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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X]Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934.
[Fee Required]
For the Fiscal Year Ended: December 31, 1996
or
[_]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
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CYTYC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 02-0407755
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
85 SWANSON ROAD, BOXBOROUGH, MASSACHUSETTS 01719
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(508) 263-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 20, 1997 (based on the closing price as quoted by
Nasdaq National Market as of such date) was $369,127,276.
As of March 20, 1997, 17,235,736 shares of the registrant's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December
31, 1996. Portions of such proxy statement are incorporated by reference into
Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Cytyc Corporation designs, develops, manufactures and markets a sample
preparation system for medical diagnostic applications. The Company's ThinPrep
System allows for the automated preparation of cervical cell specimens on
microscope slides for use in cervical cancer screening, as well as for the
automated preparation of other cell specimens on microscope slides for use in
non-gynecological testing applications. 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 Squamous Intraepithelial Lesions ("LGSIL") 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. The Company believes that the ThinPrep System improves accuracy
in the detection of cervical cancer and precancerous lesions by making the
slide more representative of the patient's clinical condition, improving
preservation of the sample, standardizing the presentation of cells on the
slide, and reducing the presence of mucus, blood and other obscuring debris.
The Company is in the process of commencing the full-scale commercial launch
of the ThinPrep System for cervical cancer screening in the first quarter of
1997.
CERVICAL CANCER
Cervical cancer is one of the most common cancers among women throughout the
world. Cervical cancer is preceded by curable precancerous lesions that
progress without symptoms over a period of years until they become invasive,
penetrating the cervical epithelium (cellular covering) and entering the
bloodstream or lymph system. In order to detect these precancerous lesions,
gynecologists in the United States typically recommend annual screening
examinations. If detected in the precancerous stage, virtually all cervical
cancer cases are preventable. The treatment of cervical cancer after it
reaches the invasive stage may require surgery, including a hysterectomy, and
chemotherapy or radiation treatment, which are difficult, expensive and may
not be successful.
The factors associated with the development of cervical cancer are believed
to include early sexual activity, multiple sexual partners, cigarette smoking
and immunosuppression. In addition, a number of recent studies have concluded
that cervical cancer is strongly correlated to the presence of certain types
of HPV. According to these studies, HPV DNA is present in most cases of
precancerous lesions and in more than 90% of cases of intraepithelial and
invasive cancer. Cervical lesions that are HPV-negative or lacking certain
types of human papillomavirus ("HPV") are less likely to progress to cervical
cancer.
THE PAP SMEAR
Cervical cancer screening has been conducted since the late 1940s using the
Pap smear, a test developed by Dr. George Papanicolaou. In the United States,
widespread and regular use of the Pap smear as a screening test has
contributed to a greater than 70% decrease in mortality from cervical cancer
in the past. The Pap smear is currently the most widely-used screening test
for the early detection of cancer in the United States.
The Pap Smear Process
The Pap smear process involves the science of cytology, which is the
microscopic interpretation of precancerous, malignant and other changes in
cells. The conventional Pap smear process begins with the collection of a
cervical specimen during a gynecological examination. To obtain a cervical
cell sample, a sampling device, such as either a brush and spatula or a
"broom-like" device, is used to scrape cells from the surface of the cervix.
The sample is then manually smeared onto a clean microscope slide by the
physician who
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must then spray the slide within a few seconds with a fixative agent to
prevent damage to the cell specimen from air drying. The slide is then
submitted to a clinical laboratory for manual microscopic examination.
At the laboratory, a cytotechnologist, a medical professional with special
training in the examination and interpretation of human cells, conducts a
microscopic review of a prepared slide to determine the adequacy of the sample
and the presence of abnormal cells. In determining slide adequacy,
cytotechnologists classify each slide in one of three categories: (i)
satisfactory for evaluation, (ii) satisfactory but limited by ("SBLB") certain
characteristics, or (iii) unsatisfactory for evaluation. The percentage of
unsatisfactory and SBLB slides varies widely from laboratory to laboratory. In
a 1991 study of 600 laboratories, it was reported that up to 20% of slides
were classified as unsatisfactory and up to 40% were classified as SBLB.
Frequent reasons for unsatisfactory or SBLB classifications include excess
blood or mucus that impairs viewing or too few cells per slide.
After determining the adequacy of the slide, the cytotechnologist manually
screens each Pap smear slide with a microscope to differentiate diseased or
abnormal cells from healthy cells based on size, shape and structural details
of the cells and nuclei. Typically, each Pap smear slide is then classified in
accordance with The Bethesda System for Reporting Cervical/Vaginal Cytologic
Diagnoses ("Bethesda System") into one of the following categories: (i)
Negative; (ii) Atypical Squamous Cells of Undetermined Significance/Atypical
Glandular Cells of Undetermined Significance ("ASCUS/AGUS"); (iii) Low Grade
Squamous Intraepithelial Lesions ("LGSIL"); (iv) High Grade Squamous
Intraepithelial Lesion ("HGSIL"); and (v) Carcinoma. Any slide classified as
other than negative is considered abnormal and may be precancerous or
cancerous. All abnormal slides are referred to a senior cytotechnologist and
pathologist for further review and final diagnosis.
Notwithstanding the classifications imposed by the Bethesda System, the
subjective nature of the classification of Pap smear specimens results in
diagnoses that vary widely among cytotechnologists, pathologists and
laboratories. In 1988, to address accuracy and quality control concerns,
Congress adopted the Clinical Laboratory Improvement Amendments of 1988
("CLIA"). CLIA requires cytology laboratories to perform proficiency testing
and quality control by testing cytotechnologists in order to assure a minimum
level of competence and expertise. In addition, the CLIA regulations currently
limit the number of slides screened per day by a cytotechnologist to 100.
Certain states have also adopted regulations further limiting the number of
slides which can be manually examined per day by a cytotechnologist. As a
further quality control measure, the CLIA regulations require that
laboratories manually rescreen at least 10% of the slides that are initially
classified as negative.
Other methods of rescreening are currently available, including computer
imaging technologies that select certain negative slides or portions of
negative slides for reexamination by the cytotechnologist. These computer
imaging technologies are intended to provide an additional quality control
measure to help identify false negative diagnoses.
Follow-Up Treatment of Abnormal Pap Smears
Women with abnormal Pap smears may have to return to their physician's
office for a repeat Pap smear or to undergo costly colposcopy and biopsy
procedures. A colposcopy involves the physician using a device to visually
examine the surface of the cervix, and if necessary, performing a biopsy.
Treatment of early-stage non-invasive cervical cancer may be accomplished by
procedures to remove the abnormal cells. Once the cancer reaches the invasive
stage, the patient's chances for recovery are diminished and more radical
treatment is typically required, such as a hysterectomy and chemotherapy or
radiation therapy. These procedures may expose the patient to risk and cost
and result in significant physical and psychological stress.
PROBLEMS WITH THE CONVENTIONAL PAP SMEAR
In spite of the success of the Pap smear in reducing deaths due to cervical
cancer, the test has significant limitations, including inadequacies in sample
collection and slide preparation, slide interpretation errors and the
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inability to use the specimen for additional diagnostic tests. These
limitations result in a substantial number of inaccurate test results,
including false negative diagnoses.
False Negative Diagnoses
The limitations of the conventional Pap smear method in sample collection,
slide preparation and interpretation result in a substantial number of
inaccurate test results in the form of false negative diagnoses. A false
negative diagnosis may allow the disease to progress to a later-stage of
development before being detected, thereby requiring a more expensive and
invasive course of treatment and diminishing the likelihood of successful
treatment. Reports of the false negative rate of the Pap test vary widely,
between 5% and 55%. Studies suggest that approximately 50% of false negative
diagnoses are attributable to inadequacies in sample collection and slide
preparation and approximately 50% are attributable to slide interpretation
errors.
Inadequacies in Sample Collection and Slide Preparation
There are a variety of difficulties with current methods of cell collection,
cell transfer and slide preparation. These difficulties include cell loss,
improper fixation of the cells (typically, from air drying), thick and uneven
smearing of cells on the slide, and excess blood, mucus and other obscuring
debris on the slide. A study published in the American Journal of Clinical
Pathology in February 1994 reported that as much as 80% of the sample taken
from a patient using the conventional Pap smear method is not transferred to
the microscope slide and remains on the discarded collection device. This
discarded portion of the sample may contain the abnormal cells necessary for
an accurate diagnosis. In addition to the problem of cell transfer, the
conventional Pap smear method produces inconsistent and non-uniform slides
with extreme variability in quality, making examination difficult. The Company
believes that these limitations are responsible for a large percentage of
slides being classified as SBLB. These slides are more difficult to interpret
and increase the uncertainty of an accurate diagnosis. Consequently, patients
are often subjected to the inconvenience and expense of return office visits
for repeat testing and to the anxiety resulting from the inconclusive nature
of the initial test. The Company believes that these repeat visits and
examinations also result in significant costs to the health care system.
Slide Interpretation Errors
The process of screening and interpreting a manually prepared Pap smear is
complex and tedious. This process requires constant vigilance, as
approximately 90% to 95% of all Pap smear diagnoses in the United States are
negative. In addition, the process is prone to error as a result of the
complexity of properly evaluating and categorizing subtle and minute changes
in cellular or nuclear detail. The screening process requires intense visual
review through a microscope of a large volume of slides, each of which
typically contains 50,000 to 300,000 cervical cells. The small percentage of
Pap smears that contain any abnormality may, in turn, contain only a small
number of abnormal cells among the vast number of normal cells.
Cytotechnologists generally review each slide for approximately five to 10
minutes and may review up to 100 slides per day. All of these factors
contribute to the incidence of false negative diagnoses.
Lack of Additional Testing Capability
The conventional Pap smear method does not permit additional or adjunct
testing from the original patient sample. The ability to produce multiple
slides from a single sample could be used by clinical laboratories for follow-
up testing, quality control or proficiency testing. Further, the conventional
Pap smear method requires the patient to be called back to the physician's
office to provide a second sample if additional testing, such as HPV testing,
is desired.
THE THINPREP SYSTEM
The Company believes that the ThinPrep System offers a number of benefits
which address limitations of the conventional Pap smear method, including
improved accuracy in the detection of cervical cancer and precancerous
lesions, standardization and simplification of the sample preparation process,
the ability to permit
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multiple tests to be conducted from a single sample and improved productivity
in screening by reducing cytotechnologist fatigue and the time required to
examine each slide.
The ThinPrep System, which was cleared for marketing as a replacement for
the conventional Pap smear method for cervical cancer screening by the FDA on
May 20, 1996, consists of the ThinPrep 2000 Processor and related disposable
reagents, filters and other supplies. The ThinPrep System is designed to
reduce the incidence of false negative diagnoses, improve slide quality,
reduce inconclusive SBLBs and enable a single sample to be used for additional
diagnostic testing. 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 LGSIL and more severe lesions
than the conventional Pap smear method in a variety of patient populations.
This expanded labeling also indicates that the specimen quality using the
ThinPrep System is significantly improved over that of the conventional Pap
smear method.
The ThinPrep process begins with the patient's cervical sample being taken
by the physician using a cervical sampling device which, rather than being
smeared on a microscope slide, is rinsed in a vial filled with the Company's
proprietary PreservCyt Solution. This enables virtually all of the patient's
cell sample to be preserved before the cells can be damaged by air drying. The
ThinPrep specimen vial is then labeled and sent to a laboratory equipped with
a ThinPrep 2000 Processor for slide preparation and screening.
At the laboratory, the ThinPrep specimen vial is inserted into a ThinPrep
2000 Processor, a proprietary sample preparation device which automates the
process of preparing cervical specimens. Once the vial is inserted into the
ThinPrep 2000 Processor, a gentle dispersion step breaks up blood, mucus, non-
diagnostic debris and large sheets of cells and homogenizes the cell
population. The cells are then automatically collected on the Company's
proprietary TransCyt Filter, which incorporates an eight micron membrane
specifically designed to collect abnormal and cancerous cells. The ThinPrep
2000 Processor constantly monitors the rate of flow through the TransCyt
Filter during the collection process in order to prevent the cellular
presentation from being too scant or too dense. A thin layer of cells is then
transferred to a glass slide in a 20 mm-diameter circle and the slide is
automatically deposited into a preservative solution. The ThinPrep 2000
Processor allows for the processing of approximately 20 to 25 patient samples
per hour.
The Company's proprietary reagents and supplies include PreservCyt Solution
to collect and transport cervical samples to the laboratory for optimal cell
preservation and TransCyt Filters to collect cells and remove non-diagnostic
debris and mucus. The Company also sells ThinPrep Microscope Slides, high-
quality microscope slides manufactured to the Company's specifications, which
improve cell adhesion to the slide.
CLINICAL TRIAL RESULTS
In October 1995, the Company completed the clinical trial used to support
its PMA application, which was a blinded study performed at six clinical sites
in the United States, including three screening centers and three hospital
sites. The study was designed to rigorously compare the effectiveness of the
ThinPrep System to the conventional Pap smear method for the detection of
precancerous lesions of the cervix. Specimen adequacy was also compared.
Combining the results of all six sites and 6,747 patients, the ThinPrep
System demonstrated a statistically significant 18% improvement in the
detection of disease (LGSIL or higher classification) as compared to the
conventional Pap smear. The results from the three screening centers indicated
a 65% improvement in the detection of disease, while in the three hospital
sites in which patients had historically exhibited high prevalence rates of
cervical abnormalities, the ThinPrep method demonstrated a 6% improvement.
Based on the clinical trial results, the FDA cleared expanded product labeling
for the ThinPrep System to include that the ThinPrep System is significantly
more effective in detecting LGSIL and more severe lesions than the
conventional Pap smear method in a variety of patient populations.
Slides from each patient were also evaluated for specimen adequacy.
Combining the results of all six sites, the ThinPrep System reduced the SBLB
classification rate of specimen adequacy by 29%, a statistically
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significant reduction. The Company believes, based on data submitted with its
PMA application, that the ThinPrep System may reduce SBLB classifications by
as much as 50% if the immersion of the sampling device in the PreservCyt
Solution occurs directly after the sample is taken rather than after the
preparation of a conventional Pap smear slide. The direct immersion procedure
reflects the intended use of the ThinPrep System in clinical practice. Based
on the clinical trial results, the FDA cleared expanded product labeling for
the ThinPrep System to include that the specimen quality using the ThinPrep
System is significantly improved over that of the conventional Pap smear
method.
NON-GYNECOLOGICAL CYTOLOGY
In May 1991, the Company began commercial shipments of the ThinPrep
Processor to cytology laboratories in the United States for use in non-
gynecological testing applications. Non-gynecological specimens include
sputum; voided and catheterized urine; body fluids such as peritoneal fluid,
ascites fluid, or cerebrospinal fluid; brushing of respiratory or
gastrointestinal tracts; and fine needle aspiration specimens obtained from a
variety of sources such as the breast, thyroid, lung or liver. These samples
are evaluated in patients in whom malignancy is strongly suspected or as
follow-up information in patients previously diagnosed and treated for cancer.
