UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______________ to __________________
Commission File Number 0-27558
CYTYC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
-------- 02-0407555
(State or other jurisdiction ----------
of incorporation or (I.R.S. Employer
organization) Identification No.)
85 Swanson Road, Boxborough, MA 01719
(Address of principal executive offices, including Zip Code)
(978) 263-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: The number of shares of the
issuer's Common Stock, $0.01 par value per share, outstanding as of August 10,
2000 was 37,137,958.
Total Number of Pages: 25
Exhibit Index is on Page 16
CYTYC CORPORATION
INDEX TO FORM 10-Q
------------------
Page
----
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
December 31, 1999 and June 30, 2000 3
Consolidated Statements of Income
for the three and six months ended
June 30, 1999 and 2000 4
Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About 13
Market Risk
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 15
2
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CYTYC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
DECEMBER 31, JUNE 30,
1999 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 29,686 $ 50,886
Short-term investments............................................................... 40,682 20,986
Accounts receivable, net of allowance for doubtful accounts of $1,134 and $1,231 in
1999 and 2000, respectively......................................................... 22,379 29,003
Inventories.......................................................................... 5,427 7,716
Prepaid expenses and other current assets............................................ 783 1,222
-------- --------
Total current assets............................................................. 98,957 109,813
-------- --------
Property and equipment, net............................................................. 10,660 14,477
Intangible assets, net.................................................................. -- 7,468
Other assets............................................................................ 2,711 2,655
-------- --------
Total assets..................................................................... $112,328 $134,413
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 4,400 $ 5,319
Accrued expenses..................................................................... 11,215 10,415
Deferred revenue..................................................................... 1,722 1,755
-------- --------
Total current liabilities........................................................ 17,337 17,489
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value--
Authorized--5,000,000 shares
No shares issued or outstanding.................................................... -- --
Common Stock, $.01 par value--
Authorized--200,000,000 shares
Issued and outstanding: 36,139,878 shares in 1999
and 37,111,012 shares in 2000..................................................... 361 371
Additional paid-in capital........................................................... 169,951 180,293
Accumulated other comprehensive loss................................................. (53) (853)
Accumulated deficit.................................................................. (75,268) (62,887)
-------- --------
Total stockholders' equity....................................................... 94,991 116,924
-------- --------
Total liabilities and stockholders' equity....................................... $112,328 $134,413
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, JUNE 30,
1999 2000 1999 2000
------- ------- ------- -------
Net sales............................................................... $18,831 $33,525 $35,036 $62,303
Cost of sales........................................................... 3,938 6,113 7,471 11,419
------- ------- ------- -------
Gross profit......................................................... 14,893 27,412 27,565 50,884
------- ------- ------- -------
Operating expenses:
Research and development............................................. 3,379 3,771 5,580 7,191
Sales and marketing.................................................. 10,660 14,368 19,821 26,881
General and administrative........................................... 1,841 3,456 3,436 6,245
------- ------- ------- -------
Total operating expenses......................................... 15,880 21,595 28,837 40,317
------- ------- ------- -------
Income (loss) from operations........................................... (987) 5,817 (1,272) 10,567
Other income (expense), net:
Interest income...................................................... 907 1,079 1,849 2,060
Other, net........................................................... 1,107 -- 1,107 --
------- ------- ------- -------
Other income, net................................................ 2,014 1,079 2,956 2,060
------- ------- ------- -------
Income before provision for income taxes................................ 1,027 6,896 1,684 12,627
Provision for income taxes.............................................. -- 156 -- 246
------- ------- ------- -------
Net income.............................................................. $ 1,027 $ 6,740 $ 1,684 $12,381
======= ======= ======= =======
Net income per common and potential common share:
Basic................................................................ $0.03 $0.18 $0.05 $0.34
======= ======= ======= =======
Diluted.............................................................. $0.03 $0.17 $0.05 $0.32
======= ======= ======= =======
Weighted average common and potential common shares outstanding:
Basic................................................................ 35,660 36,774 35,638 36,513
Diluted.............................................................. 36,856 39,347 36,860 39,252
The accompanying notes are an integral part of these consolidated financial
statements.
