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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[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, 1998
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)
(978) 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 22, 1999 (based on the closing price as quoted by The
Nasdaq Stock Market as of such date) was $266,231,398. As of March 22, 1999,
17,820,040 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, 1998. 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(R) 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. 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, 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 a third party's Hybrid Capture HPV DNA Assay.
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 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
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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 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 impair 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.
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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
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 healthcare 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 ten
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 Company believes that the ability to test for HPV directly
from the ThinPrep collection
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vial has the potential for substantial healthcare cost savings through reduced
costly management of borderline cervical abnormalities.
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 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. In August 1997, Obstetrics &
Gynecology, a preeminent, widely read, peer-reviewed journal on women's
healthcare issues, published a major study describing the effectiveness of the
ThinPrep(R) Pap Test(TM) in screening for cervical cancer.
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(R) 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. In February 1997, the Company received FDA
approval of the Company's supplemental PMA application for the use of a
combination of an endocervical brush and spatula sampling devices, a commonly
used method of collecting samples for conventional Pap smears. In September
1997, the FDA approved the Company's supplemental PMA application for the
testing for HPV directly from a single vial of patient specimen collected in a
ThinPrep solution using the Hybrid Capture HPV DNA Assay of a third party.
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(R) 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(R) 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(R) 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
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hospital sites. A total of 6,747 patients were included. The study compared
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.
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. The FDA also 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.
Since FDA approval in May of 1996, a number of studies have been published
or presented that evaluate ThinPrep Pap Test in direct-to-vial, routine
clinical use. In 1998, seven major studies outlining the improved performance
of the ThinPrep Pap Test were published in peer-review journals. In addition,
two major studies were presented at the annual American College of Obstetrics
& Gynecology meeting in May 1998. In November 1998, fifteen separate studies
evaluating the clinical advantages of the ThinPrep Pap Test were presented at
the annual scientific meeting of the American Society of Cytopathology. These
studies demonstrated a wide range of benefits including increased disease
detection, reduction of equivocal diagnoses, improved specimen adequacy and
cost effectiveness.
Non-Gynecological Cytology
In May 1991, the Company began commercial shipments of the ThinPrep(R)
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.
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 its 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 healthcare 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. In 1997, the Company
implemented a full-scale commercial launch of the ThinPrep System in the
United States with its direct marketing and sales force organization,
complemented by the initiation of strategic marketing relationships with third
parties.
The Company continues to expand its direct marketing and sales organization
in the United States, supported by customer and technical service
representatives. The Company's direct marketing and sales organization focuses
on the clinical and economic benefits of the ThinPrep System for healthcare
providers, third-party payors and clinical laboratories. The Company designs
its marketing programs to establish and reinforce the recognition of its
corporate and product names through investments in medical advertising, direct
mail, focused medical educational symposia, trade shows and other promotional
activities. The Company has also initiated an education and training program
which will be offered to accredited cytology schools across the United States.
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In addition to its direct sales efforts during 1997 and 1998, the Company
entered into an agreement with Mead Johnson and Company ("Mead Johnson") a
division of Bristol-Meyers Squibb Company, to build a joint sales force of
approximately 500 sales representatives to co-promote the ThinPrep Pap Test
directly to over 15,000 obstetricians and gynecologists throughout the United
States. The Company's agreement with Mead Johnson expired in December 1998.
Mead Johnson will receive a residual payment due in February 2000, based upon
1999 sales of the ThinPrep System. The Company has also entered into
agreements with large clinical laboratory companies with a network of
laboratories across the United States. The clinical laboratory companies have
worked with the Company on marketing and sales programs, which generally
involve joint marketing geared toward promoting the Company's products to
physicians and third-party payors. In January 1999, the Company announced its
intention to employ 75 additional direct sales personnel to promote its
products to physicians.
Following the initial market launch of the ThinPrep product in the United
States, the Company has more recently initiated its marketing and sales
efforts in Europe and Asia Pacific. The Company established subsidiaries in
Switzerland and Australia in 1997, and in France and Italy in 1998, to handle
sales, service, training and distribution to clinical laboratories. The
Company's strategy is to establish a worldwide selling channel appropriate for
developing an international customer-base, taking into consideration factors
such as government regulations, screening cycles and clinical practices of the
particular country or region. The Company is also evaluating the use of direct
and indirect international sales channels, including contract sales
organizations, distributors and marketing partners.
Due to limited market awareness of the ThinPrep System, the Company believes
that both domestic and international sales efforts will continue to involve a
lengthy process, requiring the Company to educate healthcare 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 healthcare 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 reagent 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 continue to increase its marketing and
sales capabilities. No assurance can be given that the Company's direct sales
force or strategic marketing relationships will succeed in promoting the
ThinPrep System to healthcare 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.
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
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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 healthcare
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 approximately $6.00 to $36.00 per test, with $17.00 as
the most common rate of reimbursement. The cost per ThinPrep Pap Test, plus a
laboratory mark-up, is billed by laboratories to third-party payors or
patients and typically results 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. In 1997, the United States
Healthcare Financing Administration ("USHCFA") determined that Medicare would
cover the ThinPrep Pap Test. Because the ThinPrep Pap Test is a new test, the
USHCFA did not assign a reimbursement level for the procedure, but instead
allows Medicare intermediaries at the state level to "gap fill" or reimburse
for the procedure based on the laboratory billing they receive. Although a
number of managed care organizations have added the ThinPrep Pap Test to their
coverage, there can be no assurance that third-party payors will provide or
continue to provide such coverage, that reimbursement levels will be adequate
or that healthcare 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. In February
1998, the BlueCross BlueShield Association's Technology Evaluation Center
announced results of a recent review of three new cervical cancer screening
technologies, including the ThinPrep Pap Test, with respect to cost-
effectiveness. Although the review concluded that such technologies offered
only modest improvement, the Company believes that the study did not consider
certain cost advantages inherent in using the ThinPrep System. The study's
conclusions are not binding and do not represent a national coverage or
reimbursement decision by the Blue Cross and Blue Shield organizations.
Although the Company believes that to date the review has not caused any
change in the decision of Blue Cross and Blue Shield plans currently
reimbursing laboratories for the ThinPrep Pap Test, there can be no assurance
that the review will not lead to adverse reimbursement decisions by Blue
Cross, Blue Shield plans or others. Reimbursement by a third-party payor
depends on a number of factors, including the level of demand by healthcare
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 or remain available for the
ThinPrep System or any other products that may be developed by the Company, or
that such third-party reimbursement 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. In 1997, the CPT Editorial Board assigned a
new CPT code number 88142, which has been in effect since January 1, 1998,
specifically for liquid-based monolayer cervical cell specimen preparation.
The new specific CPT code is expected to facilitate reimbursement to the
Company's laboratory customers for their use of the ThinPrep Pap
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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, which the Company believes caused orders
for the ThinPrep Pap Test during that period to be reduced, delayed, or
eliminated.
The Company's direct sales force is actively working with current laboratory
customers and health insurance companies to facilitate implementation and
reimbursement under the new CPT code. As of December 31, 1998, 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 the new CPT code will be successfully implemented by additional third-
party payors, that any reimbursement delays will be successfully reduced, or
that reimbursement levels under the new CPT code will be adequate.
The Company has 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, healthcare 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. The
Company currently leases approximately 97,000 square feet of commercial space
and believes that its existing facility is adequate to meet the full-scale
production demands for the ThinPrep System. The Company has subleased
approximately 12,500 square feet of office space to a third party for two
years ending June 30, 2000.
The Company has committed to expand its manufacturing capacity by ordering
approximately $2.0 million of additional automated equipment, which is
expected to be installed in early 1999. Of this amount, approximately $1.5
million was paid in 1998 and approximately $0.5 million will be paid in 1999.
The Company's manufacturing process is subject to pervasive and continuing
regulation by the FDA, including the FDA's Quality System Regulation ("QSR").
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 Company's equipment to perform to the Company's specifications
could impair the Company's ability to produce adequate quantities of ThinPrep
supplies. As a result, the Company may be subject to total or partial
suspension of production, withdrawal of approval, and recall or seizure of
products by the FDA in the event of product malfunction or failure.
In October 1997, the Company obtained ISO 9001 registration, an
international quality standard. The Company has also met the applicable
requirements to use the "CE" mark for its ThinPrep System. There can be no
assurance that the Company will be able to maintain compliance with ISO or CE
mark requirements. Failure to 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.
9
<PAGE>
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 instrument, the ThinPrep(R) 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. The
Company expects to conduct clinical trials using the automated ThinPrep 3000
Processor in 1999. Although the Company anticipates that the ThinPrep 3000
Processor will be commercially available during 2000, 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
may 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. The Company is also developing imaging technology, which is
also subject to regulatory approvals. There can be no assurance that the
Company will obtain necessary regulatory approvals or successfully develop
such imaging technology.
The Company's expenditures for research and development (which includes
clinical trials, regulatory affairs and engineering) were approximately $4.7
million, $6.0 million, and $8.4 million for the years ended December 31, 1996,
1997, and 1998, respectively.
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 approval through the filing of a PMA prior to commercial
distribution. In addition, certain material changes or modifications to
medical devices also are subject to the FDA review and 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. Non-compliance with applicable
requirements of the FDC Act can result in the 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 or modifications of
existing products. The failure to obtain approvals, 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.
