<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______________ to __________________
Commission File Number 0-27558
CYTYC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 02-0407755
-------- ----------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
85 Swanson Road, Boxborough, MA 01719
(Address of principal executive offices, including Zip Code)
(978) 263-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: The number of shares of the
issuer's Common Stock, $0.01 par value per share, outstanding as of May 10, 1999
was 17,822,069.
Total Number of Pages: 18
Exhibit Index is on Page 17
================================================================================
1
<PAGE>
================================================================================
CYTYC CORPORATION
INDEX TO FORM 10-Q
------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
December 31, 1998 and March 31, 1999 3
Consolidated Statements of Operations
for the three months ended March 31, 1998 and 1999 4
Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CYTYC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 33,566 $ 42,103
Short-term investments.................................................... 36,342 28,252
Accounts receivable, net.................................................. 12,548 12,846
Inventories............................................................... 3,973 4,103
Prepaid expenses and other current assets................................. 650 429
-------- --------
Total current assets.................................................. 87,079 87,733
Property and equipment, net.................................................... 8,825 9,579
Other assets................................................................... 1,833 1,685
-------- --------
Total assets.......................................................... $ 97,737 $ 98,997
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 2,555 $ 2,623
Accrued expenses.......................................................... 7,962 8,350
Deferred revenue.......................................................... 1,413 1,459
-------- --------
Total current liabilities............................................. 11,930 12,432
-------- --------
Commitments and contingencies:
Stockholders' equity:
Preferred Stock, $.01 par value--
Authorized--5,000,000 shares
No shares issued or outstanding.......................................... -- --
Common Stock, $.01 par value--
Authorized--60,000,000 shares
Issued and outstanding: 17,798,595 in 1998 and 17,821,482 in 1999........ 178 178
Additional paid-in capital................................................. 166,431 166,577
Accumulated other comprehensive income..................................... 106 61
Accumulated deficit........................................................ (80,908) (80,251)
-------- --------
Total stockholders' equity............................................ 85,807 86,565
-------- --------
Total liabilities and stockholders' equity............................ $ 97,737 $ 98,997
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1999
----------- ------------
<S> <C> <C>
Net sales............................................................ $ 8,057 $16,205
Cost of sales........................................................ 2,289 3,533
------- -------
Gross profit.................................................... 5,768 12,672
------- -------
Operating expenses:
Research and development........................................ 1,872 2,201
Sales, marketing and customer support........................... 8,909 9,161
General and administrative...................................... 2,673 1,595
------- -------
Total operating expenses................................... 13,454 12,957
------- -------
Loss from operations................................................. (7,686) (285)
Other income, net.................................................... 1,188 942
------- -------
Net income (loss).................................................... $(6,498) $657
======= =======
Net income (loss) per common and potential common share:
Basic........................................................... $( 0.37) $0.04
======= =======
Diluted......................................................... $( 0.37) $0.04
======= =======
Weighted average common and potential common shares outstanding:
Basic........................................................... 17,548 17,810
Diluted......................................................... 17,548 18,435
</TABLE>
See accompanying notes.
4
<PAGE>
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................. $(6,498) $ 657
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities
Depreciation and amortization.................................... 360 357
Provision for doubtful accounts.................................. 150 --
Compensation related to issuance of stock to directors........... -- 93
Changes in assets and liabilities--
Accounts receivable............................................. 2,699 (298)
Inventories..................................................... (1,284) (130)
Prepaid expenses and other current assets....................... 248 221
Accounts payable................................................ (207) 68
Accrued expenses................................................ (821) 388
Deferred revenue................................................ 21 46
------- --------
Net cash (used in) provided by operating activities.......... (5,332) 1,402
------- --------
Cash flows from investing activities:
(Increase) decrease in other assets................................... (104) 148
Purchases of property and equipment................................... (1,672) (1,111)
Purchases of short-term investments................................... (6,481) (13,701)
Proceeds from maturity of short-term investments...................... 17,139 21,746
------- --------
Net cash provided by investing activities.................... 8,882 7,082
------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants................ 281 53
------- --------
Net increase in cash and cash equivalents.............................. 3,831 8,537
Cash and cash equivalents, beginning of period......................... 47,204 33,566
------- --------
Cash and cash equivalents, end of period............................... $51,035 $ 42,103
======= ========
Supplemental disclosure of non-cash items:
Unrealized holding gain on short-term investments................... $ 106 $ 45
======= ========
</TABLE>
See accompanying notes.
5
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
The notes and accompanying consolidated financial statements are unaudited.