BUSINESS STRATEGY
Cytyc's objective is to establish the ThinPrep System as the standard of
care for the collection, preservation and slide preparation of cervical cell
specimens. The key elements of the Company's strategy are:
Market to Health Care Providers, Third-Party Payors and Clinical
Laboratories. The Company's strategy is to achieve market acceptance of the
ThinPrep System for cervical cancer screening through the use of a direct
marketing and sales organization to promote the clinical and patient care
benefits of the ThinPrep System. This organization will focus on health care
providers, third-party payors and clinical laboratories to stimulate demand
for the ThinPrep Pap Test, to facilitate reimbursement and to demonstrate the
economic and clinical benefits of the ThinPrep System.
Establish Reimbursement by Third-Party Payors. The Company plans to assist
clinical laboratories in obtaining reimbursement for the ThinPrep System for
cervical cancer screening from a broad range of third-party payors, including
managed care organizations, private insurers, and Medicare and Medicaid.
Expand and Leverage Installed Customer Base. The Company will seek to expand
and leverage its installed customer base of ThinPrep 2000 Processors and
predecessor instruments so that existing customers will have the capability to
perform cervical cancer screening. Broadening its installed base of systems
will also expand the Company's opportunity to market and sell its related
disposable reagents, filters and other supplies.
Expand Applications of ThinPrep Technology. The Company believes that the
collection and preservation methods used in the ThinPrep System may be suited
for other types of diagnostic testing, including testing for HPV, chlamydia
and other sexually transmitted diseases. The Company intends to pursue
licensing and collaboration arrangements with other companies to perform
diagnostic tests developed by these companies using the original patient
sample obtained by the ThinPrep System's cell collection and transfer process.
MARKETING AND SALES
The Company's marketing and sales strategy is to achieve broad market
acceptance of the ThinPrep System for cervical cancer screening. A critical
element of this strategy is to utilize the results of the Company's 1995
clinical trial and expanded FDA labeling to demonstrate the safety and
efficacy of the ThinPrep System to health care providers, third-party payors
and clinical laboratories. The Company believes that coordination of the
activity of these three market segments is necessary to achieve the desired
level of market penetration of the ThinPrep System. To accomplish this, the
Company is expanding its direct sales organization in the United States
supported by customer and technical service representatives.
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Health Care Providers. The Company is expanding its direct marketing and
sales organization to promote the benefits of the ThinPrep System to health
care providers, primarily obstetricians and gynecologists, who perform a high
volume of Pap smear tests in targeted markets in the United States. This
direct sales activity will be supported by focused medical education events,
medical advertising and other promotional activities.
Third-Party Payors. The Company hired a direct marketing and sales
organization to promote the clinical and economic benefits of the ThinPrep
System to medical and financial decision makers at national managed care
organizations, major private insurers and regional and local third-party
payors. The Company's marketing efforts will also include advertising and
promotional programs that specifically focus on the clinical and economic
benefits of the ThinPrep System.
Clinical Laboratories. The Company will continue to market directly to
clinical laboratories through its direct sales organization, as well as to
conduct promotional activities and provide customer support and service
programs. The Company also employs cytotechnologists who will conduct all
initial customer training and applications support. The Company's direct
marketing and sales organization will focus on the economic benefits of the
ThinPrep System for clinical laboratories. Due in part to a recent trend
toward consolidation of clinical laboratories, the Company expects that the
number of potential domestic customers for its products will decrease. Due to
the relative size of the largest United States laboratories, it is likely that
a significant portion of ThinPrep sales will be concentrated among a
relatively small number of clinical laboratories.
The Company is also evaluating the use of other marketing and sales
channels, both domestic and international, including contract sales
organizations, distributors and marketing partners. Due to limited market
awareness of the ThinPrep System, the Company believes that the sales effort
will involve a lengthy process, requiring the Company to educate health care
providers and third-party payors regarding the clinical benefits and cost-
effectiveness of the ThinPrep System. The Company's success and growth will
depend on market acceptance of the ThinPrep System among health care
providers, third-party payors and clinical laboratories. The Company will
continue to sell the ThinPrep 2000 Processor to customers and charge
separately for related disposable reagents, filters and supplies. 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.
In order to effectively market the ThinPrep System for cervical cancer
screening, the Company will need to substantially increase its marketing and
sales capabilities. No assurance can be given 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. While the Company is
currently evaluating marketing and sales channels abroad, including contract
sales organizations, distributors and marketing partners, the Company has
established very limited foreign sales channels. There can be no assurance
that the Company will be able to recruit and retain skilled marketing, sales,
service or support personnel or foreign distributors, or that the Company's
marketing and sales efforts will be successful. Failure to successfully expand
its marketing and sales capabilities in the United States or establish its
international marketing and sales organization internationally would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's marketing success in the United States
and abroad will depend on whether it can obtain required regulatory approvals,
successfully demonstrate the cost-effectiveness of the ThinPrep System,
further develop its direct sales capability and establish arrangements with
contract sales organizations, distributors and marketing partners. Failure by
the Company to successfully market its products would have a material adverse
effect on the Company's business, financial condition and results of
operations.
RESEARCH AND DEVELOPMENT
The Company's research and development strategy is to continue to develop
innovative medical diagnostic applications of the ThinPrep technology and to
continue to enhance the ThinPrep System. The Company has established a program
to further enhance and automate the ThinPrep Processor. The Company's next
generation
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model, the ThinPrep 3000 Processor, is being designed to provide batch
processing and walk-away capability by increasing capacity to 80 sample vials
and more fully-automating the slide preparation process. There can be no
assurance that the ThinPrep 3000 will be successfully developed, receive
necessary regulatory approvals, or be successfully commercialized.
The Company is also evaluating additional diagnostic applications of its
ThinPrep technology in testing for the presence of other types of cancers and
sexually transmitted diseases. The Company has not yet determined which of
these applications, if any, it will seek to develop and commercialize. There
can be no assurance that the Company will be successful in developing or
marketing additional applications. Furthermore, any additional applications
will require submission of a PMA application or PMA supplement prior to the
marketing of such applications. There can be no assurance that the FDA would
approve such submissions on a timely basis, if at all.
In addition, the Company is evaluating the use of certain automated
rescreening methods in conjunction with the ThinPrep System. Such systems use
imaging technology to identify slides as more likely to contain cellular
abnormalities. On November 8, 1996, the Company and Neopath, Inc. ("Neopath")
announced the completion of a joint study of the feasibility of screening
cervical specimens using the ThinPrep System in conjunction with Neopath's
AutoPap QC. Additional development work would be required prior to application
to the FDA for the use of such systems in combination. There can be no
assurance that either company will conduct further development work with
respect to this study or that the Company will be able to integrate
successfully the ThinPrep technology with any automated rescreening
technology.
The Company's expenditures for research and development (which includes
clinical trials, regulatory affairs and engineering) were approximately $2.2
million, $3.9 million and $4.7 million, for the years ended December 31, 1994,
1995 and 1996, respectively.
THIRD-PARTY REIMBURSEMENT
The Company intends to focus on obtaining coverage and reimbursement from
major national and regional managed care organizations and insurance carriers
throughout the United States. Most of the third-party payor organizations
independently evaluate new diagnostic procedures by reviewing the published
literature and the Medicare coverage and reimbursement policy on the specific
diagnostic procedure. To assist the third-party payors in their respective
evaluations of the ThinPrep System, the Company provides scientific and
clinical data to support its claims of the safety and efficacy of the ThinPrep
System. The Company believes that the ThinPrep System will allow for earlier
detection of LGSIL and more severe lesions and result in less aggressive and
costly treatment procedures. In addition, the Company expects that the
ThinPrep System will significantly improve specimen adequacy, thereby reducing
repeat office visits and test procedures and thus overall management costs.
The Company will focus on earlier disease detection and cost savings benefits
in establishing reimbursement for the ThinPrep method for cervical cancer
screening.
In the United States, the current rate of reimbursement to laboratories from
managed care organizations and other third-party payors to screen conventional
Pap smears ranges from $6.00 to $36.00 per test, with $17.00 as the most
common rate of reimbursement. The Company believes that the cost per ThinPrep
Pap Test, plus a laboratory mark-up, will be billed to third-party payors and
result in a higher cost than the current charge for conventional Pap tests.
Successful sales of the ThinPrep System for cervical cancer screening in the
United States and other countries will depend on the availability of
reimbursement from third-party payors such as private insurance plans, managed
care organizations, and Medicare and Medicaid. There is significant
uncertainty concerning third-party reimbursement for the use of any medical
device incorporating new technology. There can be no assurance that third-
party payors will provide such coverage, that reimbursement levels will be
adequate or that health care providers or clinical laboratories will use the
ThinPrep System for cervical cancer screening in lieu of the conventional Pap
smear method. There is significant uncertainty concerning third-party
reimbursement for the use of any medical device incorporating new technology.
Reimbursement by a third-party payor depends on a
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number of factors, including the level of demand by health care providers and
the payor's determination that the use of the ThinPrep System represents a
clinical advance compared to current technology and is safe and effective,
medically necessary, appropriate for specific patient populations and cost-
effective. Since reimbursement approval is required from each payor
individually, seeking such approvals is a time-consuming and costly process
which requires the Company to provide scientific and clinical data to support
the use of the ThinPrep System to each payor separately. There can be no
assurance that third-party reimbursement will be available for the ThinPrep
System or any other products that may be developed by the Company, or that
such third-party reimbursement, if obtained, will be adequate.
A key component in the reimbursement decision by most private insurers and
the United States Health Care Financing Administration, which administers
Medicare, is the assignment of a CPT code which is used in the submission of
claims to insurers for reimbursement for medical services. CPT codes are
assigned, maintained and revised by the CPT Editorial Board administered by
the American Medical Association. Although the Company has commenced sales of
the ThinPrep Pap Test, to date reimbursement has only been obtained through
the use of a non-specific CPT code. The Company has petitioned the CPT
Editorial Board to modify an existing CPT code or to establish a separate CPT
code for the ThinPrep System for cervical cancer screening. The Company
believes that the CPT Editorial Board will render a decision on the Company's
petition at its regularly scheduled meeting to address such matters in the
second quarter of 1997, and which if approved, such code will not be available
for use prior to 1998. Failure to secure a modification to an existing code or
to establish a separate code from the CPT Editorial Board could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company has very limited experience in obtaining reimbursement for its
products in the United States or other countries. In addition, third-party
payors are routinely limiting reimbursement and coverage for medical devices
and in many instances are exerting significant pressure on medical suppliers
to lower their prices. Lack of or inadequate reimbursement by government and
other third-party payors for the Company's products would have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, outside of the United States health care reimbursement
systems vary from country to country, and there can be no assurance that
third-party reimbursement will be made available at an adequate level, if at
all, for the ThinPrep System under any other reimbursement system.
MANUFACTURING
The Company manufactures its ThinPrep 2000 Processors and filters and
purchases related disposable reagents and supplies from third parties. In June
1996, the Company moved from a 17,500 square foot facility to a 51,000 square
foot facility. The Company believes that its existing manufacturing equipment
is inadequate to meet the full-scale production demands for the ThinPrep
System for cervical cancer screening. The Company has installed and is
currently validating new custom-built automated equipment for the high-volume
manufacture of disposable filters for use in connection with the ThinPrep
System, which the Company expects will be fully operational in the first half
of 1997.
The Company has limited manufacturing experience, and there can be no
assurance that the Company will be able to recruit and retain a sufficient
number of skilled manufacturing personnel or manufacture and supply the
ThinPrep System including the related disposable reagents, filters and other
supplies in a timely manner, or at a cost or in quantities necessary to make
them commercially viable. The Company's manufacturing process is subject to
pervasive and continuing regulation by the FDA, including the FDA's Good
Manufacturing Practices ("GMP") requirements. Failure to comply with such
regulations would materially impair the Company's ability to achieve or
maintain commercial-scale production. Further, any failure of the custom-built
equipment to perform to the Company's specifications or expectations, or any
other delay in the full implementation of such equipment due to necessary
training of the Company's personnel or otherwise, could further impair the
Company's ability to establish full-scale production capability in a timely
manner, or at all. If the Company is unable to achieve full-scale production
capability on a timely basis, or to sustain such capability, the acceptance by
the market of the Company's ThinPrep System could be impaired and such
inability would have a material
9
<PAGE>
adverse effect on the Company's business, financial condition and results of
operations. Further, the Company has limited manufacturing experience with the
ThinPrep System and, accordingly, there can be no assurance that the Company's
ThinPrep System for cervical cancer screening will perform adequately in the
field when subjected to use under a variety of conditions. As a result, the
Company may be subject to total or partial suspension of production,
withdrawal of approval, and recall or seizure or products in the event of
product malfunction or failure.
The Company is seeking ISO 9001 registration, an international quality
standard, and is seeking the "CE" mark for its ThinPrep System. The CE mark is
recognized by countries that are members of the European Union and the
European Free Trade Association and, effective in 1998, will be required to be
affixed to all medical devices sold in the European Union. There can be no
assurance that the Company will be able to attain or maintain compliance with
GMP requirements, obtain the CE mark for the ThinPrep System, or satisfy ISO
9001 standards. Failure to either attain or maintain compliance with the
applicable manufacturing requirements of various regulatory agencies would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Certain key components of the Company's ThinPrep System are currently
provided to the Company by single sources. In the event that the Company is
unable to obtain sufficient quantities of such components on commercially
reasonable terms, or in a timely manner, the Company would not be able to
manufacture its products on a timely and cost-competitive basis, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.
GOVERNMENT REGULATION
The manufacture and sale of medical diagnostic devices intended for
commercial use are subject to extensive governmental regulation in the United
States and in other countries. The Company's existing products, including the
ThinPrep System, are regulated in the United States as medical devices by the
FDA under the Federal Food, Drug, and Cosmetic Act ("FDC Act") and generally
require premarket clearance or PMA approval prior to commercial distribution.
In addition, certain material changes or modifications to medical devices also
are subject to the FDA review and clearance or approval. Pursuant to the FDC
Act, the FDA regulates the research, testing, manufacture, safety, labeling,
storage, record keeping, advertising, distribution and production of medical
devices in the United States. Noncompliance with applicable requirements can
result in failure of the government to grant premarket approval for devices,
withdrawal of clearances or approvals, total or partial suspension of
production, fines, injunctions, civil penalties, recall or seizure of
products, and criminal prosecution.
The regulatory approval process can be expensive, lengthy and uncertain.
There can be no assurance that the Company will be able to obtain necessary
regulatory approvals for any proposed future products. The loss of previously
received approvals, or failure to comply with existing or future regulatory
requirements, would have a material adverse effect on the Company's business,
financial condition and results of operations.
The FDA's regulations require agency approval of a PMA supplement for
certain changes if they affect the safety and effectiveness of the device,
including, but not limited to, new indications for use; labeling changes; the
use of a different facility or establishment to manufacture, process, or
package the device; changes in manufacturing facilities, methods, or quality
control systems; and changes in performance or design specifications.
