<PAGE> 1
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.................October 31, 1996
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....................................0-6375
American Cytogenetics, Inc.
- -----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-2701324
- ------------ ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6440 Coldwater Canyon, North Hollywood, California 91606
- --------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number: (818) 766-1286
------------------
N/A
- ----------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last year)
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 twelve (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
The number of shares outstanding of the Registrant's Common Stock, as of
December 10, 1996 was 4,481,023.
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AMERICAN CYTOGENETICS, INC.
FORM 10-Q
INDEX
PART I - Financial Information Page
Item 1. Financial Statements:
Consolidated Condensed Balance Sheet - 3
October 31, 1996 and January 31, 1996
Consolidated Condensed Statement of Operations -
Three Months Ended October 31, 1996 and 1995 4
Consolidated Condensed Statement of Operations -
Nine Months Ended October 31, 1996 and 1995 5
Consolidated Condensed Statement of Cash Flows -
Nine Months Ended October 31, 1996 and 1995 6
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of
Operations 10
Item 5. Other Information 14
Signatures 15
<PAGE> 3
Part I - Financial Information
- -----------------------------------
Item I. Financial Statements
<TABLE>
<CAPTION>
AMERICAN CYTOGENETICS, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
October 31, 1996 January 31, 1996
--------------------- --------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,734 $ 19,503
Accounts receivable, net 397,203 585,607
Supplies 26,113 48,042
Prepaid expenses 25,977 85,388
------------ -------------
Total current assets 457,027 738,540
Equipment and improvements, net 212,833 253,154
Customer list, net 92,335 115,416
Deferred costs and other assets 16,902 17,008
------------ -------------
Total assets $ 779,097 $1,124,118
======== ========
LIABILITIES AND CAPITAL DEFICIENCY
CURRENT LIABILITIES:
Cash overdraft $ 90,000 $ 83,509
Accounts payable, trade 779,509 743,867
Short-term debt from affiliate 470,000 5,000
Current portion of long-term debt and IRS
obligation 91,319 87,455
Current portion of capital leases 8,962 43,647
Due to affiliates 131,728 109,098
Other current liabilities 317,909 518,024
------------ -------------
Total current liabilities 1,889,427 1,590,600
Long-term debt and IRS obligation, net of
current portion 582,016 603,780
Other Liabilities 25,000 25,000
------------ -------------
Total liabilities 2,496,443 2,219,380
Capital Deficiency:
Preferred stock, $10 par value - Authorized
300,000 shares; 32,988 issued (liquidated
value $549,164 and $528,854 at October 31,
1996 and January 31, 1996, respectively) 329,880 329,880
Common stock, $.01 par value - Authorized
20,000,000 shares; 4,540,499 issued at
October 31, and January 31, 1996 45,405 45,405
Additional paid-in capital 3,803,227 3,803,227
Accumulated deficit (5,819,012) (5,196,928)
Less treasury stock, at cost (76,846) (76,846)
------------ -------------
Total capital deficiency (1,717,346) (1,095,262)
------------ -------------
Total Liabilities and
Capital Deficiency $ 779,097 $1,124,118
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 4
<TABLE>
<CAPTION>
AMERICAN CYTOGENETICS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months ended October 31,
1996 1995
------------ -------------
<S> <C> <C>
REVENUES, NET $ 508,789 $1,127,707
COSTS AND EXPENSES:
Production 423,092 789,075
Selling and marketing 7,055 59,029
General and administrative 286,590 330,858
------------ -------------
Total costs and expenses 716,737 1,178,962
------------ -------------
Operating loss (207,948) (51,255)
Other expense (principally interest) 17,017 25,064
------------ -------------
Net loss $ (224,965) $ (76,319)
======= ========
Preferred dividend requirements 6,770 6,770
------------ -------------
Net loss applicable to common shares $ (231,735) $ (83,089)
======= =======
Weighted average number of common
shares outstanding 4,481,023 4,481,023
Net loss per common share $ (0.05) $ (0.02)
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 5
<TABLE>
<CAPTION>
AMERICAN CYTOGENETICS, INC.
