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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
( ) 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 (I.R.S. Employer
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 May 6, 2002
was 122,524,119.
Total Number of Pages: 16
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1
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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, 2001 and March 31, 2002 3
Consolidated Statements of Income
for the three months ended March 31, 2001 and 2002 4
Consolidated Statements of Cash Flows
for the three months ended March 31, 2001 and 2002 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, March 31,
2001 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents ............................................................ $ 71,928 $ 91,753
Short-term investments ............................................................... 81,314 86,591
Accounts receivable, net of allowance of $1,987 and $2,153 at December 31, 2001
and March 31, 2002, respectively ............................................ 50,278 59,393
Inventories .......................................................................... 10,698 9,913
Prepaid expenses and other current assets ............................................ 1,583 5,623
-------- --------
Total current assets ............................................................ 215,801 253,273
-------- --------
Property and equipment, net ............................................................... 26,662 26,963
-------- --------
Intangible assets:
Patented technology, net of accumulated amortization of $219 at December 31, 2001
and $221 at March 31, 2002 ................................................... 211 209
Acquired developed technology and know-how, net of accumulated amortization of
$122 at December 31, 2001 and $487 at March 31, 2002 .......................... 18,878 18,513
Goodwill, net of accumulated amortization of $885 at December 31, 2001
and March 31, 2002, respectively .............................................. 94,881 95,350
-------- --------
Total intangible assets ......................................................... 113,970 114,072
-------- --------
Deferred tax assets, net .................................................................. 23,485 18,199
Other assets, net ......................................................................... 6,842 6,695
-------- --------
Total assets .................................................................... $386,760 $419,202
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................................... $9,325 $8,620
Accrued expenses ..................................................................... 24,789 28,217
Deferred revenue ..................................................................... 1,501 2,140
-------- --------
Total current liabilities ....................................................... 35,615 38,977
-------- --------
Non-current liabilities ................................................................... 837 837
-------- --------
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: 121,355,344 shares in 2001 and 122,441,616 shares in 2002 . 1,214 1,224
Additional paid-in capital ........................................................... 376,092 387,931
Deferred compensation ................................................................ (999) (782)
Accumulated other comprehensive loss ................................................. (1,529) (2,113)
Retained earnings (deficit) .......................................................... (24,470) (6,872)
-------- -------
Total stockholders' equity ...................................................... 350,308 379,388
------- -------
Total liabilities and stockholders' equity ...................................... $386,760 $419,202
======== ========
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
March 31,
2001 2002
---- ----
Net sales ................................................................ $47,467 $68,035
Cost of sales ............................................................ 8,841 12,610
------- -------
Gross profit ....................................................... 38,626 55,425
------- -------
Operating expenses:
Research and development ............................................ 4,788 4,190
Sales and marketing ................................................. 13,871 17,084
General and administrative .......................................... 3,451 6,715
------- -------
Total operating expenses ....................................... 22,110 27,989
------- -------
Income from operations ................................................... 16,516 27,436
Other income, net:
Interest income .................................................... 1,414 899
Other income (expense) ............................................. (4) 49
Litigation settlement .............................................. 3,087 ---
------- -------
Other income, net ....................................... 4,497 948
------- -------
Income before provision for income taxes ................................. 21,013 28,384
Provision for income taxes ............................................... 5,463 10,786
------- -------
Net income ............................................................... $15,550 $17,598
======= =======
Net income per common and potential common share:
Basic ............................................................... $0.14 $0.14
======= =======
Diluted ............................................................. $0.13 $0.14
======= =======
Weighted average common and potential common shares outstanding:
Basic ............................................................... 113,615 121,780
Diluted ............................................................. 119,207 126,017
The accompanying notes are an integral part of these
consolidated financial statements.