The ThinPrep System for cervical cancer screening received PMA approval in
May 1996. The Company anticipates that other applications for the ThinPrep
System will require FDA approval of a PMA supplement or a new PMA application.
There can be no assurance that such approvals will be obtained on a timely
basis, or at all.
The ThinPrep System is, and any other products manufactured or distributed
by the Company pursuant to an approved PMA application and supplements will
be, subject to pervasive and continuing regulation by the
10
<PAGE>
FDA, including record-keeping requirements, reporting of adverse experience
with the use of the device, postmarket surveillance, postmarket registry and
other actions as deemed necessary by the FDA. Product labeling and promotional
activities are also subject to scrutiny by the FDA and, in certain instances,
by the Federal Trade Commission. Products may only be promoted by the Company
and any of its distributors for their approved indications. No assurance can
be given that modifications to the labeling which may be required by the FDA
in the future will not adversely affect the Company's ability to market or
sell the ThinPrep Processor.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future, or that such laws or regulations will not have a
material adverse effect upon the Company's business, financial condition and
results of operations.
Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approval by a foreign country may be longer or shorter than
that required for FDA approval, and the requirements may differ. No assurance
can be given that such foreign regulatory approvals will be granted on a
timely basis, or at all. In addition, there can be no assurance that the
Company will meet the FDA's export requirements or receive FDA export approval
when such approval is necessary, or that countries to which the devices are to
be exported will approve the devices for import. Failure of the Company to
meet the FDA's export requirements or obtain FDA export approval when required
to do so, or to obtain approval for import, could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company is currently installing new custom-built automated manufacturing
equipment, which incorporates new materials handling procedures that are
intended to increase production capacity. Such equipment is expected to be
operational in the first half of 1997. The Company believes that use of this
equipment will not require a PMA supplement and, accordingly, intends to
report the change to the FDA in the Company's May 1997 PMA annual report,
which must report changes made without filing a PMA supplement. There can be
no assurance, however, that the FDA will agree that the change does not
require approval of a new PMA supplement. If the FDA were to require the
Company to submit a PMA supplement, the Company could also be prohibited from
distributing product manufactured with the new equipment until after approval
was obtained. In the interim, the Company would be restricted to using its
current equipment, which has more limited production capacity. Such reduction
in capacity and limitations on the sale of product could have a material
adverse effect on the Company's business, financial condition and results of
operation.
In September 1996, the Company submitted a PMA supplement requesting the
FDA's approval of certain manufacturing process and material changes (and
other related changes to the device, including a software modification). There
can be no assurance that the FDA will approve the PMA supplement on a timely
basis, if at all.
In October 1996, the Company filed a PMA supplement requesting approval of
the use of PreservCyt Solution as an alternative transport medium for
gynecologic specimens tested with the Digene's Hybrid Capture HPV DNA test.
The approval of the PMA supplement is necessary in order for the Company to
promote the ThinPrep System as capable of conducting both Digene's assay and
cervical cancer screening from a single specimen. There can be no assurance
that the FDA approve the PMA supplement in a timely fashion, if at all. A
delay in obtaining, or failure to obtain, such approval could have a material
adverse effect on the Company's ability to gain market acceptance based on the
ThinPrep System's capability of conducting multiple tests from a single
specimen.
In February 1997, the Company received FDA approval of the Company's PMA
supplement for the ThinPrep System using a combination of an endocervical
brush and spatula sampling devices, which is a commonly used method of
collecting samples for conventional Pap smears.
The laboratories that would purchase the ThinPrep System are subject to
extensive regulation under the Clinical Laboratory Improvement Amendments of
1988 (CLIA), which requires laboratories to meet specified
11
<PAGE>
standards in the areas of personnel qualifications, administration,
participation in proficiency testing, patient test management, quality
control, quality assurance and inspections. The Company believes that the
device operates in a manner that will allow laboratories purchasing the device
to comply with CLIA requirements. However, there can be no assurance that
interpretations of current CLIA regulations or future changes in CLIA
regulations would not make compliance by the laboratory difficult or
impossible and therefore have an adverse effect on sales of the ThinPrep
System.
PATENTS, COPYRIGHTS, LICENSES AND PROPRIETARY RIGHTS
The Company relies on a combination of patents, trade secrets, copyrights
and confidentiality agreements to protect its proprietary technology, rights
and know-how. The Company holds seven issued United States patents, and has
three United States patent applications pending, relating to various aspects
of its ThinPrep technology. There can be no assurance, however, that pending
patent applications will ultimately issue as patents or that the claims
allowed in any of the Company's existing or future patents will provide
competitive advantages for the Company's products or will not be successfully
challenged or circumvented by competitors. Under current law, patent
applications in the United States are maintained in secrecy until patents are
issued and patent applications in foreign countries are maintained in secrecy
for a period after filing. The right to a patent in the United States is
attributable to the first to invent, not the first to file a patent
application. The Company cannot be sure that its products or technologies do
not infringe patents that may be granted in the future pursuant to pending
patent applications or that its products do not infringe any patents or
proprietary rights of third parties. In the event that any relevant claims of
third-party patents are upheld as valid and enforceable, the Company could be
prevented from selling its products or could be required to obtain licenses
from the owners of such patents or be required to redesign its products to
avoid infringement. There can be no assurance that such licenses would be
available or, if available, would be on terms acceptable to the Company or
that the Company would be successful in any attempt to redesign its products
or processes to avoid infringement. The Company's failure to obtain these
licenses or to redesign its products would have a material adverse effect on
the Company's business, financial condition and results of operations. There
can be no assurance that the obligations of employees of the Company and third
parties with whom the Company has entered into confidentiality agreements to
maintain the confidentiality of such trade secrets and proprietary information
will effectively prevent disclosure of the Company's confidential information
or provide meaningful protection for the Company's confidential information if
there is unauthorized use or disclosure, or that the Company's trade secrets
or proprietary information will not be independently developed by the
Company's competitors. In addition, the Company is the exclusive licensee of
certain patented technology from DEKA for use in the field of cytology related
to the fluid pumping system used in the ThinPrep System. The Company is
obligated to pay royalties equal to 1% of net sales of the ThinPrep Processor,
filter cylinder disposable products which are used in the ThinPrep System, and
improvements made by the Company relating to such items. The license provides
that it may be terminated (i) by mutual written consent of both parties or
(ii) by DEKA on written notice to the Company in the event that the license is
assigned without the consent of DEKA. Failure by the Company to maintain
rights to such technology could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
also holds unregistered rights to copyrights on documentation and operating
software developed by it for the ThinPrep System. There can be no assurance
that any copyrights owned by the Company will provide competitive advantages
for the Company's products or will not be challenged or circumvented by its
competitors. Litigation may be necessary to defend against claims of
infringement, to enforce patents and copyrights of the Company, or to protect
trade secrets and could result in substantial cost to, and diversion of effort
by, the Company. There can be no assurance that the Company would prevail in
any such litigation. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States.
COMPETITION
The Company faces direct competition from a number of publicly-traded and
privately-held companies, including other manufacturers of thin layer slide
preparation systems. Many of the Company's existing and potential competitors
have substantially greater financial, marketing, sales, distribution and
technical resources
12
<PAGE>
than the Company, and more experience in research and development, clinical
trials, regulatory matters, manufacturing and marketing. In addition, many of
these companies may have established third-party reimbursement for their
products. Several established medical device manufacturers produce thin layer
slide preparation systems for use in non-gynecological testing applications,
at least one of which has achieved brand-name recognition and significant
penetration in the non-gynecological cytology market. The Company believes
that another competitor, AutoCyte, Inc., is conducting clinical trials of a
system for the production and automated analysis of thin-layer slides, a
potential alternative to the conventional Pap smear and the ThinPrep Pap Test.
The development, FDA approval and commercial marketing of such systems for
cervical cancer screening could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition
to direct competition, the Company faces indirect competition from companies
which currently market imaging systems to reexamine or rescreen conventional
Pap smears previously diagnosed as negative. The Company believes that these
rescreening systems, as currently sold, could not be used with the ThinPrep
System, and, therefore, if either of such systems is installed at or used by
hospitals and reference laboratories, the Company's ability to market its
products to such hospitals and laboratories could be materially adversely
affected. In addition, if any company receives FDA approval of an imaging
system as a primary screening system to replace some or all of the manual
screening of conventional Pap smears, marketing of these systems for such
purpose could have a material adverse effect on the Company's business,
financial condition and results of operations. The medical device industry is
characterized by rapid product development and technological advances. The
Company's products could be rendered obsolete or uneconomical by the
introduction and market acceptance of competing products, by technological
advances of the Company's current or potential competitors or by other
approaches. The Company competes on the basis of a number of factors,
including manufacturing efficiency, marketing and sales capabilities and
customer service and support, areas in which the Company currently has limited
experience. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competition,
including the development and commercialization of new products and
technology, will not have a material adverse effect on the Company's business,
financial condition or results of operations.
EMPLOYEES
As of December 31, 1996, the Company employed 124 persons. The Company is
not subject to any collective bargaining agreements, has never experienced a
work stoppage and considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's executive offices and manufacturing operations are located in
Boxborough, Massachusetts in a leased facility consisting of approximately
51,000 square feet. The lease of this facility has a term of seven years, with
an option to extend the term for an additional five years. The Company
believes this facility will satisfy its principal facilities requirements for
the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings and is not
aware of any threatened litigation that could have a material adverse effect
upon the Company's business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 1996.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "CYTC." The following table sets forth, for the calendar periods
indicated since the Company's initial public offering in March 1996, the range
of high and low sales prices for the Common Stock of the Company on the Nasdaq
National Market. These prices do not include retail mark-up, mark-down or
commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ -------
<S> <C> <C>
FISCAL YEAR 1996:
First Quarter (from March 8, 1996)......................... $18 $15 7/8
Second Quarter............................................. 34 1/2 16
Third Quarter.............................................. 26 1/8 12
Fourth Quarter............................................. 29 3/4 11 3/4
FISCAL YEAR 1997:
First Quarter (through March 20, 1997)..................... 31 1/2 22
</TABLE>
On March 20, 1997, the last reported sales price of the Common Stock on the
Nasdaq National Market was $25.25 per share. As of March 20, 1997, there were
approximately 253 holders of record of the Common Stock.
For the year ended December 31, 1996, no shares of Common Stock have been
sold which were not registered under the Securities Act.
The Company has never declared or paid cash dividends. The Company currently
intends to retain any earnings for use in its business and does not anticipate
paying any cash dividends on its capital stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below for each of the
years ended December 31, 1994, 1995 and 1996 and at December 31, 1995 and 1996
are derived from consolidated financial statements of the Company audited by
Arthur Andersen LLP, independent public accountants, which are included
elsewhere herein. The consolidated selected financial data for the years ended
December 31, 1992 and at December 31, 1992 and 1993 are derived from
consolidated financial statements of the Company audited by
Arthur Andersen LLP which are not included herein. The selected consolidated
financial data set forth below should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included as Items 7 and 8 in this Form 10-K.
14
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DA-
TA:
Net sales................... $ 2,589 $ 3,441 $ 2,920 $ 4,273 $ 8,198
Cost of sales............... 2,080 5,088 2,225 2,413 4,354
-------- -------- -------- -------- --------
Gross profit................ 509 (1,647) 695 1,860 3,844
-------- -------- -------- -------- --------
Operating expenses:
Research and development.. 2,914 3,058 2,175 3,908 4,689
Marketing, sales and cus-
tomer support............ 2,049 3,417 1,418 2,582 9,918
General and administra-
tive..................... 901 2,257 1,256 1,532 3,314
-------- -------- -------- -------- --------
Total operating ex-
penses................. 5,864 8,732 4,849 8,022 17,921
-------- -------- -------- -------- --------
Income (loss) from opera-
tions...................... (5,355) (10,379) (4,154) (6,162) (14,077)
Other income (expense),
net........................ 220 108 (112) 247 2,158
-------- -------- -------- -------- --------
Net income (loss)....... $ (5,135) $(10,271) $ (4,266) $ (5,915) $(11,919)
======== ======== ======== ======== ========
Pro forma (1):
Net income (loss) per
share.................... $ (0.65) $ (1.22) $ (0.48) $ (0.54) $ (0.92)
======== ======== ======== ======== ========
Weighted average shares
outstanding.............. 7,849 8,409 8,954 10,868 12,982
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments..... $ 7,558 $ 1,662 $ 2,777 $ 7,902 $ 39,057
Total assets................ 10,190 3,217 3,851 11,025 50,183
Accumulated deficit......... (14,736) (25,007) (29,273) (35,188) (47,107)
Total stockholders' equity
(deficit).................. 9,380 (883) (2,112) 8,078 46,681
</TABLE>
- --------
(1) See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the computation of per share data.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company designs, develops, manufactures and markets a sample preparation
system for medical diagnostic applications. The ThinPrep System consists of
the Thin Prep 2000 Processor, and related disposable reagents, filters and
other supplies. The Company has marketed the ThinPrep System for use in non-
gynecological testing applications since 1991. On May 20, 1996, the Company
received PMA approval from the 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 LGSIL and more severe lesions than the conventional Pap
smear method in a variety of patient populations. The expanded labeling also
indicates that the specimen quality using the ThinPrep System is significantly
improved over that of the conventional Pap smear method. To date,
substantially all of the Company's revenues have been derived from sales of
the ThinPrep System for use in non-gynecological testing applications.
Since inception, the Company has incurred substantial losses, principally
from expenses associated with obtaining FDA approval of the Company's ThinPrep
System for cervical cancer screening, engineering and development efforts
related to the ThinPrep System, expansion of the Company's manufacturing
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
15
<PAGE>
Company's products gain market acceptance, the rate and size of expenditures
incurred as the Company expands its domestic and establishes its international
sales and distribution networks, the timing of any approvals of the ThinPrep
System for reimbursement by third-party payors, and other factors, many of
which are outside the Company's control.
In June 1996, the Company moved from a 17,500 square foot facility to a
51,000 square foot facility. The Company believes that its existing
manufacturing equipment is inadequate to meet the full-scale production
demands for the ThinPrep System for cervical cancer screening. The Company has
installed and is currently validating new custom-built automated equipment for
the high-volume manufacture of disposable filters for use in connection with
the ThinPrep System. The Company expects that such new equipment will be fully
operational in the first half of 1997.
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 $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
Corporation and Blue Cross Blue Shield of Massachusetts have recently
announced that they will expand their health care coverage to include the
ThinPrep Pap Test, the applicable rate of reimbursement has yet to be
negotiated between United HealthCare Corporation or its various plans or Blue
Cross Blue Shield of Massachusetts, as the case may be, and the specific
clinical laboratories servicing such plans. There can be no assurance that
additional third-party payors will provide such coverage, that reimbursement
levels will be adequate, or that health care providers or clinical
laboratories will use the ThinPrep System for cervical cancer screening in
lieu of the conventional Pap smear method.
