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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 incorporation or (I.R.S. Employer
organization) Identification No.)
85 Swanson Road, Boxborough, MA 01719
(Address of principal executive offices, including Zip Code)
(978) 263-8000
(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 8, 1998
was 17,621,001.
Total Number of Pages: __
Exhibit Index is on Page __
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CYTYC CORPORATION
INDEX TO FORM 10-Q
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Page
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
December 31, 1997 and March 31, 1998 3
Consolidated Statements of Operations
for the three months ended March 31, 1997 and 1998 4
Consolidated Statements of Cash Flows
for the three months ended March 31, 1997 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURE 14
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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,
1997 1998
------------------ -------------
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 47,204 $ 51,035
Short-term investments................................................. 38,198 27,540
Accounts receivable, net............................................... 10,501 7,652
Inventories............................................................ 3,241 4,525
Prepaid expenses and other current assets.............................. 905 657
-------- --------
Total current assets................................................ 100,049 91,409
Property and equipment, net............................................... 5,851 7,163
Other assets.............................................................. 2,477 2,581
-------- --------
Total assets........................................................ $108,377 $101,153
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 2,570 $ 2,363
Accrued expenses....................................................... 8,088 7,267
Deferred revenue....................................................... 1,532 1,553
-------- --------
Total current liabilities........................................... 12,190 11,183
-------- --------
Commitments and contingencies
Stockholders' equity :
Preferred Stock, $.01 par value--
Authorized--5,000,000 shares
No shares issued or outstanding..................................... -- --
Common Stock, $.01 par value--
Authorized--60,000,000 shares
Issued and outstanding 17,454,096 in 1997 and 17,594,426 in 1998... 175 176
Additional paid-in capital............................................. 165,191 165,471
Accumulated deficit.................................................... (69,179) (75,677)
-------- --------
Total stockholders' equity.......................................... 96,187 89,970
-------- --------
Total liabilities and stockholders' equity.......................... $108,377 $101,153
======== ========
See accompanying notes.
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CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
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MARCH 31, MARCH 31,
1997 1998
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Net sales............................................................ $ 3,440 $ 8,057
Cost of sales........................................................ 1,510 2,289
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Gross profit.................................................... 1,930 5,768
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Operating expenses:
Research and development........................................ 1,535 1,872
Sales, marketing and customer support........................... 6,632 8,909
General and administrative...................................... 1,396 2,673
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Total operating expenses................................... 9,563 13,454
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Loss from operations................................................. (7,633) (7,686)
Other income......................................................... 1,038 1,188
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Net loss............................................................. $(6,595) $(6,498)
======= =======
Net loss per common and potential common share:
Basic........................................................... $ (0.42) ($0.37)
======= =======
Diluted......................................................... $ (0.42) ($0.37)
======= =======
Weighted average common and potential common shares outstanding:
Basic........................................................... 15,718 17,548
Diluted......................................................... 15,718 17,548
See accompanying notes.
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CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
------------------
MARCH 31, MARCH 31,
1997 1998
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Cash flows from operating activities:
Net loss................................................................ $ (6,595) $(6,498)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization........................................ 302 360
Provision for doubtful accounts...................................... 150 150
Changes in assets and liabilities--
Accounts receivable................................................ (151) 2,699
Inventories........................................................ (165) (1,284)
Prepaid expenses and other current assets.......................... 206 248
Accounts payable................................................... 373 (207)
Accrued expenses................................................... 1,790 (821)
Deferred revenue................................................... 230 21
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Net cash used in operating activities........................... (3,860) (5,332)
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Cash flows from investing activities:
Increase in other assets................................................. (90) (104)
Purchases of property and equipment...................................... (405) (1,672)
Purchases of short-term investments...................................... (26,801) (6,481)
Proceeds from maturity of short-term investments......................... 3,978 17,139
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Net cash (used in) provided by investing activities............. (23,318) 8,882
-------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options.................................. 182 281
Proceeds from sale of stock.............................................. 70,581 -
-------- -------
Net cash provided by financing activities....................... 70,763 281
-------- -------
Net increase in cash and cash equivalents.................................. 43,585 3,831
Cash and cash equivalents, beginning of period............................. 27,572 47,204
-------- -------
Cash and cash equivalents, end of period................................... $ 71,157 $51,035
======== =======
See accompanying notes.
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CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of 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, 1997 (File No.
000-27558).
