories or use in its own direct maintenance of the
Products from time to time.
Article 7. Pricing and Payment
7.1 Products Purchased by Nikon
Unless otherwise agreed upon by the Parties (e.g., in the
applicable order), the purchase price payable by Nikon to
NeoPath for any Product purchased by Nikon pursuant to
Article 2 will be determined in accordance with the attached
Schedule No. 2, as the same may be modified pursuant to
paragraph 6.5 or 7.7.
7.2 Products Leased by Nikon
Unless otherwise agreed upon by the Parties (e.g., in the
applicable order), the lease payments and other compensation
payable by Nikon to NeoPath for any Product leased by Nikon
pursuant to Article 3 will be determined in accordance with the
[*] Confidential treatment requested
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attached Schedule No. 3, as the same may be modified
pursuant to paragraph 6.5 or 7.7.
7.3 Services and Support by NeoPath
Unless otherwise agreed upon by the Parties, the fees,
charges and other compensation payable by Nikon to NeoPath for
any services or support provided by NeoPath pursuant to
Article 6 will be determined in accordance with the attached
Schedule No. 4, as the same may be modified pursuant to
paragraph 6.5 or 7.7.
7.4 Payment
NeoPath will issue invoices for all amounts payable under
this Agreement upon or subsequent to shipment of the Products
subject to the applicable invoice. Nikon will pay each of
NeoPath's invoice within forty-five (45) days after receipt of
the invoice and a copy of any applicable airway bill, bill of
lading or other evidence of shipment. NeoPath may accept any
check or payment in any amount less than the full amount
invoiced without prejudice to NeoPath's right to recover the
balance of any amount properly due and payable or to pursue
any other right or remedy. No endorsement or statement on any
check or payment or in any letter accompanying any check or
payment or elsewhere will be construed as an accord or
satisfaction. Unless otherwise specified, all prices, fees,
charges and other amounts specified in this Agreement or any
Schedule are denominated in United States dollars. Nikon will
pay all prices, fees, charges and other amounts payable to
NeoPath under this Agreement in currency of the United States,
at NeoPath's principal place of business in King County,
Washington, U.S.A., or such other location as may be
designated by NeoPath, without withholding, deduction, offset
or setoff.
7.5 Late Payment
Any amount not paid by Nikon when due under this
Agreement will be subject to a finance charge equal to 1.5%
per month or the highest rate allowable by applicable usury
law, whichever is less, determined and compounded daily from
the date due until the date paid. Further, Nikon will
reimburse any costs or expenses (including, but not limited
to, reasonable attorneys' fees) paid by NeoPath to collect any
amount which is not paid when due.
7.6 Taxes
The prices, fees, charges and other amounts specified in
this Agreement or any Schedule do not include any sales, use
or similar taxes. [*] all
taxes or other amounts payable to governmental authorities in
[*] Confidential treatment requested
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connection with the applicable transactions [*]
with an exemption certificate [*].
7.7 Modifications for Increased Supplier Costs
In the event of any increase in NeoPath's costs to
acquire any components, parts or materials from any Third
Party for incorporation into any Product, then NeoPath may
modify the price or other compensation for any Product,
services or support set forth in any of the Schedules referred
to in paragraph 7.1, 7.2 or 7.3 to reflect such increase as of
the commencement of any Year by giving Nikon written notice of
the modification; provided, however, that:
(a) no modification under this paragraph will be
effective prior to the later of January 1, 1998 or the
expiration of ninety (90) days after NeoPath gives Nikon
written notice of the modification; and
(b) no modification under this paragraph will apply
to any Products, services or other items subject to an
order submitted by Nikon and accepted by NeoPath prior to
the effective date of the modification.
7.8 Additional Price Modifications
In addition to the modifications described in
paragraph 7.7, NeoPath may modify the price, or other
compensation for any Product, services or support set forth in
any of the Schedules referred to in paragraph 7.1, 7.2 or 7.3
as of the commencement of any Year by giving Nikon written
notice of the modification at least ninety (90) days prior to
the commencement of such Year; provided, however, that:
(a) no modification under this paragraph prior to
the fifth (5th) anniversary of the date of this Agreement
will increase the price of any Product, service or other
item by a percentage more than [*] the percentage
increase in the CPI; and
(b) no modification under this paragraph will apply
to any Products, services or other items subject to an
order submitted by Nikon and accepted by NeoPath prior to
the effective date of this modification.
[*] Confidential treatment requested
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Article 8. Product Warranty, Liability and Indemnity
8.1 Limited Warranty and Remedy
8.1.1 Subject to the limitations set forth in
paragraph 8.1.2, NeoPath warrants that, during the Warranty
Period, each Product will:
(a) be free from material defects in materials and
workmanship;
(b) comply in all material respects with applicable
specifications, instructions, manuals and other
documentation provided by NeoPath; and
(c) operate in all material respects in accordance
with applicable specifications, instructions, manuals and
other documentation provided by NeoPath.
8.1.2 The warranty set forth in paragraph 8.1.1
will not apply to any Product that:
(a) has not been operated, maintained and repaired
in accordance with applicable specifications,
instructions, manuals and other documentation provided by
NeoPath;
(b) has been maintained or repaired by unauthorized
personnel; or
(c) has been modified, altered, misused, abused,
damaged or subjected to operation for which it was not
intended.
Further, the warranty does not apply to expendable items such
as lamps or external tubing.
8.1.3 NeoPath will use commercially reasonable
efforts to correct any failure of any Product to comply with
the warranty set forth in paragraph 8.1.1 (e.g., by
modification or repair of the noncomplying Product); provided
that Nikon gives NeoPath written notice of the noncompliance
prior to the end of the applicable Warranty Period. If Nikon
gives NeoPath notice of any such noncompliance in accordance
with the foregoing and NeoPath fails, notwithstanding its
reasonable efforts, to fully correct the noncompliance within
a reasonable period of time after receipt of such notice, then
Nikon may return the Product and elect to either (i) receive a
full refund of any amount paid by Nikon for the Product or
(ii) require NeoPath to promptly deliver a replacement
Product, in either case without cost to Nikon.
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8.2 Product Liability Indemnification
8.2.1 NeoPath will defend and indemnify Nikon from
and against any claim of any Third Party (including, without
limitation, any Customer) arising out of bodily injury
(including death) or property damage to the extent caused by
any defect in the design or manufacture of any Product
(including, without limitation, any such claim resulting from
an incorrect diagnosis - e.g., an incorrect false negative
diagnosis - generated by a NeoPath System when utilized in
accordance with the applicable specifications, instructions,
manuals and other documentation provided by NeoPath), provided
that Nikon: gives NeoPath written notice of the claim with
sufficient promptness to avoid any adverse effect on NeoPath's
ability to defend the claim; allows NeoPath to assume control
of the defense and settlement of the claim; reasonably assists
and cooperates with NeoPath in connection with the defense and
settlement of the claim at NeoPath's expense; and does not
settle the claim without NeoPath's prior written consent.
This paragraph will not apply to any claim arising out of:
(a) the negligence of Nikon or any Third Party
(including, without limitation, any Customer);
(b) any failure to operate or otherwise use the
applicable Product in accordance with the applicable
specifications, instructions, manuals and other
documentation provided by NeoPath; or
(c) any representation or warranty made by Nikon or
any employee, agent or other representative (e.g., any
sales representative, service representative, dealer or
distributor) of Nikon with respect to any Product, which
representation or warranty is not within the scope of
NeoPath's warranties set forth in paragraph 8.1.1 or
otherwise specifically set forth in any applicable
documentation, promotional literature and other materials
published by NeoPath or incorporated from such materials.
NeoPath will maintain appropriate insurance covering its
obligations under this paragraph, so long as such insurance is
available on commercially reasonable terms.
8.2.2 Notwithstanding paragraph 8.2.1, the Parties
acknowledge that it is customary in Japan to respond promptly
to claims arising out of bodily injury and that a reasonable
settlement is generally desirable in order to avoid lengthy
litigation and adverse publicity. Accordingly, in the event
of any claim against NeoPath and/or Nikon arising out of any
bodily injury in Japan resulting from any defect or failure in
any NeoPath System, then Nikon may, after notice to NeoPath
and unless otherwise directed by NeoPath, make initial
contacts with the claimant and/or the claimant's
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representatives and offer and make a reasonable settlement of
the claim, provided that, unless otherwise approved by NeoPath
in writing:
(a) the settlement does not admit any defect
(operational, design or otherwise) or failure in the
NeoPath System;
(b) the cost to NeoPath of the settlement does not
exceed the lesser of [*]
or [*] of the total cost of the
settlement;
(c) the aggregate costs to NeoPath of all such
settlements during any period of four (4) consecutive
Quarters do not exceed [*]; and
(d) such settlements will be subject to such
additional procedures, terms and conditions as NeoPath
may specify in order to comply with its applicable
insurance policies.
8.3 Infringement Indemnification
8.3.1 NeoPath will defend and indemnify Nikon
against any claim of any Third Party (including, without
limitation, any Customer) arising out of any infringement by
the Product of any patent, copyright, trademark, trade secret
or other intellectual property right arising under the laws of
the United States, Japan or any other country in which NeoPath
has been granted a patent on the Product, provided that Nikon:
gives NeoPath written notice of the claim with sufficient
promptness to avoid any adverse effect on NeoPath's ability to
defend the claim; allows NeoPath to assume control of the
defense and settlement of the claim; reasonably assists and
cooperates with NeoPath in connection with the defense and
settlement of the claim at NeoPath's expense; complies with
any court order or settlement made in connection with the
claim (e.g., as to future use of any infringing Product); and
does not settle the claim without NeoPath's prior written
consent.
8.3.2 If it is finally determined that any
Product infringes any such patent, copyright, trademark, trade
secret or other intellectual property right of any Third Party
or if an injunction is issued that prohibits the ongoing use
of a Product, in whole or in part, then NeoPath will use
commercially reasonable efforts to either:
(a) obtain a license or other right for the
Customer to continue to use the infringing Product;
[*] Confidential treatment requested
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(b) modify the infringing Product so that it no
longer infringes, without a reduction in functionality;
or
(c) replace the infringing Product with a non-
infringing Product, without a reduction in functionality.
For purposes of the foregoing, the existence of any reduction
in functionality will be determined by the Parties based upon
the functionality of the Product as set forth in the
applicable specifications, instructions, manuals and other
documentation provided by NeoPath.
8.3.3 If NeoPath is unable to accomplish the
action described in paragraph 8.3.2(a), (b) or (c) above
within a reasonable period of time under the circumstances, as
agreed upon by the Parties, but in no event exceeding three
(3) months, then, Nikon may elect to return the Product to
NeoPath in which case NeoPath will pay or reimburse Nikon for
the transportation costs reasonably incurred by Nikon to
return the Product to NeoPath, and:
(a) in the case of a Product purchased by Nikon
under Article 2, refund to Nikon the unamortized portion
of the purchase price (determined as described below)
paid by Nikon for the applicable Product; or
(b) in the case of a Product leased by Nikon under
Article 3, terminate the applicable lease and refund or
release Nikon and the Customer from any lease payments
for any portion of the applicable Lease Term after the
date of such termination.
For purposes of determining the unamortized portion of the
purchase price of any Product under (a) above, the purchase
price will be amortized on a levelized, daily basis over a
period of five (5) years commencing with the date upon which
the Product is delivered by NeoPath to Nikon or the Customer
under this Agreement.
8.3.4 Paragraphs 8.3.1, 8.3.2 and 8.3.3 will not
apply to any claim relating to:
(a) any use of Products in combination with any
equipment, software or other items not furnished by
NeoPath, where use of the Products alone would have
avoided the claim; or
(b) any use not in accordance with the applicable
specifications, instructions, manuals and other
documentation provided by NeoPath, where
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use of the Products in accordance with such specifications,
instructions, manuals and other documentation would have
avoided the claim.
