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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 1997
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 0-27558
CYTYC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 02-0407755
_______________________________ ________________________________
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
85 Swanson Road, Boxborough, MA 01719
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(Address of principal executive offices, including Zip Code)
(508) 263-8000
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(Registrant's telephone number, including area code)
____________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: The number of shares of the
issuer's Common Stock, $0.01 par value per share, outstanding as of May 5, 1997
was 17,241,736.
Total Number of Pages: 15
Exhibit Index is on Page 13
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CYTYC CORPORATION
INDEX
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Page
____
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
December 31, 1996 and March 31, 1997 3
Consolidated Statements of Operations
for the three months ended March 31, 1996
and 1997 4
Consolidated Statements of Cash Flows
for the three months ended March 31, 1996
and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Change in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
Part I Financial Information
Item 1. Consolidated Financial Statements
CYTYC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
____________________________________________________________________________________________________
December 31, March 31,
1996 1997
---- ---
(Unaudited)
Assets:
Current assets
Cash and cash equivalents $ 27,572 $ 71,157
Short-term investments 11,485 34,308
Accounts receivable, net 2,682 2,683
Inventories 1,463 1,628
Prepaid expenses and other current assets 771 565
--------- ---------
Total current assets 43,973 110,341
--------- ---------
Property and equipment, net 5,251 5,462
Other assets 959 941
--------- ---------
Total assets $ 50,183 $ 116,744
========= =========
Liabilities:
Current liabilities
Accounts payable $ 1,034 $ 1,407
Accrued expenses 1,944 3,734
Deferred revenue 524 754
--------- ---------
Total current liabilities 3,502 5,895
--------- ---------
Stockholders' equity:
Preferred Stock, $0.01 par value-
Authorized 5,000,000 shares
No shares issued or outstanding - -
Common stock, $0.01 par value-
Authorized 30,000,000 shares
Issued and outstanding 14,013,002 shares
in 1996 and 17,235,736 at March 31, 1997 140 173
Additional paid-in capital 93,648 164,378
Accumulated deficit (47,107) (53,702)
--------- ---------
Total stockholders' equity 46,681 110,849
--------- ---------
Total liabilities and stockholders' equity $ 50,183 $ 116,744
========= =========
See accompanying notes.
Page 3
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
______________________________________________________________________________________________
Three Months Ended
---------------------------
March 31, March 31,
1996 1997
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Net sales $ 1,114 $ 3,440
Cost of sales 734 1,510
--------- ---------
Gross profit 380 1,930
Operating expenses:
Research and development 866 1,535
Sales, marketing and customer support 1,708 6,632
General and administrative 644 1,396
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Total operating expenses 3,218 9,563
--------- ---------
Income (loss) from operations (2,838) (7,633)
Other income (expense) (16) -
Interest income, net 186 1,038
--------- ---------
Total other income (expense) 170 1,038
--------- ---------
Net income (loss) $ (2,668) $ (6,595)
========= =========
Net income (loss) per share $ (0.25) $ (0.42)
========= =========
Shares used in computing net income (loss) per share 10,880 15,718
========= =========
See accompanying notes
Page 4
CYTYC CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
____________________________________________________________________________________________
Three Months Ended
------------------------------
March 31, March 31,
1996 1997
--------- ---------
Cash flows from operating activities:
Net loss $ (2,668) $ (6,595)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 83 302
Changes in assets and liabilities --
Accounts receivable 563 (1)
Inventories (128) (165)
Prepaid expenses and other assets (36) 206
Accounts payable (95) 373
Accrued expenses 584 1,790
Deferred revenue (1) 230
--------- ---------
Net cash used in operating
activities (1,698) (3,860)
--------- ---------
Cash flows from investing activities:
Increase in other assets (110) (90)
Purchase of property and equipment (1,262) (405)
Purchases of short-term investments - (26,801)
Proceeds from sale and maturity of
short-term invstments - 3,978
Net cash used in investments (1,372) (23,318)
--------- ---------
Cash flows from financing activities:
Exercise of stock options 5 182
Proceeds from sale of common stock 43,290 70,581
--------- ---------
Net cash provided by
financing activities 43,295 70,763
--------- ---------
Net increase in cash and cash equivalents 40,225 43,585
Cash and cash equivalents, beginning of period 5,665 27,572
--------- ---------
Cash and cash equivalents, end of period $ 45,890 $ 71,157
========= =========
See accompanying notes.
Page 5
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES
1. Significant Accounting Policies
The notes and accompanying consolidated financial statements are unaudited.