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 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 accompanying consolidated financial statements reflect the application
of certain significant accounting policies, as discussed below and elsewhere in
the notes to consolidated financial statements. 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 and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(2) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Cytyc SARL (a Swiss corporation
including its wholly-owned subsidiaries Cytyc Italia s.r.l. and Cytyc France
s.a.r.l.), Cytyc (Australia) PTY LTD (an Australian Corporation) and Cytyc
Securities Corporation (a Massachusetts securities corporation). All material
intercompany transactions and balances have been eliminated in consolidation.
(3) 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.
(4) 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, 1998 and
December 31, 1997 are as follows:
GROSS UNREALIZED
----------------
AMORTIZED HOLDING FAIR
--------- ------- ----
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
(IN THOUSANDS)
March 31, 1998
--------------
U.S. Government and Agency securities (average
maturity of 3.9 months)................................. $27,540 70 -- $27,610
December 31, 1997
-----------------
U.S. Government and Agency securities (average
maturity of 3.6 months)................................. $38,198 71 -- $38,269
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(5) Net Loss Per Common Share
The Company adopted SFAS No. 128, Earnings Per Share, effective December
15, 1997. 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. The Company has applied the provisions of SFAS No. 128
retroactively to all periods presented. Diluted weighted average shares
outstanding for 1997 and 1998 exclude the 1,709,000 and 1,763,000 potential
common shares, respectively, from stock options and warrants outstanding because
to include them would have been antidilutive for the periods presented.
(6) Reporting Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income, effective
January 1, 1998. SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in the financial statements.
Comprehensive income is the total of net income and all other non owner changes
in equity including such items as unrealized holding gains/losses on securities
classified as available-for-sale, foreign currency translator adjustments and
minimum pension liability adjustments. The Company had no such items for the
three months ended March 31, 1997 and 1998 and therefore comprehensive income
(loss) and net income (loss) are the same.
(7) Legal Proceedings
On April 15, 1997, the Company commenced a lawsuit against Neuromedical
Systems, Inc. ("NSI"), The PIE Mutual Insurance Company ("PIE"), Cytology West,
Inc. ("CWI") and other parties in the United States District Court in
Massachusetts (Civil Action No. 97-10740). The action was voluntarily dismissed
without prejudice as to certain defendants, and dismissed as to the remaining
defendants following the court's determination that personal jurisdiction was
lacking.
The Company refiled its suit against NSI and two of its officers in the United
States District Court for the Southern District of New York on June 24, 1997
(Civil Action No. 97 CIV 4642). The lawsuit includes claims of false and
misleading advertising, unfair and deceptive trade practices, unfair
competition, misappropriation of trade secrets, tortious interference with the
Company's business relationships and defamation. In addition to seeking
preliminary and permanent injunctions to stop NSI and its officers from such
conduct, the Company seeks damages, including treble damages. On July 30, 1997,
NSI moved to dismiss the Company's complaint. On September 5, 1997, the Court
denied NSI's motion to dismiss. On September 19, 1997, the defendants filed
answers and affirmative defenses to the Company's claims, denying liability, and
on October 3, 1997, NSI filed counterclaims against the Company for false and
misleading advertising, unfair competition and defamation. On November 12,
1997, the Company moved to dismiss NSI's counterclaims and that motion is
currently pending. The case is in the middle of discovery. While the outcome of
the action cannot be determined, the Company believes that the counterclaims are
without merit and intends to defend against them vigorously.
The Company also refiled its suit against PIE and its medical director in the
United States District Court for the Northern District of Ohio, Eastern Division
on July 3, 1997 (Civil Action No. 1:97 CV 1779). The complaint alleges false
and misleading description and representation, unfair and deceptive trade
practices, interference with advantageous relationships, defamation and
commercial disparagement. The Company is seeking injunctive relief as well as
damages, including treble damages. On September 2, 1997, the defendants filed
an answer and affirmative defenses to the Company's claims, denying liability.
The case is in the early stages of discovery.
On May 14, 1997, CWI, a defendant in the Company's original lawsuit in
Massachusetts, filed suit against the Company in the United States District
Court for the District of Nevada (Civil Action, No. CV-S- 97-00594-LDG (LRL)),
alleging false description, false representation and unfair competition. On
June 27, 1997, the Company filed a motion to dismiss the complaint. The Court
granted the Company's motion as to one count of CWI's complaint, but denied the
Company's motion as to the remainder of CWI's complaint. On August 6, 1997, the
Company filed counterclaims against CWI and third party claims against its
President, including claims for false and misleading description and
representation, unfair competition, interference with advantageous
relationships, defamation, commercial disparagement and abuse of process. On
August 26, 1997, CWI and its President filed an answer and affirmative defenses
to the Company's counterclaims, denying liability. On January 23, 1998, the
Company voluntarily withdrew its claim for abuse of process. The case is in the
middle of discovery. While the outcome of the action cannot be determined, the
Company believes the claims against the Company are without merit, and intends
to defend against those claims vigorously.
