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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 0-22885
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AUTOCYTE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 56-1995728
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
780 PLANTATION DRIVE, BURLINGTON, NORTH CAROLINA 27215
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
(336) 222-9707
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(TITLE OF EACH 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 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. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 22, 1999 was: $19,637,747
There were 12,785,044 shares of the registrant's Common Stock outstanding
as of March 22, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement of the Registrant for the
Registrant's 1999 Annual Meeting of Shareholders to be held on May 26, 1999,
which definitive proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the registrant's fiscal year of
December 31, 1998, are incorporated by reference into Part III of this Form
10-K.
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PART I
ITEM 1. BUSINESS
The discussion included in this section as well as elsewhere in the Annual
Report on Form 10-K may contain forward-looking statements based on current
expectation of the Company's management. Such statements are subject to risks
and uncertainties that could cause actual results to differ from those
projected. See "Important Factors Regarding Forward-Looking Statements" attached
hereto as Exhibit 99.1 and incorporated by reference into this Form 10-K.
Readers are cautioned not to place undue reliance on the forward looking
statements, which speak only as the date hereof. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
THE COMPANY
AutoCyte, Inc. ("AutoCyte" or the "Company") develops, manufactures and
markets the only integrated automated sample preparation and image analysis
system to support cytology professionals in cervical cancer screening. The
Company is currently pursuing regulatory approval of its products for sale in
the United States and has begun sales in several foreign countries. The
Company's integrated system is comprised of the AutoCyte PREP ("PREP") sample
preparation system and the AutoCyte SCREEN ("SCREEN") image analysis system. The
Company's Pathology Workstation product line further integrates AutoCyte's
product offerings into tools for data handling of cytology and pathology images,
and tools for determining prognosis of disease from cytology and pathology
specimens.
PREP is a proprietary automated liquid-based cytology sample preparation
system that produces slides with a homogeneous layer, or "thin-layer," of
cervical cells. The Company believes PREP will improve laboratory productivity
and reduce interpretation errors by producing cell samples that are clearer,
more uniform and easier to interpret than conventional Pap smear samples. PREP
is designed to operate both as an independent sample preparation system and in
conjunction with SCREEN as part of an integrated diagnostic system.
SCREEN is an automated image analysis system which combines proprietary
imaging technology and classification software with off-the-shelf computer
hardware to screen thin-layer slides prepared using the PREP system. SCREEN is
designed to be an interactive support tool for the cytology professional in the
primary screening of cervical cells and may serve quality control and adjunctive
testing purposes. By designing PREP and SCREEN to function together, AutoCyte
has developed a system which the Company believes will operate with higher
throughput and greater diagnostic sensitivity than the conventional Pap smear
test and other cervical cancer screening systems.
CERVICAL CANCER SCREENING MARKET
Cervical cancer is the second most common form of cancer among women
throughout the world. The World Health Organization estimates that worldwide
there were approximately 525,000 new cases of cervical cancer and approximately
247,000 deaths attributable to the disease in 1996. The American Cancer Society
estimates that, in the United States alone, approximately 12,800 new cases of
cervical cancer will be diagnosed and 4,800 women will die of cervical cancer in
1999. The factors associated with the development of cervical cancer are
believed to include sexual activity at an early age, multiple sexual partners, a
history of sexually transmitted disease and cigarette smoking. Recent studies
have also indicated that cervical cancer is linked to the presence of certain
strains of Human Papillomavirus ("HPV").
Cervical cancer is preceded by curable precancerous lesions that progress
without symptoms over a period of years until they become invasive, penetrating
the cervical epithelium (cellular covering) and entering the bloodstream or
lymph system. Treatment of early-stage noninvasive cervical cancer may be
accomplished through various low-risk and low-cost procedures designed to remove
the abnormal cells. Once the cancer reaches the invasive stage, however, the
patient's chances for recovery are diminished, and more radical
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treatment, such as a hysterectomy and chemotherapy or radiation therapy, is
typically required. These procedures are costly and may expose the patient to
substantial physical morbidity and psychological stress.
Because treatment of cervical cancer at an early stage is almost always
successful, early detection is critical to medical management of the disease.
Thus, regular cervical screening examinations are recommended in the United
States and many foreign countries. The conventional Pap smear is currently the
most widely used screening test for cervical cancer. This test was developed in
1943 by Dr. George Papanicolaou and has remained virtually unchanged for the
past 50 years. It is estimated that clinical laboratories in the United States
perform over 50 million conventional Pap smears annually. The Company believes
that annual test volume outside of the United States is in excess of 55 million.
In the United States, although widespread and regular use of the
conventional Pap smear has contributed to a greater than 70% decrease in
mortality, the mortality rate from the disease has remained fairly constant
since 1970. The Company believes that there are practical limitations to the
conventional Pap smear test which contribute to an estimated $5.0 billion of
annual costs associated with the treatment of advanced precancerous and
cancerous cervical disease. Additional costs are also incurred by third-party
payors due to repeat testing and by clinical laboratories due to litigation
associated with inaccurate diagnoses.
THE CONVENTIONAL PAP SMEAR PROCESS
The conventional Pap smear process involves the science of cytology, which
includes the microscopic interpretation of precancerous, malignant and
morphological changes in cells. The conventional Pap smear process begins with
the collection of cervical cells during a gynecological examination. To obtain a
cervical cell sample, a sampling device is used by a clinician to scrape cells
from the surface of the cervix. The sample is then manually smeared onto a clean
microscope slide, and the sampling device is discarded. The clinician must then
spray the slide within a few seconds with a fixative agent to prevent damage to
the cell specimen from air drying. The slide is then submitted to a clinical
laboratory. At the laboratory, the slides are manually or mechanically stained
in a batch process typically using common reservoirs of staining reagents to
enhance the morphologic presentation of the cells.
Following staining of the slide sample, a cytotechnologist, a medical
professional with special training in the examination and interpretation of
human cells, conducts a microscopic review of the slide to determine the
adequacy of the sample and to assess the presence of abnormal cells. In
determining slide adequacy, cytotechnologists classify each slide into one of
three categories: (i) satisfactory for evaluation, (ii) satisfactory but limited
by certain characteristics ("SBLB") or (iii) unsatisfactory for evaluation. The
percentage of unsatisfactory and SBLB slides varies widely among laboratories.
In the United States, approximately 1% to 2% of all conventional Pap smear
slides are classified as unsatisfactory and as many as 20% to 30% are classified
as SBLB. Frequent reasons for unsatisfactory or SBLB classifications include
excess blood or mucus or the presence of inflammatory cells, all of which
obscure the diagnostic cells of interest, a lack of diagnostic cells and too few
cells per slide.
After assessing sample adequacy, the cytotechnologist manually screens each
usable slide using a microscope to differentiate diseased or abnormal cells from
normal cells based on size, shape and structural details of the cells and their
nuclei. Typically, each conventional Pap smear slide is then classified in
accordance with the Bethesda System for Reporting Cervical/Vaginal Cytological
Diagnoses (the "Bethesda
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System"). The following table summarizes the Bethesda System classification and
other characteristics of all conventional Pap smear slides prepared annually in
the United States:
APPROXIMATE PRECANCEROUS/ CLINICAL
BETHESDA SYSTEM CLASSIFICATION INCIDENCE INTERPRETATION CANCEROUS ACTION
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Negative....................... 92% Normal Not Cancerous Continued Regular
Testing
Atypical Squamous Cells of 5% Equivocal Undetermined Repeat Testing/
Undetermined Colposcopy/Biopsy
Significance/Atypical
Glandular
Cells of Undetermined
Significance ("ASCUS/AGUS")..
Low-grade Squamous 2% Abnormal Precancerous Colposcopy/Biopsy
Intraepithelial Lesion
("LSIL").....................
High-grade Squamous <1% Abnormal Precancerous Colposcopy/Biopsy
Intraepithelial Lesion
("HSIL").....................
Carcinoma...................... <1% Abnormal Cancerous Colposcopy/Biopsy
ASCUS/AGUS slides contain abnormal cells that cannot be fully explained on
the basis of inflammatory or reactive processes, yet lack certain criteria for a
specific abnormal diagnosis. ASCUS/AGUS slides are generally not considered
precancerous. LSIL slides represent the lowest-grade precancerous state, with
cells characterized as exhibiting mild to moderate dysplasia or evidencing signs
of HPV. Dysplasia is a condition characterized by abnormally differentiated
cells that could either progress to a precancerous state or regress to a normal
state. HSIL slides contain precancerous cells characterized as exhibiting more
serious dysplasia or signs of HPV. All ASCUS/AGUS and abnormal slides are
referred to a pathologist for further review and final diagnosis. Women with
abnormal Pap smears may have to return to their physician's office for a repeat
Pap smear or to undergo costly colposcopy and biopsy procedures. A colposcopy
involves the use of a low magnification device by a physician to visually
examine the surface of the cervix. Based on the colposcopy results, a biopsy may
then be performed for a more definitive diagnosis.
LIMITATIONS OF THE CONVENTIONAL PAP SMEAR PROCESS
In spite of the success of the conventional Pap smear in reducing deaths
due to cervical cancer, the test has several limitations, including inadequacies
in sample collection and slide preparation, detection and interpretation errors,
inability to use the patient sample for additional diagnostic tests, and
productivity constraints on laboratories caused by regulatory compliance.
Inadequacies in the sample collection and slide preparation process cause many
inaccurate test results, including false negative and false positive diagnoses.
A false negative diagnosis -- the failure to detect cancerous or precancerous
cells -- may result in the progression of cervical cancer to a later stage of
development before being detected. As a result, more expensive and invasive
courses of therapy are required, and the likelihood of patient survival is
diminished. False negative rates of the conventional Pap smear vary widely among
laboratories, ranging from 5% to 55%, depending on such factors as the skill and
experience of the practitioner who collects the sample and prepares the slide
and the level of training of the cytotechnologist and pathologist who review the
slide.
Studies suggest that approximately 60% of all false negative diagnoses are
attributable to inadequacies in sample collection and slide preparation;
approximately 40% are attributable to slide detection and interpretation errors.
False negative diagnoses have given rise to increasing levels of litigation in
recent years, resulting in significant additional costs to clinical
laboratories. False positive diagnoses -- the mistaken classification of normal
cells as precancerous -- can result in unnecessary retesting, biopsies or other
procedures which are costly, invasive and often painful and stressful for
patients.
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Inadequacies in Sample Collection and Slide Preparation
There are a variety of difficulties with the conventional Pap smear methods
of cell collection, cell transfer and slide preparation. A recent study
published in the American Journal of Clinical Pathology reported that, with a
conventional Pap smear, as much as 80% of the sample taken from a patient is not
transferred to the slide and remains on the discarded collection device. Because
the sample cells are not randomized across the collection device, the discarded
portion of the sample may contain abnormal cells necessary for an accurate
diagnosis.
In addition to the problem of cell transfer, the conventional Pap smear
slide preparation process produces inconsistent and non-uniform slides with
extreme variability in quality, often making examination difficult. The poor
quality of slides is often a result of the presence of blood, mucus,
inflammatory cells or other obscuring debris, cell clumping and air-drying of
the cell sample before it is suitably preserved or fixed. Air drying can cause
an artificial distortion in cell size and shape, which are critical indicators
in determining whether abnormalities exist. The conventional Pap smear process
also includes batch staining which may result in cross-contamination among slide
samples.
The Company believes that these sample collection and slide preparation
limitations are responsible for a large percentage of slides being classified as
unsatisfactory and SBLB. Consequently, patients are often subjected to the
inconvenience of return office visits for repeat testing and to the anxiety
resulting from the inconclusive nature of the initial test. The Company
estimates that annual costs to the United States health care system of repeat
testing due to unsatisfactory and SBLB slides are $50 million and $750 million,
respectively.
Detection and Interpretation Errors
The process of manually screening and interpreting a conventional Pap smear
is complex and tedious, which can lead to detection and interpretation errors.
Cytotechnologists typically review between 50 and 100 Pap smear slides per day.
The review process requires intense visual examination through a microscope of
the slide sample, each of which typically contains 50,000 to 300,000 cervical
cells. This review process is prone to error because of the complexity of
properly evaluating and categorizing subtle changes in the size and/or shape of
cells and their nuclei. The diagnostic cells can often be obscured by cell
clumping and the presence of debris, which increases the possibility that some
percentage of cells, including abnormal cells, will be missed.
Because more than 90% of all conventional Pap smears in the United States
are diagnosed as negative, the process of identifying the abnormal samples
requires constant vigilance. Despite the diligence of cytotechnologists, the
intense level of concentration on such a high volume of cells over long periods
of time results in some risk of fatigue. This fatigue can contribute to the
incidence of false negative and false positive diagnoses.
Lack of Additional Testing Capability
The conventional Pap smear process does not permit additional or adjunctive
testing from the original patient sample. The ability to produce multiple slides
from a single sample could be used by clinical laboratories for follow-up
testing, quality control or proficiency testing. Recent studies have shown that
HPV DNA is present in most cases of HSIL lesions and in more than 90% of cases
of cervical cancer. These studies may suggest HPV testing is a less expensive
and less invasive follow-up procedure for women with a conventional Pap smear
classification of ASCUS/AGUS or LSIL, since 30% to 75% of these patients will
not have lesions that progress to high grade lesions or cancer.
Using the conventional Pap smear process, because the residual cell sample
is not saved, the patient must return to the physician's office to provide a
second sample if additional testing, such as HPV testing, is indicated. The
Company believes that the ability to access residual cellular material from the
original patient sample would allow more cost effective patient management for
inconclusive Pap smear tests.
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Limitations on Clinical Laboratory Productivity
In 1988, to address, in part, accuracy and quality control concerns
associated with conventional Pap smears, Congress adopted the Clinical
Laboratory Improvement Amendments of 1988 ("CLIA"). CLIA regulations require
laboratories to rescreen 10% of the slides that are initially classified as
negative. In addition, CLIA regulations currently limit the number of slides
that may be screened per day by a cytotechnologist to 100. As a further quality
control measure, CLIA requires cytology laboratories to perform proficiency
testing and quality control by testing cytotechnologists in order to assure a
minimum level of competence and expertise. Certain states have also adopted
regulations further limiting the number of slides that may be manually examined
per day by a cytotechnologist. Compliance with the quality control provisions of
CLIA has resulted in substantial additional costs to clinical laboratories that
perform conventional Pap smear screening.
THE AUTOCYTE SOLUTION
AutoCyte is the first company to develop an integrated sample preparation
and screening system for cervical cancer intended to address the limitations
inherent in the conventional Pap smear process. PREP is a proprietary,
automated, liquid-based cytology sample preparation system that produces slides
with a thin and uniform layer of cervical cells. PREP is designed to operate
both as an independent sample preparation system and in conjunction with SCREEN
as part of an integrated diagnostic system. SCREEN is an automated image
analysis system which combines proprietary imaging technology and classification
software with off-the-shelf computer hardware to screen thin-layer slides
prepared using the PREP system. SCREEN is designed to be an interactive support
tool for the cytology professional in the primary screening of cervical cells,
but may also support quality control and adjunctive testing applications. The
Company's Pathology Workstation product line further integrates AutoCyte's
product offerings into tools for data handling of cytology and pathology images,
and tools for determining prognosis of disease from cytology and pathology
specimens.
The AutoCyte PREP System
The Company's PREP system consists of a proprietary preservative fluid and
reagents, plastic disposables and automated equipment for preparing a thin-layer
of cervical cells on the microscope slide. The PREP slide process begins with
the clinician taking a patient's cervical sample using a conventional collection
device. The clinician then immediately places the collection device in a vial
containing the Company's proprietary CytoRich preservative fluid, thereby
retaining virtually all of the cells from the collection device. After receiving
the vial from the clinician, the laboratory thoroughly mixes the sample,
generating a randomized cell suspension, which is then removed from the vial and
layered onto a proprietary liquid density reagent in a plastic centrifuge tube
using either the Company's patented disaggregation syringe device or, commencing
in 1999, the more automated PREPMate device described below. Batch
centrifugation is then conducted on the cell suspension to remove excess blood,
inflammatory cells and other debris from the sample.
Once centrifugation is completed, the lab technician places the tube
containing the separated diagnostic cells onto the automated PREP pipetting
station. PREP then distributes the cells in a thin-layer on the microscope slide
and discretely stains the slide for subsequent analysis. A PREP slide typically
contains between approximately 50,000 and 160,000 diagnostic cells which are
distributed uniformly over a 13-mm diameter circle. PREP is currently capable of
preparing and discretely staining 48 thin-layer slides in approximately one
hour.
AutoCyte also is currently developing a new automated front-end processor
("PREPMate") that will reduce the number of manual preparation steps required
for the PREP system. PREPMate reduces the time required to prepare samples for
processing on the PREP instrument.
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PREP Advantages vs. the Conventional Pap Smear Process
The Company believes that PREP will offer the following advantages over the
conventional Pap smear process:
- More Complete Sample Collection. Because the clinician places the
collection device directly into the PREP vial, the entire patient sample
is contained in the Company's proprietary preservative fluid. As a
result, the subsample on the thin-layer preparation is more
representative of the entire patient specimen. Using the conventional Pap
smear process, as much as 80% of the cervical sample can be inadvertently
discarded after smearing the sample onto the slide.
- Improved Sample Quality. By eliminating variations in preparation
techniques and the fixative spraying step from the sample collection
process, PREP virtually eliminates air-drying, generates a more complete
fixation and provides a more standardized preparation process in a
controlled, laboratory environment. The more uniform cell sample
distribution also reduces cell clumping and obscuring by debris. The
Company believes that PREP's thin-layer slides provide cytotechnologists
with samples that are clearer, more representative and easier to diagnose
than conventional Pap smear slides.
- Improved Cytotechnologist Productivity. In the Company's clinical
studies, laboratories using PREP have experienced a greater than 50%
increase in cytotechnologist screening productivity. The impact on
cytotechnologist efficiency is important to clinical laboratories because
of the growing shortage of qualified cytotechnologists in recent years
and the need to create and maintain a desirable working environment for
cytology professionals.
- Automated and Discrete Staining Function. PREP includes a discrete, or
individual, slide staining function performed by a computer-controlled
robotic pipetting station. Unlike conventional Pap smear slides that are
often manually stained in a batch process using common reservoirs of
staining reagents, PREP staining reagents are directly applied to
individual slides. As a result, staining reagents are not shared among
slides, which the Company believes should reduce the risk of
cross-contamination among cell samples. Cross-contamination can lead to
inaccurate diagnoses.
- Multiple Testing Capability. Because the Company's proprietary CytoRich
preservative system enables the patient sample to be preserved for
several months, it permits, if necessary, preparation of several slides
from a single sample. The Company believes that the ability to perform
additional slide-based tests using a single sample, together with the
improved quality of the slide itself, will reduce retesting expenses
typically associated with inconclusive Pap smear tests. The residual
patient sample may also be used for other diagnostic protocols such as
HPV testing, infectious disease testing and application of specific tumor
markers.
PREP Advantages vs. Other Liquid-Based Sample Preparation Systems ("LBPs")
The Company believes that PREP will offer the following advantages over
other LBPs:
- Improved Sample Quality. The PREP sample is processed through a series of
proprietary liquid-based reagents and centrifuge separation techniques
designed to "enrich" the sample with a high concentration of diagnostic
cells. The only currently FDA approved LBP relies on membrane filtration.
The Company believes that its cell enrichment process more effectively
controls the incidence of mucus, inflammatory cells and other debris that
may reduce the performance of membrane filtration systems. The Company
believes that, in populations in which rates of gynecological infection
are high, PREP's cell enrichment process will result in a more
representative slide sample which should ultimately lead to a reduction
in uncertain or incorrect diagnoses.
- Higher Throughput. PREP has the capacity to produce 48 thin-layer slide
preparations in approximately one hour unattended, using a hands-off
robotic system that provides higher throughput than other available
automated slide preparation systems. In addition to this increased
throughput, the PREP processing unit requires less oversight than other
automated systems.
