SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________________ to
_________________
Commission file number: 0-25210
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: (425) 869-7284
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 the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at July 23, 1998
(Common stock, $.01 par value) 14,484,113
<PAGE>
NEOPATH, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
Page
Item 1. Financial Statements 1
Balance Sheets -- June 30, 1998 (unaudited) and
December 31, 1997
Statements of Operations (unaudited) -- for the
three months and six months ended June 30, 1998
and 1997
Statements of Cash Flows (unaudited) -- for the
six months ended June 30, 1998 and 1997
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 10
Part II OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
Part 1 FINANCIAL INFORMATION
Item 1. Financial Statements
NEOPATH, INC.
BALANCE SHEETS
June 30, December 31,
1998 1997
__________ ____________
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 8,025,025 $ 308,970
Securities available-for-sale 12,419,508 25,409,633
Accounts receivable, net 4,872,593 3,863,818
Inventories 8,417,226 7,514,001
Other current assets 513,413 187,147
___________ ___________
Total current assets 34,247,765 40,283,569
Fee-per-use systems, net 7,981,796 8,564,189
Property and equipment, net 5,277,006 5,979,849
Intangible assets, net 3,524,901 3,383,925
Deposits and other assets 1,331,248 729,280
___________ ___________
Total assets $52,362,716 $58,940,812
=========== ===========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 1,689,318 $ 2,173,179
Salaries and wages payable 1,949,260 2,357,045
Customer deposits 280,660 431,877
Other accrued liabilities 1,046,748 567,759
Current portion of long-term obligations 2,442,981 80,966
___________ ___________
Total current liabilities 7,408,967 5,610,826
Long-term obligations, less current portion 2,652,201 101,872
Shareholders' equity:
Common stock 141,754,301 141,057,881
Accumulated deficit (99,359,128) (87,633,118)
Accumulated other comprehensive loss (93,625) (196,649)
___________ ____________
Total shareholders' equity 42,301,548 53,228,114
___________ ____________
Total liabilities and shareholders' equity $52,362,716 $ 58,940,812
=========== ============
See accompanying notes.
Page 1
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NEOPATH, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
June 30, June 30,
_____________ ______________ ____________ _____________
1998 1997 1998 1997
Revenues $ 4,308,465 $ 2,240,505 $ 7,871,156 $ 4,475,057
Cost of revenues 2,371,840 967,928 4,412,600 2,045,440
____________ ____________ ____________ ____________
Gross margin 1,936,625 1,272,577 3,458,556 2,429,617
Operating expenses:
Research and
development 2,911,427 3,922,646 5,957,243 8,309,502
Selling, general and
administrative 5,329,589 4,708,514 9,835,832 8,404,185
____________ ____________ ____________ ___________
8,241,016 8,631,160 15,793,075 16,713,687
____________ ____________ ____________ ___________
Loss from operations (6,304,391) (7,358,583) (12,334,519) (14,284,070)
Interest income 267,302 673,609 633,076 1,419,275
Interest expense (15,288) (8,125) (24,567) (14,610)
____________ ____________ ___________ ___________
Net loss $(6,052,377) $ (6,693,099) $(11,726,010) $(12,879,405)
============ ============ ============ ============
Basic and diluted net
loss per share $ (0.42) $ (0.47) $ (0.81) $ (0.92)
============ ============ ============ ============
Weighted average
common shares
outstanding 14,468,686 14,277,067 14,442,269 14,024,351
============ ============ ============ ============
See accompanying notes.
Page 2
<PAGE>
NEOPATH, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
_______________________________
1998 1997
_______________ _____________
Operating activities
Net loss $ (11,726,010) $ (12,879,405)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,790,942 1,623,844
Deferred compensation -- 74,246
Accrued interest on securities
available-for-sale 360,694 756,975
Net change in operating accounts:
Accounts receivable (1,008,775) (681,888)
Inventories and fee-per-use systems (1,474,927) (5,358,568)
Accounts payable and accrued liabilities (493,392) 1,482,984
Other (922,894) (234,169)
______________ _____________
Net cash used in operating activities (12,474,362) (15,215,981)
Investing activities
Purchases of securities available-for-sale (202,310) (5,349,511)
Maturities of securities available-for-sale 12,934,765 18,622,760
Purchase of Pathfinder System product line -- (2,542,917)
Additions to property and equipment (531,042) (590,057)
Other -- (2,546)
______________ _____________
Net cash provided by investing activities 12,201,413 10,137,729
Financing activities
Proceeds from note payable to bank 4,950,000 --
Exercise of stock options and warrants 76,660 3,734,838
Principal payments on obligations under
capital leases (37,656) (39,768)
______________ _____________
Net cash provided by financing activities 4,989,004 3,695,070
______________ _____________
Net increase (decrease) in cash and
cash equivalents 4,716,055 (1,383,182)
Cash and cash equivalents:
Beginning of period 3,308,970 7,871,401
______________ _____________
End of period $ 8,025,025 $ 6,488,219
============== =============
Noncash transactions and supplemental
disclosures
Inventories reclassified to fee-per-use
systems, net $ 441,736 $ 1,342,619
Inventories reclassified to property
and equipment 137,713 1,101,818
See accompanying notes.
