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 March 31, 1999
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 May 3, 1999
(Common stock, $.01 par value) 17,413,400
<PAGE>
NEOPATH, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
Page
____
Item 1. Financial Statements 1
Balance Sheets -- March 31, 1999 (unaudited)
and December 31, 1998
Statements of Operations (unaudited) -- for the
three months ended March 31, 1999 and 1998
Statements of Cash Flows (unaudited) -- for the
three months ended March 31, 1999 and 1998
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 12
Part II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
NEOPATH, INC.
BALANCE SHEETS
March 31, December 31,
1999 1998
___________ ____________
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 7,192,450 $ 5,579,867
Securities available-for-sale 7,694,512 3,374,549
Accounts receivable, net 3,434,920 3,011,078
Inventories 7,946,880 6,744,417
Other current assets 503,702 392,415
_____________ _____________
Total current assets 26,772,464 19,102,326
Fee-per-use systems, net 15,551,411 14,602,963
Property and equipment, net 2,986,875 3,530,694
Deposits and other assets 833,176 913,850
_____________ _____________
Total assets $ 46,143,926 $ 38,149,833
============= =============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 2,627,576 $ 2,944,252
Salaries and wages payable 958,335 1,681,710
Customer deposits 316,240 332,485
Other accrued liabilities 1,418,134 1,157,077
Current portion of long-term obligations 2,540,402 2,549,151
_____________ ____________
Total current liabilities 7,860,687 8,664,675
Long-term obligations, less current
portion 629,189 1,257,027
Shareholders' equity:
Common stock 156,558,668 142,057,561
Accumulated deficit (118,881,716) (113,813,699)
Accumulated other comprehensive loss (22,902) (15,731)
_____________ _____________
Total shareholders' equity 37,654,050 28,228,131
_____________ _____________
Total liabilities and shareholders'
equity $ 46,143,926 $ 38,149,833
============= =============
See accompanying notes.
1
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NEOPATH, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
March 31,
___________________________________
1999 1998
_______________ _________________
Revenues $ 2,025,858 $ 3,562,691
Cost of revenues 1,164,390 2,040,760
_______________ _________________
Gross margin 861,468 1,521,931
Operating expenses:
Research and development 2,418,037 3,045,816
Selling, general and
administrative 3,558,706 4,506,243
_______________ _________________
5,976,743 7,552,059
_______________ _________________
Loss from operations (5,115,275) (6,030,128)
Interest income 137,244 365,774
Interest expense (89,985) (9,279)
_______________ _________________
Net loss $ (5,068,016) $ (5,673,633)
=============== =================
Basic and diluted net
loss per share $ (0.31) $ (0.39)
=============== =================
Weighted average common
shares outstanding 16,188,161 14,415,851
=============== =================
See accompanying notes.
2
<PAGE>
NEOPATH, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
March 31,
______________________________________
1999 1998
__________________ __________________
Operating activities
Net loss $ (5,068,016) $ (5,673,633)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 1,440,530 1,408,059
Accrued interest on securities
available-for-sale 73,565 191,903
Net change in operating accounts:
Accounts receivable (423,842) (420,028)
Inventories and fee-per-use systems (3,003,721) (840,016)
Accounts payable and accrued
liabilities (795,239) (922,145)
Other (29,575) (240,250)
________________ __________________
Net cash used in operating activities (7,806,298) (6,496,110)
Investing activities
Purchases of securities available-for-sale (7,199,372) --
Sales and maturities of securities
available-for-sale 2,798,672 7,608,916
Additions to property and equipment (43,901) (274,616)
Other (1,038) (403)
________________ __________________
Net cash (used in) provided by investing
activities (4,445,639) 7,333,897
Financing activities
Proceeds from private equity
transaction, net 14,461,462 --
Payments on note payable to bank (618,750) --
Issuance of common stock under employee
stock purchase plan 38,932 70,482
Exercise of options and warrants 713 70,685
Principal payments on obligations under
capital leases (17,837) (17,899)
________________ __________________
Net cash provided by financing activities 13,864,520 123,268
________________ __________________
Net increase in cash and cash equivalents 1,612,583 961,055
Cash and cash equivalents:
Beginning of period 5,579,867 3,308,970
________________ __________________
End of period $ 7,192,450 $ 4,270,025
================ ==================
Noncash transactions and supplemental
disclosures
AutoPap Systems reclassified to (from)
fee-per-use systems, net $ 1,760,047 $ (520,831)
See accompanying notes.
