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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 September 30, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______________ to __________________
Commission File Number 0-27558
CYTYC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 02-0407755
- -------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
85 Swanson Road, Boxborough, MA 01719
(Address of principal executive offices, including Zip Code)
(978) 263-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: The number of shares of the
issuer's Common Stock, $0.01 par value per share, outstanding as of November 8,
1999 was 17,999,145.
Total Number of Pages: 18
Exhibit Index is on Page 17
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1
CYTYC CORPORATION
INDEX TO FORM 10-Q
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Page
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1998
and September 30, 1999 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 1998 and 1999 4
Consolidated Statements of Cash Flows for the three
and nine months ended September 30, 1998 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
2
Part I Financial Information
Item 1. Consolidated Financial Statements
CYTYC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, September 30,
1998 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 33,566 $ 39,532
Short-term investments .............................. 36,342 30,972
Accounts receivable, net ............................ 12,548 19,827
Inventories ......................................... 3,973 4,509
Prepaid expenses and other current assets ........... 650 1,005
--------- ---------
Total current assets ........................... 87,079 95,845
Property and equipment, net .............................. 8,825 10,470
Other assets ............................................. 1,833 1,717
--------- ---------
Total assets ................................... $ 97,737 $ 108,032
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 2,555 $ 5,158
Accrued expenses .................................... 7,962 10,310
Deferred revenue .................................... 1,413 1,672
--------- ---------
Total current liabilities ...................... 11,930 17,140
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value--
Authorized--5,000,000 shares
No shares issued or outstanding ................... -- --
Common Stock, $.01 par value--
Authorized--60,000,000 shares
Issued and outstanding: 17,798,595 shares in
1998 and 17,982,488 shares in 1999 ................ 178 180
Additional paid-in capital .......................... 166,431 168,774
Accumulated other comprehensive income .............. 106 69
Accumulated deficit ................................. (80,908) (78,131)
--------- ---------
Total stockholders' equity ..................... 85,807 90,892
--------- ---------
Total liabilities and stockholders' equity ..... $ 97,737 $ 108,032
========= =========
See accompanying notes.
3
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
-------- ------- -------- -------
Net sales ...................................................... $ 12,349 $21,331 $ 29,631 $56,367
Cost of sales .................................................. 2,902 3,832 7,672 11,303
-------- ------- -------- -------
Gross profit ............................................... 9,447 17,499 21,959 45,064
-------- ------- -------- -------
Operating expenses:
Research and development ................................... 1,994 4,246 6,147 9,826
Sales, marketing and customer support ...................... 8,412 11,842 27,271 31,663
General and administrative ................................. 1,201 1,254 7,225 4,690
-------- ------- -------- -------
Total operating expenses ...................... 11,607 17,342 40,643 46,179
-------- ------- -------- -------
Income (loss) from operations .................................. (2,160) 157 (18,684) (1,115)
Other income:
Interest income .......................................... 1,000 936 3,292 2,785
Other income ............................................. -- -- -- 1,107
-------- ------- -------- -------
Total other income ............................ 1,000 936 3,292 3,892
-------- ------- -------- -------
Net income (loss) .............................................. $ (1,160) $ 1,093 $(15,392) $ 2,777
======== ======= ======== =======
Net income (loss) per common and potential common share:
Basic ...................................................... $ (0.07) $ 0.06 $ (0.87) $ 0.16
======== ======= ======== =======
Diluted .................................................... $ (0.07) $ 0.06 $ (0.87) $ 0.15
======== ======= ======== =======
Weighted average common and potential common shares outstanding:
Basic ...................................................... 17,643 17,900 17,604 17,843
Diluted .................................................... 17,643 18,813 17,604 18,553
See accompanying notes.
