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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 June 30, 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 (I.R.S. Employer
of incorporation or 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 August 4,
1998 was 17,644,158.
Total Number of Pages: 18
Exhibit Index is on Page 16
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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 June 30, 1998 3
Consolidated Statements of Operations
for the three and six months ended June 30, 1997 and 1998 4
Consolidated Statements of Cash Flows
for the three and six months ended June 30, 1997 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 15
2
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CYTYC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, JUNE 30,
1997 1998
------------------ -------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 47,204 $ 56,353
Short-term investments......................................................... 38,198 16,495
Accounts receivable, net....................................................... 10,501 6,699
Inventories.................................................................... 3,241 4,247
Prepaid expenses and other current assets...................................... 905 1,244
-------- --------
Total current assets........................................................ 100,049 85,038
Property and equipment, net...................................................... 5,851 7,753
Other assets..................................................................... 2,477 2,366
-------- --------
Total assets................................................................ $108,377 $ 95,157
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 2,570 $ 1,297
Accrued expenses............................................................... 8,088 9,734
Deferred revenue............................................................... 1,532 1,326
-------- --------
Total current liabilities................................................... 12,190 12,357
-------- --------
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 17,634,358 in 1998............. 175 176
Additional paid-in capital..................................................... 165,191 166,035
Accumulated deficit............................................................ (69,179) (83,411)
-------- --------
Total stockholders' equity.................................................. 96,187 82,800
-------- --------
Total liabilities and stockholders' equity.................................. $108,377 $ 95,157
======== ========
See accompanying notes.
3
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
----------- ----------- ----------- -----------
Net sales.......................................................... $ 5,161 $ 9,225 $ 8,601 $ 17,282
Cost of sales...................................................... 1,853 2,481 3,363 4,770
------- ------- -------- --------
Gross profit..................................................... 3,308 6,744 5,238 12,512
------- ------- -------- --------
Operating expenses:
Research and development......................................... 1,441 2,281 2,976 4,153
Sales, marketing and customer support............................ 8,058 9,950 14,690 18,859
General and administrative.................................... 1,895 3,351 3,291 6,024
------- ------- -------- --------
Total operating expenses...................................... 11,394 15,582 20,957 29,036
------- ------- -------- --------
Loss from operations............................................... (8,086) (8,838) (15,719) (16,524)
Other income, net.................................................. 1,420 1,104 2,458 2,292
------- ------- -------- --------
Net loss........................................................... $(6,666) $(7,734) $(13,261) $(14,232)
======= ======= ======== ========
Net loss per common and potential common share:
Basic............................................................ $( 0.39) $(0.44) $(0.80) $(0.81)
======= ======= ======== ========
Diluted.......................................................... $(0.39) $(0.44) $(0.80) $(0.81)
======= ======= ======== ========
Weighted average common and potential common shares outstanding:
Basic............................................................ 17,256 17,621 16,487 17,584
Diluted.......................................................... 17,256 17,621 16,487 17,584
See accompanying notes.
4
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
--------- ----------- ------------ ------------
Cash flows from operating activities:
Net loss................................................................ $ (6,666) $(7,734) $(13,261) $(14,232)
Adjustments to reconcile net loss to net cash used in operating
activities........................................................
Depreciation and amortization............................. 151 363 453 723
Provision for doubtful accounts........................... - - - 150
Changes in assets and liabilities--
Accounts receivable............................................... ( 1,092) 953 ( 1,093) 3,652
Inventories....................................................... (182) 278 (347) (1,006)
Prepaid expenses and other current assets......................... (192) (587) 14 (339)
Accounts payable.................................................. (577) (1,067) (204) (1,274)
Accrued expenses.................................................. 2,684 2,467 4,474 1,646
Deferred revenue.................................................. 27 (227) 257 (206)
-------- ------- -------- --------
Net cash used in operating activities.......................... (5,847) (5,554) (9,707) (10,886)
-------- ------- -------- --------
Cash flows from investing activities:
Increase in other assets................................................ (215) 215 (305) 111
Purchases of property and equipment..................................... (399) (953) (804) (2,625)
Purchases of short-term investments..................................... (22,955) (3,999) (49,756) (10,480)
Proceeds from maturity of short-term investments........................ 7,878 15,044 11,856 32,183
-------- ------- -------- --------
Net cash (used in) provided by investing activities............ (15,691) 10,307 (39,009) 19,189
-------- ------- -------- --------
Cash flows from financing activities:
Proceeds from employee stock purchase program........................... 109 111 109 111
Proceeds from exercise of stock options................................. 34 454 217 735
Proceeds from sale of common stock...................................... - - 70,580 -
-------- ------- -------- --------
Net cash provided by financing activities...................... 143 565 70,906 846
-------- ------- -------- --------
Net increases (decrease) in cash and cash equivalents..................... (21,395) 5,318 22,190 9,149
Cash and cash equivalents, beginning of period............................ 71,157 51,035 27,572 47,204
-------- ------- -------- --------
Cash and cash equivalents, end of period.................................. $ 49,762 $56,353 $ 49,762 $ 56,353
======== ======= ======== ========
See accompanying notes.