8.4 Disclaimer and Release
THE WARRANTIES, OBLIGATIONS, AND LIABILITIES OF NEOPATH
TO NIKON AND THE REMEDIES OF NIKON SET FORTH IN THIS AGREEMENT
ARE EXCLUSIVE AND IN SUBSTITUTION FOR, AND NIKON HEREBY
WAIVES, RELEASES, AND DISCLAIMS, ALL OTHER WARRANTIES,
OBLIGATIONS, AND LIABILITIES OF NEOPATH TO NIKON AND ALL OTHER
RIGHTS, CLAIMS, AND REMEDIES OF NIKON AGAINST NEOPATH, EXPRESS
OR IMPLIED, ARISING BY LAW OR OTHERWISE, WITH RESPECT TO THE
PRODUCTS AND ANY OTHER GOODS OR SERVICES DELIVERED UNDER THIS
AGREEMENT, INCLUDING, BUT NOT LIMITED TO: (A) ANY IMPLIED
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE; (B) ANY IMPLIED WARRANTY ARISING FROM COURSE OF
PERFORMANCE, COURSE OF DEALING, OR USAGE OF TRADE; (C) ANY
OBLIGATION, LIABILITY, RIGHT, CLAIM, OR REMEDY IN TORT,
WHETHER OR NOT ARISING FROM THE NEGLIGENCE (ACTIVE, PASSIVE,
OR IMPUTED), PRODUCT LIABILITY, OR STRICT LIABILITY OF
NEOPATH; AND (D) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM, OR
REMEDY FOR INFRINGEMENT.
Article 9. Protection of Proprietary Rights
9.1 Reservation
Nikon acknowledges that the Products and NeoPath
Technology involve valuable patent, copyright, trademark,
trade secret and other proprietary rights of NeoPath. NeoPath
reserves all such rights. No title to or ownership of any
proprietary rights related to any Product is transferred to
Nikon or any Customer pursuant to this Agreement or any
transaction contemplated by this Agreement. Nikon will not
infringe, violate or challenge all such rights.
9.2 Software
Without limitation of paragraph 9.1, NeoPath reserves
ownership of all patent, copyright, trade secret and other
proprietary rights in any Software that is included in or
distributed with any Product. NeoPath will provide to Nikon a
license for the Customer's use of the Software with each
Product requiring such Software, whether acquired by Nikon
pursuant to Article 2 or 3, in accordance with the instructions,
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manuals and other documentation provided by
NeoPath. Nikon will not use, or grant any authorization for
any Customer or other Third Party to use, any Software for any
other purpose. Without limitation of the foregoing, Nikon
will not, and will not grant any authorization for any
Customer or other Third Party to, do any of the following:
(a) copy, modify, make any derivative work based
upon, publish or distribute any Software; or
(b) reverse engineer, decompile or attempt to
discover or recreate any source code to any Software.
9.3 Securing Rights in the Territories
During the Term, Nikon will reasonably assist and
cooperate with NeoPath in securing and maintaining any and all
patent, copyright, trademark, trade secret and other
proprietary rights in any Territory relating to any Product or
NeoPath Technology. Any such rights will be secured and
maintained solely in the name of NeoPath at NeoPath's expense,
and NeoPath will reimburse Nikon for any such expense that may
be paid by Nikon. Nikon will provide to NeoPath copies of all
registrations, certificates, correspondence and other
documentation related to any such rights.
9.4 Product Markings
Nikon will not alter, remove, deface or obscure any notice
of patent, copyright, trademark, trade secret, or other
proprietary right on any Product and will not add to any Product
any other trademark or notice of any other proprietary right
without NeoPath's prior written consent.
9.5 Trademarks, Etc.
This Agreement does not grant Nikon any license or other
right to use any trademark, service mark, trade name or trade
dress of NeoPath. Without limiting the generality of the
foregoing, Nikon will not use the name "NeoPath" or "AutoPap"
or any confusingly similar name in any publicity, advertising,
telephone listing, sign, business card, letterhead or in any
other published manner whatsoever without the prior written
approval of NeoPath.
9.6 Third Party Infringement
Nikon will promptly notify NeoPath of any infringement,
misappropriation or violation of any patent, copyright,
trademark, trade secret or other proprietary right of
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NeoPath that comes to Nikon's attention. In the event of any such
infringement, misappropriation or violation relating to the
activities of Nikon or any of its employees, agents,
representatives, distributors, dealers, sales representatives
or Customers, Nikon will take all steps reasonably necessary
to terminate such infringement, misappropriation or violation.
NeoPath will have exclusive control over the prosecution and
settlement of any legal proceeding to enforce or recover
damages on account of any infringement, misappropriation or
violation of any of NeoPath's proprietary rights, and Nikon
will:
(a) provide such assistance related to such
proceeding as NeoPath may reasonably request; and
(b) assist NeoPath in enforcing any settlement or
order made in connection with such proceeding,
in each case at NeoPath's expense.
9.7 Third-Party Claims Against the Products
If during the Term either Party becomes aware of any
claim by any Third Party that any Product infringes,
misappropriates or violates any patent, copyright, trade
secret or other proprietary right of any Third Party or any
claim of unfair competition in any Territory or in the United
States involving any Product, then such Party will notify, and
continue to keep informed, the other of the same.
9.8 Nikon Improvements
Nikon will promptly and fully disclose any Nikon
Improvement to NeoPath. If and to the extent that NeoPath
does not own (by contract or pursuant to applicable law) all
right, title and interest in any Nikon Improvement and unless
otherwise agreed upon by the Parties in writing (e.g., in a
separate written agreement between the Parties relating to the
development of the applicable Nikon Improvement), Nikon hereby
grants to NeoPath a nonexclusive, unrestricted, worldwide,
royalty-free right and license (including the right to
sublicense with respect to Nikon Improvements described in
clause (a) of the definition but not with respect to Nikon
Improvements described in clause (b) of the definition) to
make, have made, use, sell, distribute, reproduce, copy,
modify, make derivatives based upon and otherwise commercially
exploit the same in medical products and applications
(including, without limitation, Products). However, if
NeoPath implements any Nikon Improvement in any medical
product or application other than a Product under this
Agreement, then NeoPath will give Nikon a right-of-first
refusal to acquire the rights to distribute such product or
application in any Territory during the Term.
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9.9 Protection of Confidential Information
The Recipient will protect Confidential Information of
the Discloser against any unauthorized use or disclosure to
the same extent that the Recipient protects its own
Confidential Information of a similar nature against
unauthorized use or disclosure; provided that the Confidential
Information of the Discloser is conspicuously marked or
otherwise identified as confidential or proprietary upon
receipt by the Recipient or the Recipient otherwise knows or
has reason to know that the same is Confidential Information
of the Discloser. Each Party reserves ownership of its own
Confidential Information. The Recipient will use any
Confidential Information of the Discloser solely for the
purposes for which it is provided by the Discloser. This
paragraph will not be interpreted or construed to prohibit:
(a) any use or disclosure which is necessary or
appropriate in connection with the Recipient's
performance of its obligations or exercise of its rights
under this Agreement or any other agreement between the
Parties;
(b) any use or disclosure required by applicable
law (e.g., pursuant to applicable securities laws or
legal process), provided that the Recipient uses
reasonable efforts to give the Discloser reasonable
advance notice thereof (e.g., so as to afford the
Discloser an opportunity to intervene and seek an order
or other appropriate relief for the protection of its
Confidential Information from any unauthorized use or
disclosure); or
(c) any use or disclosure made with the consent of
the Discloser.
Without limitation of the foregoing, unless otherwise agreed
by the Parties, Nikon will not use any Confidential
Information of NeoPath to develop, correct, modify, enhance,
improve, maintain, repair or support any product other than a
Product, whether or not such other product competes with the
Product.
Article 10. Additional Responsibilities of Nikon
10.1 Territorial Restriction
Nikon will not promote, market or distribute Products
outside the Territory. Nikon will not ship, deliver or export
any Product to a location outside the Territory without the
prior written consent of NeoPath.
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10.2 Taxes, Withholding, Etc. in Japan or Any Other
Territory
The prices, fees and other compensation specified in any
Price List, Schedule or other provision of this Agreement are
net of any taxes, withholding or other amounts required to be
paid to any governmental authority in any Territory with
respect to any of the transactions or payments contemplated by
this Agreement. Nikon will pay any such taxes, withholding or
other amounts required to be paid to any governmental
authority in any Territory (i.e., in addition to any prices,
fees, compensation or other amounts payable to NeoPath under
this Agreement). Nikon will not, however, be responsible for
any taxes based upon NeoPath's net income, whether inside or
outside any Territory.
10.3 Noncompete
During the Term and for a period of one year thereafter,
Nikon will not, directly or indirectly, promote, market, sell
or distribute any Competing Product in any Territory. This
paragraph 10.3 will not be interpreted to prohibit Nikon from
engaging in research and development activities in any field.
10.4 Authorized Use of NeoPath Systems and NeoPath
Technology
Nikon will not use, or grant any authorization to use,
any NeoPath System or NeoPath Technology under this Agreement
for any purpose other than the review, analysis or
categorization of cervical Pap smear slides originating in the
Territory. Without limitation of the foregoing, Nikon will
not use, or grant any authorization to use, any NeoPath System
to process any slide originating or created outside the
Territory or any slide other than a cervical Pap smear slide.
Nikon will not attempt to reverse engineer any Product.
10.5 Indemnification
Except as otherwise provided for in Article 8, Nikon will
defend and indemnify NeoPath against any claim of any Third
Party (including, without limitation, any Customer) arising
out of:
(a) any representation or warranty made by Nikon or
any employee, agent or other representative (e.g., any
sales representative, service representative, dealer or
distributor) of Nikon with respect to any Product, which
representation or warranty is not within the scope of
NeoPath's warranties set forth in paragraph 8.1.1 or
otherwise specifically set forth in any applicable
documentation, promotional literature and other materials
published by NeoPath or incorporated from such materials;
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(b) any breach of or default by Nikon under any
agreement between Nikon and any Customer (including,
without limitation, any User Agreement);
(c) any use or application of any Product for any
purpose that is authorized by Nikon and not specifically
set forth in the documentation, promotional literature
and other materials published or approved in writing by
NeoPath; or
(d) any modification or alteration of any Product
made or authorized by Nikon, which modification or
alteration is not specifically approved or otherwise
authorized by NeoPath in writing,
provided that NeoPath: gives Nikon written notice of the
claim with sufficient promptness to avoid any adverse effect
on Nikon's ability to defend the claim; reasonably assists and
cooperates with Nikon in connection with the defense and
settlement of the claim at Nikon's expense; and does not
settle the claim without Nikon's prior written consent.
10.6 No Unauthorized Representations or Warranties
Nikon will not make or authorize any written or oral
representation or warranty in respect of any of the Products
except as may be contained in documentation, promotional
literature or other materials published or approved in writing by
NeoPath. Nikon will not recommend, perform or demonstrate any
use or application of any Product that is not specified in the
applicable instructions, manuals or other documentation or
otherwise specifically approved in writing by NeoPath.
10.7 Compliance with Laws
In performing this Agreement Nikon will comply with all
applicable laws, regulations, rules, orders and other
requirements, now or hereafter in effect, of governmental
authorities having jurisdiction. Nikon represents and warrants
that it is thoroughly familiar with applicable laws, regulations,
rules, orders and other governmental requirements concerning the
importation, marketing, sale, use and distribution of Products in
the Territory. Nikon will not, directly or indirectly, export or
reexport from the Territory any Products, technical data
associated with the Products, or the immediate products
(including, but not limited to, processes, services, data and
reports) derived from the use of any Product, without first
obtaining the appropriate license from the United States Office
of Export Licensing or its successor.
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10.8 No Government Representation
Nikon represents and covenants that throughout the Term,
neither it nor any of its stockholders (excluding, in the
event that Nikon's stock is listed on a national securities
exchange, stockholders of less than one percent (1%) of any
class of Nikon's capital stock), consultants, partners,
directors, officers, employees, agents or Nikons are or will
be a consultant, employee, agent or other representative of
any governmental authority responsible for procurement of any
Products.
10.9 No Conflict of Interest
Nikon represents that it does not have, and agrees that
it will not enter into, any agreement, obligation, duty or
commitment with any Third Party that conflicts with any
provision of this Agreement or any of Nikon's obligations,
duties, or commitments under this Agreement.