4
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
-------- -------- -------- --------
Cash flows from operating activities:
Net income (loss) ................................................ $ (1,160) $ 1,093 $(15,392) $ 2,777
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities
Depreciation and amortization ............................... 452 491 1,175 1,288
Provision for doubtful accounts ............................. 20 172 170 104
Compensation related to issuance of stock to
directors ................................................. -- 23 -- 118
Changes in assets and liabilities--
Accounts receivable .................................... (2,443) (3,859) 1,209 (7,383)
Inventories ............................................ 264 (128) (742) (536)
Prepaid expenses and other current assets .............. 193 101 (146) (355)
Accounts payable ....................................... 365 958 (909) 2,603
Accrued expenses ....................................... (773) 603 873 2,348
Deferred revenue ....................................... (15) 102 (221) 259
-------- -------- -------- --------
Net cash (used in) provided by operating activities (3,097) (444) (13,983) 1,223
-------- -------- -------- --------
Cash flows from investing activities:
(Increase) decrease in other assets .............................. 331 (22) 442 116
Purchases of property and equipment .............................. (1,129) (850) (3,754) (2,933)
Purchases of short-term investments .............................. (18,963) (16,784) (29,443) (41,557)
Proceeds from maturity of short-term investments ................. 7,500 12,583 39,683 46,796
-------- -------- -------- --------
Net cash (used in) provided by investing activities (12,261) (5,073) 6,928 2,422
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants ............. 77 1,895 812 2,189
Proceeds from issuance of shares under Employee
Stock Purchase Plan ............................................ -- -- 111 37
-------- -------- -------- --------
Net cash provided by financing activities ......... 77 1,895 923 2,226
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents .................. (15,281) (3,622) (6,132) 5,871
Effect of exchange rates on cash ...................................... -- (87) -- 95
Cash and cash equivalents, beginning of period ........................ 56,353 43,241 47,204 33,566
-------- -------- -------- --------
Cash and cash equivalents, end of period .............................. $ 41,072 $ 39,532 $ 41,072 $ 39,532
======== ======== ======== ========
Supplemental disclosure of non-cash items:
Changes in unrealized holding gain (loss) on
short-term investments ......................................... -- $ (4) $ 106 $ (132)
======== ======== ======== ========
See accompanying notes.
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 and are subject to year- end audit by
independent public accountants. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles 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, 1998 (File No. 0-27558).
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 generally accepted
accounting principles 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 SARL (a Swiss corporation)
(including its wholly-owned subsidiaries Cytyc Italia s.r.l. and Cytyc France
s.a.r.l.), Cytyc (Australia) PTY LIMITED (an Australian corporation), Cytyc
Canada Ltd. (a Canadian Corporation), Cytyc (UK) Limited (a United Kingdom
corporation) and Cytyc Securities Corporation (a Massachusetts securities
corporation). All intercompany transactions and balances have been eliminated in
consolidation.
(3) Cash and Cash Equivalents
Cash equivalents consist of money market mutual funds, certificates of
deposit, 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, certificates of
deposit and commercial paper with original maturities between three and twelve
months. At September 30, 1999, the Company's available-for-sale securities had
contractual maturities that expire at various dates through April 2000. 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, 1999 and December 31, 1998, 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
GROSS
UNREALIZED
HOLDING
AMORTIZED GAINS FAIR
COST (LOSSES) VALUE
-------- -------- -------
(in thousands)
September 30, 1999
Available-for-sale securities
U.S. government and agency securities (average
maturity of 4.0 months) ................................. $ 17,471 (31) $17,440
Commercial paper (average maturity of 3.0
months) ................................................. 13,527 5 13,532
-------- -------- -------
$ 30,998 (26) $30,972
======== ======== =======
December 31, 1998
Available-for-sale securities
U.S. government and agency securities (average
maturity of 4.4 months) ................................. $ 31,767 105 $31,872
Certificates of deposit (average maturity of 3.8
months) ................................................. 2,999 -- 2,999
Commercial paper (average maturity of 4.6
months) ................................................. 1,470 1 1,471
-------- -------- -------
$ 36,236 106 $36,342
======== ======== =======
(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,
1998 1999
------ ------
(in thousands)
Raw material and work-in-process $1,680 $2,197
Finished goods ................. 2,293 2,312
------ ------
$3,973 $4,509
====== ======
(6) Net Income (Loss) 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 earnings (loss) per
share is computed by dividing net income (loss) by the weighted average number
of common shares outstanding. Diluted earnings (loss) per share reflects the
potential dilution that could occur if the income were divided by the weighted-
average number of common and potential common shares outstanding during the
period. Diluted earnings (loss) per share is computed by dividing net income
(loss) by 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 options and warrants. For
the three and nine months ended September 30, 1998, net loss per diluted share
is based on weighted average common shares and excludes any common stock
equivalents as they would be anti-dilutive due to the reported loss. The
following table provides a reconciliation of the denominators used in
calculating basic and diluted earnings (loss) per share for the three and nine
months ended September 30, 1998 and 1999.