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, 1998 has been derived from the
audited financial statements at that date, but does not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
The results of operations for the three-month period ended March
31, 1999, are not necessarily indicative of results to be
expected for the entire year ending December 31, 1999 or for any
other fiscal period. For further information, refer to the
financial statements and footnotes thereto incorporated by
reference in the Company's Form 10-K for the year ended December
31, 1998.
Note 2 - Revenue Recognition
The Company recognizes revenue on either a product sale or
fee-per-use basis. Sales of AutoPap Systems are generally
recognized at date of shipment and are subject to continuing
service and license agreements for which revenue is recognized
over the corresponding contract period. Fee-per-use revenue
commences in the month an AutoPap(R) System is initially placed
in commercial use at a customer site and consists of per-slide
monthly billings, fixed rental billings, and minimum payments due
on certain fee-per-use contracts.
Note 3 - Comprehensive Net Loss
Components of comprehensive net loss, as defined by
applicable accounting and reporting standards, are as follows:
Three months ended March 31,
____________________________________
1999 1998
____________________________________
Net loss $ (5,068,016) $ (5,673,633)
Unrealized gain (loss) on
securities available-for-sale (7,171) 61,517
____________________________________
Comprehensive net loss $ (5,075,187) $ (5,612,116)
====================================
4
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Note 4 - Inventories
Inventories consist of the following:
March 31, 1999 December 31, 1998
___________________________________________
Raw materials $ 2,971,067 $ 2,093,748
Work-in-process 2,122,996 2,365,472
Finished goods 2,852,817 2,285,197
___________________________________________
$ 7,946,880 $ 6,744,417
===========================================
Note 5 - Private Equity Transaction
On February 9, 1999, NeoPath completed a $14.5 million
private equity transaction in which the Company issued 2.9
million shares of common stock to investors at a price of $5.00
per share. In connection with the financing, NeoPath issued to
Invemed Associates, Inc., a related party, five-year warrants to
purchase 100,000 shares of common stock at an exercise price of
$5.89 per share. On February 12, 1999, NeoPath filed a shelf
registration statement on Form S-3 that will, when declared
effective by the Securities and Exchange Commission, allow resale
of the newly issued shares. NeoPath must use its best efforts to
keep this registration statement effective for two years. If the
registration statement is not declared effective within 120 days
of the transaction closing, then the purchase price is reduced by
2%, payable to investors within 10 days following the expiration
of the 120-day period.
Note 6 - Litigation
On July 15, 1996, Neuromedical Systems, Inc. filed a lawsuit
against NeoPath in the United States District Court for the
Southern District of New York. The complaint alleged patent
infringement, unfair competition, false advertising, and related
claims, and requested monetary damages and injunctive relief. On
September 5, 1996, NeoPath filed its answer and counter claims.
In May 1998, a judge in the United States District Court for the
Southern District of New York denied Neuromedical's motion for a
preliminary injunction against the Company. The parties agreed
to dismiss their claims and counter claims on all but the patent
issues, and Neuromedical accordingly served an amended complaint
on July 27, 1998 asserting only patent infringement claims. On
March 26, 1999, Neuromedical announced that it had filed a
voluntary chapter 11 petition for bankruptcy. On April 6, 1999,
the court removed the case from its active docket pending further
developments in Neuromedical's bankruptcy proceedings.