Page 3
<PAGE>
NEOPATH, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited financial statements have been
prepared by NeoPath, Inc. ("NeoPath" or the "Company") in
accordance with generally accepted accounting principles for
interim financial information and according to the rules and
regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (which include only normal recurring adjustments)
considered necessary for a fair presentation have been included.
The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date, but does not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
The results of operations for the three-month and six-month
periods ended June 30, 1998, are not necessarily indicative of
results to be expected for the entire year ending December 31,
1998 or for any other fiscal period. For further information,
refer to the financial statements and footnotes thereto
incorporated by reference in the Company's Form 10-K for the year
ended December 31, 1997.
Note 2 - Revenue Recognition
The Company recognizes AutoPap(R) System fee-per-use
revenues based on the number of customer slides processed,
generally subject to agreed-upon minimum processing levels or
minimum rental payments, beginning in the month an AutoPap System
is initially placed in commercial use at the customer site.
Sales of AutoPap and Pathfinder Systems are recognized at date of
shipment.
Note 3 - Recently Issued Accounting Standards
As of January 1, 1998, NeoPath adopted Financial Accounting
Standards Board ("FASB") Statement No. 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for
the reporting and display of comprehensive income or loss and its
components; however, the adoption of this Statement had no impact
on the Company's operating results or shareholders' equity.
Statement 130 requires unrealized gains or losses on the
Company's securities available-for-sale, which prior to adoption
were reported within shareholders' equity, to be included in
other comprehensive income or loss. Statement 130 also requires
presentation of accumulated other comprehensive income or loss
separately in shareholders' equity; accordingly, prior year
financial statements have been reclassified to conform to these
requirements.
Components of comprehensive net loss are as follows:
Three months ended June 30,
___________________________________
1998 1997
_______________ _______________
Net loss $ (6,052,377) $ (6,693,099)
Unrealized gain on
securities available-
for-sale 41,507 264,238
______________ ______________
Comprehensive net loss $ (6,010,870) $ (6,428,861)
============== ==============
Six months ended June 30,
__________________________________
1998 1997
______________ ______________
Net loss $ (11,726,010) $ (12,879,405)
Unrealized gain on
securities available-
for-sale 103,024 64,074
______________ ______________
Comprehensive net loss $ (11,622,986) $ (12,815,331)
============== ==============
Page 4
<PAGE>
In 1997, the FASB issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which
is required to be adopted for periods beginning after December
15, 1997. The new Statement supersedes FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise."
Companies will be required to report each operating segment and
related information, as defined in Statement 131, in the notes to
financial statements. NeoPath plans to adopt the new Statement
in 1998. Statement 131 is not required to be applied to interim
financial statements in the initial year of adoption.
Note 4 - Inventories
Inventories consist of the following:
June 30, 1998 December 31, 1997
________________ _________________
Raw materials $ 3,394,052 $ 3,819,830
Work-in-process 1,811,255 1,061,900
Finished goods 3,211,919 2,632,271
________________ _________________
$ 8,417,226 $ 7,514,001
================ =================
Note 5 - Purchase of Pathfinder System Product Line
NeoPath acquired the Pathfinder System product line in June
1997 for an initial purchase price of $4.1 million. The initial
purchase price included cash of $2.7 million (including
transaction-related expenses), a $500,000 short-term note paid in
October 1997, and 48,564 shares of NeoPath common stock. In
addition, certain shares of NeoPath common stock were issued and
were held in escrow contingent upon certain specific technology
decisions to be made within one year of closing. In April 1998
the Company released the remaining shares held in escrow,
consisting of approximately 42,000 shares of NeoPath common
stock, resulting in recognition of an additional $550,000 in
intangible assets that will be amortized over the remaining five-
year amortization term established in June 1997.
