================================================================================
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 September 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 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 November 5,
2001 was 116,028,329.
Total Number of Pages: 16
================================================================================
1
================================================================================
CYTYC CORPORATION
INDEX TO FORM 10-Q
------------------
Page
----
Part I Financial Information
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of
December 31, 2000 and September 30, 2001 3
Consolidated Statements of Income
for the three and nine months ended September 30, 2000 and 2001 4
Consolidated Statements of Cash Flows
for the nine months ended September 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 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signature 16
2
Part I Financial Information
Item 1. Consolidated Financial Statements
CYTYC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
December 31, September 30,
2000 2001
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 61,605 $ 94,171
Short-term investments.............................................................. 27,240 57,875
Accounts receivable, net of allowance of $1,510 and $1,794 at December 31, 2000
and September 30, 2001, respectively.............................................. 40,214 49,092
Inventories......................................................................... 11,093 10,557
Prepaid expenses and other current assets........................................... 937 1,637
------------ -------------
Total current assets............................................................ 141,089 213,332
------------ -------------
Property and equipment, net............................................................. 21,363 24,081
Other assets............................................................................ 8,434 21,964
------------ -------------
Total assets.................................................................... $ 170,886 $ 259,377
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 6,043 $ 6,529
Accrued expenses.................................................................... 15,720 15,192
Deferred revenue.................................................................... 2,077 1,803
------------ -------------
Total current liabilities....................................................... 23,840 23,524
------------ -------------
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 115,936,654 shares in 2001.. 1,130 1,159
Additional paid-in capital.......................................................... 183,653 222,360
Accumulated other comprehensive loss................................................ (632) (151)
Retained earnings (deficit)......................................................... (37,105) 12,485
------------ -------------
Total stockholders' equity...................................................... 147,046 235,853
------------ -------------
Total liabilities and stockholders' equity...................................... $ 170,886 $ 259,377
============ =============
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)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 2001 2000 2001
-------- -------- -------- --------
Net sales................................................................. $ 37,209 $ 57,249 $ 99,512 $157,713
Cost of sales............................................................. 5,866 10,466 17,285 28,746
-------- -------- -------- --------
Gross profit........................................................... 31,343 46,783 82,227 128,967
-------- -------- -------- --------
Operating expenses:
Research and development............................................... 3,462 5,369 10,653 15,406
Sales and marketing.................................................... 14,264 14,496 41,145 42,849
General and administrative............................................. 3,539 4,015 9,784 11,014
-------- -------- -------- --------
Total operating expenses........................................... 21,265 23,880 61,582 69,269
-------- -------- -------- --------
Income from operations.................................................... 10,078 22,903 20,645 59,698
Other income, net:
Interest income........................................................ 1,263 1,463 3,323 4,304
Litigation settlement.................................................. -- -- -- 3,087
-------- -------- -------- --------
Other income, net.................................................. 1,263 1,463 3,323 7,391
-------- -------- -------- --------
Income before provision for income taxes.................................. 11,341 24,366 23,968 67,089
Provision for income taxes................................................ 346 6,335 592 17,499
-------- -------- -------- --------
Net income................................................................ $ 10,995 $ 18,031 $ 23,376 $ 49,590
======== ======== ======== ========
Net income per common and potential common share:
Basic.................................................................. $ 0.10 $ 0.16 $ 0.21 $ 0.43
======== ======== ======== ========
Diluted................................................................ $ 0.09 $ 0.15 $ 0.20 $ 0.41
======== ======== ======== ========
Weighted average common and potential common shares outstanding:
Basic.................................................................. 111,585 115,698 110,220 114,685
Diluted................................................................ 118,311 120,918 117,777 119,953
The accompanying notes are an integral part of these consolidated financial
statements.