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- Improved Cytotechnologist Productivity. The cell circle on a PREP slide
is smaller than the cell circle on other available LBPs, yet the number
of diagnostic cells is approximately equal. The Company believes that the
smaller cell circle, coupled with a lower incidence of infectious agents
and inflammatory cells and other debris, should result in faster, more
efficient screening by cytology professionals.
- Familiarity with Sample Preparation Approach. The PREP centrifugation and
robotic liquid handling techniques are similar to procedures already in
use in clinical laboratories.
- Automated and Discrete Staining Function. Unlike other LBPs that rely on
batch staining using common reservoirs of staining reagents, PREP
staining reagents are applied directly to individual slides. Discrete
staining offers several benefits, including a reduced risk of
cross-contamination among cell samples, less degradation of the staining
solution, less staining time and lower costs.
- Integration with SCREEN. The Company has specifically designed PREP to
function with SCREEN, creating an integrated diagnostic tool which the
Company believes will operate with higher throughput, greater efficiency
and greater diagnostic sensitivity than other systems which do not
integrate the slide preparation and screening functions.
The AutoCyte SCREEN System
SCREEN is an automated image analysis system which combines proprietary
imaging technology and classification software with off-the-shelf computer
hardware to screen thin-layer slides prepared using the PREP system. SCREEN is
designed to function as an interactive support tool for the cytology
professional in the primary screening of cervical cells, but may also serve
quality control and adjunctive testing purposes. SCREEN is designed to use a
series of proprietary algorithms to independently classify cells and present the
cytotechnologist with 120 images of the most diagnostic cells on the sample
slide.
SCREEN is designed to evaluate all areas of the PREP thin-layer slide and
presents high-resolution, color images of diagnostic cells in the sample. The
cytotechnologist is then able to undertake an independent analysis of these
selected cells to interpret each slide. Once the cytotechnologist inputs the
image assessment into the computer, SCREEN displays its interpretation for
comparison. Unless SCREEN and the cytotechnologist agree that the slide is
normal, the slide is referred to a senior cytotechnologist or pathologist for
reevaluation. Combining expert human review with unbiased computer
interpretation is a fundamental component of the Company's patented SCREEN
process.
SCREEN Advantages vs. the Conventional Pap Smear Process
The Company believes that its integrated system combining PREP and SCREEN
is designed to offer the following advantages over the conventional Pap smear
process:
- Reduced Manual Screening Time. SCREEN reduces the need for traditional
manual screening, bringing human-assisted automated detection of
abnormality to cytology practice and thereby reducing cytotechnologist
fatigue.
- More Complete Slide Examination on a High Throughput Basis. SCREEN is
designed to allow the cytotechnologist to review the thin-layer slide in
approximately one-half the time now required for manual screenings of
conventional Pap smear slides.
- Presentation of High Resolution Computer Images. Using the SCREEN system,
cytotechnologists can control and display high resolution cell images.
SCREEN is designed to enable images of cells and abnormalities to be
enlarged and enhanced for easier examination. The system is designed to
identify and select for presentation only those cells that are most
pertinent to the diagnostic process. This process enables
cytotechnologists to concentrate on the most significant cells and
clusters, thereby reducing the complexity and tedious nature of manual
review. The Company believes that SCREEN will enable cytotechnologists to
reach accurate cell classification decisions more quickly and
efficiently.
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- Reduced Compliance Costs to Clinical Laboratories. CLIA allows thin-layer
slides which result in cell dispersion on one-half or less of the total
available slide area to be screened at levels higher than the current 100
slide-per-day limit applicable to conventional Pap smear slides.
SCREEN Advantages vs. Other Automated Screening Processes
The Company believes that a diagnostic system combining PREP and SCREEN
will offer the following advantages over other screening systems recently
developed to enhance or replace conventional Pap smear testing:
- Integrated Approach. AutoCyte provides the only automated, integrated
cervical cancer screening system available today. By designing PREP and
SCREEN to work together, the Company has created a system which it
believes will operate with higher throughput and with greater diagnostic
sensitivity than other available systems or combinations of approaches.
- Interactive Approach. AutoCyte's proprietary approach to cervical cancer
screening combines review of high resolution cell images by a
cytotechnologist with SCREEN's independent computer classification of
each sample, resulting in what the Company believes is a more sensitive
detection of sample abnormalities. The integrated PREP and SCREEN system
is a diagnostic support tool designed to interact with cytotechnologists,
not replace them. By offering a system which supports the cytology
professional, AutoCyte believes its system will more readily receive
positive acceptance by laboratories compared to systems which replace or
create additional tasks for the cytotechnologist.
- Cost-Effective Approach. SCREEN uses an off-the-shelf computer hardware
platform which is more flexible and requires less customization than
other automated screening devices. The Company believes that SCREEN's
open hardware configuration, combined with the utilization of PREP's
thin-layer slides, will result in a lower cost per test than other
automated screening processes.
AUTOCYTE PRODUCT SYSTEMS
PREP System
The PREP system consists of the CytoRich line of proprietary preservatives
and reagents, a variety of proprietary plastic disposable components, and the
customized PREP instrument. The CytoRich reagents include the preservative
fluid, density reagent and multiple stains. The plastic disposables include the
preservative vial, a patented disaggregating syringe, a slide settling column
and pipette tip. The PREP instrument is a proprietary, computer-controlled
robotic pipetting station that has been specifically engineered for preparing
and discretely staining PREP thin-layer slides. The instrument can be programmed
to apply a variety of different stains. A centrifuge can be provided by the
Company as part of the system. The PREP system can prepare up to 48 thin-layer
slide preparations in approximately one hour. The resulting slides have a 13-mm
diameter circle of cells in a discretely stained thin-layer containing
approximately between 50,000 and 160,000 diagnostic cells per slide. The Company
holds a number of patents covering certain components of the PREP system and the
PREP thin-layer slide preparation process.
AutoCyte also is currently developing PREPMate, a new automated front-end
processor that will reduce the number of steps required for the PREP system.
PREPMate reduces the time required to prepare samples for processing on the PREP
instrument.
SCREEN System
The SCREEN system currently consists of a fully automated microscope, a
high capacity slide handler, an ultra high resolution digital color camera, a
high performance UNIX-based multi-processor and a high resolution monitor. The
SCREEN system uses proprietary cell population histogram analysis software. A
mechanical counter built into the SCREEN system allows the Company to monitor
the number of slides screened. The SCREEN system has been specifically designed
to process thin-layer slides that have been prepared by the PREP system. The
SCREEN system can process slides and render slide classifications on a
continuous basis without operator involvement. Up to 400 PREP slides may be
placed onto the fully
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automated SCREEN instrument for unattended slide handling, identification and
screening. SCREEN currently has the capacity to process, in unattended
operation, 160 slides per 24-hour period.
AutoCyte Pathology Workstation
AutoCyte's long-term product strategy encompasses an initiative into the
broader clinical laboratory automation market. The Company believes that market
acceptance of SCREEN will lay a foundation for additional future product lines,
including future applications of the Pathology Workstation. The Pathology
Workstation is a flexible computerized microscope which supports a set of
PC-based applications, such as image telecommunications, archiving, image and
patient data management and other supplemental testing designed to complement
and support the SCREEN system. Applications currently available from the Company
include:
- Medical Information and Image Management. The AutoCyte Image Management
System ("AIMS") is an intelligent user interface which organizes images
and data using electronic folders. Diagnostic quality images can be
acquired and stored with patient information. Folders containing both
images and text can be incorporated into reports, or transmitted to a
specialist at a remote site during a telepathology consultation. This
folder concept combined with sophisticated search functionality provides
a powerful tool for managing medical images.
- Cellular and Histological Measurement. AutoCyte QUIC (DNA & Immuno)
systems are cellular and histological measurement systems that support
objective tumor grading and prognosis by use of quantitating DNA and
specific immunohistochemical markers.
- Telepathology. AutoCyte LINK provides the ability to interactively
capture and transfer diagnostic quality images during an online
telepathology consultation. The system supports remote consultation,
continuing education and access to opinions from experts in pathology
subspecialties.
- ImageTiter(R). AutoCyte ImageTiter(R) enables the quantitative assessment
of anti-nuclear antibodies in a patient's blood specimen. This
measurement is essential in the evaluation of diseases such as lupus,
rheumatoid arthritis and other autoimmune disorders. The patented
titration emulation process is applicable to a wide range of
fluorescence-based serum antibody measurements.
The Company is currently marketing Pathology Workstation products through
distributors. See "Marketing and Sales." The Company's strategy includes the
development of additional applications or modules to run on the proprietary
Pathology Workstation platform which support and integrate a systematic approach
to diagnostic cytology and pathology. These modules include quantitative DNA
analysis, quantitative immunocytochemistry, computer assisted tumor grading,
fluorescence measurements, slide mapping and computer supported manual cytology
screenings.
NON-GYNECOLOGICAL PRODUCT APPLICATIONS
The Company began limited sales of PREP for non-gynecological cytology
applications in 1993. Non-gynecological applications relate to cytology
preparation from a wide variety of specimen types, including urine, sputum,
plural fluid, spinal fluid, peritoneal fluid and other body cavity fluids. Cell
preparations from bronchial, gastrointestinal and endometrial brushings and
washings as well as fine needle aspiration of specific organs are also addressed
among these applications. These non-gynecological applications of the PREP
system do not require FDA clearance. The Company has developed proprietary
preservatives that are optimized for these specific non-gynecological cytology
preparations.
CLINICAL TRIALS AND REGULATORY STATUS
Status of PREP System PMA
The PREP clinical trials were designed by the Company in conformance with
the FDA's draft guidelines and reviewed with the FDA to determine the ability of
PREP to separate patients with abnormal cervical conditions from those with
normal conditions. The clinical trial was a double-blinded, matched-pair study
in
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which a conventional Pap smear and a PREP thin-layer slide derived from the same
patient sample were reviewed and compared by different cytotechnologists without
knowledge of the other's interpretation. In the clinical trial, the sample
collected from the cervix was first smeared on a slide to create a conventional
Pap smear. The collection device with residual sample material was then placed
in the Company's proprietary CytoRich preservative fluid for later processing of
a PREP slide. The two slides, prepared from the same sample, were then used to
compare PREP to the conventional Pap smear.
A total of 8,983 patients from eight clinical trial sites were included in
the primary data analysis of the clinical trial. The combined data indicated
improvements in specimen adequacy using PREP relative to the conventional Pap
smear by reducing the number of unsatisfactory and SBLB slides by 39% and 44%,
respectively. The Company believes that PREP would have further reduced
unsatisfactory and SBLB slides if the sampling device had been immersed in the
CytoRich reagent directly, rather than after the preparation of a conventional
Pap smear slide, as was required by the clinical trial protocol.
Following completion of clinical trials for gynecological applications, the
Company submitted a premarket approval application ("PMA") for PREP to the
United States Food and Drug Administration ("FDA") on May 12, 1997, which was
accepted for substantive review by the FDA on June 11, 1997. Upon accepting the
PREP PMA for substantive review, the FDA informed the Company that the PMA would
not require a hearing before its Medical Devices Advisory Panel because
information in the PMA substantially duplicated information previously reviewed
by the panel in a PMA submitted by a different company relating to an
alternative thin-layer slide preparation product.
After reviewing the PREP PMA and receiving input on it from members of its
advisory panel, the FDA met with representatives from the Company in December
1997 to address certain of the FDA's questions relating to the PREP PMA. At the
meeting, the Company presented additional analyses of certain of the data from
the PREP PMA. The FDA advised the Company that it would need to amend the PREP
PMA to include this and other information, and indicated that it would notify
the Company in writing as to the scope of the required response to the agency's
questions.
In February 1998 the Company received a letter from the FDA providing
detail on additional information it needed to continue review of the PREP PMA.
The FDA did not request that the Company perform any additional clinical trials.
The FDA requested that the Company's response be in the form of an amendment to
the PREP PMA. After preparing the requested information, the Company submitted
the amendment to the FDA on March 4, 1998.
Meetings with the FDA in July and August 1998 resulted in agreement between
the Company and the FDA that additional evaluations would be done to ensure that
PREP was able to adequately separate the Bethesda categories of abnormality,
especially in the range of low-grade squamous intraepithelial lesions ("LSIL"),
high-grade squamous intraepithelial lesions ("HSIL") and invasive cancers. The
Company believes this additional request was intended to address the concerns
raised by a series of citizens' petitions which were filed with the FDA relating
to Cytyc Corporation's ThinPrep(R) product, a competing LBP. To generate the
data required, in September 1998 the Company began a spit-sample evaluation
using matched AutoCyte PREP and conventional Pap smear slides. In this new
evaluation, a more rigorous protocol was used than in the original PMA
submission, in that an LSIL interpretation was considered to be an error against
a reference interpretation of HSIL. This evaluation was completed in November
1998 and submitted to the FDA as an amendment to the PREP PMA on December 1,
1998.
In March 1999, the Company received notification from the FDA that the
Agency had completed its review of the clinical data in the PREP PMA and
considered it to be sufficient. The Company is currently working with the FDA to
complete the product labeling and the other final steps in the PMA review
process.
FDA regulations provide that the FDA will review a PMA or a PMA amendment
within 180 days from the date of submission. While the FDA review of the PREP
PMA amendment submitted on December 1, 1998 may be shorter than 180 days, there
can be no assurance that the FDA's review will not take 180 days or longer or
that the PREP PMA will be approved within that period or at all.
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In late October 1997, the Company's Burlington, North Carolina
manufacturing facility was inspected by the FDA for compliance with the FDA's
Quality System ("QS," also known as Good Manufacturing Practice, or "GMP")
requirements relating to the PREP product. The Company was notified by the FDA
in December 1997 that the facility had no outstanding deficiencies and that it
had passed the inspection.
Status of SCREEN System PMA
In October 1996, the Company began blinded clinical trials for SCREEN. This
clinical trial involved rescreening PREP slides from the PREP clinical trial
sites using the SCREEN system and comparing these results with the results from
a manual review of the PREP slides. The Company completed this clinical trial
for primary screening and submitted a PMA for SCREEN to the FDA on July 6, 1998
that was accepted for substantive review by the FDA on August 31, 1998. On
November 24, 1998, the FDA notified the Company that the SCREEN PMA would not be
considered further until the PREP PMA was approved. The FDA also raised other
issues. On February 18, 1999, the Company met with the FDA to address specific
questions regarding SCREEN performance and the SCREEN clinical trial. The
Company expects to file a formal amendment to the SCREEN PMA documenting its
responses in writing after approval of the PREP PMA is obtained, if the PREP PMA
is approved at all.
FDA regulations provide that the FDA will review a PMA or a PMA amendment
within 180 days from the date of submission. While the FDA review of the SCREEN
PMA amendment may be shorter than 180 days, there can be no assurance that the
FDA's review will not take 180 days or longer or that the SCREEN PMA will be
approved within that period or at all.
In December 1998, the Company's Burlington, North Carolina manufacturing
facility was inspected by the FDA for compliance with the FDA's QS requirements
relating to the SCREEN product. The Company was notified by the FDA in February
1999 that the facility had no outstanding deficiencies and that it had passed
the inspection.
Supplemental Study with NeoPath
In March 1999, the Company announced an agreement with NeoPath, Inc.
("NeoPath") to pursue a clinical study to obtain supplemental approval from the
FDA to use NeoPath's AutoPap(R) Primary Screening System to screen slides
prepared using PREP. There can be no assurance that this clinical study will be
completed or that any PMA supplement will be submitted to the FDA or if
submitted will be accepted for substantive review or, if accepted, will be
approved by the FDA in a timely manner, or at all.
Pathology Workstation
The Company has received FDA clearance of a premarket notification
("510(k)") covering ImageTiter, an application for the Pathology Workstation
currently being sold by the Company. The Company believes that it may need to
obtain 510(k) clearance to market in the United States certain additional
Pathology Workstation applications currently being developed.
MARKETING AND SALES
Automated slide preparation and screening products have recently been
introduced into the cervical cancer screening market and the Company expects to
benefit from the increased awareness and acceptance of these new technologies.
AutoCyte's systems are already in various stages of evaluation and use in major
universities and laboratories in several countries. The Company began limited
commercial sales of PREP in 1993 and at the end of 1998 had installed 106 PREP
systems throughout the world. The first commercial use of both PREP and SCREEN
for cervical cancer screening has begun in laboratories in Australia, Hong Kong
and Japan.
The Company generates PREP revenue from both system sales and rentals. For
system sales, customers purchase the instrument and make separate purchases of
related reagents and other disposables. For system rentals, the Company places
the PREP instrument at the customer's site, and customers make monthly payments
that include rent and a minimum monthly quantity of reagents and other
disposables. The term of the PREP rentals ranges from month-to-month to three
years. For SCREEN customers in the United States, the Company intends to place
instruments without charge at customer locations and to charge customers on a
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per test, or Fee-Per-Use ("FPU"), basis. In foreign markets, the Company plans
to either sell or license SCREEN. As an important element of its business
strategy, the Company intends to seek third-party financing to support rentals
of PREP and FPU placements of SCREEN. There can be no assurance that the Company
will be able to obtain such financing or, if so, on favorable terms.
The principal market for non-gynecological applications of PREP is clinical
laboratories worldwide, although these applications are performed in
significantly lower quantities than cervical cancer screening applications.
Non-gynecological applications for the detection of cancer are performed on body
fluids, including urines, respiratory specimens and a variety of fine-needle
aspirates of specific organs. PREP is currently being marketed for
non-gynecological applications in the United States directly through the
Company's own sales force. Foreign distribution partners are marketing PREP for
non-gynecological applications outside of the US.
The principal markets for the Pathology Workstation are pathology and
immunology laboratories and pathology research laboratories worldwide. The
Company's strategy is to sell Pathology Workstation products through
distributors and OEM vendors who will integrate certain of the workstation
software into their own products. The Company has entered into an international
distribution agreement with Carl Zeiss Jena Gmbh, a major European-based
international company engaged in microscope manufacturing and sales, to
distribute the Pathology Workstation in the US and Europe. The Company has also
entered into an agreement with Dynamic HealthCare, Inc., a leader in the sale of
integrated pathology and cytology information systems to hospitals, medical
centers and laboratories throughout the US, to supply the AutoCyte Image
Management System ("AIMS") as a key component of its CoPath(R) client/server
solution for anatomic pathology laboratories. The Company has also entered into
an exclusive distribution agreement with Medical and Biological Laboratories Co.
("MBL") to distribute the AutoCyte ImageTiter software system in support of
MBL's autoimmune diagnostic reagent offering to laboratories worldwide. MBL will
also distribute AutoCyte Pathology Workstation products in Japan, Korea and
Taiwan.
Marketing Strategy
The Company expects to commence marketing PREP and SCREEN in the United
States for cervical cancer screening when and if FDA approval for cervical
cancer screening is obtained. PREP is designed to be sold as either a
stand-alone system or as an integrated system with SCREEN. The Company intends
to achieve market acceptance of PREP alone and then to target its PREP customer
base for its initial marketing efforts of SCREEN. The Company's marketing
strategy is to achieve broad market acceptance for the integrated PREP and
SCREEN system for cervical cancer screening. In implementing this strategy, the
Company will address the needs of the constituencies described below.