The Company will continue to increase the amount of expenditures for
marketing, sales and customer support activities, principally in support of
the full-scale commercial launch of the ThinPrep System for cervical cancer
screening, which commenced in early 1997. There can be no assurance, however,
that such investments will result in increased net sales or that the Company's
direct sales force will succeed in promoting the ThinPrep System to health
care providers, third-party payors or clinical laboratories, or that
additional marketing 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, increases in
professional fees and the incremental costs associated with being a public-
held company.
RESULTS OF OPERATIONS
Years Ended December 31, 1996 and December 31, 1995
Net sales increased to $8.2 million in 1996 from $4.3 million in 1995, an
increase of 91.9%. This increase in sales was primarily due to an increase in
the number of ThinPrep Processors sold, sales of the Company's new 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 $3.8 million in 1996 from $1.9 million in 1995, an
increase of 106.7%, and the gross margin increased to 46.9% in 1996 from 43.5%
in 1995. Management attributes the increase in gross margin in 1996 to the
introduction of the ThinPrep Pap Test during the later part of 1996 and
increased sale prices for non-gynecological tests and ThinPrep 2000
Processors, offset partially by the lower unit margin for unit sales to
existing customers upgrading to the ThinPrep 2000 Processor.
16
<PAGE>
Total operating expenses increased to $17.9 million in 1996 from $8.0
million in 1995, an increase of 123.4%. Research and development costs
increased to $4.7 million in 1996 from $3.9 million in 1995, an increase of
20.0%, as a result of employment of additional research and development
personnel and engineering consulting expenses. Sales, marketing and customer
support increased to $9.9 million in 1996 from $2.6 million in 1995, an
increase of 284.1%. The increase in sales, marketing and customer support
costs reflects the employment of additional sales and customer support
personnel, increased commission expenses, increased customer training costs
and additional marketing consulting costs related to the commercial launch of
the ThinPrep Pap Test. General and administrative costs increased to $3.3
million in 1996 from $1.5 million in 1995, an increase of 116.3%, due to the
employment of additional administrative personnel, increased business
insurance costs and expenses associated with being a publicly-held company.
Net interest income increased to $2.2 million in 1996 from $262,000 in 1995,
an increase of 729.8%, due to an increase in the average cash balance
available for investment.
Years Ended December 31, 1995 and December 31, 1994
Net sales increased to $4.3 million in 1995 from $2.9 million in 1994, an
increase of 46.3%. This increase in sales was primarily due to an increase in
the number of ThinPrep Processors sold for non-gynecological applications, the
introduction of the ThinPrep 2000 Processor, which is marketed at a higher
gross margin, and, to a lesser extent, additional sales of related disposable
reagents, filters and other supplies. Gross profit increased to $1.9 million
in 1995 from $695,000 in 1994, an increase of 167.6%, and gross margin
increased to 43.5% in 1995 from 23.8% in 1994. Management attributes the
improvement in gross margin in 1995 to the introduction of the ThinPrep 2000
Processor and to improvements in manufacturing efficiency based on increased
volume.
Total operating expenses increased to $8.0 million in 1995 from $4.8 million
in 1994, an increase of 65.4%. Research and development costs increased to
$3.9 million in 1995 from $2.2 million in 1994, an increase of 79.7%, as a
result of increased clinical trial expenses and the employment of additional
research and development personnel. Sales, marketing and customer support
costs increased to $2.6 million in 1995 from $1.4 million in 1994, an increase
of 82.1%, as a result of hiring additional sales personnel, increased
commissions and additional consulting costs. General and administrative costs
increased to $1.5 million in 1995 from $1.3 million in 1994, an increase of
22.0%, due to the hiring of a consultant and additional administrative
personnel.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have significantly exceeded its
revenue, resulting in an accumulated deficit of $47.1 million as of December
31, 1996. The Company has funded its operations primarily through the private
placement and public sale of equity securities aggregating $163.9 million, net
of offering expenses. At December 31, 1996, the Company had cash, cash
equivalents and short-term investments of $39.1 million. Cash, cash
equivalents and short-term investments increased during 1996 primarily due to
the issuance of 3,450,000 shares of Common Stock in connection with the
Company's initial public offering for aggregate net proceeds of approximately
$50.0 million. In February 1997, in connection with its follow-on public
offering, the Company issued an additional 3,197,500 shares of Common Stock
resulting in net proceeds of approximately $70.6 million. Cash used in the
Company's operations was $4.6 million, $7.0 million, and $13.6 million for
1994, 1995 and 1996, respectively. The increase in cash used in operations in
1996 was due to increased levels of operating activities, primarily for the
expansion of its marketing, sales and customer support organizations.
The Company's capital expenditures for the years ended 1994, 1995 and 1996
were $286,000, $663,000 and $4.8 million respectively. The increase in capital
expenditures in 1996 was due primarily to amounts paid for customized
manufacturing equipment and leasehold improvements for the Company's new
facility. Additionally, as of December 31, 1996, the Company had commitments
for customized manufacturing equipment of approximately $83,000.
The Company is the exclusive licensee of certain patented technology used in
the ThinPrep System. In consideration for this license, the Company has agreed
to pay a royalty equal to 1% of net sales of the ThinPrep Processor, filter
cylinder disposable products which are used with the ThinPrep System, and
improvements made by the Company relating to such items. There are no minimum
royalty payments in connection with this license.
17
<PAGE>
Accounts receivable increased $1.4 million to approximately $2.7 million
during 1996 due to increased sales volume. Inventories increased approximately
$710,000 to $1.5 million from December 31, 1995 to December 31, 1996 due
primarily to the Company's planned sales increase in ThinPrep 2000 Processors
and related reagents, filters and other supplies for non-gynecological
testing. Stockholders' equity increased approximately $38.6 million from
December 31, 1995 to December 31, 1996 primarily due to the sale of 3,450,000
shares of Common Stock in connection with the Company's initial public
offering in March 1996, which was offset by the net loss of $11.9 million.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the resources required to further develop its
marketing, and sales capabilities, both domestic and international, the
resources required to expand manufacturing capacity, and the extent to which
the ThinPrep System for cervical cancer screening generates market acceptance
and demand. The Company's capital requirements will also depend upon the
progress of the Company's research and development programs including clinical
trials, the receipt of and the time required to obtain regulatory clearances
and approvals, and the resources the Company devotes to developing,
manufacturing and marketing its products. There can be no assurance that the
Company will not require additional financing or will not in the future seek
to raise additional funds through bank facilities, debt or equity offerings or
other sources of capital. Additional funding may not be available when needed
or on terms acceptable to the Company, which would have a material adverse
effect on the Company's business, financial condition and results of
operations.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company does not provide financial performance forecasts. The forward
looking statements in this Form 10-K are made under the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The Company's
operating results and financial condition have varied and may in the future
vary significantly depending on a number of factors. Statements in this Form
10-K which are not strictly historical statements, including, without
limitation, statements regarding management's plans and objectives for future
operations, product plans and performance, potential savings to the healthcare
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. Such factors, among other, may have a material
adverse effect upon the Company's business, results of operations and
financial conditions.
The following discussion of the Company's risk factors should be read in
conjunction with the consolidated financial statements and related notes
included herein. Because of these and other factors, past financial
performance should not be considered an indication of future performance.
Dependence on Single Product. Substantially all of the Company's revenues to
date have been derived from sales of its ThinPrep 2000 Processor and
predecessor instruments, and related reagents, filters and other supplies, for
use in non-gynecological testing applications. The Company expects in the
future to derive substantially all of its revenue from sales of its ThinPrep
System for cervical cancer screening. The Company's inability to successfully
commercialize the ThinPrep System for cervical cancer screening or to obtain
adequate third-party reimbursement coverage, among other factors, would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Uncertainty of Market Acceptance and Additional Cost. The Company's success
and growth will depend on market acceptance of the ThinPrep System for
cervical cancer screening by health care providers, third-party payors and
clinical laboratories. The laboratory cost of using the ThinPrep System for
cervical cancer screening is higher than that of a conventional Pap smear. Due
in part to increased competitive pressures in the health care industry to
reduce costs, the Company's ability to gain market acceptance of the ThinPrep
System for cervical cancer screening will depend on the Company's ability to
demonstrate that the higher cost of using the ThinPrep System will be offset
by a reduction in costs often associated with conventional Pap smears,
including inaccurate diagnoses and the need for repeat Pap tests.
18
<PAGE>
Limited Marketing and Sales Experience. Although the Company received
clearance from the FDA to market its ThinPrep System for cervical cancer
screening on May 20, 1996, the Company has initiated full-scale marketing and
sales efforts for the ThinPrep System in United States beginning only in the
first quarter of 1997. The Company has limited experience in selling the
ThinPrep System for cervical cancer screening, and no assurance can be given
that its marketing and sales organization will succeed in promoting the
ThinPrep System in the United States or internationally.
Dependence on Third-Party Reimbursement. Successful sales of the ThinPrep
System for cervical cancer screening in the United States and other countries
will depend on the availability of adequate reimbursement from third-party
payors such as private insurance plans, managed care organizations, and
Medicare and Medicaid. There is significant uncertainty concerning third-party
reimbursement for the use of any medical device incorporating new technology.
Limited Number of Customers and Lengthy Sales Process. Due in part to a
recent trend toward consolidation of clinical laboratories, the Company
expects that the number of potential domestic customers for its products will
decrease. Due to the relative size of the largest United States laboratories,
it is likely that a significant portion of ThinPrep System sales will be
concentrated among a relatively small number of large clinical laboratories.
Further, in order to generate demand for the ThinPrep Pap Test among clinical
laboratories, the Company will be required to educate physicians and health
care providers regarding the clinical benefits and cost-effectiveness of the
ThinPrep System as well as to demonstrate to such parties that adequate levels
of reimbursement will be available for the ThinPrep Pap Test, a process which
the Company believes will require a lengthy sales effort.
Limited Operating History; Uncertainty of Profitability. The Company has a
limited operating history and, to date, has focused on product development,
clinical trials, obtaining regulatory approvals, the expansion of
manufacturing facilities and the establishment of marketing and sales
capabilities for its ThinPrep System for cervical cancer screening in the
United States. The Company has limited experience in marketing and selling the
ThinPrep System for cervical cancer screening. The Company's future revenues
and profitability are critically dependent on the Company's ability to
successfully market and sell the ThinPrep System for cervical cancer
screening.
Risks Associated with Commercialization. In connection with the full-scale
commercialization of the ThinPrep System for cervical cancer screening, the
Company has significantly expanded its facilities and intends to continue to
significantly increase the number of its marketing and sales, engineering, and
financial personnel, and enhance or replace its management information
systems. Such activities are likely to place significant strain on the
Company's management, operations and systems.
Intense Competition. The Company faces direct competition from a number of
publicly-traded and privately-held companies, including other manufacturers of
thin layer slide preparation systems. Many of the Company's existing and
potential competitors have substantially greater financial, marketing, sales,
distribution and technical resources than the Company, and more experience in
research and development, clinical trials, regulatory matters, manufacturing
and marketing.
Limited Manufacturing Experience and Capacity. The Company has limited
manufacturing experience, and there can be no assurance that the Company will
be able to recruit and retain a sufficient number of skilled manufacturing
personnel or manufacture and supply the ThinPrep System, including the related
disposable reagents, filters and other supplies in a timely manner, or at a
cost and in quantities necessary to make them commercially viable.
History of Losses. The Company has incurred substantial losses since
inception. The Company expects such losses to continue for the foreseeable
future due to expansion of its sales and marketing activities, both domestic
and international, its product development efforts, and commencement of full-
scale commercial manufacturing.
19
<PAGE>
Potential Fluctuations in Future Quarterly Results. 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, many of which are outside
the Company's control. These factors include: the extent to which the
Company's products gain market acceptance; the rate and size of expenditures
incurred as the Company expands its domestic and establishes its international
sales and distribution networks; the timing of any approvals of the ThinPrep
System for reimbursement by third-party payors; the timing and size of sales;
the likelihood and timing of FDA approval of PMA supplements related to the
ThinPrep System; the timing and size of expenditures incurred in the research
and development of new products; and the introduction and market acceptance of
competing products or technologies.
Extensive Government Regulation. The manufacture and sale of medical
diagnostic devices are subject to extensive government regulation in the
United States and in other countries. The process of obtaining FDA and other
required regulatory approvals can be time-consuming, expensive and uncertain,
frequently requiring several years from the commencement of clinical trials to
the receipt of regulatory approval.
International Sales and Operations Risks. The Company plans to sell its
ThinPrep System and any future products to customers both in the United States
and internationally. While the Company is evaluating marketing and sales
channels abroad, including contract sales organizations, distributors and
marketing partners, the Company currently has very limited foreign sales
channels in place at this time. There can be no assurance that the Company
will successfully develop international sales capabilities or that, if the
Company establishes such capabilities, the Company will be successful in
obtaining reimbursement or any regulatory approvals required in foreign
countries.
Uncertainty of Additional Applications. The Company intends to continue to
evaluate additional diagnostic applications of its ThinPrep technology in
testing for the presence of other types of cancers and sexually transmitted
diseases. The Company has not yet determined which of these applications, if
any, it will seek to develop and commercialize.
Dependence on Key Personnel. The Company is highly dependent on the
principal members of its management and scientific staff, the loss of whose
services might impede achievement of its research and development or strategic
objectives. The Company's success will depend on its ability to retain key
employees and to attract additional qualified employees.
Dependence on Patents, Copyrights, Licenses and Proprietary Rights; Risk of
Third-Party Claims of Infringement. The Company relies on a combination of
patents, trade secrets, copyrights and confidentiality agreements to protect
its proprietary technology, rights and know-how. In addition, the Company is
the exclusive licensee of certain patented technology for use in the field of
cytology related to the fluid pumping system used in the ThinPrep System.
Failure by the Company to protect, defend and maintain such intellectual
property rights could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Single Source Suppliers. Certain key components of the
ThinPrep System, including its proprietary filter, are currently provided to
the Company by single sources. In the event that the Company is unable to
obtain sufficient quantities of such components on commercially reasonable
terms, or in a timely manner, the Company would not be able to manufacture its
products on a timely and cost-competitive basis, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item may be found on pages F-1 through F-15
of this Form 10-K.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters in the last two fiscal years.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item may be found under the sections
captioned "Election of Directors," "Occupations of Directors and Executive
Officers" and "Section 16 Requirements" in the Company's Proxy Statement (the
"1997 Proxy Statement"), which will be filed with the Securities and Exchange
Commission not later than 120 days after the close of the Company's fiscal
year ended December 31, 1996, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item may be found under the section
captioned "Compensation and Other Information concerning Directors and
Officers" in the 1997 Proxy Statement, and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item may be found under the section
captioned "Securities Ownership of Certain Beneficial Owners and Management"
in the 1997 Proxy Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item may be found under the caption
"Certain Relationships and Related Transactions" in the 1997 Proxy Statement,
and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements.