On March 31, 1997, NeoPath filed a patent infringement
lawsuit against Neuromedical in the United States District Court
for the Western District of Washington. The complaint alleges
patent infringement and seeks permanent injunctions against
Neuromedical. In March and April 1998 this lawsuit was amended,
and NeoPath filed an additional related patent lawsuit against
Neuromedical. Neuromedical filed a motion for summary judgment,
which the court denied in April 1998. In October 1998,
Neuromedical filed another motion for summary judgment that the
court denied. By court order on March 30, 1999, proceedings have
been stayed pending resolution of Neuromedical's bankruptcy
proceedings. Furthermore, the court ordered that these cases be
removed from the court's active caseload.
On March 26, 1999, AutoCyte, Inc. announced an agreement to
purchase certain Neuromedical technology, including patent
rights, for $4.0 million in cash and 1.4 million shares of
AutoCyte common stock. On April 26, 1999, NeoPath and AutoCyte
announced an agreement whereby NeoPath may acquire an undivided
interest in the intellectual property estate of Neuromedical that
AutoCyte had agreed to acquire. Subject to completion of the
agreement between AutoCyte and Neuromedical and other conditions,
NeoPath will pay AutoCyte $2.2 million in cash and issue AutoCyte
1.2 million shares of NeoPath common stock at the later of the
transaction closing date or September 1, 1999. NeoPath's
agreement with AutoCyte provides that the patent infringement
litigation between NeoPath and Neuromedical will be terminated.
Note 7 - Reclassifications
Certain prior-period amounts have been reclassified to
conform to the current-period presentation.
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 two
automated screening systems that integrate proprietary high-speed
morphology computers, video imaging technology, and sophisticated
image interpretation software to capture and analyze thousands of
microscopic images from a Pap smear slide for the early detection
of cervical cancer.
The United States Food and Drug Administration (the "FDA")
approved NeoPath's AutoPap(R) 300 QC Automatic Pap Screener
System (the "AutoPap QC") in 1995. The AutoPap QC is a
rescreening device used for quality control and rescreening of
Pap smear slides previously screened by cytotechnologists.
Clinical studies have shown that the AutoPap QC detects a
significantly higher proportion of undetected abnormal slides
than procedures typically employed by clinical laboratories to
meet federal rescreening requirements.
The FDA approved NeoPath's AutoPap(R) Primary Screening
System (the "AutoPap Screener") in May 1998. The AutoPap
Screener uses the same hardware components as the AutoPap QC, but
uses enhanced software to perform the initial screening of Pap
smear slides and to classify up to 25% of such slides as
requiring no further review. Clinical studies have shown that
the AutoPap Screener provides statistically significantly better
sensitivity and specificity when compared to existing laboratory
practice. Currently, it is the only instrument approved by the
FDA that allows Pap smear slides to bypass human review. This
feature of the AutoPap Screener provides customers with an
economic incentive to adopt the technology.
The "AutoPap System" refers to the AutoPap Screener and the
AutoPap QC together.
Results of Operations
Three months ended Three months ended
(in thousands) March 31, 1999 Change March 31, 1998
______________________________________________________________________________
Revenues $2,026 $(1,537) $3,563
(43%)
Revenues for the quarter ended March 31, 1999 consisted of
fee-per-use billings and AutoPap service fees. Revenues in the
comparable 1998 quarter consisted of $1.1 million in fee-per-use
and AutoPap service fees, $2.4 million in AutoPap product sales,
and $0.1 million in Pathfinder product sales. Fee-per-use and
AutoPap service fee revenues in the first quarter increased 84%
from the first quarter of 1998; however, AutoPap product sales
decreased 100% from the first quarter of the prior year.
NeoPath's AutoPap System placements have consisted primarily of
fee-per-use contracts in the United States and sale contracts
internationally. Because sale contracts result in immediate
revenue recognition, whereas fee-per-use contracts provide a
recurring revenue stream over several years, NeoPath's
historical revenues have included a significant sale component.