5
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. The financial statements should 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. 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. 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 June 30, 1998 and
December 31, 1997 are as follows:
GROSS UNREALIZED
AMORTIZED HOLDING GAINS FAIR
COST (LOSSES) VALUE
----------- ---------------- ----------
(IN THOUSANDS)
June 30, 1998
-------------
U.S. Government and Agency securities (average
Maturity of 6.5 months)................................. $16,495 $61 -- $16,556
December 31, 1997
-----------------
U.S. Government and Agency securities (average
maturity of 3.6 months)................................. $38,198 $71 -- $38,269
6
(5) Net Loss Per Common Share
The Company follows the provisions of 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. 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 1,719,000 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 and six months ended June 30, 1997, and in the 1998 periods had only
foreign currency translation adjustments which were not considered material and
therefore comprehensive income (loss) and net income (loss) are the same.
(7) New Accounting Standard
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging instruments. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement applies to all entities and is effective for all
fiscal quarters beginning after June 15, 1999. Initial application of this
Statement should be as of the beginning of an entity's fiscal quarter. As of
June 30, 1998 and during the quarter then ended, the Company did not hold any
derivative instruments or have any hedging activities. The Company does not
expect adoption of this Statement to have a significant impact on its financial
position or results of operations.
(8) 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. On June 15, 1998, the Court
granted the Company's motion to dismiss, in part, and denied it in part. The
case is in 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.
7
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.
Defendants filed a motion to dismiss the action on March 13, 1998. The case is
in 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. 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 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.
On August 10, 1998, the Company was served with a complaint filed in the
Delaware Chancery Court in a matter entitled Blazin v. Cytyc, et. al, (Civil
------------------------
Action No. 16571-NC), alleging that the continuing director, or "dead hand"
provision of the Company's shareholder rights plan violates Delaware law. On
June 22, 1998, the Company had amended its shareholder rights plan, deleting the
dead hand provision in its entirety. (See Amendment No. 1 to Rights Agreement,
attached as Exhibit 4.2 to this Quarterly Report on Form 10-Q). Accordingly, the
Company believes that the claims asserted in the lawsuit are entirely without
merit, and intends to seek prompt dismissal of the action. The lawsuit is in its
earliest stages, however, and, as a result, the Company is unable to determine
the extent of its liability, if any, or the likelihood of its prevailing in such
action.
8
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 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 that such losses may continue for the foreseeable future as it
expands its domestic and establishes its international marketing and sales
activities, and continues its product development efforts. 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 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, Prudential
Healthcare, Oxford Health and twenty-six 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 USHCFA (United States Health Care Financing
9
Administration) 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 half 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. As of June 30, 1998, based on
information provided to the Company, the Company believes that all of the 78
health insurance companies covering the ThinPrep Pap Test have implemented the
new CPT code and have established a reimbursement amount. 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 the
reimbursement delays will be successfully reduced, or that reimbursement levels
under the new CPT code will be adequate.
The Company expects to continue its significant 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 ("Mead Johnson"), a division
of Bristol-Myers Squibb, to promote the ThinPrep Pap Test to obstetricians and
gynecologists in the United States, and an agreement with Quest Diagnostics
Incorporated to provide processing of ThinPrep Pap Tests at its clinical
laboratories in the United States. The Quest Diagnostics agreement provides 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 also agreed
to coordinate certain 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 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 expects to continue its expenditures for research and
development to fund development of follow-on products and additional
applications of ThinPrep technology. The Company also expects to continue to
incur expenses for administrative activities, principally for the employment of
additional personnel, litigation-related and other legal expenses and
professional fees.
