===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______________ to __________________
Commission File Number 0-27558
CYTYC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 02-0407755
-------- ----------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
85 Swanson Road, Boxborough, MA 01719
(Address of principal executive offices, including Zip Code)
(978) 263-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: The number of shares of the
issuer's Common Stock, $0.01 par value per share, outstanding as of May 7, 2001
was 114,584,186.
Total Number of Pages: 14
===============================================================================
1
===============================================================================
CYTYC CORPORATION
INDEX TO FORM 10-Q
------------------
Page
----
Part I Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
December 31, 2000 and March 31, 2001 3
Consolidated Statements of Income
for the three months ended March 31, 2000 and 2001 4
Consolidated Statements of Cash Flows
for the three months ended March 31, 2000 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Part II Other Information
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
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, March 31,
2000 2001
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 61,605 $ 53,351
Short-term investments.................................................................. 27,240 52,322
Accounts receivable, net of allowance of $1,510 and $1,618 at December 31, 2000
and March 31, 2001, respectively...................................................... 40,214 42,031
Inventories............................................................................. 11,093 9,852
Prepaid expenses and other current assets............................................... 937 2,169
-------- --------
Total current assets................................................................ 141,089 159,725
-------- --------
Property and equipment, net............................................................... 21,363 23,131
Other assets ............................................................................ 8,434 26,734
-------- --------
Total assets........................................................................ $170,886 $209,590
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 6,043 $ 5,352
Accrued expenses........................................................................ 15,720 20,281
Deferred revenue........................................................................ 2,077 1,796
-------- --------
Total current liabilities............................................................. 23,840 27,429
-------- --------
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: 113,039,385 shares in 2000 and 114,172,141 shares in 2001...... 1,130 1,142
Additional paid-in capital.............................................................. 183,653 203,222
Accumulated other comprehensive loss.................................................... (632) (648)
Accumulated deficit..................................................................... (37,105) (21,555)
-------- --------
Total stockholders' equity............................................................ 147,046 182,161
-------- --------
Total liabilities and stockholders' equity............................................ $170,886 $209,590
======== ========
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
March 31,
2000 2001
---------- ----------
Net sales............................................................. $ 28,778 $ 47,467
Cost of sales......................................................... 5,306 8,841
---------- ----------
Gross profit..................................................... 23,472 38,626
---------- ----------
Operating expenses:
Research and development......................................... 3,420 4,788
Sales and marketing.............................................. 12,513 13,871
General and administrative....................................... 2,789 3,451
---------- ----------
Total operating expenses...................................... 18,722 22,110
---------- ----------
Income from operations................................................ 4,750 16,516
Other income, net:
Interest income.................................................. 981 1,410
Litigation settlement............................................ -- 3,087
---------- ----------
Other income, net............................................. 981 4,497
---------- ----------
Income before provision for income taxes.............................. 5,731 21,013
Provision for income taxes............................................ 90 5,463
---------- ----------
Net income............................................................ $ 5,641 $ 15,550
========== ==========
Net income per common and potential common share:
Basic............................................................ $ 0.05 $ 0.14
========== ==========
Diluted.......................................................... $ 0.05 $ 0.13
========== ==========
Weighted average common and potential common shares outstanding:
Basic............................................................ 108,756 113,615
Diluted.......................................................... 117,501 119,207
The accompanying notes are an integral part of these consolidated financial
statements.