Virtually all NeoPath's revenues in the first quarter of
1999 were from customers in the United States, compared to a 23%
international component in the first quarter of 1998. NeoPath's
AutoPap technology is available internationally at commercial
laboratories in Taiwan, Japan, China (Hong Kong), Korea,
Australia, and in Europe. The Company's international product
placements have primarily been denominated in U.S. dollars;
however, future product revenues may be subject to foreign
exchange rate fluctuations.
6
<PAGE>
The Company recognizes revenue on either a product sale or
fee-per-use basis. Sales of AutoPap Systems are generally
recognized at date of shipment and are subject to continuing
service and license agreements for which revenue is recognized
over the corresponding contract period. Fee-per-use revenue
commences in the month an AutoPap(R) System is initially placed
in commercial use at a customer site and consists of per-slide
monthly billings, fixed rental billings, and minimum payments
due on certain fee-per-use contracts. The 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.
Because the AutoPap Screener is the only FDA-approved
system for automated primary screening of Pap smears, NeoPath's
U.S. strategy includes 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 contract periods to reflect expected laboratory cost
efficiencies and overall increased third-party reimbursement
levels.
In October 1998, NeoPath announced an agreement with
SmithKline Beecham Clinical Laboratories pursuant to which
SmithKline agreed to adopt the AutoPap Screener throughout its
domestic laboratory organization. This four-year contract is
intended to enable SmithKline to process 100% of its Pap smear
volume on AutoPap Screeners. Initial orders under the national
agreement were shipped in the fourth quarter of 1998; however,
certain shipped systems have yet to be fully implemented, and
average AutoPap Screener usage is currently below expectation.
NeoPath continues to work with SmithKline to fully optimize
AutoPap usage at those SmithKline laboratory sites.
In February 1999, SmithKline and Quest Diagnostics
Incorporated announced that Quest had agreed to purchase
SmithKline. The combined entity would be the largest clinical
laboratory company in the world. NeoPath's national agreement
with SmithKline is binding on successor organizations, and
NeoPath management believes that the AutoPap Screeners installed
under the SmithKline agreement will continue to generate
revenues in accordance with the underlying agreement. However,
additional AutoPap Screener orders have been delayed as the two
laboratories work through their combined business issues. Future
negotiations with SmithKline and Quest could result in changes
to the overall pricing and placement rate under the existing
SmithKline agreement.
In October 1998, NeoPath announced a national agreement
with Kaiser Permanente, which is the largest non-profit group
health plan in the United States. This national agreement
allows Kaiser and affiliated entities to purchase AutoPap
Screeners during the two-year term of the agreement, with
additional annual service and licensing fees due over four
years. At current AutoPap processing rates, NeoPath estimates
that Kaiser may require up to 35 AutoPap Screeners to process
its nationwide volume of Pap smears. The timing of specific
purchase orders -- and related AutoPap Screener shipments -- is
subject to the adoption plans of Kaiser laboratories and
affiliates. No product revenues have been recognized under this
agreement through March 31, 1999.
NeoPath believes that increased third-party reimbursement of
Pap smears in general, and increased reimbursement for screening
utilizing the AutoPap System in particular, would increase market
acceptance of the Company's products. NeoPath has a
reimbursement team that works with third-party insurers and
managed care organizations to establish and/or improve third-
party reimbursement levels for the AutoPap System. On January 1,
1999, revised Physicians' Current Procedural Terminology ("CPT")
codes (established by the American Medical Association) became
effective for the AutoPap Screener. CPT codes are a standardized
system used by physicians and clinical laboratories to identify
specific procedures when billing insurers for their services.
New CPT codes that address utilization of the AutoPap QC became
available on January 1, 1998.
7
<PAGE>
<TABLE>
<CAPTION>
Three months ended Percentage of Three months ended Percentage of
(in thousands) March 31, 1999 Revenues March 31, 1998 Revenues
__________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Cost of revenues $1,164 57% $2,041 57%
Gross margin 861 43% 1,522 43%
</TABLE>
The primary components of fee-per-use cost of revenues
include depreciation and allocated service and support costs.