10
<PAGE>
The ThinPrep System for cervical cancer screening received PMA approval in
May 1996. The Company anticipates that other proposed uses for the ThinPrep
System may require 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.
In July 1997, several petitions were filed requesting that the FDA review
the PMA approval granted to the ThinPrep System. The petitions were filed
pursuant to a provision of the FDC Act permitting any interested party to
initiate a process by which the FDA may review an approval order and may issue
an order affirming, reversing or modifying the approval. To the Company's
knowledge, the FDA has conducted a review pursuant to this provision only
twice since the enactment of the Medical Device Amendments of 1976. The
Company responded to the petitions by submitting comments in December 1997
arguing that the FDA should deny them. No assurance can be given that the FDA
will not conduct a review of the PMA approval granted with respect to the
ThinPrep System, nor can assurance be given that the FDA will not, after such
review, issue an order reversing or unfavorably modifying the original PMA
approval. Any such action by the FDA would have a material adverse effect on
the Company's business, financial condition and results of operations.
The ThinPrep System is, and any other products manufactured or distributed
by the Company pursuant to an approved PMA application or supplements will be
subject to pervasive and continuing regulation by the FDA, including record-
keeping requirements, reporting of adverse experience with the use of the
device, postmarket surveillance, postmarket registration and other actions as
deemed necessary by the FDA. The Company is also subject to FDA inspection for
compliance with regulatory requirements. 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 System.
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 to market and sell the ThinPrep System from 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 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 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 ThinPrep device
operates in a manner that will allow laboratories purchasing the device to
comply with CLIA requirements. However, there can be no assurance that adverse
interpretations of current CLIA regulations or future changes in CLIA
regulations would not have an adverse effect on sales of the ThinPrep System.
Patents, Trademarks, Copyrights, Licenses and Proprietary Rights
The Company relies on a combination of patents, trademarks, trade secrets,
copyrights and confidentiality agreements to protect its proprietary
technology, rights and know-how. The Company pursues patent protection
11
<PAGE>
in the United States and files corresponding patent applications in certain
foreign jurisdictions. The Company holds eleven issued United States patents,
four pending United States patent applications, and corresponding foreign
patents or patent applications 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 attempts 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 technology similar to the
Company's will not be independently developed by the Company's competitors. In
addition, the Company is the exclusive perpetual worldwide 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 only be terminated (1) 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 to other than a single acquiror 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 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, or to enforce patents, copyrights,
trademarks or trade secrets of the Company which 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 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 is aware that another potential competitor, AutoCyte,
Inc., has submitted a PMA for systems 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
12
<PAGE>
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 initially evaluate conventional pap smears
(primary screening method) or to reexamine or rescreen conventional Pap smears
previously diagnosed as negative. The Company believes that these systems, as
currently sold, could not be used with the ThinPrep System, and, therefore, if
such systems are 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. 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, 1998, the Company employed 228 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
97,000 square feet. The lease of this facility has a term of seven years
beginning November 1997, 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. The Company has subleased
approximately 12,500 square feet of office space to a third party for two
years ending June 30, 2000.
Item 3. Legal Proceedings
The Company filed a suit against Neuromedical Systems, Inc. ("NSI") and two
of its officers in the United States District Court for the Southern District
of New York on June 24, 1997 (Civil Action No. 97 CIV 4642). On October 19,
1998, the Company announced that the parties had settled the litigation.
The Company also 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
13
<PAGE>
for abuse of process. On February 8, 1999, the Company filed an Amended
Counterclaim and Third Party Complaint. 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 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, 1998.
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 Stock Market under the
symbol "CYTC". The following table sets forth, for the calendar periods
indicated, the range of high and low sales prices for the Common Stock of the
Company on The Nasdaq Stock 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 1997:
First Quarter................................................ $31.50 $18.75
Second Quarter............................................... 31.00 14.50
Third Quarter................................................ 28.75 17.31
Fourth Quarter............................................... 30.00 18.75
Fiscal Year 1998:
First Quarter................................................ 27.88 19.06
Second Quarter............................................... 25.50 11.75
Third Quarter................................................ 20.50 7.38
Fourth Quarter............................................... 27.25 7.44
</TABLE>
On March 22, 1999, the last reported sales price of the Common Stock on The
Nasdaq National Market was $14.94 per share. As of March 22, 1999, there were
approximately 295 holders of record of the Common Stock.
For the year ended December 31, 1998, no shares of Common Stock were 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 Consolidated Financial Data
The selected consolidated financial data set forth below for each of the
years ended December 31, 1996, 1997 and 1998 and at December 31, 1997 and 1998
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 each of the
years ended December 31, 1994 and 1995 and at December 31, 1994, 1995 and 1996
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
14
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales................... $ 2,920 $ 4,273 $ 8,198 $ 26,347 $ 44,264
Cost of sales............... 2,225 2,413 4,354 8,006 11,211
-------- -------- -------- -------- --------
Gross profit................ 695 1,860 3,844 18,341 33,053
-------- -------- -------- -------- --------
Operating expenses:
Research and development.. 2,175 3,908 4,689 6,048 8,419
Marketing, sales and
customer support......... 1,418 2,582 9,918 31,761 35,332
General and
administrative........... 1,256 1,532 3,314 7,746 8,372
-------- -------- -------- -------- --------
Total operating
expenses............... 4,849 8,022 17,921 45,555 52,123
-------- -------- -------- -------- --------
Loss from operations........ (4,154) (6,162) (14,077) (27,214) (19,070)
Other income (expense),
net........................ (112) 247 2,158 5,142 7,341
-------- -------- -------- -------- --------
Net loss.................... $ (4,266) $ (5,915) $(11,919) $(22,072) $(11,729)
======== ======== ======== ======== ========
Net loss per common and
potential common share (1):
Basic and diluted......... $ (15.57) $ (19.20) $ (1.06) $ (1.31) $ (.66)
Weighted average common and
potential common shares
outstanding:
Basic and diluted......... 274 308 11,192 16,893 17,643
<CAPTION>
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
short-term investments..... $ 2,777 $ 7,902 $ 39,057 $ 85,402 $ 69,908
Total assets................ 3,851 11,025 50,183 108,377 97,737
Accumulated deficit......... (29,273) (35,188) (47,107) (69,179) (80,908)
Total stockholders' equity
(deficit).................. (2,112) 8,078 46,681 96,187 85,807
</TABLE>
- --------
(1) See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the computation of basic and diluted 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 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 HPV directly from a single
vial of
15
<PAGE>
patient specimen collected in a ThinPrep solution using the Hybrid Capture HPV
DNA Assay of Digene Corporation. The Company commenced the full-scale
commercial launch of the ThinPrep System for cervical cancer screening in the
United States in 1997.
Since inception, the Company has incurred substantial losses, principally
from expenses associated with obtaining FDA approval of the Company's ThinPrep
System for cervical cancer screening, engineering and development efforts
related to the ThinPrep System, expansion of the Company's manufacturing
facilities, and the establishment of a marketing and sales organization. The
Company expects such losses to continue for the foreseeable 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 establishes its international sales and distribution
networks, the timing and level of reimbursement for the ThinPrep System by
third-party payors, and other factors, many of which are outside the Company's
control.
The Company occupies a 97,000 square foot facility in Boxborough,
Massachusetts. In 1997 the Company installed new custom-built automated
equipment for the high-volume manufacture of disposable filters for use in
connection with the ThinPrep System. The Company has committed to expand its
manufacturing capacity in 1999 by installing additional automated equipment
during the first half of the year.
The Company believes that sales of the ThinPrep System for cervical cancer
screening in the United States will depend on the availability of adequate
reimbursement from third-party payors such as private insurance plans, managed
care organizations and Medicare and Medicaid. The Company believes that in the
United States, the current rate of reimbursement of laboratories from managed
care organizations and other third-party payors to screen conventional Pap
smears ranges from approximately $6.00 to $36.00 per test, with $17.00 as the
most common rate of reimbursement. Although health insurance companies have
added the ThinPrep Pap Test to their coverage, there can be no assurance that
third-party payors will provide or continue to provide such coverage, that
reimbursement levels will be adequate or that health care providers or
clinical laboratories will use the ThinPrep System for cervical cancer
screening in lieu of the conventional Pap smear method.
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 newly assigned Common Procedure Technology ("CPT") code specifically
for liquid-based monolayer cervical cell specimen preparation. CPT codes are
assigned, maintained and revised by the CPT Editorial Board, which is
administered by the American Medical Association, and are used in the
submission of claims to third-party payors for reimbursement for medical
services. The new, single CPT code replaced the non-specific, two-code
description used during 1997 and is expected to facilitate reimbursement to
the Company's laboratory customers for their use of the ThinPrep Pap Test.
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 implementation and
reimbursement under the new CPT code. As of December 31, 1998, based on
information provided to the Company, the Company believes that all of the 125
health
16
<PAGE>
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 Sates. There can be no assurance, however,
that the new CPT code will be successfully implemented by additional third-
party payors, that any reimbursement delays will be successfully reduced, or
that reimbursement levels under the new CPT code will be adequate.