Large clinical laboratories. Conventional Pap smear testing has become a
concentrated market in the United States. The Company believes that three major
clinical laboratories, Laboratory Corporation of America Holdings, Quest
Diagnostics, Inc. ("Quest"), formerly known as Corning Clinical Laboratories,
Inc., and SmithKline Beecham Clinical Laboratories ("SKB"), account for almost
18 million conventional Pap smears annually. In June 1997, Cytyc entered into a
multi-year agreement for the ThinPrep 2000 with Quest, which AutoCyte believes
is scheduled to expire at the end of 1999. In February 1999, Quest announced
that it was acquiring the clinical laboratory operations of SKB. The acquisition
is subject to review by various regulatory authorities and is targeted for
completion by September 1999. Other large testing laboratories, which the
Company believes perform more than 10 million conventional Pap smears in the
United States annually, account for another 20% of the market, concentrating
approximately 55% of cervical cancer test volume among a relatively small number
of large laboratories. AutoCyte believes that PREP's high throughput and
cost-effectiveness will enable the Company to market PREP successfully to this
concentrated market segment and that pressures associated with rising health
care costs, rising litigation costs and the limited supply of qualified
cytotechnologists will facilitate adoption of PREP and SCREEN by the large
laboratory market. Large clinical laboratories have used centrifuges and
liquid-based analytical techniques for a variety of applications and,
accordingly, the Company believes that the familiar nature of its underlying
technologies will enable its products to be more readily accepted in the market
than products based on other technologies. Due to the concentrated nature of the
large clinical laboratory market, the Company believes
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that a relatively small number of employees will be able to effectively market
the Company's systems to these customers.
Medium and small clinical laboratories. The Company also intends to devote
a substantial portion of its marketing resources to targeting medium and small
clinical laboratories. Hospital consolidation, and particularly the
consolidation of laboratories of the larger hospitals, is creating a new medium
sized customer for the Company's products. The Company expects that the medium
and small clinical laboratory segment of the market generally will utilize the
Company's equipment rental program.
Third-party payors. To achieve market acceptance for its products, the
Company will need to ensure that the use of its products is supported by
third-party payors. The Company will promote the clinical and economic benefits
of its PREP and SCREEN systems to national managed care providers, major private
insurers and other third-party payors. The Company's cervical cancer screening
system will initially be more expensive than conventional Pap smear testing on a
per test variable cost basis. Because the up-front, direct costs of using the
Company's products will be greater than the cost of the conventional Pap smear,
the Company will need to convince third-party payors that the overall cost
savings to the health care system, resulting from earlier detection of cervical
cancer, reduced ASCUS diagnoses and resulting reduction of unnecessary biopsies
and colposcopies, and improved specimen adequacy and resulting reduction of
unnecessary repeat Pap smears, will more than offset the cost of the Company's
products. At least two of the Company's competitors have achieved third-party
reimbursement for products that are similar to PREP and SCREEN. See "Third-Party
Reimbursement."
Health care providers. The Company intends to promote the clinical and
economic benefits of PREP and SCREEN directly to gynecologists and primary care
physicians by marketing with reference laboratory sales organizations.
AutoCyte's sales and marketing program will include a significant educational
effort to communicate the advantages of its integrated cervical cancer screening
system to the medical community.
Marketing and Sales Organization
The Company currently employs 23 persons worldwide to market, sell and
provide after sale support of its products. The Company anticipates that its
worldwide base of employees to market, sell and provide after-sale support of
its products will grow to 30 to 35 persons by the end of 1999.
In the United States, the Company plans to market its cervical cancer
screening system through a direct sales force, if PMA approvals are obtained.
The majority of the direct sales organization will focus on the laboratory
market to achieve appropriate market penetration, acceptance and availability of
the Company's products. The Company will also hire a small highly-specialized
sales organization which will market to managed care and other third-party payor
organizations to achieve appropriate reimbursement levels and to create demand
for the products. The Company will also emphasize co-marketing agreements with
sales organizations of major reference laboratories to market its products
directly to health care providers. The Company will further support the needs of
third-party payors, laboratories and individual physicians through development
of reimbursement hotlines and cost-effectiveness software models.
In international markets the Company markets and sells its products
primarily through distributors. To support these efforts, the Company employs
four people, consisting of sales professionals, supporting product managers and
after sales support personnel located in Europe and Australia. The Company
anticipates that these distributor organizations will ultimately assume
responsibility for all sales and after sales support activities as well as a
portion of the Company's marketing activities. Both large distribution
organizations with products focused on the clinical diagnostic market and
smaller distribution organizations with products focused specifically on the
anatomic pathology market have been employed to distribute AutoCyte products
worldwide.
After-sale support services, including customer training, product
installation, telephone technical support and repair service will be offered
directly to customers in the United States. Personnel providing these services
will be located both at the Company's headquarters and in select major
metropolitan areas. Internationally, the Company plans to provide these services
through distributor organizations.
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MANUFACTURING
The PREP System
The Company currently assembles, tests and packages components of the PREP
system at its manufacturing facility in Burlington, North Carolina. The Company
also manufactures its CytoRich line of reagents and stains for PREP at the
Burlington facility. The Company believes that its existing manufacturing and
assembly processes are adequate to meet the near-term, full-scale production
requirements of its PREP system for cervical cancer screening.
The Company purchases certain of the PREP instrument components from a
single OEM supplier in Europe. The consumable items used with PREP, including
glass slides, centrifuge tubes, pipette tips, settling chambers and other
disposable components, are purchased from a variety of third-party vendors, some
of which are sole source suppliers. In 1998, the Company agreed to new
multi-year exclusive contracts with two suppliers of manufactured plastic
components incorporated into its products. The first contract covers a specially
engineered component that is required for the PREPMate system. The contract
commenced in March 1998 and will terminate in March 2001. Pricing is fixed, but
is subject to adjustment based upon changes in raw material costs. In addition,
the Company has the ability to renegotiate pricing, or obtain the product
elsewhere, if the Company can identify another third-party supplier that is
willing to supply the product on more competitive terms.
The second contract covers three plastic components used with the PREP
system. The contract commenced in June 1998 and will terminate in June 2002.
Pricing is fixed, but is subject to adjustment based upon changes in raw
material costs. The Company's obligation to use this supplier exclusively for
the components is contingent upon this supplier supplying the Company at prices
competitive with those offered by third parties on similar terms, and upon this
supplier meeting the Company's quality and production requirements.
The Company believes that both suppliers have sufficient capacity to meet
its present and future requirements for plastic components.
Subject to any contractual limitations upon its ability to do so, the
Company may seek to establish other relationships with additional suppliers or
vendors for components of its products, although there can be no assurance that
it will be successful in doing so. The incorporation of new components, or
replacement components from alternative suppliers, into the Company's products
may require the Company to submit PMA supplements to, and obtain further
regulatory approvals from, the FDA before marketing the products with the new or
replacement components.
The SCREEN System
The Company also intends to assemble, test, and package its SCREEN system
at its Burlington facility. The SCREEN system is composed of a sophisticated
automated microscope, a robotic slide handler, a digital color camera, a
computer and other related components. The Company is also developing a next
generation SCREEN system (SCREEN II) that utilizes fewer custom parts than the
current system.
For the SCREEN system, the Company is reliant upon certain sole source
vendors for a variety of components. The Company intends to minimize this
reliance in the future by establishing relationships with additional suppliers.
The incorporation of alternative components from new suppliers into the SCREEN
system may require the Company to submit PMA supplements to the FDA. There can
be no assurance that the Company will be successful in gaining approval for
these supplements.
The Company currently has only limited manufacturing and assembly capacity
for the SCREEN system. The Company is taking steps to ensure it will have
adequate manufacturing capacity in place by the time the Company receives a PMA
for the product, if the Company receives a PMA for SCREEN at all. However, there
can be no assurances that the Company will be successful in these efforts.
The Company is also pursuing agreements with vendors relating to its SCREEN
II system. The Company believes these efforts will ensure there is adequate
manufacturing in place by the time the Company
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receives a PMA for SCREEN II, if the Company receives a PMA for SCREEN II at
all. However, there can be no assurances that the Company will be successful in
these efforts.
Pathology WorkStation Products
The Company currently integrates and assembles the Pathology Workstation
products at its Burlington facility and believes it has sufficient capacity to
meet anticipated customer demand for this product. To prepare a Workstation for
shipment, a computer is first configured with the proper hardware and software
components, and is then integrated with an automated microscope and other
related components.
The Company's Workstation Products consist primarily of off-the-shelf
components and proprietary software. The components are supplied by a variety of
vendors, some of which are sole-source suppliers. The Company has been
integrating and selling Workstation Products since 1993.
The Company has finalized a distribution agreement with Carl Zeiss Jena
Gmbh for the Workstation Products. In the U.S., the Company has finalized a
distribution agreement with Dynamic Healthcare, Inc. for the AIMS workstation
product. The Company has also entered into an exclusive distribution agreement
with Medical and Biological Laboratories Co. ("MBL") to distribute the AutoCyte
ImageTiter software system in support of MBL's autoimmune diagnostic reagent
offering to laboratories worldwide. MBL will also distribute AutoCyte Pathology
Workstation products in Japan, Korea and Taiwan. As part of these distribution
agreements, the Company expects to continue to provide integration services. See
"Marketing and Sales."
Manufacturing Standards
The Company's manufacturing process is subject to extensive regulation by
the FDA, including the FDA's Quality System ("QS," also known as Good
Manufacturing Practice, or "GMP") requirements. The Company's Burlington, North
Carolina manufacturing facility was inspected by the FDA in October 1997 for
compliance with QS requirements relating to the PREP product. The Company was
notified by the FDA in December 1997 that the facility had no outstanding
deficiencies and that it had passed the inspection. The facility was inspected
again by the FDA in December 1998 for compliance with QS requirements relating
to the SCREEN product. The Company was notified by the FDA in February 1999 that
the facility had no outstanding deficiencies and that it had passed the
inspection. Failure to comply with the FDA's QS requirements would materially
impair the Company's ability to achieve or maintain commercial-scale production.
In addition, if the Company is unable to maintain full-scale production
capability, acceptance by the market of PREP and SCREEN would be impaired, which
in turn would have a material adverse effect on the Company's business,
financial conditions, and results of operations.
In addition to QS manufacturing requirements, the Company may be required
to meet certain requirements relating to ISO 9001 certification and other
European regulatory requirements. A European "CE" certification is required to
successfully sell PREP and SCREEN in Europe. The OEM supplier of the PREP
instrument components has ISO 9001 certification and has obtained CE
certification for the main PREP component. CE compliance for the entire PREP
system is expected by mid-1999.
The SCREEN system was designed to meet the requirements of CE
certification. All SCREEN units shipped after January 1, 1999 comply with CE
requirements and are appropriately labeled.
The Company commenced its efforts for ISO 9001 certification in 1998 and
plans to complete the process by mid-1999. There can be no assurance, however,
that it will be successful in obtaining this certification.
Failure to either attain or maintain compliance with the applicable
manufacturing requirements of regulatory agencies would have a material adverse
effect on the Company's business, financial condition and results of operations.
RESEARCH AND DEVELOPMENT
The Company's research and development programs are currently focused on
(i) continued enhancement of the PREP instrument, related reagents and
disposables and further automation of the PREP slide
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preparation and handling process, (ii) continued development of the next
generation SCREEN product ("SCREEN II") and (iii) development of additional
Pathology Workstation applications to address the needs of the broader pathology
automation market.
Enhancements to PREP under development are particularly focused on
increasing PREP's efficiency, ease of use, reliability and cost-effectiveness.
The Company is also working to extend the shelf life of its CytoRich line of
reagents and preservatives.
PREPMate, an automated front-end processor for PREP, is designed to reduce
the number of manual pre-preparation steps required for the PREP system.
PREPMate is designed to function as a robotic mixer of the cell suspension in
the preservative vial, and to layer the cell sample before centrifugation.
PREPMate is designed to further enhance the throughput of the PREP system.
SCREEN II, a next-generation product intended to replace SCREEN, is
designed to increase throughput, incorporate more off-the-shelf components and
facilitate slide handling. SCREEN II will rely on an enhanced proprietary
algorithm classification technology and will be designed to have increased
information management and storage capabilities. The Company is developing
SCREEN II to include networking and sophisticated database capabilities.
The Company is continuing to develop additional applications to run on its
Pathology Workstation platform. These applications include quantitative image
analysis, tumor grading and slide management. One image analysis application
performs a quantitative analysis of DNA, nuclear texture and morphology to
assess the aggressiveness of various types of tumors. Another image analysis
application, immunocytochemistry, performs quantitative analysis of hormone
receptors and proliferation markers in histological sections and single cell
preparations. The tumor grading application is designed to evaluate the
arrangement of tumor cells within sections, much the same way that tissue
sections are evaluated and graded by a pathologist. The SlideWizard module
facilitates slide mapping and computer assisted manual cytology screening and
cell relocation.
There can be no assurance that any product enhancement or development
project undertaken by the Company either currently or in the future will be
successfully completed, receive regulatory approvals or be successfully
commercialized. The failure of any such enhancement or project to be completed,
approved or commercialized could prevent the Company from successfully competing
in its targeted markets and could have a material adverse effect on the
Company's business, financial condition and results of operations.
As of December 31, 1998, the Company had 36 employees engaged in research
and development. The Company's expenditures for research and development were
approximately $5.1 million, $4.4 million, $4.5 million and $4.7 million for the
years ended December 31, 1995 (predecessor), 1996 (proforma-combined), 1997 and
1998 (AutoCyte), respectively.
THIRD-PARTY REIMBURSEMENT
Successful commercialization of PREP and SCREEN for cervical cancer
screening in the United States and other countries will depend on the
availability of reimbursement from third-party payors such as private insurers
and managed care organizations. Because the up-front, direct costs of using the
Company's products will be greater than the cost of the conventional Pap smear,
the Company will need to convince third-party payors that the overall cost
savings to the health care system, resulting from earlier detection of cervical
cancer, reduced ASCUS diagnoses and resulting reduction of unnecessary biopsies
and colposcopies, and improved specimen adequacy and resulting reduction of
unnecessary repeat Pap smears, will more than offset the cost of the Company's
products. The Company intends to focus on obtaining coverage and reimbursement
from major national and regional managed care organizations and insurance
carriers throughout the United States. Most third-party payor organizations
independently evaluate new diagnostic procedures by reviewing the published
literature and the Medicare coverage and reimbursement policy on the specific
diagnostic procedure. To assist third-party payors in their respective
evaluations of PREP and SCREEN, the Company intends to provide scientific and
clinical data to support its claims of the safety and efficacy of the Company's
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products. The Company expects to focus on improved disease detection and cost
savings benefits in seeking to obtain reimbursement for PREP and SCREEN for
cervical cancer screening.
A critical component in the reimbursement decision by most private insurers
and the United States Health Care Financing Administration ("HCFA"), which
administers Medicare, is the assignment of a Current Procedural Terminology
("CPT") code which is used in the submission of claims to insurers for
reimbursement for medical services. CPT codes are assigned, maintained and
revised by the CPT Editorial Board administered by the American Medical
Association. The Company is aware that certain clinical laboratories using other
gynecological thin-layer systems have received reimbursement from certain third-
party payors using existing CPT codes. In January 1998 the CPT Editorial Board
established two separate CPT codes (88142 and 88143) for liquid-based cervical
cytology preparations by a cytotechnologist and, if necessary, a pathologist,
respectively. Payment for these new CPT codes as well as other new cervical
cytology technologies are currently being "gap filled" by local Medicare
intermediaries, meaning no national limit has been set. HCFA has targeted
September 1999 as a deadline for establishing a national limit on reimbursement
for these procedures. There can be no assurance that monetary reimbursement will
be established at a level sufficient to support use of the PREP system on a
routine basis. Failure to secure sufficient reimbursement could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company has very limited experience in obtaining reimbursement for its
products in the United States or other countries. In addition, third-party
payors are routinely limiting reimbursement and coverage for medical devices and
in many instances are exerting significant pressure on medical suppliers to
lower their prices. Lack of or inadequate reimbursement by government and other
third-party payors for the Company's products would have a material adverse
effect on the Company's business, financial condition and results of operations.
Further, outside of the United States, health care reimbursement systems vary
from country to country, and there can be no assurance that third-party
reimbursement will be made available at an adequate level, if at all, for PREP
or SCREEN under any other reimbursement system.
Although several of the Company's competitors have already received
reimbursement approval for their products, there is significant uncertainty
concerning third-party reimbursement for the use of any medical device
incorporating new technology. In February 1998, the Medical Advisory Panel
("MAP") of the Blue Cross and Blue Shield Association's Technology Evaluation
Center completed a cost-effectiveness study pertaining to certain of the
Company's competitors. The MAP concluded that Cytyc Corporation's ThinPrep(R)
process, NeoPath, Inc.'s AutoPap(R) 300 QC System (for quality control and
adjunctive testing only) and Neuromedical Systems, Inc.'s PAPNET(R) system (for
adjunctive testing only) offer only modest improvements in diagnostic accuracy
at a high cost. While the three companies have stated that they disagree with
the MAP report, and while AutoCyte's products were not included in the study,
there can be no assurance that the report will not have an adverse effect on
market acceptance of the Company's products. Further, in July 1998, the American
College of Obstetricians and Gynecologists released a report stating that, while
the new technologies improve sensitivity of the Pap test, their routine use
cannot be recommended based on costs and a lack of sufficient data demonstrating
a reduction in incidence of late-stage disease or an improvement in cervical
cancer survival rate. AutoCyte was not one of the companies whose products were
evaluated in this report. However, there can be no assurance that this
information will not negatively affect acceptance of AutoCyte PREP and SCREEN in
the marketplace. Reimbursement by a third-party payor depends on a number of
factors, including the level of demand by health care providers and the payor's
determination that the use of PREP and SCREEN represents a clinical advance
compared to current technology and is safe and effective, medically necessary,
cost-effective and appropriate for specific patient populations. Since
reimbursement approval is required from each payor individually, seeking such
approvals is a time-consuming and costly process that requires the Company to
provide scientific and clinical data to support the use of PREP and SCREEN to
each payor separately. There can be no assurance that third-party payors will
provide such coverage or coverage for any other products developed by the
Company, that reimbursement levels will be adequate or that health care
providers or clinical laboratories will use PREP and SCREEN for cervical cancer
screening in lieu of the conventional Pap smear method.
Recent health care cost containment initiatives in the United States that
have focused on reduction in reimbursement levels may effect the Company
negatively. However, emphasis on preventive measures to
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reduce the overall costs to the health care system could lead to more frequent
testing for cervical cancer and use of PREP and SCREEN if approved by the FDA.
The Company is unable to predict the outcome or the effect on its business of
the current health care reform debate.
PATENTS, COPYRIGHTS, LICENSES AND PROPRIETARY RIGHTS
The Company relies on a combination of patents, trade secrets, copyrights
and confidentiality agreements to protect its proprietary technology, rights and
know-how. The Company holds five issued United States patents as well as
corresponding foreign patents and patent applications, and has one United States
patent application that has been allowed but not issued, relating to various
aspects of its PREP and SCREEN technologies. These patents cover system
components, such as the disaggregation syringe, as well as the PREP process and
the interactivity of the cytotechnologist with the SCREEN system. The Company
has also filed one patent application which is pending in the United States and
numerous patent applications which are pending abroad. There can be no
assurance, however, that the claims allowed in any of the Company's existing or
future patents will provide competitive advantages for the Company's products or
will not be successfully challenged or circumvented by competitors. Under
current law, patent applications in the United States are maintained in secrecy
until patents are issued and patent applications in foreign countries are
maintained in secrecy for a period after filing. The right to a patent in the
United States is attributable to the first to invent, not the first to file a
patent application. The Company cannot be sure that its products or technologies
do not infringe patents that may be granted in the future pursuant to pending
patent applications or that its products do not infringe any patents or
proprietary rights of third parties. The Company is aware that several of its
competitors hold several patents relating to automated slide preparation and
screening. There can be no assurance that a court would rule that the Company's
products do not infringe such third-party patents or would invalidate such
third-party patents. The Company may incur substantial legal fees in defending
against a patent infringement claim or in asserting claims of invalidity against
third parties. In the event that any relevant claims of third-party patents are
upheld as valid and enforceable, the Company could be prevented from selling its
products or could be required to obtain licenses from the owners of such patents
or be required to redesign its products to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be on
terms acceptable to the Company or that the Company would be successful in any
attempt to redesign its products or processes to avoid infringement. The
Company's failure to obtain these licenses or to redesign its products would
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company has entered into confidentiality agreements with all of its
employees and several of its consultants and third-party vendors. 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 the Company's
competitors. The Company also holds unregistered rights to copyrights on
documentation and operating software developed by it for the PREP and SCREEN
systems. There can be no assurance that any copyrights owned by the Company will
provide competitive advantages for the Company's products or will not be
challenged or circumvented by its competitors. Litigation may be necessary to
defend against claims of infringement, to enforce patents and copyrights of the
Company, or to protect trade secrets and could result in substantial cost to,
and diversion of effort by, the Company. There can be no assurance that the
Company would prevail in any such litigation. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights to the same
extent as do the laws of the United States.