For AutoPap Systems sold, cost of revenues includes the related
manufacturing cost and estimated one-year warranty expense.
Primary screening systems are expected to process a
greater number of slides, on average, than the prior installed
base of AutoPap QCs, which is expected to improve the fee-per-
use gross margin percentage over time. The gross margin in the
first quarter of 1999 included the effect of initial lower
margins on newly installed fee-per-use systems that were
processing slides below the systems' capacity.
Three months ended Three months ended
(in thousands) March 31, 1999 Change March 31, 1998
_______________________________________________________________________________
Research and development $2,418 $(628) $3,046
(21%)
NeoPath's research and development expenses include
salaries and benefits of scientific, engineering, and
regulatory personnel; costs relating to clinical studies and
submission of applications to the FDA; testing equipment;
components used in prototypes; relevant consulting services;
and the costs of preparing and filing applications for patent
protection of NeoPath's technologies.
The Company incurred lower research and development costs in
1999 due primarily to decreased net development costs on other
AutoPap applications, lower patent filing expenditures, and
decreased overall regulatory expenses.
Three months ended Three months ended
(in thousands) March 31, 1999 Change March 31, 1998
_______________________________________________________________________________
Selling, general and
administrative $3,559 $(947) $4,506
(21%)
Selling, general and administrative expenses include
salaries and benefits of sales, marketing, administrative, and
financial personnel; non-patent application legal expenses; and
certain facility-related costs. NeoPath reduced its overall
spending rate in the second half of 1998 and continues to
carefully focus corporate spending. The decrease from 1998 is
due primarily to these cost reduction efforts as well as specific
reduced marketing expenditures and the reduction or elimination
of certain Pathfinder-related expenses as a result of the
Company's decision to write-off Pathfinder intangible assets in
the fourth quarter of 1998.
Three months ended Three months ended
(in thousands) March 31, 1999 Change March 31, 1998
_______________________________________________________________________________
Interest income $137 $(229) $366
(63%)
The decrease in interest income in 1999 is due to decreased
cash equivalents and securities available-for-sale resulting from
NeoPath's negative operating cash flow.
8
<PAGE>
Three months ended Three months ended
(in thousands) March 31, 1999 Change March 31, 1998
_______________________________________________________________________________
Interest expense $(90) $(81) $(9)
(870%)
The increase in interest expense in 1999 is due to NeoPath's
initial draw-down of its debt facility in
June 1998.
Liquidity and Capital Resources
As of March 31, 1999, the Company had $14.9 million in cash,
cash equivalents, and securities available-for-sale, compared to
$9.0 million as of December 31, 1998. The increase was a result
of a $14.5 million private equity transaction completed in
February 1999, offset by cash used during the quarter for
operating activities. As a result of the equity transaction,
NeoPath issued 2.9 million shares of common stock to existing
institutional NeoPath investors at a price of $5.00 per share.
On February 12, 1999, NeoPath filed a shelf registration
statement on Form S-3 that will, when declared effective by the
Securities and Exchange Commission, allow resale of the newly
issued shares. NeoPath must use its best efforts to keep this
registration statement effective for two years. If the
registration statement is not declared effective within 120 days
of the transaction closing, then the purchase price is reduced by
2%, payable to investors within 10 days following the expiration
of the 120-day period.
The Company's cash used in operating activities was $7.8
million and $6.5 million in the three months ended March 31, 1999
and 1998, 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
$44,000 and $275,000 in the quarters ended March 31, 1999 and
1998, respectively.
The Company has a debt facility with Silicon Valley Bank
with $3.1 million remaining outstanding as of the end of the
first quarter. The bank facility's interest rate was 8.75% as
of March 31, 1999, and the facility is secured by $2.0 million
in restricted cash in an interest-bearing account with the
bank. The restricted cash is included in cash and cash
equivalents on the balance sheet. The remaining debt is due
monthly through June 2000. The Company is required to maintain
certain financial covenants, including minimum liquidity
coverage, minimum tangible net worth, and minimum debt-to-
tangible-net-worth figures. NeoPath was in compliance with all
financial covenants as of March 31, 1999. The bank debt is
secured by substantially all of NeoPath's assets, excluding
intellectual property.