4
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
SIX MONTHS ENDED
June 30,
1999 2000
---- ----
Cash flows from operating activities:
Net income............................................................. $ 1,684 $ 12,381
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization........................................ 797 1,425
Provision for doubtful accounts...................................... -- 97
Amortization of goodwill and warrant................................. -- 815
Compensation related to issuance of stock to directors............... 95 131
Changes in assets and liabilities, excluding effects of acquisition
Accounts receivable............................................... (3,592) (6,280)
Inventories....................................................... (408) (2,011)
Prepaid expenses and other current assets......................... (456) (424)
Accounts payable.................................................. 1,645 464
Accrued expenses.................................................. 1,745 (1,339)
Deferred revenue.................................................. 157 33
-------- --------
Net cash provided by operating activities 1,667 5,292
-------- --------
Cash flows from investing activities:
Acquisition of Acu-Pak, Inc. net of cash acquired.................... -- (5,760)
Decrease in other assets............................................. 138 56
Purchases of property and equipment.................................. (2,083) (2,336)
Purchases of short-term investments.................................. (24,773) (17,620)
Proceeds from maturity of short-term investments..................... 34,213 37,304
-------- --------
Net cash provided by investing activities 7,495 11,644
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrant.................. 294 4,764
Proceeds from issuance of shares under Employee Stock Purchase Plan.. 37 288
-------- --------
Net cash provided by financing activities............ 331 5,052
-------- --------
Effect of exchange rates on cash........................................ 182 (788)
-------- --------
Net increase in cash and cash equivalents............................... 9,675 21,200
Cash and cash equivalents, beginning of period.......................... 33,566 29,686
-------- --------
Cash and cash equivalents, end of period................................ $ 43,241 $ 50,886
======== ========
Supplemental disclosure of non-cash items:
Changes in unrealized holding loss on short-term investments $ (128) $ (12)
======== ========
Issuance of common stock warrant to Quest Diagnostics, Inc -- $ 5,169
========
In connection with the acquisition of Acu-Pak, Inc., the following
noncash transaction occurred:
Fair value of assets acquired -- $ 7,173
Liabilities assumed -- (994)
-------- --------
Cash paid for acquisition and acquisition costs -- $ 6,179
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
The notes and accompanying consolidated financial statements are
unaudited. They have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations. The
financial statements should be read in conjunction with the financial statements
and notes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
The information furnished reflects all adjustments, which, in the opinion of
management, are necessary for a fair presentation of results for the interim
periods. Such adjustments consisted only of normal recurring items. The
interim periods are not necessarily indicative of the results expected for the
full year or any future period.
The accompanying consolidated financial statements reflect the application of
certain significant accounting policies, as discussed below and elsewhere in the
notes to consolidated financial statements. The preparation of these
consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(2) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries: Cytyc International, S.A. (a Swiss
corporation) (including its wholly-owned subsidiaries Cytyc Swiss, S.A., and
Cytyc SARL, whose wholly-owned subsidiaries are Cytyc Italia s.r.l. and Cytyc
France s.a.r.l.), Cytyc (Australia) PTY LIMITED (an Australian corporation),
Cytyc Canada Ltd. (a Canadian Corporation), Cytyc (UK) Limited (a United Kingdom
corporation) and Cytyc Securities Corporation (a Massachusetts securities
corporation), Cytyc R.E., Inc. (a Delaware corporation) and Cytyc NH, Inc. (a
Delaware corporation). All intercompany transactions and balances have been
eliminated in consolidation.
(3) Cash and Cash Equivalents
Cash equivalents consist of money market mutual funds, commercial paper and
U.S. government securities with original maturities of three months or less.
(4) Short-term Investments
The Company follows the provisions of Statement of Financial Accounting
Standards (''SFAS'') No. 115, Accounting for Certain Investments in Debt and
Equity Securities.
Short-term investments consist of U.S. government securities, corporate bonds
and commercial paper with original maturities between three and twelve months.
