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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934. [Fee Required]
For the Fiscal Year Ended: December 31, 2000
or
[_] 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
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CYTYC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 02-0407755
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
85 Swanson Road, 01719
Boxborough, Massachusetts (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (978) 263-8000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 14, 2001 (based on the closing price as quoted by The
Nasdaq Stock Market as of such date) was $2,109,262,404. As of
March 14, 2001, 114,014,184 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December
31, 2000. Portions of such proxy statement are incorporated by reference into
Part III of this Form 10-K.
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PART I
Item 1. Business
The Company
Cytyc Corporation (the "Company") designs, develops, manufactures and
markets a sample preparation system for medical diagnostic applications. The
Company's ThinPrep(R) System allows for the automated preparation of cervical
cell specimens on microscope slides for use in cervical cancer screening, as
well as for the automated preparation of other cell specimens on microscope
slides for use in non-gynecological testing applications. 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 Squamous Intraepithelial Lesions ("LGSIL") 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. The Company believes that the ThinPrep System
improves accuracy in the detection of cervical cancer and precancerous lesions
by making the slide more representative of the patient's clinical condition,
improving preservation of the sample, standardizing the presentation of cells
on the slide, and reducing the presence of mucus, blood and other obscuring
debris. 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, 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 Digene Corporation's Hybrid Capture(R) HPV DNA Assay.
In March 1999, the FDA approved the use of Digene Corporation's Hybrid
Capture(R) 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 ThinPrep(R) 3000 Processor, the Company's next-generation
processor for automated sample preparation. In December 2000, the Company
began clinical trials of the ThinPrep(R) Imaging System(TM) to aid in cervical
cancer screening.
Cervical Cancer
Cervical cancer is one of the most common cancers among women throughout the
world. Cervical cancer is preceded by curable precancerous lesions that
progress without symptoms over a period of years until they become invasive,
penetrating the cervical epithelium (cellular covering) and entering the
bloodstream or lymph system. In order to detect these precancerous lesions,
gynecologists in the United States typically recommend annual screening
examinations. If detected in the precancerous stage, virtually all cervical
cancer cases are preventable. The treatment of cervical cancer after it
reaches the invasive stage may require surgery, including a hysterectomy, and
chemotherapy or radiation treatment, which are difficult, expensive and may
not be successful.
The factors associated with the development of cervical cancer are believed
to include early sexual activity, multiple sexual partners, cigarette smoking
and immunosuppression. In addition, a number of recent studies have concluded
that cervical cancer is strongly correlated to the presence of certain types
of HPV. According to these studies, HPV DNA is present in most cases of
precancerous lesions and in more than 90% of cases of intraepithelial and
invasive cancer. Cervical lesions that are HPV-negative or lacking certain
types of HPV are less likely to progress to cervical cancer.
The Pap Smear
Cervical cancer screening has been conducted since the late 1940s using the
Pap smear, a test developed by Dr. George Papanicolaou. In the United States,
widespread and regular use of the Pap smear as a screening test
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has contributed to a greater than 70% decrease in mortality from cervical
cancer in the past. The Pap smear is currently the most widely used screening
test for the early detection of cancer in the United States.
The Pap Smear Process
The Pap smear process involves the science of cytology, which is the
microscopic interpretation of precancerous, malignant and other changes in
cells. The conventional Pap smear process begins with the collection of a
cervical specimen during a gynecological examination. To obtain a cervical
cell sample, a sampling device, such as either a brush and spatula or a
"broom-like" device, is used to scrape cells from the surface of the cervix.
The sample is then manually smeared onto a clean microscope slide by the
physician who must then spray the slide within a few seconds with a fixative
agent to prevent damage to the cell specimen from air drying. The slide is
then submitted to a clinical laboratory for manual microscopic examination.
At the laboratory, a cytotechnologist, a medical professional with special
training in the examination and interpretation of human cells, conducts a
microscopic review of a prepared slide to determine the adequacy of the sample
and the presence of abnormal cells. In determining slide adequacy,
cytotechnologists classify each slide in one of three categories: (i)
satisfactory for evaluation, (ii) satisfactory but limited by ("SBLB") certain
characteristics, or (iii) unsatisfactory for evaluation. The percentage of
unsatisfactory and SBLB slides varies widely from laboratory to laboratory. In
a 1991 study of 600 laboratories, it was reported that up to 20% of slides
were classified as unsatisfactory and up to 40% were classified as SBLB.
Frequent reasons for unsatisfactory or SBLB classifications include excess
blood or mucus that impair viewing or too few cells per slide.
After determining the adequacy of the slide, the cytotechnologist manually
screens each Pap smear slide with a microscope to differentiate diseased or
abnormal cells from healthy cells based on size, shape and structural details
of the cells and nuclei. Typically, each Pap smear slide is then classified in
accordance with the Bethesda System for Reporting Cervical/Vaginal Cytologic
Diagnoses ("Bethesda System") into one of the following categories: (i)
Negative; (ii) Atypical Squamous Cells of Undetermined Significance/Atypical
Glandular Cells of Undetermined Significance ("ASCUS/AGUS"); (iii) Low Grade
Squamous Intraepithelial Lesions ("LGSIL"); (iv) High Grade Squamous
Intraepithelial Lesion ("HGSIL"); and (v) Carcinoma. Any slide classified as
other than negative is considered abnormal and may be precancerous or
cancerous. All abnormal slides are referred to a senior cytotechnologist and
pathologist for further review and final diagnosis.
Notwithstanding the classifications imposed by the Bethesda System, the
subjective nature of the classification of Pap smear specimens results in
diagnoses that vary widely among cytotechnologists, pathologists and
laboratories. In 1988, to address accuracy and quality control concerns,
Congress adopted the Clinical Laboratory Improvement Amendments of 1988
("CLIA"). CLIA requires cytology laboratories to perform proficiency testing
and quality control by testing cytotechnologists in order to assure a minimum
level of competence and expertise. In addition, the CLIA regulations currently
limit the number of slides screened per day by a cytotechnologist to 100.
Certain states have also adopted regulations further limiting the number of
slides which can be manually examined per day by a cytotechnologist. As a
further quality control measure, the CLIA regulations require that
laboratories manually rescreen at least 10% of the slides that are initially
classified as negative.
Other methods of rescreening are currently available, including computer
imaging technologies that select certain negative slides or portions of
negative slides for reexamination by the cytotechnologist. These computer-
imaging technologies are intended to provide an additional quality control
measure to help identify false negative diagnoses.
Follow-Up Treatment of Abnormal Pap Smears
Women with abnormal Pap smears may have to return to their physician's
office for a repeat Pap smear or to undergo costly colposcopy and biopsy
procedures. A colposcopy involves the physician using a device to visually
examine the surface of the cervix, and if necessary, performing a biopsy.
Treatment of early-stage non-
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invasive cervical cancer may be accomplished by procedures to remove the
abnormal cells. Once the cancer reaches the invasive stage, the patient's
chances for recovery are diminished and more radical treatment is typically
required, such as a hysterectomy and chemotherapy or radiation therapy. These
procedures may expose the patient to risk and cost and result in significant
physical and psychological stress.
Problems with the Conventional Pap Smear
In spite of the success of the Pap smear in reducing deaths due to cervical
cancer, the test has significant limitations, including inadequacies in sample
collection and slide preparation, slide interpretation errors and the
inability to use the specimen for additional diagnostic tests. These
limitations result in a substantial number of inaccurate test results,
including false negative diagnoses.
False Negative Diagnoses
The limitations of the conventional Pap smear method in sample collection
slide preparation and interpretation result in a substantial number of
inaccurate test results in the form of false negative diagnoses. A false
negative diagnosis may allow the disease to progress to a later-stage of
development before being detected, thereby requiring a more expensive and
invasive course of treatment and diminishing the likelihood of successful
treatment. Reports of the false negative rate of the Pap test vary widely,
between 5% and 55%. Past studies have suggested that approximately 50% of
false negative diagnoses are attributable to inadequacies in sample collection
and slide preparation and approximately 50% are attributable to slide
interpretation errors. The most comprehensive literature survey to date was
recently published by the Agency for Health Care Policy and Research (AHCPR),
a division of the U.S. Department of Health and Human Services. The
"Evaluation of Cervical Cytology" evidence report concluded that the false
negative rate for the conventional Pap smear is approximately 49% and that
about two-thirds of false negatives are due to sampling error and the
remaining one-third due to detection error.