They have been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission and are subject to year-end audit by
independent public accountants. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The financial statements should be read in conjunction
with the financial statements and notes included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 (File No. 0-27558).
The information furnished reflects all adjustments, which, in the opinion
of management, are necessary for a fair presentation of results for the interim
periods. Such adjustments consisted only of normal recurring items. The interim
periods are not necessarily indicative of the results expected for the full year
or any future period.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies, as discussed below and elsewhere in
the notes to consolidated financial statements. The preparation of these
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(2) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries: Cytyc SARL (a Swiss corporation)
(including its wholly-owned subsidiaries Cytyc Italia s.r.l. and Cytyc France
s.a.r.l.), Cytyc (Australia) PTY LIMITED (an Australian corporation) and Cytyc
Securities Corporation (a Massachusetts securities corporation). All
intercompany transactions and balances have been eliminated in consolidation.
(3) Cash and Cash Equivalents
Cash equivalents consist of money market mutual funds, certificates of
deposit, commercial paper and U.S. Government securities with original
maturities of three months or less.
(4) Short-term Investments
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and
Equity Securities.
Short-term investments consist of U.S. Government securities, certificates
of deposit and commercial paper with original maturities between three and
twelve months. At March 31, 1999, the Company's available-for-sale securities
had contractual maturities that expire at various dates through March 2000. The
fair value of available-for-sale securities was determined based on quoted
market prices at the reporting date for those securities. Available-for-sale
securities are shown in the consolidated financial statements at fair market
value. At March 31, 1999 and December 31, 1998, the amortized cost basis,
aggregate fair value and gross unrealized holding gains (losses) by major
security type were as follows:
6
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AMORTIZED GROSS FAIR
--------- ----- ----
COST UNREALIZED VALUE
---- ---------- -----
HOLDING GAINS
-------------
(IN THOUSANDS)
<S> <C> <C> <C>
MARCH 31, 1999
--------------
Available-for-sale securities
U.S. Government and Agency securities (average
maturity of 5.8 months)....................................... $21,346 60 $21,406
Certificates of Deposit (average maturity of 0.9 months)...... 3,000 -- 3,000
Commercial Paper (average maturity of 2.6 months)............. 3,845 1 3,846
------- --- -------
$28,191 61 $28,252
======= === =======
DECEMBER 31, 1998
-----------------
Available-for-sale securities
U.S. Government and Agency securities (average
maturity of 4.4 months)....................................... $31,767 105 $31,872
Certificates of Deposit (average maturity of 3.8 months....... 2,999 -- 2,999
Commercial Paper (average maturity of 4.6 months)............. 1,470 1 1,471
------- --- -------
$36,236 106 $36,342
======= === =======
</TABLE>
(5) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
DECEMBER 31, MARCH 31,
------------ ---------
1998 1999
---- ----
(IN THOUSANDS)
Raw material and work-in-process......... $1,680 $1,717
Finished goods........................... 2,293 2,386
------ ------
$3,973 $4,103
====== ======
(6) Net Income (Loss) Per Common Share
The Company applies SFAS No. 128, Earnings per Share, which requires
companies to report both basic and diluted per share data, for all periods for
which an income statement is presented. Basic earnings (loss) per share is
computed by dividing net income (loss) by the weighted average number of common
shares outstanding. Diluted earnings (loss) per share reflects the potential
dilution that could occur if the income were divided by the weighted-average
number of common and potential common shares outstanding during the period.
Diluted earnings (loss) per share is computed by dividing net income (loss) by
weighted average number of common shares and potential common shares from
outstanding stock options. Potential common shares are calculated using the
treasury stock method and represent incremental shares issuable upon exercise of
the Company's outstanding options. For the quarter ended March 31, 1998, net
loss per diluted share is based on weighted average common shares and excludes
any common stock equivalents as they would be anti-dilutive due to the reported
loss. The following table provides a reconciliation of the numerators and
denominators used in calculating basic and diluted earnings (loss) per share for
the three months ended March 31, 1998 and 1999.
7
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basic and diluted income per share, as required by SFAS No. 128, is as
follows (in thousands except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1999
---- ----
<S> <C> <C>
Net income (loss).................................................... $(6,498) $657
======== =======
Basic weighted average common shares outstanding..................... 17,548 17,810
Dilutive effect of assumed exercise of stock options................. -- 625
Weighted average common shares outstanding assuming dilution......... 17,548 18,435
======== =======
Basic net income (loss) per share.................................... $ (0.37) $0.04
======== =======
Diluted net income (loss) per share.................................. $ (0.37) $0.04
======== =======
</TABLE>
Diluted weighted average shares outstanding excludes 1,157,163 and 522,205
potential common shares from stock options and warrants outstanding as of March
31, 1998 and 1999, respectively, as their effect would be anti-dilutive.