Article 11. Limitations of Liability
11.1 Force Majeure
Neither Party will be liable for, or be considered to be
in breach of or default under this Agreement on account of,
any delay or failure to perform as required by this Agreement
as a result of any cause or condition beyond such Party's
reasonable control (including, but not limited to: fire,
explosion, earthquake, storm, flood, wind, drought and act of
God or the elements; court order; act, delay or failure to act
by civil, military or other governmental authority; strike,
lockout, labor dispute, riot, insurrection, sabotage and war;
unavailability of required parts, materials or other items;
and act, delay or failure to act by the other Party or any
Third Party); provided that such Party uses its best efforts
to promptly overcome or mitigate the delay or failure to
perform. Any Party whose performance is delayed or prevented
by any cause or condition within the purview of this paragraph
will promptly notify the other Party thereof, the anticipated
duration of the delay or prevention, and the steps being taken
to overcome or mitigate the delay or failure to perform. In
the event of any such delay, the applicable delivery dates,
schedules or other times for performance affected by the delay
will be equitably adjusted to accommodate the delay. This
paragraph will not apply to excuse any payment obligation of
either Party for more than forty-five (45) days.
11.2 Limitation of Consequential Damages
NEITHER PARTY WILL BE LIABLE TO THE OTHER PARTY FOR ANY
INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES
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(INCLUDING, BUT NOT NECESSARILY LIMITED TO, LOSS OF PROFIT,
REVENUE OR USE) RESULTING FROM ANY PERFORMANCE,
NONPERFORMANCE, BREACH OR DEFAULT UNDER THIS AGREEMENT.
However, the limitations set forth in this paragraph will not
apply to limit:
(a) either Party's liability for damages with
respect to any breach of such Party's obligations under
paragraphs 9.2, 9.4, 9.5, 9.9, 10.4 (last sentence only)
or 10.8; or
(b) either Party's liability for consequential
damages (including, but not necessarily limited to, loss
of profit, revenue or use) with respect to any breach of
such Party's obligations under paragraphs 9.8, 10.1, 10.3
or 10.4 (other than the last sentence).
11.3 Additional Limitations of NeoPath's Liability
NEOPATH'S LIABILITY TO NIKON (WHETHER IN CONTRACT, TORT,
OR OTHERWISE, AND NOTWITHSTANDING ANY FAULT, NEGLIGENCE,
STRICT LIABILITY, OR PRODUCT LIABILITY OF NEOPATH) WITH REGARD
TO ANY PRODUCT OR OTHER GOODS OR SERVICES FURNISHED UNDER THIS
AGREEMENT WILL NOT EXCEED THE AMOUNTS PAID OR PAYABLE BY NIKON
TO NEOPATH FOR THE SAME. However, the limitations set forth
in this paragraph will not apply to NeoPath's obligations
under sections 8.2 and 8.3.
Article 12. Term and Termination
12.1 Term
The Term will commence as of the date of this Agreement
and continue unless and until terminated pursuant to paragraph
12.2, 12.3, 12.5 or 12.6.
12.2 Termination After Five Years
Either Party may terminate the Term effective as of any
anniversary of the date of this Agreement by giving the other
Party written notice of termination, provided that:
(a) no termination under this paragraph will be
effective prior to the fifth (5th) anniversary of the
date of this Agreement; and
(b) such notice must be given at least ninety (90)
days prior to the anniversary date upon which the
termination is to become effective.
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12.3 Termination for Failure to Meet [*] of Quota for
Japan
If the number of NeoPath Systems distributed in Japan by
Nikon under this Agreement during any Year after 1996 does not
equal or exceed [*] of the Quota for Japan for
such Year, then NeoPath may terminate the Term by giving Nikon
written notice of such termination within ninety (90) days
after the end of the Year in which such distributions did not
equal or exceed [*] of the applicable Quota.
Any termination pursuant to this paragraph will be effective
upon the expiration of ninety (90) days after Nikon's receipt
of NeoPath's notice of such termination.
12.4 Partial Termination for Failure to Meet [*] of
Quota for any Other Territory
If the number of NeoPath Systems distributed in any
Territory other than Japan during any Year after 1996 by Nikon
under this Agreement does not equal or exceed [*]
of the Quota for such Territory and Year, then NeoPath
may delete such Territory from this Agreement by giving Nikon
written notice of the deletion within ninety (90) days after
the end of the Year in which such distributions did not equal
or exceed [*] of the applicable Quota. Unless
otherwise agreed by the Parties, any such deletion will be
effective ninety (90) days after Nikon's receipt of NeoPath's
notice of the deletion. NeoPath will not have any liability
(e.g., for any claim of damages, for any loss of revenue,
profit or compensation, or for any costs, expenses,
expenditures, investments or other commitments made in
reliance upon or otherwise in connection with this Agreement)
on account of the deletion of any Territory in accordance with
this paragraph.
12.5 Termination for Material Breach or Default
If either Party commits a material breach of or default
under this Agreement, then the other Party may give such Party
written notice of the breach or default (including, but not
necessarily limited to, a statement of the facts relating to
the breach or default, the provisions of this Agreement that
are in breach or default, and the action required to cure the
breach or default) and that the Term will terminate pursuant
to this paragraph if the breach or default is not cured within
thirty (30) days after receipt of notice (or such later date
as may be specified in such notice). If the other Party fails
to cure the specified breach or default within thirty (30)
days after receipt of such notice (or such later date as may
be specified in such notice), then the Term will terminate
without any further notice or action by the terminating Party.
[*] Confidential treatment requested
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12.6 Termination for Act of Insolvency
If an Act of Insolvency occurs with respect to any Party,
then the other Party may terminate the Term by giving the
other Party written notice of termination. Any termination
pursuant to this paragraph will be effective immediately upon
receipt by the Party with respect to which the Act of
Insolvency has occurred.
12.7 Effect of Termination
In the event of any termination of the Term, the
following will apply:
12.7.1 Unless otherwise agreed by the Parties, each
Party will fulfill its obligations under any and all orders
that have been submitted by Nikon and accepted by NeoPath in
accordance with Article 2 or 3 prior to the date of
termination; provided, however, that, in the event of any
termination by NeoPath pursuant to paragraph 12.5 or 12.6,
NeoPath may, at its option, cancel any outstanding orders by
giving Nikon written notice of such cancellation. Any such
cancellation will be without cost, penalty or liability to
NeoPath.
12.7.2 Articles 6 through 14, inclusive, and any
other provisions of this Agreement that may reasonably be
interpreted or construed to survive termination of the Term
will survive termination of the Term.
12.7.3 Neither Party will have any liability (e.g.,
for any claim of damages, for any loss of revenue, profit or
compensation or for any costs, expenses, expenditures,
investments or other commitment made in reliance upon or
otherwise in connection with this Agreement) to the other on
account of any termination of the Term in accordance with this
Article 12. Without limiting the generality of the foregoing,
neither Party will have any right, either express or implied
by applicable law or otherwise, to renewal of this Agreement
or to any damages or compensation for any termination of the
Term in accordance with this Article 12. Each of the Parties
have considered the possibility of such termination and the
possibility of loss and damage resulting therefrom in making
expenditures pursuant to the performance of this Agreement.
It is the express intent and agreement of the Parties that
neither will be liable to the other for damages or otherwise
by reason of the termination of the Term as provided for
herein.
12.7.4 Upon NeoPath's request, Nikon will use
reasonable efforts to transfer to NeoPath or surrender any
registration, permit, license, approval, certificate or other
governmental action obtained or held by Nikon in its own name
under this Agreement for such Territory to the extent that the
same can be so transferred or surrendered under applicable
law, such transfer or surrender to be effective upon the
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<PAGE>
effective date of such termination or as soon thereafter as
possible. Further, Nikon will not oppose or otherwise
interfere with NeoPath's efforts to apply for, obtain or hold
any registration, permit, license, approval, certificate or
other governmental action relating to the distribution of
Products in any Territory as to which Nikon's exclusive rights
hereunder no longer apply.
Article 13. Resolution of Disputes
13.1 General
If any dispute arises between the Parties relating to
this Agreement, the Parties will follow the procedures set
forth in this Article 13. However, either Party may commence
litigation within thirty (30) days prior to the date after
which the commencement of such litigation could be barred by
any applicable statute of limitations or other law, rule,
regulation, or order of similar import or in order to request
injunctive or other equitable relief necessary to prevent
irreparable harm. In such event, the Parties will (except as
may be prohibited by judicial order) nevertheless continue to
follow the procedures set forth in this Article 13.
13.2 Unassisted Settlement
13.2.1 A Party seeking to initiate the procedures
under this Article 13 will give written notice thereof to the
other Party. Such notice will state that it is notice
initiating the procedures under this Article 13, describe
briefly the nature of the dispute, describe briefly the
notifying Party's claim or position in connection with the
dispute, and identify an individual with authority to settle
the dispute on behalf of the notifying Party.
13.2.2 Within ten (10) business days after receipt
of any notice under paragraph 13.2.1, the receiving Party will
give the other Party written notice which describes briefly
the receiving Party's claims and positions in connection with
the dispute and identifies an individual with the authority to
settle the dispute on behalf of the receiving Party.
13.2.3 The individuals identified in the Party's
respective notices under paragraphs 13.2.1 and 13.2.2 will
promptly make such investigation of the dispute as they deem
appropriate. Promptly and in no event later than thirty (30)
days after the date of the initiating Party's notice under
paragraph 13.2.1, such individuals will commence discussions
concerning resolution of the dispute. If the dispute has not
been resolved within thirty (30) days after commencement of
such discussions, then either Party may submit the dispute to
arbitration under section 13.3.
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13.3 Arbitration
13.3.1 If any dispute is not resolved after
compliance with the procedure set forth in subsection 13.2,
then either Party may submit the dispute to arbitration in
accordance with the rules of AAA.
13.3.2 The Parties will use their best efforts to
agree upon a mutually acceptable arbitrator within twenty (20)
days after submission of the dispute to arbitration. If the
Parties are unable to agree upon a mutually acceptable
arbitrator, then either Party may request AAA to supply a list
of at least five potential arbitrators satisfying the
requirements set forth in paragraph 13.3.3 and such other
requirements as the Parties may agree upon. Within ten (10)
days after receipt of the list, the Parties will independently
rank the proposed arbitrators and simultaneously exchange
rankings. Each Party may eliminate one of the listed
arbitrators. The arbitrator receiving the highest combined
ranking will be selected to serve.
13.3.3 The arbitrator will be impartial in fact and
appearance, not an advocate of any Party. The arbitrator will
not have (and neither Party will nominate a potential
arbitrator who it knows to have):
(a) any direct or indirect financial or personal
interest in the outcome of the arbitration; or
(b) any past, present or anticipated financial,
business, professional, family, social or other
relationship which is likely to affect impartiality or
which might reasonably create the appearance of
partiality or bias.
The arbitrator will be required to disclose to each of the
Parties any such interest or relationship, and the Parties may
agree to waive the requirements of the preceding sentence as
to any interest or relationship so disclosed.
13.3.4 In any arbitration, each Party will have:
(a) full access to the records of the other Party
that pertain directly to the subject matter of the
dispute;
(b) the power to call for the testimony of any
officer, employee, agent or representative of the other
Party having direct knowledge or information that
pertains to the subject matter of the dispute; and
(c) such other rights of discovery as may be
afforded by the Commercial Arbitration Rules of the AAA
or by the arbitrator.
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However, the Parties and the arbitrator will use their best
efforts to: avoid any unnecessary discovery; limit discovery
to the extent reasonably required to ensure a fair and
equitable decision; and otherwise conduct all discovery in an
effective, efficient, expeditious and economical manner.
13.3.5 Unless otherwise agreed by the Parties, any
arbitration hearing will be held at a mutually acceptable
location in the State of Hawaii, U.S.A.
13.3.6 The arbitration will be conducted in the
English language.
13.3.7 The arbitrator will render his or her
decision in writing not later than thirty (30) days after the
final statements and proof have been submitted and any hearing
on the matter is closed, and such decision will be final,
conclusive and binding upon the Parties.
13.3.8 Costs of the arbitrator, AAA, court
reporter, hearing rooms and other common costs will be divided
equally between the Parties. Each Party will bear the expense
of preparing and presenting its own case in connection with
the arbitration (including, but not limited to, its own
attorneys' fees and costs of witnesses).
13.3.9 Each Party hereby irrevocably consents to
the jurisdiction of the state and federal courts in the State
of Hawaii, U.S.A., and to the service of process by U.S. mail
in connection with any legal action to compel, administer or
enforce any arbitration under this Section 13.3 or any
litigation permitted under paragraph 13.1.
Article 14. Miscellaneous
14.1 Notices
Any notice or other communication under this Agreement
given by either Party to the other Party will be in writing
and will be delivered in person or mailed, properly addressed
and stamped with the required postage, to the intended
recipient at its address specified below its signature at the
end of this Agreement and to the attention of the person that
executed this Agreement on behalf of such Party. Either Party
may from time to time change such address by giving the other
Party notice of such change in accordance with this paragraph.