7
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1999 1998 1999
------ ------ ------ ------
Basic weighted average common shares
outstanding ................................. 17,643 17,900 17,604 17,843
Dilutive effect of assumed exercise of
stock options ............................... -- 913 -- 710
------ ------ ------ ------
Weighted average common shares
outstanding assuming dilution ............... 17,643 18,813 17,604 18,553
====== ====== ====== ======
Diluted weighted average shares outstanding excludes 1,887,883 and 6,903
potential common shares from stock options outstanding for the three months
ended September 30, 1998 and 1999, respectively, and 1,306,410 and 290,256
potential common shares from stock options and warrants outstanding for the nine
months ended September 30, 1998 and 1999, as their effect would be anti-
dilutive.
(7) Reporting Comprehensive Income
The Company follows the provisions of SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income is the total of net income and all other non owner changes
in equity including such items as unrealized holding gains/losses on securities
classified as available-for-sale, foreign currency translation adjustments and
minimum pension liability adjustments. The Company's comprehensive income
(loss) for the three months ended September 30, 1998 and 1999 was ($1,160,000)
and $1,002,000 respectively, and for the nine months ended September 30, 1998
and 1999 was ($15,392,000) and $2,846,000 respectively.
(8) Legal Proceedings
On September 13, 1999, the Company filed a patent infringement lawsuit against
AutoCyte, Inc. ("AutoCyte") in the United States District Court for the District
of Delaware. On that same day, the Company filed a Motion for a Preliminary
Injunction in the matter. In addition to seeking preliminary and permanent
injunctions to stop AutoCyte from infringing Cytyc's patent, the Company seeks
damages. AutoCyte has answered the Complaint in the lawsuit and has asserted
counterclaims seeking a judgment declaring that the patent at issue is invalid
and unenforceable and not infringed by AutoCyte. The lawsuit is in the early
stages of discovery.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company designs, develops, manufactures and markets a sample preparation
system for medical diagnostic applications. The ThinPrep(R) System consists of
the ThinPrep(R) 2000 Processor and related disposable reagents, filters and
other supplies. The Company has marketed the ThinPrep System for use in non-
gynecological testing applications since 1991. On May 20, 1996, the Company
received premarket approval ("PMA") from the United States Food and Drug
Administration ("FDA") to market the ThinPrep 2000 Processor and related
reagents for cervical cancer screening as a replacement for the conventional Pap
smear method. On November 6, 1996, the FDA cleared expanded product labeling for
the ThinPrep System to include the claim that the ThinPrep 2000 System is
significantly more effective in detecting low grade and more severe lesions than
the conventional Pap smear method in a variety of patient populations. The
expanded labeling also indicates that the specimen quality using the ThinPrep
System is significantly improved over that of the conventional Pap smear method.
On February 25, 1997, the FDA approved the Company's supplemental PMA
application for use of a combination of an endocervical brush and spatula
sampling devices, which is a commonly used method of collecting samples for
conventional Pap smears. On September 4, 1997, the FDA approved the Company's
supplemental PMA application for the testing for the human papillomavirus
("HPV") directly from a single vial of patient specimen collected in a ThinPrep
solution using the Hybrid Capture HPV I DNA Assay of Digene Corporation. In
March 1999, the FDA approved the use of Hybrid Capture II DNA Assay from a
single vial of patient specimen collected in ThinPrep solution. 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. During the third quarter of 1999, the Company completed
clinical trials for the ThinPrep(R) 3000 Processor, the Company's next-
generation processor, and submitted a supplemental PMA application to the FDA in
October 1999. Also in July 1999, the Company announced that it had successfully
completed feasibility studies of the ThinPrep Imaging System(TM) to aid in
cervical cancer screening and has since accelerated its product development
activities.
Since inception, the Company has incurred substantial operating losses,
principally from expenses associated with obtaining FDA approval of the
Company's ThinPrep System for cervical cancer screening, engineering and
development efforts related to the ThinPrep System, 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 new
product development efforts. The operating results of the Company have
fluctuated significantly in the past on an annual and a quarterly basis. The
Company expects that its operating results will fluctuate significantly from
quarter to quarter in the future depending on a number of factors, including the
extent to which the Company's products continue to gain market acceptance, the
rate and size of expenditures incurred as the Company expands its domestic and
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.