(7) Reporting Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income, effective
January 1, 1998. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income is the total of net income and all other non owner changes
in equity including such items as unrealized holding gains/losses on securities
classified as available-for-sale, foreign currency translation adjustments and
minimum pension liability adjustments. The Company had no such items for the
three months ended March 31, 1998 and one such item in 1999, an unrealized
holding gain on marketable securities, totaling approximately $61,000.
(8) Legal Proceedings
The Company filed a suit against the PIE Mutual Insurance Company ("PIE")
and its medical director in the United States District Court for the Northern
District of Ohio, Eastern Division on July 3, 1997 (Civil Action No. 1:97 CV
1779). The complaint alleges false and misleading description and
representation, unfair and deceptive trade practices, interference with
advantageous relationships, defamation and commercial disparagement. The Company
is seeking injunctive relief as well as damages, including treble damages. On
September 2, 1997, the defendants filed an answer and affirmative defenses to
the Company's claims, denying liability. Defendants filed a motion to dismiss
the action on March 13, 1998. The case is in discovery.
On May 14, 1997, Cytology West, Inc. ("CWI") filed suit against the Company
in the United States District Court for the District of Nevada (Civil Action No.
CV-S- 97-00594-LDG (LRL)), alleging false description, false representation and
unfair competition. On June 27, 1997, the Company filed a motion to dismiss the
complaint. The Court granted the Company's motion as to one count of CWI's
complaint, but denied the Company's motion as to the remainder of CWI's
complaint. On August 6, 1997, the Company filed counterclaims against CWI and
third party claims against its President, including claims for false and
misleading description and representation, unfair competition, interference with
advantageous relationships, defamation, commercial disparagement and abuse of
process. On August 26, 1997, CWI and its President filed an answer and
affirmative defenses to the Company's counterclaims, denying liability. On
January 23, 1998, the Company voluntarily withdrew its claim for abuse of
process. On February 8, 1999, the Company filed an Amended Counterclaim and
Third Party Complaint, and on April 12, 1999, CWI and its President filed an
answer and affirmative defenses to the Company's Amended Counterclaims, denying
liability. While the outcome of the action cannot be determined, the Company
believes the claims against the Company are without merit and intends to defend
against those claims vigorously.
The CWI and PIE actions are both pending and are in the discovery phase of
litigation. Accordingly, the Company is unable to determine the extent of its
liability, if any, or the likelihood of prevailing in such actions.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company designs, develops, manufactures and markets a sample
preparation system for medical diagnostic applications. The ThinPrep(R) System
consists of the ThinPrep(R) 2000 Processor and related disposable reagents,
filters and other supplies. The Company has marketed the ThinPrep for use in
non-gynecological testing applications since 1991. On May 20, 1996, the Company
received premarket approval ("PMA") from the United States Food and Drug
Administration ("FDA") to market the ThinPrep 2000 Processor and related
reagents 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 2000 System is
significantly more effective in detecting low grade and more severe lesions than
the conventional Pap smear method in a variety of patient populations. The
expanded labeling also indicates that the specimen quality using the ThinPrep
System is significantly improved over that of the conventional Pap smear method.
On February 25, 1997, the FDA approved the Company's supplemental PMA
application for use of a combination of an endocervical brush and spatula
sampling devices, which is a commonly used method of collecting samples for
conventional Pap smears. On September 4, 1997, the FDA approved the Company's
supplemental PMA application for the testing for the human papillomavirus
("HPV") directly from a single vial of patient specimen collected in a ThinPrep
solution using the Hybrid Capture HPV I DNA Assay of Digene Corporation. In
March 1999, the FDA approved the use of Hybrid Capture II DNA Assay from a
single vial of patient specimen collected in ThinPrep solution. The Company
commenced the full-scale commercial launch of the ThinPrep System for cervical
cancer screening in the United States in 1997 and in selected international
markets in 1998.
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 may continue in the future as it expands its
domestic and international marketing and sales activities, and continues its
product development efforts. The operating results of the Company have
fluctuated significantly in the past on an annual and a quarterly basis. The
Company expects that its operating results will fluctuate significantly from
quarter to quarter in the future depending on a number of factors, including the
extent to which the Company's products continue to gain market acceptance, the
rate and size of expenditures incurred as the Company expands its domestic and
international sales and distribution networks, the timing and level of
reimbursement for the ThinPrep System by third-party payors, and other factors,
many of which are outside the Company's control.