NeoPath's fee-per-use business strategy requires a
significant investment in the production of AutoPap Systems as
well as sufficient resources to meet operating expenses while
this recurring revenue stream grows. The Company expects
negative cash flow from operations to continue at least into the
year 2000. The Company may require additional funds to produce
AutoPap Systems for its fee-per-use program and cover continuing
losses. NeoPath's future capital requirements will depend on
numerous factors, including the following:
- sales of AutoPap Systems;
- fee-per-use revenues;
- research and development programs for the development of
enhanced products;
- additional clinical trials;
- relationships with existing and future corporate
collaborators, if any;
- competing technological and market developments;
- the time and costs involved in obtaining regulatory
approvals;
- the costs involved in filing, prosecuting, defending and
enforcing patent claims; and
- the time and costs of manufacturing scale-up and
commercialization activities.
9
<PAGE>
The Company estimates that existing cash and cash
equivalents will meet capital requirements through 1999. In
the year 2000, NeoPath's cash requirements will depend on many
factors, including the placement rate and pricing of fee-per-
use AutoPap Screeners. The Company cannot guarantee that the
assumptions underlying its estimates will prove to be accurate.
The Company intends to seek additional funding through private
debt financing to provide additional resources to support
AutoPap Screener production. To date, NeoPath has had
discussions with various potential lenders. A lender's
collateral would be based primarily on AutoPap Systems placed
on multi-year fee-per-use contracts. SmithKline is NeoPath's
largest customer; therefore, the February 1999 announcement
that Quest agreed to purchase SmithKline may delay NeoPath's
ability to obtain debt financing. Adequate funds, whether
obtained through financial markets or from collaborative or
other arrangements with corporate partners or other sources,
may not be available when needed or may not be available on
favorable terms, if at all. If the Company raises additional
funds by issuing equity securities, existing shareholders will
suffer dilution of their interest in NeoPath. In addition, if
the Company obtains additional funds through arrangements with
collaborative partners, NeoPath may have to relinquish rights
to certain technologies or potential products that the Company
would otherwise seek to develop or commercialize itself.
Insufficient funds may require the Company to delay, scale back
or eliminate some of its manufacturing, sales and marketing,
research and development or clinical programs.
Impact of Year 2000
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Company's internal or product
computer programs or hardware that have date-sensitive software
or embedded chips may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in system
errors or failures, and could significantly disrupt normal
business activities.
Based on assessments made in 1998, the Company determined
that it would be required to modify or replace certain portions
of its internal systems and product software and certain
hardware so that those systems will properly recognize dates
beyond December 31, 1999. To date, the Company has completed
its assessment of all internal and product systems that could
be significantly affected by the Year 2000 issue. The
assessment indicated that certain of the Company's internal and
product systems could be affected. However, no significant
Year 2000 issues have been identified that cannot be resolved
through software or hardware upgrades that are currently
available or expected to be available soon. The Company
presently believes that with modifications or replacements of
existing software and certain hardware, the Year 2000 issue as
it relates to the Company's internal systems and products can
be effectively mitigated. However, if such modifications and
replacements are not made, or are not completed in a timely
manner, the Year 2000 issue could have a material impact on
NeoPath's and its customers' operations. In addition, the
Company has gathered information about the Year 2000 compliance
status of its significant suppliers and subcontractors and
continues to monitor their compliance.
The Company utilizes existing internal resources to
reprogram or replace, test, and implement the internal systems
and product software and certain hardware modifications necessary
for Year 2000 compliance. The total cost of the Year 2000
project has been borne primarily by operating departments with
existing personnel and infrastructure; therefore, incremental
costs have not been material and remaining incremental costs are
estimated at less than $100,000. The project is estimated to be
completed by mid-1999.