Inadequacies in Sample Collection and Slide Preparation
There are a variety of difficulties with current methods of cell collection,
cell transfer and slide preparation. These difficulties include cell loss,
improper fixation of the cells (typically, from air-drying), thick and uneven
smearing of cells on the slide, and excess blood, mucus and other obscuring
debris on the slide. A study published in the American Journal of Clinical
Pathology in February 1994 reported that as much as 80% of the sample taken
from a patient using the conventional Pap smear method is not transferred to
the microscope slide and remains on the discarded collection device. This
discarded portion of the sample may contain the abnormal cells necessary for
an accurate diagnosis. In addition to the problem of cell transfer, the
conventional Pap smear method produces inconsistent and non-uniform slides
with extreme variability in quality, making examination difficult. The Company
believes that these limitations are responsible for a large percentage of
slides being classified as SBLB. These slides are more difficult to interpret
and increase the uncertainty of an accurate diagnosis. Consequently, patients
are often subjected to the inconvenience and expense of return office visits
for repeat testing and to the anxiety resulting from the inconclusive nature
of the initial test. The Company believes that these repeat visits and
examinations also result in significant costs to the healthcare system.
Slide Interpretation Errors
The process of screening and interpreting a manually prepared Pap smear is
complex and tedious. This process requires constant vigilance, as
approximately 90% to 95% of all Pap smear diagnoses in the United States are
negative. In addition, the process is prone to error as a result of the
complexity of properly evaluating and categorizing subtle and minute changes
in cellular or nuclear detail. The screening process requires intense visual
review through a microscope of a large volume of slides, each of which
typically contains 50,000 to 300,000 cervical cells. The small percentage of
Pap smears that contain any abnormality may, in turn, contain only a small
number of abnormal cells among the vast number of normal cells.
Cytotechnologists generally review each
4
slide for approximately five to ten minutes and may review up to 100 slides
per day. All of these factors contribute to the incidence of false negative
diagnoses.
Lack of Additional Testing Capability
The conventional Pap smear method does not permit additional or adjunct
testing from the original patient sample. The ability to produce multiple
slides from a single sample could be used by clinical laboratories for follow-
up testing, quality control or proficiency testing. Further, the conventional
Pap smear method requires the patient to be called back to the physician's
office to provide a second sample if additional testing, such as HPV testing,
is desired. The Company believes that the ability to test for HPV directly
from the ThinPrep collection vial has the potential for substantial healthcare
cost savings through reduced costly management of borderline cervical
abnormalities.
The ThinPrep System
The Company believes that the ThinPrep System offers a number of benefits
which address limitations of the conventional Pap smear method, including
improved accuracy in the detection of cervical cancer and precancerous
lesions, standardization and simplification of the sample preparation process,
the ability to permit multiple tests to be conducted from a single sample and
improved productivity in screening by reducing cytotechnologist fatigue and
the time required to examine each slide. In August 1997, Obstetrics &
Gynecology, a preeminent, widely read, peer-reviewed journal on women's
healthcare issues, published a major study describing the effectiveness of the
ThinPrep(R) Pap Test(TM) in screening for cervical cancer.
The ThinPrep System, which was cleared for marketing as a replacement for
the conventional Pap smear method for cervical cancer screening by the FDA on
May 20, 1996, consists of the ThinPrep(R) Processor and related disposable
reagents, filters and other supplies. The ThinPrep System is designed to
reduce the incidence of false negative diagnoses, improve slide quality,
reduce inconclusive SBLBs and enable a single sample to be used for additional
diagnostic testing. 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 LGSIL and more severe lesions
than the conventional Pap smear method in a variety of patient populations.
This expanded labeling also indicates that the specimen quality using the
ThinPrep System is significantly improved over that of the conventional Pap
smear method. In February 1997, the Company received FDA approval of the
Company's supplemental PMA application for the use of a combination of an
endocervical brush and spatula sampling devices, a commonly used method of
collecting samples for conventional Pap smears. In September 1997, the FDA
approved the Company's supplemental PMA application for the testing for HPV
directly from a single vial of patient specimen collected in a ThinPrep
solution using the Hybrid Capture HPV DNA Assay of Digene Corporation. In
March 1999, the FDA approved the use of Digene Corporation's Hybrid Capture II
HPV DNA Assay from a single vial of patient specimen collected in ThinPrep
solution. The Company commenced the full-scale commercial launch of the
ThinPrep System for cervical cancer screening in the United States in 1997 and
in selected international markets in 1998. In May 2000, the FDA approved the
ThinPrep 3000 Processor, the Company's next-generation processor for automated
sample preparation. In December 2000, the Company began clinical trials of the
ThinPrep Imaging System to aid in cervical cancer screening.
The ThinPrep process begins with the patient's cervical sample being taken
by the physician using a cervical sampling device which, rather than being
smeared on a microscope slide, is rinsed in a vial filled with the Company's
proprietary PreservCyt(R) Solution. This enables virtually all of the
patient's cell sample to be preserved before the cells can be damaged by air
drying. The ThinPrep specimen vial is then labeled and sent to a laboratory
equipped with a ThinPrep Processor for slide preparation and screening.
At the laboratory, the ThinPrep specimen vial is inserted into a ThinPrep
Processor, a proprietary sample preparation device which automates the process
of preparing cervical specimens. Once the vial is inserted into the ThinPrep
Processor, a gentle dispersion step breaks up blood, mucus, non-diagnostic
debris and large sheets of cells and homogenizes the cell population. The
cells are then automatically collected on the Company's
5
proprietary TransCyt(R) Filter, which incorporates an eight micron membrane
specifically designed to collect abnormal and cancerous cells. The ThinPrep
Processor constantly monitors the rate of flow through the TransCyt Filter
during the collection process in order to prevent the cellular presentation
from being too scant or too dense. A thin layer of cells is then transferred
to a glass slide in a 20 mm-diameter circle and the slide is automatically
deposited into a preservative solution.
The Company's proprietary reagents and supplies include PreservCyt Solution
to collect and transport cervical samples to the laboratory for optimal cell
preservation and TransCyt Filters to collect cells and remove non-diagnostic
debris and mucus. The Company also sells ThinPrep(R) Microscope Slides, high-
quality microscope slides manufactured to the Company's specifications, which
improve cell adhesion to the slide.
Clinical Trial Results
In October 1995, the Company completed the clinical trial used to support
its PMA application, which was a blinded, split-sample study performed at six
clinical sites in the United States, including three screening centers and
three hospital sites. A total of 6,747 patients were included. The study
compared the effectiveness of the ThinPrep System to the conventional Pap
smear method for the detection of precancerous lesions of the cervix. Specimen
adequacy was also compared.
The results from the three screening centers indicated a 65% improvement in
the detection of disease, while in the three hospital sites in which patients
had historically exhibited high prevalence rates of cervical abnormalities,
the ThinPrep method demonstrated a 6% improvement. In May 1996, based on the
clinical trial results, the Food and Drug Administration (FDA) approved the
ThinPrep 2000 System as a replacement for the conventional Pap smear method in
screening for the presence of atypical cells, cervical cancer, and its
precursor lesions. After further analysis of the clinical trial data, in
November 1996, the FDA cleared expanded product labeling for the ThinPrep
System to include that the ThinPrep System is significantly more effective in
detecting LGSIL and more severe lesions than the conventional Pap smear method
in a variety of patient populations. The FDA also cleared expanded product
labeling for the ThinPrep System to include that the specimen quality using
the ThinPrep System is significantly improved over that of the conventional
Pap smear method. In May 2000, the FDA approved the ThinPrep 3000 Processor,
the Company's next generation processor for automated sample preparation. In
July 1999, the Company announced that it had successfully completed
feasibility studies of the ThinPrep Imaging System to aid in cervical cancer
screening and in December 2000 began clinical trials. There can be no
assurance that the Company will obtain necessary regulatory approvals or
successfully develop such imaging technology.
Since FDA approval in May of 1996, a number of studies have been published
or presented that evaluate the ThinPrep Pap Test in direct-to-vial, routine
clinical use. To date, more than 30 major studies evaluating the performance
of the ThinPrep Pap Test have been published in peer-review journals. The
studies have included more than 300,000 patients in the ThinPrep Pap Test
cohort and have been conducted in every region of the United States, as well
as Europe, Asia, Africa and Australia. These studies consistently demonstrate
a wide range of benefits of the ThinPrep Pap Test including increased disease
detection, reduction of equivocal diagnoses, improved specimen adequacy and
cost effectiveness.
Non-Gynecological Cytology
In May 1991, the Company began commercial shipments of the ThinPrep(R)
Processor to cytology laboratories in the United States for use in non-
gynecological testing applications. Non-gynecological specimens include
sputum; voided and catheterized urine; body fluids such as peritoneal fluid,
ascites fluid, or cerebrospinal fluid; brushing of respiratory or
gastrointestinal tracts; and fine needle aspiration specimens obtained from a
variety of sources such as the breast, thyroid, lung or liver. These samples
are evaluated in patients in whom malignancy is strongly suspected or as
follow-up information in patients previously diagnosed and treated for cancer.