14.2 Assignment
Neither Party will assign this Agreement without the
prior written consent of the other Party; provided however,
that either Party may assign this Agreement without such
consent to any successor as a result of any merger,
consolidation or other
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corporate reorganization of such Party
or any sale of all or substantially all of the assets of such
Party, but only in the event that the successor assumes or is
otherwise fully bound by all of the obligations of the
assigning Party under this Agreement. No assignment, with or
without such consent, will relieve either Party from any of
its obligations under this Agreement. Subject to the
foregoing, this Agreement will be fully binding upon, inure to
the benefit of and be enforceable by the Parties and their
respective successors and assigns.
14.3 Nonwaiver
Any failure to insist upon or enforce strict performance
of any provision of this Agreement or to exercise any right or
remedy under this Agreement or applicable law will not be
construed as a waiver or relinquishment to any extent of the
right to assert or rely upon any such provision, right or
remedy in that or any other instance; rather the same will be
and remain in full force and effect.
14.4 Severability
This Agreement will be enforced to the fullest extent
permitted by applicable law. If for any reason any provision
of this Agreement is held to be invalid or unenforceable to
any extent, then:
(a) such provision will be interpreted, construed
or reformed to the extent reasonably required to render
the same valid, enforceable and consistent with the
original intent underlying such provision;
(b) such provision will be void to the extent it is
held to be invalid or unenforceable;
(c) such provision will remain in effect to the
extent that it is not invalid or unenforceable; and
(d) such invalidity or unenforceability will not
affect any other provision of this Agreement or any other
agreement between the Parties.
14.5 Applicable Law
This Agreement will be interpreted, construed and
enforced in all respects in accordance with the laws of the
State of New York, U.S.A., without reference to its rules
relating to choice of law. The provisions of the U.N.
Convention on Contracts for the International Sale of Goods
will not apply.
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14.6 Entire Agreement
This Agreement (including all Schedules) constitutes the
entire agreement, and supersedes any and all prior agreements
(including, without limitation, the letter of intent, dated
June 11, 1996, previously entered into by the Parties),
between NeoPath and Nikon with regard to the Products. No
amendment, modification or waiver of any of the provisions of
this Agreement will be valid unless set forth in a written
instrument signed by the Party to be bound thereby. Without
limitation of the foregoing, NeoPath will not be bound by, and
specifically objects to, any term, condition, or other
provision which is different from or in addition to the
provisions of this Agreement (whether or not it would
materially alter this Agreement) which is proffered by Nikon
in any order, receipt, acceptance, confirmation, or otherwise,
unless NeoPath specifically agrees to such provision in a
written instrument signed by NeoPath.
IN WITNESS WHEREOF, the Parties have executed this
Agreement on the date first above written.
Nikon: NeoPath:
Nikon Corporation NeoPath, Inc., a
Washington corporation
By: /s/Hirofumi Tagawa By:/s/Volker R. Kettering
------------------- ----------------------
Hirofumi Togawa Volker R. Kettering
Title: Title:
Director Vice President, Sales
Address: Address:
Page 35
<PAGE>
Schedule No. 1
(Dated Dec. 19, 1996)
This Schedule No. 1 dated as of Dec. 19, 1996, is made
and entered into pursuant to the International Distributor
Agreement dated as of Dec. 19, 1996 ("Agreement") between:
NeoPath, Inc., a corporation duly organized and existing under
the laws of the State of Washington, U.S.A. ("NeoPath"); and
Nikon Corporation, a corporation duly organized and existing
under the laws of Japan ("Nikon"). By this reference, this
Schedule is incorporated into and made a part of the
Agreement.
Definitions
Whenever used in the Agreement with initial letters
capitalized, the following terms will have the following
specified meanings:
"AAA" means the American Arbitration Association or any
other arbitration service approved by the Parties.
"Act of Insolvency" means the occurrence of any of the
following: (a) the filing by or against a Party of a petition
to have such a Party adjudged as bankrupt or a petition for
reorganization or arrangement of such Party under any Debtor
Relief Law (unless, in the case of a petition filed against
such Party, the same is dismissed within sixty (60) days after
it is filed); (b) the making of any general assignment or
general arrangement for the benefit of a Party's creditors
under any Debtor Relief Law; (c) the appointment of a trustee
or receiver to take possession of all or substantially all of
a Party's assets under any Debtor Relief Law (unless such
possession is returned to such Party within thirty (30) days
after such appointment); (d) the attachment, execution or
other judicial seizure of all or substantially all of a
Party's assets (unless the same is released within thirty (30)
days); or (e) a Party dissolves or liquidates, is dissolved or
liquidated, or adopts any plan of dissolution or liquidation,
where such a Party does not continue as a viable business in
altered form.
"Competing Product" means any product performing the
automatic analysis or categorization of specimens containing
pap smear or other medical material; provided, however, that
microscopes and other equipment used to enhance visual or
electronic images of medical specimens shall not be deemed to
be Competing Products. Additionally, microscopes and other
equipment for the analysis or
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<PAGE>
categorization of non-medical
specimens [*] shall not be
deemed to be Competing Products. In addition, a product for
the analysis or categorization of medical specimens that would
otherwise be a "Competing Product" will be excluded from that
definition, and shall not be subject to Nikon's obligations
under paragraph 10.3, if Nikon: (a) offers to NeoPath the
opportunity to collaborate or otherwise participate with Nikon
in the development or marketing of the product and (b) NeoPath
fails to accept such offer notwithstanding the Parties' good
faith negotiations concerning appropriate collaborative terms
and conditions over a minimum of three months.
"Confidential Information" means any information that is
proprietary or confidential or that a Party is obligated to
keep confidential (e.g., pursuant to a contractual or other
obligation owing to a Third Party). Confidential Information
may be of a technical, business or other nature (including,
but not limited to, information which relates to a Party's
technology, research, development, products, customers,
employees, contractors, marketing plans, finances, contracts,
legal affairs, or business affairs). The terms and conditions
of this Agreement will be treated as Confidential Information
of each Party. However, Confidential Information does not
include any information that:
(a) was known to the Recipient prior to receiving
the same from the Discloser in connection with this
Agreement;
(b) is independently developed by the Recipient
without the use of or reliance upon any Confidential
Information of the Discloser;
(c) is acquired by the Recipient from another
source without restriction as to use or disclosure; or
(d) is or becomes part of the public domain through
no fault or action of the Recipient.
"CPI" means the Consumer Price Index for All Items, All
Urban Consumers (Base Year 1982-84 = 100) for the Seattle
Metropolitan Area published by the United States Department of
Labor, Bureau of Labor Statistics, or such other index as the
Parties may agree upon in writing. If the then-current CPI is
replaced with a corresponding or similar CPI (e.g., if there
is a change in the base year), then the CPIs taken into
account in making any determination under this Agreement will
be equitably adjusted to reflect the change. If the then-
current CPI is discontinued and not replaced with a
corresponding or similar CPI, then the Parties shall agree
upon a replacement CPI.
[*] Confidential treatment requested
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<PAGE>
"Customer" means any Person that acquires any Product
through Nikon under the Agreement.
"Debtor Relief Law" means any bankruptcy, moratorium,
insolvency, reorganization, liquidation, conservatorship or
similar law, now or hereafter in effect, for the relief of
debtors and that affects the rights of creditors generally.
"Discloser" means a Party that discloses Confidential
Information to the other Party.
"Government Order" means an order for a Product placed by
a Customer that is owned in whole or in part by a governmental
authority (including any government-sponsored laboratory).
"Lease Term" means the term of any lease of any Product
from NeoPath to Nikon under Article 3.
"MHW Approval" means the approval of the Ministry of
Health and Welfare of Japan required for the use of Screener
Systems in Japan or the date upon which the Parties determine
that such approval is not required.
"NeoPath System" means NeoPath's system for the automated
interpretation of cervical Papanicolaou (Pap) smear slides, as
more particularly described in the attached Schedules, as the
same may be modified from time to time by agreement of the
Parties.
"NeoPath Technology" means NeoPath's inventions,
products, processes, methods, designs, know-how,
specifications and other technology related to any Product
(including, without limitation, any technology incorporated in
or utilized by any Product or any technology utilized by
NeoPath in the development, correction, modification,
enhancement, improvement, maintenance, repair or support of
any Product).
"Nikon Improvement" means any correction, modification,
enhancement or improvement that Nikon may discover or make
that is either:
(a) based upon or developed with the use of any
Confidential Information of NeoPath; or
(b) developed for, applied to or incorporated into
any Product by Nikon.
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<PAGE>
"Party" means NeoPath, Nikon or a successor permitted
under paragraph 10.2 to all of the right, title and interest
of NeoPath or Nikon under the Agreement.
"Person" means any individual, corporation, trust,
association, governmental authority or other entity.
"Product" means the NeoPath System, any part or component
of the NeoPath System or any other products that Nikon is
authorized to distribute under the Agreement. The "Products"
as of the date of the Agreement are specified in the attached
Schedules. Subject to any limitation set forth in any
applicable Schedule, NeoPath may change the Products from time
to time to reflect any updates, enhancements, improvements or
other modifications of the same; provided that, unless
otherwise agreed by Nikon, (a) no change in the Products will
be effective as to Nikon until the expiration of ninety (90)
days after NeoPath gives Nikon written notice of the change
and (b) no NeoPath System will be added as a Product.
"QC System" means a NeoPath System that is used solely
for the limited purpose of rescreening cervical Pap smear
slides that have been manually analyzed and categorized (e.g.,
screened) as normal by a cytologist or other trained
laboratory professional.
"Quarter" means a calendar quarter (i.e., a period of
three consecutive months commencing with January, April, July
or October).
"Quota" means the quota for NeoPath Systems to be
distributed in any Territory during any Year by Nikon under
the Agreement as specified in the attached Schedule No. 5 or
otherwise agreed upon by the Parties.
"Recipient" means a Party that receives Confidential
Information from the other Party.
"Schedule" means any of the schedules or other documents
attached to, incorporated into or otherwise made a part of the
Agreement.
"Screener System" means a NeoPath System that may be used
to automatically analyze and categorize (e.g., screen)
cervical Pap smear slides prior to their review by a
cytologist or other trained laboratory professional.
"Services" means the services to be performed by Nikon
pursuant to the Agreement (including, but not necessarily
limited to, the services described in Article 5 of the
Agreement).
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"Software" means any computer program or other software
that is included in, or provided by NeoPath with, any Product.
"Standard Terms and Conditions" means NeoPath's standard
terms and conditions in effect from time to time. The
Standard Terms and Conditions as of the date of the Agreement
are included in the attached Schedules.
"Supplemental Terms and Conditions" means NeoPath's
standard supplemental terms and conditions for user agreements
in effect from time to time. The Supplemental Terms and
Conditions as of the date of the Agreement are included in the
attached Schedules.
"Term" means the period of time specified in Article 12
of the Agreement.
"Territory" means Japan or any other geographical area in
which Nikon is authorized to distribute Products under the
Agreement. As of the date of the Agreement, the only
Territory is Japan. The Parties may from time to time add or
delete Territories pursuant to a written instrument signed by
both Parties. Territories may also be deleted pursuant to
paragraph 12.3 of the Agreement.
"Third Party" means any Person other than a Party.
"User Agreement" means a sublease or rental agreement
between Nikon and a Customer pursuant to which a NeoPath
System leased by Nikon from NeoPath is made available for a
Customer's use in the Territory pursuant to Article 3 of the
Agreement.
"Warranty Period" means, with respect to any Product, the
period of time from the delivery of such Product by NeoPath
under this Agreement until the expiration of three hundred
sixty-five (365) days after such delivery.
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<PAGE>
"Year" means a calendar year.
Nikon: NeoPath:
Nikon Corporation NeoPath, Inc., a
Washington corporation
By:/s/ Hirofumi Tagawa By:/s/Volker R. Kettering
------------------- ----------------------
Hirofumi Togawa Volker R. Kettering
Title: Title:
Director Vice President, Sales
Page 6
<PAGE>
Schedule No. 2
Price Schedule for Purchased Products
This Schedule No. 2, dated as of Dec. 19, 1996, is made
and entered into pursuant to the International Distributor
Agreement, dated as of Dec. 19, 1996 ("Agreement") between:
NeoPath, Inc., a corporation duly organized and existing under
the laws of the State of Washington, U.S.A. ("NeoPath"); and
Nikon Corporation, a corporation duly organized and existing
under the laws of Japan ("Nikon"). By this reference, this
Schedule is incorporated into and made a part of the
Agreement. All terms defined in Schedule No. 1 to the
Agreement will have the same meanings when used in this
Schedule.