4
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
March 31,
2000 2001
-------- --------
Cash flows from operating activities:
Net income............................................................... $ 5,641 $ 15,550
Adjustments to reconcile net income to net cash (used in) provided by
operating activities
Depreciation and amortization......................................... 671 717
Provision for doubtful accounts....................................... 70 108
Amortization of goodwill and warrant.................................. 451 650
Gain on settlement of litigation...................................... -- (2,712)
Compensation related to issuance of stock to directors and
executives.................................................... 120 320
Changes in assets and liabilities, excluding effects of acquisition
Accounts receivable........................................... (4,004) (1,925)
Inventories................................................... (341) 1,241
Prepaid expenses and other current assets..................... (342) (1,232)
Accounts payable.............................................. (1,325) (691)
Accrued expenses.............................................. (2,559) 4,561
Deferred revenue.............................................. (29) (281)
-------- --------
Net cash (used in) provided by operating activities... (1,647) 16,306
-------- --------
Cash flows from investing activities:
Acquisition of Acu-Pak, Inc. net of cash acquired........................ (5,760) --
Decrease (increase) in other assets...................................... 127 (155)
Purchases of property and equipment...................................... (859) (2,485)
Purchases of short-term investments...................................... (2,698) (34,331)
Proceeds from maturity of short-term investments......................... 30,848 9,332
-------- --------
Net cash provided by (used in) investing activities... 21,658 (27,639)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options.................................. 1,211 3,178
-------- --------
Net cash provided by financing activities............. 1,211 3,178
-------- --------
Effect of exchange rates on cash.............................................. (470) (99)
-------- --------
Net increase (decrease) in cash and cash equivalents.......................... 20,752 (8,254)
Cash and cash equivalents, beginning of period................................ 29,686 61,605
-------- --------
Cash and cash equivalents, end of period...................................... $ 50,438 $ 53,351
======== ========
Supplemental disclosure of non-cash items:
Changes in unrealized holding (loss) gain on short-term investments...... $ (13) $ 83
======== ========
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, 2000.
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, Limited (a Canadian Corporation), Cytyc (UK) Limited
(a United Kingdom corporation), Cytyc Securities Corporation (a Massachusetts
securities corporation), and Cytyc Healthcare Ventures, LLC (a Delaware limited
liability company). 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 March 31, 2001, the Company's available-for-sale securities had
contractual maturities that expire at various dates through March 2002. The fair
value of available-for-sale securities was determined based on quoted market
prices at the reporting date for those securities. Available-for-sale securities
are shown in the consolidated financial statements at fair market value. At
March 31, 2001 and December 31, 2000, 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)
March 31, 2001
--------------
Available-for-sale securities
U.S. government and agency securities (average maturity of 5.7 months)... $ 30,546 $ 54 $ 30,600
Corporate bonds (average maturity of 6.8 months)......................... 6,765 12 6,777
Commercial paper (average maturity of 3.1 months)........................ 14,928 17 14,945
--------- ---------- ---------
$ 52,239 $ 83 $ 52,322
========= ========== =========
December 31, 2000
-----------------
Available-for-sale securities
U.S. government and agency securities (average maturity of 8.2 months)... $ 14,535 $ 21 $ 14,556
Corporate bonds (average maturity of 9.4 months)......................... 1,691 6 1,697
Commercial paper (average maturity of 2.5 months)........................ 10,999 (12) 10,987
--------- ---------- ---------
$ 27,225 $ 15 $ 27,240
========= ========== =========
(5) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
December 31, March 31,
------------ ---------
2000 2001
---- ----
(in thousands)
Raw material and work-in-process.......... $ 6,353 $ 6,739
Finished goods............................ 4,740 3,113
------- -------
$11,093 $ 9,852
======= =======
(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 months ended
March 31, 2000 and 2001.
7
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Three Months
Ended
March 31,
2000 2001
-------- --------
Basic weighted average common shares outstanding......................... 108,756 113,615
Dilutive effect of assumed exercise of stock options and warrant......... 8,745 5,592
-------- --------
Weighted average common shares outstanding assuming dilution............. 117,501 119,207
======== ========
Diluted weighted average shares outstanding excludes 59,529 and 4,528,722
potential common shares from stock options and a warrant outstanding as of March
31, 2000 and 2001, respectively, as their effect would be anti-dilutive.
(7) Comprehensive Income
The components of comprehensive income for the three months ended March 31,
2000 and 2001 are as follows:
Three Months
Ended
March 31,
2000 2001
-------- --------
(in thousands)
Comprehensive income:
Net income............................................................... $ 5,641 $ 15,550
Other comprehensive income (loss)
Unrealized (loss) gain on short-term investments...................... (13) 83
Foreign currency translation.......................................... (470) (99)
-------- --------
Comprehensive income.......................................................... $ 5,158 $ 15,534
======== ========
(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"). TriPath
answered the complaint in the lawsuit and asserted counterclaims seeking a
judgment declaring that the patent at issue was invalid and unenforceable and
not infringed by TriPath. On January 8, 2001, the Company announced that the
parties had settled the litigation. On January 11, 2001, the court signed and
entered a consent judgment confirming the validity and enforceability of the
patent at issue.