Note 6 - Note Payable to Bank
In April 1998, NeoPath entered into a loan agreement with a
bank whereby the Company may borrow up to $10 million through
June 1999. The bank debt is secured by substantially all of
NeoPath's assets, excluding intellectual property, and amounts
are repaid over 24 months from the date of each drawdown. In
addition, NeoPath must comply with certain financial covenants.
Borrowings under this agreement bear interest at the bank's
prime rate plus 1 percent per annum (9.5% at June 30, 1998). The
balance outstanding at June 30, 1998 was $4,950,000, of which
$2,357,988 was classified as due within one year.
Note 7 - Litigation
On July 15, 1996, Neuromedical Systems, Inc.
("Neuromedical") 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. In May
1998, a judge in the United States District Court for the
Southern District of New York denied Neuromedical's motion for a
preliminary injunction against NeoPath. The parties have agreed
to dismiss their claims and counterclaims on all but the patent
issues, and Neuromedical accordingly served an amended complaint
on July 27, 1998 asserting only patent infringement claims. This
lawsuit is still in the discovery stage and a trial date has not
been set. The Company continues to believe it has a strong
position in this action and will defend itself vigorously.
On March 31, 1997, the Company filed a patent infringement
lawsuit against Neuromedical in the United States District Court
for the Western District of Washington. The complaint alleges
patent infringement and seeks permanent injunctions against
Neuromedical. In March and April 1998 this lawsuit was amended,
and NeoPath filed an additional related patent lawsuit against
Neuromedical. Neuromedical filed a motion for summary judgment,
which was denied by the court in April 1998. The first lawsuit
is scheduled for trial in the autumn of 1998, and the second
lawsuit is currently in the discovery stage.
Page 5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
NeoPath, Inc. ("NeoPath" or the "Company") develops and
markets visual intelligence technology to increase accuracy in
medical testing. NeoPath's initial products include (i) 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 for the early detection of cervical cancer
and (ii) the Pathfinder(R) System product line acquired in 1997.
In 1995, the United States Food and Drug Administration (the
"FDA") cleared for commercial use the Company's first product,
the AutoPap(R) 300 QC Automatic Pap Screener System (the "AutoPap
QC"). In early 1996, the Health Care Financing Administration
(the "HCFA") officially allowed clinical laboratories to use the
AutoPap QC in the quality control review of Pap smear slides that
had been initially screened by cytologists and classified as
normal. The HCFA decision allowed AutoPap QCs to be used in
determining which slides will be rescreened under the federally
mandated rescreening requirement.
NeoPath's second product is the AutoPap Primary Screening
System (the "AutoPap Screener" and, in combination with the
AutoPap QC, the "AutoPap System"). The AutoPap Screener utilizes
the same hardware components as the AutoPap QC; however, it uses
enhanced software, including additional cell-classification
algorithms. During 1997, NeoPath completed a prospective
intended-use clinical study to evaluate the performance of the
AutoPap Screener as a primary screening system. This study
included analysis of more than 25,000 Pap smear slides at five
clinical laboratories in the United States and Canada. In August
1997, NeoPath submitted the results of the study in an amendment
to its pending PreMarket Approval ("PMA") Supplement to the FDA,
for use of the AutoPap Screener as a primary screener of Pap
smear slides. In January 1998, the Hematology and Pathology
Devices Advisory Panel of the FDA (the "Panel") unanimously
recommended that the FDA approve, the supplement to NeoPath's PMA
submission. On May 5, 1998, the FDA followed the Panel's
recommendation and approved the AutoPap Screener for use as a
primary Pap smear screener. As approved by the FDA, the AutoPap
Screener demonstrates a statistically significant increase in
identifying disease when compared to current practice.
NeoPath's Pathfinder System provides improved productivity
and quality assurance in the clinical cytology laboratory by
computerizing the cytotechnologists' microscopes, thereby helping
to eliminate screening errors and facilitating critical cell
identification in applications such as Pap smear screening.