6
Marketing and Sales
The Company's marketing and sales strategy is to achieve broad market
acceptance of the ThinPrep System for cervical cancer screening. A critical
element of its strategy is to utilize the results of the Company's 1995
clinical trial and expanded FDA labeling to demonstrate the safety and
efficacy of the ThinPrep System to healthcare providers, third-party payors
and clinical laboratories. The Company believes that coordination of the
activity of these three market segments is necessary to achieve the desired
level of market penetration of the ThinPrep System. In 1997, the Company
implemented a full-scale commercial launch of the ThinPrep System in the
United States with its direct marketing and sales force organization,
complemented by the initiation of strategic marketing relationships with third
parties.
The Company continues to expand its direct marketing and sales organization
in the United States, supported by customer and technical service
representatives. The Company's direct marketing and sales organization focuses
on the clinical and economic benefits of the ThinPrep System for healthcare
providers, third-party payors and clinical laboratories. The Company designs
its marketing programs to establish and reinforce the recognition of its
corporate and product names through investments in medical advertising, direct
mail, focused medical educational symposia, trade shows and other promotional
activities. The Company has also initiated an education and training program
which will be offered to accredited cytology schools across the United States.
In addition to its direct sales efforts during 1997 and 1998, the Company
entered into an agreement with Mead Johnson and Company ("Mead Johnson") a
division of Bristol-Meyers Squibb Company, to build a joint sales force to co-
promote the ThinPrep Pap Test directly to over 15,000 obstetricians and
gynecologists throughout the United States. The Company's agreement with Mead
Johnson expired in December 1998. Mead Johnson received a residual payment in
February 2000, based upon 1999 sales of the ThinPrep System. The Company has
also entered into agreements with large clinical laboratory companies with
networks of laboratories across the United States. The clinical laboratory
companies have worked with the Company on marketing and sales programs, which
generally involve joint marketing geared toward promoting the Company's
products to physicians and third-party payors.
In January 2000, the Company entered into a supply and co-marketing
agreement with Quest Diagnostics Incorporated to market the Company's ThinPrep
Pap Test as Quest Diagnostics' exclusive liquid-based cervical cancer
screening methodology.
In October 2000, the Company entered into an agreement with Roche
Diagnostics Corporation ("RDC"), exclusive in the United States and Puerto
Rico, to co-promote the benefits of testing for chlamydia and gonorrhea using
RDC's COBAS(R) AMPLICOR(R) CT/NG Test directly from the ThinPrep collection
vial. The companies also intend to explore the potential for collaborating on
a portfolio of additional screening and diagnostic tests based on the
companies' respective technologies.
In January 2001, the Company entered into an agreement with Digene
Corporation ("Digene"), exclusive in the United States and Puerto Rico, to co-
promote the benefits of testing for human papillomavirus (HPV) using Digene's
Hybrid Capture(R) II HPV DNA Assay directly from the ThinPrep collection vial.
The companies expect that the co-promotion program will initially focus on
promoting Digene's HPV DNA test, using the residual material in ThinPrep
collection vials, as the optimal patient management strategy for borderline
cytology results.
Following the initial market launch of the ThinPrep product in the United
States, the Company has more recently initiated its marketing and sales
efforts in Europe and Asia Pacific. The Company established subsidiaries in
Switzerland and Australia in 1997, and in France and Italy in 1998 and in
Canada and the United Kingdom in 1999, to handle sales, service, training and
distribution to clinical laboratories. The Company's strategy is to establish
a worldwide selling channel appropriate for developing an international
customer-base, taking into consideration factors such as government
regulations, screening cycles and clinical practices of the particular country
or region. The Company is also evaluating the use of direct and indirect
international sales channels, including contract sales organizations,
distributors and marketing partners.
7
The Company believes that both domestic and international sales efforts will
continue to involve a lengthy process, requiring the Company to educate
healthcare providers, clinical laboratories, and third-party payors regarding
the clinical benefits and cost-effectiveness of the ThinPrep System. The
Company's success and growth will depend on market acceptance of the ThinPrep
System among healthcare providers, third-party payors and clinical
laboratories. The Company will continue to sell the ThinPrep Processor to
customers and charge separately for related disposable reagent filters and
supplies. In the past, the Company has offered discounts 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.
In order to effectively market the ThinPrep System for cervical cancer
screening, the Company will need to continue to increase its marketing and
sales capabilities. No assurance can be given that the Company's direct sales
force or strategic marketing relationships will succeed in promoting the
ThinPrep System to healthcare providers, third-party payors or clinical
laboratories, or that additional marketing and sales channels will be
successfully established. While the Company is currently evaluating marketing
and sales channels abroad, including contract sales organizations,
distributors and marketing partners, the Company has established very limited
foreign sales channels. There can be no assurance that the Company will be
able to recruit and retain skilled marketing, sales, service or support
personnel or foreign distributors, or that the Company's marketing and sales
efforts will be successful. Failure to successfully expand its marketing and
sales capabilities in the United States or establish its international
marketing and sales organization would have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company's marketing success in the United States and abroad will depend on
whether it can obtain required regulatory approvals, successfully demonstrate
the cost-effectiveness of the ThinPrep System, further develop its direct
sales capability and establish arrangements with contract sales organizations,
distributors and marketing partners. Failure by the Company to successfully
market its products would have a material adverse effect on the Company's
business, financial condition and results of operations.
Third-Party Reimbursement
The Company intends to focus on obtaining coverage and reimbursement from
major national and regional managed care organizations and insurance carriers
throughout the United States. Most of the third-party payor organizations
independently evaluate new diagnostic procedures by reviewing the published
literature and the Medicare coverage and reimbursement policy on the specific
diagnostic procedure. To assist the third-party payors in their respective
evaluations of the ThinPrep System, the Company provides scientific and
clinical data to support its claims of the safety and efficacy of the ThinPrep
System. The Company believes that the ThinPrep System will allow for earlier
detection of LGSIL and more severe lesions and result in less aggressive and
costly treatment procedures. In addition, the Company expects that the
ThinPrep System will significantly improve specimen adequacy, thereby reducing
repeat office visits and test procedures and thus overall healthcare
management costs. The Company will focus on earlier disease detection and cost
savings benefits in establishing reimbursement for the ThinPrep method for
cervical cancer screening.
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. The cost per ThinPrep Pap Test, plus a
laboratory mark-up, is billed by laboratories to third-party payors or
patients and typically results in a higher cost than the current charge for
conventional Pap tests. Although a number of managed care organizations 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 healthcare providers or clinical
laboratories will use the ThinPrep System for cervical cancer screening in
lieu of the conventional Pap smear method. There is significant uncertainty
concerning third-party reimbursement for the use of any medical device
incorporating new technology. Reimbursement by a third-party payor depends on
a number of factors, including the level of demand by healthcare providers and
the payor's determination that the use of the ThinPrep System represents a
clinical advance compared to current technology and is safe and effective,
medically necessary, appropriate for
8
specific patient populations and cost-effective. Since reimbursement approval
is required from each payor individually, seeking such approvals is a time-
consuming and costly process, which requires the Company to provide scientific
and clinical data to support the use of the ThinPrep System to each payor
separately. There can be no assurance that third-party reimbursement will be
or remain available for the ThinPrep System or any other products that may be
developed by the Company, or that such third-party reimbursement will be
adequate.
In February 1998, the BlueCross BlueShield Association's Technology
Evaluation Center announced results of a review of three new cervical cancer
screening technologies, including the ThinPrep Pap Test, with respect to cost-
effectiveness. Although the review concluded that such technologies offered
only modest improvement, the Company believes that the study did not consider
certain cost advantages inherent in using the ThinPrep System. The study's
conclusions are not binding and do not represent a national coverage or
reimbursement decision by the Blue Cross and Blue Shield organizations. The
Company estimates that approximately two thirds of the existing Blue Cross and
Blue Shield Plans currently cover the ThinPrep Pap Test. Although the Company
believes that to date the review has not caused any significant change in the
decision of Blue Cross and Blue Shield plans currently reimbursing
laboratories for the ThinPrep Pap Test, there can be no assurance that the
review will not lead to adverse reimbursement decisions by Blue Cross, Blue
Shield plans or others.
A key component in the reimbursement decision by most private insurers and
the United States Healthcare Financing Administration ("USHCFA") is the
assignment of a CPT code which is used in the submission of claims to insurers
for reimbursement for medical services. CPT codes are assigned, maintained and
revised by the CPT Editorial Board administered by the American Medical
Association. In 1997, the CPT Editorial Board assigned a new CPT code number
88142, which has been in effect since January 1, 1998, specifically for
liquid-based monolayer cervical cell specimen preparation. 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, which the Company believes caused orders for the ThinPrep
Pap Test during that period to be reduced, delayed, or eliminated.