4
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
2001 2002
---- ----
Cash flows from operating activities:
Net income .......................................................... $15,550 $17,598
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .................................. 827 1,711
Provision for doubtful accounts ................................ 108 175
Amortization of warrant ........................................ 540 605
Non-cash gain on settlement of litigation ...................... (2,712) ---
Compensation related to issuance of stock to directors and
executives .................................................. 320 241
Compensation related to options assumed in acquisition ......... --- 133
Change in deferred tax asset ................................... --- 5,285
Tax benefit from exercise of options ........................... --- 4,299
Changes in assets and liabilities, excluding effects of
acquisition:
Accounts receivable ....................................... (1,925) (9,290)
Inventories ............................................... 1,241 785
Prepaid expenses and other current assets ................. (1,232) (4,040)
Accounts payable .......................................... (691) (705)
Accrued expenses .......................................... 4,561 2,961
Deferred revenue .......................................... (281) 639
------- -------
Net cash provided by operating activities ............ 16,306 20,397
------- -------
Cash flows from investing activities:
Increase in other assets ............................................ (155) (456)
Purchases of property and equipment ................................. (2,485) (1,647)
Purchases of short-term investments ................................. (34,331) (40,533)
Proceeds from maturity of short-term investments .................... 9,332 34,987
-------- -------
Net cash used in investing activities ................ (27,639) (7,649)
-------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options ........................... 3,178 7,393
-------- -------
Net cash provided by financing activities ............ 3,178 7,393
-------- -------
Effect of exchange rates on cash ......................................... (99) (316)
-------- -------
Net (decrease) increase in cash and cash equivalents ..................... (8,254) 19,825
Cash and cash equivalents, beginning of period ........................... 61,605 71,928
------ ------
Cash and cash equivalents, end of period ................................. $53,351 $91,753
======= =======
Supplemental disclosure of non-cash items:
Changes in unrealized holding gain (loss) on short-term investments ... $83 $(269)
======== =======
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, 2001.
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 Europe, 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.RL.), Cytyc
(Australia) PTY Limited (an Australian corporation), Cytyc Canada, Limited (a
Canadian corporation), Cytyc (UK) Limited (a United Kingdom corporation), Cytyc
Germany GmbH (a German company), Cytyc Securities Corporation (a Massachusetts
securities corporation), Cytyc Interim, Inc. (a Delaware corporation), Cytyc
Healthcare Ventures, LLC (a Delaware limited liability company), Cytyc Health
Corporation (a Delaware corporation) and Cruiser, Inc. (a Delaware corporation).
All intercompany transactions and balances have been eliminated in
consolidation.
(3) Cash and Cash Equivalents
Cash equivalents consist of money market mutual funds, commercial paper
and U.S. government securities with original maturities, at date of purchase, of
three months or less.
(4) Short-term Investments
The Company follows the provisions of Statement of Financial Accounting
Standards ( "SFAS ") No. 115, Accounting for Certain Investments in Debt and
Equity Securities.
Short-term investments consist of U.S. government securities, corporate
bonds and commercial paper with original maturities between three and twelve
months. At March 31, 2002, the Company's available-for-sale securities had
contractual maturities that expire at various dates through March 2003. The fair
value of available-for-sale securities was determined based on quoted market
prices at the reporting date for those securities. Available-for-sale securities
are shown in the consolidated financial statements at fair market value. At
March 31, 2002 and December 31, 2001, the amortized cost basis, aggregate fair
value and gross unrealized holding gains (losses) by major security type were as
follows:
6
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Gross
Unrealized
Holding
Amortized Gains Fair
Cost (Losses) Value
--------- ---------- -----
(in thousands)
March 31, 2002
--------------
Available-for-sale securities
U.S. government and agency securities (average
maturity of 6.4 months) ............................ $56,374 $(117) $56,257
Corporate bonds (average maturity of 4.4 months) ... 30,373 (39) 30,334
------- ----- -------
$86,747 $(156) $86,591
======= ===== =======
December 31, 2001
-----------------
Available-for-sale securities
U.S. government and agency securities (average
maturity of 3.9 months) ............................ $55,711 $ 44 $55,755
Corporate bonds (average maturity of 5.0 months) ... 22,601 68 22,669
Commercial paper (average maturity of 1.2 months) .. 2,889 1 2,890
------- ---- -------
$81,201 $113 $81,314
======= ==== =======
(5) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following:
December 31, March 31,
2001 2002
---- ----
(in thousands)
Raw material and work-in-process. ........... $ 6,377 $6,938
Finished goods .............................. 4,321 2,975
------- ------
$10,698 $9,913
======= ======
(6) Income Taxes
The Company estimated that its effective tax rate for the three months
ended March 31, 2002 was 38%, 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.
(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 months ended
March 31, 2001 and 2002.