Results of Operations
(in thousands) June 30, 1998 Change June 30, 1997
_____________________________________________________________________
Revenues:
Three months ended $4,308 $2,067 $2,241
92%
Six months ended $7,871 $3,396 $4,475
76%
The Company recognizes revenue on either a sale or fee-per-
use basis (subject to certain license agreements, lease
contracts, and minimum payments on fee-per-use contracts). 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 AutoPap Screener is the only FDA-approved system for
primary screening of Pap smears. In June 1998, NeoPath
implemented a strategy to take advantage of this competitive
opportunity by offering AutoPap Screeners to customers with
initial fee-per-use pricing in line with existing laboratory
economics. Per-slide pricing is designed to increase during the
contract period to reflect increases in third-party reimbursement
levels. NeoPath will also continue to offer traditional, fixed
price fee-per-use contracts.
Page 6
<PAGE>
NeoPath believes that increased third-party reimbursement of
Pap smears in general, and increased reimbursement for screening
utilizing the AutoPap System in particular, will increase the
Company's revenue potential in the remainder of 1998 and beyond.
In early 1998, NeoPath formed a five-person team to work with
third-party insurers and managed care organizations to establish
and/or improve third-party reimbursement levels for the AutoPap
System. These reimbursement specialists are working closely
with NeoPath's field sales personnel throughout the United
States. Effective January 1, 1998, revised Physicians' Current
Procedural Terminology ("CPT") codes (established by the American
Medical Association) became effective for the AutoPap QC. CPT
codes are a universal system used by physicians and clinical
laboratories to identify specific procedures when billing
insurers for their services. The Company believes that new CPT
codes which address utilization of the AutoPap as a primary Pap
smear screener will be published for implementation on January 1,
1999. In the interim, the Company's reimbursement team has been
working with initial primary screening customers to obtain
reimbursement when using the AutoPap System.
The majority of AutoPap Systems placed in the United States
are under fee-per-use contracts, while international placements
have been primarily sales transactions. Approximately 78 percent
of second quarter 1998 revenues resulted from worldwide AutoPap
System sales and upgrades of previously installed AutoPap QCs
to enable operation as AutoPap Primary Screening Systems. For
the six-month period, approximately 73 percent of total revenues
were attributable to AutoPap System sales and upgrades. The
remaining revenues represented fee-per-use contract billings and
Pathfinder System sales. Pathfinder System sales accounted for
less than 5 percent of total revenues in the first half of 1998.
The Company anticipates that future AutoPap System
placements will continue to consist of both fee-per-use and sale
contracts. However, because an AutoPap sale results in NeoPath's
immediate recognition of product revenue (while a fee-per-use
contract provides lower initial revenues but generally extends
over several years) the Company expects that near-term AutoPap
System sale transactions will account for a higher percentage of
total revenues than will the fee-per-use program. The sales mix
may vary as product features and markets mature, and as third-
part reimbursement policies change.
During the second quarter of 1998, NeoPath placed AutoPap
Primary Screening Systems in Taiwan, which represents the fourth
country in Asia to accept AutoPap technology. NeoPath's AutoPap
Systems are also processing slides in Japan, China (Hong Kong),
and Korea, as well as locations in Europe and Australia. Year-to-
date AutoPap revenues included additional AutoPap System
placements in Hong Kong and Japan. Virtually all of the
Company's international product placements have been denominated
in U.S. dollars; however, future product revenues may include
customer contracts subject to foreign exchange rate fluctuations.
Approximately 31 percent of NeoPath's revenues in the second
quarter of 1998 represented sales to customers outside of the
United States, compared to approximately 67 percent in the same
period in 1997. For the six months ended June 30, international
revenues accounted for approximately 27 percent of total
revenues, compared to 69 percent for the same period in 1997.
Percentage Percentage
(in thousands) June 30,1998 of Revenues June 30, 1997 of Revenues
_______________________________________________________________________________
Cost of revenues:
Three months ended $2,372 55% $968 43%
Six months ended $4,413 56% $2,045 46%
Gross margin:
Three months ended $1,937 45% $1,273 57%
Six months ended $3,459 44% $2,430 54%
Page 7
<PAGE>
The Company's year-to-date gross margin reflects discounts
and incentives included in AutoPap QC pricing in the first
quarter as customers anticipated the FDA's approval of the
AutoPap Screener. Pricing incentives continued into the second
quarter as initial primary screening placements were made. The
change in gross margin from the prior year was also attributable
to 1997 international sales under a distribution agreement with
higher initial AutoPap System pricing in comparison to 1998.