The Company's direct sales force is actively working with current laboratory
customers and health insurance companies to facilitate implementation and
reimbursement under the new CPT code. As of December 31, 2000, based on
information provided to the Company, the Company believes that substantially
all of the 298 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 the new CPT code will be successfully implemented
by additional third-party payors, that any reimbursement delays will be
successfully reduced, or that reimbursement levels under the new CPT code will
be adequate.
The Company has limited experience in obtaining reimbursement for its
products in the United States or other countries. In addition, third-party
payors are routinely limiting reimbursement and coverage for medical devices
and in many instances are exerting significant pressure on medical suppliers
to lower their prices. Lack of or inadequate reimbursement by government and
other third-party payors for the Company's products would have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, outside of the United States, healthcare reimbursement
systems vary from country to country, and there can be no assurance that
third-party reimbursement will be made available at an adequate level, if at
all, for the ThinPrep System under any other reimbursement system.
Manufacturing
In January 2000, the Company acquired Acu-Pak, Inc. ("Acu-Pak"), a contract
packager in Londonderry, New Hampshire that was, prior to the acquisition,
manufacturing, filling vials containing and distributing the Company's
solutions for all of its ThinPrep line of products. The Company currently
leases approximately 97,000 square feet of commercial space in Boxborough, MA
and believes that its existing facility, along with the Acu-Pak production
facility consisting of approximately 45,000 square feet of commercial space,
are adequate to meet the existing production requirements for the ThinPrep
System.
9
The Company plans to expand its manufacturing capacity by adding
approximately $4.1 million of additional automated equipment, which will be
installed in late 2001. Of this amount, approximately $3.8 million was paid in
2000 and approximately $0.3 million will be paid in 2001.
The Company's manufacturing process is subject to pervasive and continuing
regulation by the FDA, including the FDA's Quality System Regulation ("QSR").
Failure to comply with such regulations would materially impair the Company's
ability to achieve or maintain commercial-scale production. Further, any
failure of the Company's equipment to perform to the Company's specifications
could impair the Company's ability to produce adequate quantities of ThinPrep
supplies. As a result, the Company may be subject to total or partial
suspension of production, withdrawal of approval, and recall or seizure of
products by the FDA in the event of product malfunction or failure.
In October 1997, the Company obtained ISO 9001 registration, an
international quality standard. The Company has also met the applicable
requirements to use the "CE" mark for its ThinPrep System. There can be no
assurance that the Company will be able to maintain compliance with ISO or CE
mark requirements. Failure to maintain compliance with the applicable
manufacturing requirements of various regulatory agencies would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Certain key components of the Company's ThinPrep System are currently
provided to the Company by single sources. In the event that the Company is
unable to obtain sufficient quantities of such components on commercially
reasonable terms, or in a timely manner, the Company would not be able to
manufacture its products on a timely and cost-competitive basis, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Research and Development
The Company's research and development strategy is to continue to develop
innovative medical diagnostic applications of the ThinPrep technology and to
continue to enhance the ThinPrep System. The Company has established a program
to further enhance and automate the ThinPrep Processor. The Company's next
generation instrument, the ThinPrep 3000 Processor, was designed to provide
batch processing and walk-away capability by increasing capacity to 80 sample
vials and more fully automating the slide preparation process. In May 2000,
the FDA approved the ThinPrep 3000 Processor, which is now commercially
available.
The Company is also evaluating additional diagnostic applications of its
ThinPrep technology in testing for the presence of other types of cancers and
sexually transmitted diseases. The clinical laboratory companies have worked
with the Company on marketing and sales programs, which generally involve
joint marketing geared toward promoting the Company's products to physicians
and third-party payors.
In January 2000, the Company entered into a supply and co-marketing
agreement with Quest Diagnostics Incorporated to market the ThinPrep Pap Test
as Quest Diagnostics' exclusive liquid-based cervical cancer screening
methodology.
In October 2000, the Company entered into an agreement with Roche
Diagnostics Corporation ("RDC"), exclusive in the United States and Puerto
Rico, to co-promote the benefits of testing for chlamydia and gonorrhea using
RDC's COBAS(R) AMPLICOR(R) CT/NG Test directly from the ThinPrep collection
vial. The companies also intend to explore the potential for collaborating on
a portfolio of additional screening and diagnostic tests based on the
companies' respective technologies.
In January 2001, the Company entered into an agreement with Digene
Corporation ("Digene"), exclusive in the United States and Puerto Rico, to co-
promote the benefits of testing for human papillomavirus (HPV) using Digene's
Hybrid Capture(R) II HPV DNA Assay directly from the ThinPrep collection vial.
The companies expect that the co-promotion program will initially focus on
promoting Digene's HPV DNA test, using the residual material in ThinPrep
collection vials, as the optimal patient management strategy for borderline
cytology results.
10
The Company has not yet determined additional applications, if any, it will
seek to develop and commercialize. There can be no assurance that the Company
will be successful in developing or marketing additional applications.
Furthermore, any additional applications may require submission of a PMA
application or PMA supplement prior to the marketing of such applications.
There can be no assurance that the FDA would approve such submissions on a
timely basis, if at all.
In July 1999, the Company announced that it had successfully completed
feasibility studies of the ThinPrep Imaging System to aid in cervical cancer
screening and in December 2000 began clinical trials. There can be no
assurance that the Company will obtain necessary regulatory approvals or
successfully develop such imaging technology.
The Company's expenditures for research and development (which includes
clinical trials, regulatory affairs and engineering) were approximately $8.4
million, $13.4 million, and $14.2 million for the years ended December 31,
1998, 1999, and 2000, respectively.
Government Regulation
The manufacture and sale of medical diagnostic devices intended for
commercial use are subject to extensive governmental regulation in the United
States and in other countries. The Company's existing products, including the
ThinPrep System, are regulated in the United States as medical devices by the
FDA under the Federal Food, Drug, and Cosmetic Act ("FDC Act") and generally
require premarket approval through the filing of a PMA prior to commercial
distribution. In addition, certain material changes or modifications to
medical devices also are subject to the FDA review and approval. Pursuant to
the FDC Act, the FDA regulates the research, testing, manufacture, safety,
labeling, storage, record keeping, advertising, distribution and production of
medical devices in the United States. Non-compliance with applicable
requirements of the FDC Act can result in the failure of the government to
grant premarket approval for devices, withdrawal of clearances or approvals,
total or partial suspension of production, fines, injunctions, civil
penalties, recall or seizure of products, and criminal prosecution.
The regulatory approval process can be expensive, lengthy and uncertain.
There can be no assurance that the Company will be able to obtain necessary
regulatory approvals for any proposed future products or modifications of
existing products. The failure to obtain approvals, loss of previously
received approvals, or failure to comply with existing or future regulatory
requirements, would have a material adverse effect on the Company's business,
financial condition and results of operations.
The FDA's regulations require agency approval of a PMA supplement for
certain changes if they affect the safety and effectiveness of the device,
including, but not limited to, new indications for use; labeling changes; the
use of a different facility or establishment to manufacture, process, or
package the device; changes in manufacturing facilities, methods, or quality
control systems; and changes in performance or design specifications.
The ThinPrep System for cervical cancer screening received PMA approval in
May 1996. In May 2000, the FDA approved the ThinPrep 3000 Processor, the
Company's next generation processor for automated sample preparation. In July
1999, the Company announced that it had successfully completed feasibility
studies of the ThinPrep Imaging System to aid in cervical cancer screening.
The Company began clinical trials in December 2000 for the ThinPrep Imaging
System and is currently gathering data for submission to the FDA. The product
has not received regulatory approval to date. There can be no assurance that
such approval will be obtained on a timely basis, or at all. The Company
anticipates that any other proposed uses for the ThinPrep System may require
approval of a PMA supplement or a new PMA application.
In July 1997, several petitions were filed requesting that the FDA review
the PMA approval granted to the ThinPrep System. The petitions were filed
pursuant to a provision of the FDC Act permitting any interested party to
initiate a process by which the FDA may review an approval order and may issue
an order affirming, reversing
11
or modifying the approval. The Company responded to the petitions by
submitting comments in December 1997 arguing that the FDA should deny them.
In April 1999, the U.S. Food and Drug Administration (FDA) ruled on the
petitions objecting to the approval of the ThinPrep Pap Test. In a letter
addressed to petitioners, and copied to Cytyc, the FDA concluded: "It would
serve no useful purpose to convene an advisory committee of experts to
consider the objections raised in the petitions." The FDA addressed each of a
total of 10 objections raised by the seven petitioners. In each instance, the
agency concluded that there was no justification for review.