The Company expects to increase its significant expenditures for marketing,
sales and customer support activities of the ThinPrep System for cervical
cancer screening. There can be no assurance, however, that such investments
will result in increased net sales or that the Company's direct sales force
will succeed in promoting the ThinPrep System to health care providers, third-
party payors or clinical laboratories, or that additional marketing and sales
channels will be successfully established. During 1996, the Company entered
into a co-promotion agreement with Mead Johnson 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. 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 agreements with
third parties will be successful, that the Company's direct sales force will
succeed in promoting the ThinPrep System to health care providers, third-party
payors or clinical laboratories, or that additional marketing and sales
channels will be successfully established.
The Company expects to continue its expenditures for research and
development to fund development of follow-on products and additional
applications of ThinPrep technology. The Company also expects to continue to
incur expenses for administrative activities, principally for the employment
of personnel, and professional fees.
Results of Operations
Years Ended December 31, 1998 and December 31, 1997
Net sales increased to $44.3 million in 1998 from $26.3 million in 1997, an
increase of 68.0%. This increase in sales was primarily due to an increase in
worldwide sales of the Company's ThinPrep Pap Test for cervical cancer
screening. Gross profit increased to $33.1 million in 1998 from $18.3 million
in 1997, an increase of 80.2% and the gross margin increased to 74.7% in 1998
from 69.6% in 1997. Management attributes the increase in gross margin in 1998
primarily to a change in the product mix with increased sales of the higher
gross margin ThinPrep Pap Test as compared to the ThinPrep 2000 Processor, and
increased selling prices for non-gynecological tests.
Total operating expenses increased to $52.1 million in 1998 from $45.6
million in 1997, an increase of 14.4%. Research and development costs
increased to $8.4 million in 1998 from $6.0 million in 1997, an increase of
39.2%, as a result of costs associated with the development of the ThinPrep
3000 instrument and other product development activities. Sales, marketing and
customer support costs increased to $35.3 million in 1998 from $31.8 million
in 1997, an increase of 11.2%. The increase in sales, marketing and customer
support costs primarily reflects increased payments to Mead Johnson,
employment of additional sales personnel in the United States and the
additional sales and marketing costs related to the international launch of
the ThinPrep Pap Test. General and administrative costs increased to $8.4
million in 1998 from $7.7 million in 1997, an increase of 8.1%, due to the
employment of additional administrative personnel and legal expenses
associated with certain litigation. Net interest income decreased to $4.3
million in 1998 from $5.2 million in 1997, a decrease of 16.7%, due to a
decrease in the average cash balance available for investment. The Company
recorded $3.1 million in the 1998 period as other income relating to the
settlement of certain litigation.
Years Ended December 31, 1997 and December 31, 1996
Net sales increased to $26.3 million in 1997 from $8.2 million in 1996, an
increase of 221.4%. This increase in sales was primarily due to an increase in
the number of ThinPrep Processors sold, sales of the Company's
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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 $18.3 million in 1997 from $3.8 million in 1996, an
increase of 377.1%. The gross margin increased to 69.6% in 1997 from 46.9% in
1996. Management attributes the increase in gross margin in 1997 primarily to
the introduction and sales of the ThinPrep Pap Test beginning in the later
part of 1996, the subsequent change in product mix, and increased sale prices
for non-gynecological tests and ThinPrep 2000 Processors.
Total operating expenses increased to $45.6 million in 1997 from $17.9
million in 1996, an increase of 154.2%. Research and development costs
increased to $6.0 million in 1997 from $4.7 million in 1996, an increase of
29.0%, as a result of employment of additional research and development
personnel and engineering consulting expenses. Sales, marketing and customer
support increased to $31.8 million in 1997 from $9.9 million in 1996, an
increase of 220.2%. The increase in sales, marketing and customer support
costs reflects the employment of additional sales and customer support
personnel, increased commission expenses, expenses associated with the Mead
Johnson co-promotion agreement, and additional marketing consulting costs
related to the commercial launch of the ThinPrep Pap Test. General and
administrative costs increased to $7.7 million in 1997 from $3.3 million in
1996, an increase of 133.7%, due to the employment of additional
administrative personnel, increased business insurance costs, and legal
expenses. Net interest income increased to $5.1 million in 1997 from $2.2
million in 1996, an increase of 138.3%, due to an increase in the average cash
balance available for investment.
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded its
revenue, resulting in an accumulated deficit of $80.9 million as of December
31, 1998. 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 December 31, 1998, the Company had cash, cash
equivalents and short-term investments of $69.9 million. Cash, cash
equivalents and short-term investments decreased during 1998 primarily due to
funding the Company's operating loss. Cash used in the Company's operations
was $13.6 million, $22.0 million, and $12.8 million for 1996, 1997, and 1998
respectively. The decrease in cash used in operations in 1998 was primarily
due to a decreased loss from operations.
The Company's capital expenditures for the years ended 1996, 1997 and 1998
were $4.8 million, $1.7 million, and $4.6 million respectively. The increase
in capital expenditures in 1998 was due primarily to increased purchases for
manufacturing equipment, furniture, fixtures and computer equipment.
Additionally, as of December 31, 1998, the Company had commitments for new
manufacturing equipment of approximately $0.5 million.
Accounts receivable increased $2.0 million to approximately $12.5 million
during 1998 as a result of increased sales volume. Inventories increased
approximately $0.7 million to $4.0 million from December 31, 1997 to December
31, 1998 due primarily to the Company's planned sales increase in 1999 of
ThinPrep Pap Tests, ThinPrep 2000 Processors and reagents, filters and other
supplies for non-gynecological testing and increased production of filters in
anticipation of an estimated four to six week shutdown of manufacturing in the
first half of 1999 to install new equipment. Stockholders' equity decreased
approximately $10.5 million from December 31, 1997 to December 31, 1998
primarily due to the net loss of $11.7 million.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the resources required to further develop its
marketing and sales capabilities, both domestic and international, and the
extent to which such activities generate market acceptance and demand for the
ThinPrep System for cervical cancer screening. The Company's capital
requirements will also depend upon the progress of the Company's research and
development programs including imminent clinical trials, the receipt of and
the time required to obtain regulatory clearances and approvals, and the
resources the Company devotes to developing, manufacturing and marketing its
products. In addition, the Company's capital requirements will depend on the
extent of potential liabilities, if any, and costs associated with existing or
future litigation. See "Legal Proceedings".
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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 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 under development. 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.
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
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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 end of fiscal 1998 to address year
2000 compliance efforts were approximately $40,000. The Company estimates it
will incur up to approximately $50,000 during 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 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 by 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
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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.
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 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-K which are not strictly historical statements, including, without
limitation, statements regarding management's plans and objectives for future
operations, domestic and international marketing and sales plans, 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 others, 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 gynecological and non-gynecological testing applications. 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 healthcare 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 healthcare 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.
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 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 depended on strategic marketing
relationships with large clinical laboratories to effect commercial-scale
marketing in the United States. There can be no assurance that such
relationships will succeed in promoting the ThinPrep System in the United
States. In January 1999, the Company announced its intention to employ 75
additional direct sales personnel to promote its products directly to
physicians. The Company has
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limited experience in marketing and selling the ThinPrep System for cervical
cancer screening, and no assurance can be given that its direct 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. Although a number of managed care organizations have
added the ThinPrep Pap Test to their coverage, there can be no assurance that
reimbursement will be available, reimbursement levels will be adequate or that
healthcare providers or clinical laboratories will use the ThinPrep System for
cervical cancer screening in lieu of the conventional Pap smear method. In
February 1998, the BlueCross BlueShield Association's Technology Evaluation
Center announced results of a recent review of three new cervical cancer
screening technologies, including the ThinPrep Pap Test, with respect to cost-
effectiveness. Although the review concluded that such technologies offered
only modest improvement, the Company believes that the study did not consider
certain cost and other advantages inherent in using the ThinPrep System. The
study's conclusions are not binding and do not represent a national coverage
or reimbursement decision by the Blue Cross and Blue Shield organizations.
Although the Company believes that to date the review has not caused any
change in the decision of Blue Cross and Blue Shield plans currently
reimbursing laboratories for the ThinPrep Pap Test, there can be no assurance
that the review will not lead to adverse reimbursement decisions by Blue
Cross, Blue Shield plans or others. 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
healthcare 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 and abroad. 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 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 at least one other
manufacturer of a thin-layer slide preparation system which is seeking
approval of its PMA application. 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. 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.
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History of Losses. The Company has incurred substantial losses since
inception. The Company expects such losses to continue in 1999 due to
expansion of its sales and marketing activities, both domestic and
international, and its new product development efforts.
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. After approval, the Company and its
medical products remain subject to pervasive regulation and FDA inspection for
compliance with regulatory requirements. In July 1997, several petitions were
filed requesting that the FDA review the PMA approval granted to the ThinPrep
System. The petitions were filed pursuant to a provision of the FDC Act
permitting any interested party to initiate a process by which the FDA may
review an approval order and may issue an order affirming, reversing or
modifying the approval. To the Company's knowledge, the FDA has conducted a
review pursuant to this provision only twice since the enactment of the
Medical Device Amendments of 1976. The Company responded to the petitions by
submitting comments in December 1997 arguing that the FDA should deny them. No
assurance can be given that the FDA will not conduct a review of the PMA
approval granted to the ThinPrep System, nor can assurance be given that the
FDA will not, after such review, issue an order reversing or unfavorably
modifying the original PMA approval. Any such action by the FDA would have a
material adverse effect on the Company.