Gross margin is expected to fluctuate depending on the mix
of fee-per-use revenues, AutoPap System sales, upgrades, and
other revenues, as well as sales incentive programs that may be
offered. The continued development of the manufacturing, service
and support functions, as well as overall production levels, are
also expected to contribute to fluctuations in gross margin.
Therefore, the Company's historic gross margins are not
necessarily indicative of future gross margins.
(in thousands) June 30, 1998 Change June 30,1997
_________________________________________________________________
Research and development:
Three months ended $2,911 $(1,012) $3,923
(26%)
Six months ended $5,957 $(2,353) $8,310
(28%)
The Company incurred higher research and development costs
in 1997 due primarily to NeoPath's AutoPap Screener clinical
study which was completed in 1997.
(in thousands) June 30, 1998 Change June 30, 1997
_________________________________________________________________
Selling, general
and administrative:
Three months ended $5,330 $621 $4,709
13%
Six months ended $9,836 $1,432 $8,404
17%
Selling, general and administrative expenses increased from
the prior year due primarily to continued investment in
significant new sales and marketing initiatives, including the
market launch of the AutoPap Screener, as well as expansion of
the sales and reimbursement team in 1998. Costs in the first
half of 1998 also included the amortization of the allocated
purchase price and integration of the Pathfinder System product
line acquired in June 1997.
(in thousands) June 30, 1998 Change June 30, 1997
_________________________________________________________________
Interest income:
Three months ended $267 $(407) $674
(60%)
Six months ended $633 $(786) $1,419
(55%)
The decrease in interest income in 1998 was due to decreased
cash equivalents and securities available-for-sale resulting from
NeoPath's negative operating cash flow.
Page 8
<PAGE>
Liquidity and Capital Resources
As of June 30, 1998, the Company had $20.4 million in cash,
cash equivalents, and securities available-for-sale, compared to
$28.7 million as of December 31, 1997. The decrease was a result
of cash used in the Company's operations for the six months ended
June 30, 1998, offset by approximately $5 million in cash
obtained from drawing down the first tranche of the Company's new
$10 million debt facility. The Company's cash used in operating
activities was $12.5 million and $15.2 million in the six months
ended June 30, 1998 and 1997, respectively. The Company expended
cash for property and equipment, excluding AutoPap Systems
reclassified to either fee-per-use systems or reclassified to
property and equipment, of $531,000 and $590,000 in the six
months ended June 30, 1998 and 1997, respectively.
The Company expects negative cash flow from operations to
continue at least through early 1999 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 and analyzes data from clinical or pre-clinical
studies. The Company has obtained a bank financing facility to
borrow up to $10 million based on current and future fee-per-use
AutoPap Systems placed at customer sites, of which $5 million
remains available through June 1999. The Company currently
estimates that its existing cash resources and established
financing facility will enable it to sustain operations for at
least the next twelve months. There can be no assurance,
however, that the Company will not be required to seek additional
cash in the form of either debt or equity at an earlier date.
The Company's future capital requirements will depend on many
factors, including the extent and rate of adoption of the AutoPap
Screener; the increased market acceptance of the Company's fee-
per-use programs; the mix of fee-per-use and sale placements; the
market acceptance of the Pathfinder System; 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 will experience dilution. Insufficient
funds may require the Company to delay, scale back or eliminate
some or all of its manufacturing, research and development or
clinical programs.
Impact of Year 2000
Some of the Company's internal and product software programs
were written using two digits rather than four to define the
applicable year. As a result, those computer programs have time-
sensitive software that recognize a date using "00" as the year
1900 rather than the year 2000. The Company has completed a
preliminary assessment and will have to modify or replace
portions of its internal and product software so that its
computer systems will function properly with respect to dates in
the year 2000 and thereafter. The project is estimated to be
completed in early 1999, and the total Year 2000 project cost is
not expected to be material.
The Company believes that with modifications to existing
software and conversions to new software, the Year 2000 Issue
will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have
a material impact on NeoPath's operations.
Page 9
<PAGE>
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,
which speak only as of their dates. 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: market acceptance of
the Company's products, marketing and sales programs; dependence
on reimbursement; product and manufacturing regulatory approvals;
the Company's limited marketing, sales, customer service and
support capabilities; uncertainties relating to international
transactions; potential need for additional capital; the
Company's sole or limited source of supply of certain components;
the status of competing products; dependence on single product
line; product liability; dependence on patents and property
rights; and the risk of third-party claims of infringement. For
a more detailed discussion of these and other factors, see
"Factors Affecting Future Results and Forward-Looking Statements"
of the Company's Form 10-K for the fiscal year ended December 31,
1997.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Not applicable.
