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, 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 (I.R.S. Employer
incorporation or 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 2,
2001 was 115,550,522.
Total Number of Pages 32
Exhibit Index is on Page 16
1
CYTYC CORPORATION
INDEX TO FORM 10-Q
------------------
Page
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
December 31, 2000 and June 30, 2001 3
Consolidated Statements of Income
for the three and six months ended June 30, 2000 and 2001 4
Consolidated Statements of Cash Flows
for the six months ended June 30, 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 13
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 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,
2000 2001
-------- --------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 61,605 $ 65,407
Short-term investments............................ 27,240 62,693
Accounts receivable, net of allowance of $1,510
and $1,699 at December 31, 2000
and June 30, 2001, respectively................. 40,214 44,542
Inventories....................................... 11,093 9,828
Prepaid expenses and other current assets......... 937 2,102
-------- --------
Total current assets............................ 141,089 184,572
-------- --------
Property and equipment, net.......................... 21,363 23,726
Other assets ........................................ 8,434 22,517
-------- --------
Total assets................................. $170,886 $230,815
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 6,043 $ 5,612
Accrued expenses.................................. 15,720 15,252
Deferred revenue.................................. 2,077 1,690
-------- --------
Total current liabilities...................... 23,840 22,554
-------- --------
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 115,523,401 shares in 2001........... 1,130 1,155
Additional paid-in capital........................ 183,653 214,133
Accumulated other comprehensive loss.............. (632) (1,481)
Accumulated deficit............................... (37,105) (5,546)
-------- --------
Total stockholders' equity........................ 147,046 208,261
-------- --------
Total liabilities and stockholders' equity........ $170,886 $230,815
======== ========
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,
2000 2001 2000 2001
-------- -------- -------- --------
Net sales............................................................... $ 33,525 $ 52,997 $ 62,303 $100,464
Cost of Sales........................................................... 6,113 9,439 11,419 18,280
-------- -------- -------- --------
Gross profit...................................................... 27,412 43,558 50,884 82,184
-------- -------- -------- --------
Operating expenses:
Research and development............................................. 3,771 5,249 7,191 10,037
Sales and marketing.................................................. 14,368 14,482 26,881 28,353
General and administrative........................................... 3,456 3,548 6,245 6,999
-------- -------- -------- --------
Total operating expenses.......................................... 21,595 23,279 40,317 45,389
-------- -------- -------- --------
Income from operations.................................................. 5,817 20,279 10,567 36,795
Other income, net:
Interest income...................................................... 1,079 1,431 2,060 2,841
Litigation settlement................................................ -- -- -- 3,087
-------- -------- -------- --------
Other income, net................................................. 1,079 1,431 2,060 5,928
-------- -------- -------- --------
Income before provision for income taxes................................ 6,896 21,710 12,627 42,723
Provision for income taxes.............................................. 156 5,701 246 11,164
-------- -------- -------- --------
Net income............................................................. $ 6,740 $ 16,009 $ 12,381 $ 31,559
======== ======== ======== ========
Net income per common and potential common share:
Basic................................................................ $0.06 $0.14 $0.11 $0.28
======== ======== ======== ========
Diluted.............................................................. $0.06 $0.13 $0.11 $0.26
======== ======== ======== ========
Weighted average common and potential common shares outstanding:
Basic............................................................... 110,322 114,744 109,539 114,179
Diluted............................................................. 118,041 119,981 117,756 119,585
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,
2000 2001
---- ----
Cash flows from operating activities:
Net income........................................................... $ 12,381 $ 31,559
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization..................................... 1,425 1,528
Provision for doubtful accounts................................... 97 189
Amortization of goodwill and warrant.............................. 815 1,278
Gain on settlement of litigation.................................. -- (2,712)
Compensation related to issuance of stock to directors and
executives..................................................... 131 359
Deferred tax provision............................................ -- 11,341
Changes in assets and liabilities, excluding effects of acquisition
Accounts receivable............................................ (6,280) (4,517)
Inventories.................................................... (2,011) 1,265
Prepaid expenses and other current assets...................... (424) (1,165)
Accounts payable............................................... 464 (431)
Accrued expenses............................................... (1,339) (468)
Deferred revenue............................................... 33 (387)
-------- --------
Net cash provided by operating activities 5,292 37,839
-------- --------
Cash flows from investing activities:
Acquisition of Acu-Pak, Inc. net of cash acquired................. (5,760) --
Decrease (increase) in other assets............................... 56 (611)
Purchases of property and equipment............................... (2,336) (3,891)
Purchases of short-term investments............................... (17,620) (71,035)
Proceeds from maturity of short-term investments.................. 37,304 35,659
-------- --------
Net cash provided by (used in) investing activities 11,644 (39,878)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrant.................... 4,764 6,236
Proceeds from issuance of shares under Employee Stock Purchase Plan ... 288 529
-------- --------
Net cash provided by financing activities........... 5,052 6,765
-------- --------
Effect of exchange rates on cash....................................... (788) (924)
-------- --------
Net increase in cash and cash equivalents.............................. 21,200 3,802
Cash and cash equivalents, beginning of period......................... 29,686 61,605
-------- --------
Cash and cash equivalents, end of period............................... $ 50,886 $ 65,407
======== ========
Supplemental disclosure of non-cash items:
Changes in unrealized holding (loss) gain on short-term investments. $ (12) $ 77
======== ========
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, Inc. (a Delaware
corporation), 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 June 30, 2001, the Company's available-for-sale securities had contractual
maturities that expire at various dates through June 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 June
30, 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)
June 30, 2001
- -------------
Available-for-sale securities
U.S. government and agency securities (average
maturity of 5.4 months)................................ $31,005 $ 48 $31,053
Corporate bonds (average maturity of 6.3 months)......... 18,624 20 18,644
Commercial paper (average maturity of 2.2 months)........ 12,987 9 12,996
------- ---- -------
$62,616 $ 77 $62,693
======= ==== =======
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, JUNE 30,
2000 2001
------- ------
(in thousands)
Raw material and work-in-process............. $ 6,353 $6,763
Finished goods............................... 4,740 3,065
------- ------
$11,093 $9,828
======= ======
(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 months
ended June 30, 2000 and 2001.