International Sales and Operations Risks. The Company has commenced sale of
its ThinPrep System and intends to sell 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, trademarks 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
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intellectual property rights, or a third party claim of infringement, 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. The Company has been increasing its inventory
of this component in an effort to mitigate this risk. 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.
Year 2000 Risks. 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 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 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. There can be no assurance,
however, that the Company will be able to successfully modify on a timely
basis its internal systems to ensure compliance with year 2000 requirements,
or that suppliers, 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 suppliers, 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. See "Year 2000 Readiness Disclosure and Related
Information."
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.
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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 10% 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,
results of operations and financial condition.
Impact of Ongoing Litigation. The Company is currently involved in ongoing
commercial litigation. Any such litigation, regardless of the outcome, could
result in substantial cost to the Company and divert management's attention
from the Company's operations.
Item 8. Financial Statements and Supplementary Data
The information required by this item may be found on pages F-1 through F-16
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.
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(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement (the "1999 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, 1998, 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 1999 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 1999 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 1999 Proxy Statement,
and is incorporated herein by reference.
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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.
4.2(3) Rights Agreement, dated as of August 27, 1997, between Cytyc
Corporation and BankBoston, N.A (the "Rights Agreement") which
includes as Exhibit A the Form of Certificate of Designations, as
Exhibit B the Form of Rights Certificate, and as Exhibit C the
Summary of Rights to Purchase Preferred Stock.
4.3(4) Amendment No. 1 to Rights Agreement, dated as of June 22, 1998,
between Cytyc Corporation and BankBoston, N.A., amending the Rights
Agreement.
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) Form of Indemnification Agreement.
10.8(1) Lease Agreement between the Company and BFA Realty Partnership, L.P.
d/b/a BFA, Limited Partnership of February 1996.
10.9(5) Amendment No. 1 to Lease Agreement dated as of February 1996 between
the Company and BFA Realty Partnership, L.P. d/b/a BFA, Limited
Partnership.
10.10(6)# Co-Promotion Agreement dated as of May 27, 1997 by and between Mead
Johnson & Company and the Company.
10.11(7)# Amendment No. 1 to Co-Promotion Agreement dated as of May 27, 1997
by and between Mead Johnson & Company and the Company.
10.12** * Cytyc Corporation Director Deferred Compensation Plan.
13.1*** The Company's 1998 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 signature page hereto).
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).
26
<PAGE>
(2) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (File No. 333-19367).
(3) Incorporated herein by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K, filed August 29, 1997 (File No. 000-27558).
(4) Incorporated herein by reference to Exhibit 4.2 to the Company's Quarterly
Report on Form 10-Q, filed August 13, 1998.
(5) Incorporated herein by reference to Exhibit 10.9 to the Company's Annual
Report on Form 10-K, filed March 31, 1998.
(6) Incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q, filed August 8, 1997.
(7) Incorporated herein by reference to Exhibit 10.11 to the Company's Annual
Report on Form 10-K, filed March 31, 1998.
* 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.
+ Confidential treatment requested as to omitted portions pursuant to Rule
24b-2 promulgated under the Securities Exchange Act of 1934, as amended.
(b) Reports On Form 8-K
There were no reports on Form 8-K filed by the Company for the quarter
ended December 31, 1998.
(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."
27
<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 30, 1999
/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.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ Patrick J. Sullivan President, Chief Executive March 30, 1999
______________________________________ Officer (Principal
Patrick J. Sullivan Executive Officer) and
Director
/s/ Joseph W. Kelly Vice President, Finance March 30, 1999
______________________________________ and Chief Financial
Joseph W. Kelly Officer (Principal
Financial Officer and
Principal Accounting
Officer)
/s/ Sally W. Crawford Director March 30, 1999
______________________________________
Sally W. Crawford
/s/ Franklin J. Iris Director March 30, 1999
______________________________________
Franklin J. Iris
/s/ William G. Little Director March 30, 1999
______________________________________
William G. Little
/s/ C. William McDaniel Director March 30, 1999
______________________________________
C. William McDaniel
/s/ Anna S. Richo Director March 30, 1999
______________________________________
Anna S. Richo
/s/ Monroe E. Trout, M.D. Chairman of the Board of March 30, 1999
______________________________________ Directors
Monroe E. Trout, M.D.
</TABLE>
28
<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, 1997 and 1998............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998..................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998........................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998..................................................... 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, 1997
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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, 1997 and 1998 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 21, 1999
F-2
<PAGE>
CYTYC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 47,204 $33,566
Short-term investments.................................... 38,198 36,342
Accounts receivable, net.................................. 10,501 12,548
Inventories............................................... 3,241 3,973
Prepaid expenses and other current assets................. 905 650
-------- -------
Total current assets.................................... 100,049 87,079
Property and equipment, net................................. 5,851 8,825
Other assets................................................ 2,477 1,833
-------- -------
Total assets............................................ $108,377 $97,737
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,570 $ 2,555
Accrued expenses.......................................... 8,088 7,962
Deferred revenue.......................................... 1,532 1,413
-------- -------
Total current liabilities............................... 12,190 11,930
-------- -------
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred Stock, $.01 par value--
Authorized--5,000,000 shares
No shares issued or outstanding.......................... -- --
Common Stock, $.01 par value--
Authorized--60,000,000 shares
Issued and outstanding 17,454,096 shares in 1997 and
17,798,595 in 1998....................................... 175 178
Additional paid-in capital................................ 165,191 166,431
Accumulated other comprehensive income.................... -- 106
Accumulated deficit....................................... (69,179) (80,908)
-------- -------
Total stockholders' equity.............................. 96,187 85,807
-------- -------
Total liabilities and stockholders' equity.............. $108,377 $97,737
======== =======
</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 amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net sales....................................... $ 8,198 $ 26,347 $ 44,264
Cost of sales................................... 4,354 8,006 11,211
-------- -------- --------
Gross profit.................................. 3,844 18,341 33,053
-------- -------- --------
Operating expenses:
Research and development...................... 4,689 6,048 8,419
Sales, marketing and customer support......... 9,918 31,761 35,332
General and administrative.................... 3,314 7,746 8,372
-------- -------- --------
Total operating expenses.................... 17,921 45,555 52,123
-------- -------- --------
Loss from operations............................ (14,077) (27,214) (19,070)
Other income (expense):
Interest income............................... 2,174 5,152 4,291
Other, net.................................... (16) (10) 3,050
-------- -------- --------
Total other income (expense)................ 2,158 5,142 7,341
Net loss........................................ $(11,919) $(22,072) $(11,729)
======== ======== ========
Net loss per common and potential common share:
Basic and diluted............................. $ (1.06) $ (1.31) $ (.66)
======== ======== ========
Weighted average common and potential common
shares outstanding:
Basic and diluted............................. 11,192 16,893 17,643
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Convertible
Common Stock Preferred Stock Accumulated
---------------- ----------------- Additional Other Total
Comprehensive Number of Par Number of Par Paid in Accumulated Comprehensive Stockholders'
Income (Loss) Shares Value Shares Value Capital Deficit Income Equity
------------- ---------- ----- ---------- ----- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 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 Employee
Stock Purchase
Plan.............. -- 6,022 -- -- -- 83 -- -- 83
Comprehensive loss:
Net loss.......... $(11,919) -- -- -- -- -- (11,919) -- (11,919)
--------
Comprehensive
loss............. $(11,919) -- -- -- -- -- -- -- --
======== ---------- ---- ---------- --- -------- -------- ---- -------
Balance, December
31, 1996.......... 14,013,002 140 -- -- 93,648 (47,107) -- 46,681
Sale of Common
Stock, net of
issuance costs of
$500,000.......... -- 3,197,500 32 -- -- 70,549 -- -- 70,581
Exercise of stock
options........... -- 232,421 3 -- -- 752 -- -- 755
Issuance of shares
under Employee
Stock Purchase
Plan.............. -- 11,173 -- -- -- 242 -- -- 242
Comprehensive loss:
Net loss.......... $(22,072) -- -- -- -- -- (22,072) -- (22,072)
--------
Comprehensive
loss............. $(22,072) -- -- -- -- -- -- -- --
======== ---------- ---- ---------- --- -------- -------- ---- -------
Balance, December
31, 1997.......... -- 17,454,096 175 -- -- 165,191 (69,179) -- 96,187
Exercise of stock
options........... -- 324,185 3 -- -- 921 -- -- 924
Issuance of shares
under Employee
Stock Purchase
Plan.............. -- 16,720 -- -- -- 231 -- -- 231
Issuance of shares
under Directors'
Stock Plan........ -- 3,594 -- -- -- 88 -- -- 88
Comprehensive loss:
Net loss.......... $(11,729) -- -- -- -- -- (11,729) -- (11,729)
Other
comprehensive
income--
Unrealized gain
on securities.... 106 -- -- -- -- -- -- 106 106
--------
Comprehensive
loss............. $(11,623) -- -- -- -- -- -- -- --
======== ---------- ---- ---------- --- -------- -------- ---- -------
Balance, December
31, 1998.......... 17,798,595 $178 -- -- $166,431 $(80,908) $106 $85,807
========== ==== ========== === ======== ======== ==== =======
</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,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(11,919) $(22,072) $(11,729)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization................ 520 1,084 1,603
Provision for doubtful accounts.............. 135 672 913
Compensation expense related to issuance of
stock to directors.......................... -- -- 88
Changes in assets and liabilities--
Accounts receivable........................ (1,494) (8,491) (2,960)
Inventories................................ (710) (1,778) (732)
Prepaid expenses and other current assets.. (723) (134) 255
Accounts payable........................... (220) 1,536 (15)
Accrued expenses........................... 527 6,144 (126)
Deferred revenue........................... 248 1,008 (119)
-------- -------- --------
Net cash used in operating activities.... (13,636) (22,031) (12,822)
-------- -------- --------
Cash flows from investing activities:
(Increase) decrease in other assets............ (900) (1,518) 644
Purchases of property and equipment............ (4,831) (1,684) (4,577)
Purchases of short-term investments............ (23,084) (66,653) (45,143)
Proceeds from sale and maturity of short-term
investments................................... 13,836 39,940 47,105
-------- -------- --------
Net cash used in investing activities.... (14,979) (29,915) (1,971)
-------- -------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options........ 453 755 924
Proceeds from issuance of shares under Employee
Stock Purchase Plan........................... 83 242 231
Proceeds from sale of stock.................... 49,986 70,581 --
-------- -------- --------
Net cash provided by financing activi-
ties.................................... 50,522 71,578 1,155
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 21,907 19,632 (13,638)
Cash and cash equivalents, beginning of period... 5,665 27,572 47,204
-------- -------- --------
Cash and cash equivalents, end of period......... $ 27,572 $ 47,204 $ 33,566
======== ======== ========
Supplemental disclosure of non-cash items:
Unrealized holding gain on short-term
investments..................................... $ -- $ -- $ 106
======== ======== ========
</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 has 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 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 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.