The Company occupies a 97,000 square foot facility in Boxborough,
Massachusetts. The Company has installed automated customized equipment for the
high-volume manufacture of disposable filters for use in connection with the
ThinPrep System.
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. In the United States, the
current rate of reimbursement of laboratories from managed care organizations
and other third-party payors to screen conventional Pap smears ranges from
approximately $6.00 to $36.00 per test, with $17.00 as the most common rate of
reimbursement. Although health insurance companies have added the ThinPrep(R)
Pap Test to their coverage, there can be no assurance that third-party payors
will provide or continue to provide such coverage, that reimbursement levels
will be adequate or that health care providers or clinical laboratories will use
the ThinPrep System for cervical cancer screening in lieu of the conventional
Pap smear method.
The cost per ThinPrep Pap Test, plus a laboratory mark-up, is generally
billed to third-party payors and results in a higher cost for the ThinPrep Pap
Test 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.
Since January 1, 1998, the Company's laboratory customers have been able to
request reimbursement for the ThinPrep Pap Test from health insurance companies
and the USHCFA (United States Health Care Financing Administration) using a
Common Procedure Technology ("CPT") code specifically for liquid-based monolayer
cervical cell specimen preparation. CPT codes are assigned, maintained and
revised by the CPT Editorial Board, which is administered by the American
Medical Association, and are used in the submission of claims to third-party
payors for reimbursement for medical services. The single CPT code replaced the
non-specific, two-code
9
<PAGE>
description used during 1997 and is expected to facilitate reimbursement to the
Company's laboratory customers for their use of the ThinPrep Pap Test. Initial
delays in the implementation of the new CPT code by third-party payors, however,
resulted in delayed reimbursement to the Company's laboratory customers in the
first half of 1998. As a result, the Company believes that orders for ThinPrep
Pap Tests during the first half of 1998 were reduced, delayed or eliminated.
The Company's direct sales force is actively working with current
laboratory customers and health insurance companies to facilitate reimbursement
under the new CPT code. As of March 31, 1999, based on information provided to
the Company, the Company believes that all of the 125 health insurance companies
which announced coverage of the ThinPrep Pap Test have implemented the new CPT
code and have established a reimbursement amount. There are approximately six
hundred managed care organizations and other third party payors in the United
States. There can be no assurance, however, that reimbursement levels under the
new CPT code will be adequate.
The Company expects to continue its significant expenditures for marketing,
sales and customer support activities of the ThinPrep System for cervical cancer
screening. During 1997, the Company entered into a co-promotion agreement with
Mead Johnson & Company ("Mead Johnson"), a division of Bristol-Myers Squibb
Company, to promote the ThinPrep Pap Test to obstetricians and gynecologists in
the United States. The Mead Johnson agreement expired on December 31, 1998;
however, Mead Johnson will receive a residual payment in February 2000 based on
1999 product sales. In January 1999, the Company announced its intention to
employ 75 additional direct sales personnel to promote its products directly to
physicians. As of March 31, 1999, sixty such sales personnel had been employed
or otherwise engaged by the Company. There can be no assurance that the
Company's current and planned marketing, sales and customer support activities
will result in increased net sales, that the Company's direct sales force will
succeed in promoting the ThinPrep System to health care providers, third-party
payors or clinical laboratories, or that additional marketing and sales channels
will be successfully established.
The Company expects to increase its expenditures for research and
development to fund development of follow-on products and additional
applications of ThinPrep technology. The Company also expects to continue to
incur expenses for administrative activities, principally for the employment of
personnel, and professional fees.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
Net sales increased to $16.2 million in the first quarter of 1999 from $8.1
million for the same period of 1998, an increase of 101%. The increase was
primarily due to increased sales of the Company's ThinPrep Pap Test for cervical
cancer screening in the United States. Gross profit increased to $12.7 million
in the first quarter of 1999 from $5.8 million for the same period of 1998, an
increase of 120%, and the gross margin increased to 78% in the first quarter of
1999 from 72% for the same period of 1998. Management attributes the increase in
gross margin in 1999 primarily to increased sales of the higher gross margin
ThinPrep Pap Test in the United States as compared to the ThinPrep 2000
Processor in the United States or international sales of either Tests or
Processors.