At June 30, 2000, the Company's available-for-sale securities had contractual
maturities that expire at various dates through May 2001. The fair value of
available-for-sale securities was determined based on quoted market prices at
the reporting date for those securities. Available-for-sale securities are
shown in the consolidated financial statements at fair market value. At June
30, 2000 and December 31, 1999, the amortized cost basis, aggregate fair value
and gross unrealized holding gains (losses) by major security type were as
follows:
6
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Gross
Unrealized
Holding
Amortized Gains Fair
Cost (Losses) Value
----------- ----------- ---------
(in thousands)
June 30, 2000
- -------------
Available-for-sale securities
Corporate bonds (average maturity of 7.6 months)........ $ 1,986 $ (3) $ 1,983
U.S. government and agency securities (average
maturity of 4.5 months)................................ 9,003 (7) 8,996
Commercial paper (average maturity of 2.4 months)....... 10,009 (2) 10,007
------- ---- -------
$20,998 $(12) $20,986
======= ==== =======
December 31, 1999
- -----------------
Available-for-sale securities
U.S. government and agency securities (average
maturity of 3.9 months).................................. $20,600 $(49) $20,551
Commercial paper (average maturity of 1.2 months)......... 20,126 5 20,131
------- ---- -------
$40,726 $(44) $40,682
======= ==== =======
(5) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
DECEMBER 31, JUNE 30,
------------ -------
1999 2000
----- -----
(in thousands)
Raw material and work-in-process............ $2,927 $4,745
Finished goods.............................. 2,500 2,971
------ ------
$5,427 $7,716
====== ======
(6) Net Income Per Common Share
The Company follows the provisions of SFAS No. 128, Earnings per Share, which
requires companies to report both basic and diluted per share data, for all
periods for which an income statement is presented. Basic net income per share
is computed by dividing net income by the weighted average number of common
shares outstanding. Diluted net income per share is computed by dividing net
income by the weighted average number of common shares and potential common
shares from outstanding stock options and warrants. Potential common shares are
calculated using the treasury stock method and represent incremental shares
issuable upon exercise of the Company's outstanding stock options and warrant.
The following table provides a reconciliation of the denominators used in
calculating basic and diluted net income per share for the three and six month
periods ended June 30, 1999 and 2000.
7
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Three Months Six Months
Ended Ended
June 30, June 30,
1999 2000 1999 2000
---- ---- ---- ----
Basic weighted average common shares outstanding............................. 35,660 36,774 35,638 36,513
Dilutive effect of assumed exercise of stock options and warrant............. 1,196 2,573 1,222 2,739
------ ------ ------ ------
Weighted average common shares outstanding assuming dilution................. 36,856 39,347 36,860 39,252
====== ====== ====== ======
Diluted weighted average shares outstanding excludes 676,154 and 5,628
potential common shares from stock options and warrant outstanding for the three
months ended June 30, 1999 and 2000, respectively, and 599,725 and 52,076
potential common shares from stock options and warrants outstanding for the six
months ended June 30, 1999 and 2000 as their effect would be anti-dilutive.
(7) Reporting Comprehensive Income
The Company follows the provisions of SFAS No. 130, Reporting Comprehensive
Income. 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 nonowner 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's comprehensive income for
the three months ended June 30, 1999 and 2000 was $1,020 and $6,423
respectively. The Company's comprehensive income for the six months ended June
30, 1999 and 2000 was $1,738 and $11,581 respectively.
(8) Legal Proceedings
On September 13, 1999, the Company filed a patent infringement lawsuit
against AutoCyte, Inc. in the United States District Court for the District of
Delaware. In September 1999, AutoCyte, Inc. effected a merger with NeoPath, Inc.
The combined company was renamed TriPath Imaging, Inc. ("TriPath"). In addition
to seeking a permanent injunction to stop TriPath from infringing the Company's
patent, the Company seeks damages. TriPath answered the complaint in the lawsuit
and asserted counterclaims seeking a judgment declaring that the patent at issue
is invalid and unenforceable and not infringed by TriPath. On March 10, 2000,
TriPath filed a Motion for Summary Judgement of non-infringement, which the
Company opposed. On May 16, 2000, TriPath filed a motion for leave to amend its
answer and counterclaims in order to assert counterclaims that accused Cytyc of
certain violations of federal antitrust law, making false and misleading
statements in violation of federal and state unfair competition law, tortious
interference, abuse of process, and trade libel. In addition, TriPath sought to
add certain affirmative defenses to the patent infringement claims. On June 8,
2000, the Company opposed TriPath's motion for leave to amend, and on June 30,
2000, the court denied TriPath's motion. Discovery is ongoing in this case.