(b) Revenue Recognition
The Company recognizes product revenue upon shipment, when customer
acceptance is assured and collection of the resulting receivable is probable.
Deferred revenue represents amounts relating to deferred interest recorded in
connection with sales type finance leases with customers and amounts related
to product billed but not shipped.
(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.
At December 31, 1998, the Company's available-for-sale securities had
contractual maturities that expire at various dates through December 1999. The
fair value of available-for-sale and held-to-maturity 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 and held-to-maturity securities are
stated at amortized cost. At December 31, 1998 and 1997, the amortized cost
basis, aggregate fair value and gross unrealized holding gains (losses) by
major security type are as follows:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Cost Holding Gains Value
--------- ---------------- -------
(in thousands)
<S> <C> <C> <C>
December 31, 1998
Available-for-sale securites
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
======= === =======
December 31, 1997
Held-to-maturity securities
U.S. Government and Agency securities
(average maturity of 3.6 months)....... $38,198 71 $38,269
======= === =======
</TABLE>
In the fourth quarter of 1998, upon the Company's re-evaluation of its
investment portfolio, all of the Company's securities were re-classified from
held-to-maturity to available-for-sale for SFAS No. 115 purposes. During 1998,
the Company sold prior to maturity securities previously classified as held-
to-maturity with an amortized cost aggregating $3,998,626. Total proceeds from
these sales were $4,084,075 resulting in a realized gain of $85,449.
(e) Reclassifications
Certain amounts in the prior year's financial statements have been
reclassified to conform with the current year's presentation.
(f) 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
financial 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-8
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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............................................. 3-7 Years
Furniture, fixtures and computer equipment..................... 3-7 Years
Leasehold improvements......................................... Life of lease
</TABLE>
(h) Other Assets
Other assets consist of long-term lease receivables from the sale of
ThinPrep Processors and long-term deposits.
(i) Research and Development Costs
The Company charges research and development costs to operations as
incurred.
(j) Net Loss Per Common Share
The Company applies SFAS No. 128, Earnings Per Share, which establishes
standards for computing and presenting earnings per share and applies to
entities with publicly held common stock or potential common stock. In
accordance with Staff Accounting Bulletin (SAB) No. 98, the Company has
determined that there were no nominal issuances of common stock or potential
common stock in the period prior to the Company's initial public offering
(IPO). Diluted weighted average shares outstanding for 1996, 1997 and 1998
exclude the potential common shares from stock options and convertible
preferred stock outstanding because to do so would have been antidilutive for
the years presented.
Options to purchase approximately 1,457,123, 1,463,157, and 1,367,277
weighted average shares of common stock were outstanding as of December 31,
1996, 1997 and 1998, respectively, but were not included in the computation of
diluted net loss per share as a result of their dilutive effect due to the
loss available to common stockholders. Diluted weighted average shares
outstanding also excludes 2,000 potential common shares from warrants
outstanding as of December 31, 1996, 1997 and 1998.
(k) Post-retirement and Post-employment Benefits
The Company has no obligations for post-retirement or post-employment
benefits.
(l) 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 years ended December 31, 1996 and 1997 and one such item in
1998, an unrealized holding gain on marketable securities, totaling
approximately $106,000.
F-9
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(m) Segment and Enterprise-Wide Reporting
In 1997, the FASB issued SFAS No. 131. Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 requires certain financial
and supplementary information to be disclosed on an annual and interim basis
for each reportable operating segment of an enterprise, as defined. Based on
the criteria set forth in SFAS No. 131, the Company currently operates in one
operating segment, medical diagnostic equipment.
SFAS No. 131 also requires that certain enterprise-wide disclosures be made
related to products and services, geographic areas and major customers. The
Company derives substantially all of its operating revenue from the sale and
support of one group of similar products and services. Primarily all of the
Company's assets are located within the United States. During 1996, 1997 and
1998, the Company derived its sales from the following countries (as a
percentage of net sales):
<TABLE>
<CAPTION>
Years Ended
--------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
United States................................................. 91% 97% 89%
Other......................................................... 9% 3% 11%
---- ---- ----
100% 100% 100%
==== ==== ====
</TABLE>
No one customer accounted for 10% or more of net sales in 1996, 1997 or
1998.
(n) New Accounting Pronouncement
In June 1998, the FASB issued SFAS No. 133. Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 will be effective for
the Company's fiscal year ending December 31, 2000. Management believes that
this statement will not have a significant impact on the Company, its
financial position or results from operations.
(3) Allowance for Doubtful Accounts
A summary of the allowance for doubtful accounts activity is as follows:
<TABLE>
<CAPTION>
December 31,
----------------
1996 1997 1998
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year................................. $148 $135 $672
Amounts provided........................................... -- 546 325
Amounts written off........................................ (13) (9) (84)
---- ---- ----
Balance, end of year....................................... $135 $672 $913
==== ==== ====
</TABLE>
(4) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------- -------
(in thousands)
<S> <C> <C>
Raw material and work-in-process............................ $ 1,374 $ 1,680
Finished goods.............................................. 1,867 2,293
------- -------
$ 3,241 $ 3,973
======= =======
</TABLE>
F-10
<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,
---------------
1997 1998
------- -------
(in thousands)
<S> <C> <C>
Production equipment........................................ $ 3,140 $ 3,390
Research equipment.......................................... 843 905
Furniture, fixtures and computer equipment.................. 1,985 3,331
Construction in process..................................... 321 3,240
Leasehold improvements...................................... 2,001 2,001
------- -------
8,290 12,867
Less accumulated depreciation and amortization.............. 2,439 4,042
------- -------
$ 5,851 $ 8,825
======= =======
</TABLE>
At December 31, 1998, the Company has commitments for the purchase of
manufacturing equipment of approximately $500,000.
(6) Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------- -------
(in thousands)
<S> <C> <C>
Accrued product upgrade costs............................... $ 906 $ 260
Accrued compensation........................................ 2,865 2,941
Accrued consulting fees..................................... 981 742
Other accruals.............................................. 3,336 4,019
------- -------
$ 8,088 $ 7,962
======= =======
</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, 1998, the Company has available net operating loss
carryforwards for federal tax purposes of approximately $62,949,000 and
research and development credit carryforwards of approximately $1,122,000 to
reduce future income taxes, if any. In addition, the Company has net operating
loss carryforwards for state tax purposes of approximately $51,291,000 and
other credit carryforwards of $1,018,000. These carryforwards expire at
various dates from 2003 to 2018, and are subject to review and possible
adjustment by the Internal Revenue Service.
The Internal Revenue Code ("IRC") contains provisions that may limit the
amount of net federal 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 in IRC Section 382, utilization of the carryforwards
may be restricted.
F-11
<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,
----------------
1997 1998
------- -------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards......................... $22,657 $24,583
Research and development and other tax credit
carryforwards........................................... 1,866 2,140
Capitalized research and development expenses............ 3,478 2,907
Nondeductible accruals................................... 1,322 2,302
Other temporary differences.............................. 1,832 885
------- -------
Deferred tax asset....................................... 31,155 32,817
Valuation allowance...................................... (31,155) (32,817)
------- -------
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, 1998, the Company has reserved 2,526,070 shares of Common
Stock for issuance as follows:
<TABLE>
<CAPTION>
Amount
---------
<S> <C>
Exercise of stock options.......................................... 2,417,985
Exercise of warrant................................................ 2,000
Employee stock purchase plan....................................... 106,085
---------
2,526,070
=========
</TABLE>
(b) Preferred Stock
The Company's By-laws provide for and 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 of Directors has no present plans to
issue any shares of Preferred Stock.