7
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
THREE MONTHS SIX MONTHS
Ended Ended
June 30, JUNE 30,
2000 2001 2000 2001
------- ------- ------- -------
Basic weighted average common shares 110,322 114,744 109,539 114,179
outstanding.............................
Dilutive effect of assumed exercise of 7,719 5,237 8,217 5,406
stock options and warrant............... ------- ------- ------- -------
Weighted average common shares 118,041 119,981 117,756 119,585
outstanding assuming dilution........... ======= ======= ======= =======
Diluted weighted average shares outstanding excludes 16,884 and 1,879,276
potential common shares from stock options and a warrant outstanding for the
three months ended June 30, 2000 and 2001, respectively, and 156,228 and
4,354,941 potential common shares from stock options and a warrant outstanding
for the six months ended June 30, 2000 and 2001 as their effect would be anti-
dilutive.
(7) Comprehensive Income
The components of comprehensive income for the three and six months ended
June 30, 2000 and 2001 are as follows:
THREE MONTHS SIX MONTHS
Ended Ended
June 30, June 30,
2000 2001 2000 2001
------ ------- ------- -------
(IN THOUSANDS)
Comprehensive income:
Net income...................................... $6,740 $16,009 $12,381 $31,559
Other comprehensive income (loss)
Unrealized gain (loss) on short-term
investments................................ 1 (6) (12) 77
Foreign currency translation................. (318) ( 825) (788) (924)
------ ------- ------- -------
Comprehensive income............................ $6,423 $15,178 $11,581 $30,712
======= ======= ======= =======
(8) 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 ("Digene"). In March 1999, the FDA approved the use of Digene'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 Pap Test, 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. Although many health insurance
companies have added the ThinPrep Pap Test to their coverage, there can be no
assurance that third-party payors will provide
9
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 United States Health Care Financing Administration ("HCFA") 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. HCFA has established a
national fee of $28 for the CPT codes describing the ThinPrep Pap Test. This
reimbursement level is nearly dobule the level of reimbursement for the
conventional Pap smear.
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 June 30, 2001, based on information provided to the
Company, the Company believes that all of the 351 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, exclusive
in the United States and Puerto Rico, to co-promote the benefits of testing for
HPV using Digene's Hybrid Capture 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 June 30, 2001 and 2000
Net sales increased to $53.0 million in the second quarter of 2001 from $33.5
million for the same period of 2000, an increase of 58%. 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 $43.6 million
in the second quarter of 2001 from $27.4 million for the same period of 2000, an
increase of 59%, and the gross margin was maintained at 82% in the second
quarter of 2001 as 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 $23.3 million in the second quarter of
2001 from $21.6 million for the same period of 2000, an increase of 8%.
Research and development costs increased to $5.2 million in the second quarter
of 2001 from $3.8 million for the same period of 2000, an increase of 39%,
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 for the imaging system will decrease in the
second half of 2001. Sales and marketing costs were
10
essentially unchanged at $14.4 million in the second quarter of 2001 as compared
to the same period of 2000. Sales and marketing costs may increase in succeeding
quarters as a result of increased expenditures for personnel, physician and
consumer marketing programs and commissions expense. General and administrative
costs were essentially unchanged at $3.5 million in the second quarter of 2001
as compared to the same period of 2000.
Interest income increased to $1.4 million in the second quarter of 2001 from
$1.1 million for the same period of 2000, an increase of 33%, due to higher cash
balances available for investment.
Six Months Ended June 30, 2001 and 2000
Net sales increased to $100.5 million in the first six months of 2001 from
$62.3 million for the same period of 2000, an increase of 61%. 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 $82.2 million
in the first six months of 2001 from $50.9 million for the same period of 2000,
an increase of 62%, and the gross margin was maintained at 82% in the first six
months of 2001 as 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 $45.4 million in the first six months of
2001 from $40.3 million for the same period of 2000, an increase of 13%.