On May 12, 2000, the Company filed a lawsuit against TriPath in the United
States District Court for the District of Massachusetts. The Company seeks
damages and injunctive relief and alleges that TriPath engaged in false and
misleading description, representation, advertising and promotion, unfair
competition, commercial disparagement, and interference with Cytyc's
advantageous business relationships. On June 5, 2000, the Massachusetts District
Court stayed the case until the Delaware District Court, where the Company's
lawsuit for patent infringement is pending against TriPath, ruled upon whether
there should be two proceedings and, if not, where the dispute should be
litigated. The Company has filed a motion to reconsider the stay and has opposed
TriPath's motion to transfer the case to the Delaware District Court. The
lawsuit is in its earliest stages.
8
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company designs, develops, manufactures and markets a sample preparation
system for medical diagnostic applications. The ThinPrep(R) System consists of
the ThinPrep(R) Processor and related disposable reagents, filters and other
supplies. The Company has marketed the ThinPrep System for use in non-
gynecological testing applications since 1991. On May 20, 1996, the Company
received premarket approval ("PMA") from the United States Food and Drug
Administration ("FDA") to market the ThinPrep 2000 Processor and related
reagents for cervical cancer screening as a replacement for the conventional Pap
smear method. On November 6, 1996, the FDA cleared expanded product labeling for
the ThinPrep System to include the claim that the ThinPrep 2000 System is
significantly more effective in detecting low grade and more severe lesions than
the conventional Pap smear method in a variety of patient populations. The
expanded labeling also indicates that the specimen quality using the ThinPrep
System is significantly improved over that of the conventional Pap smear method.
The Company commenced the full-scale commercial launch of the ThinPrep System
for cervical cancer screening in the United States in 1997 and in selected
international markets in 1998. On February 25, 1997, the FDA approved the
Company's supplemental PMA application for use of a combination of an
endocervical brush and spatula sampling devices, which is a commonly used method
of collecting samples for conventional Pap smears. On September 4, 1997, the FDA
approved the Company's supplemental PMA application for the testing for the
human papillomavirus ("HPV") directly from a single vial of patient specimen
collected in a ThinPrep solution using the Hybrid Capture HPV I DNA Assay of
Digene Corporation. In March 1999, the FDA approved the use of Hybrid Capture II
DNA Assay from a single vial of patient specimen collected in ThinPrep solution.
In the third quarter of 1999, the Company announced that it had successfully
completed feasibility studies of the ThinPrep Imaging System(TM) to aid in
cervical cancer screening and is currently developing the product in preparation
for clinical trials. In May 2000, the FDA approved the ThinPrep(R) 3000
Processor, the Company's next-generation processor.
In the past, 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, ThinPrep 3000 Processor, and ThinPrep Imaging System,
expansion of the Company's manufacturing facilities, and the establishment of a
sales and marketing organization. The Company may experience losses in the
future due to domestic and international marketing and sales activities and new
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 for domestic and international sales and
distribution activities, the timing and level of reimbursement for the ThinPrep
System by third-party payors, and other factors, many of which are outside the
Company's control.
The Company occupies a 97,000 square foot facility in Boxborough,
Massachusetts. The Company has installed automated customized equipment for the
high-volume manufacture of disposable filters for use in connection with the
ThinPrep System. In January 2000, the Company acquired approximately 2.7 acres
of land and facilities of Acu-Pak, Inc., a contract packager in Londonderry, New
Hampshire that was manufacturing, filling vials containing and distributing the
Company's solutions for all of its ThinPrep line of products for $5.9 million in
cash. The Company accounted for the acquisition as a purchase and is amortizing
goodwill associated with the purchase over seven years beginning in January
2000.
The cost per ThinPrep(R) Pap Test(TM), plus a laboratory mark-up, is generally
billed by laboratories to third-party payors and results in a higher amount for
the ThinPrep Pap Test than the current billing 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 adequate
reimbursement from third-party payors such as private insurance plans, managed
care organizations and Medicare and Medicaid. In the United States, the current
rate of reimbursement 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.
Although many health insurance companies have added the ThinPrep Pap Test to
their coverage, there can be no assurance
9
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 Company expects to continue significant expenditures for sales and
marketing activities of the ThinPrep System and ThinPrep 3000 Processor for
cervical cancer screening in 2000. There can be no assurance that the Company's
current and planned sales and marketing activities will result in increased net
sales or will succeed in promoting the ThinPrep System to health care providers,
third-party payors or clinical laboratories.