7
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Three Months
Ended
March 31,
2001 2002
---- ----
Basic weighted average common shares outstanding .................. 113,615 121,780
Dilutive effect of assumed exercise of stock options and warrant... 5,592 4,237
------- -------
Weighted average common shares outstanding assuming dilution ...... 119,207 126,017
======= =======
Diluted weighted average shares outstanding excludes 4,528,722 and
4,463,191 potential common shares from stock options and warrant outstanding for
the three months ended March 31, 2001 and 2002, respectively, as their effect
would be anti-dilutive.
(8) Comprehensive Income
The components of accumulated other comprehensive income for the three
months ended March 31, 2001 and 2002 are as follows:
Three Months
Ended
March 31,
2001 2002
---- ----
(in thousands)
Comprehensive income:
Net income ................................................... $15,550 $17,598
Other comprehensive income (loss)
Unrealized gain (loss) on short-term investments ....... 83 (269)
Foreign currency translation ........................... (99) (316)
------- -------
Comprehensive income ................................................. $15,534 $17,013
======= =======
(9) Stock Splits
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 this stock
split.
(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
adopted SFAS No. 142 on January 1, 2002. The Company expects this will reduce
annual amortization expense by approximately $450,000. Management is currently
evaluating the impact this statement will have, if any, on it's financial
statements in reviewing goodwill for impairment when applying the
fair-value-based test.
8
In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets which 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. SFAS No. 144 requires that companies (1) recognize an impairment
loss only if the carrying amount of a long-lived asset is not recoverable based
on its undiscounted future cash flows and (2) measure an impairment loss as the
difference between the carrying amount and fair value of the asset. In addition,
SFAS No. 144 provides guidance on accounting and disclosure issues surrounding
long-lived assets to be disposed of by sale. The adoption of this statement did
not have a material impact on the Company's financial position or results of
operations.
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 Company's
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 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
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 December 2001, the Company
submitted a PMA Supplement Application to the FDA to allow for testing for
Chlamydia Trachomatis (CT) and Neisseria Gonorrhea (NG) directly from the
ThinPrep Pap Test vial using Roche Diagnostics Corporation ("RDC") COBAS
Amplicor(TM) automated system. In January 2002, the Company submitted a PMA
Application to the FDA for the ThinPrep Imaging System 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 Company's
products 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.
In November 2001, as part of its acquisition of Pro Duct Health, Inc.
("Pro Duct"), a manufacturer of medical devices in Menlo Park, California, the
Company entered into a lease for a 35,000 square feet facility. The lease of
this facility terminates on April 30, 2003. The Company has subleased
approximately 17,000 square feet of office
10
space in Menlo Park, California to a third party for eighteen months ending
April 30, 2003. In connection with the acquisition, the Company committed to a
plan to abandon the leased facilities and did so on April 1, 2002 with the
exception of 3,500 square feet of office space. The Company has accrued
approximately $787,000 for the abandonment of the leased facility, representing
the present value of future minimum lease payments less estimated sub-lease
receipts.
The cost per ThinPrep(R) Pap Test(TM), plus a laboratory mark-up, is
generally billed by laboratories to third-party payors and results in a higher
amount for the ThinPrep Pap Test than the current billing for conventional Pap
tests. Successful sales of the ThinPrep System for cervical cancer screening in
the United States and other countries will depend on the availability of
adequate reimbursement from third-party payors such as private insurance plans,
managed care organizations and Medicare and Medicaid. 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 March 31, 2002, based on information provided to
the Company, the Company believes that all of the 373 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
and the ductal lavage device acquired from Pro Duct in 2002.
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 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(TM) CT/NG Test
directly from the ThinPrep collection vial. The companies also agreed 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(R) II HPV DNA Assay directly from
the ThinPrep collection vial. The companies expect that the co-promotion program
will initially focus on promoting Digene's HPV DNA test, using the residual
material in ThinPrep collection vials, as the optimal patient management
strategy for borderline cytology results.
The Company expects to continue its expenditures in 2002 for research
and development to fund follow-on studies of the ductal lavage device acquired
from Pro Duct, as well as follow-on products and additional applications of
ThinPrep technology. The Company also expects that expenses for the Thin Prep
Imaging System development activities will decrease in 2002.