The ThinPrep System is, and any other products manufactured or distributed
by the Company pursuant to an approved PMA application or supplements will be,
subject to pervasive and continuing regulation by the FDA, including record-
keeping requirements, reporting of adverse experience with the use of the
device, postmarket surveillance, postmarket registration and other actions as
deemed necessary by the FDA. The Company is also subject to FDA inspection for
compliance with regulatory requirements. Product labeling and promotional
activities are also subject to scrutiny by the FDA and, in certain instances,
by the Federal Trade Commission. Products may only be promoted by the Company
and any of its distributors for their approved indications. No assurance can
be given that modifications to the labeling which may be required by the FDA
in the future will not adversely affect the Company's ability to market or
sell the ThinPrep System.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future, or that such laws or regulations will not have a
material adverse effect upon the Company's business, financial condition and
results of operations.
Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approval to market and sell the ThinPrep System from a
foreign country may be longer or shorter than that required for FDA approval
and the requirements may differ. No assurance can be given that such foreign
regulatory approvals will be granted on a timely basis, or at all. In
addition, there can be no assurance that the Company will meet the FDA's
export requirements or receive FDA export approval when such approval is
necessary, or that countries to which the devices are to be exported will
approve the devices for import. Failure of the Company to meet the FDA's
export requirements or obtain FDA export approval when required to do so, or
to obtain approval for import, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The laboratories that would purchase the ThinPrep System are subject to
extensive regulation under the Clinical Laboratory Improvement Amendments of
1988 (CLIA), which requires laboratories to meet specified standards in the
areas of personnel qualifications, administration, participation in
proficiency testing, patient test management, quality control, quality
assurance and inspections. The Company believes that the ThinPrep device
operates in a manner that will allow laboratories purchasing the device to
comply with CLIA requirements. However, there can be no assurance that adverse
interpretations of current CLIA regulations or future changes in CLIA
regulations would not have an adverse effect on sales of the ThinPrep System.
Patents, Trademarks, Copyrights, Licenses and Proprietary Rights
The Company relies on a combination of patents, trademarks, trade secrets,
copyrights and confidentiality agreements to protect its proprietary
technology, rights and know-how. The Company pursues patent protection in the
United States and files corresponding patent applications in certain foreign
jurisdictions. The Company holds fourteen issued United States patents,
thirteen pending United States patent applications, and corresponding foreign
patents or patent applications relating to various aspects of its ThinPrep
technology. There can be no assurance, however, that pending patent
applications will ultimately issue as patents or that the claims allowed in
any of the Company's existing or future patents will provide competitive
advantages for the Company's products
12
or will not be successfully challenged or circumvented by competitors. Under
current law, patent applications in the United States are maintained in
secrecy until patents are issued and patent applications in foreign countries
are maintained in secrecy for a period after filing. The right to a patent in
the United States is attributable to the first to invent, not the first to
file a patent application. The Company cannot be sure that its products or
technologies do not infringe patents that may be granted in the future
pursuant to pending patent applications or that its products do not infringe
any patents or proprietary rights of third parties. In the event that any
relevant claims of third-party patents are upheld as valid and enforceable,
the Company could be prevented from selling its products or could be required
to obtain licenses from the owners of such patents or be required to redesign
its products to avoid infringement. There can be no assurance that such
licenses would be available or, if available, would be on terms acceptable to
the Company or that the Company would be successful in any attempts to
redesign its products or processes to avoid infringement. The Company's
failure to obtain these licenses or to redesign its products would have a
material adverse effect on the Company's business, financial condition and
results of operations.
There can be no assurance that the obligations of employees of the Company
and third parties with whom the Company has entered into confidentiality
agreements to maintain the confidentiality of the Company's trade secrets and
proprietary information, will effectively prevent disclosure of the Company's
confidential information or provide meaningful protection for the Company's
confidential information if there is unauthorized use or disclosure, or that
technology similar to the Company's will not be independently developed by the
Company's competitors. In addition, the Company is the exclusive perpetual
worldwide licensee of certain patented technology from DEKA for use in the
field of cytology related to the fluid pumping system used in the ThinPrep
System. The Company is obligated to pay royalties equal to 1% of net sales of
the ThinPrep Processor, filter cylinder disposable products which are used in
the ThinPrep System, and improvements made by the Company relating to such
items. The license provides that it may only be terminated (1) by mutual
written consent of both parties or (ii) by DEKA on written notice to the
Company in the event that the license is assigned to other than a single
acquiror without the consent of DEKA. Failure by the Company to maintain
rights to such technology could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
also holds unregistered copyrights on documentation and operating software
developed by it for the ThinPrep System. There can be no assurance that any
copyrights owned by the Company will provide competitive advantages for the
Company's products or will not be challenged or circumvented by its
competitors.
Litigation may be necessary to defend against claims of infringement, or to
enforce patents, copyrights, trademarks or trade secrets of the Company which
could result in substantial cost to, and diversion of effort by, the Company.
(See "Legal Proceedings".) In addition, the laws of some foreign countries do
not protect the Company's proprietary rights to the same extent as do the laws
of the United States.
Competition
The development, FDA approval and commercial marketing of competing systems
for cervical cancer screening could have a material adverse effect on the
Company's business, financial condition and results of operations.The Company
faces direct competition from a number of publicly-traded and privately-held
companies, including other manufacturers of thin layer slide preparation
systems. Many of the Company's existing and potential competitors have
substantially greater financial, marketing, sales, distribution and technical
resources than the Company, and more experience in research and development,
clinical trials, regulatory matters, manufacturing and marketing. In addition,
many of these companies may have established third-party reimbursement for
their products. Several established medical device manufacturers produce thin
layer slide preparation systems for use in non-gynecological testing
applications, at least one of which has achieved brand-name recognition and
significant penetration in the non-gynecological cytology market. In June
1999, AutoCyte, Inc., a competitor of the Company, received FDA approval to
market its slide preparation system. In September 1999, AutoCyte, Inc.
effected a merger with NeoPath, Inc., another competitor of the Company and a
company that has received FDA approval for a computer imaging system for
primary screening of Pap smears. The combined company was renamed TriPath
Imaging, Inc. In addition to direct competition, the Company faces
13
indirect competition from companies which currently market imaging systems to
initially evaluate conventional pap smears (primary screening method) or to
reexamine or rescreen conventional Pap smears previously diagnosed as
negative. The Company believes that these systems, as currently sold, could
not be used with the ThinPrep System, and, therefore, if such systems are
installed at or used by hospitals and reference laboratories, the Company's
ability to market its products to such hospitals and laboratories could be
materially adversely affected.
The medical device industry is characterized by rapid product development
and technological advances. The Company's products could be rendered obsolete
or uneconomical by the introduction and market acceptance of competing
products, by technological advances of the Company's current or potential
competitors or by other approaches.
The Company competes on the basis of a number of factors, including
manufacturing efficiency, marketing and sales capabilities and customer
service and support. There can be no assurance that the Company will be able
to compete successfully against current or future competitors or that
competition, including the development and commercialization of new products
and technology, will not have a material adverse effect on the Company's
business, financial condition or results of operations.
Employees
As of December 31, 2000, the Company employed 457 persons. The Company is
not subject to any collective bargaining agreements, has never experienced a
work stoppage and considers its relations with its employees to be good.
Item 2. Properties
The Company's executive offices and manufacturing operations are located in
Boxborough, Massachusetts in a leased facility consisting of approximately
97,000 square feet. The lease of this facility has a term of seven years
beginning November 1997, with an option to extend the term for an additional
five years. In January 2000, as part of its acquisition of Acu-Pak, Inc., a
contract packager in Londonderry, New Hampshire, the Company acquired
approximately 2.7 acres of land and facilities. The Company believes that its
facilities in Massachusetts and New Hampshire will satisfy its operational
requirements for the foreseeable future.
Item 3. Legal Proceedings
On September 13, 1999, the Company filed a patent infringement lawsuit
against AutoCyte, Inc. in the United States District Court for the District of
Delaware. In September 1999, AutoCyte, Inc. effected a merger with NeoPath,
Inc. The combined company was renamed TriPath Imaging, Inc. ("TriPath").
TriPath answered the complaint in the lawsuit and asserted counterclaims
seeking a judgment declaring that the patent at issue was invalid and
unenforceable and not infringed by TriPath. On January 8, 2001, the Company
announced that the parties had settled the litigation. On January 11, 2001,
the court signed and entered a consent judgment confirming the validity and
enforceability of the patent at issue.
On May 12, 2000, the Company filed a lawsuit against TriPath in the United
States District Court for the District of Massachusetts, alleging that TriPath
engaged in false and misleading description, representation, advertising and
promotion, unfair competition, commercial disparagement, and interference with
Cytyc's advantageous business relationships. On January 8, 2001, the Company
announced that the parties had settled the litigation and the parties filed a
Stipulation of Dismissal dismissing all claims and counterclaims with
prejudice.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders of the Company
during the fourth quarter of the year ended December 31, 2000.