The Company expects to increase its expenditures in 2000 for research and
development to fund development of the ThinPrep Imaging System, as well as
follow-on products and additional applications of ThinPrep technology. There
can be no assurance that the Company will obtain necessary regulatory approvals
or successfully develop such imaging technology or any other ThinPrep
technology.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 and 1999
Net sales increased to $33.5 million in the second quarter of 2000 from $18.8
million for the same period of 1999, an increase of 78%. The increase was
primarily due to increased sales of the Company's ThinPrep Pap Test for cervical
cancer screening in the United States. Gross profit increased to $27.4 million
in the second quarter of 2000 from $14.9 million for the same period of 1999, an
increase of 84%, and the gross margin increased to 82% in the second quarter of
2000 from 79% for the same period of 1999. ThinPrep Pap Tests in the United
States generally have a higher gross margin than the ThinPrep 2000 Processor or
international sales of either tests or processors. Management attributes the
increase in gross margin to the fact that sales of the ThinPrep Pap Test in the
United States represented a larger portion of revenue in the second quarter of
2000.
Total operating expenses increased to $21.6 million in the second quarter of
2000 from $15.9 million for the same period of 1999, an increase of 36%.
Research and development costs increased to $3.8 million in the second quarter
of 2000 from $3.4 million for the same period of 1999, an increase of 12%,
primarily as a result of engineering costs associated with the Company's
ThinPrep Imaging System development activities. The Company expects that
research and development expenses will increase in the succeeding quarters as a
result of the development costs for the imaging system. Sales and marketing
costs increased to $14.4 million in the second quarter of 2000 from $10.7
million for the same period of 1999, an increase of 35%. This increase
primarily reflects expenses associated with personnel costs and commissions
related to increased sales and increased international sales personnel, the
opening of new branches and physician advertising programs. The Company expects
that sales and marketing costs will increase in succeeding quarters as a result
of increased expenditures for personnel, physician and consumer marketing
programs and commissions expense. General and administrative costs increased to
$3.5 million in the second quarter of 2000 from $1.8 million for the same period
of 1999, an increase of 88%, primarily due to litigation expenses associated
with the patent infringement and other lawsuits (see "Legal Proceedings") and
increased personnel costs.
Interest income increased to $1.1 million in the second quarter of 2000 from
$0.9 million for the same period of 1999, an increase of 19%, due to higher
interest rates in 2000. The Company also recorded $1.1 million in other income
during the second quarter of 1999 resulting from the favorable settlement of
certain litigation.
Six Months Ended June 30, 2000 and 1999
Net sales increased to $62.3 million in the first six months of 2000 from
$35.0 million for the same period of 1999, an increase of 78%. The increase was
primarily due to increased sales of the Company's ThinPrep Pap Test for cervical
cancer screening in the United States. Gross profit increased to $50.9 million
in the first six months of 2000 from $27.6 million for the same period of 1999,
an increase of 85%, and the gross margin increased to 82% in the first six
months of 2000 from 79% for the same period of 1999. Management attributes the
increase in gross margin in 2000 primarily to increased sales of the higher
gross margin ThinPrep Pap Test in the United States as compared to domestic
sales of the ThinPrep 2000 Processor or international sales of either tests or
processors.
Total operating expenses increased to $40.3 million in the first six months of
2000 from $28.8 million for the same period of 1999, an increase of 40%.
Research and development costs increased to $7.2 million in the first six months
of 2000 from $5.6 million for the same period of 1999, an increase of 29%,
primarily as a result of engineering costs associated with the Company's
ThinPrep Imaging System development activities. The Company expects that
research and development expenses will increase in the succeeding quarters as a
result of the
10
development costs for the imaging system. Sales and marketing costs increased to
$26.9 million in the first six months of 2000 from $19.8 million for the same
period of 1999, an increase of 36%. This increase primarily reflects expenses
associated with personnel costs and commissions related to increased sales,
increased medical education programs, and increased international sales
personnel, opening of new branches and physician advertising programs. The
Company expects that sales and marketing costs will increase in succeeding
quarters as a result of increased expenditures for personnel, physician and
consumer marketing programs and commission expense. General and administrative
costs increased to $6.2 million in the first six months of 2000 from $3.4
million for the same period of 1999, an increase of 82%, primarily due to
litigation expenses associated with the patent infringement and other lawsuits
(see "Legal Proceedings") and increased personnel costs.