The cost per ThinPrep Pap Test, plus a laboratory mark-up, is generally billed
by laboratories to third-party payors and results in a higher amount for the
ThinPrep(R) Pap Test/TM/ than the current billing for conventional Pap tests.
Successful sales of the ThinPrep System for cervical cancer screening in the
United States and other countries will depend on the availability of adequate
reimbursement from third-party payors such as private insurance plans, managed
care organizations and Medicare and Medicaid. In the United States, the current
rate of reimbursement to laboratories from managed care organizations and other
third-party payors to screen conventional Pap smears ranges from approximately
$6.00 to $36.00 per test, with $17.00 as the most common rate of reimbursement.
Although many health insurance companies have added the ThinPrep Pap Test to
their coverage, there can be no assurance 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.
In the past, the Company has offered discounts to laboratory customers to
stimulate demand for the ThinPrep System and may elect to do so in the future,
which discounts could have a material adverse effect on the Company's business,
financial condition and results of operations.
9
Since January 1, 1998, the Company's laboratory customers have been able to
request reimbursement for the ThinPrep Pap Test from health insurance companies
and the USHCFA (United States Health Care Financing Administration) using a
Common Procedure Technology ("CPT") code specifically for liquid-based monolayer
cervical cell specimen preparation. CPT codes are assigned, maintained and
revised by the CPT Editorial Board, which is administered by the American
Medical Association, and are used in the submission of claims to third-party
payors for reimbursement for medical services. The single CPT code replaced the
non-specific, two-code description used for the ThinPrep Pap Test during 1997
and is expected to facilitate reimbursement to the Company's laboratory
customers for their use of the ThinPrep Pap Test. Initial delays in the
implementation of the new CPT code by third-party payors, however, resulted in
delayed reimbursement to the Company's laboratory customers in the first half of
1998. As a result, the Company believes that orders for ThinPrep Pap Tests
during the first half of 1998 were reduced, delayed or eliminated.
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, 1999, based on information provided to the
Company, the Company believes that all of the 159 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 marketing,
sales and customer support activities of the ThinPrep System for cervical cancer
screening. During 1997, the Company entered into a co-promotion agreement with
Mead Johnson & Company ("Mead Johnson"), a division of Bristol-Myers Squibb
Company, to promote the ThinPrep Pap Test to obstetricians and gynecologists in
the United States. The Mead Johnson agreement expired on December 31, 1998;
however, Mead Johnson will receive a residual payment in February 2000 based on
a percentage of certain 1999 product sales. In January 1999, the Company
announced its intention to employ 75 additional direct sales personnel to
promote its products directly to physicians. As of September 30, 1999, all 75 of
such sales personnel had been employed or otherwise engaged by the Company.
There can be no assurance that the Company's current and planned marketing,
sales and customer support activities will result in increased net sales, that
the Company's direct sales force will succeed in promoting the ThinPrep System
to health care providers, third-party payors or clinical laboratories, or that
additional marketing and sales channels will be successfully established.
The Company expects to increase its expenditures for research and development
to fund development of the ThinPrep Imaging System, as well as follow-on
products and additional applications of ThinPrep technology. The Company also
expects to continue to incur expenses for administrative activities, principally
for the employment of personnel, and professional fees.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 and 1998
Net sales increased to $21.3 million in the third quarter of 1999 from $12.3
million for the same period of 1998, an increase of 73%. 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 $17.5 million
in the third quarter of 1999 from $9.4 million for the same period of 1998, an
increase of 85%, and the gross margin increased to 82% in the third quarter of
1999 from 77% for the same period of 1998. Management attributes the increase in
gross margin in 1999 primarily to increased sales of the higher gross margin
ThinPrep Pap Test in the United States as compared to domestic sales of the
ThinPrep 2000 Processor or international sales of either tests or processors.
Total operating expenses increased to $17.3 million in the third quarter of
1999 from $11.6 million for the same period of 1998, an increase of 49%.