Each of the above pending actions are still in discovery and, accordingly, the
Company is unable to determine the extent of its liability, if any, or the
likelihood of prevailing in such actions.
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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 ThinPrep 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. On February 25, 1997, the FDA
approved the Company's supplemental PMA application for use of a combination of
an endocervical brush and spatula sampling devices, which is a commonly used
method of collecting samples for conventional Pap smears. On September 4, 1997,
the FDA approved the Company's supplemental PMA application for the testing for
the human papilloma virus ("HPV") directly from a single vial of patient
specimen collected in a ThinPrep solution using the Hybrid Capture HPV DNA Assay
of Digene Corporation. The Company commenced the full-scale commercial launch of
the ThinPrep System for cervical cancer screening in the United States in 1997.
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
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development efforts related to the ThinPrep System, expansion of the Company's
manufacturing facilities, 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 and level of reimbursement for the ThinPrep
System by third-party payors, and other factors, many of which are outside the
Company's control.
The Company occupies a 97,000 square foot facility in Boxborough,
Massachusetts. The Company has installed new custom-built automated equipment
for the high-volume manufacture of disposable filters for use in connection with
the ThinPrep System.
The Company believes that sales of the ThinPrep System for cervical cancer
screening in the United States will depend on the availability of adequate
reimbursement from third-party payors such as private insurance plans, managed
care organizations and Medicare and Medicaid. The Company believes that in the
United States the current rate of reimbursement of laboratories from managed
care organizations and other third-party payors to screen conventional Pap
smears ranges from approximately $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. In the past, the Company has
offered discounts to stimulate demand for the ThinPrep System and may elect to
do so in the future, which discounts could have a material adverse effect on the
Company's business, financial condition and results of operations.
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, twenty-one
of fifty-five Blue Cross and Blue Shield plans and a number of health insurance
companies have added the ThinPrep Pap Test to their coverage, there can be no
assurance that third-party payors will provide or continue to 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.
Effective January 1, 1998, the Company's laboratory customers are able to
request reimbursement for the ThinPrep Pap Test from health insurance companies
and the United States Health Care Financing Administration ("USHCFA"), which
administers Medicare, using a newly assigned Common Procedure Technology ("CPT")
code specifically for liquid-based monolayer cervical cell specimen preparation.
CPT codes are assigned, maintained and revised by the CPT Editorial Board which
is administered by the American Medical Association, and are used in the
submission of claims to third-party payors for reimbursement for medical
services. The new, single CPT code replaces the non-specific, two-code
description used during 1997 and is expected to facilitate reimbursement to the
Company's laboratory customers for their use of the ThinPrep Pap Test. Delays in
the implementation of the new CPT code by third-party payors, however, have
resulted in delayed reimbursement to the Company's laboratory customers. As a
result, orders for ThinPrep Pap Tests during the first quarter of 1998 were
reduced, delayed or eliminated.
The Company's direct sales force is actively working directly with current
laboratory customers and health insurance companies to facilitate implementation
and reimbursement under the new CPT code. There are approximately six hundred
managed care organizations and other third party payors in the United States.
There can be no assurance, however, that the new CPT code will be successfully
implemented by third-party payors, that
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the reimbursement delays will be successfully reduced, or that reimbursement
levels under the new CPT code will be adequate.
The Company will continue to increase the amount of expenditures for
marketing, sales and customer support activities of the ThinPrep System for
cervical cancer screening. 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 and sales channels will be successfully established. During 1997, the
Company entered into a number of agreements in connection with its marketing and
sales activities, including a co-promotion agreement with Mead Johnson &
Company, a division of Bristol-Myers Squibb, to promote the ThinPrep Pap Test to
obstetricians in the United States, and an agreement with Quest Diagnostics
Incorporated to provide ThinPrep Pap Testing at its clinical laboratories in the
United States. The Quest Diagnostics agreement is exclusive in that Quest will
only provide other liquid-based mono or thin layer sample preparation
technologies if FDA labeling claims for such products exceed the FDA labeling
claims of the ThinPrep System and will only provide computer aided rescreening
upon customer initiated request. Quest Diagnostics and the Company agreed to
coordinate their efforts in planning and marketing the ThinPrep Pap Test to
medical professionals and third party payors. There can be no assurance that
such marketing, sales and customer support activities will result in increased
net sales, that the agreement with Mead Johnson & Company or other third parties
will be successful, 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 and sales channels will be
successfully established.