CONSOLIDATED CONDE NSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months ended October 31,
1996 1995
------------ -------------
<S> <C> <C>
REVENUES, NET $2,119,153 $3,783,384
COSTS AND EXPENSES:
Production 1,747,146 2,636,004
Selling and marketing 57,359 220,622
General and administrative 869,180 1,054,228
------------ -------------
Total costs and expenses 2,673,685 3,910,854
------------ -------------
Operating loss (554,532) (127,470)
Other expense (principally interest) 67,552 72,507
------------ -------------
Net loss $ (622,084) $ (199,977)
======= ========
Preferred dividend requirements 20,310 20,310
------------ -------------
Net loss applicable to common shares $ (642,394) $ (220,287)
======= ========
Weighted average number of common
shares outstanding 4,481,023 4,481,023
Net loss per common share $ (0.14) $ (0.05)
======== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 6
<TABLE>
<CAPTION>
AMERICAN CYTOGENETICS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months ended October 31,
1996 1995
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INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (622,084) $ (199,977)
Adjustments to reconcile net
loss to net cash used
by operating activities:
Depreciation and amortization 63,736 73,588
Provision for losses on accounts
receivable 66,744 8,828
Changes in assets and liabilities:
Accounts receivable 121,660 88,469
Supplies 21,929 (12,643)
Prepaid expenses 59,411 40,603
Other assets 106 (762)
Accounts payable 35,642 4,505
Other current liabilities (177,485) (75,199)
------------ -------------
NET CASH USED IN
OPERATING ACTIVITIES (430,341) (72,588)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in cash overdraft 6,491 134,659
Increase in borrowings from affiliates 465,000 0
Repayment of debt (17,900) (70,274)
Payment on capital lease obligations (34,685) (15,350)
------------ -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 418,906 49,085
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (334) (7,818)
------------ -------------
NET DECREASE IN CASH (11,769) (31,321)
CASH AT BEGINNING OF PERIOD 19,503 35,279
------------ -------------
CASH AT END OF PERIOD $ 7,734 $ 3,958
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 7
<TABLE>
<CAPTION>
AMERICAN CYTOGENETICS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months ended October 31,
1996 1995
------------ -------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
<S> <C> <C>
Cash paid for interest $ 67,552 $ 72,507
======= ========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Purchase of assets with long-
term debt $ 100,095
========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 8
AMERICAN CYTOGENETICS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
- -------------------------------------------------
The accompanying consolidated condensed financial statements for American
Cytogenetics, Inc.(the "Company"), have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial
statements. Certain reclassification of the prior year financial statements
have been made to conform such information to current period presentation. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation have been made.
Income (loss) per common share is computed by dividing the net income or loss
for each period, adjusted for required preferred stock dividends, by the
weighted average number of common shares outstanding. Income (loss) per
common share does not provide for the effects of shares issuable contingent
upon the exercise of the stock options because the effect would be immaterial
or anti- dilutive.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and footnotes thereto included in
the Registrant's Annual Reporton Form 10-K for the fiscal year ended
January 31, 1996.
The results of operations for the three and nine months ended
October 31, 1996 and 1995 are not necessarily indicative of the results to
be expected for the full year.
Note 2: GOING CONCERN
- ----------------------------------
The Company has incurred losses from operations for the past four fiscal
years, has negative working capital and a capital deficiency. The Company
has been notified by its largest customer that, due to budgetary shortfalls,
test volume may be reduced significantly. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
Note 3: CONTINGENCIES
- ----------------------------------
On August 11, 1992, a complaint was filed, Mary Lou Back v. American
Cytogenetics, et al., Case BC061917, in the Superior Court of California for the
County of Los Angeles, against the Company, Cancer Screening Services ("CSS"),
Earl Brian, Alice
<PAGE> 9
Hendricks, Liston Witherill, Allan Tessler, Gary Prince and Dwight Geduldig.
Each of the above named individuals, except Allan Tessler, is or at one time was
a member of the Board of Directors of the Company. Allan Tessler was removed
from the case. The Complaint alleges that Ms. Back, who was employed as
President and Chief Executive Officer of the Company and CSS from May 1990
to January 1992, was wrongfully terminated in violation of public policy and
various other reasons. The complaint seeks damages in the amount of $200,000
plus punitive damages and indemnification from Internal Revenue Service "IRS"
assessments against Back for taxes not paid by CSS. In October 1993 the court
granted the Company's motion to dismiss Back's claim for indemnification and on
March 22, 1994 the court granted the Company's motion for summary
adjudication of Back's remaining claims. Back's subsequent request for
reconsideration of the summary adjudication order has been denied. Back filed
a Notice of Appeal and on July 30, 1996 the California Appeals Court reversed
the motion for summary adjudication. The Company has vigorously defended
the action and is unable to predict the outcome at this time.
The Company's laboratories, in the ordinary course of business, are subject
on occasion to legal claims alleging improper reporting or misreading of
specimens. The Company previously had adequately covered these legal claims by
claims-made policies provided by commercial insurance carriers, subject to a
deductible. Due to the financial condition of the Company claims-made
policies have not always been in place in fiscal year 1997 and management is
currently seeking coverage. Several claims currently exist against the Company
for which coverage at this time is not available. However, management can give
no assurance that, at some future date, if a policy is in place a claim might
not be initiated that is in excess of insurance coverage or that the
Company may be unable to obtain coverage.