(c) Stockholders' Rights Plan
On August 6, 1997 the Board of Directors declared a dividend of one
Preferred Stock purchase right for each outstanding share of the Company's
Common Stock to stockholders of record at the close of business on September
5, 1997. Each right entitles the holder to purchase from the Company a unit
consisting of one one-hundredth of a share of Series A Junior Participating
Preferred Stock, $.01 par value, at a purchase price of $110 per Unit, subject
to adjustment.
(d) Warrant
At December 31, 1998, a warrant to purchase 2,000 shares of Common Stock at
an exercise price of $10.00 per share was outstanding and exercisable. The
warrant was exercised in January 1999.
F-12
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Stock Option and Employee Stock Purchase Plans
During 1995, the Board of Directors and stockholders approved the 1995 Stock
Option Plan, (the "1995 Plan"). The aggregate number of shares of Common Stock
that may be issued pursuant to the 1995 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
December 31, 1998, 437,334 shares were available for future grant under the
1995 Plan.
In 1997, the Company approved for grant 3,500 shares of Common Stock to each
of seven directors under the 1995 Plan. In January 1998, the Company approved
for grant 3,000 shares of Common Stock to six directors (500 shares each,
vesting equally each month during 1998).
As of December 31, 1998, options to purchase 589,816 shares of common were
outstanding under the 1989 Stock Plan. No further grants may be issued under
the 1989 Stock Option Plan.
The Board of Directors and stockholders approved the 1995 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. In January
1998, the Company granted 45,000 options to three directors under the 1995
Director Option Plan. At December 31, 1998, the Company had 140,000 options
available for future grants under the 1995 Director Stock Option Plan.
The following schedule summarizes the activity under the Company's stock
option plans for the three years ended December 31, 1998.
<TABLE>
<CAPTION>
Weighted
Number Average
of Shares Option Price Option Price
--------- ---------------- ------------
<S> <C> <C> <C>
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
Granted......................... 262,110 17.50 -- 31.13 23.89
Exercised....................... (232,421) 0.50 -- 22.00 3.25
Canceled........................ (22,583) 0.84 -- 32.00 15.15
--------- ---------------- ------
Outstanding, December 31, 1997.... 1,716,632 0.50 -- 33.50 10.94
Granted......................... 687,750 7.75 -- 24.88 17.19
Exercised....................... (324,185) 0.50 -- 23.25 2.63
Canceled........................ (244,546) 0.625 -- 33.50 18.98
--------- ---------------- ------
Outstanding, December 31, 1998.... 1,835,651 $0.50 -- $33.50 $13.72
--------- ---------------- ------
Exercisable, December 31, 1998.... 452,406 $0.50 -- $33.50 $13.75
========= ================ ======
</TABLE>
F-13
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted
Exercise Average Weighted Weighted
Price/Range of Remaining Average Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.500 --
$ 0.625 139,900 5.21 $ 0.62 33,900 $ 0.62
$ 0.840 --
$ 0.840 221,760 6.66 $ 0.84 60,410 $ 0.84
$ 0.850 --
$ 5.000 200,490 6.76 $ 3.43 76,290 $ 4.09
$ 7.750 --
$14.750 247,916 7.04 $13.69 42,266 $12.78
$14.780 --
$15.000 108,250 3.61 $15.00 34,300 $15.00
$16.000 --
$16.130 322,250 9.18 $16.12 31,200 $16.01
$16.250 --
$21.880 257,960 8.93 $20.55 51,843 $21.07
$22.000 --
$27.000 307,825 7.81 $25.60 115,151 $25.95
$27.130 --
$32.000 27,800 8.07 $27.97 6,446 $28.16
$33.500 --
$33.500 1,500 7.41 $33.50 600 $33.50
--------- ---- ------ ------- ------
$ 0.500 --
$33.500 1,835,651 7.41 $13.72 452,406 $13.75
========= ==== ====== ======= ======
</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 1996, 1997 and 1998 using the Black-
Scholes option pricing model prescribed by SFAS No. 123. The underlying
assumptions used are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Risk-free interest rate............................ 6.18% 6.22% 5.52%
Expected dividend yield............................ -- -- --
Expected lives..................................... 5.99 4.59 5.00
Expected volatility................................ 90% 80% 98%
Weighted average value of grants................... $13.85 $15.53 $13.25
Weighted average remaining contractual life of
options outstanding (years)....................... 8.31 8.29 7.41
</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,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net loss--
As reported................................. $(11,919) $(22,072) $(11,729)
Pro forma................................... (13,079) (24,975) (15,696)
Net loss per share, as reported--
Basic and diluted........................... $ (1.06) $ (1.31) $ (0.66)
Net loss per share, pro forma--
Basic and diluted........................... $ (1.17) $ (1.48) $ (0.89)
</TABLE>
F-14
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
During 1995, the Board of Directors and stockholders approved 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 lesser of 85% of
the closing price on the first or last day of the period. During 1998, 16,720
shares of common stock were issued at the purchase prices of $13.76 and $13.87
per share. As of December 31, 1998, 106,085 shares were available for future
issuance under the 1995 Employee Stock Purchase Plan.
(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 shares of the Company's
Common Stock at $23.50 per share.
(11) Commitments and Contingencies
(a) Lease Commitments
The Company leases its facilities under non-cancelable operating leases
which have expiration dates ranging from 1999 through 2005.
At December 31, 1998, future minimum annual lease payments under these
leases are as follows:
<TABLE>
<CAPTION>
Amount
--------------
(in thousands)
<S> <C>
1999.......................................................... $1,276
2000.......................................................... 1,269
2001.......................................................... 1,241
2002.......................................................... 1,248
2003.......................................................... 1,209
Thereafter.................................................... 1,419
------
$7,662
======
</TABLE>
Rent expense under operating leases totaled approximately $513,000, $709,000
and $1,226,000 in 1996, 1997 and 1998, respectively.
(b) Litigation
The Company filed a suit against Neuromedical Systems, Inc. ("NSI") and two
of its officers in the United States District Court for the Southern District
of New York on June 24, 1997 (Civil Action No. 97 CIV 4642).
F-15
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company settled the lawsuit in 1998 which resulted in proceeds of
$3,050,000 which have been included in other income.
The Company also 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. 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.
Any litigation, regardless of the outcome, could result in substantial cost
to the Company and divert management's attention from the Company's
operations.
(c) Royalties
The Company is the exclusive licensee of certain patented technology used in
the ThinPrep System. In consideration for this license, the Company has agreed
to pay a royalty equal to 1% of net sales of the ThinPrep Processor, filter
cylinder disposable products that are used with the ThinPrep System, and
improvements made by the Company relating to such items. Royalty payments, in
connection with this license, for the years ended December 31, 1996, 1997 and
1998 were $53,000, $135,000 and $211,000, 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 totaling $44,386, $89,635 and $109,833 during 1996,
1997 and 1998, respectively.
F-16
<PAGE>
INDEX TO EXHIBITS FILED WITH FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1998
<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.
4.2(3) Rights Agreement, dated as of August 27, 1997, between Cytyc
Corporation and BankBoston, N.A (the "Rights Agreement") which
includes as Exhibit A the Form of Certificate of Designations, as
Exhibit B the Form of Rights Certificate, and as Exhibit C the
Summary of Rights to Purchase Preferred Stock.
4.3(4) Amendment No. 1 to Rights Agreement, dated as of June 22, 1998,
between Cytyc Corporation and BankBoston, N.A., amending the Rights
Agreement.
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) Form of Indemnification Agreement.
10.8(1) Lease Agreement between the Company and BFA Realty Partnership, L.P.
d/b/a BFA, Limited Partnership of February 1996.
10.9(5) Amendment No. 1 to Lease Agreement dated as of February 1996 between
the Company and BFA Realty Partnership, L.P. d/b/a BFA, Limited
Partnership.
10.10(6)# Co-Promotion Agreement dated as of May 27, 1997 by and between Mead
Johnson & Company and the Company.
10.11(7)# Amendment No. 1 to Co-Promotion Agreement dated as of May 27, 1997
by and between Mead Johnson & Company and the Company.
10.12** * Cytyc Corporation Director Deferred Compensation Plan.
13.1*** The Company's 1998 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 signature page hereto).
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's Registration
Statement on Form S-1 (File No. 333-19367).
(3) Incorporated herein by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K, filed August 29, 1997 (File No. 000-27558).
(4) Incorporated herein by reference to Exhibit 4.2 to the Company's Quarterly
Report on Form 10-Q, filed August 13, 1998.
(5) Incorporated herein by reference to Exhibit 10.9 to the Company's Annual
Report on Form 10-K, filed March 31, 1998.
(6) Incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q, filed August 8, 1997.
(7) Incorporated herein by reference to Exhibit 10.11 to the Company's Annual
Report on Form 10-K, filed March 31, 1998.
<PAGE>
* 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.