They have been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission and are subject to year end audit by
independent public accountants. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. It is suggested that the financial statements be read in
conjunction with the financial statements and notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-
27558).
The information furnished reflects all adjustments which, in the opinion of
management, are necessary for a fair presentation of results for the interim
periods. Such adjustments consisted only of normal recurring items. It should
also be noted that results for the interim periods are not necessarily
indicative of the results expected for the full year or any future period.
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. Cash and Cash Equivalents
Cash equivalents consist of money market mutual funds, commercial paper and
U.S. Government securities with original maturities of three months or less.
3. Short-term Investments
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and
Equity Securities.
Short-term investments consist of U.S. Government securities with original
maturities between three and twelve months. The Company classifies these short-
term investments as held-to-maturity, and accordingly, they are carried at
amortized cost, which approximates market. Aggregate fair value, amortized cost
and average maturity for marketable securities held at March 31, 1997 and
December 31, 1996 are as follows:
Amortized Gross Unrealized Fair
Cost Holding Gains (Losses) Value
--------- ---------------------- -------
March 31, 1997 (in thousands)
- - --------------
U.S. Government and Agency
securities (average maturity of
.57 years)..................... $34,308 91 - $34,399
======= == = =======
December 31, 1996
- - -----------------
U.S. Government and Agency
securities (average maturity of
.44 years)..................... $11,485 66 - $11,551
======= == = =======
Page 6
4. Net Loss Per Share
Net loss per share for the three months ended March 31, 1997 is computed
based upon the weighted average number of common shares outstanding during the
period. Common stock equivalents consist of stock options and warrants and are
not included in the calculation of earnings per share because their effect would
be antidilutive. Fully diluted earnings per share have not been presented, as
the amounts would not differ significantly from primary earnings per share.
5. Follow-on Public Offering of Securities
On February 6, 1997, the Company sold through an underwritten follow-on
public offering 2,650,000 shares of common stock at a price to the public of
$23.50 per share, while existing shareholders sold 1,000,000 shares of common
stock. On February 20, 1997, the underwriters of the follow-on public offering
exercised their over-allotment option in full to purchase an additional 547,500
shares of the Company's common stock at a price to the public of $23.50 per
share.
6. New Accounting Standard
On March 31, 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. SFAS No. 128 is effective for fiscal years
ending after December 15, 1997 and early adoption is not permitted. When
adopted by the Company, SFAS No. 128 will require restatement of prior years'
earnings per share. The Company will adopt SFAS No. 128 for its fiscal year
ended December 31, 1997. The Company believes that the adoption of SFAS No. 128
will not have a material effect on its financial statements.
Page 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company designs, develops, manufactures and markets a sample preparation
system for medical diagnostic applications. The ThinPrep System consists of the
Thin Prep 2000 Processor, and related disposable reagents, filters and other
supplies. The Company has marketed the ThinPrep System for use in non-
gynecological testing applications since 1991. On May 20, 1996, the Company
received premarket approval ("PMA") from the United States Food and Drug
Administration ("FDA") to market the ThinPrep System for cervical cancer
screening as a replacement for the conventional Pap smear method. On November 6,
1996, the FDA cleared expanded product labeling for the ThinPrep System to
include the claim that the ThinPrep System is significantly more effective in
detecting low grade and more severe lesions than the conventional Pap smear
method in a variety of patient populations. The expanded labeling also indicates
that the specimen quality using the ThinPrep System is significantly improved
over that of the conventional Pap smear method. To date, most of the Company's
revenues have been derived from sales of the ThinPrep System for use in non-
gynecological testing applications.
Since inception, the Company has incurred substantial losses, principally
from expenses associated with obtaining FDA approval of the Company's ThinPrep
System for cervical cancer screening, engineering and development efforts
related to the ThinPrep System, expansion of the Company's manufacturing
capabilities, and the establishment of a marketing and sales organization. The
Company expects such losses to continue for the foreseeable future as it expands
its domestic and establishes its international marketing and sales activities,
continues its product development efforts, and commences full-scale
manufacturing of the ThinPrep System for cervical cancer screening. The
operating results of the Company have fluctuated significantly in the past on an
annual and a quarterly basis. The Company expects that its operating results
will fluctuate significantly from quarter to quarter in the future and will
depend on a number of factors, including the extent to which the Company's
products gain market acceptance, the rate and size of expenditures incurred as
the Company expands its domestic and establishes its international sales and
distribution networks, the timing of any approvals of the ThinPrep System for
reimbursement by third-party payors, and other factors, many of which are
outside the Company's control.