Page 10
<PAGE>
Part II OTHER INFORMATION
Item 1. Legal Proceedings
On July 15, 1996, Neuromedical Systems, Inc.
("Neuromedical") 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. In May
1998, a judge in the United States District Court for the
Southern District of New York denied Neuromedical's motion for a
preliminary injunction against NeoPath. The parties have agreed
to dismiss their claims and counterclaims on all but the patent
issues, and Neuromedical accordingly served an amended complaint
on July 27, 1998 asserting only patent infringement claims. This
lawsuit is still in the discovery stage and a trial date has not
been set. The Company continues to believe it has a strong
position in this action and will defend itself vigorously.
On March 31, 1997, the Company filed a patent infringement
lawsuit against Neuromedical in the United States District Court
for the Western District of Washington. The complaint alleges
patent infringement and seeks permanent injunctions against
Neuromedical. In March and April 1998 this lawsuit was amended,
and NeoPath filed an additional related patent lawsuit against
Neuromedical. Neuromedical filed a motion for summary judgment,
which was denied by the court in April 1998. The first lawsuit
is scheduled for trial in the autumn of 1998, and the second
lawsuit is currently in the discovery stage.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May
21, 1998 (the "Annual Meeting"), the following individuals were
elected to the Board of Directors:
For Withheld Authority
___ __________________
Class 1 Directors
_________________
Alan C. Nelson 11,819,885 202,454
Thomas A. Bonfiglio 11,820,511 201,828
The following proposal was approved at the Company's Annual
Meeting:
For Against Abstained
___ _______ _________
Amendment of the NeoPath,
Inc. 1989 Restated Stock
Option Plan (the "1989
Plan") authorizing the
issuance of an additional
720,000 shares of Common
Stock upon exercise of
options under the 1989 Plan 10,942,419 1,011,252 68,668
Total shares represented but unvoted on the above proposal: -0-
In accordance with the Company's Bylaws, a shareholder proposing
to transact business at the Company's annual meeting must provide
written notice of such proposal, in the manner provided by the
Company's Bylaws, no later than 60 days prior to the date of such
annual meeting (or, if the Company provides less than 60 days notice
of such meeting, no later than 10 days after the date of the
Company's notice). In addition, if the Company receives notice of a
shareholder proposal after March 2, 1999, the persons named as
proxies in such proxy statement and proxy will have discretionary
authority to vote on such shareholder proposal.
Page 11
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report.
Exhibit No. Description
___________ ___________
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1998.
Page 12
<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.
NeoPath, Inc.
Date: August 10, 1998 By: /s/ ALAN C. NELSON
______________________
Alan C. Nelson
President, CEO and Chairman
By: /s/ ROBERT C. BATEMAN
_____________________
Robert C. Bateman
Vice President and Chief Financial Officer
Page 13
<PAGE>
NEOPATH, INC.
INDEX TO EXHIBITS
Exhibit No. Description
___________ ___________
27 Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q as of June 30, 1998 and for the six months then ended, and is
qualified in its entirety by reference to such financial statements and
footnotes.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,025,025
<SECURITIES> 12,419,508
<RECEIVABLES> 4,872,593
<ALLOWANCES> 0
<INVENTORY> 8,417,226
<CURRENT-ASSETS> 34,247,765
<PP&E> 5,277,006
<DEPRECIATION> 0
<TOTAL-ASSETS> 52,362,716
<CURRENT-LIABILITIES> 7,408,967
<BONDS> 0
0
0
<COMMON> 141,754,301
<OTHER-SE> (99,452,753)
<TOTAL-LIABILITY-AND-EQUITY> 52,362,716
<SALES> 0
<TOTAL-REVENUES> 7,871,156
<CGS> 0
<TOTAL-COSTS> 4,412,600
<OTHER-EXPENSES> 15,793,075
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,567
<INCOME-PRETAX> (11,726,010)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,726,010)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,726,010)
<EPS-PRIMARY> (0.81)<F1>
<EPS-DILUTED> 0.00
<FN>
<F1>Basic and diluted net loss per share are the same amount.
</FN>
</TABLE>