+ Confidential treatment requested as to omitted portions pursuant to Rule
24b-2 promulgated under the Securities Exchange Act of 1934, as amended.
<PAGE>
Exhibit 10.12
CYTYC CORPORATION
DIRECTOR DEFERRED COMPENSATION PLAN
1. Purpose. Cytyc Corporation, a Delaware corporation (the "Company"),
hereby adopts this Director Deferred Compensation Plan (the "DDC Plan") to
promote the long-term growth and financial success of the Company by
attracting and retaining non-employee directors of outstanding ability and
promoting a greater identity of interest between the Company's non-employee
directors and its stockholders.
The DDC Plan is intended to allow participating non-employee directors to
meet the requirements of, and be treated as "disinterested persons" with
respect to, other stock plans of the Company, as defined in Rule 16b-3 ("Rule
16b-3") of the Securities Exchange Act of 1934, as amended.
2. Administration.
(a) The DDC Plan shall be administered by a committee (the "DDC
Committee") appointed by the Board of Directors of the Company (the
"Board") consisting of one employee director and the secretary of the
Company. The DDC Committee may be changed at any time in the discretion of
the Board.
(b) The DDC Committee shall have the authority (i) to exercise all of the
powers granted to it under the DDC Plan, (ii) to construe, interpret and
implement the DDC Plan and all relevant documents, (iii) to prescribe,
amend and rescind rules relating to the DDC Plan, and (iv) to make any
determination necessary or advisable in administering the DDC Plan.
(c) The determination of the DDC Committee on all matters relating to the
DDC Plan, or any document executed pursuant to the DDC Plan, shall be
conclusive.
(d) No member of the DDC Committee shall be liable for any action or
determination made in good faith with respect to the DDC Plan.
3. Eligibility. Only directors of the Company who are not employees of the
Company or any affiliate of the Company ("Eligible Directors") shall
participate in the DDC Plan.
4. Common Shares Subject to the DDC Plan.
4.1 Shares. For purposes of the DDC Plan, "Shares" shall mean shares of
common stock, par value $.01 per share, of the Company and any other stock
into which such common stock shall thereafter be changed by reason of any
merger, reorganization, recapitalization, consolidation, split-up,
combination of shares or similar event as set forth in and in accordance
with this Section 4.
4.2 Shares Available for Awards. Subject to Section 4.3 (relating to
adjustments upon changes in capitalization), as of any date, the total
number of Shares issuable under the DDC Plan shall be issued from the
shares authorized for issuance pursuant to the Company's 1995 Stock Plan,
including any successor plan, and/or any shares repurchased by the Company
on the open market.
4.3 Adjustments. In the event of any merger, reorganization,
recapitalization, consolidation, sale or other distribution of all or
substantially all of the assets of the Company, any stock dividend, split,
spin-off, split-up, split-off, distribution of securities or other property
by the Company, or other change in the Company's corporate structure
affecting the Shares, the number of Shares issuable under the DDC Plan and
the Share Units (as defined in Section 5.3(b)), then credited pursuant to
Section 5.3 shall be appropriately adjusted as determined by the DDC
Committee in its sole discretion.
5. Payment of Retainer, Meeting and/or Committee Fees.
5.1 In General. Subject to Sections 5.2 through 5.6 below, commencing on
the DDC Plan Effective Date (as herein defined), each Eligible Director may
elect to receive payment of (a) the annual retainer payable to such
Director for services as a member of the Board and its committees (the
"Retainer") and/or
<PAGE>
(b) fees payable to such Director for meetings of the Board or committees
of the Board ("Meeting Fees" and "Committee Fees" together with the
"Retainer" collectively, "Fees"), (i) in cash; or (ii) in Shares (the
"Current Payment Election"), in accordance with Section 5.2. Alternatively,
each Eligible Director may elect to defer such payments, payable in cash or
in Shares (the "Deferred Payment Election"), in accordance with the
provisions of Section 5.3. In the absence of any Current Payment Election
or Deferred Payment Election, all payments of Fees shall be paid to the
Eligible Directors in cash.
5.2 Election to Receive Shares Without Deferral. An Eligible Director may
elect, with respect to any calendar year, to receive payment of each type
of Fees due for such calendar year in Shares (the "Current Payment
Election"), valued at their Fair Market Value on the date on which such
amounts become payable, by submitting an election form ("Current Payment
Election Form") to the Company within 30 days after the DDC Plan Effective
Date, or for subsequent calendar years, at least 30 days prior to the
beginning of any calendar year. Except as provided herein, the beginning of
such calendar year shall be the effective date of such election for payment
of such Fees. A Current Payment Election shall be effective only with
respect to Fees that become payable after the effective date. Any election
made under this Section 5.2 shall continue in full force and effect,
including for subsequent calendar years, until revoked by written notice to
the Company, until superseded by a new Current Payment Election Form, or
unless no longer permitted by law or regulations (including Rule 16b-3).
5.3 Elective Deferrals. An Eligible Director may elect to defer the
payment of Fees by electing to have the Fees paid in cash or credited to an
account as Shares ("Deferred Amount"), by submitting an election form (a
"Deferred Payment Election Form") to the Company within 30 days after the
DDC Plan Effective Date with respect to amounts payable in 1998, or, for
subsequent calendar years, at least 30 days prior to any calendar year in
which such Fees would otherwise be paid to the Eligible Director. Except as
provided herein, any such election shall become effective for the calendar
year following the calendar year in which such Deferred Payment Election
Form is submitted to the Company. An election under this Section 5.3 shall
continue in effect, until the end of the calendar year in which it is
revoked by written notice to the Company, until it is superseded by a new
Deferred Payment Election Form, or immediately, if no longer permitted by
law or regulation (including under Rule 16b-3). An Eligible Director may
designate, in a Deferred Payment Election Form, one or more beneficiaries
to receive any distributions under the DDC Plan upon the death of the
Eligible Director, and such designation may be changed at any time by
submitting a new designation in writing to the Company, which shall become
effective immediately upon receipt by the Company. If no beneficiary is
designated by an Eligible Director, distributions under the DDC Plan shall
be made to the Eligible Director's estate.
(a) Cash Account: The Deferred Payment Election Form shall indicate:
(i) any Fees to be allocated to the "Cash Account" (the "Deferred
Amount"); and (ii) the date on which the commencement of payments of
Deferred Amounts (the "Distribution Date") should begin, as
contemplated by Section 5.4(a).
(b) Share Account: The Deferred Payment Election Form shall indicate:
(i) any Fees to be credited to an account (a "Share Account") in units
which are equivalent in value to Shares ("Share Units") which shall
comprise the "Deferred Amount". The Deferred Amount allocated to the
Share Account shall be credited to the Share Account no later than the
end of the month during which the Eligible Director becomes entitled to
payment of the Retainer, Meeting and/or Committee Fees. The number of
Share Units credited to such Share Account shall be an amount equal to
the result obtained by dividing (i) the Deferred Amount allocated to
the Share Account by (ii) the Fair Market Value of a Share on the
business day on which the Eligible Director becomes entitled to payment
of the Fees. If Share Units exist in an Eligible Director's Share
Account on a dividend record date for the Company's Shares, the Share
Account shall be credited, on the dividend payment date, with an
additional number of Share Units equal to (i) the cash dividend paid on
one Share, times (ii) the number of Share Units in the Share Account on
the dividend record date, divided by (iii) the Fair Market Value of a
Share on the dividend payment date.
2
<PAGE>
5.4 Distributions.
(a) Distribution Date. Each Eligible Director shall designate, on a
Deferred Payment Election Form, one of the following dates as a
Distribution Date with respect to the Deferred Amount credited to the
Eligible Director's Account thereafter: (i) the first day of a month
following the termination of service or retirement of the Eligible
Director as a member of the Board, (ii) a fixed date in the future at
least one year after the date of such deferral as specified on a
Deferred Payment Election Form, but no later than December 12, 2005; or
(iii) the earlier to occur of (i) or (ii). In the event of an Eligible
Director's death, all Deferred Amounts shall be paid no later than the
end of the month following the occurrence of such event.
(b) Share Account Distribution Method. Distributions shall be made
from the Eligible Director's Share Account in a single payment in the
form of whole Shares, and cash representing any fractional interest in
a Share.
(c) Emergency Distribution. In the event that an Eligible Director
encounters an unanticipated emergency that is caused by an event beyond
the control of such Eligible Director and/or his/her beneficiary (if
any) which would result in severe financial hardship if early
withdrawal were not permitted, the Eligible Director may submit a
written request to the DDC Committee outlining the nature of such
emergency and the portion of any Deferred Amount (the "Early
Distribution") necessary to meet such emergency. The DDC Committee, in
its sole discretion, shall determine the amount of any such Early
Distribution to be paid in accordance with the terms of this Section
5.4.
5.5 Interest on Cash Deferrals. Any payments due an Eligible Director and
deferred into the Cash Account shall be credited as of January 1, April 1,
July 1 and October 1 of each year, with an amount equal to the balance in
said account at the end of the preceding quarter, multiplied by the
percentage that represents 25% of the prime rate of interest as reflected
in the Wall Street Journal on the last business day of the preceding
quarter.