Research and development costs increased to $4.2 million in the third quarter of
1999 from $2.0 million for the same period of 1998, an increase of 113%,
primarily as a result of engineering costs associated with the Company's
ThinPrep Imaging System development activities and to a lesser extent clinical
trials for the ThinPrep 3000 Processor. The Company expects that research and
development expenses will increase in the succeeding quarters as a result of the
development costs for the imaging system. Sales, marketing and customer support
costs increased to $11.8 million in the third quarter of 1999 from $8.4 million
for the same period of 1998, an increase of 41%. This increase reflects
expenses associated with the employment of additional direct sales personnel and
commissions related to increased sales and to a lesser extent additional travel
and sales meetings. The Company expects that selling and marketing costs will
increase in succeeding quarters as a result of increased expenditure for
personnel, marketing programs and commissions expense which increases with
sales. General and
10
administrative costs were approximately flat at $1.2 million in the third
quarter of 1999 and for the same period of 1998. During the third quarter of
1999, the Company revised its estimate and reversed $700,000 in legal expenses
which had been accrued for certain litigation which was favorably settled during
the second quarter of 1999, with all related efforts and costs completed in the
third quarter. Excluding the reversal, general and administrative expenses would
have increased 63% primarily as a result of building facilities costs allocated
to general and administrative departments.
Net interest income for the quarters ended September 30, 1999 and 1998 was
essentially unchanged.
Nine Months Ended September 30, 1999 and 1998
Net sales increased to $56.4 million in the first nine months of 1999 from
$29.6 million for the same period of 1998, an increase of 90%. 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 $45.1 million
in the first nine months of 1999 from $22.0 million for the same period of 1998,
an increase of 105%, and the gross margin increased to 80% in the first nine
months of 1999 from 74% for the same period of 1998. Management attributes the
increase in gross margin in 1999 primarily to increased sales of the higher
gross margin ThinPrep Pap Test in the United States as compared to domestic
sales of the ThinPrep 2000 Processor or international sales of either tests or
processors.
Total operating expenses increased to $46.2 million in the first nine months
of 1999 from $40.6 million for the same period of 1998, an increase of 14%.
Research and development costs increased to $9.8 million in the first nine
months of 1999 from $6.1 million for the same period of 1998, an increase of
60%, primarily as a result of engineering costs associated with the Company's
ThinPrep Imaging System development activities. Sales, marketing and customer
support costs increased to $31.7 million in the first nine months of 1999 from
$27.3 million for the same period of 1998, an increase of 16%. This increase
relates to expenses associated with additional direct sales personnel costs and
increased commissions expense for direct selling and Mead Johnson residual
payments accrued for 1999 sales. General and administrative costs decreased to
$4.7 million in the first nine months of 1999 from $7.2 million for the same
period of 1998, a decrease of 35%, primarily due to decreased legal expenses
associated with litigation. During the third quarter of 1999, the Company
revised its estimate and reversed $700,000 in legal expenses which had been
accrued for certain litigation which was favorably settled during the second
quarter of 1999, with all related efforts and costs completed in the third
quarter. Excluding the reversal, general and administrative expenses would have
decreased 25% due to decreased legal expenses.
Net interest income decreased to $2.8 million in the first nine months of 1999
from $3.3 million for the same period of 1998, a decrease of 15%, due to both a
decrease in the average cash balances available for investment and lower
interest rates. The Company recorded $1.1 million in other income during the
first nine months of 1999 resulting from favorable settlement of certain
litigation.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have significantly exceeded its
revenue, resulting in an accumulated deficit of $78.1 million as of September
30, 1999. The Company has funded its operations primarily through the private
placement and public sale of equity securities aggregating $165.4 million, net
of offering expenses. At September 30, 1999, the Company had cash, cash
equivalents and short-term investments of $70.5 million. For the nine months
ended September 30, 1999, cash provided by the Company's operations was $1.2
million compared to $14 million in cash used by the Company's operations for the
same period in 1998, primarily as a result of net income generated in the 1999
period as compared to a net loss in 1998.
Net accounts receivable increased by $7.4 million to approximately $19.8
million during the first nine months of 1999 which was due to a significant
growth in sales during the first nine months of the year.
Net inventories increased to $4.5 million from $3.9 million during the first
nine months of 1999 which was primarily due to increased raw material purchases
for planned sales growth.