For a list of the consolidated financial information included herein, see
Index on page F-1.
(a)(2) Financial Statement Schedules.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
accompanying Consolidated Financial Statements or notes thereto.
(a)(3) List of Exhibits.
The following exhibits are filed as part of and incorporated by reference
into, this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1(2) Third Amended and Restated Certificate of Incorporation of the
Company.
3.2(2) Amended and Restated By-Laws of the Company.
4.1(1) Specimen certificate representing the Common Stock.
10.1(1)* 1988 Stock Plan.
10.2(1)* 1989 Stock Plan.
10.3(1)* 1995 Stock Plan.
10.4(1)* 1995 Non-Employee Director Stock Option Plan.
10.5(1)* 1995 Employee Stock Purchase Plan, as amended.
10.6(1)# License Agreement between the Company and DEKA Products Limited
Partnership dated March 22, 1993.
10.7(1) Series C1 Senior Convertible Preferred Stock Purchase Agreement dated
as of June 13, 1995.
10.8(1) Form of Indemnification Agreement.
10.9(1) Lease Agreement between the Company and Cedar Hill Associates II of
December, 1990, as amended.
10.10(1) Lease Agreement between the Company and BFA Realty Partnership, L.P.
d/b/a BFA, Limited Partnership of February 1996.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
11.1** Statement re computation of per share earnings.
13.1*** The Company's 1996 Annual Report to Stockholders, certain portions of
which have been incorporated herein by reference.
21.1** List of Subsidiaries of the Company.
23.1** Consent of Arthur Andersen LLP.
24.1** Power of Attorney (see page 23).
27.1** Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 333-00300).
(2) Incorporated by reference to the exhibits to the Company Registration
Statement on Form S-1 (File No. 333-19367).
* Indicates a management contract or any compensatory plan, contract or
arrangement.
** Filed herewith.
*** Such report, except for those portions thereof which are expressly
incorporated by reference herein, is furnished for the information of the
Commission and is not to be deemed "filed" as part of this Annual Report
on Form 10-K.
# Confidential treatment granted as to certain portions.
(b) Reports On Form 8-K
There were no reports on Form 8-K filed by the Company for the quarter
ended December 31, 1996.
(c) Exhibits.
The Company hereby files as part of this Annual Report on Form 10-K the
exhibits listed in Item 14(a)(3) set forth above. Exhibits which are
incorporated herein by reference may be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, Washington, D.C.
20549, and at the SEC's regional offices located at Seven World Trade
Center, Suite 1300, New York, New York 10048, and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60611-2511. Copies of
such material may be obtained by mail from the Public Reference Section of
the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The SEC also maintains a Website that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC at the address
"http://www.sec.gov".
22
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Cytyc Corporation
Date: March 31, 1997
/s/ Patrick J. Sullivan
By: _________________________________
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Cytyc Corporation, hereby
severally constitute and appoint Patrick J. Sullivan and Joseph W. Kelly, and
each of them singly, our true and lawful attorneys, with full power to both of
them and each of them singly, to sign for us and in our names in the
capacities indicated below, any amendments to this Report on Form 10-K, and
generally to do all things in our names and on our behalf in such capacities
to enable Cytyc Corporation to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all the requirements of the Securities
and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant, in the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE
/s/ Patrick J. Sullivan President, Chief March 31, 1997
- ------------------------------------- Executive Officer
PATRICK J. SULLIVAN (Principal
Executive Officer)
and Director
/s/ Joseph W. Kelly Vice President, March 31, 1997
- ------------------------------------- Finance and
JOSEPH W. KELLY Administration and
Chief Financial
Officer (Principal
Financial Officer
and Principal
Accounting Officer)
/s/ Frederick R. Blume Director March 31, 1997
- -------------------------------------
FREDERICK R. BLUME
/s/ Guy de Chazal Director March 31, 1997
- -------------------------------------
GUY DE CHAZAL
/s/ Janet G. Effland Director March 31, 1997
- -------------------------------------
JANET G. EFFLAND
/s/ Franklin J. Iris Director March 31, 1997
- -------------------------------------
FRANKLIN J. IRIS
/s/ Edwin M. Kania, Jr. Director March 31, 1997
- -------------------------------------
EDWIN M. KANIA, JR.
/s/ C. William McDaniel Director March 31, 1997
- -------------------------------------
C. WILLIAM MCDANIEL
/s/ Monroe Trout, M.D. Director March 31, 1997
- -------------------------------------
MONROE TROUT, M.D.
23
<PAGE>
CYTYC CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1994, 1995 and 1996..................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1994, 1995 and 1996.................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Cytyc Corporation:
We have audited the accompanying consolidated balance sheets of Cytyc
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1996, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cytyc
Corporation and subsidiaries as of December 31, 1995 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 20, 1997,
(except for the matter
discussed in Note 13, as
to which the date is
March 3, 1997)
F-2
<PAGE>
CYTYC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,665 $ 27,572
Short-term investments.................................... 2,237 11,485
Accounts receivable, net (Note 3)......................... 1,323 2,682
Inventories (Note 4)...................................... 753 1,463
Prepaid expenses and other current assets................. 48 771
-------- --------
Total current assets.................................... 10,026 43,973
Property and equipment, net (Note 5)........................ 940 5,251
Other assets................................................ 59 959
-------- --------
Total assets............................................ $ 11,025 $ 50,183
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,254 $ 1,034
Accrued expenses (Note 6)................................. 1,417 1,944
Deferred revenue.......................................... 276 524
-------- --------
Total current liabilities............................... 2,947 3,502
-------- --------
Commitments and contingencies (Note 11)
Stockholders' equity (Note 8):
Preferred Stock, $.01 par value--
Authorized--5,000,000 shares
No shares issued or outstanding.......................... -- --
Convertible Preferred Stock, $.01 par value--
Authorized, issued in series and outstanding--
9,778,326 in 1995........................................ 98 --
Common Stock, $.01 par value--
Authorized--30,000,000 shares
Issued 308,506 shares in 1995 and 14,013,002 in 1996..... 3 140
Additional paid-in capital................................ 43,165 93,648
Accumulated deficit....................................... (35,188) (47,107)
-------- --------
Total stockholders' equity.............................. 8,078 46,681
-------- --------
Total liabilities and stockholders' equity.............. $ 11,025 $ 50,183
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Net sales.......................................... $ 2,920 $ 4,273 $ 8,198
Cost of sales...................................... 2,225 2,413 4,354
------- ------- --------
Gross profit..................................... 695 1,860 3,844
------- ------- --------
Operating expenses:
Research and development......................... 2,175 3,908 4,689
Sales, marketing and customer support............ 1,418 2,582 9,918
General and administrative....................... 1,256 1,532 3,314
------- ------- --------
Total operating expenses....................... 4,849 8,022 17,921
------- ------- --------
Loss from operations............................... (4,154) (6,162) (14,077)
------- ------- --------
Other income (expense):
Interest income.................................. 43 371 2,175
Interest expense................................. (153) (109) (1)
Other, net....................................... (2) (15) (16)
------- ------- --------
Total other income (expense)................... (112) 247 2,158
------- ------- --------
Net loss........................................... $(4,266) $(5,915) $(11,919)
======= ======= ========
Net loss per common share........................ $ (0.48) $ (0.54) $ (0.92)
======= ======= ========
Shares used in computing net loss per common
share........................................... 8,954 10,868 12,982
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
COMMON STOCK PREFERRED STOCK
---------------- ------------------ ADDITIONAL TOTAL
NUMBER PAR NUMBER PAR PAID IN ACCUMULATED NOTE RECEIVABLE STOCKHOLDERS'
OF SHARES VALUE OF SHARES VALUE CAPITAL DEFICIT FOR STOCK ISSUED EQUITY (DEFICIT)
---------- ----- ----------- ----- ---------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 255,206 $ 2 13,852,743 $ 139 $23,993 $(25,007) $ (10) $ (883)
Sale of Series A1
Convertible Preferred
Stock.................. -- -- 2,399,573 24 2,975 -- -- 2,999
Exercise of stock
options................ 51,900 1 -- -- 27 -- -- 28
Forgiveness of note
receivable............. -- -- -- -- -- -- 10 10
Net loss................ -- -- -- -- -- (4,266) -- (4,266)
---------- ---- ----------- ----- ------- -------- ----- --------
Balance, December 31,
1994................... 307,106 3 16,252,316 163 26,995 (29,273) -- (2,112)
Sale of Series C1
Convertible Preferred
Stock, net of issuance
costs of $157.......... -- -- 3,095,238 31 12,812 -- -- 12,843
Conversion of notes,
including accrued
interest of $262, into
Series C1 Convertible
Preferred Stock........ -- -- 714,145 7 3,254 -- -- 3,261
Conversion of four prior
series of convertible
preferred stock into
Series B1 Convertible
Preferred Stock........ -- -- (10,283,373) (103) 103 -- -- --
Exercise of stock
options................ 1,400 -- -- -- 1 -- -- 1
Net loss................ -- -- -- -- -- (5,915) -- (5,915)
---------- ---- ----------- ----- ------- -------- ----- --------
Balance, December 31,
1995................... 308,506 3 9,778,326 98 43,165 (35,188) -- 8,078
Conversion of
convertible preferred
stock into Common
Stock.................. 9,778,326 98 (9,778,326) (98) -- -- -- --
Sale of 3,450,000 shares
of Common Stock net of
issuance costs of
$1,350,000............. 3,450,000 34 -- -- 49,952 -- -- 49,986
Exercise of stock
options................ 470,148 5 -- -- 448 -- -- 453
Issuance of shares under
the Employee Stock
Purchase Plan ......... 6,022 -- -- -- 83 -- -- 83
Net loss................ -- -- -- -- -- (11,919) -- (11,919)
---------- ---- ----------- ----- ------- -------- ----- --------
Balance, December 31,
1996................... 14,013,002 $140 -- $ -- $93,648 $(47,107) $ -- $ 46,681
========== ==== =========== ===== ======= ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(4,266) $(5,915) $(11,919)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization.................. 173 238 520
Forgiveness of note receivable................. 10 -- --
Forgiveness of accrued interest................ -- 109 --
Changes in assets and liabilities--
Accounts receivable.......................... 284 (870) (1,359)
Inventories.................................. 303 (690) (710)
Prepaid expenses and other current assets.... (2) (22) (723)
Accounts payable............................. (39) 669 (220)
Accrued expenses............................. (1,113) (642) 527
Deferred revenue............................. 16 109 248
------- ------- --------
Net cash used in operating activities...... (4,634) (7,014) (13,636)
------- ------- --------
Cash flows from investing activities:
Decrease (increase) in other assets.............. 9 (42) (900)
Purchases of property and equipment.............. (286) (663) (4,831)
Purchases of short-term investments.............. -- (2,237) (23,084)
Proceeds from sale and maturity of short-term
investments..................................... -- -- 13,836
------- ------- --------
Net cash used in investing activities...... (277) (2,942) (14,979)
------- ------- --------
Cash flows from financing activities:
Proceeds from notes payable to stockholders...... 2,999 -- --
Proceeds from exercise of stock options.......... 28 1 453
Proceeds from issuance of shares under the
Employee Stock Purchase Plan -- -- 83
Proceeds from sale of stock...................... 2,999 12,843 49,986
------- ------- --------
Net cash provided by financing activities.. 6,026 12,844 50,522
------- ------- --------
Net increase in cash and cash equivalents.......... 1,115 2,888 21,907
Cash and cash equivalents, beginning of period..... 1,662 2,777 5,665
------- ------- --------
Cash and cash equivalents, end of period........... $ 2,777 $ 5,665 $ 27,572
======= ======= ========
Supplemental disclosure of noncash financing
activities:
Conversion of notes payable, including accrued
interest, into Series C1 Convertible Preferred
Stock........................................... $ -- $ 3,261 $ --
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
Cytyc Corporation and subsidiaries (the Company) design, develop,
manufacture and market sample preparation systems for medical diagnostic
applications. The Company's principal product, the ThinPrep System, is an
automated system for the preparation of non-gynecological samples and cervical
specimens on microscope slides.
In 1991, the Company commenced commercial sales of ThinPrep Processors,
reagents, filters and related supplies for non-gynecological diagnostic
applications to clinical laboratories and hospitals. On May 20, 1996, the
Company received clearance from the U.S. Food and Drug Administration to
market the ThinPrep System for cervical cancer screening.
To date revenue from sales of products have not generated sufficient cash to
support the Company's operations. Since inception, the Company has incurred
substantial losses, principally from expenses associated with obtaining FDA
approval of the ThinPrep System, engineering and development efforts related
to the ThinPrep System and the establishment of a sales and administrative
organization. The Company has funded its operations primarily through the
private placement and public sale of equity securities, which resulted in
$93.3 million of net proceeds. Subsequent to year-end, the Company completed a
follow-on offering for public sale of 3,197,500 additional shares of Common
Stock, which resulted in an additional $70.6 of net proceeds. The Company
continues to be subject to certain risks common to medical device companies in
similar stages of development, including dependence on a single product,
extensive government regulation, uncertainty of market acceptance, limited
manufacturing, marketing and sales experience and uncertainty of future
profitability.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Cytyc SARL (a French
corporation) and Cytyc Securities Corporation (a Massachusetts securities
corporation). All material intercompany transactions and balances have been
eliminated in consolidation. Cytyc SARL ceased operations and was formally
dissolved in 1994.
(b) Revenue Recognition
The Company recognizes product revenue upon shipment, when customer
acceptance is assured and collection of the resulting receivable is probable.
(c) 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.
F-7
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(d) 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 December 31, 1996
are as follows:
<TABLE>
<CAPTION>
AMORTIZED GROSS UNREALIZED FAIR
COST HOLDING GAINS (LOSSES) VALUE
--------- ----------------------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government and Agency
securities (average maturity of
.44 years)....................... $11,485 66 -- $11,551
======= =========== =========== =======
</TABLE>
(e) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk are principally cash, cash equivalents, short-term investments
and accounts receivable. The Company places its investments in highly rated
institutions. Concentration of credit risk with respect to accounts receivable
is limited to certain customers to whom the Company makes substantial sales.
To reduce risk, the Company routinely assesses the financial strength of its
customers and, as a consequence, believes that its accounts receivable credit
risk exposure is limited. The Company maintains an allowance for potential
credit losses but historically has not experienced any significant credit
losses related to an individual customer or groups of customers in any
particular industry or geographic area.
(f) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
(g) Depreciation and Amortization
The Company provides for depreciation and amortization by charges to
operations, on a straight-line basis, in amounts estimated to allocate the
cost of the assets over their estimated useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -----------
<S> <C>
Production equipment.......................................... 3-7 Years
Research equipment............................................ 5-7 Years
Furniture and fixtures........................................ 5-7 Years
Computer equipment............................................ 3-5 Years
Leasehold improvements........................................ Life of lease
</TABLE>
F-8
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(h) Other Assets
Other assets consist of long term lease receivables from the sale of
ThinPrep Processors, long-term deposits and the cost of obtaining patents.