In June 1996, the Company moved from a 17,500 square foot facility to a
51,000 square foot facility. The Company has installed and has validated new
custom-built automated equipment for the high-volume manufacture of disposable
filters for use in connection with the ThinPrep System. Such new equipment
became fully operational at the end of the first quarter of 1997.
The Company believes, that in the United States, the current rate of
reimbursement of laboratories from insurance companies, managed care
organizations and other third-party payors to screen conventional Pap smears
ranges from $6.00 to $36.00 per test, with $17.00 as the most common rate of
reimbursement. The Company believes that the cost per ThinPrep Pap Test, plus a
laboratory mark-up, will be billed to third-party payors and result in a higher
cost than the current charge for conventional Pap tests.
The Company believes that its expanded FDA labeling supported by clinical
field and trial results may assist in the establishment of increased
reimbursement for the ThinPrep Pap Test. Although United HealthCare Corporation
and Blue Cross Blue Shield of Massachusetts have announced that they will expand
their health care coverage to include the ThinPrep Pap Test, the applicable rate
of reimbursement has yet to be negotiated between United HealthCare Corporation
or its various plans or Blue Cross Blue Shield of Massachusetts, as the case
may be, and the specific clinical laboratories servicing such plans. There can
be no assurance that additional third-party payors will provide such coverage,
that reimbursement levels will be adequate, or that health care providers or
clinical laboratories will use the ThinPrep System for cervical cancer screening
in lieu of the conventional Pap smear method.
The Company will continue to increase the amount of expenditures for
marketing, and customer support activities, principally in support of the full-
scale commercial launch of the ThinPrep System for cervical cancer screening in
the United States, which commenced in early 1997. There can be no assurance,
however, that such investments will result in increased net sales or that the
Company's direct sales force will succeed in promoting the ThinPrep System to
health care providers, third-party payors or clinical laboratories, or that
additional marketing
Page 8
and sales channels will be successfully established. The Company will continue
to significantly increase its expenditures for research and development to fund
development of follow-on products and additional applications of the ThinPrep
technology. The Company will also continue to increase the amount of
expenditures for administrative activities, principally for the employment of
additional administrative personnel, increases in professional fees and the
incremental costs associated with being a public-held company.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1996
Net sales increased to $3.4 million in 1997 from $1.1 million in 1996, an
increase of 208.8% This increase in net sales was primarily due to an increase
in the number of ThinPrep Processors sold, sales of the Company's ThinPrep Pap
Test for cervical cancer screening, and additional sales of related reagents,
filters and other supplies for non-gynecological testing. Gross profit increased
to $1.9 million in 1997 from $380,000 in 1996, an increase of 407.9%, and the
gross margin increased to 56.1% in 1997 from 34.1% in 1996. Management
attributes the increase in gross margin in 1997 to the introduction and sales of
the ThinPrep Pap Test beginning in the later part of 1996 and increased sale
prices for non-gynecological tests and ThinPrep 2000 Processors, offset
partially by the lower unit margin for unit sales to existing customers
upgrading to the ThinPrep 2000 Processor.
Total operating expenses increased to $9.6 million in 1997 from $3.2 million
in 1996, an increase of 197.2%. Research and development costs increased to $1.5
million in 1997 from $866,000 in 1996, an increase of 77.3%, as a result of
employment of additional research and development personnel and engineering
consulting expenses. Sales, marketing and customer support increased to $6.6
million in 1997 from $1.7 million in 1996, an increase of 288.3%. The increase
in sales, marketing and customer support costs reflects the employment of
additional sales and customer support personnel, increased commission expenses,
and additional marketing consulting costs related to the commercial launch of
the ThinPrep Pap Test. General and administrative costs increased to $1.4
million in 1997 from $644,000 in 1996, an increase of 116.8%, due to the
employment of additional administrative personnel, increased business insurance
costs and expenses associated with being a publicly-held company.
Net interest income increased to $1.0 million in the first quarter of 1997
from $186,000 for the same period of 1996, an increase of 510.6%, due to an
increase in the average cash balance available for investment.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have significantly exceeded its
revenue, resulting in an accumulated deficit of $53.7 million as of March 31,
1997. The Company has funded its operations primarily through the private
placement and public sale of equity securities aggregating $164.6 million, net
of offering expenses. At March 31, 1997, the Company had cash, cash equivalents
and short-term investments of $105.5 million. Cash, cash equivalents and short-
term investments increased during 1997 primarily due to the issuance of
3,197,500 shares of Common Stock in connection with the Company's follow-on
public offering for aggregate net proceeds of approximately $70.6 million. Cash
used in the Company's operations during the first quarter of 1997 was $3.9
million compared to $1.7 million in the first quarter of 1996, an increase of
127.3%. The increase in cash used in operations in the first quarter of 1997
was due to increased levels of operating activities, primarily for the expansion
of its marketing, sales and customer support organizations.