Interest income increased to $2.1 million in the first six months of 2000 from
$1.8 million for the same period of 1999, an increase of 11%, due to higher
interest rates in 2000. The Company also recorded $1.1 million in other income
during the first six months of 1999 resulting from favorable settlement of
certain litigation.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have significantly exceeded its
revenue, resulting in an accumulated deficit of $62.9 million as of June 30,
2000. The Company has funded its operations primarily through the private
placement and public sale of equity securities and exercise of stock options and
warrants aggregating $180.7 million, net of offering expenses. At June 30, 2000,
the Company had cash, cash equivalents and short-term investments of $71.9
million. Cash provided by the Company's operations during the six months ended
June 30, 2000, was $5.3 million compared to $1.7 million in cash provided by the
Company's operations for the same period in 1999, primarily as a result of
significantly higher net income. The increase in accounts receivable of $6.3
million during the first six months of 2000 was primarily due to significant
growth in sales during 2000 compared to 1999. Net inventories increased
approximately $2.0 million during the six months ended June 30, 2000 primarily
due to increased raw material purchases for planned ThinPrep 3000 production and
increased demand for filters and solutions.
The Company's capital expenditures for the six months ended June 30, 2000 and
1999 were $2.3 million excluding the acquisition of Acu-Pak, and $2.0 million,
respectively. The increase was due primarily to production equipment, furniture
and fixtures, computer hardware and software purchases which were partially
offset by a decrease in leasehold improvements.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the resources required to further develop its
marketing and sales capabilities, both domestic and international, the extent to
which such activities generate market acceptance and demand for the ThinPrep
System for cervical cancer screening and additional applications of its ThinPrep
technology. The Company's liquidity and capital requirements will also depend
upon the progress of the Company's research and development programs to develop
follow-on products including the ThinPrep Imaging System, the receipt of and the
time required to obtain regulatory clearances and approvals, and the resources
the Company devotes to developing, manufacturing and marketing its products. In
addition, the Company's capital requirements will depend on the extent of
potential liabilities, if any, and costs associated with existing or future
litigation (see "Legal Proceedings"). There can be no assurance that the
Company will not require additional financing or will not in the future seek to
raise additional funds through bank facilities, debt or equity offerings or
other sources of capital. Additional funding may not be available when needed or
on terms acceptable to the Company, which would have a material adverse effect
on the Company's business, financial condition and results of operations.
INCOME TAXES
The Company's estimated effective tax rate for the three months ended June 30,
2000 was 2.3%, due primarily to the effect of net operating loss carryforwards
and the application of the federal alternative minimum tax and certain state
minimum taxes. The effective tax rate represents the Company's estimate of the
rate expected to be applicable for the full fiscal year.
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, data corruption 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
11
competitive differentiation. Problems associated with the year 2000 problem may
not become apparent until some time after January 2000.
The Company has completed its assessment of the potential impact of the year
2000 problem on the Company's products, internal information systems and third-
party suppliers, payors and laboratory customers, and has finalized a year 2000
contingency plan for all mission critical systems. The plan includes an
assessment of possible contingencies and responsive remediation plans if any of
these systems are determined to have year 2000 issues. The costs incurred by
the Company through June 30, 2000 to address year 2000 compliance efforts were
approximately $40,000.
On the basis of its assessment, the Company believes that all of its products
are year 2000 compliant and that its internal information systems will not
experience material disruption as a result of year 2000 issues. However, because
of the many uncertainties associated with year 2000 compliance efforts by the
Company's third-party payors, laboratory customers and suppliers and because any
assessment by the Company of the year 2000 readiness of such third-party payors,
laboratory customers and suppliers is necessarily based primarily on information
provided by such parties, there can be no assurance that the impact on the
Company of any resulting year 2000 disruptions with respect to such parties will
not be material.
IMPACT OF EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Economic and
Monetary Union established fixed conversion rates between their existing
sovereign currencies and the Euro, and adopted the Euro as their common legal
currency. The Euro is currently being traded on currency exchanges and is
available for non-cash transactions. For a three-year transition period, both
the Euro and each participating country's sovereign currency will remain legal
currency. After June 30, 2002, the Euro will be the sole legal tender for the
participating countries.