14
PART II
Item 5. Market for Registrant's Common Equity and Related Security Holder
Matters
The Company's Common Stock is traded on The Nasdaq Stock Market under the
symbol "CYTC". The following table sets forth, for the calendar periods
indicated, the range of high and low sale prices for the Common Stock of the
Company on The Nasdaq Stock Market, as adjusted to reflect both the two-for-
one stock split in the form of a stock dividend paid in January 2000 to
holders of record of the Company's Common Stock on January 14, 2000 and the
three-for-one stock split in the form of a stock dividend paid in March 2001
to holders of record of the Company's Common Stock on February 16, 2001. These
prices do not include retail mark-up, mark-down or commissions and may not
represent actual transactions.
High Low
------ ------
1999:
First Quarter............................................... $ 4.33 $ 1.67
Second Quarter.............................................. 4.08 2.31
Third Quarter............................................... 6.73 3.20
Fourth Quarter.............................................. 10.39 4.88
2000:
First Quarter............................................... $19.25 $ 7.94
Second Quarter.............................................. 22.58 9.83
Third Quarter............................................... 23.48 11.25
Fourth Quarter.............................................. 22.38 12.67
2001:
First Quarter (through March 14, 2001)...................... $22.67 $16.63
On March 14, 2001, the last reported sales price of the Common Stock on The
Nasdaq National Market was $18.50 per share. As of March 14, 2001, there were
approximately 303 holders of record of the Common Stock.
The Company has never declared or paid cash dividends. The Company currently
intends to retain any earnings for use in its business and does not anticipate
paying any cash dividends on its capital stock in the foreseeable future.
In December 1999, the Company's Board of Directors approved a two-for-one
split of the Company's Common Stock. Payable in the form of a 100 percent
stock dividend, all stockholders of record at the close of business on January
14, 2000 received one additional share of Common Stock for each share owned.
The additional shares were distributed to stockholders on or about January 31,
2000. In January 2001, the Company's Board of Directors approved a three-for-
one split of the Company's Common Stock. Payable in the form of a 200 percent
stock dividend, all stockholders of record at the close of business on
February 16, 2001 received two additional shares of Common Stock for each
share owned. The additional shares were distributed to stockholders on or
about March 2, 2001. All share numbers contained in this report on Form 10-K
and the computations of basic and diluted net income (loss) per common share
have been adjusted for all periods presented to reflect both the two-for-one
and three-for-one stock splits.
On January 1, 2000, the Company issued to Quest Diagnostics Incorporated a
warrant to purchase up to 900,000 shares of the Company's Common Stock at an
exercise price equal to $10.14 per share. The warrant was issued in
consideration of entering into a multi-year joint-marketing agreement. No
underwriter was involved in the issuance of the warrant. Such issuance was
made by the Company in reliance upon an exemption from the registration
provisions of the Securities Act of 1933 set forth in Section 4(2) thereof as
a transaction by an issuer not involving a public offering. The warrant is
exercisable at any time on or before January 31, 2002 and contains a cashless
exercise feature.
15
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data set forth below for each of the
years ended December 31, 1998, 1999 and 2000 and at December 31, 1999 and 2000
are derived from consolidated financial statements of the Company audited by
Arthur Andersen LLP, independent public accountants, which are included
elsewhere herein. The consolidated selected financial data for the years ended
December 31, 1996 and 1997 and at December 31, 1996, 1997 and 1998 are derived
from consolidated financial statements of the Company audited by Arthur
Andersen LLP which are not included herein. The selected consolidated
financial data set forth below should be read in conjunction with the
consolidated financial statements and related notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
Year Ended December 31,
-------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- --------- --------
(in thousands, except per share data)
Statements of Operations
Data:
Net sales.................. $ 8,198 $ 26,347 $ 44,264 $ 81,100 $142,065
Cost of sales.............. 4,354 8,006 11,211 15,815 24,565
-------- -------- -------- --------- --------
Gross profit 3,844 18,341 33,053 65,285 117,500
-------- -------- -------- --------- --------
Operating expenses:
Research and
development............. 4,689 6,048 8,419 13,372 14,171
Sales and marketing...... 9,918 31,761 35,332 44,017 55,162
General and
administrative.......... 3,314 7,746 8,372 6,765 13,872
-------- -------- -------- --------- --------
Total operating
expenses.............. 17,921 45,555 52,123 64,154 83,205
-------- -------- -------- --------- --------
Income (loss) from
operations................ (14,077) (27,214) (19,070) 1,131 34,295
Other income, net.......... 2,158 5,142 7,341 4,639 4,721
-------- -------- -------- --------- --------
Income (loss) before
provision for income
taxes..................... (11,919) (22,072) (11,729) 5,770 39,016
Provision for income
taxes..................... -- -- -- 130 853
-------- -------- -------- --------- --------
Net income (loss).......... $(11,919) $(22,072) $(11,729) $ 5,640 $ 38,163
======== ======== ======== ========= ========
Net income (loss) per
common and
potential common share
(1):
Basic.................... $ (0.18) $ (0.22) $ (0.11) $ 0.05 $ 0.34
======== ======== ======== ========= ========
Diluted.................. $ (0.18) $ (0.22) $ (0.11) $ 0.05 $ 0.32
======== ======== ======== ========= ========
Weighted average common and
potential common shares
outstanding (1):
Basic.................... 67,152 101,358 105,858 107,346 110,754
Diluted.................. 67,152 101,358 105,858 112,530 117,960
1996 1997 1998 1999 2000
-------- -------- -------- --------- --------
Balance Sheet Data:
Cash, cash equivalents and
short-term investments.... $ 39,057 $ 85,402 $ 69,908 $ 70,368 $ 88,845
Total assets............... 50,183 108,377 97,737 112,328 170,886
Accumulated deficit........ (47,107) (69,179) (80,908) (75,268) (37,105)
Total stockholders'
equity.................... 46,681 96,187 85,807 94,991 147,046
- --------
(1) See Note 2 in the notes to the consolidated financial statements for an
explanation of the computation of basic and diluted per share data.
16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company designs, develops, manufactures and markets a sample preparation
system for medical diagnostic applications. The ThinPrep System consists of
the Thin Prep 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 PMA approval from the 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 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 HPV directly from a single
vial of patient specimen collected in a ThinPrep solution using the Hybrid
Capture HPV DNA Assay of Digene Corporation. In March 1999, the FDA approved
the use of Digene Corporation's Hybrid Capture II HPV DNA Assay from a single
vial of patient specimen collected in ThinPrep Solution. The Company commenced
the full-scale commercial launch of the ThinPrep System for cervical cancer
screening in the United States in 1997 and in selected international markets
in 1998. In May 2000, the FDA approved the ThinPrep(R) 3000 Processor, the
Company's next-generation processor for automated sample preparation. In
December 2000, the Company began clinical trials of the ThinPrep Imaging
System (TM) to aid in cervical cancer screening.
Prior to 2000, the Company incurred substantial losses, principally from
expenses associated with obtaining FDA approval of the Company's ThinPrep
System for cervical cancer screening, engineering and development efforts
related to the ThinPrep 2000 Processor, ThinPrep 3000 Processor, and ThinPrep
Imaging System, expansion of the Company's manufacturing facilities, and the
establishment of a marketing and sales organization. The Company may
experience losses in the future as it expands its domestic and international
marketing and sales activities and continues its product development efforts.
The operating results of the Company have fluctuated significantly in the past
on an annual and a quarterly basis. The Company expects that its operating
results may fluctuate significantly from quarter to quarter in the future
depending on a number of factors, including the extent to which the Company's
products continue to gain market acceptance, the rate and size of expenditures
incurred as the Company expands its domestic and establishes its international
sales and distribution networks, the timing and level of reimbursement for the
ThinPrep System by third-party payors, and other factors, many of which are
outside the Company's control.
The Company occupies a 97,000 square foot facility in Boxborough,
Massachusetts. The Company has installed automated customized equipment for
the high-volume manufacture of disposable filters for use in connection with
the ThinPrep System. In January 2000, the Company acquired approximately 2.7
acres of land and facilities of Acu-Pak, Inc., a contract packager in
Londonderry, New Hampshire that was manufacturing, filling vials containing
and distributing the Company's solutions for all of its ThinPrep line of
products, for approximately $6.0 million in cash. The Company accounted for
the acquisition as a purchase and is amortizing goodwill associated with the
purchase over seven years which began in January 2000.