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 and filter
cylinder disposable products that are used with the ThinPrep System, and
improvements made by the Company relating to such items. Royalty expense, in
connection with this license in the three and six month periods ended June 30,
1997 and 1998 were approximately $22,699 and $38,139 and, $67,445 and $77,260,
respectively.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 and 1997
Net sales increased to $9.2 million in the second quarter of 1998 from $5.2
million for the same period of 1997, an increase of 79%. The increase was
primarily due to sales of the Company's ThinPrep Pap Test for cervical cancer
screening. Gross profit increased to $6.7 million in the second quarter of 1998
from $3.3 million for the same period of 1997, an increase of 104%, and the
gross margin increased to 74% in the second quarter of 1998 from 64% for the
same period of 1997. Management attributes the increase in gross margin in 1998
primarily to increased sales of the higher gross margin ThinPrep Pap Test as
compared to the ThinPrep 2000 Processor, and increased sale prices for non-
gynecological tests and ThinPrep 2000 Processors.
10
Total operating expenses increased to $15.6 million in the second quarter of
1998 from $11.4 million for the same period of 1997, an increase of 37%.
Research and development costs increased to $2.3 million in the second quarter
of 1998 from $1.4 million for the same period of 1997, an increase of 58%, as a
result of the feasibility trial for the ThinPrep 3000 instrument and other
product development opportunities. Sales, marketing and customer support costs
increased to $10.0 million in the second quarter of 1998 from $8.1 million for
the same period of 1997, an increase of 23%. 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 $3.4 million in the second quarter of 1998 from $1.9 million for
the same period of 1997, an increase of 77%, due to increased legal expenses.
Net interest income decreased to $1.1 million in the second quarter of 1998 from
$1.4 million for the same period of 1997, a decrease of 22%, due to a decrease
in the average cash balances available for investment.
Six Months Ended June 30, 1998 and 1997
Net sales increased to $17.3 million in the first six months of 1998 from
$8.6 million for the same period in 1997, an increase of 101%. This increase was
primarily due to sales of the Company's ThinPrep Pap Test for cervical cancer
screening. Gross profit increased to $12.5 million in the first six months of
1998 from $5.2 million for the same period in 1997, an increase of 139%, and the
gross margin increased to 73% from 61%. Management attributes the increase in
gross margin in 1998 primarily to the increased sales of the higher gross margin
ThinPrep Pap Test as opposed to the ThinPrep 2000 Processor and increased
selling prices for non-gynecological tests and ThinPrep 2000 Processors.
Total operating expenses increased to $29.0 million in the first six months
of 1998 from $21.0 million for the same period of 1997, an increase of 39%.
Research and development costs increased to $4.2 million in the first six months
of 1998 from $3.0 million for the same period in 1997, an increase of 40%,
primarily as a result of the feasibility trial for the ThinPrep 3000 instrument
and other product development opportunities. Sales, marketing and customer
support costs increased to $18.9 million in the first six months of 1998 from
$14.7 million for the same period in 1997, an increase of 28%. 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 $6.0 million in the first six
months of 1998 from $3.3 million for the same period in 1997, an increase of
83%, primarily due to legal expenses. Net interest income decreased slightly to
$2.3 million in the first six months of 1998 from $2.5 million for the same
period in 1997 as a result of lower average cash balances available for
investment.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have significantly exceeded its
revenue, resulting in an accumulated deficit of $83.4 million as of June 30,
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 June 30, 1998, the Company had cash, cash equivalents
and short-term investments of $72.8 million. Cash used in the Company's
operations during the second quarter of 1998 decreased to $5.6 million compared
to $5.8 million in the second quarter of 1997.
Accounts receivable decreased by $3.7 million to approximately $6.7 million
during the first six months of 1998 as a result of decreased sales volume at
June 30, 1998 as compared to December 31, 1997. Inventories increased
approximately $1.0 million to $4.2 million from December 31, 1997 to June 30,
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 June 30, 1998 and
1997 were $.9 million and $.4 million, respectively. The increase in capital
expenditures in the second quarter of 1998 was due primarily to increased
purchases for customized manufacturing equipment and computer equipment.
Additionally, as of June 30, 1998, the Company had commitments for customized
manufacturing equipment of approximately $.6 million.
11
The Company has taken actions to understand the nature and extent of work
required to make its products, systems and infrastructure Year 2000 compliant.
The Company uses a number of computer software programs and operating systems in
its internal operations, including applications used in manufacturing, product
development, financial business systems and various administrative functions.
To the extent that these software applications contain source code that is
unable to appropriately interpret the upcoming year "2000," some level of
modification or possibly replacement of such source code or applications will be
necessary. While these efforts will involve some additional costs, the Company
believes, based on available information, that it will be able to manage its
total Year 2000 transition without any material adverse effect on its business,
financial condition or operating results.
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 Quarterly Report on 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 the
additional cost related thereto, 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 performance should not be considered an
indication of future performance.