COMPETITION
The cervical cancer screening market is comprised of the conventional Pap
smear process and certain technologies which have been introduced in recent
years or are currently under development to provide improvements over the
conventional Pap smear process. The Company's competitors in the development and
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commercialization of alternative cervical cancer screening technologies include
both publicly traded and privately held companies. The alternative technologies
known to the Company have focused on improvements in slide sample preparation,
the development of automated, computerized screening systems and adjunctive
testing technologies. To date, the Company knows of no competitor which has
developed an integrated sample preparation and image analysis system, such as
PREP and SCREEN, which have been designed to function together. Nevertheless,
some competitors' products have already received FDA approval and are being
marketed in the United States. In addition, certain of the Company's competitors
have substantially greater financial, marketing, sales, distribution and
technical resources than the Company, and more experience in research and
development, clinical trials, regulatory matters, customer support,
manufacturing and marketing. In addition, some of these companies have received
third-party reimbursement for their products. The Company believes that its
products will compete on the basis of a number of factors, including slide
specimen adequacy, screening sensitivity, ease of use, efficiency, cost to
customers and performance claims. While the Company believes that its products
will have competitive advantages based on some of these factors, there can be no
assurance that various competitors' products will not have competitive
advantages based on other factors that, when coupled with the earlier market
entry of some products, will adversely effect the market acceptance of PREP and
SCREEN. Moreover, there can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competition,
including the development and commercialization of new products and
technologies, will not have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's products could be
rendered obsolete or uneconomical by technological advances of the Company's
current or potential competitors, the introduction and market acceptance of
competing products or by other approaches.
The Company's primary competitor in thin-layer slide preparation is Cytyc
Corporation ("Cytyc"). Cytyc's system, the ThinPrep(R) 2000 Processor(TM)
("ThinPrep 2000"), is based on a membrane-filtration separation system rather
than the centrifugation approach used in the AutoCyte PREP process. ThinPrep
2000 is the only thin-layer sample preparation system approved by the FDA for
cervical cytology applications. It is also used for non-gynecological
applications. The FDA has allowed Cytyc to conclude in the discussion section of
the package insert for ThinPrep 2000 that the sample preparation is
". . .significantly more effective than the conventional Pap smear for the
detection of Low Grade Squamous Intraepithelial (LSIL) and more severe lesions
in a variety of patient populations." The FDA has also allowed Cytyc to conclude
in the package insert that specimen quality ". . . is significantly improved
over that of conventional Pap smear preparation in a variety of patient
populations." In June 1997, Cytyc entered into a multi-year agreement with
Quest, one of the three large national chain laboratories. AutoCyte believes
this agreement is scheduled to expire at the end of 1999. In February 1999,
Quest announced that it was acquiring the clinical laboratory operations of
SmithKline Beecham, another of the large national chain laboratories. The
acquisition is subject to review by various regulatory authorities and is
targeted for completion by September 1999. In addition, in October of 1996,
Cytyc announced a non-exclusive co-marketing agreement with Digene Corporation,
which has developed a product that detects the presence or absence of HPV in
precancerous cervical lesions. In September 1997, the FDA approved PMA
supplements submitted by Cytyc and Digene enabling testing for HPV directly from
Cytyc's ThinPrep process cell suspension. The Company anticipates working with
Digene on a PMA supplement for use of PREP's cell suspension with Digene's HPV
test in the United States. In Europe, the AutoCyte PREP cell suspension is
already in routine use with Digene's HPV test. Cytyc has also announced that it
is developing a higher throughput version of its ThinPrep 2000 system (the
ThinPrep 3000) that is expected to complete clinical trials by the end of 1999.
Finally, in January 1999, Cytyc announced that it was expanding its direct sales
force by 75 people to sell directly to hospitals, laboratories and doctors.
Cytyc's success with implementation of any of the foregoing arrangements or
marketing initiatives may make it more difficult for the Company to promote PREP
in markets in which it competes with Cytyc.
In automated screening the Company faces direct competition primarily from
two companies, NeoPath, Inc. ("NeoPath") and Neuromedical Systems, Inc. ("NSI"),
both of which market imaging systems to reexamine or rescreen conventional Pap
smears previously diagnosed as negative. NeoPath is marketing an imaging system
designed to enhance quality control in connection with the rescreening of the
10% of the slides that are initially classified as negative, as required by
CLIA. NeoPath has also developed and is marketing a primary screening system and
filed a PMA supplement for this system in August 1997. NeoPath's primary
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screening system was recommended for approval by the FDA's Pathology and
Hematology Medical Advisory Panel in January 1998, and was approved for primary
screening in May 1998. The NeoPath primary screening system protocol excludes
high-risk patient samples, and of the remaining samples, approximately 25% are
designated, based on system analysis, for no further review. The remaining 75%
of non-high-risk patients' samples undergo full cytotechnologist review.
NSI markets an adjunctive screening system ("PapNet(R)") to supplement
primary slide screening. In February 1998, NSI announced that it was working
toward regulatory approval to sell its PapNet screening system as an interactive
primary screener to be located in the clinical laboratory. In July 1998, NSI
announced the commencement of a multi-center clinical trial for both the
conventional Pap smear and liquid-based preparations. NSI has announced that it
expects its clinical trials to be completed by mid-1999 and FDA approval by the
end of 1999. Additionally, in January 1999, NSI announced that it had hired an
investment banker to assist NSI in identifying and evaluating strategic
alternatives for NSI.
The Company believes that these systems, without further adaptation and FDA
approval, could not be used with PREP and, therefore, if either of such systems
is installed at or used by hospitals and reference laboratories, the Company's
ability to market its products to such hospitals and laboratories could be
materially adversely affected. If either NeoPath or NSI receives FDA approval of
its current system or any future product as a primary screening system to
replace some or all of the manual screening of conventional Pap smears,
marketing of these systems for such purpose could have a material adverse effect
on the Company's business, financial condition and results of operations.
GOVERNMENT REGULATION
The manufacture and sale of medical diagnostic devices are subject to
extensive governmental regulation in the United States and in other countries.
PREP and SCREEN are regulated for cervical cytology applications in the United
States as medical devices by the FDA under the Federal Food, Drug, and Cosmetic
Act (the "FDC Act") and require premarket approval by the FDA prior to
commercial distribution. In addition, certain modifications to medical devices,
their manufacture or their labeling also are subject to FDA review and approval
before marketing. Pursuant to the FDC Act, the FDA regulates the preclinical and
clinical testing, manufacture, labeling, distribution, sales, marketing,
advertising and promotion of medical devices in the United States. Noncompliance
with applicable requirements, including good clinical practice requirements, can
result in the refusal of the government to grant premarket approval for devices,
suspension or withdrawal of clearances or approvals, total or partial suspension
of production, distribution, sales and marketing, fines, injunctions, civil
penalties, recall or seizure of products, and criminal prosecution of a company
and its officers and employees.
Medical devices are classified into one of three classes, Class I, II or
III, on the basis of the controls deemed by the FDA to be necessary to
reasonably ensure their safety and effectiveness. Class I devices are subject to
general controls (e.g., labeling and adherence to FDA-mandated quality system
(including QS) requirements and, in some cases, premarket notification
("510(k)")). Class II devices are subject to general controls including, in most
cases, premarket notification, and to special controls (e.g., performance
standards, patient registries and FDA guidelines). Generally, Class III devices
are those that must receive premarket approval by the FDA to ensure their safety
and effectiveness (e.g., life-sustaining, life-supporting and implantable
devices) and also include most devices that were not on the market before May
28, 1976 ("new medical devices") and for which the FDA has not made a finding of
"substantial equivalence" based on a premarket notification. Class III devices
usually require clinical testing and FDA approval prior to marketing and
distribution. The Company's PREP and SCREEN products, when intended for
gynecological use, are regulated as Class III medical devices.
If human clinical trials of a device are required and the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or
distributor of the device) is required to file an investigational new device
("IDE") application prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal
and laboratory testing. If the IDE application is approved by the FDA (or the
FDA does not notify the sponsor 30 days after receipt of the application that
the trials may not
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begin) and one or more appropriate institutional review boards ("IRBs") approves
the study protocol, clinical trials may begin at a specified number of
investigational sites with a specific number of patients, as approved by the
FDA. If the device presents a "nonsignificant risk" to the patient, such as the
Company's PREP and SCREEN products when intended for gynecological use in a
"split-sample" study, or is an IDE exempt in-vitro diagnostic ("IVD") device, a
sponsor may begin the clinical trial after obtaining approval for the study from
one or more appropriate IRBs. Sponsors of clinical trials are permitted to sell
devices distributed in the course of the study provided the price charged does
not exceed recovery of the cost of manufacture, research, development and
handling. Generally, for an IDE study, a supplement must be submitted to, and
approved by, the FDA (or the FDA does not notify the sponsor 30 days after
receipt of the supplement that the change may not be implemented) before a
sponsor or an investigator may make a change to the investigational plan that
may affect its scientific soundness or the rights, safety or welfare of human
subjects. The FDA has the authority to re-evaluate, alter, suspend or terminate
clinical testing based on its assessment of data collected throughout the trials
or for non-compliance with regulatory requirements.
Generally, before a new Class II medical device can be introduced into the
market, the manufacturer must obtain FDA clearance of a 510(k) or approval of a
premarket approval application, unless the device is exempt from the requirement
of such clearance. A 510(k) clearance will be granted if the submitted
information establishes that the device is "substantially equivalent" to a
legally marketed predicate device (Class I or II medical device (for a Class I
or II device that is not exempt from the requirement of 510(k) clearance) or to
a legally marketed Class III device that does not itself require an approved PMA
prior to marketing.) A 510(k) must contain information to support a claim of
substantial equivalence, which may include laboratory test results or the
results of clinical studies of the device in humans. Such studies can take years
to complete, analyze, and prepare for submission to the FDA. Commercial domestic
distribution of a device for which a 510(k) is required may begin only after the
FDA issues an order finding the device to be "substantially equivalent" to a
predicate device. An FDA review of a 510(k) is generally expected to take from
three to six months from the date the 510(k) is accepted for review by the
agency, but it may take far longer, and 510(k) clearance may never be obtained.
An FDA order may declare that the device is "substantially equivalent" to
another legally marketed device and allow the proposed device to be marketed in
the United States. The FDA, however, may determine that the proposed device is
not "substantially equivalent" or require further information, including
clinical data, to make a determination of substantial equivalence. Such
determinations or requests for additional information could prevent or delay
market introduction of the product that is the subject of the 510(k) premarket
notification.
Generally, a PMA for a new Class III device must be filed with and approved
by the FDA before marketing of the device may begin. A PMA must be supported by
valid scientific evidence that typically includes extensive data, including data
from preclinical testing and human clinical trials to demonstrate the safety and
effectiveness of the device. The FDA ordinarily requires the performance of
independent, statistically significant human clinical trials that demonstrate
the safety and effectiveness of the device in order to obtain FDA approval of
the PMA. The PMA must also contain the results of all relevant bench tests,
laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling and promotional labeling.
Upon receipt of the PMA, the FDA makes a threshold determination as to
whether the application is sufficiently complete to permit a substantive review.
If the FDA so determines, the FDA will accept the PMA for filing and begin an
in-depth review of it. An FDA review of a PMA typically is expected to take
approximately one year from the date the PMA application is accepted for filing,
but may take significantly longer if the FDA requests additional information and
any major amendments to the PMA are filed. The review time is often
significantly extended by requests from the FDA for more information or
clarification of information already provided in the submission. During the
review period, an advisory committee, including clinicians, may be convened to
review and evaluate the application and provide recommendations to the FDA as to
whether the PMA should be approved. The FDA is not bound by the recommendation
of the advisory committee. The FDA will usually inspect the applicant's
manufacturing facility to ensure compliance with QS
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requirements prior to approval of a PMA. The FDA also may conduct bioresearch
monitoring inspections of the clinical trial sites and the PMA applicant to
ensure data integrity, and that the studies were conducted in compliance with
the applicable FDA regulations.
If the FDA's evaluations of the clinical study sites' compliance with the
agency's Good Clinical Practice ("GCP") requirements and the QS compliance of
the manufacturing facilities are acceptable, the FDA will issue either an
approval letter (order) or an "approvable letter" containing a number of
conditions that must be met in order to secure approval of a PMA. If the FDA's
evaluation of the PMA, the clinical study sites or the manufacturing facilities
are not favorable, the FDA will deny approval of the PMA or issue a "not
approvable letter." The FDA may also determine that additional preclinical
testing or human clinical trials are necessary, in which case approval of the
PMA could be delayed for several years while additional testing or trials are
conducted and submitted in an amendment to the PMA. The IDE/PMA process is
expensive, uncertain and lengthy (typically taking five to seven years or more
to complete), and a number of devices for which FDA approval has been sought by
other companies have never been approved for marketing. There can be no
assurance that the Company will be able to obtain necessary regulatory approvals
for any proposed future products in a timely manner or at all. Delays in receipt
of approvals, failure to receive approvals, the loss of previously received
approvals, or failure to comply with existing or future regulatory requirements,
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The FDA's regulations require agency approval of a PMA supplement for
certain changes if they affect the safety and effectiveness of the device,
including, but not limited to, new indications for use; certain labeling
changes; certain types of manufacturing changes; and changes in performance or
design specifications. Any such change will require FDA approval of a PMA
supplement before implementing the change.
PREP and SCREEN and any other products manufactured or distributed by the
Company pursuant to an approved PMA application and supplements (or to 510(k)
clearances) will be subject to pervasive and continuing regulation by the FDA,
including record-keeping requirements and reporting of adverse experience with
the use of the device. Device manufacturers are required to register their
establishments and list their devices with the FDA. The FDC Act requires that
medical devices be manufactured in accordance with the FDA's QS regulation.
Product labeling and promotional activities are also subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. Products may
only be promoted by the Company and any of its distributors for their approved
indications. No assurance can be given that modifications to the labeling which
may be required by the FDA in the future will not adversely affect the Company's
ability to market or sell PREP, SCREEN or other products of the Company.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future, or that such laws or regulations will not have a
material adverse effect upon the Company's business, financial condition and
results of operations.
Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain approval by a foreign country may be longer or shorter
than that required for FDA approval, and the requirements may differ. No
assurance can be given that such foreign regulatory approvals will be granted on
a timely basis, or at all. The Company has been advised by various parties,
including consultants engaged by the Company and foreign distributors, that no
regulatory approvals for a device analogous to FDA approval of a PMA are
currently required by any country where the Company currently sells PREP or
SCREEN. Such approval requirements may be imposed in the future. Export sales of
investigational devices that are subject to PMA or IDE application requirements
and have not received FDA marketing approval generally may be subject to FDA
export permit requirements depending upon, among other things, the purpose of
the export (investigational or commercial), the country to which the device is
intended for export, and on whether the device has valid marketing authorization
in a country listed in the FDA Export Reform and Enhancement Act of 1996, e.g.,
any member country of the European Union and certain other countries including
but not limited to Australia, Canada, Israel, Japan,
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New Zealand, and South Africa. In order to obtain such a permit, when one is
required, the Company must provide the FDA with documentation from the medical
device regulatory authority of the country in which the purchaser is located,
stating that the device may be marketed in the country. In addition, the FDA
must find the exportation of the device is not contrary to the public health and
safety of the country in order for the Company to obtain the permit. The Company
received an FDA permit to export PREP and SCREEN to all foreign countries in
which the Company is currently selling these products and where such a permit
was required. There can be no assurance that the Company will meet the FDA's
export requirements or receive additional FDA export approval when such approval
is necessary, or that countries to which the devices are to be exported will
approve the devices for import. Failure of the Company to meet the FDA's export
requirements or obtain FDA export approval when required to do so, or to obtain
approval for import, could have a material adverse effect on the Company's
business, financial condition and results of operations.
The laboratories that would purchase the Company's PREP and SCREEN products
are subject to extensive regulation under CLIA, which requires laboratories to
meet specified standards in the areas of personnel qualifications,
administration, participation in proficiency testing, patient test management,
quality control, quality assurance and inspections. The Company believes that
its PREP and SCREEN products operate in a manner that will allow laboratories
using the products to comply with CLIA requirements. However, there can be no
assurance that interpretations of current CLIA regulations or future changes in
CLIA regulations would not make compliance by the laboratory difficult or
impossible and therefore have an adverse effect on sales of the Company's
products.
PRODUCT LIABILITY
Commercial use of any Company products may expose the Company to product
liability claims. The Company currently carries $12,000,000, limited to
$11,000,000 per occurrence, in general liability (including product liability)
insurance coverage. The Company believes that this amount is adequate to meet
its present needs. 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. To date, the Company has not experienced
difficulty obtaining an amount of insurance coverage commensurate with its level
of sales. As the Company's sales expand, however, there can be no assurance that
the Company's existing product liability insurance will be adequate or that
additional product liability insurance will be available to the Company at a
reasonable cost, or that any product liability claim would not have a material
adverse effect on the Company's business, financial condition and results of
operations.
EMPLOYEES
As of December 31, 1998 the Company employed 83 persons on a full-time
basis. The Company believes that its relations with its employees are good. None
of the Company's employees are a party to a collective bargaining agreement.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
James B. Powell, M.D. .................... 60 President, Chief Executive Officer and
Director
Ernest A. Knesel.......................... 53 Executive Vice President
Thomas Gahm............................... 42 Vice President of Computer Science
James W. Geyer............................ 54 Vice President of Laboratory Science
William O. Green.......................... 41 Chief Financial Officer, Vice President of
Finance and Treasurer
Eric W. Linsley........................... 37 Vice President of Operations and Business
Development
Steven C. McPhail......................... 45 Vice President of Sales and Marketing
James M. Clinton.......................... 48 Vice President of Regulatory Affairs and
Quality Assurance
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James B. Powell, M.D. has served as a director of the Company since
November 1996 and as its President and Chief Executive Officer since January
1997. Prior to joining AutoCyte, Dr. Powell served as the President and Chief
Executive Officer of Laboratory Corporation of America Holdings ("LabCorp") from
May 1995 until January 1997. From 1982 until May 1995, Dr. Powell served as
President of Biomedical Reference Laboratories/Roche Biomedical Laboratories,
Inc. ("RBL"), the predecessor to both LabCorp and Roche Image Analysis Systems,
Inc. ("RIAS"), the predecessor of AutoCyte and which he co-founded. He continues
to serve on the board of LabCorp, a publicly traded company. Dr. Powell received
a B.A. degree from Virginia Military Institute and an M.D. from Duke University,
and is board certified in anatomical and clinical pathology.
Ernest A. Knesel has served as Executive Vice President of the Company
since November 1996 and served as its interim President from November 1996 until
January 1997. Previously, Mr. Knesel was a founder of RIAS and served as
President of RIAS from May 1989 until joining AutoCyte. Mr. Knesel also was a
co-founder of RBL, for which he served as Senior Vice President and was
responsible for Scientific Affairs from June 1969 until 1993. Mr. Knesel
received a B.S. in medical technology and an M.S. in biochemistry from Fairleigh
Dickinson University.