The cost per ThinPrep(R) Pap Test(TM), plus a laboratory mark-up, is
generally billed by laboratories to third-party payors and results in a higher
amount for the ThinPrep Pap Test than the current billing for conventional Pap
tests. Successful sales of the ThinPrep System for cervical cancer screening
in the United States and other countries will depend on the availability of
adequate reimbursement from third-party payors such as private insurance
plans, managed care organizations and Medicare and Medicaid. In the United
States, the current rate of reimbursement to laboratories from managed care
organizations and other third-party payors to screen conventional Pap smears
ranges from approximately $6.00 to $36.00 per test, with $17.00 as the most
common rate of reimbursement. Although many health insurance companies have
added the ThinPrep Pap Test to their
17
coverage, there can be no assurance that third-party payors will provide or
continue to provide such coverage, that reimbursement levels will be adequate
or that health care providers or clinical laboratories will use the ThinPrep
System for cervical cancer screening in lieu of the conventional Pap smear
method.
Since January 1, 1998, the Company's laboratory customers have been able to
request reimbursement for the ThinPrep Pap Test from health insurance
companies and the USHCFA (United States Health Care Financing Administration)
using a newly assigned Common Procedure Technology ("CPT") code specifically
for liquid-based monolayer cervical cell specimen preparation. CPT codes are
assigned, maintained and revised by the CPT Editorial Board, which is
administered by the American Medical Association, and are used in the
submission of claims to third-party payors for reimbursement for medical
services. 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 December 31, 2000, based on information provided to the
Company, the Company believes that all of the 298 health insurance companies
which announced coverage of the ThinPrep Pap Test have implemented the new CPT
code and have established a reimbursement amount. There are approximately six
hundred managed care organizations and other third party payors in the United
States. There can be no assurance, however, that reimbursement levels under
the new CPT code will be adequate.
The Company expects to continue its significant expenditures for sales and
marketing activities of the ThinPrep System for cervical cancer screening in
2001. During 1997, the Company entered into a co-promotion agreement with Mead
Johnson to promote the ThinPrep Pap Test to obstetricians and gynecologists in
the United States. The Mead Johnson agreement expired on December 31, 1998;
however, Mead Johnson received a residual payment of approximately $1.6
million in February 2000 based on 1999 product sales. The clinical laboratory
companies have worked with the Company on marketing and sales programs, which
generally involve joint marketing geared toward promoting the Company's
products to physicians and third-party payors.
In January 2000, the Company entered into a supply and co-marketing
agreement with Quest Diagnostics Incorporated to market the ThinPrep Pap Test
as Quest Diagnostics' exclusive liquid-based cervical cancer screening
methodology.
In October 2000, the Company entered into an agreement with Roche
Diagnostics Corporation ("RDC"), exclusive in the United States and Puerto
Rico, to co-promote the benefits of testing for chlamydia and gonorrhea using
RDC's COBAS(R) AMPLICOR(R) CT/NG Test directly from the ThinPrep collection
vial. The companies also intend to explore the potential for collaborating on
a portfolio of additional screening and diagnostic tests based on the
companies' respective technologies.
In January 2001, the Company entered into an agreement with Digene
Corporation ("Digene"), exclusive in the United States and Puerto Rico, to co-
promote the benefits of testing for human papillomavirus (HPV) using Digene's
Hybrid Capture(R) II HPV DNA Assay directly from the ThinPrep collection vial.
The companies expect that the co-promotion program will initially focus on
promoting Digene's HPV DNA test, using the residual material in ThinPrep
collection vials, as the optimal patient management strategy for borderline
cytology results.
The Company expects to increase its expenditures in 2001 for research and
development to fund development of the ThinPrep Imaging System, as well as
follow-on products and additional applications of ThinPrep technology.
Results of Operations
Years Ended December 31, 2000 and December 31, 1999
Net sales increased to $142.1 million in 2000 from $81.1 million in 1999, an
increase of 75.2%. This increase was primarily due to increased sales of the
Company's ThinPrep Pap Test for cervical cancer screening
18
in the United States. Gross profit increased to $117.5 million in 2000 from
$65.3 million in 1999, an increase of 80.0%, and the gross margin increased to
82.7% in 2000 from 80.5% in 1999. Management attributes the increase in gross
margin in 2000 primarily to increased sales of the higher gross margin
ThinPrep Pap Test in the United States compared to domestic sales of the
ThinPrep Processor or international sales of either tests or processors.
Total operating expenses increased to $83.2 million in 2000 from $64.2
million in 1999, an increase of 29.7%. Research and development costs
increased to $14.2 million in 2000 from $13.4 million in 1999, an increase of
6.0%, primarily as a result of engineering costs and additional personnel
expenses associated with the Company's ThinPrep Imaging System development
activities. Sales and marketing costs increased to $55.2 million in 2000 from
$44.0 million in 1999, an increase of 25.3%. The increase primarily relates to
personnel costs in domestic sales and marketing, including commissions, travel
and meetings expense, marketing medical education programs in the United
States and the expansion of international sales and marketing. The Company
expects that sales and marketing costs will increase in succeeding quarters as
a result of increased expenditure for personnel, marketing programs and
commissions expense, all of which increase with sales. General and
administrative costs increased to $13.9 million in 2000 from $6.8 million in
1999, an increase of 105.1%, due to increased legal expenses associated with
litigation and increased personnel costs and professional fees. During the
third quarter of 1999, the Company revised its estimate and reversed
approximately $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 85.8%.
Interest income increased to $4.7 million in 2000 from $3.8 million in 1999,
an increase of 24.9%, due to an increase in the average cash balance available
for investment and higher average interest rates. The Company recorded $1.1
million in 1999 as other income relating to the settlement of certain
litigation. The Company also recorded $0.3 and $0.8 million in foreign
currency transaction losses in 1999 and 2000, respectively.
Years Ended December 31, 1999 and December 31, 1998
Net sales increased to $81.1 million in 1999 from $44.3 million in 1998, an
increase of 83.2%. This 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 $65.3 million in 1999 from $33.1 million in
1998, an increase of 97.5%, and the gross margin increased to 80.5% in 1999
from 74.7% in 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 compared to domestic sales of the ThinPrep 2000 Processor or
international sales of either tests or processors.
Total operating expenses increased to $64.2 million in 1999 from $52.1
million in 1998, an increase of 23.1%. Research and development costs
increased to $13.4 million in 1999 from $8.4 million in 1998 an increase of
58.8%, primarily as a result of engineering costs associated with the
Company's ThinPrep Imaging System development activities. Sales and marketing
costs increased to $44.0 million in 1999 from $35.3 million in 1998, an
increase of 24.6%. The increase reflects expenses associated with the
employment of additional direct sales personnel, commissions related to
increased sales and to a lesser extent additional travel and sales meetings.
The Company expects that sales and marketing costs will increase in succeeding
quarters as a result of increased expenditure for personnel, marketing
programs and commissions expense, all of which increase with sales. General
and administrative costs decreased to $6.8 million in 1999 from $8.4 million
in 1998, a decrease of 19.2%, due to decreased legal expenses associated with
litigation. During the third quarter of 1999, the Company revised its estimate
and reversed approximately $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 10.8%. Interest income decreased to $3.8 million in 1999 from $4.3
million in 1998, a decrease of 11.7%, due to a decrease in the average cash
balance available for investment. The Company recorded $1.1 million in 1999
and $3.1 million in 1998 as other income relating to the settlement of certain
litigation. The Company also recorded $0.3 million in foreign currency
transaction losses in 1999.
19
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded its
revenue, resulting in an accumulated deficit of $37.1 million as of December
31, 2000. Although the Company generated cash of $31.9 million in 2000, 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 $184.8 million, net of offering expenses. At December
31, 2000, the Company had cash, cash equivalents and short-term investments of
$88.8 million. Cash provided by the Company's operations was $1.7 million and
$25.9 million during 1999 and 2000, respectively, primarily as a result of net
income generated in each year partially offset by increases in working capital
requirements. Net accounts receivable increased by $17.8 million to
approximately $40.2 million during 2000 as a result of significant sales
growth in 2000. Net inventories increased approximately $5.4 million from
December 31, 1999 to December 31, 2000 due primarily to the production of the
Company's second generation processor, the ThinPrep 3000, and the increased
production due to planned sales growth of ThinPrep Pap Tests. Cash used in the
Company's operations was $12.8 million during 1998 due primarily to operating
losses in 1998.
The Company's capital expenditures for the years ended December 31, 1999 and
2000 were $3.8 million and $10.8 million respectively. The increase in capital
expenditures in 2000 as compared to 1999 was due primarily to the purchase of
automated customized manufacturing equipment in 2000.