<PAGE> 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- --------------------------
The Company's revenues are derived from the sale of testing services for
gynecological cytology (Pap testing), certain sexually transmitted diseases
(primarily Chlamydia trachomatis) and histopathology testing. As in years past,
the majority of the Company's revenues (approximately 70%) are derived from the
sales of Pap tests. While this represents a lower percentage than in the
past, Pap testing remains the Company's major business focus.
The Company has been notified by its largest customer that, due to budgetary
shortfalls, testvolume may be reduced significantly. The Company's primary
marketing focus has been andcontinues to be on publicly financed (either
directly or through tax exemptions) reproductivehealth agencies and
organizations. The purchasing ability of such agencies and organizations is
generally dictated by their ability to appropriate or otherwise generate
funding. As such, there is a high degree of price sensitivity in this
marketplace. Management believes that price sensitivity will continue to be a
driving factor for the foreseeable future.
The Company's ability to continue to compete successfully for this business
depends to a largeextent on its ability to control costs, particularly labor
costs. In fiscal year 1991, regulations were enacted in the State of
California that limited the number of cytology slides that a cytotechnologist
could analyze in a 24-hour period. These limits were lower than those for other
states. As a result, labor costs increased substantially, with a concomitant
negative impact on the Registrant's ability to compete in its historical market.
Management's efforts have focussed on controlling production costs in order to
improve the Company's competitive position. These efforts include staff
reorganization and increased use of automation for administrative and reporting
functions. In fiscal year 1995, the Company established a test processing
facility in Missouri in order to increase capacity at reduced cost. In the
first half of the fiscal year 1996, approximately 26% of the Company's Pap tests
were performed at then ew facility. However, due to reduced test volume from
the Company's largest ustomer the Company ceased operations in the Missouri
facility in October 1995. Due to theCompany's elimination of the lower cost
facility in Missouri, and reduced volumes from its largestcustomer the Company
has experienced significant revenues declines. Due to the commensurate reduced
capacity in fiscal year 1997 the Company recorded a reduction to revenues of
approximately $170,000 as a result of disputes with previous customers over
testing servicesprovided in excess of agreed upon time period to process
specimens. These factors have placedthe financial condition of the Company
in jeopardy.
<PAGE> 11
The Company is continuing to seek outside financing to reduce existing debt and
provide workingcapital. Since January of 1996 the Company has borrowed
approximately $505,000 from itsmajority shareholder, Questech Capital
Corporation ("Questech"). No assurance can be given that Questech will
continue to finance the Company with needed funds for working capital, debt
reduction and necessary restructuring costs. The Company continues to pursue
other financing sources as well as ways to restructure it's debt burden and
poor financial position.
Comparison of Three Months Ended October 31, 1996 and October 31, 1995
- ---------------------------------------------------------------------------
Revenues for the third quarter of fiscal year 1997 decreased approximately
$619,000 or 55% as compared to the same period in fiscal year 1996. The lower
revenues are primarily a result of a reduction of 65% in volume and the
reduction to revenues of $35,000 due to disputes with customers over the
timeliness of services provided.
Total production expenses decreased approximately $366,000 or 46% over the
same period last fiscal year and production expenses as a percent of sales
increased from 70% to 78% before the $35,000 reduction to revenues in the
current quarter.
The increase in production expenses as a percent of sales is primarily due to
the significantly reduced volume. The Company's facility and cost structure is
not commensurate with the reduced volume of tests currently being processed. In
addition, the Company did not process any volume at the Company's previously
operating lower cost facility in Missouri. Management believes that the
Company's current cost structure will need major restructuring in order to
remain competitive.
Selling and marketing expenses decreased by approximately $52,000 or 88% due to
reduced labor expense in the quarter ended October 31, 1996. The Company has
not replaced marketing staff in an attempt to concentrate on existing business
and due to the Company's negative cash flow from operations.
General and administrative expenses decreased by approximately $44,000 or 13%.
The Company did not incur expenses related to the management of the Missouri
facility in the current quarter and labor expense is lower due to reduced
testing volume. However, the Company's facility and cost structure is not
commensurate with the reduced volume of tests currently being processed and
restructuring is necessary.
The approximate $8,000 decrease in other expense is due to decreased interest
expense as a result of increased borrowings from the Company's largest
shareholder, Quectech, offset by the lower interest on a capital lease
entered into in fiscal year 1996 to finance computer hardware necessary for the
new laboratory information system and the obligation to the IRS.
<PAGE> 12
The results of operations for the three months ended October 31, 1996 decreased
by $149,000 compared with the three months ended October 31, 1995 due primarily
to reduced testing volumes and the Company's inability to restructure its
facility and cost structure.