Thomas Gahm, Ph.D. has served as Vice President of Computer Science of the
Company since November 1996. Previously, he served RIAS and RBL in the same
capacity since August 1993. From 1983 to 1993, Dr. Gahm was a Scientific Advisor
and Project Coordinator of Kontron Electronics, Image Analysis Division, where
he focused on the commercial development of microscopic image analysis. Dr. Gahm
received an engineering degree from the University of Stuttgart (Institute of
Physical Electronics) and a Ph.D. from the Medical and Technical University of
Hannover, Germany.
James W. Geyer, Ph.D. has served as Vice President of Laboratory Science of
the Company since November 1996. From 1991 until November 1996, Dr. Geyer served
RIAS in the same capacity. He also served as Vice President of Product
Development for RBL from 1991 until 1994. In September 1986, Dr. Geyer founded
Genetic Design Inc. ("GDI"), a genetic testing laboratory, and served as Vice
President of Scientific Affairs of GDI until it was acquired by Genzyme
Corporation in 1991. From 1975 until 1986, Dr. Geyer served as Vice President of
Research and Development at RBL. Dr. Geyer received a Ph.D. in immunology and
microbiology and an M.S. in biochemistry, both from Wayne State University
School of Medicine.
William O. Green joined the Company as Controller in January 1997 and
became Chief Financial Officer and Vice President of Finance in April 1997.
Prior to joining AutoCyte, Mr. Green served from 1994 to 1996 as Vice President
and Chief Financial Officer of CORPEX Technologies, Inc. ("CORPEX"), a specialty
chemical company. Prior to joining CORPEX, Mr. Green held various positions at
Mann Industries, Inc. ("Mann"), a privately held manufacturer of technical
man-made fibers and yarns from 1989 to 1993, serving most recently as Chief
Operating Officer from 1992 to 1993. On September 16, 1993 Mann filed for
receivership and subsequently was liquidated. From 1981 to 1989, Mr. Green
worked as a certified public accountant at Arthur Andersen & Co. He received a
B.S. degree in business administration from the University of North Carolina,
Chapel Hill.
Eric W. Linsley has served as Vice President of Operations and Business
Development of the Company since May 1997. Prior to joining AutoCyte, Mr.
Linsley was a partner with Ampersand Ventures ("Ampersand"), a venture capital
firm, from 1991 to May 1997, and, in connection with such position, served as
interim management in operating and financial roles for various industrial
products and health care companies. From 1989 to 1991, Mr. Linsley was a
management consultant with Bain & Co. In 1988, he served in the same capacity
with McKinsey & Co. He also has worked as a certified public accountant with
Arthur Andersen LLP from 1984 to 1987. He received a B.A. from Trinity College,
an M.S. in accounting from New York University and an M.B.A. from the Wharton
School at the University of Pennsylvania.
Steven C. McPhail has served as Vice President of Sales and Marketing of
the Company since May 1997. Prior to joining AutoCyte, Mr. McPhail served as
Vice President of Sales and Marketing from January 1992 to May 1997 for DYNEX
Technologies, Inc. ("DYNEX"), a division of Thermo BioAnalysis Corporation and a
manufacturer of microtiter technology products serving both clinical and
research laboratory customers.
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Prior to joining DYNEX, Mr. McPhail served in sales and marketing positions from
1981 to 1992 with Abbott Laboratories Diagnostics Division. He received a B.S.
in biology from San Diego State University.
James M. Clinton was promoted to Vice President of Regulatory Affairs and
Quality Assurance in February 1999 after serving as the department director
since joining the Company in September 1998. Prior to joining AutoCyte, Mr.
Clinton worked as an independent consultant following nineteen years in the
medical device and pharmaceutical industries. From 1996 to 1997, Mr. Clinton
served as Director of Regulatory Affairs and Quality Assurance for
Cardiovascular Diagnostics, Inc.; from 1981 to 1995, for Bayer Corporation as a
microbiologist, supervisor and manager of medical device and pharmaceutical
quality assurance laboratories; and from 1978 to 1981 as a microbiologist and
supervisor for Boeringer Mannheim Corporation. Mr. Clinton holds a B.A degree in
biology from the University of Massachusetts and an M.S. in microbiology from
Indiana University.
ITEM 2. PROPERTIES
The Company currently leases a total of 43,000 square feet of space devoted
to manufacturing, warehousing, administrative, research and development and
engineering functions, at 780 Plantation Drive, Burlington, North Carolina under
a seven-year lease expiring in July 2005. The lease is renewable for five
additional one-year terms. The Company also currently leases a 5,000 square foot
education facility at 1111 Huffman Mill Road in Burlington, North Carolina under
a three-year lease expiring in June 2001. The education facility lease is
renewable for one additional three-year term, and also contains an option to
expand the leased space by 4,500 square feet.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of the fiscal year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $0.01 par value per share (the "Common Stock"),
is traded on the Nasdaq National Market under the symbol "ACYT". The following
table sets forth, for the calendar periods indicated since the Company's initial
public offering in September 1997 (the "Offering"), the range of high and low
sales prices for the Common Stock of the Company on the Nasdaq National Market.
These prices do not include retail mark-up, mark-down or commissions and may not
represent actual transactions.
HIGH LOW
------- ------
Fiscal Year 1997:
Third Quarter (from September 5, 1997).................... $10.125 $8.500
Fourth Quarter............................................ $13.125 $7.000
Fiscal Year 1998:
First Quarter............................................. $ 8.375 $4.000
Second Quarter............................................ $ 8.250 $4.500
Third Quarter............................................. $ 6.375 $2.875
Fourth Quarter............................................ $ 4.438 $2.250
On March 22, 1999, the last reported sales price of the Common Stock on the
Nasdaq National Market was $7.125 per share. As of March 22, 1999, there were
approximately 96 holders of record of the Common Stock.
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Use of proceeds information is provided herewith in connection with the
Offering. The Company's Registration Statement on Form S-1, Commission file
number 333-30227, was declared effective by the Securities and Exchange
Commission on September 4, 1997.
In connection with the Offering, the Company incurred the following
expenses through December 31, 1998: underwriting discounts and commissions of
$2,187,000 and other expenses of $1,169,339. After expenses incurred through
December 31, 1998, the Company's net proceeds from the Offering were $27,893,661
as of December 31, 1997. From September 5, 1997 (the effective date of the
Company's Registration Statement on Form S-1) through December 31, 1997, the
amount of net offering proceeds used by the Company was as follows: $2,257,245
for purchases of machinery and equipment, $9,614,765 to fund current operations
(of which $1,721,295 was paid to officers of the Company), $988,030 for working
capital purposes, and the remaining $15,033,621 was invested in short-term
securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain its future earnings, if any, for use in
its business and therefore does not anticipate paying cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company's Board of Directors after taking into account various
factors, including the Company's financial condition, operating results, current
and anticipated cash needs and plans for expansion.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of December 31,
1994 and 1995 and for the years ended December 31, 1994 and 1995 and for the
period from January 1, 1996 to November 21, 1996 are derived from Financial
Statements of the Company's predecessor, the cytology and pathology automation
business of Roche Image Analysis Systems, Inc. ("RIAS"), included elsewhere
herein, which have been audited by Ernst & Young LLP, independent auditors. The
selected financial data presented below as of December 31, 1996, 1997 and 1998
and for the period from November 22, 1996 through December 31, 1996 and the
years ended December 31, 1997 and 1998 are derived from Financial Statements of
the Company, included elsewhere herein, which have been audited by Ernst & Young
LLP, independent auditors. The selected consolidated financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Financial Statements
and related Notes thereto included in this Form 10-K.
PREDECESSOR(1) AUTOCYTE PRO FORMA
---------------------------------- PERIOD FROM COMBINED
PERIOD FROM NOVEMBER 22, PREDECESSOR AND
YEARS ENDED JANUARY 1, 1996 AUTOCYTE AUTOCYTE AUTOCYTE
DECEMBER 31, 1996 THROUGH THROUGH YEAR ENDED YEAR ENDED YEAR ENDED
------------------- NOVEMBER 21, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1996 1996(2) 1997 1998
-------- -------- ------------ ------------ --------------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Net sales................... $ 3,396 $ 3,396 $ 1,747 $ 129 $ 1,876 $ 2,668 $ 4,770
Gross profit (loss)......... 796 982 (1,049) 17 (1,032) 715 1,787
Research and development.... 3,605 5,074 3,908 458 4,366 4,462 4,700
Selling, general and
administrative............ 8,479 7,895 11,966 525 12,491 6,532 7,458
Operating loss.............. (11,288) (11,987) (16,923) (966) (17,889) (10,279) (10,370)
Net loss.................... $(11,288) $(11,987) $(16,923) $ (923) $(17,846) $(10,985) $ (9,090)
======== ======== ======== ======= ======== ======== ========
Net loss per Share (basic
and diluted)(3)........... $ (0.22) $ (1.59) $ (0.72)
======= ======== ========
Weighted-average shares
outstanding(3)............ 4,279 6,903 12,664
======= ======== ========
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PREDECESSOR(1)
----------------- AUTOCYTE
DECEMBER 31, ------------------------------------------
----------------- DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1997 1998
------- ------- ------------ ------------ ------------
(IN THOUSANDS)
Balance Sheet Data:
Cash and cash equivalents..................... $ 8 $ 10 $ 9,517 $28,655 $19,986
Working capital............................... 1,600 3,585 10,673 30,223 22,194
Total assets.................................. 10,544 10,714 16,683 37,021 30,026
Redeemable convertible preferred stock........ -- -- 9,882 -- --
Total stockholders' equity.................... 8,966 10,002 5,235 35,027 26,847
- ---------------
(1) Reflects the operations of the cytology and pathology automation business as
conducted by RIAS.
(2) Reflects the operations of the cytology and pathology automation business as
conducted by RIAS from January 1, 1996 through November 21, 1996 and the
operations of the Company from November 22, 1996 through December 31, 1996.
(3) See Note 2 of Notes to the Company's Financial Statements for information
concerning the computation of net loss per share and shares used in
computing net loss per share. Net loss per share is not disclosed for
periods prior to November 22, 1996 since RIAS operated as a wholly owned
subsidiary of Roche Holding Ltd. prior to the formation of AutoCyte.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Form 10-K. The financial
results for the years ended December 31, 1994 and 1995 and for the period from
January 1, 1996 through November 21, 1996 are for the business of the Company as
conducted by the Company's predecessor, the cytology and pathology automation
business of Roche Image Analysis Systems, Inc. ("RIAS"). For purposes of this
discussion, information for the year ended December 31, 1996 combines financial
results of the Company's predecessor and AutoCyte.
Background
AutoCyte was formed in October 1996 to acquire the cytology and pathology
automation business then owned by RIAS, a wholly-owned subsidiary of Roche
Holding Ltd. ("Roche"). Roche had previously operated such business as part of
Roche Biomedical Reference Laboratories, Inc., a predecessor company to
Laboratory Corporation of America, Inc., the largest clinical laboratory chain
in the United States and formerly a wholly-owned subsidiary of Roche.
The Company cannot market its PREP or SCREEN systems in the United States
for use in preparing or screening thin-layer slides for cervical cancer until
PMA approvals are received from the FDA. If such approvals are obtained, the
Company intends to focus its marketing efforts on such products for cervical
cytology applications. The Company expects to generate a substantial majority of
its future revenues from the PREP and SCREEN systems. The Company's long-term
revenues and future success are substantially dependent upon its ability to
obtain regulatory approval for, and market and commercialize the PREP and SCREEN
systems for, cervical cancer screening in the United States and abroad.
The Company generates PREP revenue from both system sales and rentals. For
system sales, customers purchase the PREP instrument and make separate purchases
of related reagents and other disposables. For system rentals, the Company
places the PREP instrument at the customer's site, and customers make monthly
payments that include rent and the purchase of a minimum monthly quantity of
reagents and other disposables. The term of the PREP rentals ranges from
month-to-month to three years. For SCREEN customers in the United States, the
Company intends to place instruments without charge at customer locations and to
charge customers on a per test, or Fee-Per-Use ("FPU"), basis. In foreign
markets, the Company plans to either sell or license SCREEN. As an important
element of its business strategy, the Company intends to seek third-party
financing to support rentals of PREP and FPU placements of SCREEN.
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There can be no assurance that the Company will be able to obtain such financing
or, if so, on favorable terms. Failure to obtain such financing could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Future revenues and results of operations may fluctuate significantly from
quarter to quarter and will depend upon, among other factors, the timing and
outcome of the FDA review of the PREP PMA amendment and the SCREEN PMA
amendment, the extent to which the Company's products gain market acceptance,
the timing and volume of sales and rental orders, regulatory and reimbursement
matters, introduction of alternative technologies by competitors, pricing of
competitive products, and the cost and effect of promotional discounts and
marketing programs adopted by the Company.
The Company anticipates that if FDA approval is received to market PREP for
gynecological uses, its marketing and sales expenditures will increase
significantly. The Company also anticipates that research and development
expenses, both in the areas of product enhancement and new product development,
and manufacturing expenses will also increase as product commercialization
increases. The Company additionally expects to incur compensation expense of
$1.9 million as its deferred compensation balance is amortized.
RESULTS OF OPERATIONS
Years ended December 31, 1998 and 1997
Net sales and gross profit. Net sales increased by 79% from $2.7 million
in 1997 to $4.8 million in 1998. The increase was due to higher sales of PREP
units and related consumables and an increase in Pathology Workstation related
sales. Included in Pathology Workstation revenues in 1998 was $540,000 of
revenue recognized pursuant to a world-wide distribution agreement for
ImageTiter(R), the Company's product that enables the quantitative assessment of
anti-nuclear antibodies in a patient's blood specimen. The Company's gross
profit during 1998 was $1.8 million, or 37% of sales, an increase from $715,000,
or 27% of sales, in 1997. This increase was due to the increased sales of PREP
consumables, as well as improved margins on Pathology Workstation products that
primarily resulted from the high margin on the ImageTiter(R) distribution
agreement revenue.
Total operating expenses. Operating expenses increased by 11% from $11.0
million in 1997 to $12.2 million in 1998. Research and development costs for
1998 were $4.7 million, an increase of $238,000 from $4.5 million in 1997, due
primarily to increased regulatory expenses associated with the PREP and SCREEN
products. Selling, general and administrative ("SG&A") costs for 1998 were $7.5
million, an increase of $925,000 from $6.5 million in 1997, due primarily to
higher costs as the Company increased its staffing levels and other expenditures
to support product commercialization.
Interest income and interest expense, including credit agreement commitment
fee. Interest income for 1998 was $1.3 million, an increase of 68% from
$773,000 in 1997, primarily attributable to the short-term investment of
proceeds from the Company's initial public offering in September 1997. Interest
expense for 1998 was $21,000, a decrease from $1.5 million in 1997. The
significant interest expense in 1997 was due to the one-time, non-cash expense
resulting from the issuance of warrants as a commitment fee for a credit
agreement between the Company and certain of its principal stockholders.
Years ended December 31, 1997 (AutoCyte) and December 31, 1996 (Pro Forma
Combined)
Net sales and gross profit. Net sales increased by 42% from $1.9 million
in 1996 to $2.7 million in 1997. The increase was primarily attributable to a
$1.1 million increase in PREP revenue from $65,000 in 1996 to $1.2 million in
1997 as the Company increased the number of PREP placements in the United States
and international markets. This increase was partially offset by a $512,000
decrease in sales of Pathology Workstation products from $1.8 million in 1996 to
$1.3 million in 1997. This decrease was a result of management's decision to
focus on development and sales of PREP and SCREEN products. Additionally, SCREEN
revenues increased to $220,000 in 1997 from $0 in 1996, resulting from foreign
placements. Gross profit increased by $1.7 million from a loss of $1.0 million
in 1996 to gross profit of $715,000. The loss in 1996 was due primarily to the
write-off of obsolete inventory by the Company's predecessor of $1.4 million in
the
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fourth quarter of 1996 as a result of management's decision to focus on
development and sales of PREP and SCREEN products.
Total operating expenses. Operating expenses decreased by 35% from $16.9
million in 1996 to $11.0 in 1997. Research and development costs remained
relatively flat, increasing from $4.4 million in 1996 to $4.5 million in 1997.
SG&A costs decreased by 48% from $12.5 million in 1996 to $6.5 million in 1997
due primarily to the write-down of property and equipment by the Company's
predecessor of $3.9 million in the fourth quarter of 1996, and other
acquisition-related one-time charges in the fourth quarter of 1996 of $1.5
million.
During 1997 the Company granted options under the 1996 Equity Incentive
Plan to acquire 304,962 shares of Common Stock at an exercise price of $0.2033
per share. The Company also sold to certain members of management 48,819 shares
of Series A Preferred Stock at a price of $2.048 per share. The Company recorded
$1.7 million of deferred compensation expense and $432,000 of compensation
expense with respect to these transactions. The Company also recorded $705,000
of amortization of deferred compensation expense during 1997.
Interest income and interest expense, including credit agreement commitment
fee. On June 27, 1997 the Company issued warrants to acquire 207,291 shares of
Common Stock at an exercise price of $2.033 per share as a commitment fee for a
credit agreement among the Company and certain of its principal stockholders.
The Company recorded $1.5 million of commitment fee expense with respect to this
transaction, all of which was expensed in June 1997. This increase in interest
expense was partially offset by an increase in interest income of $730,000 which
was primarily attributable to the investment of the proceeds from the Company's
initial public offering.
INCOME TAXES
The Company has not generated any taxable income to date and, therefore,
has not paid any federal income taxes since its inception. Realization of
deferred tax assets is dependent on future earnings, if any, the timing and
amount of which are uncertain. Accordingly, valuation allowances, in amounts
equal to the net deferred tax assets as of December 31, 1998 and 1997, have been
established in each period to reflect these uncertainties.
At December 31, 1998, the Company had net operating losses, for tax
purposes, of approximately $22.4 million that may be carried forward to offset
future taxable income. This amount expires in 2011 through 2013. Utilization of
net operating losses and any tax credit carryforwards are subject to complex
treatment under the Internal Revenue Code of 1986, as amended (the "Code").
Pursuant to Section 382 of the Code, the change in ownership resulting from the
Company's initial public offering in September 1997 and any other future sale of
stock may limit utilization of future losses in any one year. The Company
believes that the sale of Common Stock in the Offering did not create any
immediate limitations on the Company's utilization of net operating losses.
YEAR 2000 READINESS DISCLOSURE
The Company has established a task force comprised of experienced personnel
from all functional areas of the Company to determine the impact the Year 2000
problem will have on its operations. The task force's activities are designed to
ensure that there is no adverse effect on the Company's core business operations
and that transactions with customers and suppliers are fully supported before,
during and after January 1, 2000. The task force is focusing its efforts on five
key areas: products, information technology ("IT") systems, vendors and service
providers, telecommunications, and facilities, including non-IT systems. The
Company is well underway with these efforts, and anticipates achieving Year 2000
Readiness, including the development of a contingency plan, by September 30,
1999.
All shipments of PREP units made subsequent to September 1, 1998 are Year
2000 compliant, and the Company is upgrading non-compliant units in the field in
conjunction with routine preventative maintenance visits. Most of the Company's
Pathology Workstation products are currently Year 2000 compliant, and the
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Company is currently determining an appropriate course of action to deal with
non-compliant products. The Company expects to complete its assessment of SCREEN
by June 30, 1999. The Company believes that the majority of its internal systems
are Year 2000 compliant, and has initiated correspondence with significant
suppliers, large customers and financial institutions to ensure that those
parties have appropriate plans to remediate Year 2000 issues where their systems
could effect the Company's operations. While the Company believes its planning
efforts are adequate to address its Year 2000 concerns, there can be no
guarantee that systems of other companies on which the Company relies will be
converted on a timely basis and will not have a material effect on the Company,
or that the Company will ever achieve Year 2000 Readiness. The Company is
dependent on certain sole source suppliers. Failure on the part of those
suppliers to become Year 2000 compliant could affect the ability of the Company
to obtain product from those suppliers and could adversely affect operations and
financial results. To-date, the Company has not incurred material costs in
addressing the Year 2000, and the remaining costs of the Year 2000 initiatives
are not expected to be material to the Company's results of operation or
financial position.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes standards for reporting and display of comprehensive income
and its components in financial statements. The application of the new rules did
not have an impact on the Company's financial statements since it has no items
of other comprehensive income in any period presented.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
statements to shareholders. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The application of the new rules did not have an impact on the Company's
financial statements as the Company operates in only one business segment.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which is effective for years beginning after June 15, 1999. SFAS 133
establishes a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The Company will adopt SFAS
133 in 2000, which may result in additional disclosures. The application of the
new rules is not expected to have a significant impact on the Company's
financial position or results from operations.