4
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
2000 2001
---- ----
Cash flows from operating activities:
Net income..................................................................... $ 23,376 $ 49,590
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization............................................... 2,181 2,756
Provision for doubtful accounts............................................. 153 284
Amortization of goodwill and warrant........................................ 1,312 2,052
Gain on settlement of litigation............................................ -- (2,712)
Compensation related to issuance of stock to directors and
executives............................................................... 186 421
Deferred taxes.............................................................. -- 18,243
Changes in assets and liabilities, excluding effects of acquisition
Accounts receivable...................................................... (10,796) (9,162)
Inventories.............................................................. (3,995) 536
Prepaid expenses and other current assets................................ (258) (700)
Accounts payable......................................................... 1,016 486
Accrued expenses......................................................... (228) (528)
Deferred revenue......................................................... 719 (274)
-------- --------
Net cash provided by operating activities............................ 13,666 60,992
-------- --------
Cash flows from investing activities:
Acquisition of Acu-Pak, Inc. net of cash acquired.............................. (5,760) --
Decrease (increase) in other assets............................................ 335 (832)
Purchases of property and equipment............................................ (5,345) (5,474)
Purchases of short-term investments............................................ (27,917) (98,780)
Proceeds from maturity of short-term investments............................... 45,799 68,291
-------- --------
Net cash provided by (used in) investing activities.................. 7,112 (36,795)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrant............................ 6,299 7,503
Proceeds from issuance of shares under Employee Stock Purchase Plan............ 288 529
-------- --------
Net cash provided by financing activities............................ 6,587 8,032
-------- --------
Effect of exchange rates on cash.................................................... (1,110) 337
-------- --------
Net increase in cash and cash equivalents........................................... 26,255 32,566
Cash and cash equivalents, beginning of period...................................... 29,686 61,605
-------- --------
Cash and cash equivalents, end of period............................................ $ 55,941 $ 94,171
======== ========
Supplemental disclosure of non-cash items:
Changes in unrealized holding (loss) gain on short-term investments................ $ (7) $ 146
======== ========
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 September 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
September 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)
September 30, 2001
------------------
Available-for-sale securities
U.S. government and agency securities (average
maturity of 3.2 months)................................ $28,320 $ 82 $28,402
Corporate bonds (average maturity of 4.4 months)....... 20,999 43 21,042
Commercial paper (average maturity of 3.0 months)...... 8,410 21 8,431
------- ------ -------
$57,729 $146 $57,875
======= ====== =======
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, September 30,
------------- -------------
2000 2001
---- ----
(in thousands)
Raw material and work-in-process....... $ 6,353 $ 7,008
Finished goods......................... 4,740 3,549
------- -------
$11,093 $10,557
======= =======
(6) Income Taxes
The Company estimated that its effective tax rate for the nine months ended
September 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.
(7) 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 nine months
ended September 30, 2000 and 2001.
7
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 2001 2000 2001
---- ----- ---- ----
Basic weighted average common shares outstanding......................... 111,585 115,698 110,220 114,685
Dilutive effect of assumed exercise of stock options and warrant......... 6,726 5,220 7,557 5,268
------- ------- ------- -------
Weighted average common shares outstanding assuming dilution............. 118,311 120,918 117,777 119,953
======= ======= ======= =======
Diluted weighted average shares outstanding excludes 306,786 and 74,276
potential common shares from stock options and a warrant outstanding for the
three months ended September 30, 2000 and 2001, respectively, and 769,641 and
1,753,032 potential common shares from stock options and a warrant outstanding
for the nine months ended September 30, 2000 and 2001 as their effect would be
anti-dilutive.
(8) Comprehensive Income
The components of comprehensive income for the three and nine months ended
September 30, 2000 and 2001 are as follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 2001 2000 2001
---- ----- ---- ----
(in thousands)
Comprehensive income:
Net income................................................................... $10,995 $18,031 $23,376 $49,590
Other comprehensive income (loss)
Unrealized gain (loss) on short-term investments.......................... 5 69 (7) 146
Foreign currency translation.............................................. (323) 1,261 (1,110) 337
------- ------- ------- -------
Comprehensive income............................................................ $10,677 $19,361 $22,259 $50,073
======= ======= ======= =======
(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.
(10) Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations. SFAS No. 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method. The
adoption of SFAS No. 141 is not expected to have a material impact on the
Company's consolidated financial statements.
In July 2001, the FASB also issued SFAS No. 142, Goodwill and Other
Intangible Assets. Under SFAS No. 142, goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is subject to at
least an annual assessment for impairment by applying a fair-value-based test.
Also under SFAS No. 142, intangible assets acquired in conjunction with a
business combination should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented or exchanged,
regardless of the acquirer's intent to do so. Intangible assets will continue to
be amortized over their respective useful lives under SFAS No. 142. The Company
must adopt SFAS
8
No. 142 on January 1, 2002. The adoption of SFAS No. 142 is not expected to have
a material impact on the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. This statement supersedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of, and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations - Report the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. Under this statement it is required that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, and it broadens the
presentation of discontinued operations to include more disposal transactions.
The provisions of this statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim period within
those fiscal years, with early adoption permitted. The Company is currently
evaluating whether it will early adopt the provisions of SFAS No. 144, and
management will not be able to determine the ultimate impact of this statement
on its results of operations or financial position until such time as its
provisions are applied.