Total operating expenses decreased slightly to $13.0 million in the first
quarter of 1999 from $13.5 million for the same period of 1998, a decrease of
4%. Research and development costs increased to $2.2 million in the first
quarter of 1999 from $1.9 million for the same period of 1998, an increase of
18%, primarily as a result of engineering costs associated with the Company's
other product development activities. The Company expects that research and
development expenses will increase in the succeeding quarters as a result of
clinical trials for the more automated ThinPrep 3000 Processor which commenced
in April 1999 and development costs for other follow-on products. Sales,
marketing and customer support costs increased slightly to $9.2 million in the
first quarter of 1999 from $8.9 million for the same period of 1998, an increase
of 3%. This increase reflects increased expenses associated with the
international promotion of the ThinPrep technology. The Company expects that
selling and marketing costs will increase in succeeding quarters as a result of
employment of additional sales personnel and costs of direct to consumer
advertising which commenced in April 1999. General and administrative costs
decreased to $1.6 million in the first quarter of 1999 from $2.7 million for the
same period of 1998, a decrease of 40%, primarily due to decreased legal
expenses associated with litigation.
Net interest income decreased to $0.9 million in the first quarter of 1999
from $1.2 million for the same period of 1998, a decrease of 21%, due to both a
decrease in the average cash balances available for investment and lower
interest rates.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have significantly exceeded its
revenue, resulting in an accumulated deficit of $80.3 million as of March 31,
1999. The Company has funded its operations primarily through the private
placement and public sale of equity securities aggregating $165.4 million, net
of offering expenses. At March 31, 1999, the Company had cash, cash equivalents
and short-term investments of $70.4 million. Cash provided by the Company's
operations during the first quarter of 1999 was $1.4 million compared to $5.3
million in cash used during the first quarter of 1998.
Net accounts receivable increased by $0.3 million to approximately $12.8
million during the first quarter of 1999. Inventories were approximately equal
at the end of the first quarter of 1999.
The Company's capital expenditures for the quarters ended March 31, 1999 and
1998 were $1.1 million and $1.7 million, respectively. The decrease in capital
expenditures in the first quarter of 1999 was due primarily to decreased
purchases for manufacturing equipment which was partially offset by increased
costs related to leasehold improvements.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the resources required to further develop its
marketing and sales capabilities, both domestic and international, and the
extent to which such activities generate market acceptance and demand for the
ThinPrep System for cervical cancer screening. The Company's capital
requirements will also depend upon the progress of the Company's research and
development programs to develop follow-on products including clinical trials for
the ThinPrep 3000 Processor, the receipt of and the time required to obtain
regulatory clearances and approvals, and the resources the Company devotes to
developing, manufacturing and marketing its products. In addition, the Company's
capital requirements will depend on the extent of potential liabilities, if any,
and costs associated with existing or future litigation. See "Legal
Proceedings." There can be no assurance that the Company will not require
additional financing or will not in the future seek to raise additional funds
through bank facilities, debt or equity offerings or other sources of capital.
Additional funding may not be available when needed or on terms acceptable to
the Company, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
YEAR 2000 READINESS DISCLOSURE AND RELATED INFORMATION
Until recently, many computer programs were written using two digits rather
than four digits to define the applicable year in the twentieth century. Such
software may recognize a date using "00" as the year 1900 rather than the year
2000. In addition, the year 2000 is a special case leap year. The consequences
of this issue may include systems failures and business process interruption to
the extent companies fail to upgrade, replace or otherwise address year 2000
problems. The year 2000 problem may also result in additional business and
competitive differentiation. The Company is working to assess the potential
impact of the year 2000 issue on the Company's products and systems and on its
third-party suppliers, payors and laboratory customers, and to minimize the
effects of any such impact.
The Company believes that it has three general areas of potential exposure
with respect to the year 2000 problem: (1) software integral to the operation of
the Company's own products; (2) software used in the Company's internal
information systems, financial and accounting systems, manufacturing systems,
and other administrative functions; and (3) the effects of third party year
2000-related compliance efforts on the Company's business with such third
parties. The Company has established a task force composed of experienced
personnel from technical operations, information systems, legal and finance
functional areas and is currently in the process of evaluating its year 2000
readiness with respect to these areas of potential exposure, and currently
anticipates that its evaluation will include the following phases: (i)
identification of all potentially affected products, hardware, systems and third
party compliance efforts; (ii) assessment of any repair or replacement
requirements; (iii) conducting any necessary repairs or replacements; (iv)
testing; (v) implementation; and (vi) creation of contingency plans in the event
of year 2000 failures.