The purchase price of each Product purchased by Nikon
under Article 2 of the Agreement will be as follows, subject
to adjustment as provided for in the Agreement:
Product Price
AutoPap 300 QC System [*]
AutoPap System [*]
Spare parts, components, etc. See price list
attached
The NeoPath System will classify as "Review" or "Process
Review" certain slides that cannot be analyzed by the NeoPath
System (e.g., because of scant cellularity, light staining,
improper application of the slide cover or other matters
involving preparation or handling of slides). Changes in the
procedures for slide preparation and handling can result in
fewer slides being classified as "Review" or "Process Review"
slides. Accordingly, Nikon will use its best efforts to
educate Customers (and others who may prepare slides for
processing by NeoPath Systems in any Territory) and otherwise
implement NeoPath's recommendations regarding proper
procedures for slide preparation and handling. If the
percentage of slides to be classified by a NeoPath System
being purchased by Nikon under paragraph 2.2 of the Agreement
as "Review" or "Process Review" (e.g., as compared to the
total number of slides processed by such NeoPath System) is
expected to be less than the following percentage (e.g., based
upon the procedures for slide preparation and handling being
used by the Customer), then the purchase price for such
NeoPath System will be increased by the following amount:
[*] Confidential treatment requested
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If % of Review and Amount of Increase Amount of Increase
Process Review in the Purchase in Purchase Price
Slides Is Expected Price for AutoPap for AutoPap System
To Be Less Than 300 QC System
[*] [*] [*]
[*] [*] [*]
[*] [*] [*]
Nikon: NeoPath:
Nikon Corporation NeoPath, Inc., a
Washington corporation
By:/s/Hirofumi Togawa By:/s/Volker R. Kettering
------------------ ----------------------
Hirofumi Togawa Volker R. Kettering
Title: Title:
Director Vice President, Sales
[*] Confidential treatment requested
Page 2
<PAGE>
Schedule No. 3
Price Schedule for Leased Products
This Schedule No. 3, dated as of Dec. 19, 1996, is made
and entered into pursuant to the International Distributor
Agreement, dated as of Dec. 19, 1996 ("Agreement") between:
NeoPath, Inc., a corporation duly organized and existing under
the laws of the State of Washington, U.S.A. ("NeoPath"); and
Nikon Corporation, a corporation duly organized and existing
under the laws of Japan ("Nikon"). By this reference, this
Schedule is incorporated into and made a part of the
Agreement. All terms defined in Schedule No. 1 to the
Agreement will have the same meanings when used in this
Schedule.
A. Annual Lease Payments
The annual lease payment for each NeoPath System leased
by Nikon under Article 3 of the Agreement will be as follows,
subject to adjustment as provided for below and elsewhere in
the Agreement:
Product Annual Lease Payment
AutoPap 300 QC System [*]
AutoPap System [*]
1. The annual lease payments specified above are for a Lease
Term of five years commencing upon completion of
installation of the applicable NeoPath System.
2. The annual lease payments specified above will be payable
in equal quarterly installments. A quarterly installment
will be due and payable in advance on the first day of
each quarter within the annual period for which the
payment is being made (a "Lease Quarter").
3. If the "Exchange Rate" (as defined below) increases or
decreases by more than [*] of the Exchange
Rate on the date of this Agreement, then, upon request of
either Party, the Parties will meet, in person or by
conference telephone, to discuss in good faith whether,
in light of such increase or decrease, the lease payments
should be increased or decreased for subsequent periods.
However, the lease payments previously agreed upon by the Parties
[*] Confidential treatment requested
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<PAGE>
will remain in effect absent a written agreement
by the Parties to the contrary. For purposes of the
foregoing, "Exchange Rate" means the rate for the
exchange of United States dollars and Japanese yen as
published in the Wall Street Journal or another source
agreed upon by the Parties.
4. If (a) any Product leased by Nikon under Article 3 of the
Agreement is rendered inoperable for a period in excess
of one week due to NeoPath's fault (e.g., due to a defect
in the design of the Product or NeoPath's failure to
deliver necessary parts or components in a timely
fashion) and (b) the Customer is relieved of its
obligation to pay Nikon under the applicable User
Agreement for the period in question, then Nikon will be
relieved of its obligation to pay NeoPath that portion of
the annual lease payment for such Product under this
Agreement which is attributable to that portion of such
period which is in excess of two weeks. This paragraph
will not apply to any period (or portion thereof) in
which the Product is inoperable due to any failure of
Nikon or the Customer to perform their respective
obligations under this Agreement or the applicable User
Agreement (e.g., regarding the use or maintenance of the
applicable Product or the maintenance of a reasonable
inventory of spare parts and components).
5. If (a) a Customer terminates a User Agreement prior to
the end of the applicable Lease Term for any reason other
than Nikon's default or Nikon terminates a User Agreement
on account of the Customer's nonpayment or other breach
and (b) after exercising commercially reasonable efforts
to collect the remaining payments due Nikon under the
applicable User Agreement, Nikon is unable to collect all
of such payments, then, upon Nikon's request, the Parties
will meet, in person or by conference telephone, to
discuss in good faith whether, in light of the early
termination of the applicable User Agreement and Nikon's
inability to collect the remaining payments due Nikon,
the lease payments under this Agreement for the period in
question should be equitably adjusted.
B. Supplemental Lease Payments
The NeoPath System will classify as "Review" or "Process
Review" certain slides that cannot be analyzed by the NeoPath
System (e.g., because of scant cellularity, light staining,
improper application of the slide cover or other matters
involving preparation or handling of slides). Changes in the
procedures for slide preparation and handling can result in
fewer slides being classified as "Review" or "Process Review"
slides. Accordingly, Nikon will use its best efforts to
educate Customers (and others who may prepare slides for
processing by NeoPath Systems in
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<PAGE>
any Territory) and otherwise
implement NeoPath's recommendations regarding proper
procedures for slide preparation and handling. If the
percentage of slides classified by a NeoPath System leased by
Nikon under Article 3 of the Agreement as "Review" or "Process
Review" (e.g., as compared to the total number of slides
processed by such NeoPath System) during any Lease Quarter is
less than the following percentage, then Nikon will pay to
NeoPath (e.g., in addition to the annual lease payment under A
above) a supplemental payment for the applicable Lease Quarter
equal to the following:
If % of Review Amount of
and Process Review Supplemental Payment
Slides Is Less for the Applicable
Than Lease Quarter
- ------------------- ---------------------
[*] [*]
[*] [*]
[*] [*]
Any supplemental payment will be due and payable to NeoPath
within thirty (30) days after the end of the applicable Lease
Quarter.
Nikon: NeoPath:
Nikon Corporation NeoPath, Inc., a
Washington corporation
By:/s/Hirofumi Togawa By:/s/Volker R. Kettering
------------------ ----------------------
Hirofumi Togawa Volker R. Kettering
Title: Title:
Director Vice President, Sales
[*] Confidential treatment requested
Page 3
<PAGE>
Schedule No. 4
Price Schedule for NeoPath Services and Support
This Schedule No. 4, dated as of Dec. 19, 1996, is made
and entered into pursuant to the International Distributor
Agreement, dated as of Dec. 19, 1996 ("Agreement") between:
NeoPath, Inc., a corporation duly organized and existing under
the laws of the State of Washington, U.S.A. ("NeoPath"); and
Nikon Corporation, a corporation duly organized and existing
under the laws of Japan ("Nikon"). By this reference, this
Schedule is incorporated into and made a part of the
Agreement. All terms defined in Schedule No. 1 to the
Agreement will have the same meanings when used in this
Schedule.
1. Annual Support Services
Product Annual Fee
AutoPap 300 QC System [*]
AutoPap System [*]
Note: The annual fee specified above applies only to
Products purchased under paragraph 2.2 of the
Agreement.
2. Spare parts, components, etc. See price list
attached
This Schedule does not apply to NeoPath Systems leased by
Nikon under Article 3 of the Agreement.
Nikon: NeoPath:
Nikon Corporation NeoPath, Inc., a
Washington corporation
By:/s/Hirofumi Togawa By:/s/Volker R. Kettering
------------------ ----------------------
Hirofumi Togawa Volker R. Kettering
Title: Title:
Director Vice President, Sales
[*] Confidential treatment requested
Page 1
<PAGE>
Schedule No. 5
Quotas
This Schedule No. 5, dated as of Dec. 19, 1996, is made
and entered into pursuant to the International Distributor
Agreement, dated as of Dec. 19, 1996 ("Agreement") between:
NeoPath, Inc., a corporation duly organized and existing under
the laws of the State of Washington, U.S.A. ("NeoPath"); and
Nikon Corporation, a corporation duly organized and existing
under the laws of Japan ("Nikon"). By this reference, this
Schedule is incorporated into and made a part of the
Agreement. All terms defined in Schedule No. 1 to the
Agreement will have the same meanings when used in this
Schedule.
1. Following are the preliminary Quotas for Japan for
calendar years 1996 through 2002:
Year Annual Quota
1996 [*]
1997 [*]
1998 [*]
1999 [*]
2000 [*]
After 2000 [*]
2. The Quotas set forth in paragraph 1 are expressed as
the number of NeoPath Systems delivered to Nikon under this
Agreement during the applicable Year, whether such NeoPath
Systems are purchased or leased by Nikon.
3. Upon request of either Party prior to September 1 of
any Year, the Parties will meet, in person or by conference
telephone, to discuss in good faith whether, in light of the
development of the market for Products in each Territory, the
Quota applicable to such Territory should be changed (upwards
or downwards) for subsequent years. However, Quotas
previously agreed upon by the Parties shall remain in effect
absent a written agreement by the Parties to the contrary.
[*] Confidential treatment requested
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<PAGE>
Nikon: NeoPath:
Nikon Corporation NeoPath, Inc., a
Washington corporation
By:/s/Hirofumi Togawa By:/s/Volker R. Kettering
------------------ ----------------------
Hirofumi Togawa Volker R. Kettering
Title: Title:
Director Vice President, Sales
Page 2
<PAGE>
EXHIBIT 11.1
<TABLE>
<CAPTION>
NEOPATH, INC.
COMPUTATION OF NET LOSS PER SHARE
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Historical:
Net Loss $ (17,655,283) $ (14,365,386) $ (12,323,688)
============ ============ ============
Shares used in calculating net loss per share:
Weighted average common shares outstanding 13,029,314 9,007,570 403,650
Net effect of stock options exercised and stock options and
warrants granted during the 12 months prior to the
Company's initial public offering, at less than the
offering price, calculated using the treasury stock
method at the offering price of $11.00 per share, and
treated as outstanding for all periods prior to
January 1995 -- -- 498,566
Net effect of convertible preferred stock, after
the effect of conversion to common stock, issued
during the 12 months prior to the Company's
initial public offering, at less than the
offering price, calculated using the treasury
stock method at the offering price of $11.00 per
share, and treated as outstanding for all periods
prior to January 1995 -- -- 944,059
---------- --------- --------
Total 13,029,314 9,007,570 1,846,275
========== ========= =========
Net loss per share $(1.36) $(1.59) $(6.67)
======= ======= =======
Pro forma:
Shares used in calculating pro forma net loss per share:
Weighted average common shares outstanding 9,007,570 403,650
Weighted average common shares giving effect to
conversion of preferred stock to common stock for
all periods subsequent to issuance 405,113 4,497,176
Net effect of stock options exercised and stock options
and warrants granted during the 12 months
prior to the Company's initial public
offering, at less than the offering price, calculated
using the treasury stock
method at the offering price of $11.00 per share, and
treated as outstanding for all periods prior to
January 1995 -- 498,566
Net effect of convertible preferred stock, after the effect of
conversion to common stock, issued during
the 12 months prior to the Company's initial public offering,
at less than the offering price, calculated
using the treasury stock method at the
offering price of $11.00 per share, and
treated as outstanding for all periods prior
to January 1995 -- 944,059
--------- ---------
Total 9,412,683 6,343,451
========= =========
Pro forma net loss per share $(1.53) $(1.94)
======= =======
</TABLE>
selected five-year financial data
IN THOUSANDS, EXCEPT PER SHARE DATA
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992
--------- -------- -------- -------- -------
STATEMENT OF OPERATIONS DATA
Revenues $ 3,062 $ - $ - $ - $ -
Gross margin 1,157 - - - -
Operating expenses:
Research and development 11,202 9,384 9,183 4,792 3,877
Selling, general and
administrative 11,295 6,626 3,320 1,413 1,565
Net loss (17,655) (14,365) (12,324) (6,264) (5,380)
Net loss per share 1, 2 (1.36) (1.53) (1.94)
BALANCE SHEET DATA
Cash, cash equivalents,
and securities
available-for-sale $ 58,488 $ 23,430 $ 2,295 $ 1,001 $ 1,588
Working capital 60,821 22,876 2,316 82 1,061
Total assets 76,132 28,016 5,193 1,662 2,146
Obligations under capital leases,
less current portion 183 258 176 216 170
Total shareholders' equity 71,602 25,133 3,602 489 1,399
The comparability of the above data is affected by the
Company's initial public offering completed in February
1995 and second public offering completed in January
1996. See Note 8 of Notes to Financial Statements.
1 Amounts presented for 1995 and 1994 are pro forma
(unaudited). The basis for determining the number of
shares used in computing pro forma (unaudited) net loss
per share is described in Note 1 of Notes to Financial
Statements.