The Company will continue to increase its expenditures for research and
development to fund development of follow-on products and additional
applications of ThinPrep technology. The Company will also continue to increase
the amount of expenditures for administrative activities, principally for the
employment of additional administrative personnel and other legal and
professional fees. The Company may also continue to increase the expenditure
amounts for litigation-related legal expenses.
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 that are used with the ThinPrep System, and
improvements made by the Company relating to such items. Royalty payments, in
connection with this license for the three months ended March 31, 1997 and 1998
were $14,000 and $27,000, respectively.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
Net sales increased to $8.1 million in the first quarter of 1998 from $3.4
million for the same period of 1997, an increase of 134.2%. This increase in
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 $5.8 million in the first
quarter of 1998 from $1.9 million for the same period of 1997, an increase of
198.9%, and the gross margin increased to 71.6% in the first quarter of 1998
from 56.1% for the same period of 1997. Management attributes the increase in
gross margin in 1998 primarily to the increased sales of the higher gross margin
ThinPrep Pap Test and increased sale prices for non-gynecological tests and
ThinPrep 2000 Processors.
Total operating expenses increased to $13.4 million in the first quarter of
1998 from $9.6 million for the same period of 1997, an increase of 40.7%.
Research and development costs increased to $1.9 million in the first quarter of
1998 from $1.5 million for the same period of 1997, an increase of 22.0%, as a
result of employment of additional research and development personnel and
engineering consulting expenses. Sales, marketing and customer support increased
to $8.9 million in the first quarter of 1998 from $6.6 million for the same
period of 1997, an increase of 34.3%. The increase in sales, marketing and
customer support costs reflects the employment of additional sales and customer
support personnel, increased expenses associated with the Mead Johnson co-
promotion agreement, and additional marketing consulting costs related to the
international launch of the ThinPrep Pap Test. General and administrative costs
increased to $2.7 million in the first quarter of 1998 from
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$1.4 million for the same period of 1997, an increase of 91.5%, due to the
employment of additional administrative personnel and increased legal expenses.
Net interest income increased to $1.2 million in the first quarter of 1998 from
$1.0 million for the same period of 1997, an increase of 14.5%, 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 $75.7 million as of March 31,
1998. The Company has funded its operations primarily through the private
placement and public sale of equity securities aggregating $165.6 million, net
of offering expenses. At March 31, 1998, the Company had cash, cash equivalents
and short-term investments of $78.6 million. Cash used in the Company's
operations during the first quarter of 1998 was $5.3 million compared to $3.9
million in the first quarter of 1997, an increase of 38.1%. The increase in cash
used in operations in 1998 was primarily due to changes in current assets and
liabilities.
Accounts receivable decreased by $2.8 million to approximately $7.7 million
during the first quarter of 1998 as a result of decreased sales volume.
Inventories increased approximately $1.3 million to $4.5 million from December
31, 1997 to March 31, 1998 due primarily to the Company's planned sales increase
of ThinPrep Pap Tests, ThinPrep 2000 Processors and reagents, filters and other
supplies for non-gynecological testing.
The Company's capital expenditures for the quarters ended March 31, 1998
and 1997 were $1.7 million and $405,000 respectively. The increase in capital
expenditures in the first quarter of 1998 was due primarily to increased
purchases for customized manufacturing equipment and computer equipment.