LIQUIDITY AND CAPITAL RESOURCES
Since its formation on October 24, 1996, the Company's expenses have
significantly exceeded its revenues, resulting in an accumulated deficit of
$21.0 million as of December 31, 1998. The Company has funded its operations
primarily through the private placement and public sale of equity securities,
resulting in net proceeds of $38.0 million, debt facilities and limited product
sales. As of December 31, 1998, the Company had cash and cash equivalents of
$20.0 million.
Cash used in the Company's operations was $8.1 million in 1998, $8.2
million during 1997 and $10.0 million on a pro forma combined basis during 1996.
Negative operating cash flow during 1998, 1997 and 1996 was caused primarily by
operating losses. The Company's capital expenditures were $1.6 million in 1998,
$1.0 million during 1997 and $377,000 on a pro forma combined basis during 1996,
with the increases primarily attributable to the purchase of PREP units for
rental and demonstration purposes. The Company has no material commitments for
capital expenditures.
The Company believes that its existing cash and anticipated additional debt
and lease financing for internal use assets, rental placements of PREP and
fee-per-use placements of SCREEN (if and when FDA approval is received), will be
sufficient to enable the Company to meet its future cash obligations through
1999. The Company's future liquidity and capital requirements will depend upon
numerous factors, including
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the timing of the Company's receipt of FDA approval of its PMA for PREP, the
availability of financing for the Company's anticipated equipment lease and
rental programs, the level of placements of rental PREP systems and fee-per-use
SCREEN systems, the resources required to further develop its marketing and
sales capabilities domestically and internationally, the resources required to
expand manufacturing capacity and the extent to which the Company's products
generate market acceptance and demand. In particular, if the FDA approves the
PREP PMA, the Company anticipates that marketing and sales expenditures for the
PREP market launch for gynecological uses in the United States, capital
expenditures associated with placements of PREP rental units, and expenditures
related to manufacturing and other administrative costs will increase
significantly. There can be no assurance that the Company will not require
additional financing or will not in the future seek to raise additional funds
through bank facilities, debt or equity offerings or other sources of capital.
Additional funding may not be available when needed or on terms acceptable to
the Company, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The discussion included in this section as well as elsewhere in the Annual
Report on Form 10-K may contain forward-looking statements based on current
expectation of the Company's management. Such statements are subject to risks
and uncertainties that could cause actual results to differ from those
projected. See "Important Factors Regarding Forward-Looking Statements" attached
hereto as Exhibit 99.1 and incorporated by reference into this Form 10-K.
Readers are cautioned not to place undue reliance on the forward looking
statements, which speak only as the date hereof. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's financial results and cash flows are subject to fluctuation
due to changes in interest rates, primarily from its investment of available
cash balances in highly rated institutions. Under its current policies, the
Company does not use interest rate derivative instruments to manage exposure to
interest rate changes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item may be found on pages F-1 through
F-24 of this Form 10-K.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters in the last fiscal year.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption "Executive
Officers of the Registrant" in Part I, Item 1A hereof and the remainder is
incorporated herein by reference from the discussion responsive thereto under
the captions "Election of Directors" and "Section 16(a) Beneficial Reporting
Compliance" in the Company's Proxy Statement relating to its Annual Meeting of
Stockholders scheduled for May 26, 1999 (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the captions "Election of Directors,"
"Director Compensation," "Executive Compensation" and "Compensation Committee
Interlocks and Insider Participation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Share Ownership" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Certain Transactions" in the
Proxy Statement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements are listed under Part II, Item 8 of this
report.
2. Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
accompanying Consolidated Financial Statements.
3. Exhibits
The exhibits are listed under Part IV, Item 14(c) of this report.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fourth quarter of
1998.
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Restated Certificate of Incorporation of the Company. Filed
as Exhibit 3.5 to the Company's Registration Statement on
Form S-1 (File No. 333-30227) and incorporated herein by
reference.
3.2 Amended and Restated By-laws of the Company. Filed as
Exhibit 3.7 to the Company's Registration Statement on Form
S-1 (File No. 333-30227) and incorporated herein by
reference.
4.1 Specimen of Common Stock Certificate. Filed as Exhibit 4.1
to the Company's Registration Statement on Form S-1 (File
No. 333-30227) and incorporated herein by reference.
10.1* Amended and Restated 1996 Equity Incentive Plan (including
forms of incentive stock option certificate and nonstatutory
stock option certificate). Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (File No.
333-30227) and incorporated herein by reference.
10.2* 1997 Director Stock Option Plan (including form of director
nonstatutory stock option certificate). Filed as Exhibit
10.2 to the Company's Registration Statement on Form S-1
(File No. 333-30227) and incorporated herein by reference.
10.3 Lease Agreement dated as of March 10, 1993 by and between
Carolina Hosiery Mills, Inc. and Roche Biomedical
Laboratories, Inc. ("RBL"), the predecessor of the Company's
predecessor (including notices of renewal thereof dated
December 27, 1995 and March 24, 1997). Filed as Exhibit 10.3
to the Company's Registration Statement on Form S-1 (File
No. 333-30227) and incorporated herein by reference.
10.4 Lease Agreement dated as of April 25, 1995 by and between
RBL, the predecessor of the Company's predecessor, and Roche
Image Analysis Systems, Inc. ("RIAS"), the Company's
predecessor (including notices of renewal thereof dated
January 10, 1996 and March 18, 1997). Filed as Exhibit 10.4
to the Company's Registration Statement on Form S-1 (File
No. 333-30227) and incorporated herein by reference.
10.5+ OEM Supply Agreement dated January 13, 1995 between Tecan AG
and RIAS, the Company's predecessor. Filed as Exhibit 10.6
to the Company's Registration Statement on Form S-1 (File
No. 333-30227) and incorporated herein by reference.
10.6+ Amendment to the OEM Supply Agreement dated October 14, 1996
between Tecan AG and RIAS, the Company's predecessor. Filed
as Exhibit 10.7 to the Company's Registration Statement on
Form S-1 (File No. 333-30227) and incorporated herein by
reference.
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EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.7 Agreement dated July 26, 1993 by and between Technical
Precision Plastics, Inc. and RIAS, the Company's
predecessor. Filed as Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (File No. 333-30227) and
incorporated herein by reference.
10.8 Registration Rights Agreement dated as of November 22, 1996
by and among the Company and the individuals and entities
listed on Exhibit A thereto (including amendment thereof
dated June 26, 1997). Filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (File No. 333-30227) and
incorporated herein by reference.
10.9 Contribution Agreement dated as of November 22, 1996 by and
among HLR Holdings Inc., RIAS and the Company. Filed as
Exhibit 10.10 to the Company's Registration Statement on
Form S-1 (File No. 333-30227) and incorporated herein by
reference.
10.10 Form of Indemnification Agreement between the Company and
its Directors and Executive Officers. Filed as Exhibit 10.11
to the Company's Registration Statement on Form S-1 (File
No. 333-30227) and incorporated herein by reference.
10.11 Lease Agreement dated as of July 28, 1997 by and between
Carolina Hosiery Mills, Inc. and the Company. Filed as
Exhibit 10.12 to the Company's Registration Statement on
Form S-1 (File No. 333-30227) and incorporated herein by
reference.
10.12 Renewal dated January 6, 1998 of Lease Agreement dated as of
April 25, 1995 by and between RBL, the predecessor of the
Company's predecessor, and RIAS, the Company's predecessor.
Filed as Exhibit 10.12 to the Company's Form 10-K for the
year ended December 31, 1997 (File No. 0-22885) and
incorporated herein by reference.
10.13 Lease Agreement dated July 8, 1998 by and between Laboratory
Corporation of America(TM) Holdings and AutoCyte, Inc. Filed
as Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended September 30, 1998 (File No. 0-22885) and incorporated
herein by reference.
10.14 Lease Agreement dated June 12, 1998 by and between Carolina
Hosiery Mills, Inc. and AutoCyte, Inc. Filed as Exhibit 10.1
to the Company's Form 10-Q for the quarter ended June 30,
1998 (File No. 0-22885) and incorporated herein by
reference.
10.15+ Supply Agreement dated June 1, 1998 by and between Technical
Precision Plastics, Inc. and AutoCyte, Inc. Filed as Exhibit
10.2 to the Company's Form 10-Q for the quarter ended June
30, 1998 (File No. 0-22885) and incorporated herein by
reference.
10.16+ Supply Agreement dated March 5, 1998 by and between Tecan AG
and AutoCyte, Inc. Filed as Exhibit 10.3 to the Company's
Form 10-Q for the quarter ended June 30, 1998 (File No.
0-22885) and incorporated herein by reference.
10.17 Master Loan and Security Agreement dated December 21, 1998
by and between Oxford Venture Finance, LLC and AutoCyte,
Inc. Filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors to the
Company. Filed herewith.
27.1 Financial Data Schedule. Filed herewith. (for SEC use only)
99.1 Important Factors Regarding Forward-Looking Statements.
Filed herewith.
- ---------------
* Indicates a management contract or compensatory plan.
+ Certain confidential material contained in the document has been omitted and
filed separately with the Securities and Exchange Commission pursuant to Rule
406 of the Securities Act of 1933, as amended.
Omitted information is identified with asterisks in the appropriate places in
the agreement.
35
36
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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
BURLINGTON, STATE OF NORTH CAROLINA, ON MARCH 24, 1999.
AUTOCYTE, INC.
BY: /s/ JAMES B. POWELL, M.D.
-----------------------------------
James B. Powell, M.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 on this 24th day of March, 1999.
SIGNATURE TITLE
--------- -----
/s/ JAMES B. POWELL, M.D. President, Chief Executive Officer and
- ----------------------------------------------------- Director (Principal Executive Officer)
JAMES B. POWELL, M.D.
/s/ WILLIAM O. GREEN Chief Financial Officer, Vice President of
- ----------------------------------------------------- Finance and Treasurer (Principal Financial
WILLIAM O. GREEN Officer and Principal Accounting Officer)
/s/ RICHARD A. CHARPIE Director
- -----------------------------------------------------
RICHARD A. CHARPIE
/s/ ROBERT E. CURRY Director
- -----------------------------------------------------
ROBERT E. CURRY
/s/ THOMAS P. MACMAHON Director
- -----------------------------------------------------
THOMAS P. MACMAHON
/s/ SUSAN E. WHITEHEAD Director
- -----------------------------------------------------
SUSAN E. WHITEHEAD
36
37
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AUTOCYTE, INC.
Years ended December 31, 1998 and 1997 and period from November 22, 1996
(inception)
through December 31, 1996
PAGE
----
Report of Independent Auditors.............................. F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.
Years ended December 31, 1994 and 1995, and the period from January 1, 1996
through November 21, 1996
Report of Independent Auditors.............................. F-17
Audited Financial Statements
Balance Sheets.............................................. F-18
Statements of Operations.................................... F-19
Statements of Cash Flows.................................... F-20
Notes to Financial Statements............................... F-21
F-1
38
AUTOCYTE, INC.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
AutoCyte, Inc.
We have audited the accompanying consolidated balance sheets of AutoCyte,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, redeemable convertible preferred stock
and stockholders' equity and cash flows for the years ended December 31, 1998
and 1997 and for the period from November 22, 1996 (inception) through 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 consolidated financial position of AutoCyte, Inc.
and subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for the years ended December 31, 1998 and
1997 and for the period from November 22, 1996 (inception) through December 31,
1996 in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Raleigh, North Carolina
February 5, 1998
F-2
39
AUTOCYTE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 19,986,107 $ 28,655,082
Accounts receivable....................................... 919,211 906,154
Inventory................................................. 3,240,869 2,191,995
Other current assets...................................... 432,578 415,248
------------ ------------
Total current assets................................... 24,578,765 32,168,479
Property and equipment...................................... 2,762,995 2,018,142
Goodwill.................................................... 2,684,375 2,834,375
------------ ------------
Total assets........................................... $ 30,026,135 $ 37,020,996
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,028,788 $ 1,129,016
Accrued expenses.......................................... 534,197 685,998
Deferred revenue.......................................... 630,185 130,000
Current portion of long-term debt......................... 191,795 --
------------ ------------
Total current liabilities.............................. 2,384,965 1,945,014
Long term debt, less current portion........................ 689,782 --
Other long-term liabilities................................. 104,514 48,768
Stockholders' equity:
Common stock, $0.01 par value; 20,650,000 shares authorized;
12,729,925 and 12,505,412 shares issued and outstanding
at December 31, 1998 and 1997, respectively............... 127,299 125,054
Additional paid-in capital.................................. 49,598,025 49,553,302
Deferred compensation....................................... (1,880,516) (2,743,280)
Accumulated deficit......................................... (20,997,934) (11,907,862)
------------ ------------
Total stockholders' equity............................. 26,846,874 35,027,214
------------ ------------
Total liabilities and stockholders' equity............. $ 30,026,135 $ 37,020,996
============ ============
See accompanying notes.
F-3
40
AUTOCYTE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM
YEAR ENDED YEAR ENDED NOVEMBER 22, 1996
DECEMBER 31, DECEMBER 31, (INCEPTION) THROUGH
1998 1997 DECEMBER 31, 1996
------------ ------------ -------------------
Sales.......................................... $ 4,769,686 $ 2,667,837 $ 129,189
Cost of sales.................................. 2,982,198 1,952,691 112,022
------------ ------------ ---------
Gross profit................................... 1,787,488 715,146 17,167
Operating expenses:
Research and development..................... 4,700,003 4,461,881 457,918
Selling, general and administrative.......... 7,457,968 6,532,551 524,669
------------ ------------ ---------
12,157,971 10,994,432 982,587
------------ ------------ ---------
Operating loss................................. (10,370,483) (10,279,286) (965,420)
Interest income................................ 1,301,078 772,563 42,431
Interest expense, including credit agreement
commitment fee............................... (20,667) (1,478,150) --
------------ ------------ ---------
Net loss....................................... $ (9,090,072) $(10,984,873) $(922,989)
============ ============ =========
Net loss per common share (basic and
diluted)..................................... $ (0.72) $ (1.59) $ (0.22)
============ ============ =========
Weighted-average common shares outstanding..... 12,664,223 6,903,290 4,279,389
============ ============ =========
See accompanying notes.
F-4
41
AUTOCYTE, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
REDEEMABLE
CONVERTIBLE ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL COMPENSATION DEFICIT EQUITY
----------- -------- ----------- ------------ ------------ -------------
Balance at Inception.......... $ -- $ -- $ -- $ -- $ -- $ --
Net assets acquired in
exchange for common
stock..................... -- 36,891 5,963,109 -- -- 6,000,000
Issuance of common stock.... -- 5,903 114,097 -- -- 120,000
Issuance of redeemable
convertible preferred
stock..................... 9,882,000 -- -- -- -- --
Deferred compensation
related to issuance of
restricted stock and grant
of stock options.......... -- -- 1,821,750 (1,821,750) -- --
Amortization of deferred
compensation.............. -- -- -- 37,807 -- 37,807
Net loss.................... -- -- -- -- (922,989) (922,989)
----------- -------- ----------- ----------- ------------ ------------
Balance at December 31,
1996........................ 9,882,000 42,794 7,898,956 (1,783,943) (922,989) 5,234,818
Issuance of redeemable
convertible preferred
stock and stock options... 100,000 -- 432,000 -- -- 432,000
Issuance of warrants........ -- -- 1,475,002 -- -- 1,475,002
Exercise of warrants........ -- 1,936 282,121 -- -- 284,057
Issuance of common stock.... -- 31,250 27,862,411 -- -- 27,893,661
Conversion of preferred
stock..................... (9,982,000) 48,819 9,933,181 -- -- 9,982,000
Exercise of stock options... -- 255 4,937 -- -- 5,192
Deferred compensation
related to grant of stock
options................... -- -- 1,664,694 (1,664,694) -- --
Amortization of deferred
compensation.............. -- -- -- 705,357 -- 705,357
Net loss...................... -- -- -- -- (10,984,873) (10,984,873)
----------- -------- ----------- ----------- ------------ ------------
Balance at December 31,
1997........................ -- 125,054 49,553,302 (2,743,280) (11,907,862) 35,027,214
Exercise of stock options... -- 2,245 44,723 -- -- 46,968
Amortization of deferred
compensation.............. -- -- -- 862,764 -- 862,764
Net loss.................... -- -- -- -- (9,090,072) (9,090,072)
----------- -------- ----------- ----------- ------------ ------------
Balance at December 31,
1998........................ $ -- $127,299 $49,598,025 $(1,880,516) $(20,997,934) $ 26,846,874
=========== ======== =========== =========== ============ ============
See accompanying notes.
F-5
42
AUTOCYTE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
NOVEMBER 22, 1996
YEAR ENDED YEAR ENDED (INCEPTION) THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -------------------
OPERATING ACTIVITIES
Net loss....................................... $(9,090,072) $(10,984,873) $ (922,989)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation.............................. 857,333 477,686 39,797
Amortization of goodwill.................. 150,000 150,000 15,625
Amortization of deferred compensation..... 862,764 705,357 37,807
Issuance of preferred stock and stock
options for services rendered........... -- 432,000 --
Issuance of warrants as consideration for
credit agreement commitment fee......... -- 1,475,002 --
Changes in operating assets and
liabilities:
Accounts receivable..................... (13,057) (145,037) (48,792)
Inventory............................... (1,048,874) (280,589) (128,674)
Other current assets.................... (17,330) (366,040) 65
Accounts payable........................ (100,228) 56,090 225,511
Accrued expenses........................ (151,801) 192,430 334,785
Deferred revenue........................ 500,185 130,000 --
----------- ------------ -----------
Net cash used in operating activities.......... (8,051,080) (8,157,974) (446,865)
INVESTING ACTIVITIES
Purchases of property and equipment............ (1,602,186) (1,035,896) (47,889)
Net cash acquired in acquisition of business... -- -- 10,028
----------- ------------ -----------
Net cash used in investing activities.......... (1,602,186) (1,035,896) (37,861)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock..... -- 27,893,661 120,000
Net proceeds from issuance of redeemable
convertible preferred stock.................. -- 100,000 9,882,000
Proceeds from exercise of warrants............. -- 284,057 --
Proceeds from exercise of stock options........ 46,968 5,192 --
Increase in other long-term liabilities........ 55,746 48,768 --
Proceeds from long-term debt................... 905,019 -- --
Payments on long-term debt..................... (23,442) -- --
----------- ------------ -----------
Net cash provided by financing activities...... 984,291 28,331,678 10,002,000
----------- ------------ -----------
Net increase (decrease) in cash and cash
equivalents.................................. (8,668,975) 19,137,808 9,517,274
Cash and cash equivalents at beginning of
period....................................... 28,655,082 9,517,274 --
----------- ------------ -----------
Cash and cash equivalents at end of period..... $19,986,107 $ 28,655,082 $ 9,517,274
=========== ============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest......................... $ 20,667 $ 3,148 $ --
=========== ============ ===========
See accompanying notes.
F-6
43
AUTOCYTE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
AutoCyte, Inc. ("AutoCyte" or the "Company"), a Delaware Corporation, was
formed on October 24, 1996 to acquire the cytology and pathology automation
business (the "Business") then owned by Roche Image Analysis Systems, Inc.