2 Net loss per share for 1993 and 1992 is not considered
meaningful.
nineteen NEOPATH 1996 ANNUAL REPORT
<PAGE>
management's discussion and analysis of
financial condition and results of operations
overview
NeoPath, Inc. (the "Company" or "NeoPath") develops and
markets products that automate the interpretation of
medical images. The Company's initial products are two
automated screening systems that integrate proprietary
high-speed image processing computers, video imaging
technology and sophisticated image interpretation
software to capture and analyze thousands of microscopic
images from a Papanicolaou ("Pap") smear slide. In
September 1995, the United States Food and Drug
Administration (the "FDA") cleared for commercial use
the Company's first product, the AutoPap 300 QC
Automatic Pap Screener System (the "AutoPap QC").
During the first quarter of 1996, the Health Care
Financing Administration officially allowed clinical
laboratories to use the AutoPap QC in the quality
control review of Pap smear slides that have been
initially screened by cytologists as normal. The
decision allows AutoPap QCs to replace the federally
mandated rescreening requirement. As a result of these
approvals, NeoPath transitioned from a "development
stage" company to a commercial entity, with the
Company's first product revenues recognized in 1996.
NeoPath is seeking FDA approval for the Company's
second product, the AutoPap Automatic Pap Screener
System (the "AutoPap Screener" and, in combination with
the AutoPap QC, the "AutoPap System"). On September 27,
1996 a Hematology and Pathology Devices Advisory Panel
recommended that the FDA not approve, at that time, the
supplement to the Company's premarket approval ("PMA")
submission for the use of the AutoPap Screener as a primary
screener of Pap
smear slides pending the completion of additional
premarket studies. The FDA subsequently followed the
Panel's recommendation. The Company is performing
additional clinical studies, as requested by the FDA,
and plans to resubmit this matter to the FDA in 1997.
The Company is compensated on either a sale or fee-
per-use basis (subject to certain license agreements and
minimum payments). Under its fee-per-use program, the
Company retains ownership of AutoPap Systems placed at
customer sites and assesses customers a charge for each
Pap smear slide analyzed. The fee-per-use program
entails a significant capital commitment since the
Company retains ownership of the AutoPap Systems. The
cost of each AutoPap System is reclassified from
inventories to depreciable equipment upon shipment to a
fee-per-use customer site. Such equipment, reflected on
the balance sheet under "fee-per-use systems, net," is
depreciated on a straight-line basis over a four-year
period, commencing upon commercial operation. The
Company's product placements have primarily consisted of
fee-per-use contracts in the United States and sales
contracts internationally. The Company anticipates that
future product placements will continue to consist of a
mixture of fee-per-use and sale contracts.
During 1996, the Company developed commercial-scale
manufacturing capability and expanded its
sales, marketing, and administrative functions. The
Company expects spending to increase as it supports its
fee-per-use program, continues to expand its sales,
marketing, and customer service and support
capabilities, and continues its research and development
activities (including additional clinical studies).
Accordingly, the Company expects to incur negative cash
flows and additional losses in 1997. However, NeoPath
anticipates increased domestic and international AutoPap
System revenues in 1997 as the Company builds on its
established base of fee-per-use customers in the United
States and places AutoPap Systems worldwide through a
mixture of fee-per-use and sale contracts.
twenty NEOPATH 1996 ANNUAL REPORT
<PAGE>
Cost of revenues includes depreciation on the AutoPap
System used in the fee-per-use program, allocated
service and support costs, and, with regard to AutoPap
Systems sold, the related manufacturing cost of those
devices. The Company's research and development
expenses include salaries and benefits of scientific,
engineering, and regulatory personnel, testing
equipment, components used in prototypes, consulting
services and the costs of preparing and filing
applications for patent protection for the Company's
technologies. General and administrative expenses
include salaries and benefits of financial,
administrative, sales and marketing personnel, non-
patent legal expenses, and facility-related costs.
results of operations
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
REVENUES AND GROSS MARGIN
NeoPath began recognizing product revenues in the first
quarter of 1996 and ended the year with a total of
$3.1 million in revenues. Total revenues consisted of
fee-per-use and sale revenues.
The Company's gross margin fluctuates from period-to-
period as a result of the mixture of fee-per-use
revenues and sale revenues; therefore, the gross margin
of 38% in 1996 is not necessarily indicative of future
gross margin.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the year ended
December 31, 1996 increased to $11.2 million compared to
$9.4 million and $9.2 million for the same periods in
1995 and 1994, respectively. The $1.8 million increase
in 1996 was due primarily to increased research and
development personnel. The Company expects research and
development expenses to increase in 1997 as it conducts
clinical trials of the AutoPap Screener in the United
States and elsewhere and seeks to continuously improve
the AutoPap Systems' performance.
The increase for the year ended December 31, 1995 was
primarily due to a $350,000 noncash contribution of
shares of common stock to the University of Washington
in the second quarter of 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased
to $11.3 million in 1996 from $6.6 million and
$3.3 million, respectively, for the comparable periods
in 1995 and 1994. The increase in 1996 was primarily a
result of increased personnel and expanded sales,
marketing and administrative functions. The Company
expects selling, general and administrative expenses to
continue to increase as it further expands these
functions to support the continued worldwide rollout of
the AutoPap System. The Company also incurred increased
legal fees in 1996 relating to the Neuromedical Systems,
Inc. lawsuit (see Note 10 of Notes to Financial
Statements).
The increase in 1995 was primarily a result of the
expansion of the Company's manufacturing, sales and
marketing, and customer service and support capacities
and from the relocation and expansion of the Company's
corporate headquarters in January 1995.
twenty one NEOPATH 1996 ANNUAL REPORT
<PAGE>
During 1994, the Company recorded deferred
compensation for the difference between the exercise
price and the deemed fair value for financial reporting
purposes of the Company's common stock for options
granted in 1994. Such options were granted at prices
ranging from $1.20 to $4.00 per share with a deemed fair
value ranging from $2.40 to $6.00 per share. This
compensation expense aggregated $774,000, and is being
amortized over the respective vesting periods. During
1996, 1995 and 1994, $78,000, $278,000 and $321,000,
respectively, of such compensation expense was
recognized.
INTEREST INCOME
Interest income for the year ended December 31, 1996
increased to $3.7 million from $1.7 million and $252,000,
respectively, for the comparable periods in 1995 and
1994 due primarily to the investment of the $61.7
million net proceeds from the Company's second public
stock offering completed in January 1996. The increase
in 1995 is due to the investment of the $34.7 million
net proceeds from the Company's initial public stock
offering completed in February 1995. The Company
expects that its interest income will decline in 1997 as
a result of declining cash available for investment.
limitation on use of net operating loss and tax credit
carryforwards
As of December 31, 1996, the Company had net operating
loss carryforwards of approximately $62.6 million and
research and development credit carryforwards of
approximately $1.3 million for federal income tax
purposes, which expire between 2004 and 2011. Due to
the issuance and sale of shares of preferred stock, and
the Company's initial public offering, 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 to approximately
$6.4 million per year through 1997 and to lower amounts
in subsequent years. 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. See
Note 7 of Notes to Financial Statements.
liquidity and capital resources
As of December 31, 1996, the Company had approximately
$58.5 million in cash, cash equivalents and securities
available-for-sale, representing 77% of total
assets. As of December 31, 1996, the Company had
capital lease obligations, including interest, of
$304,000 and operating lease obligations of $1.9
million. Other than capitalized lease obligations, the
Company has no outstanding long-term debt.
twenty two NEOPATH 1996 ANNUAL REPORT
<PAGE>
The Company's cash used in operating activities was
$25.0 million, $12.8 million, and $13.0 million in the
years ended December 31, 1996, 1995, and 1994,
respectively. The Company expended cash for property
and equipment of $3.3 million, $1.9 million, and
$552,000 in the years ended December 31, 1996, 1995, and
1994, respectively.
The Company expects negative cash flow from
operations to continue at least through 1997 as it
manufactures AutoPap Systems to support fee-per-use
product placements, continues to expand its marketing,
sales, and customer service and support capabilities,
continues its research and development activities and
conducts clinical trials of the AutoPap Screener. The
Company currently estimates that its existing capital
resources and interest income will enable it to sustain
operations for approximately two years. There can be no
assurance, however, that the Company will not be
required to seek additional capital at an earlier date.
The Company's future capital requirements will depend on
many factors, including the extent and rate of adoption
of use of the AutoPap QC and, if the requisite
regulatory approvals are obtained, the AutoPap Screener;
the adoption of the Company's fee-per-use program; the
mix of fee-per-use and sale placements; the extent and
rate of development of the Company's marketing, sales,
and customer service and support capabilities; and the
status of competing products. The Company may, from time
to time, seek additional funding through public or
private financing, including equity financing. There
can be no assurance that adequate funding will be
available as needed or on terms acceptable to the
Company. If additional funds are raised by issuing
equity securities, existing shareholders may experience
dilution. Insufficient funds may require the Company to
delay, scale back or eliminate some or all of its
research and development and clinical programs.
forward-looking statements
The preceding Management's Discussion and Analysis of
Financial Condition and Results of Operations contains
"forward-looking statements" which reflect the Company's
current views with respect to future events and
financial performance. These forward-looking statements
are subject to certain risks and uncertainties that
could cause actual results to differ materially from
historical results or those anticipated. The words
"plan," "expect," "anticipate," and similar expressions
identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-
looking statements. The Company undertakes no
obligation to publicly update or revise any forward-
looking statements, whether as a result of new
information, future events, or otherwise. Factors that
could cause actual results to differ materially from
historical results or those anticipated include, without
limitation, the following: the Company's limited
operating history and history of losses; market
acceptance of the Company's products; the acceptance of
the Company's fee-per-use or sale programs; product and
manufacturing regulatory approvals; the Company's
limited marketing, sales, customer service and support
capabilities; uncertainties relating to international
transactions; the Company's sole or limited source of
supply of certain components; the status of competing
products; dependence on reimbursement; dependence on
single product line; product liability; dependence on
patents and proprietary rights; the risk of third-party
claims of infringement; and dependence on key personnel.
For a more detailed discussion of these factors, see
"Factors Affecting Future Results and Forward-Looking
Statements" of the Company's Form 10-K for the fiscal
year ended December 31, 1996.
twenty three NEOPATH 1996 ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
balance sheets
DECEMBER 31, 1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,871,401 $ 4,150,923
Securities available-for-sale 50,616,477 19,278,839
Accounts receivable, net of allowance of $175,000 840,256 -
Inventories 5,641,914 1,841,560
Other current assets 197,726 229,555
---------- ----------
Total current assets 65,167,774 25,500,877
Fee-per-use systems, net 5,994,137 -
Property and equipment, net 4,813,745 2,192,984
Deposits and other assets 155,899 322,295
------------ ------------
Total assets $ 76,131,555 $ 28,016,156
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,496,630 $ 803,649
Salaries and wages payable 2,208,454 1,443,131
Customer deposits 164,330 35,000
Other accrued liabilities 401,609 149,328
Current portion of obligations under capital leases 75,861 193,442
---------- -----------
Total current liabilities 4,346,884 2,624,550
Obligations under capital leases, less current portion 182,535 258,395
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; 13,652,156 and 9,819,487 shares
issued and outstanding at December 31, 1996
and 1995, respectively 136,255,746 71,649,971
Deferred compensation (74,246) (175,782)
Accumulated deficit (64,579,364) (46,340,978)
----------- -----------
Total shareholders' equity 71,602,136 25,133,211
----------- -----------
Total liabilities and shareholders' equity $ 76,131,555 $ 28,016,156
=========== ===========
See accompanying notes.