Research and development costs increased to $10.0 million in the first six
months of 2001 from $7.2 million for the same period of 2000, an increase of
40%, primarily as a result of engineering costs 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 $28.4 million in the first six months of 2001
from $26.9 million for the same period of 2000, an increase of 5%. This
increase primarily reflects expenses associated with personnel costs and
commissions related to increased sales, and increased advertising programs and
exhibitions in the United States. Sales and marketing costs may 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 $7.0 million in the first six months of 2001
from $6.2 million for the same period of 2000, an increase of 12%, primarily due
to a combination of increased personnel costs and professional fees, including
those related to the establishment of Cytyc Healthcare Ventures, LLC, which were
partially offset by decreased litigation expenses.
Interest income increased to $2.8 million in the first six months of 2001 from
$2.1 million for the same period of 2000, an increase of 38%, due to higher cash
balances available for investment. The Company also recorded $3.1 million
during the first six months of 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 $5.5 million as of June 30,
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 $191.9
million, net of offering expenses. At June 30, 2001, the Company had cash, cash
equivalents and short-term investments of $128.1 million. Cash provided by the
Company's operations during the six months ended June 30, 2001, was $37.8
million compared to $5.3 million for the same period in 2000, primarily as a
result of significantly higher net income. Net accounts receivable increased by
$4.3 million during the first six 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 $1.3 million during the six months ended June 30, 2001 primarily
due to improved inventory management and production control.
The Company's capital expenditures for the six months ended June 30, 2001 and
2000 were $3.9 million, and $2.3 million, excluding the acquisition of Acu-Pak,
respectively. The increase was due primarily to leasehold improvements in both
the Boxborough and Londonderry facilities and information systems expenditures.
11
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 six months ended June 30,
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 and includes the
reversal of existing valuation allowances.
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 3% 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 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 products,
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
12
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.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
-----------------------------------------
(c) Recent Sales of Unregistered Securities.
--- ---------------------------------------
Effective June 6, 2001, Quest Diagnostics Incorporated exercised in
full a warrant to purchase up to 900,000 shares of the Company's Common
Stock at an exercise price equal to $10.14 per share. Pursuant to the
warrant's cashless exercise feature, the Company issued Quest Diagnostics
Incorporated 494,400 shares of the Company's Common Stock. Such issuance
was made by the Company in reliance upon an exemption from the registration
provisions of the Securities Act of 1933 set forth in Section 4(2) thereof
as a transaction by an issuer not involving a public offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
At the Company's annual meeting of stockholders held on May 23, 2001 (the
"2001 Annual Meeting"), the Company's stockholders took the following actions:
1. The Company's stockholders elected Alfred J. Battaglia, Walter E. Boomer,
and William G. Little as Class II Directors, each to serve for a three
year term expiring at the Company's annual meeting of stockholders in
2004, 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 2001
Annual Meeting. With respect to such matter, the votes were cast as
follows: 100,026,654 shares were voted for the election of Mr. Battaglia,
100,028,122 shares were voted for the election of Mr. Boomer, 100,026,440
shares were voted for the election of Mr. Little, 179,828 shares were
withheld from the election of Mr. Battaglia, 178,360 shares were withheld
from the election of Mr. Boomer and 180,042 shares were withheld from the
election of Mr. Little. No other persons were nominated or received votes
for election as directors of the Company at the 2001 Annual Meeting. The
other directors of the Company whose terms of office continued after the
2001 Annual Meeting were Sally W. Crawford, C. William McDaniel, Anna S.
Richo, Patrick J. Sullivan, and Monroe E. Trout, M.D.
2. The Company's stockholders approved an amendment to the Company's 1995
Employee Stock Purchase Plan, increasing from 840,000 to 1,440,000 the
number of authorized shares of Common Stock, $.01 par value, of the
Company available for issuance thereunder. With respect to such matter,
the votes were cast as follows: 93,525,817 shares were voted for the
proposal, 6,551,104 shares were voted against the proposal and 129,561
shares were abstained from voting on the proposal.
3. The Company's stockholders ratified and approved the Company's 2001 Non-
Employee Director Stock Plan, which provides for the issuance of up to
4,000,000 shares of Common Stock to non-employee directors of the Company
in the form of stock options and other stock awards. With respect to such
matter, the votes were cast as follows: 73,583,155 shares were voted for
the proposal, 26,432,889 shares were voted against the proposal and
190,438 shares were abstained from voting on the proposal.
13
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, 2001. With respect to such matter, the
votes were cast as follows: 99,651,067 shares were voted for the proposal,
435,067 shares were voted against the proposal and 120,348 shares were
abstained from voting on the proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
(a) Exhibits
------------
10.1 1995 Employee Stock Purchase Plan, as amended.
10.2 2001 Non-Employee Director Stock Plan, as amended.
(b) Reports on Form 8-K
-----------------------
There were no reports on Form 8-K filed by the Company for the quarter
ended June 30, 2001.
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 8, 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
15
EXHIBIT INDEX
Exhibit
Number Description Page
- ------ ------------ ----
10.1 1995 Employee Stock Purchase Plan, as amended 17
10.2 2001 Non-Employee Director Stock Plan, as amended 25
16