The Company has queried its significant suppliers and
subcontractors as to their Year 2000 compliance status. To
date, the Company is not aware of any external agent with Year
2000 problems that would materially impact the Company's
results of operations, liquidity, or capital resources.
However, the Company has no means of ensuring that external
agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a
timely fashion could materially impact the Company. The
Company cannot determine the effect of non-compliance by
external agents.
10
<PAGE>
The Company currently has no contingency plans in place in
the event it does not complete all phases of the Year 2000
program, including if its external agents are not Year 2000
ready. The Company plans to evaluate the status of its own
Year 2000 program in the second quarter of 1999 and determine
whether such a plan is necessary. NeoPath management believes
it has an effective program in place to resolve the Year 2000
issues within its control in a timely manner. The Company
believes that with modifications to NeoPath's products,
existing internal software and conversions to new software, the
Year 2000 Issue will not pose significant operational problems
for its computer systems. However, in the worst case scenario,
if the Company or external agents do not make necessary
modifications and conversions, or do not complete them on time,
the Year 2000 issue could disrupt NeoPath's operations and
materially affect its business, financial condition, and
results of operations.
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:
- history of losses and uncertainty of profitable operations;
- potential need for additional capital;
- uncertainty of market acceptance of NeoPath's products;
- market consolidation and concentration among a few large
customers;
- uncertainty of product regulatory clearance;
- sole or limited source of supply for key components;
- governmental regulation of NeoPath's manufacturing;
- competition in the industry;
- dependence on third-party reimbursement;
- dependence on a single product line;
- product liability and availability of adequate insurance;
- dependence on patents and proprietary rights;
- risk of third-party claims of infringement;
- dependence on key personnel;
- highly volatile stock price;
- potential fluctuations in future quarterly results; and
- Year 2000 issues.
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,
1998.
11
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk related to changes
in interest rates, which could adversely affect the value of
the Company's investments in securities available-for-sale or
increase the interest expense on outstanding debt. The Company
does not use derivative financial instruments.
NeoPath maintains a short-term investment portfolio
consisting of interest bearing securities with an average
maturity of less than two years. These securities are
classified as "available-for-sale" securities. The interest
bearing securities are subject to interest rate risk and will
fall in value if market interest rates increase. If market
interest rates were to increase immediately and uniformly by
10% from levels at March 31, 1999, the fair value of the
portfolio would decline by an immaterial amount.
In a like manner, a 10% increase in market interest rates
would have an immaterial effect on the Company's long-term
obligations. The Company does not expect its operating results
or cash flows to be affected to any significant degree by a
sudden change in market interest rates.
12
<PAGE>
Part II OTHER INFORMATION
Item 1. Legal Proceedings
On July 15, 1996, Neuromedical Systems, Inc. filed a lawsuit
against NeoPath in the United States District Court for the
Southern District of New York. The complaint alleged patent
infringement, unfair competition, false advertising, and related
claims, and requested monetary damages and injunctive relief. On
September 5, 1996, NeoPath filed its answer and counter claims.
In May 1998, a judge in the United States District Court for the
Southern District of New York denied Neuromedical's motion for a
preliminary injunction against the Company. The parties agreed
to dismiss their claims and counter claims on all but the patent
issues, and Neuromedical accordingly served an amended complaint
on July 27, 1998 asserting only patent infringement claims. On
March 26, 1999, Neuromedical announced that it had filed a
voluntary chapter 11 petition for bankruptcy. On April 6, 1999,
the court removed the case from its active docket pending further
developments in Neuromedical's bankruptcy proceedings.
On March 31, 1997, NeoPath filed a patent infringement
lawsuit against Neuromedical in the United States District Court
for the Western District of Washington. The complaint alleges
patent infringement and seeks permanent injunctions against
Neuromedical. In March and April 1998 this lawsuit was amended,
and NeoPath filed an additional related patent lawsuit against
Neuromedical. Neuromedical filed a motion for summary judgment,
which the court denied in April 1998. In October 1998,
Neuromedical filed another motion for summary judgment that the
court denied. By court order on March 30, 1999, proceedings have
been stayed pending resolution of Neuromedical's bankruptcy
proceedings. Furthermore, the court ordered that these cases be
removed from the court's active caseload.