The Company's capital expenditures for the quarters ended March 31, 1997 and
1996 were $405,000 and $1.3 million, respectively. The higher level of capital
expenditures in the first quarter ended March 31, 1996 was due primarily to
amounts paid for customized manufacturing equipment and leasehold improvements
for the Company's larger facility.
The Company is the exclusive licensee of certain patented technology used in
the ThinPrep System. In consideration for this license, the Company has agreed
to pay a royalty equal to 1% of net sales of the ThinPrep Processor, filter
cylinder disposable products which are used with the ThinPrep System, and
improvements made by the Company relating to such items. There are no minimum
royalty payments in connection with this license.
Accounts receivable remained at the same level from December 31, 1996 to
March 31, 1997 due to increased sales, partially offset by improved collection
efforts. Inventories increased approximately $165,000 to $1.6 million from
December 31, 1996 to March 31, 1997 due primarily to the Company's planned sales
increase in ThinPrep
Page 9
2000 Processors and related reagents, filters and other supplies. Stockholders'
equity increased approximately $64.2 million from December 31, 1996 to March 31,
1997 primarily due to the sale of 3,197,500 shares of Common Stock in connection
with the Company's follow-on public offering in February 1997, which was offset
by the net loss of $6.6 million.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the resources required to further develop its
marketing and sales capabilities, both domestic and international, the resources
required to expand manufacturing capacity, and the extent to which the ThinPrep
System for cervical cancer screening generates market acceptance and demand. The
Company's capital requirements will also depend upon the progress of the
Company's research and development programs including clinical trials, the
receipt of and the time required to obtain regulatory clearances and approvals,
and the resources the Company devotes to developing, manufacturing and marketing
its products. 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.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company does not provide financial performance forecasts. The forward
looking statements in this Form 10-Q are made under the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The Company's operating
results and financial condition have varied and may in the future vary
significantly depending on a number of factors. The statements contained in
this report which are not strictly historical information, including, without
limitation, statements regarding the implementation of the Company's full-scale
marketing and sales activities, management's plans and objectives for future
operations, product plans and performance, potential savings to the health care
system, management's assessment of market factors, as well as statements
regarding the strategy and plans of the Company, constitute forward looking
statements which involve risks and uncertainties. The following factors, among
others, could cause actual results to differ materially from those contained in
forward-looking statements made in this report and presented elsewhere by
management from time to time. The Company's risk factors include its dependence
on a single product, uncertainty of market acceptance and additional cost, a
limited number of customers and a lengthy sales cycle, a limited operating
history, risks associated with commercialization, dependence on third party
reimbursement, limited marketing and sales experience, a history of losses,
potential fluctuations in future quarterly results, intense competition,
uncertainty of additional applications, extensive government regulation, limited
manufacturing experience, dependence on patents and copyrights, licenses and
proprietary rights, risk of third party claims of infringement and dependence on
single source suppliers. Such factors, among others, may have a material
adverse effect upon the Company's business, results of operations and financial
conditions. Because of these and other factors, past financial performance
should not be considered an indication of future performance.
Page 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
Not applicable.
Item 2. Changes in Securities.
---------------------
Not applicable.
Item 3. Defaults upon Senior Securities.
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
Not applicable
Item 5. Other Information.
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
--------
11.1 Statement of Computation of Weighted
Average Shares Outstanding
27 Financial Data Schedule
(b) Reports on Form 8-K.
-------------------
The Company filed a report on form 8-K on April 15, 1997
reporting the commencement of a lawsuit against Neuromedical Systems, Inc., The
PIE Mutual Insurance Company and other parties in the United States District
Court in Massachusetts (Civil Action No. 97-10740).
Page 11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYTYC CORPORATION
Date: May 14, 1997 By: /s/ Joseph W. Kelly
-------------------
Joseph W. Kelly
Vice President, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting Officer)
Page 12
EXHIBIT INDEX
Exhibit
Number Description Page
- - ------- ----------- ----
11.1 Statement of Computation of Weighted Average
Shares Outstanding
27 Financial Data Schedule