Patent costs are amortized over their estimated useful lives on a straight-
line basis.
(i) Research and Development Costs
The Company charges research and development costs to operations as
incurred.
(j) Computation of Net Loss per Share
Net loss per share for the years ended December 31, 1994, 1995 and 1996 was
computed based on the weighted average number of common shares outstanding and
gives effect to the following adjustments. Common equivalent shares are not
included in the per share calculations, as the effect of their inclusion would
be antidilutive, except that, for the years ended December 31, 1994 and 1995,
in accordance with Securities and Exchange Commission requirements, stock
options granted and Common Stock equivalents, consisting of Series C1
Convertible Preferred Stock, issued during the twelve-month period prior to
the filing of the initial public offering of Common Stock described in Note
(10), have been included in the calculation as if they were outstanding for
all periods presented using the treasury-stock method and the public offering
price. Also, all outstanding shares of Series A1 Convertible Preferred Stock
are assumed to have been converted to Common Stock at the time of issuance,
and all outstanding shares of Series B1 Convertible Preferred Stock are
assumed to have been converted to Common Stock at the time of issuance of each
of the four prior series of convertible preferred stock, which automatically
converted into Series B1 Convertible Preferred Stock in 1995. Historical net
loss per share has not been presented as such information is not considered to
be relevant or meaningful.
(k) Postretirement and Postemployment Benefits
The Company has no obligations for postretirement or postemployment
benefits.
(3) ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of the allowance for doubtful accounts activity is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995 1996
----- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year................................ $ 929 $158 $148
Amounts charged off to expense............................ -- 50 --
Amounts written off....................................... (552) (60) (13)
Amounts reclassified (to) other accounts.................. (219) -- --
----- ---- ----
Balance, end of year...................................... $ 158 $148 $135
===== ==== ====
</TABLE>
(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER
31,
-----------
1995 1996
---- ------
(IN
THOUSANDS)
<S> <C> <C>
Raw material and work-in-process................................ $494 $ 880
Finished goods.................................................. 259 583
---- ------
$753 $1,463
==== ======
</TABLE>
F-9
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Production equipment.......................................... $ 325 $ 650
Research equipment............................................ 591 712
Furniture, fixtures and computer equipment.................... 569 1,256
Deposits on equipment......................................... 377 2,248
Leasehold improvements........................................ 94 1,740
------ ------
1,956 6,606
Less accumulated depreciation and amortization................ 1,016 1,355
------ ------
$ 940 $5,251
====== ======
</TABLE>
(6) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Accrued warranty costs........................................ $ 251 $ 251
Accrued product upgrade costs................................. 648 378
Accrued compensation.......................................... 204 335
Accrued taxes................................................. 147 153
Accrued consulting fees....................................... -- 205
Other accruals................................................ 167 622
------ ------
$1,417 $1,944
====== ======
</TABLE>
(7) INCOME TAXES
The Company records a deferred tax asset or liability based on the
difference between the financial statement and tax bases of assets and
liabilities, as measured by the enacted tax rates assumed to be in effect when
these differences reverse.
As of December 31, 1996, the Company has available net operating loss
carryforwards for Federal Tax purposes of approximately $40,000,000 and
research and development credit carryforwards of approximately $909,000 to
reduce future income taxes, if any. These carryforwards expire at various
dates from 2002 to 2011 and are subject to review and possible adjustment by
the Internal Revenue Service.
The Internal Revenue Code contains provisions that may limit the amount of
net operating loss and credit carryforwards that the Company may utilize in
any one year in the event of certain cumulative changes in ownership over a
three-year period. In the event the Company has had a change of ownership, as
defined, utilization of the carryforwards may be restricted.
F-10
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The approximate income tax effect of each type of temporary difference and
carryforward is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards......................... $ 11,144 $ 15,638
Research and development credit carryforwards............ 813 909
Capitalized research and development expenses............ 2,068 3,037
Nondeductible accruals................................... 539 733
Other temporary differences.............................. 114 303
-------- --------
Deferred tax asset....................................... $ 14,678 $ 20,620
Valuation allowance...................................... (14,678) (20,620)
-------- --------
Net deferred tax asset................................... $ -- $ --
======== ========
</TABLE>
Due to the uncertainty surrounding the realization of the deferred tax
asset, the Company has provided a full valuation allowance against this
amount.
(8) STOCKHOLDERS' EQUITY
(a) Common Stock Reserved
As of December 31, 1996, the Company has reserved 2,519,654 shares of Common
Stock for issuance as follows:
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
Exercise of stock options.......................................... 2,383,676
Exercise of warrant................................................ 2,000
Employee stock purchase plan....................................... 133,978
---------
2,519,654
=========
</TABLE>
(b) Preferred Stock
The Board of Directors and stockholders authorized 5,000,000 shares of $.01
par value Preferred Stock. The Board of Directors has the authority to issue
such shares in one or more series and to fix the relative rights and
preferences without further vote or action by the stockholders. The Board has
no present plans to issue any shares of Preferred Stock.
(c) Convertible Preferred Stock
Convertible Preferred Stock consisted of the following:
<TABLE>
<CAPTION>
LIQUIDATION PAR VALUE
PREFERENCE AT ---------
DECEMBER 31, 1995 1995 1996
----------------- ---- ----
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
Series A1, $0.01 par value--
Authorized, issued and outstanding--2,399,573
shares in 1995................................ $ 3,135 $24 $--
Series B1, $0.01 par value--
Authorized, issued and outstanding--3,569,370
shares in 1995................................ 15,672 36 --
Series C1, $0.01 par value--
Authorized, issued and outstanding--3,809,383
shares in 1995................................ 16,726 38 --
--- ----
$98 $--
=== ====
</TABLE>
F-11
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the sale of Series C1 Convertible Preferred Stock in
1995, 13,852,743 shares of Convertible Preferred Stock issued in four prior
series automatically converted into 3,569,370 shares of Series B1 Convertible
Preferred Stock. In addition, upon the closing of the Company's initial public
offering described in Note (10), all outstanding shares of Convertible
Preferred Stock converted into 9,778,326 shares of Common Stock.
The Convertible Preferred Stock had certain rights and preferences, all of
which expired upon conversion to Common Stock.
(9) STOCK OPTION PLANS AND WARRANT
(a) 1995 Stock Option Plan
During 1995, the Board of Directors and stockholders approved, effective
upon the closing of the initial public offering of the Company's Common Stock
described in Note (10), the 1995 Stock Option Plan. The aggregate number of
shares of Common Stock that may be issued pursuant to this Plan is 1,000,000
plus, effective as of January 1, 1997 and each year thereafter, the excess, if
any, of (i) five percent of the total number of shares of Common Stock issued
and outstanding as of December 31 of the preceding year or then reserved for
issuance upon the exercise or conversion of outstanding options, warrants or
convertible securities, over (ii) the number of shares then remaining reserved
and available for grant under the 1995 Plan, subject to certain adjustments,
provided, however, that in no event shall more than 2,000,000 shares of Common
Stock be issued pursuant to incentive stock options under the 1995 Plan. At
January 1, 1997, 171,500 additional shares were made available for grant under
this provision.
(b) 1989 Stock Option Plan
Under the 1989 Stock Option Plan, the Board of Directors may grant options
to purchase up to an aggregate of 1,900,000 shares of Common Stock. The
Company may grant incentive stock options to eligible employees and directors.
The exercise price of each incentive stock option may not be less than 100% of
the fair market value of Common Stock at the date of grant. Nonqualified stock
options may be granted to any employee, officer, director or consultant of the
Company. The exercise price of each nonqualified stock option is determined by
the Board of Directors. To date, all stock options have been granted with
exercise prices equal to the fair market value of the Company's Common Stock
at the time of grant. All stock options issued under this Plan become
exercisable over periods ranging from 2 to 5 years and expire within 10 years
from the date of grant.
The 1989 Stock Option Plan also allows the Company to grant awards of Common
Stock to directors, officers, employees and consultants of the Company. No
such awards had been granted as of December 31, 1995. Upon the closing of the
initial public offering of the Company's Common Stock described in Note (10),
no further grants may be issued under the 1989 Stock Option Plan.
(c) 1995 Director Option Plan
The Board of Directors and stockholders approved the 1995 Non-Employee
Director Stock Option Plan pursuant to which options to purchase up to 250,000
shares of Common Stock were authorized for future issuance. In January 1996,
the Company granted options to purchase 105,000 shares of Common Stock to
seven directors under this Plan at an exercise price equal to $16.00 per
share.
At December 31, 1996, the Company had 674,150 options available for future
grants under the 1995 Stock Option Plan and the 1995 Director Option Plan.
F-12
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following schedule summarizes the activity under the Company's stock
option plans for the three years ended December 31, 1996.
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES OPTION PRICE OPTION PRICE
--------- --------------- ----------------
<S> <C> <C> <C>
Outstanding, December 31,
1993......................... 423,247 $ 0.50 --$ 1.25 $0.80
Granted..................... 628,000 0.625-- 1.25 0.63
Exercised................... (51,900) 0.50 -- 0.85 0.55
Canceled.................... (278,900) 0.50 -- 1.25 0.77
--------- --------------- -----
Outstanding, December 31,
1994......................... 720,447 0.50 -- 1.25 0.68
Granted..................... 876,877 0.625-- 10.00 1.96
Exercised................... (1,400) 0.50 -- 1.25 0.66
Canceled.................... (22,800) 0.50 -- 1.25 0.77
--------- --------------- -----
Outstanding, December 31,
1995......................... 1,573,124 0.50 -- 10.00 1.39
Granted..................... 641,400 10.00 -- 33.50 18.97
Exercised................... (470,148) 0.50 -- 5.00 0.96
Canceled.................... (34,850) 0.625-- 32.00 8.75
--------- --------------- -----
Outstanding, December 31,
1996......................... 1,709,526 $ 0.50 --$33.50 $7.96
--------- --------------- -----
Exercisable, December 31,
1996......................... 138,772 $ 0.50 --$16.00 $6.46
========= =============== =====
</TABLE>
In October 1995, the FASB issued SFAS No. 123, which requires the
measurement of the fair value of stock-based compensation to be included in
the statement of operations or disclosed in the notes to the financial
statements. The Company has determined that it will continue to account for
stock-based compensation for employees under Accounting Principles Board
Opinion No. 25 and elect the disclosure-only alternative under SFAS No. 123
for stock-based compensation awarded in 1995 and 1996 using the Black-Scholes
option pricing model prescribed by SFAS No. 123. The underlying assumptions
used are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
----- ------
<S> <C> <C>
Risk-free interest rate....................................... 6.38% 6.18%
Expected dividend yield....................................... -- --
Expected lives................................................ 5.95 5.99
Expected volatility........................................... 90% 90%
Weighted average value of grants.............................. $1.52 $13.85
Weighted average remaining
contractual life of options outstanding (years).............. 8.95 8.31
</TABLE>
Had compensation cost for the Company's stock option plans and Employee
stock purchase plan been determined consistent with SFAS No. 123, pro forma
net loss and net loss per share would have been:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------- --------
<S> <C> <C>
Net loss--
As reported............................................. $(5,915) $(11,919)
Pro forma............................................... (5,951) (13,079)
Net loss per share--
As reported............................................. $ (.54) $ (.92)
Pro forma............................................... (.55) (1.01)
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
F-13
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(d) 1995 Employee Stock Purchase Plan
During 1995, the Board of Directors and stockholders approved, effective
upon the closing of the initial public offering of the Company's Common Stock
described in Note (10), the 1995 Employee Stock Purchase Plan pursuant to
which 140,000 shares of Common Stock could be issued. Purchase price is
determined by taking the lower of 85% of the closing price on the first or
last day of the period, whichever is lower. During 1996, 6,022 shares of
common stock were issued at the purchase price of $13.81 per share. As of
December 31, 1996, 133,978 shares were available for issuance.
(e) Warrant
In June 1994, the Company issued to a stockholder a warrant to purchase
shares of Common Stock at an exercise price equal to the fair market value of
Common Stock at the time of vesting but not less than $5.00 per share. The
warrant expires ten years from the date of issuance. Vesting of the warrant
was contingent upon achievement of certain performance objectives in
connection with a purchasing agreement between the Company and the
stockholder, which was canceled on July 22, 1996. At December 31, 1996, such
warrant was exercisable to purchase 2,000 shares of Common Stock at an
exercise price of $10.00 per share.
(10) PUBLIC STOCK OFFERINGS
On March 8, 1996 the Company sold through an underwritten initial public
offering, 3,000,000 shares of its Common Stock at $16.00 per share. Upon the
closing of the Company's initial public offering, all outstanding shares of
the Convertible Preferred Stock were converted into 9,778,326 shares of Common
Stock. On April 4, 1996, the Underwriters of the Company's initial public
offering exercised their over-allotment option in full to purchase an
additional 450,000 shares of the Company's Common Stock at $16.00 per share.
On February 6, 1997, the Company sold through an underwritten follow-on
offering 2,650,000 shares of Common Stock at $ 23.50 per share, while existing
shareholders sold 1,000,000 shares of common stock. On February 20, 1997, the
Underwriters of the follow-on public offering exercised their over-allotment
option in full to purchase an additional 547,500 share of the Company's Common
Stock at $ 23.50 per share.
(11) COMMITMENTS AND CONTINGENCIES
The Company rents a manufacturing and administrative facility under an
operating lease expiring in April 2003.
At December 31, 1996, future minimum annual lease payments under this lease
are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
1997.......................................................... $ 552
1998.......................................................... 552
1999.......................................................... 569
2000.......................................................... 577
2001.......................................................... 577
Thereafter.................................................... 745
------
$3,572
======
</TABLE>
Rent expense under operating leases totaled approximately $266,000, $270,000
and $513,000 in 1994, 1995 and 1996, respectively.
F-14
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996, the Company has commitments for the purchase of
capital equipment costing approximately $83,000.
In addition, the Company is the exclusive licensee of certain patented
technology used in the ThinPrep System. In consideration for this license, the
Company has agreed to pay a royalty equal to 1% of net sales of the ThinPrep
Processor, filter cylinder disposable products which are used with the
ThinPrep System, and improvements made by the Company relating to such items.
There are no minimum royalty payments in connection with this license. During
the years ended December 31, 1994, 1995 and 1996, the Company paid royalties
of approximately $23,000, $22,000 and $52,000, respectively.
(12) EMPLOYEE BENEFIT PLAN
The Company maintains an employee benefit plan under Section 401(k) of the
Internal Revenue Code. The Plan allows for employees to defer a portion of
their salary up to the maximum allowed under IRS rules. The Company made
contributions to the Plan during 1996 totaling $44,836.
(13) NEW ACCOUNTING STANDARD
On March 3, 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. This statement is effective for fiscal
years ending after December 15, 1997 and early adoption is not permitted. When
adopted, the statement will require restatement of prior years' earnings per
share. The Company will adopt this statement for its fiscal year ended
December 31, 1997. In addition, the Company believes that the adoption of SFAS
No. 128 will not have a material effect on its financial statements.