(11) Subsequent Event
On October 17, 2001, the Company, Pro Duct Health, Inc., a Delaware
corporation ("Pro Duct") and Cytyc Health Corporation, a Delaware corporation
and wholly-owned subsidiary of the Company ("Merger Sub") entered into an
Agreement and Plan of Merger (the "Merger Agreement"). Subject to the terms and
conditions of the Merger Agreement, Pro Duct will merge with and into Merger
Sub, with Merger Sub to survive the merger as a wholly-owned subsidiary of the
Company. Pursuant to the Merger Agreement, upon the effective time of the
Merger, the Company will pay Pro Duct security holders (in accordance with the
existing preferences under Pro Duct's Certificate of Incorporation) a
combination of 5.0 million shares of the Company's common stock and $38.5
million in cash in exchange for all of Pro Duct's outstanding capital stock and
vested options and warrants. The Company will assume in the merger all then
outstanding options exercisable for the purchase of shares of Pro Duct capital
stock. The consummation of the merger is subject to various closing conditions,
including, among others, approval of the Merger Agreement by the stockholders of
Pro Duct and the expiration or early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
9
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 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. In August 2001, the FDA approved the
Company's PMA Supplement Application for the inclusion of data describing the
detection of High-Grade Squamus Intraepithelial Lesions (HSIL) with the ThinPrep
Pap Test. In October 2001, the Company announced that it had entered into a
definitive merger agreement to acquire Pro Duct Health, Inc. a privately-held
company that has developed a ductal lavage device to enhance the evaluation of
risk for breast cancer. The Company expects the transaction to close in the
fourth quarter of 2001.
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,
10
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 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 Center for Medicare and Medicaid Services ("CMS") 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. CMS has established a national
fee of $28 for the CPT codes describing the ThinPrep Pap Test. This
reimbursement level is nearly double 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 September 30, 2001, based on information provided
to the Company, the Company believes that all of the 360 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.
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.
The Company expects to continue 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. Costs
related to the ThinPrep Imaging System are expected to decrease in the fourth
quarter of 2001.
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(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.
On October 17, 2001, the Company, Pro Duct Health, Inc., a Delaware
corporation ("Pro Duct") and Cytyc Health Corporation, a Delaware corporation
and wholly-owned subsidiary of the Company ("Merger Sub") entered into an
Agreement and Plan of Merger (the "Merger Agreement"). Subject to the terms and
conditions of the Merger Agreement, Pro Duct will merge with and into Merger
Sub, with Merger Sub to survive the merger as a wholly-owned subsidiary of the
Company. Pursuant to the Merger Agreement, upon the effective time of the
Merger, the Company will pay Pro Duct security holders (in accordance with the
existing preferences under Pro Duct's Certificate of Incorporation) a
combination of 5.0 million shares of the Company's common stock and $38.5
million in cash in exchange for all of Pro Duct's outstanding capital stock and
vested options and warrants. The Company will assume in the merger all then
outstanding options exercisable for the purchase of shares of Pro Duct capital
stock. The consummation of the merger is subject to various closing conditions,
including, among others, approval of the Merger Agreement by the stockholders of
Pro Duct and the expiration or early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
11
Results of Operations
Three Months Ended September 30, 2001 and 2000
Net sales increased to $57.2 million in the third quarter of 2001 from
$37.2 million for the same period of 2000, an increase of 54%. 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 $46.8 million
in the third quarter of 2001 from $31.3 million for the same period of 2000, an
increase of 49%, and the gross margin decreased to 82% in the third quarter of
2001 from 84% for the same period of 2000, primarily due to customer mix.
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 $23.9 million in the third quarter of
2001 from $21.3 million for the same period of 2000, an increase of 12%.
Research and development costs increased to $5.4 million in the third quarter of
2001 from $3.5 million for the same period of 2000, an increase of 55%,
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
fourth quarter of 2001. Sales and marketing costs were essentially unchanged at
$14.5 million in the third quarter of 2001 as compared to $14.3 million for 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 increased to $4.0 million in the third quarter of 2001 from $3.5 million
for the same period of 2000, an increase of 13%, primarily due to a combination
of increased personnel costs and professional fees, including those related to
Cytyc Healthcare Ventures, LLC, which were partially offset by decreased
litigation expenses.
Interest income increased to $1.5 million in the third quarter of 2001 from
$1.3 million for the same period of 2000, an increase of 16%, due to higher cash
balances available for investment.