The Company's capital expenditures for the nine months ended September 30,
1999 were $2.9 million compared to $3.8 million during the same period in 1998.
The reduction was due primarily to the purchase of automated customized
manufacturing equipment which occurred in 1998.
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
11
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 3000 Processor and ThinPrep Imaging
System, the receipt of and the time required to obtain regulatory clearances and
approvals, and the resources the Company devotes to developing and manufacturing
its products. In addition, the Company's capital requirements will depend on the
extent of potential liabilities, if any, and costs associated with any existing
or future litigation. See "Legal Proceedings." There can be no assurance that
the Company will not require additional financing or will not in the future seek
to raise additional funds through bank facilities, debt or equity offerings or
other sources of capital. Additional funding may not be available when needed or
on terms acceptable to the Company, which would have a material adverse effect
on the Company's business, financial condition and results of operations.
YEAR 2000 READINESS DISCLOSURE AND RELATED INFORMATION
Until recently, many computer programs were written using two digits rather
than four digits to define the applicable year in the twentieth century. Such
software may recognize a date using "00" as the year 1900 rather than the year
2000. In addition, the year 2000 is a special case leap year. The consequences
of this issue may include systems failures and business process interruption to
the extent companies fail to upgrade, replace or otherwise address year 2000
problems. The year 2000 problem may also result in additional business and
competitive differentiation. The Company has completed its assessment of the
potential impact of the year 2000 issue on the Company's products and systems
and on its third-party suppliers, payors and laboratory customers, and has taken
steps to minimize the effects of any such impact.
The Company believes that it has three general areas of potential exposure
with respect to the year 2000 problem: (1) software integral to the operation of
the Company's own products; (2) software used in the Company's internal
information systems, financial and accounting systems, manufacturing systems,
and other administrative functions; and (3) the effects of third party year
2000-related compliance efforts on the Company's business with such third
parties. The Company established a task force composed of experienced personnel
from technical operations, information systems, legal and finance functional
areas and has evaluated its year 2000 readiness with respect to these areas of
potential exposure, which evaluation included the following phases: (i)
identification of all potentially affected products, hardware, systems and third
party compliance efforts; (ii) assessment of any repair or replacement
requirements; (iii) conducting any necessary repairs or replacements; (iv)
testing; (v) implementation; and (vi) creation of contingency plans in the event
of year 2000 failures.
The first type of potential year 2000 exposure for the Company relates to
software and/or hardware used in the Company's ThinPrep Processors. The Company
has completed an assessment of its ThinPrep 2000 Processor and, based on this
assessment, has determined that it is year 2000 compliant due to the fact that
the system does not have any software or hardware time or calendar functions
available in its design. The Company has also assessed the year 2000 compliance
of its next-generation product, the ThinPrep 3000 Processor, which was submitted
to the FDA for approval in October 1999. As a result of this assessment, the
Company believes that the ThinPrep 3000 Processor will be year 2000 compliant
upon its initial release to the market.
The second type of potential year 2000 exposure for the Company relates to
software applications used in the Company's internal information systems,
financial and accounting systems, manufacturing processes, and other
administrative functions. The Company has conducted a review of its internal
computer software and systems to determine the extent to which the Company's
internal systems may be adversely affected by the onset of the year 2000. The
Company believes that it has identified all of its systems which require updates
in order to become year 2000 compliant. The Company has implemented, tested and
validated all existing system updates and will continue this process with any
new system updates it receives. The Company has also established a procurement
process intended to ensure that all new software and hardware systems are year
2000 compliant. Based on its assessment to date, and the identified corrective
actions and validation testing, the Company believes that it will not experience
material disruption as a result of year 2000 issues with respect to its internal
information systems, financial and accounting systems, manufacturing processes,
and other administrative functions. The Company is also in the process of
finalizing a year 2000 contingency plan for all mission critical systems. The
plan includes an assessment of possible contingencies and responsive remediation
plans if any of these systems are determined to have year 2000 issues.