</TABLE>
twenty four NEOPATH 1996 ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
statements of operations
YEAR ENDED DECEMBER 31, 1996 1995 1994
<S> <C> <C> <C>
Revenues $ 3,061,849 $ - $ -
Cost of revenues 1,904,559 - -
------------- ------------- ------------
Gross margin 1,157,290 - -
Operating expenses:
Research and development 11,202,375 9,384,177 9,183,484
Selling, general and administrative 11,295,228 6,626,317 3,320,025
------------- ------------ ------------
22,497,603 16,010,494 12,503,509
Loss from operations (21,340,313) (16,010,494) (12,503,509)
Interest income 3,741,843 1,730,094 252,245
Interest expense (56,813) (84,986) (72,424)
------------- ------------ ------------
Net loss $ (17,655,283) $ (14,365,386) $ (12,323,688)
============= ============ ============
Net loss per share $ (1.36) $ (1.59) $ (6.67)
============= ============ ============
Shares used in computation
of net loss per share 13,029,314 9,007,570 1,846,275
Pro forma (unaudited) net loss per share,
reflecting assumed conversion of
convertible preferred stock $ (1.53) $ (1.94)
============ ============
Shares used in computation of pro forma net
loss per share 9,412,683 6,343,451
See accompanying notes.
</TABLE>
twenty five NEOPATH 1966 ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
statements of shareholders' equity
PREFERRED STOCK COMMON STOCK
----------------------- ------------------------
NUMBER OF NUMBER OF DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 3,134,892 $ 18,014,091 331,020 $ 2,166,571 $ - $ (19,691,849) $ 488,813
Series G preferred stock
issued for cash, net of
issuance costs of $85,027 2,307,699 14,914,971 - - - - 14,914,971
Exercise of stock options - - 197,354 217,686 - - 217,686
Deferred compensation
related to stock option grants - - - 774,000 (774,000) - -
Amortization of deferred
compensation - - - - 320,553 - 320,553
Unrealized loss on securities
available-for-sale - - - - - (16,425) (16,425)
Net loss - - - - - (12,323,688) (12,323,688)
---------- ----------- -------- --------- -------- ----------- -----------
Balance at December 31, 1994 5,442,591 32,929,062 528,374 3,158,257 (453,447) (32,031,962) 3,601,910
Preferred stock converted
to common stock (5,442,591) (32,929,062) 5,609,257 32,929,062 - - -
Initial public offering
- common stock, net of
issuance costs of $3,209,734 - - 3,450,000 34,740,266 - - 34,740,266
Exercise of options and warrants - - 206,856 472,386 - - 472,386
Amortization of deferred
compensation - - - - 277,665 - 277,665
Gift of original issuance shares - - 25,000 350,000 - - 350,000
Unrealized appreciation on securities
available-for-sale - - - - - 56,370 56,370
Net loss - - - - - (14,365,386) (14,365,386)
---------- ----------- --------- ---------- --------- ------------ -----------
Balance at December 31, 1995 - - 9,819,487 71,649,971 (175,782) (46,340,978) 25,133,211
Second 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)
---------- ----------- ----------- ---------- --------- ----------- -----------
Balance at December 31, 1996 - $ - 13,652,156 $136,255,746 $ (74,246) $(64,579,364) $ 71,602,136
========== =========== =========== =========== ========= =========== ===========
</TABLE>
See accompanying notes.
twenty six and twenty seven NEOPATH 1996 ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
statements of cash flows
YEAR ENDED DECEMBER 31, 1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(17,655,283) $(14,365,386) $(12,323,688)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and amortization 1,994,064 539,217 248,110
Deferred compensation 77,791 277,665 320,553
Gift of original issuance shares - 350,000 -
Accrued interest on securities
available-for-sale 660,623 (337,098) (59,140)
Net change in operating accounts:
Accounts receivable (840,256) - -
Inventories and
fee-per-use systems (11,093,253) (577,634) (1,263,926)
Accounts payable and
accrued liabilities 1,839,915 1,421,009 183,528
Other 40,888 (86,707) (134,147)
----------- ----------- -----------
Net cash used in operating activities (24,975,511) (12,778,934) (13,028,710)
INVESTING ACTIVITIES
Purchases of securities
available-for-sale (75,750,434) (35,663,513) (9,145,429)
Maturities of securities
available-for-sale 43,169,070 19,073,237 6,893,049
Additions to property and equipment (3,325,122) (1,885,813) (552,156)
Other 166,396 85,115 (297,127)
----------- ----------- ----------
Net cash used in investing activities (35,740,090) (18,390,974) (3,101,663)
FINANCING ACTIVITIES
Proceeds from bank note - 500,000 -
Payments on bank note - (500,000) -
Issuance of common stock, net 61,740,351 34,740,266 -
Issuance of preferred stock, net - - 14,914,971
Exercise of stock options
and warrants 2,889,169 472,386 217,686
Proceeds from sale/
leaseback transactions - 317,594 152,468
Principal payments on obligations
under capital leases (193,441) (209,415) (155,789)
---------- ---------- ----------
Net cash provided by
financing activities 64,436,079 35,320,831 15,129,336
Net increase (decrease) in cash
and cash equivalents 3,720,478 4,150,923 (1,001,037)
Cash and cash equivalents:
Beginning of period 4,150,923 - 1,001,037
---------- ----------- -----------
End of period $ 7,871,401 $ 4,150,923 $ -
========== =========== ===========
NONCASH TRANSACTIONS
AND SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 56,813 $ 84,986 $ 76,090
Inventories transferred to
fee-per-use systems 6,563,537 - -
Inventories transferred to property
and equipment 729,362 - -
Deferred compensation
on stock option grants - - 774,000
See accompanying notes.
</TABLE>
twenty eight and twenty nine NEOPATH 1996 ANNUAL REPORT
<PAGE>
notes to financial statements
DECEMBER 31, 1996
one
description of business and summary of significant
accounting policies
BUSINESS
NeoPath, Inc. (the "Company") develops and markets
products that automate the interpretation of medical
images. The Company's AutoPap System is a medical
device that integrates proprietary high-speed image
processing computers, video imaging technology and
sophisticated image interpretation software to capture
and analyze thousands of microscopic images from a
Papanicolaou ("Pap") smear slide. The Company began
recognizing product revenues in 1996, thereby
transitioning from a "development stage" company to a
commercial entity.
REVENUES AND MARKETS
NeoPath's primary market includes domestic and foreign
clinical laboratories. Domestic revenues are generated
primarily through NeoPath's direct sales force;
international revenues in 1996 were derived from
distributors. The Company's four largest customers
accounted for 86% of total 1996 revenues, and
export product placements accounted for 45% of
total 1996 revenues. The Company recognizes fee-per-use
revenue based on the number of customer slides
processed, subject to agreed-upon minimum processing
levels, beginning in the month an AutoPap System is
initially placed in commercial use at the customer site
and is accepted by the customer. Sales of AutoPap
Systems are recognized at date of shipment.
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
The Company's investment portfolio is classified as
available-for-sale, and such securities are stated at
fair value, with the unrealized gains and losses
adjusted through accumulated deficit. 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
placed in commercial use, 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.
The Company purchases all components for the AutoPap
Systems from outside vendors, including certain
components from sole-source or single vendors. The
establishment of additional or replacement sources of
supply 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
the Company's manufacture of, or cause the Company to
cease manufacturing, its products.
thirty NEOPATH 1996 ANNUAL REPORT
<PAGE>
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.
DEFERRED OFFERING COSTS
The Company capitalizes deferred offering costs. Upon
completion of an offering, the costs are netted against
the proceeds of the offering.
STOCK-BASED COMPENSATION
The Company 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 alternative fair value
accounting provided for under Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock-
Based Compensation" ("FASB 123") requires use of option
valuation models that were not developed for use in
valuing employee 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 compensation expense has been recognized since
the Company's initial public stock offering. See Note 8
for FASB 123 pro forma disclosures.
NET LOSS PER SHARE
Net loss per share is computed based on the weighted
average number of shares of common stock outstanding.
Common equivalent shares are not included in the per
share calculation when the effect of their inclusion
would be antidilutive, except that, in accordance with
Securities and Exchange Commission requirements, common
and common equivalent shares issued during the twelve-month
period immediately preceding the Company's initial
public offering have been included in the calculation as
if they were outstanding for all periods prior to the
initial public offering using the treasury stock method.
Unaudited pro forma net loss per share is based on
the number of shares determined above adjusted for the
assumed conversion of all outstanding shares of
convertible preferred stock into common stock at the
time of issuance.
CONCENTRATIONS OF CREDIT RISK
The Company invests its excess cash in accordance with
guidelines which limit the credit exposure to any one
financial institution and to any one type of investment,
other than securities issued by the United States
Government. 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 five 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.
RECLASSIFICATIONS
Certain reclassifications have been made to conform
prior year financial information to classifications
presented in the current year.
thirty one NEOPATH 1996 ANNUAL REPORT
<PAGE>
two
securities available-for-sale
Securities available-for-sale consist of the following:
GROSS GROSS
UNREALIZED UNREALIZED
DECEMBER 31, 1996 COST GAINS LOSSES FAIR VALUE
Corporate bonds $41,495,498 $ 2,130 $(373,817) $41,123,811
Government bonds 9,664,137 543 (172,014) 9,492,666
----------- ------- -------- ----------
$51,159,635 $ 2,673 $(545,831) $50,616,477
=========== ======= ======== ==========
GROSS GROSS
UNREALIZED UNREALIZED
DECEMBER 31, 1995 COST GAINS LOSSES FAIR VALUE
Corporate bonds $19,086,934 $100,546 $ (60,980) $19,126,500
Government bonds 151,960 379 - 152,339
---------- ------- ------- ----------
$19,238,894 $100,925 $ (60,980) $19,278,839
========== ======= ======= ==========
There were no realized gains or losses on sales of
securities available-for-sale for the years ended
December 31, 1996 and 1995. The net adjustment for
unrealized holding gains and losses on securities
available-for-sale, included as a component of
shareholders' equity, was a loss of $583,103 for the
year ended December 31, 1996 and a gain of $56,370 for
the year ended December 31, 1995. The fair value of
securities available-for-sale maturing within one year
totals $22,757,631. The fair value of securities
available-for-sale maturing between one and five years
totals $27,858,846. The Company considers all
securities available-for-sale as available for use in
current operations.
three
inventories
Inventories consist of the following:
DECEMBER 31, 1996 1995
Raw materials $2,725,725 $ 789,142
Work-in-process 166,437 343,306
Finished goods 2,749,752 709,112
--------- ---------
$5,641,914 $1,841,560
========= =========
thirty two NEOPATH 1996 ANNUAL REPORT
<PAGE>
Finished goods consist of AutoPap Systems which will
be reclassified to fee-per-use systems (non-current
assets) when placed in commercial use and AutoPap
Systems to be sold. As of December 31, 1996, finished
goods included AutoPap Systems used internally on a
temporary basis and AutoPap Systems placed at
"evaluation" sites.
four
fee-per-use systems
Fee-per-use systems consist of the following:
DECEMBER 31, 1996
Fee-per-use systems $6,563,537
Accumulated depreciation (569,400)
---------
$5,994,137
=========
five
property and equipment
Property and equipment consist of the following:
DECEMBER 31, 1996 1995
Laboratory and other equipment $ 4,955,452 $ 2,218,000
Furniture and fixtures 1,133,276 542,135
Leasehold improvements 1,154,922 529,970
--------- ----------
Total property and equipment 7,243,650 3,290,105
Accumulated depreciation and amortization (2,429,905) (1,097,121)
---------- ----------
$ 4,813,745 $ 2,192,984
========== ==========
At December 31, 1996 and 1995, the Company held
equipment under capitalized leases with an original cost
of $500,371 and $875,660 and a net book value of
$255,497 and $497,238, respectively.
six
lease agreements
The Company 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 include lease terms ranging from 36 to 60
months and purchase options at the end of each lease.
thirty three NEOPATH 1996 ANNUAL REPORT
<PAGE>
The Company leases office and operating facilities
under operating leases expiring in May 1998 through
January 2000, with various renewal options. Operating
lease expense for the years ended December 31, 1996,
1995, and 1994 was $620,895, $496,190, and $216,215,
respectively.