Additionally, as of March 31, 1998, the Company has made commitments for
customized manufacturing equipment of approximately $1.3 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, and the
extent to which such activities generate market acceptance and demand for the
ThinPrep System for cervical cancer screening. 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. In
addition, the Company's capital requirements will depend on the extent of
potential liabilities, if any, and costs associated with, existing or future
litigation. See "Legal Proceedings". 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 Section 21E of the Securities Exchange Act of 1934, as amended. The Company's
operating results and financial condition have varied and may in the future vary
significantly depending on a number of factors. Statements in this Form 10-Q
which are not strictly historical statements, including, without limitation,
statements regarding current or future financial performance, management's plans
and objectives for future operations, domestic and international marketing and
sales plans, product plans and performance, availability of reimbursement for
the Company's product, 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 that 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, limited marketing and sales experience, dependence on
timely and adequate levels of third-party reimbursement, CPT code implementation
delays and delays in reimbursement, a limited operating history, risks
associated with commercialization, a history of losses, potential fluctuations
in future quarterly results, intense competition, potential liabilities and
costs associated with existing or future litigation, limited manufacturing
experience, uncertainty of additional applications and dependence on single
source suppliers. Such factors, among other risks detailed in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997, filed
with the Securities and Exchange Commission, may have a material adverse effect
upon the Company's business, results of operations and financial condition.
Because of these and other factors, past financial performances should not be
considered an indication of future performance.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
On April 15, 1997, the Company commenced a lawsuit against Neuromedical
Systems, Inc. ("NSI"), The PIE Mutual Insurance Company ("PIE"), Cytology West,
Inc. ("CWI") and other parties in the United States District Court in
Massachusetts (Civil Action No. 97-10740). The action was voluntarily dismissed
without prejudice as to certain defendants, and dismissed as to the remaining
defendants following the court's determination that personal jurisdiction was
lacking.
The Company refiled its suit against NSI and two of its officers in the
United States District Court for the Southern District of New York on June 24,
1997 (Civil Action No. 97 CIV 4642). The lawsuit includes claims of false and
misleading advertising, unfair and deceptive trade practices, unfair
competition, misappropriation of trade secrets, tortious interference with the
Company's business relationships and defamation. In addition to seeking
preliminary and permanent injunctions to stop NSI and its officers from such
conduct, the Company seeks damages, including treble damages. On July 30, 1997,
NSI moved to dismiss the Company's complaint. On September 5, 1997, the Court
denied NSI's motion to dismiss. On September 19, 1997, the defendants filed
answers and affirmative defenses to the Company's claims, denying liability, and
on October 3, 1997, NSI filed counterclaims against the Company for false and
misleading advertising, unfair competition and defamation. On November 12, 1997,
the Company moved to dismiss NSI's counterclaims, and that motion is currently
pending. The case is in the middle of discovery. While the outcome of the action
cannot be determined, the Company believes that the counterclaims are without
merit, and intends to defend against them vigorously.
The Company also refiled its suit against PIE and its medical director in
the United States District Court for the Northern District of Ohio, Eastern
Division on July 3, 1997 (Civil Action No. 1:97 CV 1779). The complaint alleges
false and misleading description and representation, unfair and deceptive trade
practices, interference with advantageous relationships, defamation and
commercial disparagement. The Company is seeking injunctive relief as well as
damages, including treble damages. On September 2, 1997, the defendants filed an
answer and affirmative defenses to the Company's claims, denying liability. The
case is in the early stages of discovery.
On May 14, 1997, CWI, a defendant in the Company's original lawsuit in
Massachusetts, filed suit against the Company in the United States District
Court for the District of Nevada (Civil Action, No. CV-S- 97-00594-LDG (LRL)),
alleging false description, false representation and unfair competition. On
June 27, 1997, the Company filed a motion to dismiss the complaint. The Court
granted the Company's motion as to one count of CWI's complaint, but denied the
Company's motion as to the remainder of CWI's complaint. On August 6, 1997, the
Company filed counterclaims against CWI and third party claims against its
President, including claims for false and misleading description and
representation, unfair competition, interference with advantageous
relationships, defamation, commercial disparagement and abuse of process. On
August 26, 1997, CWI and its President filed an answer and affirmative defenses
to the Company's counterclaims, denying liability. On January 23, 1998, the
Company voluntarily withdrew its claim for abuse of process. The case is in the
middle of discovery. While the outcome of the action cannot be determined, the
Company believes the claims against the Company are without merit, and intends
to defend against those claims vigorously.
Each of the above pending actions are still in discovery and, accordingly,
the Company is unable to determine the extent of its liability, if any, or the
likelihood of prevailing in such actions.
-12-
Item 2. Changes in Securities.
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Not applicable.
Item 3. Defaults upon Senior Securities.
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
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Not applicable.
Item 5. Other Information.
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
Not applicable.
-13-
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 15, 1998 By: /s/ Joseph W. Kelly
--------------------------------------------
Joseph W. Kelly
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
-14-
EXHIBIT INDEX
Exhibit
Number Description Page
- ------ ----------- ----
27 Financial Data Schedule __