Nine Months Ended September 30, 2001 and 2000
Net sales increased to $157.7 million in the first nine months of 2001 from
$99.5 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 $129.0 million
in the first nine months of 2001 from $82.2 million for the same period of 2000,
an increase of 57%, and the gross margin was maintained at approximately 82% in
the first nine 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 $69.3 million in the first nine
months of 2001 from $61.6 million for the same period of 2000, an increase of
12%. Research and development costs increased to $15.4 million in the first nine
months of 2001 from $10.7 million for the same period of 2000, an increase of
45%, 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 fourth quarter of 2001. Sales and marketing
costs increased to $42.8 million in the first nine months of 2001 from $41.1
million for the same period of 2000, an increase of 4%. 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 $11.0 million in the first nine months of 2001 from $9.8 million
for the same period of 2000, an increase of 13%, primarily due to a combination
of increased personnel costs and professional fees, including those related to
Cytyc Healthcare Ventures, LLC, which were partially offset by decreased
litigation expenses.
Interest income increased to $4.3 million in the first nine months of 2001
from $3.3 million for the same period of 2000, an increase of 30%, due to higher
cash balances available for investment. The Company also recorded $3.1 million
during the first nine 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.
12
Liquidity and Capital Resources
Until the quarter ended September 30, 2001, the Company's expenses
significantly exceeded its revenue, resulting in an accumulated deficit in prior
periods. The Company is no longer in a deficit position and as of September 30,
2001 had retained earnings of $12.5 million. 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 $193.2 million, net of offering expenses. At September 30,
2001, the Company had cash, cash equivalents and short-term investments of
$152.0 million. Cash provided by the Company's operations during the nine months
ended September 30, 2001, was $61.0 million compared to $13.7 million for the
same period in 2000, primarily as a result of significantly higher net income.
Net accounts receivable increased by $8.9 million during the first nine months
of 2001 compared to 2000 due to growth in sales during the 2001 period. Net
inventories decreased approximately $0.5 million during the nine months ended
September 30, 2001 primarily due to improved inventory management and production
control.
The Company's capital expenditures for the nine months ended September 30,
2001 and 2000 were $5.5 million, and $5.3 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.
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 estimated that its effective tax rate for the nine months ended
September 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 nine 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.
13
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, statements concerning the Company's expected acquisition of Pro Duct
Health, Inc., 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, risks associated with the consummation and
integration of the acquisition of Pro Duct Health, Inc., its dependence on a
single product, uncertainty of FDA approval and market acceptance and the
additional cost related thereto, limited marketing and sales experience,
dependence on timely and adequate levels of third-party reimbursement, a limited
number of customers and a lengthy sales process, a limited operating history,
management of growth, intense competition, potential fluctuations in future
quarterly results, extensive government regulation, international sales and
operations risks, uncertainty of additional applications, dependence on key
personnel, dependence on patents, copyrights, licenses and proprietary rights,
risk of third-party claims of infringement, dependence on single source
suppliers, and risks associated with the Euro conversion. 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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
-------------
Exhibit 2.1 Agreement and Plan of Merger, dated October 17,
2001, by and among Cytyc Corporation, Pro Duct
Health, Inc., and Cytyc Health Corporation (filed
as Exhibit 2.1 to the Company's Current Report on
Form 8-K (File No. 000-27558) and incorporated
herein by reference).
Exhibit 99.1 Press Release, dated October 18, 2001, by Cytyc
Corporation (filed as Exhibit 99.1 to the
Company's Current Report on Form 8-K (File No.
000-27558) and incorporated herein by reference).
Exhibit 99.2 Form of Registration Rights Agreement by and among
Cytyc Corporation and holders of the capital stock
of Pro Duct as of the closing of the Merger (filed
as Exhibit 99.2 to the
14
Company's Current Report on Form 8-K (File No.
000-27558) and incorporated herein by reference).
Exhibit 99.3 Voting Agreement, dated as of October 17, 2001, by
and among Cytyc Corporation and certain principal
stockholders of Pro Duct Health, Inc. (filed as
Exhibit 99.3 to the Company's Current Report on
Form 8-K (File No. 000-27558) and incorporated
herein by reference).
(b) Reports on Form 8-K
------------------------
There were no current reports on Form 8-K filed by the Company
for the quarter ended September 30, 2001.
On October 19, 2001, the Company filed a current report on
Form 8-K reporting Item 5 - Other Events - to disclose the
execution of a definitive merger agreement to acquire Pro Duct
Health, Inc. and Item 7 -Financial Statements, Pro Forma
Financial Statements and Exhibits - to disclose the related
Agreement and Plan of Merger, Voting Agreement and Form of
Registration Rights Agreement and a Press Release announcing the
transaction.
15
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: November 9, 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
16