6. Definition of Fair Market Value. For purposes of this DDC Plan, in
respect to the valuation of Shares, if the Company's Common Stock is publicly
traded, "fair market value" shall be determined as of the last business day
for which prices or quotes are available and shall mean (a) the average (on
that date) of the high and low prices of the Common Stock on the principal
national securities exchange on which the Common Stock is traded, if the
Common Stock is then traded on a national securities exchange; or (b) the last
reported sale price (on that date) of the Common Stock on the Nasdaq Stock
Market, if the Common Stock is not then traded on a national securities
exchange; or (c) the closing bid price (or average of bid prices) last quoted
(on that date) by an established quotation service for over-the-counter
securities, if the Common Stock is not reported on the Nasdaq Stock market.
However, if the Common Stock is not publicly traded at the time a Share is to
be credited to a Share Account under the DDC Plan, "fair market value" shall
be deemed to be the fair value of the Common Stock as determined by the DDC
Committee after taking into consideration all factors which it deems
appropriate, including, without limitation, recent sale and offer prices of
the Common Stock in private transactions negotiated at arm's length; provided,
however, that the "fair market value" of the stock issuable upon a
Distribution Date pursuant to the DDC Plan within 120 days prior to the time
the Company's Common Stock is publicly traded shall be deemed to be equal to
the initial per share purchase price at which the Company's Common Stock is
offered to the public.
7. Definition of Disability. "Disability" shall mean any condition which
causes an Eligible Director to be unable to substantially perform services as
a member of the Board for a period of at least three consecutive months, or
for an aggregate of at least five months within any 12-month period.
8. Issuance of Certificates and Legal Compliance.
8.1 Restrictions on Transferability. All Shares delivered under the DDC
Plan shall contain such restrictive legends and be subject to such stop-
transfer orders and other restrictions as the Company may deem advisable or
legally necessary under any laws, rules, regulations and other legal
requirements
3
<PAGE>
including, without limitation, those of any stock exchange upon which the
Shares are then listed and any applicable federal, state or foreign
securities law.
8.2 Compliance with Laws. Anything to the contrary herein
notwithstanding, the Company shall not be required to issue any Shares
under the DDC Plan if, in the opinion of the Company's General Counsel, the
issuance and delivery of such Shares would constitute a violation by the
Eligible Director or the Company of any applicable law or regulation of any
governmental authority, including, without limitation, federal and state
securities laws and the rules of any stock exchange on which the Company's
securities may then be listed. If and to the extent that the DDC Committee
determines that it would be illegal, impractical or inadvisable to issue
Shares under the DDC Plan, or to the extent Shares are unavailable, the DDC
Committee shall make any distribution of Shares otherwise required under
the DDC Plan in cash.
8.3 Listing, Registration and Legal Compliance. If the DDC Committee
shall at any time determine that any Consent (as hereinafter defined) is
necessary or desirable as a condition of, or in connection with, the
granting of any award under the DDC Plan, the issuance of Shares or other
rights hereunder or the taking of any other action hereunder (each such
action being hereinafter referred to as a "Plan Action"), then such Plan
Action shall not be taken, in whole or in part, unless and until such
Consent shall have been effected or obtained. The term "Consent" as used
herein with respect to any Plan Action means (a) the listing, registration
or qualification of any Shares issued under the DDC Plan on any securities
exchange or under any foreign, federal, state or local law, rule or
regulation, (b) any and all consents, clearances and approvals in respect
of a Plan Action by any governmental or other regulatory bodies, or (c) any
and all written agreements and representations by an Eligible Director with
respect to the disposition of Shares or with respect to any other matter
which the DDC Committee shall deem necessary or desirable in order to
comply with the terms of any such listing, registration or qualification or
to obtain an exemption from the requirement that any such listing,
qualification or registration be made.
8.4 Governing Law. The DDC Plan shall be governed by, and construed in
accordance with, the laws of the Commonwealth of Massachusetts.
8.5 Rights as a Shareholder. An Eligible Director shall have no rights as
a shareholder of the Company with respect to any Shares issuable under the
DDC Plan until such Shares have been delivered to the Eligible Director.
9. Tax Related Issues.
9.1 Withholding and Other Obligations. The Company shall require as a
condition of delivery of any Shares or payment of any Deferred Amount to an
Eligible Director that, if applicable, such Director remit an amount
sufficient to satisfy any foreign, federal, state, local and other
governmental withholding tax requirements relating thereto and any
indebtedness or other obligation of the Eligible Director to the Company.
9.2 Unfunded DDC Plan. The DDC Plan shall be unfunded and shall not
create (or be construed to create) a trust or separate fund. The DDC Plan
shall not establish any fiduciary relationship between the Company and any
Eligible Director or other person and shall constitute a mere promise by
the Company to make payments in the future. To the extent any person holds
any rights by virtue of a pending deferral under the DDC Plan, such rights
shall be no greater than the rights of an unsecured general creditor of the
Company.
9.3 Rights Not Transferable or Subject to Alienation. No rights granted
to an Eligible Director under this DDC Plan may be sold, assigned or
otherwise transferred by the Eligible Director other than by will or the
laws of descent or distribution; all rights granted to an Eligible Director
under this DDC Plan may be exercised during the Eligible Director's
lifetime only by such Eligible Director. An Eligible Director's rights to
payments under the DDC Plan are not subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment or
garnishment by his creditors or his beneficiaries.
4
<PAGE>
10. DDC Plan Amendments and Termination. The Board may suspend or terminate
the DDC Plan at any time and may amend it at any time, in whole or in part,
provided that no amendment or termination may adversely affect any rights of
any Eligible Director that have accrued prior to the date of such amendment or
termination, and provided, further, that any amendment for which shareholder
approval is required by law or in order to maintain continued qualification of
the DDC Plan under Rule 16b-3, shall not be effective until such approval has
been obtained.
11. Right of Discharge Reserved. Nothing in the DDC Plan shall confer upon
any Eligible Director the right to continue in the service of the Company or
affect any right that the Company may have to terminate the service of such
Eligible Director.
12. Other Payments or Awards. Nothing contained in the DDC Plan shall be
deemed in any way to limit or restrict the Company, any affiliate, or the
Board from making any award or payment to any person under any other plan,
arrangement or understanding, whether now existing or hereafter in effect,
other than by use of the shares authorized under the Company's 1995 Stock
Plan.
13. Severability. If any portion of the DDC Plan is declared by any court or
governmental authority to be invalid, such invalidity shall not affect any
portion not declared to be invalid. Any portion so declared to be invalid
shall, if possible, be construed in a manner which will give effect to the
terms of such portion to the fullest extent possible while remaining valid.
14. Notices. All notices and other communications hereunder shall be given
in writing and shall be personally delivered or sent by registered or
certified mail, return receipt requested, or by reputable overnight delivery
service. Any notice shall be deemed given on the date of delivery or mailing,
and if mailed, shall be addressed (a) to the Company, at 85 Swanson Road,
Boxborough, MA 01719, Attention: DDC Committee (c/o President), and (b) to an
Eligible Director, at the Eligible Director's principal residential address
last furnished to the Company. Either party may, by notice, change the address
to which notice to such party is to be given.
15. Section Headings. The Section headings contained herein are for
convenience only and are not intended to define or limit the contents of said
Sections.
16. Effective Date. This DDC Plan shall become effective immediately upon
the approval of the DDC Plan by the Board, as reflected in a Board Resolution
(the "DDC Plan Effective Date").
17. Exculpation. It is understood that the obligations incurred by the
Company with respect to this DDC Plan do not constitute personal obligations
of the Directors, officers, employees or shareholders and shall not create or
involve any claim against, or personal liability on the part of, them or any
of them. The Eligible Directors agree not to seek recourse against any such
Directors, officers, employees or shareholders, or any of them or any of their
personal assets for satisfaction of any liability under or with respect to the
DDC Plan.
5
<PAGE>
EXHIBIT 21.1
------------
SUBSIDIARIES OF CYTYC CORPORATION
---------------------------------
Cytyc Securities Corporation, a Massachusetts corporation
Cytyc SARL, a Swiss corporation
Cytyc (Australia) PTY LTD, an Australian corporation
The following entities are each subsidiaries of Cytyc SARL, a wholly owned Swiss
subsidiary of Cytyc Corporation:
Cytyc Italia s.r.l.
Cytyc France s.a.r.l.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report set forth on page F-2 of this Form 10-K, into the Company's
previously filed Registration Statements on Form S-8, File No. 333-2196, File
No. 333-59291 and File No. 333-22675.
Arthur Andersen, LLP
Boston, Massachusetts
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
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</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
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<PERIOD-END> DEC-31-1998
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<SECURITIES> 36,342
<RECEIVABLES> 13,461
<ALLOWANCES> 913
<INVENTORY> 3,973
<CURRENT-ASSETS> 87,079
<PP&E> 12,867
<DEPRECIATION> 4,042
<TOTAL-ASSETS> 97,737
<CURRENT-LIABILITIES> 11,930
<BONDS> 0
0
0
<COMMON> 178
<OTHER-SE> 85,629
<TOTAL-LIABILITY-AND-EQUITY> 97,737
<SALES> 44,264
<TOTAL-REVENUES> 51,605
<CGS> 11,211
<TOTAL-COSTS> 52,123
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (11,729)
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<EPS-PRIMARY> (.66)
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