F-15
<PAGE>
CYTYC CORPORATION
INDEX TO EXHIBITS FILED WITH FORM 10-K
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<C> <S> <C>
3.1(2) Third Amended and Restated Certificate of Incorporation of the
Company.
3.2(2) Amended and Restated By Laws of the Company.
4.1(1) Specimen certificate representing the Common Stock.
10.1(1)* 1988 Stock Plan.
10.2(1)* 1989 Stock Plan.
10.3(1)* 1995 Stock Plan.
10.4(1)* 1995 Non-Employee Director Stock Option Plan.
10.5(1)* 1995 Employee Stock Purchase Plan, as amended.
10.6(1)# License Agreement between the Company and DEKA Products Limited
Partnership dated March 22, 1993.
10.7(1) Series C1 Senior Convertible Preferred Stock Purchase Agreement
dated as of June 13, 1995.
10.8(1) Form of Indemnification Agreement.
10.9(1) Lease Agreement between the Company and Cedar Hill Associates
II of December, 1990, as amended.
10.10(1) Lease Agreement between the Company and BFA Realty Partnership,
L.P. d/b/a BFA, Limited Partnership of February 1996.
11.1** Statement re computation of per share earnings.
13.1*** The Company's 1996 Annual Report to Stockholders, certain
portions of which have been incorporated herein by reference.
21.1** List of Subsidiaries of the Company.
23.1** Consent of Arthur Andersen LLP.
24.1** Power of Attorney (see page 23).
27.1** Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1(File No. 333-00300).
(2) Incorporated by reference to the exhibits to the Company Registration
Statement on Form S-1 (File No. 333-19367).
* Indicates a management contract or any compensatory plan, contract or
arrangement.
** Filed herewith.
*** Such report, except for those portions thereof that are expressly
incorporated by reference herein, is furnished for the information of the
Commission and is not to be deemed "filed" as part of this Annual Report
on Form 10-K.
# Confidential treatment granted as to certain portions.
<PAGE>
EXHIBIT 11.1
CYTYC CORPORATION
STATEMENT OF COMPUTATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1995 1996
--------- ---------- ----------
<S> <C> <C> <C>
Weighted average Series A-1 Convertible
Preferred Stock outstanding during the period,
assuming conversion to Common Stock........... 519,360 2,399,573 --
Weighted average Series B-1 Convertible
Preferred Stock outstanding during the period,
assuming conversion to Common Stock(1)........ 3,569,370 3,569,370 --
Weighted average Series C-1 Convertible
Preferred Stock outstanding during the period,
assuming conversion to Common Stock(2)........ 3,809,383 3,809,383 --
Weighted average Common Stock outstanding
during the period(3).......................... 273,803 308,106 12,981,637
Net share issuable upon exercise of stock
options granted subsequent to January 15,
1995(2)....................................... 782,274 782,274 --
--------- ---------- ----------
8,954,190 10,868,706 12,981,637
========= ========== ==========
</TABLE>
- --------
(1) All outstanding shares of Series B-1 Convertible Preferred Stock are
assumed to have been converted into shares of Common Stock at the time of
issuance of the four prior series of Convertible Preferred Stock, which
automatically converted into Series B-1 Convertible Preferred Stock in
1995.
(2) Common Stock equivalents issued and stock options granted during the
twelve-month period immediately prior to the filing of the initial public
offering have been included as outstanding for all periods presented prior
to the initial public offering using the treasury-stock method and the
public offering price.
(3) In March, 1996, the Company sold, through an initial public offering,
3,000,000 shares of its Common Stock at $16 per share. All shares of the
Company's Convertible Preferred Stock were automatically converted into
9,778,326 shares of Common Stock at the time of the initial public
offering and are assumed to be issued Common Stock as of January 1, 1996.
Additionally, on April 4, 1996, the Underwriters of the Company's initial
public offering exercised their over-allotment option in full to purchase
an additional 450,000 shares of the Company's Common Stock at $16 per
share.
<PAGE>
SUMMARY ANNUAL REPORT 1996
[Four photographs on the left hand side of page, from top to bottom: cells on a
ThinPrep Pap Test Slide; clinical laboratory technician examining slides;
female patient; female physician.]
Cytyc Corporation
Creating a Clearer Picture
of Women's Health
<PAGE>
CLEAR VISION
A Major Step in Women's Healthcare
It started with a simple test. A simple Pap smear, the routine test given to
detect cervical cancer in women. But for travel management consultant Mindy
Cimmino, this particular test turned out to be anything but routine.
She was told that her test results were "inconclusive." Her doctor explained
that there was nothing to worry about. However, several more Pap smears and
other more invasive procedures still couldn't provide a clear answer. Mindy's
initial concern soon turned to frustration.
Sadly, Mindy Cimmino's story is not that unique. Each year, it is estimated that
an average 5% of the 50 million Pap smears performed in the United States are
classified as inconclusive. In most cases, the problem can be attributed to the
50-year-old Pap smear test itself.
Although the Pap smear has been credited with decreasing invasive cervical
cancer by 70% since the 1950s, the test has its limitations. Often, cervical
cells are obscured by elements such as blood, mucus, and inflammation when the
patient sample is smeared onto a slide, and as much as 80% may be discarded in
the physician's office. As a result, abnormal cells can be difficult to detect.
OVERCOMING THE LIMITATIONS
Mindy knew that cervical cancer is highly curable when detected early, so she
sought a second opinion. Fortunately, she visited a gynecologist who evaluated
her sample using the ThinPrep(TM) Pap Test(R) from Cytyc Corporation. This new,
fluid-based method of cell sample preparation detected abnormalities that
allowed Mindy's doctor to diagnose and treat her precancerous condition early.
Today she is fully recovered.
[Photograph of patient Mindy Cimmino with the following caption:]
Travel management consultant Mindy Cimmino refused to accept the inconclusive
results of her Pap smear tests. She then turned to the ThinPrep Pap Test, a
new fluid-based technology, which clearly showed she had precancerous cells.
Cytyc's mission is to improve early detection, and therefore reduce the risk of
cervical cancer for all women. No woman should have to face inconclusive test
results. Rather, she should enjoy peace of mind in knowing she can obtain a
clearer picture of her state of health.
The recent availability of the ThinPrep Pap Test represents a major step in that
direction.
- --------------------------------------------------------------------------------
<PAGE>
Financial Highlights
Cytyc Corporation was financially on
target for 1996. With the
introduction of the ThinPrep Pap
Test, the Company's revenues
increased substantially over
revenues in 1995. The substantial
[Two photographs: photograph of cells increase can be directly attributed
on a ThinPrep Pap Test Slide and to initial sales of the new product,
photograph of microscope, with the which was shipped both domestically
following caption:] and internationally.
By presenting cells representative
of the patient's condition and
by eliminating obscuring elements,
the ThinPrep Pap Test provides lab
technicians with a clearer view to
help detect abnormal cervical cells.
1996
INSTALLED BASE WORLDWIDE
[Bar graph entitled "1996 Installed
Base Worldwide" providing information
for the quarters ended January, March,
June, September and December 1996 of
the number of ThinPrep 2000
Processors placed during each period
with the following caption:]
The number of ThinPrep 2000 Processors
placed indicates steady growth in 1996.
Cytyc commenced full-market launch in
early 1997.
- --------------------------------------------------------------------------------
<PAGE>
CLEAR PROGRESS
2
- -
Reflecting on a Year of Milestones
Message from the President
[Photograph of Patrick J. Sullivan, President and Chief Executive Officer of the
Company, with the following caption:]
PATRICK J. SULLIVAN
President and Chief Executive Officer
This has been an exciting year of milestones for Cytyc Corporation and its
shareholders. Since the Company's inception, our goal has been to improve the
state of diagnostic testing and to protect women like Mindy Cimmino from ever
developing cervical cancer. We took a major step toward that goal this year with
the initial launch of the first major improvement in over 50 years of cervical
cancer screening: the ThinPrep Pap Test. That was just one of many highlights
that made 1996 so memorable.
In March, we conducted our initial public offering of three million shares of
common stock. The proceeds have gone to increase our manufacturing capacity, to
support new product development, and to expand our sales and marketing efforts
for the ThinPrep Pap Test. Two months later, the FDA approved our ThinPrep 2000
System as a replacement for the conventional Pap smear in screening for cervical
cancer.
That approval was followed by a preliminary marketing program aimed at educating
laboratories, physicians, and managed care providers about the clinical and
economic benefits of the ThinPrep Pap Test. In November, the FDA further
strengthened our claims by issuing a supplemental approval confirming that the
ThinPrep Pap Test is a "significantly more effective" method of screening for
low-grade squamous intraepithelial lesions (LSIL) and more severe lesions of the
cervix in screening center populations.
Also in November, we received an early indication that the health insurance
community would embrace the ThinPrep method when United HealthCare Corporation
announced its decision to cover the test for its subscribers. This was welcome
news because, with a subscriber base of over 14 million people, United
HealthCare is one of the nation's leading providers of health insurance. The
insurer will cover the ThinPrep Pap Test as part of its continuing focus on
early detection and prevention of disease.
Another major milestone we achieved in 1996 was the relocation of our corporate
headquarters to a renovated facility in Boxborough, Massachusetts. With 50,000
square feet of space, this facility provides the manufacturing capacity needed
to meet the growing demand for the ThinPrep Pap Test and its related supplies,
while we continue to pursue research and development. The facility also includes
a state-of-the-art training center designed to train customers on the ThinPrep
Pap Test.
As incredible as this past year was, the future looks even brighter. In January
1997, we initiated a full-scale marketing and sales launch of the ThinPrep Pap
Test, and hired and trained an aggressive new sales force. Our goal is clear:
market conversion from the conventional Pap smear to the ThinPrep Pap Test. We
are confident we will soon fully realize the promise the future holds for
women's health, our shareholders, and our Company.
/s/ Patrick Sullivan
- --------------------------------------------------------------------------------
"Our message is clear and simple --
the ThinPrep Pap Test is a better and more effective method of screening
for cervical cancer."
Patrick J. Sullivan
President, CEO
<PAGE>
3
-
[Photograph of the executive officers of the Company, including from left to
right:]
DANIEL J. LEVANGIE
Sales
TED S. GEISELMAN
Engineering and Operations
MICHAEL F. ADAMS
Regulatory Affairs and
Quality Assurance
VICTORIA ROBINSON
Service Operations
ROBERT J. SILVERMAN
Marketing
JAMES LINDER, MD
Medical Affairs
DAVID J. ZAHNISER, PHD
Scientific Affairs
JOSEPH W. KELLY
Finance
- --------------------------------------------------------------------------------
<PAGE>
CLEAR SOLUTION
4
- -
The ThinPrep Pap Test
Clear and Simple
PROMISE FULFILLED
For the first time in 50 years, there is a test that overcomes many of the
limitations of the conventional Pap smear method. The ThinPrep Pap Test achieves
this by improving sample quality right from the start.
The test is performed using the ThinPrep System, which consists of the ThinPrep
2000 Processor and patented reagents, filters, and other supplies. The process
begins with the physician taking a cervical sample from the patient in the usual
fashion. Rather than smearing the collection device onto a microscope slide, the
physician simply immerses the collection device into a vial filled with Cytyc
Corporation's proprietary PreservCyt(R) Solution.
This method captures virtually 100% of the patient's cell sample and preserves
it before the cells can be damaged by air drying. The ThinPrep specimen vial is
then labeled and sent to a laboratory equipped with the ThinPrep 2000 Processor
for slide preparation.
HOW THINPREP IMPROVES SLIDE QUALITY
At the laboratory, the vial is placed into the automated processor, which
separates the cervical cells from obscuring artifacts such as blood, mucus, and
inflammation. These are the factors that can render a slide compromised or
unsuitable for diagnostic review.
Once the debris has been removed, the processor prepares a clear, representative
sample slide. Consequently, the ThinPrep Pap Test produces more slides that are
suitable for diagnostic review, and fewer compromised slides that can yield
inconclusive results.
HOW THINPREP REDUCES FALSE NEGATIVES
One of the drawbacks of the conventional Pap smear method is that only a small
portion of the patient cervical cell sample is captured and preserved. As much
as 80% of the sample can be discarded with the collection device. The discarded
portion of the sample may contain the abnormal cells necessary for an accurate
diagnosis.
The ThinPrep Pap Test, however, captures virtually all of the patient's cervical
cell sample in the preservative
[Photograph of a clinical laboratory technician using the ThinPrep System to
screen ThinPrep Pap Test Slides.]
- --------------------------------------------------------------------------------
"The ThinPrep Test will quickly become the new standard
of care for cervical cancer screening by standardizing
the sample preparation."
Raheela Ashfaq, MD
Director of Cytology
Parkland Memorial Hospital
<PAGE>
5
-
solution. This allows the laboratory to produce a slide that is a more accurate
representation of the patient's true condition. The merits of this method were
proved in clinical trials, where the ThinPrep Pap Test identified 65% more
positive cases in screening center populations and 6% more positive cases in
high-risk populations than the conventional Pap smear.
[Photograph of the ThinPrep 2000 Processor, PreservCyt Vials, ThinPrep Pap Test
Slides and TransCyt Filters with the following caption:]
Sample Collection
At the lab, the PreservCyt vial containing the patient's cervical sample is
placed into the ThinPrep 2000 Processor.
[Four diagrams depicting the ThinPrep Sample Preparation Process. The text below
accompanies each of the four diagrams:]
At the Physician's Office
Sample Collection
Cervical cells are rinsed from the collection device into a vial filled with
PreservCyt Solution, then sent to a laboratory equipped with a ThinPrep 2000
Processor.
At the Laboratory
Dispersion
The vial is placed into the processor. The TransCyt/(R)/ Filter rotates within
the cell suspension, gently separating cells from blood, mucus, and inflammation
without affecting cell morphology.
Cell Collection
A vacuum is then applied to the TransCyt Filter, which collects cells onto the
exterior surface of the filter membrane. The ThinPrep 2000 Processor
automatically calculates the number of cells collected.
Slide Preparation
The ThinPrep 2000 Processor inverts the filter against a microscope slide and
reverses the air pressure, distributing a thin layer of cells in a defined
circular area. If needed, additional slides can be produced from the original
sample.
- --------------------------------------------------------------------------------
"What a device like this can do is increase the sensitivity
and improve the diagnostic accuracy of the Pap smear.''
Stanley Inhorn, MD
Director of Cytopathology
Wisconsin State Laboratory of Hygiene
<PAGE>
CLEAR ADVANTAGE
6
- -
ECONOMIC ADVANTAGES
REDUCING HEALTHCARE COSTS
Cervical cancer is a disease that progresses through precancerous and cancerous
stages over a number of years. However, the disease is virtually 100% curable if
it is detected and treated appropriately during the earlier stages.
The Company believes that the earlier detection of cervical disease with the
ThinPrep Pap Test should result in a reduction in the overall cost of treatment.