On May 12, 2000, the Company filed a lawsuit against TriPath in the United
States District Court for the District of Massachusetts, alleging 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 January 8, 2001, the Company
announced that the parties had settled the litigation and the parties filed a
Stipulation of Dismissal dismissing all claims and counterclaims with prejudice.
(9) Stock Splits
In December 1999, the Board of Directors approved a two-for-one split of
the Company's Common Stock to be effected in the form of a 100% stock dividend.
The additional shares were distributed on or about January 31, 2000 to
stockholders of record on January 14, 2000. In January 2001, the Board of
Directors approved a three-for-one split of the Company's Common Stock to be
effected in the form of a 200% stock dividend. The additional shares were
distributed on or about March 2, 2001 to stockholders of record on February 16,
2001. All share and per share data presented herein has been retroactively
restated to give effect to both stock splits.
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 System
consists of the ThinPrep 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 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 PMA Supplement 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 PMA Supplement 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 DNA Assay of
Digene Corporation. In March 1999, the FDA approved the use of Digene
Corporation's Hybrid Capture II HPV DNA Assay from a single vial of patient
specimen collected in ThinPrep Solution. The Company commenced the full-scale
commercial launch of the ThinPrep System for cervical cancer screening in the
United States in 1997 and in selected international markets in 1998. In May
2000, the FDA approved the Company's PMA Supplement Application to market the
ThinPrep(R) 3000 Processor, the Company's next-generation processor for
automated sample preparation. In December 2000, the Company began clinical
trials of the ThinPrep Imaging System (TM) to aid in cervical cancer screening.
Prior to 2000, the Company 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 2000 Processor, ThinPrep 3000 Processor, and ThinPrep Imaging
System, expansion of the Company's manufacturing facilities, and the
establishment of a marketing and sales organization. The Company may experience
losses in the future as it expands its domestic and international marketing and
sales activities and continues its product development efforts. The operating
results of the Company have fluctuated significantly in the past on an annual
and a quarterly basis. The Company expects that its operating results may
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. 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 approximately
$6.0 million in cash. The Company accounted for the acquisition as a purchase
and is amortizing goodwill associated with the purchase over seven years which
began 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
9
many 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.
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 Company's direct sales force is actively working with current
laboratory customers and health insurance companies to facilitate reimbursement
under the new CPT code. As of March 31, 2001, based on information provided to
the Company, the Company believes that all of the 309 health insurance companies
which announced coverage of the ThinPrep Pap Test have implemented the new CPT
code and have established a reimbursement amount. There are approximately six
hundred managed care organizations and other third party payors in the United
States. There can be no assurance, however, that reimbursement levels under the
new CPT code will be adequate.
The Company expects to continue its significant expenditures for sales and
marketing activities of the ThinPrep System for cervical cancer screening in
2001. During 1997, 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 received a residual payment of approximately $1.6 million
in February 2000 based on 1999 product sales.
In January 2000, the Company entered into a supply and co-marketing
agreement with Quest Diagnostics Incorporated to market the ThinPrep Pap Test as
Quest Diagnostics' exclusive liquid-based cervical cancer screening methodology.
In October 2000, the Company entered into an agreement with Roche
Diagnostics Corporation ("RDC"), exclusive in the United States and Puerto Rico,
to co-promote the benefits of testing for chlamydia and gonorrhea using RDC's
COBAS AMPLICOR CT/NG Test directly from the ThinPrep collection vial. The
companies also intend to explore the potential for collaborating on a portfolio
of additional screening and diagnostic tests based on the companies' respective
technologies.
In January 2001, the Company entered into an agreement with Digene
Corporation ("Digene"), exclusive in the United States and Puerto Rico, to co-
promote the benefits of testing for human papillomavirus (HPV) using Digene's
Hybrid Capture(R) II HPV DNA Assay directly from the ThinPrep collection vial.
The companies expect that the co-promotion program will initially focus on
promoting Digene's HPV DNA test, using the residual material in ThinPrep
collection vials, as the optimal patient management strategy for borderline
cytology results.
The Company expects to increase its expenditures in 2001 for research and
development to fund further development of the ThinPrep Imaging System, as well
as follow-on products and additional applications of ThinPrep technology.