A significant amount of uncertainty exists as to the interpretation of
certain Euro regulations and the effect that the Euro will have on the
marketplace, including its impact on currency exchange rate risk, pricing,
competition, contracts, information systems and taxation. The Company derived
approximately 2% of its revenues from sales of the ThinPrep System to customers
in countries which have converted to the Euro for the first six months of 2000
which was billed in local currencies. The Company is currently evaluating Euro-
related issues and the impact that the introduction of the Euro may have on the
Company's business and results of operations. The Company expects to take
appropriate actions based on the results of its evaluation. The Company has not
yet determined the costs of addressing Euro-related issues, but does not expect
such costs to be material. Because the Company's evaluation of Euro-related
issues is at an early stage and is ongoing, however, there can be no assurance
that such issues and their related costs will not have a material adverse effect
on the Company's business, financial condition and results of operations.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company does not provide financial performance forecasts. The forward
looking statements in this Quarterly Report on Form 10-Q are made under the safe
harbor provisions of Section 21E of the Securities Exchange Act of 1934, as
amended. The Company's operating results and financial condition have varied and
may in the future vary significantly depending on a number of factors.
Statements in this Form 10-Q which are not strictly historical statements,
including, without limitation, statements regarding current or future financial
performance, management's plans and objectives for future operations, domestic
and international marketing and sales plans, product plans and performance,
availability of reimbursement for the Company's product, potential savings to
the health care system, management's assessment of market factors, as well as
statements regarding the strategy and plans of the Company, constitute forward-
looking statements that involve risks and uncertainties. The following factors,
among others, could cause actual results to differ materially from those
contained in forward-looking statements made in this report and presented
elsewhere by management from time to time. The Company's risk factors include
its dependence on a single product, uncertainty of FDA approval and market
acceptance and the additional cost related thereto, a limited number of
customers and a lengthy sales cycle, limited marketing and sales experience,
dependence on timely and adequate levels of third-party reimbursement, CPT code
implementation delays and delays in reimbursement, a limited operating history,
risks associated with commercialization, a history of losses, potential
fluctuations in future quarterly results, management of growth, extensive
government regulation, intense competition, risks associated with the Euro
conversion, potential liabilities and costs associated with any existing or
future litigation, uncertainty of additional applications and dependence on
single source suppliers. Such factors, among other risks detailed in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999
filed with the Securities and Exchange Commission, may have a material adverse
effect upon
12
the Company's business, financial condition and results of operations. Because
of these and other factors, past financial performance should not be considered
an indication of future performance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
----------------------------------------------------------
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments. The Company does not participate in derivative financial
instruments, other financial instruments for which the fair value disclosure
would be required under SFAS No. 107, or derivative commodity instruments. All
of the Company's investments are in short-term, investment-grade commercial
paper, corporate bonds and U.S. Government and agency securities that are
carried at fair value on the Company's books. Accordingly, the Company has no
quantitative information concerning the market risk of participating in such
investments.
Primary Market Risk Exposures. The Company's primary market risk exposures
are in the areas of interest rate risk and foreign currency exchange rate risk.
The Company's investment portfolio of cash equivalents is subject to interest
rate fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments. The Company's business outside the
United States is conducted in local currency transactions. The Company has no
foreign exchange contracts, option contracts, or other foreign hedging
arrangements. However, the Company estimates that any market risk associated
with its foreign operations is not significant and is unlikely to have a
material adverse effect on the Company's business, financial condition and
results of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
On September 13, 1999, the Company filed a patent infringement lawsuit
against AutoCyte, Inc. in the United States District Court for the District of
Delaware. In September 1999, AutoCyte, Inc. effected a merger with NeoPath, Inc.
The combined company was renamed TriPath Imaging, Inc. ("TriPath"). In addition
to seeking a permanent injunction to stop TriPath from infringing the Company's
patent, the Company seeks damages. TriPath answered the complaint in the lawsuit
and asserted counterclaims seeking a judgment declaring that the patent at issue
is invalid and unenforceable and not infringed by TriPath. On March 10, 2000,
TriPath filed a Motion for Summary Judgement of non-infringement, which the
Company opposed. On May 16, 2000, TriPath filed a motion for leave to amend its
answer and counterclaims in order to assert counterclaims that accused Cytyc of
certain violations of federal antitrust law, making false and misleading
statements in violation of federal and state unfair competition law, tortious
interference, abuse of process, and trade libel. In addition, TriPath sought to
add certain affirmative defenses to the patent infringement claims. On June 8,
2000, the Company opposed TriPath's motion for leave to amend, and on June 30,
2000, the court denied TriPath's motion. Discovery is ongoing in this case.