12
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. On June 15, 1998, the Court
granted the Company's motion to dismiss, in part, and denied it in part. The
case is in 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.
Defendants filed a motion to dismiss the action on March 13, 1998. The case is
in 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. 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 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.
On August 10, 1998, the Company was served with a complaint filed in the
Delaware Chancery Court in a matter entitled Blazin v. Cytyc, et. al, (Civil
------------------------
Action No. 16571-NC), alleging that the continuing director, or "dead hand"
provision of the Company's shareholder rights plan violates Delaware law. On
June 22, 1998, the Company had amended its shareholder rights plan, deleting the
dead hand provision in its entirety. (See Amendment No. 1 to Rights Agreement,
attached as Exhibit 4.2 to this Quarterly Report on Form 10-Q). Accordingly, the
Company believes that the claims asserted in the lawsuit are entirely without
merit, and intends to seek prompt dismissal of the action. The lawsuit is in its
earliest stages, however, and, as a result, the Company is unable to determine
the extent of its liability, if any, or the likelihood of its prevailing in such
action.
13
Item 2. Changes in Securities.
---------------------
The Company executed Amendment No. 1 to Rights Agreement, dated as of June
22, 1998, between the Company and BankBoston, N.A., deleting the
"continuing director" provision of the Rights Agreement. See Exhibit 4.2 to
this Quarterly Report on Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
At the Company's Annual Meeting of stockholders held May 6, 1998 (the "1998
Annual Meeting"), the Company's stockholders took the following actions:
1. The Company's stockholders elected Franklin J. Iris and William G.
Little as Class II directors, each to serve for a three-year term
expiring at the Company's annual meeting of stockholders in 2001, or
until his successor has been duly elected and qualified or until his
earlier resignation or removal. Election of the directors was
determined by a plurality of the votes cast at the 1998 Annual Meeting.
With respect to such matter, the votes were cast as follows: 14,232,456
shares were voted for the election of Mr. Iris, 14,232,241 shares were
voted for the election of Mr. Little, 2,173,436 shares were withheld
from the election of Mr. Iris and 2,173,651 shares were withheld from
the election of Mr. Little. No other persons were nominated, or
received votes, for election as directors of the Company at the 1998
Annual Meeting. The other directors of the Company whose terms of
office continued after the 1998 Annual Meeting were: Sally W. Crawford,
C. William McDaniel, Anna S. Richo, Patrick J. Sullivan and Monroe
Trout, M.D.
2. The Company's stockholders ratified the selection of Arthur Andersen
LLP, independent certified public accountants, as auditors for the
Company's fiscal year ending December 31, 1998. With respect to such
matter, the votes were cast as follows: 16,345,024 shares were voted
for the proposal, 46,943 shares were voted against the proposal, 13,925
shares were abstained from voting on the proposal and no shares were
broker nonvotes.
Item 5. Other Information.
-----------------
Proposals of stockholders intended for inclusion in the proxy statement to
be furnished to all stockholders entitled to vote at the next annual
meeting of stockholders of the Company must be received at the Company's
principal executive offices not later than December 4, 1998. The Company's
by-laws establish an advance notice procedure with regard to proposals that
stockholders otherwise desire to introduce at the annual meeting without
inclusion in the Company's proxy statement for that meeting. Written notice
of such stockholder proposals for the next annual meeting of the Company
must be received by the Secretary of the Company at the Company's principal
executive offices not later than the close of business on December 4, 1998
and not earlier than the close of business on November 4, 1998 in order to
be considered timely, and must contain specified information concerning the
matters proposed to be brought before such meeting and concerning the
stockholder proposing such matters. The matters proposed to be brought
before the meeting also must be proper matters for stockholder action.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
--------
4.2 Amendment No. 1 to Rights Agreement, dated as of June 22, 1998
between Cytyc Corporation and BankBoston, N.A., amending the
Rights Agreement dated August 27, 1997 between Cytyc Corporation
and BankBoston, N.A.
27 Financial Data Schedule
14
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: August 13, 1998 By: /s/ Joseph W. Kelly
--------------------
Joseph W. Kelly
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting
Officer)
15
EXHIBIT INDEX
Exhibit
Number Description Page
- ------- ----------- ----
4.2 Amendment No. 1 to Rights Agreement, dated as of 17
June 22, 1998, between Cytyc Corporation and
BankBoston, N.A., amending the Rights Agreement
dated August 27, 1997 between Cytyc Corporation
and BankBoston, N.A.
27 Financial Data Schedule 18