11
Results of Operations
Three Months Ended March 31, 2002 and 2001
Net sales increased to $68.0 million in the first quarter of 2002 from
$47.5 million for the same period of 2001, an increase of 43%. The increase was
primarily due to increased U.S. sales of the Company's ThinPrep Pap Test for
cervical cancer screening. Gross profit increased to $55.4 million in the first
quarter of 2002 from $38.6 million for the same period of 2001, an increase of
43%, and the gross margin was approximately equal in the first quarter of 2002
when compared to the same period of 2001.
Total operating expenses increased to $28.0 million in the first quarter
of 2002 from $22.1 million for the same period of 2001, an increase of 27%.
Research and development costs decreased to $4.2 million in the first quarter of
2002 from $4.8 million for the same period of 2001, a decrease of 12%, primarily
as a result of decreased engineering costs associated with the Company's
ThinPrep Imaging System development activities partially offset by increases in
regulatory affairs travel and personnel costs, and increased amortization
expense related to the ductal lavage technology in 2002. The Company expects to
continue its expenditures in 2002 for research and development to fund follow-on
studies of the ductal lavage device acquired from Pro Duct, as well as follow-on
products and additional applications of Thin Prep technology. The Company
expects that research and development expenses for the imaging system will
decrease in the remainder of 2002. Sales and marketing costs increased to $17.1
million in the first quarter of 2002 from $13.9 million for the same period of
2001, an increase of 23%. This increase primarily reflects costs associated with
expansion in international subsidiaries and to a lesser extent U.S. sales force
personnel costs. The Company expects that sales and marketing costs will
increase in succeeding quarters as a result of increased expenditures for
personnel, marketing programs and commissions expense. General and
administrative costs increased to $6.7 million in the first quarter of 2002 from
$3.5 million for the same period of 2001, an increase of 95%, primarily due to
increased consulting costs related to business development, integration
activities and professional fees.
Interest income decreased to $0.9 million in the first quarter of 2002
from $1.4 million for the same period of 2001, a decrease of 36%, due primarily
to lower interest rates. The Company also recorded $3.1 million in 2001 as other
income relating to the settlement of certain litigation. The settlement
consisted of cash and stock. The stock has been recorded at the discounted value
of its guaranteed price two years from the date of the settlement.
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded its
revenue, resulting in an accumulated deficit of $6.9 million as of March 31,
2002. Although the Company generated cash of $19.8 million in the first quarter
of 2002, 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 $202.0 million, net of offering expenses. At
March 31, 2002, the Company had cash, cash equivalents and short-term
investments of $178.3 million. Cash provided by the Company's operations was
$16.3 million and $20.4 million during the first quarter of 2001 and 2002,
respectively, primarily as a result of net income generated in each period,
partially offset by increases in working capital. Net accounts receivable
increased by $9.3 million to approximately $59.4 million during the first
quarter of 2002 as a result of significant sales growth. Net inventories
decreased approximately $0.8 million from December 31, 2001 to March 31, 2002
due primarily to improved inventory management and production control.
The Company's investing activities used cash of approximately $27.6
million and $7.6 million during the first quarter of 2001 and 2002,
respectively. The Company's investing activities included capital expenditures
for the quarters ended March 31, 2001 and 2002 of $2.5 million and $1.6 million,
respectively. The Company's investing activities utilized cash of approximately
$25.0 million and $5.5 million for the purchase of short-term investments for
the first quarter of 2001 and 2002, respectively.
The Company's financing activities generated cash of approximately $3.2
million and $7.4 million in the first quarter of 2001 and 2002, respectively.
The Company's financing activities consisted primarily of proceeds from the
exercise of common stock options.
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
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to which such activities generate market acceptance and demand for the ThinPrep
System for cervical cancer screening and additional applications of its ThinPrep
technology, including the ductal lavage device acquired from Pro Duct. 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 and the ductal lavage device acquired from
Pro Duct, 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.
Critical Accounting Policies
We considered the disclosure requirements of FR-60 regarding critical
accounting policies and FR-61 regarding liquidity and capital resources, certain
trading activities and related party/certain other disclosures, and concluded
that nothing materially changed during the quarter that would warrant further
disclosure under these releases.
Income Taxes
The Company estimated that its effective tax rate for the three months
ended March 31, 2002 was 38%, due primarily to the effect of net operating loss
carryforwards and the application of the federal alternative minimum tax and
certain state minimum taxes. The effective tax rate represents the Company's
estimate of the rate expected to be applicable for the full fiscal year.