On May 12, 2000, the Company filed a lawsuit against TriPath in the United
States District Court for the District of Massachusetts. The Company seeks
damages and injunctive relief and alleges that TriPath engaged in false and
misleading description, representation, advertising and promotion, unfair
competition, commercial disparagement, and interference with Cytyc's
advantageous business relationships. On June 5, 2000, the Massachusetts District
Court stayed the case until the Delaware District Court, where the Company's
lawsuit for patent infringement is pending against TriPath, ruled upon whether
there should be two proceedings and, if not, where the dispute should be
litigated. The Company has filed a motion to reconsider the stay and has opposed
TriPath's motion to transfer the case to the Delaware District Court. The
lawsuit is in its earliest stages.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
At the Company's annual meeting of stockholders held on June 7, 2000 (the
"2000 Annual Meeting"), the Company's stockholders took the following actions:
1. The Company's stockholders elected Sally Crawford, C. William McDaniel and
Patrick Sullivan as Class I Directors, each to serve for a three year term
expiring at the Company's annual meeting of stockholders in 2003, or until
his or her successor has been duly elected and qualified or until his or
her earlier resignation or removal. Election of the directors was
determined by a plurality of the votes cast at the 2000 Annual Meeting.
With respect to such matter, the votes were cast as follows: 32,474,784
shares were voted for the election of Ms. Crawford, 32,474,346 shares were
voted for the election of Mr. McDaniel, 28,518,802 shares were voted for
the election of Mr. Sullvan, 393,663 shares were withheld from the
election of Ms. Crawford, 394,101 shares were withheld from the election
of Mr. McDaniel and 4,349,645 shares were withheld from the election of
Mr. Sullivan. No other persons were nominated or received votes, for
election as directors of the Company at the 2000 Annual Meeting. The
other directors of the Company whose terms of office continued after the
2000 Annual Meeting were Alfred J. Battaglia, Walter E. Boomer, William G.
Little, Anna S. Richo, and Monroe E. Trout, M.D.
2. The Company's stockholders approved an amendment to the Company's Third
Amended and Restated Certificate of incorporation increasing from
60,000,000 to 200,000,000 the number of authorized shares of Common Stock,
$.01 par value, of the Company. With respect to such matter, the votes
were cast as follows: 21,673,450 shares were voted for the proposal,
10,760,771 shares were voted against the proposal and 434,226 shares were
abstained from voting on the proposal.
3. The Company's stockholders ratified and approved the Company's Amended and
Restated 1995 Non-Employee Director Stock Option Plan (the "Plan") which
provides that in the event of the retirement of any non-employee director
of the Company, all outstanding and unvested options granted to such non-
employee director under the Plan shall be immediately and automatically
accelerated and become fully vested and exercisable in full. With respect
to such matter, the votes were cast as follows: 27,372,611
13
shares were voted for the proposal, 5,052,162 shares were voted against
the proposal and 443,624 shares were abstained from voting on the
proposal.
4. The Company's stockholders ratified the selection of Arthur Andersen LLP,
independent certified public accountants, as auditors for the Company's
fiscal year ending December 31, 2000. With respect to such matter, the
votes were cast as follows: 32,830,672 shares were voted for the proposal,
14,493 shares were voted against the proposal and 23,282 shares were
abstained from voting on the proposal.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
--------
3, 4 Certificate of Amendment of Third Amended and Restated Certificate
of Incorporation
10 Amended and Restated 1995 Non-Employee Director Stock Option Plan
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed by the Company for the quarter
ended June 30, 2000.
14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYTYC CORPORATION
Date: August 14, 2000 By: /s/ Joseph W. Kelly
--------------------
Joseph W. Kelly
Senior Vice President, Chief
Financial Officer and
Treasurer
(Principal Financial and Accounting
Officer)
By: /s/ Leslie Teso-Lichtman
-------------------------
Leslie Teso-Lichtman
Vice President & Controller
15
EXHIBIT INDEX
Exhibit
Number Description Page
- ------ ----------- ----
3, 4 Certificate of Amendment of Third Amended and
Restated Certificate of Incorporation 17
10 Amended and Restated 1995 Non-Employee
Director Stock Option Plan 18
27 Financial Data Schedule 25
16