("RIAS"), a wholly-owned subsidiary of Roche Holding Ltd. ("Roche"). The Company
develops, manufactures and markets the only integrated automated sample
preparation and image analysis system to support cytology professionals in
cervical cancer screening. The Company's integrated system is comprised of the
AutoCyte PREP ("PREP") sample preparation system and the AutoCyte SCREEN
("SCREEN") image analysis system. The Company's Pathology Workstation product
line further integrates AutoCyte's product offerings into tools for data
handling of cytology and pathology images, and tools for determining prognosis
of disease from cytology and pathology specimens.
On November 22, 1996, the Company entered into a Contribution Agreement
(the "Agreement") with Roche and RIAS whereby the Company acquired the net
assets and liabilities of the cytology and pathology automation business of RIAS
in exchange for 3,689,129 shares of Common Stock valued at $6.0 million. The
transaction was accounted for as a purchase transaction in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations".
On September 5, 1997, the Company completed an initial public offering of
3,100,000 shares of $0.01 par value Common Stock (the "Offering"). The Offering
price was $10 per common share resulting in gross offering proceeds of
$31,000,000. Proceeds to the Company, net of underwriters' discount and offering
expenses were $27,661,161. Simultaneously with the Offering, the redeemable
convertible preferred stock of the Company was automatically converted into
4,881,936 shares of Common Stock. On October 10, 1997, the underwriters
exercised a portion of their over-allotment option and purchased an additional
25,000 shares of Common Stock at $10 per share resulting in additional net
proceeds of $232,500.
Revenues from sales of products have not generated sufficient cash to
support the Company's operations. Both the Company and its predecessor have
incurred substantial losses. The Company has funded its operations primarily
through the private sale of equity securities and its September 1997 initial
public offering. The Company continues to be subject to certain risks and
uncertainties common to early stage medical device companies including the
uncertainty of availability of additional financing, extensive government
regulation, uncertainty of market acceptance of its products, limited
manufacturing, marketing and sales experience, uncertainty of future
profitability and the uncertainty of United States Food and Drug Administration
("FDA") approval of its products.
The Company must obtain FDA approval in order to market its products in the
United States for their principal intended use. Generally, before a new medical
device can be introduced into the market in the United States, the manufacturer
must obtain FDA approval of a premarket approval application ("PMA") or FDA
clearance of a 510(k) premarket notification. Each of the Company's two
principal products, PREP and SCREEN, are subject to the PMA process, however,
neither has yet received such approval. The Company's failure to obtain or
maintain FDA regulatory approval for its products would have a material adverse
effect on the Company's business, financial condition and results of operations.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of AutoCyte,
Inc. and its subsidiaries, AutoCyte Europe b.v.b.a. and AutoCyte Australia Pty
Ltd. All significant intercompany balances and transactions have been eliminated
in consolidation.
F-7
44
AUTOCYTE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Concentration of Credit Risk
The Company's principal financial instruments subject to potential
concentration of credit risk are cash, cash equivalents and unsecured accounts
receivable. The Company invests its funds in highly rated institutions, and
limits its investment in any individual debtor to $5 million. The Company
provides an allowance for doubtful accounts equal to the estimated losses to be
incurred in the collection of accounts receivable, which have historically been
minimal and within management's expectations.
Revenue Recognition
Revenue is recognized from product sales and rentals. Product sales revenue
is recognized when products are shipped, at which time sales are final, and
product rental revenue is recognized as earned.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost is
determined using the average cost method. Net realizable value of inventory is
reviewed in detail on an on-going basis, with consideration given to
deterioration, obsolescence and other factors.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives (three to five years)
of the individual assets. Depreciation expense amounted to $857,333 during 1998,
$477,686 during 1997 and $39,797 during the period from November 22, 1996
(inception) through December 31, 1996.
Included in property and equipment is demonstration equipment, which
consists of units being used for demonstration purposes by salespeople; being
evaluated by clinics, laboratories, hospitals, doctors offices or universities;
or being used in clinical trials. A listing of all demonstration equipment is
reviewed quarterly by the Company, and, based on various factors, including
whether or not the Company continues to market the products being demonstrated,
asset impairment reserves are established as necessary.
Goodwill
The excess cost over the fair value of net assets acquired ("goodwill") is
being amortized using the straight-line method over 20 years. Accumulated
amortization was $315,625 and $165,625 at December 31, 1998 and 1997,
respectively. The Company periodically reviews the value of its goodwill to
determine if an impairment has occurred. In accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", if this review
indicates that goodwill will not be recoverable, as determined based on an
analysis of undiscounted cash flows over the remaining amortization period, the
Company would reduce the carrying value of its goodwill accordingly.
F-8
45
AUTOCYTE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Research and Development Costs
Research and development costs are charged to operations as incurred.
Deferred Revenue
Deferred revenue at December 31, 1998 relates primarily to a worldwide
exclusive international distributor agreement for the Company's ImageTiter(R)
product. Pursuant to the terms of this agreement, the Company received
$1,000,000 as a non-refundable upfront payment for the worldwide exclusive
distribution rights for ImageTiter, services to be performed, and as a
prepayment for future product shipments. Revenue related to the worldwide
exclusive distribution rights will be recognized ratably over five years, the
estimated life of the agreement. Revenue related to services was recognized in
1998 as the services were completed. Revenue for product shipments is recognized
at the time of shipment.
Deferred revenue at December 31, 1997 related to customer payments for PREP
units sold in 1997 that contained right of return provisions. During 1998 these
right of return provisions lapsed and the revenue was recognized.
Income Taxes
The Company accounts for income taxes using the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities.
Net Loss Per Common Share
The Company's calculation of earnings (loss) per share reflects the
completion of its initial public offering and the simultaneous conversion of its
convertible preferred stock into common stock in September 1997. As the Company
incurred losses during all periods presented, the effect of options, warrants
and convertible preferred stock is anti-dilutive and accordingly, there is no
difference between basic and diluted loss per share.
Stock Based Compensation
The Company accounts for stock options issued to employees in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Under APB 25, no compensation expense is recognized for
stock or stock options issued with an exercise price equivalent to the fair
value of the Company's Common Stock. For stock options granted at exercise
prices below the deemed fair value, the Company records deferred compensation
expense for the difference between the exercise price of the shares and the
deemed fair value. Any resulting deferred compensation expense is amortized
ratably over the vesting period of the individual options.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). For
companies that continue to account for stock based compensation arrangements
under APB 25, SFAS 123 requires disclosure of the pro forma effect on net income
(loss) and earnings (loss) per share as if the fair value based method
prescribed by SFAS 123 had been applied. The Company has adopted the pro forma
disclosure requirements of SFAS 123.
Advertising Expense
The cost of advertising is expensed as incurred. Advertising and marketing
expense, including trade show expense, amounted to $158,719 during 1998,
$157,095 during 1997 and $3,900 during the period from November 22, 1996
(inception) through December 31, 1996.
F-9
46
AUTOCYTE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassification
Certain amounts in the 1997 financial statements have been reclassified to
conform to 1998 classifications. These reclassifications had no impact on net
loss or stockholders' equity amounts previously reported.
Recently Issued Accounting Standards
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes standards for reporting and display of comprehensive income
and its components in financial statements. The application of the new rules did
not have an impact on the Company's financial statements since it has no items
of other comprehensive income in any period presented.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
statements to shareholders. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The application of the new rules did not have an impact on the Company's
financial statements as the Company operates in only one segment.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which is effective for years beginning after June 15, 1999. SFAS 133
establishes a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The Company will adopt SFAS
133 in 2000, which may result in additional disclosures. The application of the
new rules is not expected to have a significant impact on the Company's
financial position or results from operations.
3. BUSINESS SEGMENTS
The Company operates in a single business segment and is engaged in the
development and sale of cytology and pathology automation systems for use in
clinical laboratory applications. Revenues from significant customers, those
representing 10% or more of total revenues for the respective periods, are
summarized as follows:
YEAR ENDED PERIOD FROM
DECEMBER 31, NOVEMBER 22, 1996
---------------- (INCEPTION) THROUGH
1998 1997 DECEMBER 31, 1996
---- ---- -------------------
Customer 1................................... 30% -- --
Customer 2................................... 13% -- --
Customer 3................................... -- 17% --
Customer 4................................... -- -- 70%
Sales by geographic region during 1998 and 1997 were as follows:
YEAR ENDED
DECEMBER 31,
----------------
1998 1997
---- ----
United States............................................... 37% 59%
Europe...................................................... 28% 19%
Asia and Australia.......................................... 35% 18%
Other International Sales................................... -- 4%
There were no international sales during the period from November 22, 1996
(inception) through December 31, 1996.
F-10
47
AUTOCYTE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of the allowance for doubtful accounts activity is as follows:
DECEMBER 31,
----------------------------
1998 1997 1996
-------- ------- -------
Balance, beginning of year............................... $ 85,000 $17,500 $ 7,500
Amounts charged to expense............................... 102,000 67,500 10,000
Amounts written off...................................... (2,125) -- --
-------- ------- -------
Balance, end of year..................................... $184,875 $85,000 $17,500
======== ======= =======
5. INVENTORY
Inventory consists of the following:
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
Raw materials............................................... $1,685,495 $1,878,632
Finished goods.............................................. 1,555,374 313,363
---------- ----------
$3,240,869 $2,191,995
========== ==========
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
------------------------
1998 1997
----------- ----------
Demonstration equipment..................................... $ 1,291,105 $1,236,161
Rental units................................................ 1,172,575 320,607
Machinery and equipment..................................... 761,536 457,228
Furniture, fixtures and improvements........................ 160,829 87,859
Computer equipment and software............................. 503,045 424,278
----------- ----------
3,889,090 2,526,133
Less accumulated depreciation............................... (1,126,095) (507,991)
----------- ----------
$ 2,762,995 $2,018,142
=========== ==========
7. ACCRUED EXPENSES
Accrued expenses consists of the following:
DECEMBER 31,
-------------------
1998 1997
-------- --------
Accrued payroll and related benefits........................ $161,461 $213,443
Accrued warranty costs...................................... 202,664 196,709
Other accrued expenses...................................... 170,072 275,846
-------- --------
$534,197 $685,998
======== ========
F-11
48
AUTOCYTE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CREDIT AGREEMENT
On June 27, 1997, the Company entered into a credit agreement with certain
of its institutional stockholders and the Company's Chief Executive Officer. The
agreement provided the Company with access to a credit line of up to $8,000,000
at an interest rate of prime plus 1%. As consideration for this agreement, the
Company issued warrants to purchase 207,291 shares of its Common Stock at an
exercise price of $2.033 per share. The warrants were immediately exercisable,
with an expiration date ten years from the date of issuance. The Company
estimated the expense associated with the warrant issuance to be approximately
$1,475,000, all of which was expensed at the time of issuance as a credit
agreement commitment fee. No borrowings were made under this credit arrangement,
which expired upon the completion of the Offering in September 1997. On October
24, 1997, all of the outstanding warrants were exercised.
9. DEBT
During 1998, the Company entered into an agreement with an equipment
financing company to provide the Company with a $5,000,000 line of credit to
finance certain of the Company's equipment purchases. At December 31, 1998, the
Company had outstanding borrowings of $881,577 under the agreement with a loan
term of 48 months. The loan is collateralized by a security interest in the
financed equipment. Interest is calculated based on the four-year Treasury Bill
Weekly Average rate (4.447% at December 31, 1998) + 6.121%.
At December 31, 1998, maturities of the outstanding debt are as follows:
1999........................................................ $191,795
2000........................................................ 213,075
2001........................................................ 236,715
2002........................................................ 239,992
--------
$881,577
========
The fair value of the Company's long term debt, which approximates its
carrying value, is estimated using discounted cash flow analysis based on the
Company's current incremental borrowing rates for similar type borrowing
arrangements.
10. LEASES
The Company leases its office and manufacturing facilities and certain
office equipment under operating leases expiring at various times through July
2005.
At December 31, 1998, future minimum lease payments under these leases are
as follows:
1999........................................................ $ 394,026
2000........................................................ 394,183
2001........................................................ 361,183
2002........................................................ 326,863
2003........................................................ 326,863
Thereafter.................................................. 519,008
----------
$2,322,126
==========
Rent expense amounted to $378,004 during 1998, $281,424 during 1997 and
$25,245 during the period from November 22, 1996 (inception) to December 31,
1996.
F-12
49
AUTOCYTE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
The Company has cumulative net operating loss carryforwards available to
offset future taxable income of approximately $22,380,000 which expire in
2011-2013. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Components of
deferred taxes are as follows:
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
Deferred tax assets:
Inventory................................................. $ 735,000 $ 1,174,000
Property and equipment.................................... 1,517,000 2,161,000
Intangible assets......................................... 672,000 737,000
Net operating loss carryforward........................... 8,728,000 4,429,000
Other..................................................... 176,000 189,000
----------- -----------
Total deferred tax asset.................................... 11,828,000 8,690,000
Valuation allowance for deferred tax asset.................. (11,828,000) (8,690,000)
----------- -----------
Net deferred taxes.......................................... $ -- $ --
=========== ===========
12. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Redeemable Convertible Preferred Stock
The 9,925,000 shares of Series A Convertible Preferred Stock automatically
converted into 4,881,936 shares of Common Stock upon completion of the Offering
in September 1997.
Pursuant to the Company's amended and restated Certificate of
Incorporation, the Board of Directors has the authority, without further vote or
action by the stockholders, to issue up to 1,000,000 shares of Preferred Stock
in one or more series and to fix the relative rights, preferences, privileges,
qualifications, limitations and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of such series, any or all of
which may be greater that the rights of Common Stock. At December 31, 1998 there
are no shares of Preferred Stock outstanding.
Equity Incentive Plans
At inception, the Company adopted the 1996 Equity Incentive Plan (the
"Plan") under which incentive and non-statutory stock options, stock
appreciation rights and restricted stock may be granted to employees or
consultants of the Company. Generally, options and restricted stock grants vest
ratably over a 48-month term. Stock options expire ten years from the date of
grant.
F-13
50
AUTOCYTE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of activity under the Plan is as follows:
OPTIONS OUTSTANDING
-------------------------------------------
WEIGHTED-
NUMBER OF EXERCISE AVERAGE
SHARES PRICE RANGE EXERCISE PRICE
--------- -------------- --------------
Outstanding at December 31, 1996........................ 689,836 $0.20 $0.20
Options granted....................................... 349,962 0.20-10.50 1.47
Options exercised..................................... (25,535) 0.20 0.20
Options canceled/expired.............................. (8,353) 0.20 0.20
--------- -------------- -----
Outstanding at December 31, 1997........................ 1,005,910 0.20-10.50 0.64
Options granted....................................... 465,176 2.69-7.38 4.33
Options exercised..................................... (224,513) 0.20-4.19 0.21
Options canceled/expired.............................. (78,092) 0.20-10.50 6.35
--------- -------------- -----
Outstanding at December 31, 1998........................ 1,168,481 $0.20-$10.00 $1.81
========= ============== =====
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- -------------------------------
WEIGHTED-
NUMBER AVERAGE NUMBER
OUTSTANDING AT REMAINING WEIGHTED- EXERCISABLE AT WEIGHTED-
DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
PRICE RANGE 1998 LIFE (YEARS) EXERCISE PRICE 1998 EXERCISE PRICE
- ------------ -------------- ------------ -------------- -------------- --------------
$0.20 718,713 8.0 $ 0.20 220,169 $ 0.20
2.69-3.13 24,000 9.7 3.03 1,394 3.06
4.19-6.25 402,157 9.2 4.27 124,391 4.25
6.56-9.75 21,611 9.2 7.44 4,426 7.53
10.00 2,000 8.9 10.00 500 10.00
--------- --- ------ ------- ------
$0.20-$10.50 1,168,481 8.5 $ 1.81 350,880 $ 1.76
========= === ====== ======= ======
At inception, the Company sold 590,260 shares of restricted Common Stock
with a deemed fair value of $1.6264 per share to the Company's Chief Executive
Officer at a price of $0.2033 per share. Under the terms of the restricted stock
purchase agreement, the shares vest ratably over a 48-month term and are subject
to repurchase by the Company at the issuance price if the CEO ceases to be
employed by the Company. Under the terms of an amendment to the restricted stock
purchase agreement, in the event that the Chief Executive Officer terminates
employment with the Company other than for cause, in addition to all other
shares that have vested pursuant to the original agreement, 50% of the unvested
shares as of the date of departure shall become vested as of that date.
During 1997, the Board of Directors approved the adoption of the 1997
Director Stock Option Plan and reserved 100,000 shares of common stock for
issuance under the plan. As of December 31, 1998, no options had been granted
pursuant to this plan.
F-14
51
AUTOCYTE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS 123
The Company has adopted the disclosure-only provisions of SFAS 123. In
accordance with SFAS 123, the fair value of each option grant was determined by
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
PERIOD FROM
YEAR ENDED DECEMBER 31, NOVEMBER 22, 1996
----------------------- (INCEPTION) THROUGH
1998 1997 DECEMBER 31, 1996
---------- ---------- -------------------
Risk-free interest rate....................... 5.29% 6.20% 5.92%
Expected dividend yield....................... 0.00% 0.00% 0.00%
Expected lives................................ 48 months 48 months 48 months
Expected volatility........................... 0.75 0.71 0.60
Weighted-average fair value of grants......... $ 2.46 $ 5.63 $ 1.45
Had compensation cost for the Company's stock options been determined based
on the fair value at the date of grant consistent with the provisions of SFAS
123, the Company's pro forma net loss and net loss per share would have been:
PERIOD FROM
YEAR ENDED DECEMBER 31, NOVEMBER 22, 1996
-------------------------- (INCEPTION) THROUGH
1998 1997 DECEMBER 31, 1996
----------- ------------ -------------------
Net loss:
As reported............................. $(9,090,072) $(10,984,873) $(922,989)
Pro forma............................... $(9,517,798) $(10,987,980) $(929,276)
Net loss per common share (basic &
diluted):
As reported............................. $ (0.72) $ (1.59) $ (0.22)
Pro forma............................... $ (0.75) $ (1.59) $ (0.22)
Common Stock Reserved for Future Issuance
At December 31, 1998, the Company has reserved authorized shares of Common
Stock for future issuance as follows:
Outstanding stock options................................... 1,168,481
Possible future issuance under equity incentive plans....... 177,536
---------
Total shares reserved............................. 1,346,017
=========
Deferred Compensation
The Company recorded deferred compensation of $1,664,694 during 1997 and
$1,821,750 during the period from November 22, 1996 (inception) through December
31, 1996 for the difference between the exercise price and the deemed fair value
of the Company's common stock option and restricted stock grants. The amount is
being amortized over the vesting period of the individual options, generally 48
months. Amortization of deferred compensation totaled $862,764 during 1998,
$705,357 during 1997 and $37,807 during the period from November 22, 1996
(inception) through December 31, 1996.
F-15
52
AUTOCYTE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. RELATED PARTY TRANSACTIONS
The Company has entered into certain ongoing arrangements with Laboratory
Corporation of America Holdings, Inc. ("LabCorp"), a public company partially
owned by Roche, for selling its products to LabCorp. Roche is a shareholder of
the Company and the Company's Chief Executive Officer is a Director of LabCorp.
Sales to LabCorp amounted to $634,884 during 1998 and $33,354 during 1997. There
were no sales to LabCorp during the period from November 22, 1996 (inception)
through December 31, 1996.
The Company has a continuing arrangement with LabCorp for leasing a portion
of LabCorp's facility in Elon College, North Carolina. Total rent paid to
LabCorp amounted to $61,995 during 1998, $111,375 during 1997 and $11,600 during
the period from November 22, 1996 (inception) through December 31, 1996.