Results of Operations
Three Months Ended March 31, 2001 and 2000
Net sales increased to $47.5 million in the first quarter of 2001 from
$28.8 million for the same period of 2000, an increase of 65%. 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 $38.6 million
in the first quarter of 2001 from $23.5 million for the same period of 2000, an
increase of 65%, and the gross margin was approximately equal in the first
quarter of 2001 when compared to the same period of 2000. ThinPrep Pap Tests in
the United States generally have a higher gross margin than the ThinPrep 2000
Processor, ThinPrep 3000 Processor, or international sales of either tests or
processors.
Total operating expenses increased to $22.1 million in the first quarter of
2001 from $18.7 million for the same period of 2000, an increase of 18%.
Research and development costs increased to $4.8 million in the first quarter of
2001 from $3.4 million for the same period of 2000, an increase of 40%,
primarily as a result of engineering costs
10
associated with the Company's ThinPrep Imaging System development activities and
to a lesser extent clinical trial costs. The Company expects that research and
development expenses for the imaging system will decrease in the second half of
2001. Sales and marketing costs increased to $13.9 million in the first quarter
of 2001 from $12.5 million for the same period of 2000, an increase of 11%. This
increase primarily reflects sales personnel and commission expenses associated
with increased sales and advertising programs in the United States. 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 first quarter of 2001 from $2.8 million for the same period
of 2000, an increase of 24%, primarily due to increased personnel costs and
professional fees, including the establishment of Cytyc Healthcare Ventures,
LLC.
Interest income increased to $1.4 million in the first quarter of 2001 from
$1.0 million for the same period of 2000, an increase of 44%, due to both higher
interest rates and higher cash balances available for investment. The Company
also recorded $3.1 million in 2001 as other income relating to the settlement of
certain litigation. The settlement consisted of cash and stock. The stock has
been recorded at the discounted value of its guaranteed price two years from the
date of the settlement.
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded its
revenue, resulting in an accumulated deficit of $21.6 million as of March 31,
2001. Although the Company generated cash of $31.9 million in 2000 and expects
to be cash flow positive in 2001, the Company had previously funded its
operations primarily through the private placement and public sale of equity
securities and exercise of stock options and warrants aggregating $188.0
million, net of offering expenses. At March 31, 2001, the Company had cash, cash
equivalents and short-term investments of $105.7 million. Cash provided by the
Company's operations during the three months ended March 31, 2001, was $16.3
million compared to $1.6 million in cash used in the Company's operations for
the same period in 2000, primarily as a result of significantly higher net
income. Net accounts receivable increased by $1.8 million during the first three
months of 2001 compared to 2000 due to growth in sales during the 2001 period
which was partially offset by improved management of the accounts receivable
portfolio. Net inventories decreased approximately $1.2 million during the three
months ended March 31, 2001 primarily due to improved inventory management and
production control.
The Company's capital expenditures for the three months ended March 31,
2001 and 2000 were $2.5 million, and $0.9 million, excluding the acquisition of
Acu-Pak, respectively. The increase was due primarily to leasehold improvements
in both the Boxborough and Londonderry facilities.
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 any future litigation.
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 March
31, 2001 was 26%, 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.
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
11
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 3% of its revenues from sales of the ThinPrep System to customers
in countries which have converted to the Euro for the first three months of 2001
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 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 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, 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 future
litigation, uncertainty of additional applications, dependence on key personnel,
dependence on patents, copyrights, licenses and proprietary rights, risk of
third-party claims of infringement, 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, 2000 filed with the Securities and
Exchange Commission, may have a material adverse effect upon 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.
12
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"). TriPath
answered the complaint in the lawsuit and asserted counterclaims seeking a
judgment declaring that the patent at issue was invalid and unenforceable and
not infringed by TriPath. On January 8, 2001, the Company announced that the
parties had settled the litigation. On January 11, 2001, the court signed and
entered a consent judgment confirming the validity and enforceability of the
patent at issue.
On May 12, 2000, the Company filed a lawsuit against TriPath in the United
States District Court for the District of Massachusetts, alleging 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 January 8, 2001, the Company
announced that the parties had settled the litigation and the parties filed a
Stipulation of Dismissal dismissing all claims and counterclaims with prejudice.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company for the quarter
ended March 31, 2001.
13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYTYC CORPORATION
Date: May 14, 2001 By: /s/ Robert L. Bowen
--------------------
Robert L. Bowen
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
By: /s/ Leslie Teso-Lichtman
-------------------------
Leslie Teso-Lichtman
Vice President & Controller
14