Comparison of Nine Months Ended October 31, 1996 and October 31, 1995
- -------------------------------------------------------------------------
Revenues for the first three quarters of fiscal year 1997 decreased
approximately $1,664,000 or 44% as compared to the same period in fiscal year
1996. The lower revenues are primarily a result of a reduction of 40% in
volume and the reduction to revenues of $170,000 due to disputes with customers
over the timeliness of services provided.
Total production expenses decreased approximately $889,000 or 34% over the
same period last fiscal year and production expenses as a percent of sales
increased from 70% to 76% before the $170,000 reduction to revenues in the
current fiscal year. The increase in production expenses as a percent of sales
is primarily due to the significantly reduced volume. The Company's facility
and cost structure is not commensurate with the reduced volume of tests
currently being processed. In addition, the Company did not process any volume
at the Company's previously operating lower cost facility in Missouri.
Management believes that the Company's current cost structure will need major
restructuring in order to remain competitive.
Selling and marketing expenses decreased by approximately $163,000 or 74% due
to reduced labor expense in the nine months ended October 31, 1996. The
Company has not replaced marketing staff in an attempt to concentrate on
existing business and due to the Company's negative cash flow from operations.
General and administrative expenses increased approximately $185,000 or 18%.
The Company did not incur expenses related to the management of the Missouri
facility in the current fiscal year and labor expense is lower due to reduced
testing volume. However, the Company's facility and cost structure is not
commensurate with the reduced volume of tests currently being processed and
restructuring is necessary.
The approximate $5,000 decrease in other expense is due to decreased interest
expense as a result of borrowings from the Company's largest shareholder,
Questech,. offset by the lower interest on a capital lease entered into in
fiscal year 1996 to finance computer hardware necessary for the new laboratory
information system and the obligation to the IRS.
The net loss from operations for the nine months ended October 31, 1996
increased by $422,000 compared with the nine months ended October 31, 1995 due
primarily to reduced testing volumes and the Company's inability to restructure
its facility and cost structure.
<PAGE> 13
Liquidity and Capital Resources
- --------------------------------------
Working capital decreased approximately $580,000 from a deficit of approximately
$852,000 at January 31, 1996 to a deficit of $1,432,000 at October 31, 1996
primarily as a result of the loss from operations.
Capital expenditures were approximately $0 and $109,000, respectively, for the
nine months ended October 31, 1996 and 1995. Purchases in the prior period were
for computer hardware and software development associated with the Company's
effort to develop a new laboratory information system. The hardware portion was
financed by lease requiring payments over 16 months.
On May 12, 1992 the Company reached an informal installment agreement with the
IRS on a payment plan for approximately $525,000 of unpaid payroll taxes,
interest and penalties. The IRS has established a lien against the company's
assets for repayment of this liability. The Company had attempted to gain some
relief from the IRS by offering a compromised amount lower than the amount the
IRS has asserted is due and the amount the amount the Company carries on its
balance sheet as payable. The IRS has tentatively accepted that offer subject
to certain conditions, one of which being the Company's ability to pay the
compromised amount. The Company is seeking an outside financing source for this
amount.
Management's plans include seeking and obtaining additional cash through
issuance of stock or other financing alternatives. Proceeds from financing
activities are intended to be used in paying down debt, modernizing plant and
equipment, and providing working capital. In addition, as part of implementing
management's plans, the Company is: continuing to pursue cost reductions;
continuing renegotiations with the IRS for a more favorable settlement;
planning to obtain and implement current information technology to reduce
certain operating costs and increase billing efficiencies; and focusing on
strengthening certain operating controls. Despite management efforts it is not
certain that the Company will be able to meet its obligations during fiscal
year 1997.
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities: None
Item 3. Defaults upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Exhibits: None
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN CYTOGENETICS, INC.
Dated: December 10, 1996 /s/ Eric W. Hoffman
--------------------
Eric W. Hoffman
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 7,734
<SECURITIES> 0
<RECEIVABLES> 795,658
<ALLOWANCES> 398,455
<INVENTORY> 0
<CURRENT-ASSETS> 457,027
<PP&E> 661,616
<DEPRECIATION> 448,783
<TOTAL-ASSETS> 779,097
<CURRENT-LIABILITIES> 1,889,427
<BONDS> 0
0
329,880
<COMMON> 45,405
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 779,097
<SALES> 2,119,153
<TOTAL-REVENUES> 2,119,153
<CGS> 1,747,146
<TOTAL-COSTS> 2,673,685
<OTHER-EXPENSES> 67,552
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (622,084)
<INCOME-TAX> 0
<INCOME-CONTINUING> (622,084)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (622,084)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