Additionally, the Company owed approximately $249,000 and $348,000 at December
31, 1998 and 1997, respectively, to Roche or its affiliates for services
provided.
14. RETIREMENT PLAN
The Company has a qualified 401(k) Retirement Plan (the "Plan").
Substantially all full-time employees are eligible to participate and
participants may contribute from 1% to 15% of their compensation to the Plan.
The Company matches 50% of each participant's contribution up to 6% of the
employee's compensation, and may make additional matching contributions at the
discretion of management, not to exceed 15% of the employee's compensation.
Total expense for the plan was $128,541 during 1998, $82,198 during 1997 and
$5,572 during the period from November 22, 1996 (inception) through December 31,
1996.
15. PRO FORMA COMBINED RESULTS OF OPERATIONS
The pro forma combined results of operations as if AutoCyte had acquired
the predecessor entity on January 1, 1996 and had been in operation for the
entire year as a combined entity would have been as follows:
PERIOD FROM PERIOD FROM
JANUARY 1, 1996 NOVEMBER 22, 1996
THROUGH THROUGH YEAR ENDED
NOVEMBER 21, 1996 DECEMBER 31, 1996 DECEMBER 31, 1996
(PREDECESSOR) (AUTOCYTE) (PRO FORMA COMBINED)
----------------- ----------------- --------------------
Sales.............................. $ 1,747,209 $ 129,189 $ 1,876,398
Cost of goods sold................. 2,796,802 112,022 2,908,824
------------ --------- ------------
Gross profit (loss)................ (1,049,593) 17,167 (1,032,426)
Operating expenses:
Research and development......... 3,907,682 457,918 4,365,600
Selling, general and
administrative................ 11,965,813 524,669 12,490,482
------------ --------- ------------
15,873,495 982,587 16,856,082
------------ --------- ------------
Operating loss................... (16,923,088) (965,420) (17,888,508)
Interest income.................. -- 42,431 42,431
------------ --------- ------------
Net loss........................... $(16,923,088) $(922,989) $(17,846,077)
============ ========= ============
Net loss per share is not disclosed for 1996 since RIAS operated as a
wholly owned subsidiary of Roche Holding Ltd. prior to the formation of AutoCyte
on November 22, 1996.
F-16
53
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
AutoCyte, Inc.
We have audited the accompanying balance sheets of the Cytology and
Pathology Automation Business of Roche Image Analysis Systems, Inc. (the
"Business") as of December 31, 1995 and November 21, 1996, and the related
statements of operations and cash flows for the years ended December 31, 1994
and 1995 and for the period from January 1, 1996 to November 21, 1996. These
financial statements are the responsibility of the Business'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 the Cytology and Pathology
Automation Business of Roche Image Analysis Systems, Inc. at December 31, 1995
and November 21, 1996, and the results of its operations and its cash flows for
the years ended December 31, 1994 and 1995 and for the period from January 1,
1996 to November 21, 1996 in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Raleigh, North Carolina
June 13, 1997
F-17
54
CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, NOVEMBER 21,
1995 1996
------------ ------------
ASSETS
Current assets:
Cash...................................................... $ 9,530 $ 10,028
Accounts receivable, net.................................. 744,288 712,325
Inventory................................................. 3,508,756 1,782,732
Other current assets...................................... 34,575 49,273
----------- ----------
Total current assets.............................. 4,297,149 2,554,358
Property and equipment, net of accumulated depreciation of
$4,448,000 and $5,732,000 at December 31, 1995 and
November 21, 1996, respectively........................... 6,416,967 1,451,840
----------- ----------
Total assets...................................... $10,714,116 $4,006,198
=========== ==========
LIABILITIES AND BUSINESS EQUITY
Current liabilities:
Accounts payable.......................................... $ 411,647 $ 2,010
Accrued expenses.......................................... 300,231 1,004,188
----------- ----------
Total current liabilities......................... 711,878 1,006,198
Business equity................................... 10,002,238 3,000,000
----------- ----------
Total liabilities and business equity............. $10,714,116 $4,006,198
=========== ==========
See accompanying notes.
F-18
55
CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31, 1996 TO
---------------------------- NOVEMBER 21,
1994 1995 1996
------------ ------------ ------------
Net sales to LabCorp and its predecessor......... $ 844,593 $ 598,174 $ 297,047
Net sales to third parties....................... 2,551,717 2,797,656 1,450,162
------------ ------------ ------------
3,396,310 3,395,830 1,747,209
Cost of goods sold............................... 2,599,859 2,413,886 2,796,802
------------ ------------ ------------
Gross profit (loss).................... 796,451 981,944 (1,049,593)
Operating expenses:
Research and development....................... 3,604,898 5,073,764 3,907,682
Selling, general and administrative............ 8,479,057 7,895,394 11,965,813
------------ ------------ ------------
12,083,955 12,969,158 15,873,495
------------ ------------ ------------
Net loss............................... $(11,287,504) $(11,987,214) $(16,923,088)
============ ============ ============
See accompanying notes.
F-19
56
CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31, 1996 TO
---------------------------- NOVEMBER 21,
1994 1995 1996
------------ ------------ ------------
Cash flows from operating activities:
Net loss....................................... $(11,287,504) $(11,987,214) $(16,923,088)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation................................ 1,915,481 2,242,320 1,359,527
Asset impairment write-down................. 1,980,596 506,241 5,256,680
Changes in operating assets and liabilities:
Accounts receivable......................... 1,916,368 105,938 31,963
Inventory................................... (162,485) (1,208,216) 403,810
Other current assets........................ 105,086 (15,150) (14,698)
Accounts payable............................ (477,270) 157,953 417
Accrued expenses............................ 384,384 (1,024,112) 293,903
------------ ------------ ------------
Net cash used in operating
activities........................... (5,625,344) (11,222,240) (9,591,486)
Cash flows from investing activities:
Purchases of property and equipment............ (1,702,032) (1,800,295) (328,866)
------------ ------------ ------------
Net cash used in investing
activities........................... (1,702,032) (1,800,295) (328,866)
Cash flows from financing activities:
Advances from Roche............................ 7,329,932 13,023,796 9,920,850
------------ ------------ ------------
Net cash provided by financing
activities........................... 7,329,932 13,023,796 9,920,850
------------ ------------ ------------
Net increase in cash and cash equivalents........ 2,556 1,261 498
Cash and cash equivalents at beginning of
period......................................... 5,713 8,269 9,530
------------ ------------ ------------
Cash and cash equivalents at end of period....... $ 8,269 $ 9,530 $ 10,028
============ ============ ============
See accompanying notes.
F-20
57
CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 21, 1996
1. DESCRIPTION OF THE BUSINESS
The Cytology and Pathology Automation Business (the "Business") of Roche
Image Analysis Systems, Inc. ("RIAS") was engaged in the manufacturing and
marketing of automated pathology workstations, and in the development and
marketing of an integrated sample preparation and automated image analysis
system to support cytologists in cervical cancer screening. The Business
represents the predecessor entity of AutoCyte, Inc. ("AutoCyte"), a company
formed in October 1996 to acquire the Business including its two principal
product candidates, the AutoCyte PREP ("PREP") sample preparation system and the
AutoCyte SCREEN ("SCREEN") automated image analysis system. In addition to this
Business, RIAS, a wholly-owned subsidiary of Roche Holding Ltd ("Roche"), was
also engaged in the sale of human leukocyte antigen ("HLA") kits used for
paternity testing. The HLA business was not acquired by AutoCyte and is thus not
included in these predecessor entity financial statements.
On November 22, 1996, RIAS entered into a Contribution Agreement with
AutoCyte and Roche whereby AutoCyte acquired the net assets and liabilities of
the Business for 3,689,129 shares of AutoCyte common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared as if the Business
had existed as a separate, stand-alone entity during the periods presented and
include the historical assets, liabilities, revenues and expenses that are
directly related to the Business's operations. However, these financial
statements are not necessarily indicative of the financial position and results
of operations which would have occurred had the Business been an independent
company.
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.
Concentrations of Credit Risk
The Business's principal financial instrument subject to potential
concentration of credit risk is unsecured accounts receivable. The Business
provides an allowance for doubtful accounts equal to the estimated losses to be
incurred in the collection of accounts receivable.
Revenue Recognition
Revenue from product sales is recognized when products are shipped.
Cash and Cash Equivalents
The Business considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Product Warranty
The Business's products generally carry a one year warranty against
defects. The Business provides for estimated warranty costs in the period the
related sales are made.
F-21
58
CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Impairment of Long-Lived Assets
The Business adopted the Financial Accounting Standards Board Statement No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of"
("SFAS 21") in the first quarter of 1996. During 1996, the Business decided to
focus on its newer generation PREP and SCREEN systems. Accordingly, the Business
evaluated the ongoing value of the older model systems and other equipment
included in property and equipment. Based on this evaluation, the Business
determined that assets with a carrying amount of approximately $5.4 million were
impaired and wrote them down by $3.9 million to their estimated fair value. Fair
value was based on the estimated price at which the assets could be sold.
Additionally, the Business performed similar evaluations of fair values in 1995
and 1994 and wrote-down certain demonstration equipment and other equipment by
approximately $500,000 and approximately $2 million, respectively.
Income Taxes
The results of the Business's operations were included in the consolidated
income tax returns of its parent company. No provision for income taxes has been
included in these financial statements since the Business's significant
operating losses would have precluded recording any deferred tax assets if the
Business was a stand-alone taxpayer.
Business Equity
Because the Business operated as part of a wholly-owned subsidiary of
Roche, its equity accounts have been combined and presented as "Business Equity"
which includes net amounts advanced to the Business by Roche (Note 7).
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost is
determined using the average cost method. Consideration is given to
deterioration, obsolescence and other factors in evaluating net realizable
value.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives (three to five years)
of the individual assets. Depreciation expense amounted to $1,915,481,
$2,242,320 and $1,359,527 during 1994, 1995 and the period from January 1, 1996
to November 21, 1996, respectively.
Included in property and equipment is demonstration equipment, which
consists of units being used for demonstration purposes by salespeople; being
evaluated by clinics, laboratories, hospitals, doctors offices or universities;
or being used in clinical trials. As this equipment will likely not be sold
within the next year, the amounts are recorded as a component of property and
equipment rather than inventory, and are being depreciated over their estimated
useful life of four years.
Research and Development Costs
Research and development costs are charged to operations as incurred.
Advertising Expense
The cost of advertising is expensed as incurred. Advertising expense
amounted to $302,444, $478,662 and $405,572 during 1994, 1995 and the period
from January 1, 1996 to November 21, 1996, respectively.
F-22
59
CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. SALES AND ACCOUNTS RECEIVABLE
The Business operates in a single industry and is engaged in the
development and sale of cytology and pathology automation systems for use in
clinical laboratory testing. Revenues from significant customers, those
representing 10% or more of total revenues for the respective periods, are
summarized as follows:
PERIOD FROM
YEARS ENDED JANUARY 1,
DECEMBER 31, 1996 TO
------------ NOVEMBER 21,
1994 1995 1996
---- ---- ------------
Customer 1............................................... 24.9% 17.6% 17.0%
Customer 2............................................... 19.5 -- --
Customer 3............................................... -- -- 13.7
The Business sells its products to international customers, however, these
sales accounted for less than 10% of total sales during all periods presented.
4. INVENTORY
Inventory consists of the following:
DECEMBER 31, NOVEMBER 21,
1995 1996
------------ ------------
Raw materials............................................... $1,119,173 $ 802,580
Finished goods.............................................. 2,389,583 980,152
---------- ----------
$3,508,756 $1,782,732
========== ==========
During 1996, the Business decided to focus on PREP and SCREEN systems. As a
result, certain inventory items were written down by approximately $1.4 million
to their estimated net realizable values.
5. LEASES
The Business leases its office and manufacturing facilities and certain
equipment under operating leases. Rent expense amounted to $391,684, $480,725
and $421,812 during 1994, 1995 and during the period from January 1, 1996 to
November 21, 1996, respectively.
6. CORPORATE ALLOCATIONS
Roche provided substantial services to the Business, including, but not
limited to, general administration, treasury, tax, financial reporting, payroll
administration, insurance, human resources and legal functions. Roche has
traditionally charged the Business for certain of these services through
corporate allocations which were generally based on a percent of sales. The
amount of corporate allocations was dependent upon the total amount of
anticipated allocable costs incurred by Roche, less amounts charged as a
specific cost or expense rather than by allocation. The amounts allocated are
not necessarily indicative of amounts that would have been incurred by the
Business had it operated on a stand-alone basis. Management believes that the
method of expense allocation is reasonable.
F-23
60
CYTOLOGY AND PATHOLOGY AUTOMATION BUSINESS
OF ROCHE IMAGE ANALYSIS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. BUSINESS EQUITY
A summary of the Business equity account activity is as follows:
ADVANCES ACCUMULATED
FROM ROCHE DEFICIT TOTAL
----------- ------------ ------------
Balance at December 31, 1993.................. $22,044,244 $ (9,121,016) $ 12,923,228
Advances from Roche......................... 7,329,932 -- 7,329,932
Net loss for year........................... -- (11,287,504) (11,287,504)
----------- ------------ ------------
Balance at December 31, 1994.................. 29,374,176 (20,408,520) 8,965,656
Advances from Roche......................... 13,023,796 -- 13,023,796
Net loss for year........................... -- (11,987,214) (11,987,214)
----------- ------------ ------------
Balance at December 31, 1995.................. 42,397,972 (32,395,734) 10,002,238
Advances from Roche......................... 9,920,850 -- 9,920,850
Net loss for period......................... -- (16,923,088) (16,923,088)
----------- ------------ ------------
Balance at November 21, 1996.................. $52,318,822 $(49,318,822) $ 3,000,000
=========== ============ ============
8. RELATED PARTY TRANSACTIONS
The Business entered into certain product sale arrangements with Laboratory
Corporation of America Holdings or its predecessor ("LabCorp"), a public company
partially owned by Roche. Sales to LabCorp amounted to $844,593, $598,174 and
$297,047 during 1994, 1995 and during the period from January 1, 1996 to
November 21, 1996, respectively.
Additionally, the Business rented its office facility from LabCorp. Rent
paid to LabCorp amounted to $96,000, $102,500 and $100,000 during 1994, 1995 and
during the period from January 1, 1996 to November 21, 1996, respectively.
F-24
61
EXHIBIT INDEX
EXHIBIT
NUMBER
- -------
3.1 Restated Certificate of Incorporation of the Company. Filed
as Exhibit 3.5 to the Company's Registration Statement on
Form S-1 (File No. 333-30227) and incorporated herein by
reference.
3.2 Amended and Restated By-laws of the Company. Filed as
Exhibit 3.7 to the Company's Registration Statement on Form
S-1 (File No. 333-30227) and incorporated herein by
reference.
4.1 Specimen of Common Stock Certificate. Filed as Exhibit 4.1
to the Company's Registration Statement on Form S-1 (File
No. 333-30227) and incorporated herein by reference.
10.1* Amended and Restated 1996 Equity Incentive Plan (including
forms of incentive stock option certificate and nonstatutory
stock option certificate). Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (File No.
333-30227) and incorporated herein by reference.
10.2* 1997 Director Stock Option Plan (including form of director
nonstatutory stock option certificate). Filed as Exhibit
10.2 to the Company's Registration Statement on Form S-1
(File No. 333-30227) and incorporated herein by reference.
10.3 Lease Agreement dated as of March 10, 1993 by and between
Carolina Hosiery Mills, Inc. and Roche Biomedical
Laboratories, Inc. ("RBL"), the predecessor of the Company's
predecessor (including notices of renewal thereof dated
December 27, 1995 and March 24, 1997). Filed as Exhibit 10.3
to the Company's Registration Statement on Form S-1 (File
No. 333-30227) and incorporated herein by reference.
10.4 Lease Agreement dated as of April 25, 1995 by and between
RBL, the predecessor of the Company's predecessor, and Roche
Image Analysis Systems, Inc. ("RIAS"), the Company's
predecessor (including notices of renewal thereof dated
January 10, 1996 and March 18, 1997). Filed as Exhibit 10.4
to the Company's Registration Statement on Form S-1 (File
No. 333-30227) and incorporated herein by reference.
10.5+ OEM Supply Agreement dated January 13, 1995 between Tecan AG
and RIAS, the Company's predecessor. Filed as Exhibit 10.6
to the Company's Registration Statement on Form S-1 (File
No. 333-30227) and incorporated herein by reference.
10.6+ Amendment to the OEM Supply Agreement dated October 14, 1996
between Tecan AG and RIAS, the Company's predecessor. Filed
as Exhibit 10.7 to the Company's Registration Statement on
Form S-1 (File No. 333-30227) and incorporated herein by
reference.
10.7 Agreement dated July 26, 1993 by and between Technical
Precision Plastics, Inc. and RIAS, the Company's
predecessor. Filed as Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (File No. 333-30227) and
incorporated herein by reference.
10.8 Registration Rights Agreement dated as of November 22, 1996
by and among the Company and the individuals and entities
listed on Exhibit A thereto (including amendment thereof
dated June 26, 1997). Filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (File No. 333-30227) and
incorporated herein by reference.
10.9 Contribution Agreement dated as of November 22, 1996 by and
among HLR Holdings Inc., RIAS and the Company. Filed as
Exhibit 10.10 to the Company's Registration Statement on
Form S-1 (File No. 333-30227) and incorporated herein by
reference.
10.10 Form of Indemnification Agreement between the Company and
its Directors and Executive Officers. Filed as Exhibit 10.11
to the Company's Registration Statement on Form S-1 (File
No. 333-30227) and incorporated herein by reference.
10.11 Lease Agreement dated as of July 28, 1997 by and between
Carolina Hosiery Mills, Inc. and the Company. Filed as
Exhibit 10.12 to the Company's Registration Statement on
Form S-1 (File No. 333-30227) and incorporated herein by
reference.
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EXHIBIT
NUMBER
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10.12 Renewal dated January 6, 1998 of Lease Agreement dated as of
April 25, 1995 by and between RBL, the predecessor of the
Company's predecessor, and RIAS, the Company's predecessor.
Filed as Exhibit 10.12 to the Company's Form 10-K for the
year ended December 31, 1997 (File No. 0-22885) and
incorporated herein by reference.
10.13 Lease Agreement dated July 8, 1998 by and between Laboratory
Corporation of America(TM) Holdings and AutoCyte, Inc. Filed
as Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended September 30, 1998 (File No. 0-22885) and incorporated
herein by reference.
10.14 Lease Agreement dated June 12, 1998 by and between Carolina
Hosiery Mills, Inc. and AutoCyte, Inc. Filed as Exhibit 10.1
to the Company's Form 10-Q for the quarter ended June 30,
1998 (File No. 0-22885) and incorporated herein by
reference.
10.15+ Supply Agreement dated June 1, 1998 by and between Technical
Precision Plastics, Inc. and AutoCyte, Inc. Filed as Exhibit
10.2 to the Company's Form 10-Q for the quarter ended June
30, 1998 (File No. 0-22885) and incorporated herein by
reference.
10.16+ Supply Agreement dated March 5, 1998 by and between Tecan AG
and AutoCyte, Inc. Filed as Exhibit 10.3 to the Company's
Form 10-Q for the quarter ended June 30, 1998 (File No.
0-22885) and incorporated herein by reference.
10.17 Master Loan and Security Agreement dated December 21, 1998
by and between Oxford Venture Finance, LLC and AutoCyte,
Inc. Filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors to the
Company. Filed herewith.
27.1 Financial Data Schedule. Filed herewith (for SEC use only).
99.1 Important Factors Regarding Forward-Looking Statements.
Filed herewith.
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* Indicates a management contract or compensatory plan.
+ Certain confidential material contained in the document has been omitted and
filed separately with the Securities and Exchange Commission pursuant to Rule
406 of the Securities Act of 1933, as amended. Omitted information is
identified with asterisks in the appropriate places in the agreement.