The third type of potential year 2000 exposure for the Company relates to the
effects of third party compliance efforts and the potential failure by third
parties to achieve year 2000 readiness. Certain key components of the ThinPrep
System, including its proprietary filter, are currently supplied to the Company
by single sources. In the
12
event that any of the Company's suppliers will be unable to provide the Company
with such key components due to the failure of such suppliers to timely resolve
their year 2000 issues, the Company has developed contingency plans, including,
if appropriate, establishing sufficient reserves of such key components in order
to limit or prevent any material disruption of the Company's ability to
manufacture its products on a timely and cost-competitive basis. In the event
that the Company is unable to obtain sufficient quantities of such key
components caused by the failure of the Company's suppliers to resolve their own
year 2000 issues, or otherwise address any material disruption of its supply of
such components, the Company may not be able to manufacture its products on a
timely and cost-competitive basis, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company is also dependent on third-party payors such as private insurance
plans, managed care organizations and Medicare and Medicaid to reimburse its
laboratory customers for the ThinPrep Pap Test, and on laboratory customers for
orders of and payments for ThinPrep Pap Tests. The Company completed its
initial program focused on determining the year 2000 readiness of its
significant third-party payors, laboratory customers and critical suppliers and
will continue its dialog with those organizations whose compliance processes
were incomplete, until it secures appropriate assurances. There can be no
assurance that any information provided by such entities ensures that their
respective systems and products are year 2000 compliant. Delays in reimbursement
to the Company's laboratory customers by third-party payors caused by year 2000
disruptions of third-party payors' systems, or the inability of such laboratory
customers to process ThinPrep Pap Tests and/or pay the Company for the Company's
products as a result of the failure of the laboratory customers to resolve their
own year 2000 issues, may adversely impact future orders for ThinPrep Pap Tests
and ThinPrep Processors, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
the purchasing patterns of laboratory customers or potential customers may be
affected by year 2000 issues to the extent they expend significant resources to
correct their current systems for year 2000 compliance. Because of the many
uncertainties associated with year 2000 compliance efforts by third-party payors
and the Company's laboratory customers and suppliers and because the Company's
assessment is necessarily based primarily on information provided by such third-
party payors, laboratory customers and suppliers, there can be no assurance that
the Company's assessment of year 2000 readiness of such payors, laboratory
customers and suppliers will be correct or that the impact on the Company of any
resulting year 2000 disruptions with respect to such parties will not be
material.
In addition, if certain critical third party providers, such as those
supplying electricity, water, or telecommunications services, experience
difficulties resulting in a material interruption of services to the Company,
such interruption would likely result in a material adverse effect on the
Company's business, financial condition and results of operations.
To date, the Company has not incurred any material expenditures in connection
with identifying or evaluating year 2000 compliance issues. The costs incurred
by the Company through the first nine months of fiscal 1999 to address year 2000
compliance efforts were approximately $34,000. The Company estimates it will
incur up to approximately $10,000 during the remainder of fiscal 1999 to support
its compliance initiatives. Most of the Company's expenses have been, and in
the future are expected to be, related to the opportunity cost of time spent by
employees of the Company evaluating year 2000 compliance matters in general and
outside consulting to review the Company's year 2000 program. Because the
Company's year 2000 compliance efforts are ongoing, however, the actual costs to
the Company of its efforts to address year 2000 issues are not presently known,
and there can be no assurance that such costs will not have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's expectations as to the extent and timeliness of modifications
required in order to achieve year 2000 compliance and of the prospects of the
Company and its third party payors and customers to achieve year 2000 compliance
are forward-looking statements subject to risks and uncertainties. Actual
results may vary materially as a result of a number of factors, including, among
others, those described in this paragraph. There can be no assurance that the
Company will be able to successfully modify on a timely basis its systems to
comply with year 2000 requirements, or that third party payors, laboratory
customers and suppliers will not suffer material disruptions due to year 2000
issues, any of which failures could have a material adverse effect on the
business, financial condition and results of operations of the Company.
Further, while the Company believes that its year 2000 compliance efforts will
be completed on a timely basis in advance of the year 2000 date transition and
without material cost, there can be no assurance that unexpected delays or
problems, including the failure to ensure year 2000 compliance by third party
payors, laboratory customers and suppliers, will not result in material costs of
compliance to the Company or otherwise have a material adverse effect on the
business, financial condition and results of operations of the Company.