Impact of Euro Conversion
In January 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
Euro. As of March 2002, 12 of the 15 member countries adopted the Euro as their
sole legal currency.
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 has taken
the necessary steps to convert its European accounting software to Euros and has
been invoicing exclusively in Euro's since January 1, 2002 at all subsidiaries
in countries that have adopted the Euro. The Company derived approximately 1.7%
of its revenues from sales of the ThinPrep System to customers in countries
which have converted to the Euro for the first three months of 2002. The Company
has assessed the costs of addressing Euro-related issues, and does not expect
such costs to be material. Because the Company's evaluation of Euro-related
issues 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 management's
expectations for future growth and plans and objectives for future management
and operations, domestic and international marketing and sales plans, product
plans and performance and potential savings to the health care system,
management's assessment of market factors, statements concerning the integration
of Pro Duct, statements concerning the acquisition of Digene, 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 Company's proposed acquisition of Digene, risks
associated with the integration of Pro Duct, 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
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reimbursement, a limited number of customers and a lengthy sales process, a
limited operating history, risks associated with acquisitions including
diversion of management's attention from other important business concerns, use
of significant amounts of cash, potential dilutive issuances of equity
securities, incurrence of debt or amortization expenses related to certain
intangible assets, future impairment charges related to diminished fair value of
businesses acquired as compared to their net book value, difficulties associated
with assimilating and integrating the personnel, operations and technologies of
the acquired companies, failure to retain key personnel, loss of key customers,
customer dissatisfaction or performance problems with the acquired company, the
costs associated with the integration of acquired operations and assumption of
unknown liabilities, management of growth, intense competition, potential
fluctuations in future quarterly results, limited foreign sales capabilities,
uncertainty of additional applications, dependence on key personnel, dependence
on protection of 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, 2001 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 February 19,
2002, by and among Cytyc Corporation, Digene
Corporation and Cruiser, Inc. (filed as Exhibit 2.1
to the Company's Current Report on Form 8-K, filed
February 20, 2002 (File No. 000-27558) and
incorporated herein by reference).
Exhibit 99.1 Stockholders Agreement, dated February 19, 2002,
by and among Cytyc Corporation, Cruiser, Inc. and
executive officers, directors and certain
stockholders of Digene Corporation (filed as Exhibit
2.1 to the Company's Current Report on Form 8-K,
filed February 20, 2002 (File No. 000-27558) and
incorporated herein by reference).
Exhibit 99.2 Transaction Option Agreement, dated February 19,
2002, by and between Cytyc Corporation and Digene
Corporation (filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, filed February 20, 2002
(File No. 000-27558) and incorporated herein by
reference).
(b) Reports on Form 8-K
There were five reports on Form 8-K filed by the Company for the quarter
ended March 31, 2002.
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On February 5, 2002, the Company filed a current report on Form
8-K which announced the Board of Directors' approval of a stock
repurchase program. A copy of the Company's press release announcing
the stock repurchase program was attached and incorporated by reference
therein.
On February 12, 2002, the Company filed a current report on Form
8-K/A which amended a current report on Form 8-K filed on December 14,
2001. The original Form 8-K announced the completion of the Company's
acquisition of Pro Duct Health, Inc. ("Pro Duct") and included the
press release announcing the completion of the acquisition. The Form
8-K/A included the financial statements of Pro Duct required by Item
7(a) of Form 8-K and the pro forma financial information required by
Item 7(b) of Form 8-K.
On February 20, 2002, the Company filed a current report on Form
8-K announcing the execution of a definitive agreement to acquire all
of the outstanding shares of common stock of Digene Corporation
("Digene") in an exchange offer transaction. A copy of the definitive
agreement and agreements related thereto, along with the Company's
press release announcing the definitive agreement, were attached and
incorporated by reference therein.
On March 15, 2002, the Company filed a current report on Form 8-K
announcing the filing by Digene of a declaratory judgment action
against Enzo Biochem, Inc. A copy of the Company's press release
announcing the declaratory judgment action was attached and
incorporated by reference therein.
On March 22, 2002, the Company filed a current report on Form 8-K
regarding the U.S. Federal Trade Commission's review of the Company's
proposed acquisition of Digene. A copy of the Company's press release
with respect to such review was attached and incorporated by reference
therein.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYTYC CORPORATION
Date: May 14, 2002 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
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