The first type of potential year 2000 exposure for the Company relates to
software and/or hardware used in the Company's ThinPrep Processors. The Company
has completed an assessment of its ThinPrep 2000 Processor and, based on this
assessment, has determined that it is year 2000 compliant due to the fact that
the system does not have any software or hardware time or calendar functions
available in its design. The Company has also assessed the year 2000 compliance
of its next-generation product, the ThinPrep 3000 Processor, which is currently
in clinical trials. As a result of this assessment, the Company believes that
the ThinPrep 3000 Processor will be year 2000 compliant upon its initial release
to the market.
11
<PAGE>
The second type of potential year 2000 exposure for the Company relates to
software applications used in the Company's internal information systems,
financial and accounting systems, manufacturing processes, and other
administrative functions. The Company has conducted a review of its internal
computer software and systems to determine the extent to which the Company's
internal systems may be adversely affected by the onset of the year 2000. The
Company believes that it has identified all of its systems which require updates
in order to become year 2000 compliant. The Company plans to have all of these
systems and updates implemented, tested and validated during the second quarter
of 1999. The Company has also established a procurement process intended to
ensure that all new software and hardware systems are year 2000 compliant. Based
on its assessment to date, and the identified corrective actions and validation
testing, the Company believes that it will not experience material disruption as
a result of year 2000 issues with respect to its internal information systems,
financial and accounting systems, manufacturing processes, and other
administrative functions.
The third type of potential year 2000 exposure for the Company relates to
the effects of third party compliance efforts and the potential failure by third
parties to achieve year 2000 readiness. Certain key components of the ThinPrep
System, including its proprietary filter, are currently supplied to the Company
by single sources. In the event that the Company believes that any of the
Company's suppliers will be unable to provide the Company with such key
components due to the failure of such suppliers to timely resolve their year
2000 issues, the Company intends to develop contingency plans, including, if
appropriate, establishing sufficient reserves of such key components in order to
limit or prevent any material disruption of the Company's ability to manufacture
its products on a timely and cost-competitive basis. In the event that the
Company is unable to obtain sufficient quantities of such key components caused
by the failure of the Company's suppliers to resolve their own year 2000 issues,
or otherwise address any material disruption of its supply of such components,
the Company may not be able to manufacture its products on a timely and cost-
competitive basis, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is also dependent on third-party payors such as private
insurance plans, managed care organizations and Medicare and Medicaid to
reimburse its laboratory customers for the ThinPrep Pap Test, and on laboratory
customers for orders of and payments for ThinPrep Pap Tests. The Company has
initiated a program to determine the year 2000 readiness of its significant
third-party payors and laboratory customers and anticipates completion of this
program in the second quarter of 1999. The Company has begun to contact critical
suppliers and large volume third party payors and laboratory customers through
correspondence concerning their year 2000 readiness. There can be no assurance
that any such entities will provide any requested information on a timely basis,
or at all. Delays in reimbursement to the Company's laboratory customers by
third-party payors caused by year 2000 disruptions of third-party payors'
systems, or the inability of such laboratory customers to process ThinPrep Pap
Tests and/or pay the Company for the Company's products as a result of the
failure of the laboratory customers to resolve their own year 2000 issues, may
adversely impact future orders for ThinPrep Pap Tests and ThinPrep Processors,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, the purchasing patterns of
laboratory customers or potential customers may be affected by year 2000 issues
to the extent they expend significant resources to correct their current systems
for year 2000 compliance. Because of the many uncertainties associated with year
2000 compliance efforts by third-party payors and the Company's laboratory
customers and suppliers and because the Company's assessment is necessarily
based primarily on information provided by such third-party payors, laboratory
customers and suppliers, there can be no assurance that the Company's assessment
of year 2000 readiness of such payors, laboratory customers and suppliers will
be correct or that the impact on the Company of any resulting year 2000
disruptions with respect to such parties will not be material.
In addition, if certain critical third party providers, such as those
supplying electricity, water, or telecommunications services, experience
difficulties resulting in a material interruption of services to the Company,
such interruption would likely result in a material adverse effect on the
Company's business, financial condition and results of operations.
To date, the Company has not incurred any material expenditures in
connection with identifying or evaluating year 2000 compliance issues. The costs
incurred by the Company through the first quarter of fiscal 1999 to address year
2000 compliance efforts were approximately $10,000. The Company estimates it
will incur up to approximately $40,000 during the remainder of fiscal 1999 to
support its compliance initiatives. Most of the Company's expenses have been,
and in the future are expected to be, related to the opportunity cost of time
spent by employees of the Company evaluating year 2000 compliance matters in
general and outside consulting to review the Company's year 2000 program.
Because the Company's year 2000 process is at an early stage and is ongoing,
however, the actual costs to the Company of its efforts to address year 2000
issues are not presently known, and
12
<PAGE>
there can be no assurance that such costs will not have a material adverse
effect on the Company's business, financial condition and results of operations.