13
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 1999
which was billed in local currencies. The Company is currently evaluating Euro-
related issues and the impact that the introduction of the Euro may have on the
Company's business and results of operations. The Company expects to take
appropriate actions based on the results of its evaluation. The Company has not
yet determined the costs of addressing Euro-related issues, but does not expect
such costs to be material. Because the Company's evaluation of Euro-related
issues is at an early stage and is ongoing, however, there can be no assurance
that such issues and their related costs will not have a material adverse effect
on the Company's business, financial condition and results of operations.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company does not provide financial performance forecasts. The forward
looking statements in this Quarterly Report on Form 10-Q are made under the safe
harbor provisions of Section 21E of the Securities Exchange Act of 1934, as
amended. The Company's operating results and financial condition have varied and
may in the future vary significantly depending on a number of factors.
Statements in this Form 10-Q which are not strictly historical statements,
including, without limitation, statements regarding current or future financial
performance, management's plans and objectives for future operations, domestic
and international marketing and sales plans, product plans and performance,
availability of reimbursement for the Company's product, potential savings to
the health care system, management's assessment of market factors, as well as
statements regarding the strategy and plans of the Company, constitute forward-
looking statements that involve risks and uncertainties. The following factors,
among others, could cause actual results to differ materially from those
contained in forward-looking statements made in this report and presented
elsewhere by management from time to time. The Company's risk factors include
its dependence on a single product, uncertainty of market acceptance and the
additional cost related thereto, a limited number of customers and a lengthy
sales cycle, limited marketing and sales experience, dependence on timely and
adequate levels of third-party reimbursement, CPT code implementation delays and
delays in reimbursement, risks associated with potential year 2000 software
disruptions involving the products and systems of the Company and certain third
party customers, suppliers and payors of the Company, a limited operating
history, risks associated with commercialization, a history of losses, potential
fluctuations in future quarterly results, intense competition, risks associated
with the Euro conversion, potential liabilities and costs associated with any
existing or future litigation, limited manufacturing experience, uncertainty of
additional applications and dependence on single source suppliers. Such
factors, among other risks detailed in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 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 and U.S. Government and agency securities that
14
are carried at fair value on the Company's books. Accordingly, the Company has
no quantitative information concerning the market risk of participating in such
investments.
Primary Market Risk Exposures. The Company's primary market risk exposures
are in the areas of interest rate risk and foreign currency exchange rate risk.
The Company's investment portfolio of cash equivalents is subject to interest
rate fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments. The Company's business outside the
United States is conducted in local currency transactions. The Company has no
foreign exchange contracts, option contracts, or other foreign hedging
arrangements. However, the Company estimates that any market risk associated
with its foreign operations is not significant and is unlikely to have a
material adverse effect on the Company's business, financial condition and
results of operations.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
On September 13, 1999, the Company filed a patent infringement lawsuit against
AutoCyte, Inc. ("AutoCyte") in the United States District Court for the District
of Delaware. On that same day, the Company filed a Motion for a Preliminary
Injunction in the matter. In addition to seeking preliminary and permanent
injunctions to stop AutoCyte from infringing Cytyc's patent, the Company seeks
damages. AutoCyte has answered the Complaint in the lawsuit and has asserted
counterclaims seeking a judgment declaring that the patent at issue is invalid
and unenforceable and not infringed by AutoCyte. The lawsuit is in the early
stages of discovery.
Item 5. Other Information.
-----------------
Proposals of stockholders intended for inclusion in the proxy statement to be
furnished to all stockholders entitled to vote at the 2000 annual meeting of
stockholders of the Company must be received at the Company's principal
executive offices not later than December 7, 1999. The Company's by-laws
establish an advance notice procedure with regard to proposals that stockholders
otherwise desire to introduce at the annual meeting without inclusion in the
Company's proxy statement for that meeting. Written notice of such stockholder
proposals for the next annual meeting of the Company must be received by the
Secretary of the Company at the Company's principal executive offices not later
than the close of business on December 7, 1999 and must not have been received
earlier than the close of business on November 7, 1999 in order to be considered
timely, and must contain specified information concerning the matters proposed
to be brought before such meeting and concerning the stockholder proposing such
matters. The matters proposed to be brought before the meeting also must be
proper matters for stockholder action.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
--------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed by the Company for the
quarter ended September 30, 1999.
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 12, 1999 By: /s/ Joseph W. Kelly
-------------------------------------
Joseph W. Kelly
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
Exhibit
Number Description Page
------ ----------- ----
27 Financial Data Schedule 18
17