Minimum future lease payments as of December 31, 1996
are as follows:
YEAR ENDING DECEMBER, 31 CAPITAL LEASES OPERATING LEASES
1997 $ 99,347 $ 760,330
1998 94,827 635,546
1999 91,274 497,703
2000 19,050 21,023
2001 - 11,941
-------- ----------
Total minimum lease payments 304,498 $1,926,543
Less amount representing interest 46,102 ==========
--------
Present value of minimum lease payments 258,396
Current portion 75,861
--------
Obligations under capital leases, less
current portion $182,535
========
Interest rates on capitalized leases range from 10% to
19%.
seven
income taxes
As of December 31, 1996, the Company had net operating
loss carryforwards of approximately $62.6 million and
research and development credit carryforwards of
approximately $1.3 million for federal income tax
purposes, which expire between 2004 and 2011. Due to
the issuance and sale of shares of preferred stock and
the Company's initial public offering, 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 to approximately
$6.4 million per year through 1997 and to lower amounts
in subsequent years. 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 $3.8 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 realized.
thirty four NEOPATH 1996 ANNUAL REPORT
<PAGE>
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 at December 31,
1996 and 1995 are as follows:
DECEMBER 31, 1996 1995
Net operating loss carryforwards $ 21,281,000 $ 14,789,000
Research and development credits 1,260,000 1,066,000
Research and development costs 759,000 971,000
Deferred compensation 230,000 204,000
Accrued vacation 184,000 128,000
Charitable contribution carryforwards 124,000 123,000
Allowance for doubtful accounts 60,000 -
Property and equipment 55,000 (12,000)
Other 234,000 51,000
Valuation allowance (24,187,000) (17,320,000)
----------- -----------
$ - $ -
=========== ===========
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
deferred tax assets. The Company's valuation allowance
for deferred tax assets increased $6,867,000 and
$6,013,000 for the years ended December 31, 1996 and
1995, respectively.
eight
shareholders' equity
COMMON STOCK
In February 1995, the Company completed its initial
public offering for the sale of 3,450,000 shares of
common stock at $11.00 per share. The net proceeds,
after underwriting discounts and offering expenses, from
the sale of the common stock was $34,740,266. Upon
closing, all outstanding shares of preferred stock
converted into 5,609,257 shares of common stock, and all
preferred stock warrants converted into common stock
warrants.
In April 1995, the Company donated 25,000 shares of
common stock to a university.
In January 1996, the Company completed its second
public offering for the sale of 2,875,000 shares of
common stock at $23.00 per share. The net proceeds,
after underwriting discounts and offering expenses, from
the sale of the common stock was $61,740,351.
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.
thirty five NEOPATH 1996 ANNUAL REPORT
<PAGE>
A summary of the Company's option activity and
related information follows:
SHARES EXERCISE PRICE PER SHARE
Balance outstanding, January 1, 1994 678,711 $0.60 - $ 1.20
Granted 481,938 1.20 - 4.00
Exercised (197,354) 0.60 - 1.20
Cancelled (79,783) 0.60 - 1.80
---------
Balance outstanding, December 31, 1994 883,512 0.60 - 4.00
Granted 365,675 1.20 - 24.00
Exercised (153,268) 0.60 - 7.20
Cancelled (68,677) 0.60 - 16.25
---------
Balance outstanding, December 31, 1995 1,027,242 $0.60 - $24.00
=========
SHARES WEIGHTED AVERAGE
EXERCISE PRICE
Balance outstanding, January 1, 1996 1,027,242 $ 6.59
Granted 838,218 22.91
Exercised (195,429) 2.60
Cancelled (65,811) 10.66
--------- -----
Ending outstanding 1,604,220 15.39
========= =====
Exercisable as of December 31, 1996 524,318 $ 5.12
========= =====
Available for grant at December 31, 1996 881,035
=========
Outstanding and exercisable options by price range as
of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ---------------------
OPTIONS WEIGHTED WEIGHTED OPTIONS WEIGHTED
RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE AS OF REMAINING EXERCISE AS OF EXERCISE
PER SHARE DEC. 31, 1996 TERM (YEARS) PRICE DEC. 31,1996 PRICE
<S> <C> <C> <C> <C> <C>
$ 0.60 - $ 1.20 257,465 6.28 $ 1.14 220,439 $ 1.13
1.80 - 2.40 204,272 7.50 2.30 165,138 2.32
4.00 - 6.00 12,021 7.82 4.13 6,391 4.09
7.20 - 9.00 6,467 8.16 8.19 2,953 8.10
11.25 - 16.50 303,997 8.78 15.22 105,426 14.18
18.25 - 27.38 769,448 9.39 23.03 23,971 20.96
27.50 - 30.25 50,550 9.73 29.42 0 0.00
--------- ---- ------ ------- ------
$ 0.60 - $30.25 1,604,220 8.53 $15.39 524,318 $ 5.12
========= ==== ====== ======= ======
</TABLE>
thirty six NEOPATH 1996 ANNUAL REPORT
<PAGE>
Pro forma information regarding net loss and net loss
per share is required by FASB 123, and has been
determined as if the Company had accounted for its
employee stock options under the fair value method of
that Statement. 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 1996 and 1995,
respectively: risk-free interest rates of 6.01% and
6.27%; dividend yields of 0%; volatility factors of the
expected market price of the Company's common stock of
0.5512; and a weighted-average expected life of the
option of 1.46 years from vest date.
The Black-Scholes option value model was developed
for use in estimating the fair value of traded options
which have no vesting restrictions and are fully
transferable. In addition, option valuation models
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:
YEAR ENDED DECEMBER 31, 1996 1995
Pro forma net loss $20,717,024 $15,126,112
Pro forma net loss per share $ 1.59 $ 1.61
Shares used in computation 13,029,314 9,412,683
The FASB 123 pro forma disclosures above are not
necessarily indicative of future pro forma disclosures
because of the manner in which FASB 123 calculations are
phased in over time.
The weighted average fair value for options granted
during 1996 using the Black-Scholes multiple option
pricing model is $10.86.
During 1994, the Company recorded deferred
compensation for the difference between the exercise
price and the deemed fair value for financial reporting
purposes of the Company's common stock for options
granted in 1994. Such options were granted at prices
ranging from $1.20 to $4.00 per share, with a deemed
fair value ranging from $2.40 to $6.00 per share. This
compensation expense aggregated $774,000, and is being
amortized over the respective vesting periods.
thirty seven NEOPATH 1996 ANNUAL REPORT
<PAGE>
WARRANTS
Warrants to purchase common stock were issued in
connection with several of the preferred stock
offerings. These warrants expire at various dates
through 2001.
Total common stock warrants outstanding at December
31, 1996 were 699,180 at a weighted average exercise
price per share of $7.42.
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, for which the Company received no proceeds.
Such rights allow the warrantholder 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. The remaining
warrants outstanding as of December 31, 1996 have net
exercise rights.
COMMON STOCK RESERVED
At December 31, 1996, common shares were reserved for the
following purposes:
Exercise of common stock warrants 699,180
Exercise and future grants of stock options 2,485,255
---------
3,184,435
=========
nine
employee benefits
The Company has a retirement plan covering substantially
all employees which 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.
ten
litigation
On July 15, 1996, Neuromedical Systems, Inc. filed a
lawsuit against NeoPath, Inc. 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, the Company filed its answer and
counter claims. The Company believes it has a strong
position in this action and is defending itself
vigorously.
thirty eight NEOPATH 1996 ANNUAL REPORT
<PAGE>
management's statement
of financial responsibility
The management of NeoPath, Inc. is responsible for the
fair and accurate presentation of the financial
information in this annual report. The financial
statements and related notes have been prepared in
accordance with generally accepted accounting principles
based on Company records and other sources. Certain
financial information is, of necessity, based on
judgment and estimation.
We believe that adequate accounting systems and
financial controls are maintained to ensure that the
Company's records are free from material misstatement
and to protect the Company's assets from loss or
unauthorized use. In addition, the Audit Committee of
the Board of Directors periodically meets with Company
management and with Ernst & Young LLP, the Company's
independent auditors.
/S/ Alan C. Nelson
ALAN C. NELSON, PH.D.
President and
Chief Executive Officer
/S/ William L. Scott
WILLIAM L. SCOTT
Vice President and
Chief Financial Officer
/S/ Robert C. Bateman
ROBERT C. BATEMAN
Corporate Controller
Acting Chief Accounting Officer
thirty nine NEOPATH 1996 ANNUAL REPORT
<PAGE>
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, 1996 and 1995, and the
related statements of operations, shareholders' equity,
and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are
free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles
used and significant estimates made by management, as
well as evaluating the overall financial statement
presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
financial position of NeoPath, Inc. as of December 31,
1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally
accepted accounting principles.
/S/Ernst & Young LLP
Seattle, Washington
January 24, 1997
forty NEOPATH 1996 ANNUAL REPORT
<PAGE>
common stock information
Since January 26, 1995, the Company's common stock has
been trading on the Nasdaq National Market tier of The
Nasdaq National Market ("Nasdaq") under the symbol
"NPTH." As of January 31, 1997, there were 329 holders
of record of the common stock of the Company and
13,704,895 shares outstanding. Since certain of the
shares of common stock are held in street name, there
may be additional beneficial holders of the Company's
common stock.
The following table sets forth, for the periods
indicated, the high and the low closing prices for the
common stock as reported by Nasdaq:
1996 1995
high low high low
First Quarter $28.00 $21.50 $15.88 $11.25
Second Quarter 26.00 20.50 16.50 13.50
Third Quarter 30.25 18.50 27.75 16.50
Fourth Quarter 21.50 14.63 27.88 18.50
The Company has not declared or paid cash dividends
on its common stock. The Company currently intends to
retain all earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable
future.
forty one NEOPATH 1996 ANNUAL REPORT
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual
Report (Form 10-K) of NeoPath, Inc. of our report dated
January 24, 1997, included in the 1996 Annual Report to
Shareholders of NeoPath, Inc.
Our audits also included the financial statement schedule of
NeoPath, Inc. listed in Item 14(a). This schedule is the
responsibility of management. Our responsibility is to
express an opinion based on our audits. In our opinion, the
financial statement schedule referred to above, when
considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects
the information set forth therein.
We also consent to the incorporation by reference in the
Registration Statements (Form S-8) pertaining to
the NeoPath, Inc. Stock Option Plan for Nonemployee Directors and
the NeoPath, Inc. 1989 Stock Option Plan, both as restated
on April 25, 1996, of our report dated January 24, 1997, with
respect to the financial statements and schedule included in
or incorporated by reference in this Annual Report (Form 10-
K) for the year ended December 31, 1996.
/s/ERNST & YOUNG LLP
Seattle, Washington
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
form 10K and documents incorporated by reference for the year ended December 31,
1996, and is qualified in its etirety by reference to such financial statements
and footnotes.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,871,401
<SECURITIES> 50,616,477
<RECEIVABLES> 1,015,256
<ALLOWANCES> 175,000
<INVENTORY> 5,641,914
<CURRENT-ASSETS> 65,167,774
<PP&E> 7,243,650
<DEPRECIATION> 2,429,905
<TOTAL-ASSETS> 76,131,555
<CURRENT-LIABILITIES> 4,346,884
<BONDS> 0
0
0
<COMMON> 136,255,746
<OTHER-SE> (64,653,610)
<TOTAL-LIABILITY-AND-EQUITY> 76,131,555
<SALES> 0
<TOTAL-REVENUES> 3,061,849
<CGS> 0
<TOTAL-COSTS> 1,904,559
<OTHER-EXPENSES> 22,497,603
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,813
<INCOME-PRETAX> (17,655,283)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,655,283)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,655,283)
<EPS-PRIMARY> (1.36)
<EPS-DILUTED> 0
</TABLE>