At present, the Company has not developed a year 2000-specific contingency
plan. The Company intends to prepare a contingency plan with respect to mission
critical systems no later than the second quarter of 1999. In addition, if
material year 2000 compliance issues are discovered, the Company will then
evaluate the need for one or more contingency plans relating to such issues.
The Company's expectations as to the extent and timeliness of modifications
required in order to achieve year 2000 compliance and of the prospects of the
Company and its third party payors and customers to achieve year 2000 compliance
are forward-looking statements subject to risks and uncertainties. Actual
results may vary materially as a result of a number of factors, including, among
others, those described in this paragraph. There can be no assurance that the
Company will be able to successfully modify on a timely basis its systems to
comply with year 2000 requirements, or that third party payors and laboratory
customers will not suffer material disruptions due to year 2000 issues, any of
which failures could have a material adverse effect on the business, financial
condition and results of operations of the Company. Further, while the Company
believes that its year 2000 compliance efforts will be completed on a timely
basis in advance of the year 2000 date transition and without material cost,
there can be no assurance that unexpected delays or problems, including the
failure to ensure year 2000 compliance by third party payors and laboratory
customers, will not result in material costs of compliance to the Company or
otherwise have a material adverse effect on the business, financial condition
and results of operations of the Company.
IMPACT OF EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Economic
and Monetary Union established fixed conversion rates between their existing
sovereign currencies and the Euro, and adopted the Euro as their common legal
currency. The Euro is currently being traded on currency exchanges and is
available for non-cash transactions. For a three-year transition period, both
the Euro and each participating country's sovereign currency will remain legal
currency. After June 30, 2002, the Euro will be the sole legal tender for the
participating countries.
A significant amount of uncertainty exists as to the interpretation of
certain Euro regulations and the effect that the Euro will have on the
marketplace, including its impact on currency exchange rate risk, pricing,
competition, contracts, information systems and taxation. The Company derives
approximately 7% of its revenues from sales of the ThinPrep System to customers
in countries which have converted to the Euro. The Company is currently
evaluating Euro-related issues and the impact that the introduction of the Euro
may have on the Company's business and results of operations. The Company
expects to take appropriate actions based on the results of its evaluation. The
Company has not yet determined the costs of addressing Euro-related issues, but
does not expect such costs to be material. Because the Company's evaluation of
Euro-related issues is at an early stage and is ongoing, however, there can be
no assurance that such issues and their related costs will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company does not provide financial performance forecasts. The forward
looking statements in this Quarterly Report on Form 10-Q are made under the safe
harbor provisions of Section 21E of the Securities Exchange Act of 1934, as
amended. The Company's operating results and financial condition have varied and
may in the future vary significantly depending on a number of factors.
Statements in this Form 10-Q which are not strictly historical statements,
including, without limitation, statements regarding current or future financial
performance, management's plans and objectives for future operations, domestic
and international marketing and sales plans, product plans and performance,
availability of reimbursement for the Company's product, potential savings to
the health care system, management's assessment of market factors, as well as
statements regarding the strategy and plans of the Company, constitute forward-
looking statements that involve risks and uncertainties. The following factors,
among others, could cause actual results to differ materially from those
contained in forward-looking statements made in this report and presented
elsewhere by management from time to time. The Company's risk factors include
its dependence on a single product, uncertainty of market acceptance and the
additional cost related thereto, a limited number of customers and a lengthy
sales cycle, limited marketing and sales experience, dependence on timely and
adequate levels of third-party reimbursement, CPT code implementation delays and
delays in reimbursement, risks associated with potential Year 2000 software
disruptions involving the products and systems of the Company and certain third
party customers, suppliers and payors of the Company, a limited operating
history, risks associated with commercialization, a history of losses, potential
fluctuations in future quarterly results,
13
<PAGE>
intense competition, potential liabilities and costs associated with existing or
future litigation, limited manufacturing experience, uncertainty of additional
applications and dependence on single source suppliers. Such factors, among
other risks detailed in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 filed with the Securities and Exchange Commission,
may have a material adverse effect upon the Company's business, results of
operations and financial condition. Because of these and other factors, past
financial performance should not be considered an indication of future
performance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
----------------------------------------------------------
Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments. The Company does not participate in derivative
financial instruments, other financial instruments for which the fair value
disclosure would be required under SFAS No. 107, or derivative commodity
instruments. All of the Company's investments are in short-term, investment-
grade commercial paper, certificates of deposit and U.S. Government and agency
securities that are carried at fair value on the Company's books. Accordingly,
the Company has no quantitative information concerning the market risk of
participating in such investments.