And, by improving specimen quality, the ThinPrep Pap Test can reduce medical
costs associated with unnecessary repeat office visits.
The economic advantages of the ThinPrep Pap Test have recently been confirmed by
a cost-effectiveness analysis prepared by an independent pharmacoeconomic
consulting firm. This simulated, long-term analysis found that the use of the
ThinPrep Pap Test resulted in significantly lower screening and treatment costs.
The report concluded that this remarkable outcome was primarily the result of
two factors: greater sensitivity, which reduced treatment costs, and improved
specimen adequacy rates, which reduced the need for repeat testing.
Along with earlier detection of cervical disease and reduction in less-than-
adequate samples, the ThinPrep System may also have economic value in reducing
borderline Pap smears. The National Cancer Institute estimates that equivocal
Pap smear diagnoses add $3.6 billion to annual U.S. healthcare system costs due
to expensive and often unnecessary follow-up colposcopies and biopsies.
Cytyc is currently working with the National Cancer Institute and others to
demonstrate the potential of combining the ThinPrep Pap Test with other
diagnostic tests to reduce borderline diagnoses. Such an alternative,
noninvasive approach could provide physicians with more information on which to
base a definitive diagnosis, while further reducing overall healthcare costs
(see Expanding Application of ThinPrep Technology, page 8).
[Photograph of a vial of the PreservCyt Solution for the ThinPrep Pap Test.]
- --------------------------------------------------------------------------------
The ThinPrep Pap Test significantly improves detection of abnormalities -- low-
grade disease (LSIL) and more severe abnormalities -- by 65% in screening center
populations and by 6% in hospital populations.
<PAGE>
7
-
[Photograph of cells on a conventional Pap Smear Slide with the following
caption:]
CONVENTIONAL PAP SMEAR SLIDE
Blood, mucus, and inflammation can obscure cervical cells, making a diagnosis
difficult.
[Photograph of cells on a ThinPrep Pap Test Slide with the following caption:]
THINPREP PAP TEST SLIDE
Through processing, obscuring elements are removed. The result is a clearer,
more readable slide for diagnostic review.
- --------------------------------------------------------------------------------
"I think that most clinicians would welcome any attempt
to reduce the false-negative rate and to provide increased
screening for cervical cancer.''
Thomas V. Sedlacek, MD
The Graduate Hospital, Philadelphia
<PAGE>
CLEAR ADVANCEMENTS
8
- -
BEYOND 1996
COMMITMENT TO INNOVATION
Cytyc Corporation is committed to improving cervical cancer detection and
appropriate treatment by developing innovative products and methods designed to
aid medical professionals in this field.
The ThinPrep 2000 Processor is a giant step in that direction. Cytyc's goal is
to continue expanding the instrument's applications, and to improve its
technology, in order to solve problems inherent in cervical cancer screening.
EXPANDING APPLICATION OF THINPREP TECHNOLOGY
Since only a portion of the patient specimen is used to prepare the initial
ThinPrep Pap Test slide, the ThinPrep fluid-based system is ideally suited for
follow-up testing. Supplemental diagnostic strategies that would reduce costs
while maintaining quality care are currently being explored. Additional
diagnostic testing of the residual sample can increase the information yielded
from a single patient sample. For example, the Company believes that in the
future, identification of sexually transmitted diseases often linked with
cervical cancer, such as human papilloma-virus (HPV), may be performed directly
from the same ThinPrep sample vial.
[Photograph of a Company employee standing next to the Company's ThinPrep 3000
Processor, with the following caption:]
The ThinPrep 3000 Processor is an automated batch-processing instrument that
combines superior quality with increased efficiency by handling up to 80 sample
vials at one time.
<PAGE>
9
-
TESTING FOR HPV
There is evidence of a strong correlation between HPV infection and the
progression of cervical cancer. Based upon this relationship, researchers hope
to determine whether HPV typing of samples diagnosed as borderline or ASCUS
(atypical squamous cells of undetermined significance) may help triage women
into more conservative follow-up than colposcopy and biopsy when appropriate.
The National Cancer Institute is currently conducting one such study. Its six-
year, multicenter Triage Study uses the ThinPrep Pap Test in conjunction with
HPV DNA typing to assess triage strategies. By using this approach, the
patient's condition can be predicted without repeat patient examination, which
could potentially reduce patient anxiety while substantially increasing cost
savings.
Preparing for the day when HPV triage could become accepted by the medical
community, Cytyc has submitted a Premarket Approval Supplement to the FDA that
would allow patients with borderline diagnoses of precancerous cells to be
tested for HPV directly from the sample collected from the ThinPrep Pap Test.
THE THINPREP 3000 PROCESSOR
Another way Cytyc is advancing the ThinPrep technology is with the ThinPrep 3000
Processor, which incorporates the technology of the ThinPrep 2000 Processor with
walk-away convenience and laboratory efficiency.
This next-generation batch-processing instrument has the capability to process
80 sample vials without operator attendance. It uses the same standard ThinPrep
Pap Test disposables, TransCyt(R) Filters, and PreservCyt Solution, and it
provides the same slide-to-slide quality and uniformity. The processor automates
patient sample preparation and prevents any possibility of cross-contamination.
[Photograph of ThinPrep Pap Test Slide being utilized for an HPV test with the
following caption:]
Cervical Cancer and HPV Testing for HPV from a preserved ThinPrep Pap Test
sample could provide physicians with valuable diagnostic information on
precancerous and benign cells prior to treatment.
- --------------------------------------------------------------------------------
"This is the biggest advance in 50 years in preparation
of Pap smears. It's really not a smear anymore.''
Mark Schiffman, National Cancer Institute,
in the Wall Street Journal, November 7, 1996
<PAGE>
CLEAR SUPPORT
10
- --
POSITIONING FOR GROWTH
DEVELOPING A UNIQUE MARKETING STRATEGY
Cytyc Corporation's objective is to establish the ThinPrep System as the
standard of care for the collection, preservation, and slide preparation of
cervical cell specimens. To achieve this, the Company's marketing and sales
strategy is to gain broad acceptance and promote the benefits of the ThinPrep
System among three key audiences: healthcare providers, clinical laboratories,
and third-party payors.
In 1996, Cytyc implemented a preliminary launch program targeting these three
key groups. Components of Cytyc's marketing efforts included a comprehensive
public awareness program, as well as physician and laboratory announcements,
advertising, and regional direct-to-physician test marketing.
Full market launch, which began in January 1997, builds on the previous
components while adding some compelling new ones. The most notable addition is
Cytyc's recently expanded sales force. After completing a comprehensive sales
training program, the new sales representatives were assigned in teams to focus
specifically on our target audiences.
The main focus of the 1997 full-launch efforts are Ob/Gyns in major metropolitan
areas. Additional materials developed to address this audience include patient
education materials for the physician's office and product background for
physicians to help document the superior effectiveness of the ThinPrep Pap Test.
TRAINING IS A CORNERSTONE
The training of lab technicians on how to use the ThinPrep 2000 Processor for
the ThinPrep Pap Test is a cornerstone for gaining acceptance of the new system.
Therefore, as clinical laboratories sign on, pathologists and technicians
participate in an intensive, hands-on training course at Cytyc headquarters.
In 1996, over 300 specialists representing over 75 labs completed training in
the Boxborough facility. To further support these specialists back in the lab,
Cytyc provides a Specialists from clinical laboratories throughout the country
receive hands-on training at Cytyc headquarters. Laboratory Implementation Kit
that makes the transition from conventional preparations to the ThinPrep method
easier.
STRONG TECHNICAL SUPPORT
The long-term success of the ThinPrep Pap Test depends on customer satisfaction,
so to maintain a high-level of acceptance, Cytyc provides a full range of
Technical Support Personnel and Services for the ThinPrep 2000 Processor.
[Photograph of three clinicial laboratory technologists receiving hands-on
training at the Company's headquarters with the following caption:]
Specialists from clinical laboratories throughout the country receive hands-on
training at Cytyc headquarters.
- --------------------------------------------------------------------------------
[Photograph of two of the Company's sales materials including one document
entitled "ThinPrep Pap Test Sales Training Series" and another entitled
"Improved Quality From the Start" with the following caption:]
Cytyc provides a full range of support materials aimed at gaining acceptance of
the ThinPrep Pap Test.
"Not only will we increase our business base through ThinPrep marketing efforts,
we will also continue to build our credibility and reputation as a leader
in the field of cervical cytology. That benefit is invaluable."
William Jaffurs, MD, Director
Cytology Services of Maryland, Inc.
<PAGE>
11
--
CORPORATE INFORMATION
Corporate Officers
Patrick J. Sullivan
President and
Chief Executive Officer
Michael F. Adams
Vice President, Regulatory Affairs
and Quality Assurance
Ted S. Geiselman
Vice President, Engineering and
Operations
Joseph W. Kelly
Chief Financial Officer
Vice President, Treasurer and
Secretary
Daniel J. Levangie
Vice President, Sales
James Linder, MD
Medical Director
Victoria Robinson
Vice President, Service Operations
Robert J. Silverman
Vice President, Marketing
David J. Zahniser, PhD
Vice President, Scientific Affairs
Copies of the Company's Form 10-K, Form 10-Q, the quarterly earnings releases
issued by the Company, or recent news releases may be obtained through:
Cytyc Worldwide Web Homepage: http://www.cytyc.com
or by writing to:
Investor Relations
Cytyc Corporation
85 Swanson Road
Boxborough, Massachusetts 01719
Registrar and Transfer Agent
The First National Bank of Boston
Shareholder Service, Client
Administration
Mail Stop 45-02-62
P.O. Box 1865
Boston, Massachusetts 02105
617-575-3120
The Transfer Agent is responsible for handling shareholder questions regarding
lost stock certificates, address changes, and changes of ownership or name in
which shares are held.
Independent Accountants
Arthur Andersen LLP
Boston, Massachusetts
Legal Counsel
Testa, Hurwitz & Thibeault, LLP
Boston, Massachusetts
Stock Symbol
Cytyc common stock trades on the
NASDAQ National Market under the symbol "CYTC."
Annual Meeting
The annual meeting of shareholders will be held on Friday, May 9, 1997, at 9:30
a.m. at the Boxborough Holiday Inn, One Adams Place, Boxborough, Massachusetts.
[Photograph of the Company's headquarters in Boxborough, Massachusetts, with the
following caption:]
Cytyc relocated its headquarters to Boxborough, Massachusetts, in June 1996 to
accommodate the Company's rapidly growing needs.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Board of Directors
<S> <C> <C> <C>
Frederick R. Blume Janet G. Effland Edwin M. Kania Patrick J. Sullivan
C B Health Ventures Patricof & Company OneLiberty Ventures Cytyc Corporation
Guy de Chazal Franklin J. Iris C. William McDaniel Monroe Trout, MD
Morgan Stanley Ventures Iris & Associates CWM Associates Chairman Emeritus,
American Healthcare Systems
</TABLE>
<PAGE>
CLEAR PROGRESS
12
- --
Five-Year Selected Financial Data
This 1996 Summary Annual Report contains selected financial information,
including the five-year financial summary below. Completed consolidated
financial statements, including notes to the consolidated financial
statements, as well as management's discussion and analysis of financial
condition and results of operations, are presented in the Company's 1996
Annual Report on Form 10-K.
(Dollars in thousands except per share data)
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
For the five years ended December 31, 1996 1995 1994 1993 1992
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 8,198 $ 4,273 $ 2,920 $ 3,441 $ 2,589
Gross profit $ 3,844 $ 1,860 $ 695 $ (1,647) $ 509
Selling, marketing, and administrative expenses $ 13,232 $ 4,114 $ 2,674 $ 5,674 $ 3,005
Research expense $ 4,689 $ 3,908 $ 2,175 $ 3,058 $ 2,859
Other income (expense) $ 2,158 $ 247 $ (112) $ 108 $ 220
Net loss $(11,919) $(5,915) $(4,266) $(10,271) $(5,135)
Net loss per share $(0.92) $(0.54) $(0.48) $(1.22) $(0.65)
-----------------------------------------------------------------------------------------------------
Shares used in computing net loss per share 12,982 10,868 8,954 8,409 7,849
</TABLE>
- --------------------------------------------------------------------------------
BALANCE SHEET DATA
<TABLE>
<CAPTION>
As of December 31, 1996 1995 1994 1993 1992
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents, and short-term investments $ 39,057 $ 7,902 $ 2,777 $ 1,662 $ 7,558
Property and equipment, net $ 5,251 $ 940 $ 468 $ 322 $ 793
Total assets $ 50,183 $ 11,025 $ 3,851 $ 3,217 $ 10,190
Total liabilities $ 3,502 $ 2,947 $ 5,963 $ 4,100 $ 811
Accumulated deficit $(47,107) $(35,188) $(29,273) $(25,007) $(14,736)
Total stockholders' equity $ 46,681 $ 8,078 $ (2,112) $ (883) $ 9,380
----------------------------------------------------------------------------------------------------------
Shares outstanding 14,013 10,087 16,559 14,108 14,093
</TABLE>
- --------------------------------------------------------------------------------
Forward-looking statements in this document are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Investors
are cautioned that statements in this report which are not strictly historical
statements, including, without limitation, statements regarding management's
plans and objectives for future operations, product plans and performance,
potential savings to the healthcare system, management's assessment of market
factors, as well as statements regarding the strategy and plans of the Company,
constitute forward-looking statements. Such statements involve risks and
uncertainties of the Company, including, without limitation, risks associated
with the Company's dependence on a single product, uncertainty of market
acceptance, and limited number of customers, as well as risks of downturns in
economic conditions generally, and in the healthcare industry specifically,
risks associated with competition and competitive pricing pressures, and other
risks detailed in the Company's filings with the Securities and Exchange
Commission, including its 1996 Form 10-K filed with the Commission.
<PAGE>
[LOGO OF CYTYC CORPORATION]
Cytyc(R), the Cytyc(R)logo, ThinPrep(R), TransCyt(R), PreservCyt(R),
EnhanceCyt(R), and CytoLyt(R) are registered trademarks of the Company, and
ThinPrep(TM) Pap Test(R) is a trademark of the Company for which registration
has been applied. All other trademarks and registered trademarks are the
property of their respective owners.
<PAGE>
[LOGO OF CYTYC CORPORATION]
85 SWANSON ROAD, BOXBOROUGH, MA 01719
PHONE 508-263-8000 FAX 508-635-1033
<PAGE>
EXHIBIT 21.1
CYTYC CORPORATION
SUBSIDIARIES OF CYTYC CORPORATION
Cytyc Securities Corporation, a Massachusetts corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 333-00300, 333-02196, 333-19367 and 333-22675.
Arthur Andersen, LLP
Boston, Massachusetts
March 28, 1997
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1995
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 5,665 27,572
<SECURITIES> 2,237 11,485
<RECEIVABLES> 1,471 2,817
<ALLOWANCES> 148 135
<INVENTORY> 753 1,463
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