On March 26, 1999, AutoCyte, Inc. announced an agreement to
purchase certain Neuromedical technology, including patent
rights, for $4.0 million in cash and 1.4 million shares of
AutoCyte common stock. On April 26, 1999, NeoPath and AutoCyte
announced an agreement whereby NeoPath may acquire an undivided
interest in the intellectual property estate of Neuromedical that
AutoCyte had agreed to acquire. Subject to completion of the
agreement between AutoCyte and Neuromedical and other conditions,
NeoPath will pay AutoCyte $2.2 million in cash and issue AutoCyte
1.2 million shares of NeoPath common stock at the later of the
transaction closing date or September 1, 1999. NeoPath's
agreement with AutoCyte provides that the patent infringement
litigation between NeoPath and Neuromedical will be terminated.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
Exhibit No. Description
___________ ___________
4.1 Common Stock Purchase Agreement, dated as of
February 8, 1999, between NeoPath, Inc. and
the Purchasers (filed as Exhibit 4.1 to the
registrant's Current Report on Form 8-K dated
February 9, 1999 and incorporated herein by
reference)
4.2 Investor Rights Agreement, dated as of
February 8, 1999, between NeoPath, Inc. and
the Purchasers (filed as Exhibit 4.2 to the
registrant's Current Report on Form 8-K dated
February 9, 1999 and incorporated herein by
reference)
27 Financial Data Schedule
___________________________________________________________________________
(b) Reports on Form 8-K
The Company filed a Form 8-K on February 9, 1999 to
disclose a private equity transaction in which NeoPath sold 2.9
million shares of its common stock.
13
<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: May 14, 1999 By: /s/ RONALD R. BROMFIELD
_______________________
Ronald R. Bromfield
President and Chief Executive Officer
By: /s/ ROBERT C. BATEMAN
_____________________
Robert C. Bateman
Vice President and Chief Financial Officer
14
<PAGE>
NEOPATH, INC.
INDEX TO EXHIBITS
Exhibit No. Description
___________ ___________
4.1 Common Stock Purchase Agreement, dated as of
February 8, 1999, between NeoPath, Inc. and
the Purchasers (filed as Exhibit 4.1 to the
registrant's Current Report on Form 8-K dated
February 9, 1999 and incorporated herein by
reference)
4.2 Investor Rights Agreement, dated as of
February 8, 1999, between NeoPath, Inc. and
the Purchasers (filed as Exhibit 4.2 to the
registrant's Current Report on Form 8-K dated
February 9, 1999 and incorporated herein by
reference)
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 March 31, 1999 and for the three months then ended, and is qualified
in its entirety by reference to such financial statements and footnotes.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,192,450
<SECURITIES> 7,694,512
<RECEIVABLES> 3,434,920
<ALLOWANCES> 0
<INVENTORY> 7,946,880
<CURRENT-ASSETS> 26,772,464
<PP&E> 2,986,875
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,143,926
<CURRENT-LIABILITIES> 7,860,687
<BONDS> 0
0
0
<COMMON> 156,558,668
<OTHER-SE> (118,904,618)
<TOTAL-LIABILITY-AND-EQUITY> 46,143,926
<SALES> 0
<TOTAL-REVENUES> 2,025,858
<CGS> 0
<TOTAL-COSTS> 1,164,390
<OTHER-EXPENSES> 5,976,743
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89,985
<INCOME-PRETAX> (5,068,016)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,068,016)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,068,016)
<EPS-PRIMARY> (0.31)<F1>
<EPS-DILUTED> 0.00
<FN>
<F1>Basic and diluted net loss per share are the same amount.
</FN>
</TABLE>