Primary Market Risk Exposures. The Company's primary market risk exposures
are in the areas of interest rate risk and foreign currency exchange rate risk.
The Company's investment portfolio of cash equivalents is subject to interest
rate fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments. The Company's business outside the
United States is conducted in local currency transactions. The Company has no
foreign exchange contracts, option contracts, or other foreign hedging
arrangements. However, the Company estimates that any market risk associated
with its foreign operations is not significant and is unlikely to have a
material adverse effect on the Company's business, results of operations, or
financial condition.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
The Company filed a suit against the PIE Mutual Insurance Company ("PIE")
and its medical director in the United States District Court for the Northern
District of Ohio, Eastern Division on July 3, 1997 (Civil Action No. 1:97 CV
1779). The complaint alleges false and misleading description and
representation, unfair and deceptive trade practices, interference with
advantageous relationships, defamation and commercial disparagement. The Company
is seeking injunctive relief as well as damages, including treble damages. On
September 2, 1997, the defendants filed an answer and affirmative defenses to
the Company's claims, denying liability. Defendants filed a motion to dismiss
the action on March 13, 1998. The case is in discovery.
On May 14, 1997, Cytology West, Inc. ("CWI") filed suit against the Company
in the United States District Court for the District of Nevada (Civil Action No.
CV-S- 97-00594-LDG (LRL)), alleging false description, false representation and
unfair competition. On June 27, 1997, the Company filed a motion to dismiss the
complaint. The Court granted the Company's motion as to one count of CWI's
complaint, but denied the Company's motion as to the remainder of CWI's
complaint. On August 6, 1997, the Company filed counterclaims against CWI and
third party claims against its President, including claims for false and
misleading description and representation, unfair competition, interference with
advantageous relationships, defamation, commercial disparagement and abuse of
process. On August 26, 1997, CWI and its President filed an answer and
affirmative defenses to the Company's counterclaims, denying liability. On
January 23, 1998, the Company voluntarily withdrew its claim for abuse of
process. On February 8, 1999, the Company filed an Amended Counterclaim and
Third Party Complaint, and on April 12, 1999, CWI and its President filed an
answer and affirmative defenses to the Company's Amended Counterclaims, denying
liability. While the outcome of the action cannot be determined, the Company
believes the claims against the Company are without merit and intends to defend
against those claims vigorously.
The CWI and PIE actions are both pending and are in the discovery phase of
litigation. Accordingly, the Company is unable to determine the extent of its
liability, if any, or the likelihood of prevailing in such actions.
Item 5. Other Information.
-----------------
Proposals of stockholders intended for inclusion in the proxy statement to
be furnished to all stockholders entitled to vote at the 2000 annual meeting of
stockholders of the Company must be received at the Company's principal
executive offices not later than December 7, 1999. The Company's by-laws
establish an advance notice procedure with regard to proposals that stockholders
otherwise desire to introduce at the annual meeting without inclusion in the
Company's proxy statement for that meeting. Written notice of such stockholder
proposals for the next annual meeting of the Company must be received by the
Secretary of the Company at the Company's principal executive offices not later
than the close of business on December 7, 1999 and not earlier than the close of
business on November 7, 1999 in order to be considered timely, and must contain
specified information concerning the matters proposed to be brought before such
meeting and concerning the stockholder proposing such matters. The matters
proposed to be brought before the meeting also must be proper matters for
stockholder action.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
--------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed by the Company for the
quarter ended March 31, 1999.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYTYC CORPORATION
Date: May 14, 1999 By: /s/ Joseph W. Kelly
--------------------
Joseph W. Kelly
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
16
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
- ------ ----------- ----
27 Financial Data Schedule 18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 42,103
<SECURITIES> 28,252
<RECEIVABLES> 13,667
<ALLOWANCES> 821
<INVENTORY> 4,103
<CURRENT-ASSETS> 87,733
<PP&E> 13,978
<DEPRECIATION> 4,399
<TOTAL-ASSETS> 98,997
<CURRENT-LIABILITIES> 12,432
<BONDS> 0
0
0
<COMMON> 178
<OTHER-SE> 86,387
<TOTAL-LIABILITY-AND-EQUITY> 98,997
<SALES> 16,205
<TOTAL-REVENUES> 17,147
<CGS> 3,533
<TOTAL-COSTS> 12,957
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 657
<INCOME-TAX> 0
<INCOME-CONTINUING> 657
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 657
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