Stockholders' equity increased approximately $52.1 million from December 31,
1999 to December 31, 2000 primarily due to net income of $38.2 million,
proceeds from the exercise of stock options of $8.4 million and the issuance
of a warrant to Quest Diagnostics Incorporated valued at $5.2 million.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the resources required to further develop its
marketing and sales capabilities, both domestic and international, the extent
to which such activities generate market acceptance and demand for the
ThinPrep System for cervical cancer screening and additional applications of
its ThinPrep technology. The Company's liquidity and capital requirements will
also depend upon the progress of the Company's research and development
programs to develop follow-on products including the ThinPrep Imaging System,
the receipt of and the time required to obtain regulatory clearances and
approvals, and the resources the Company devotes to developing, manufacturing
and marketing its products. In addition, the Company's capital requirements
will depend on the extent of potential liabilities, if any, and costs
associated with any future litigation (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.
Income Taxes
The Company has net operating loss and research and development tax credit
carryforwards for federal income tax purposes of approximately $67.2 million
and $3.1 million, respectively, at December 31, 2000 that will expire at
various dates through the year 2020 if not utilized.
The net operating loss and research and development tax credit carryforwards
are subject to review by the Internal Revenue Service. Ownership changes, as
defined in the Internal Revenue Code, may limit the amount of these tax
attributes that can be utilized annually to offset future taxable income or
tax liabilities. The amount of the annual limitation is determined based on
the value immediately prior to the ownership change. Subsequent ownership
changes may further affect the limitation in future years.
20
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.
Certain Factors Which May Affect Future Results
The forward looking statements in this Form 10-K 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-K 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, potential savings to the healthcare 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. Such factors, among others, may have a material adverse
effect upon the Company's business, financial conditions, and results of
operations.
The following discussion of the Company's risk factors should be read in
conjunction with the consolidated financial statements and related notes
included herein. Because of these and other factors, past financial
performance should not be considered an indication of future performance.
Dependence on Single Product. Substantially all of the Company's revenues to
date have been derived from sales of its ThinPrep 2000 Processor and
predecessor instruments, and related reagents, filters and other supplies for
use in gynecological and non-gynecological testing applications. Although the
Company has begun marketing its next-generation ThinPrep 3000 Processor and is
currently in clinical trials for its ThinPrep Imaging System, neither product
has generated significant revenue to date. The Company's inability to
successfully commercialize its current ThinPrep System for cervical cancer
screening or to obtain adequate third-party reimbursement coverage, among
other factors, would have a material adverse effect on the Company's business,
financial condition and results of operations.
Uncertainty of FDA Approval. The manufacturer and sale of medical diagnostic
devices intended for commercial use are subject to extensive governmental
regulation in the United States and FDA approval is required before any United
States commercial sales of such devices may commence. In December 2000, the
Company initiated clinical trials for its ThinPrep Imaging System. There can
be no assurance that this product will receive necessary regulatory approval
on a timely basis, or at all.
Uncertainty of Market Acceptance and Additional Cost. The Company's success
and growth will depend on market acceptance of the ThinPrep System, including
follow-on products and additional applications of
21
ThinPrep technology, if any, for cervical cancer screening by healthcare
providers, third-party payors and clinical laboratories. The laboratory cost
of using the ThinPrep System for cervical cancer screening is higher than that
of a conventional Pap smear. Due in part to increased competitive pressures in
the healthcare industry to reduce costs, the Company's ability to gain market
acceptance of the ThinPrep System for cervical cancer screening will depend on
the Company's ability to demonstrate that the higher cost of using the
ThinPrep System will be offset by a reduction in costs often associated with
conventional Pap smears, including inaccurate diagnoses and the need for
repeat Pap tests.
Limited Marketing and Sales Experience. Although the Company received
clearance from the FDA to market its ThinPrep System for cervical cancer
screening on May 20, 1996, the Company initiated full-scale marketing and
sales efforts for the ThinPrep System in United States beginning only in the
first quarter of 1997. In order to effectively market the ThinPrep System for
cervical cancer screening, the Company will need to continue to increase its
marketing and sales capabilities. No assurance can be given that the Company's
direct sales force or strategic marketing relationships will succeed in
promoting the ThinPrep System to healthcare providers, third-party payors or
clinical laboratories, or that additional marketing and sales channels will be
successfully established. While the Company is currently evaluating marketing
and sales channels abroad, including contract sales organizations,
distributors and marketing partners, the Company has established very limited
foreign sales channels. There can be no assurance that the Company will be
able to recruit and retain skilled marketing, sales, service or support
personnel or foreign distributors, or that the Company's marketing and sales
efforts will be successful. Failure to successfully expand its marketing and
sales capabilities in the United States or establish its international
marketing and sales organization would have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Third-Party Reimbursement. 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 a number of managed care organizations have
added the ThinPrep Pap Test to their coverage, there can be no assurance that
reimbursement will be available, reimbursement levels will be adequate or that
healthcare providers or clinical laboratories will use the ThinPrep System for
cervical cancer screening in lieu of the conventional Pap smear method.
Limited Number of Customers and Lengthy Sales Process. Due in part to a
recent trend toward consolidation of clinical laboratories, the Company
expects that the number of potential domestic customers for its products will
decrease. Due to the relative size of the largest United States laboratories,
it is likely that a significant portion of ThinPrep System sales will be
concentrated among a relatively small number of large clinical laboratories.
Further, in order to generate demand for the ThinPrep Pap Test among clinical
laboratories, the Company will be required to educate physicians and
healthcare providers regarding the clinical benefits and cost-effectiveness of
the ThinPrep System as well as to demonstrate to such parties that adequate
levels of reimbursement will be available for the ThinPrep Pap Test, a process
which the Company believes will require a lengthy sales effort.
Limited Operating History. The Company has a limited operating history and,
to date, has focused on product development, clinical trials, obtaining
regulatory approvals, the expansion of manufacturing facilities and the
establishment of marketing and sales capabilities for its ThinPrep System for
cervical cancer screening in the United States and abroad. The Company's
future revenues and profitability are critically dependent on the Company's
ability to successfully market and sell the ThinPrep System, including follow-
on products and additional applications of ThinPrep technology, if any, for
cervical cancer screening.
Management of Growth. The Company has recently experienced rapid growth in
the scope of its operations and facilities, the number of its employees and
the geographic area of its operations. Such growth may place a significant
strain on the Company's managerial, operational and financial resources and
systems. To manage its growth effectively, the Company will be required to
continue to implement and improve additional management and financial systems
and controls, and to expand, train and manage its employee base. If the
22
Company is unable to manage growth effectively, the Company's business,
operating results and financial condition may be materially adversely
effected.
Intense Competition. The Company faces direct competition from a number of
publicly-traded and privately-held companies, including at least one other
manufacturer of a thin-layer slide preparation system. The development, FDA
approval and commercial marketing of such systems for cervical cancer
screening could have a material adverse effect on the Company's business,
financial condition and results of operations. Many of the Company's existing
and potential competitors have substantially greater financial, marketing,
sales, distribution and technical resources than the Company, and more
experience in research and development, clinical trials, regulatory matters,
manufacturing and marketing.
Potential Fluctuations in Future Quarterly Results. The Company expects that
its operating results will fluctuate significantly from quarter to quarter in
the future and will depend on a number of factors, many of which are outside
the Company's control. These factors include: the extent to which the
Company's products 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 of any approvals of the ThinPrep
System for reimbursement by third-party payors; the timing and size of sales;
the likelihood and timing of FDA approval of PMA supplements related to the
ThinPrep System; the timing and size of expenditures incurred in the research
and development of new products; and the introduction and market acceptance of
competing products or technologies.
Extensive Government Regulation. The manufacture and sale of medical
diagnostic devices are subject to extensive government regulation in the
United States and in other countries. The process of obtaining FDA and other
required regulatory approvals can be time-consuming, expensive and uncertain,
frequently requiring several years from the commencement of clinical trials to
the receipt of regulatory approval. After approval, the Company and its
medical products remain subject to pervasive regulation and FDA inspection for
compliance with regulatory requirements. The Company is currently in clinical
trials for its ThinPrep Imaging System. There can be no assurance that the
Company will successfully obtain the necessary approvals to market and
commercialize this system.
International Sales and Operations Risks. The Company has commenced sale of
its ThinPrep System and intends to sell any future products to customers both
in the United States and internationally. While the Company is evaluating
marketing and sales channels abroad, including contract sales organizations,
distributors and marketing partners, the Company currently has very limited
foreign sales channels in place at this time. There can be no assurance that
the Company will successfully develop international sales capabilities or
that, if the Company establishes such capabilities, the Company will be
successful in obtaining reimbursement or any regulatory approvals required in
foreign countries.
Uncertainty of Additional Applications. In late 2000 and early 2001, the
Company entered into agreements for the co-promotion of Roche Diagnostics
Corporation's COBAS(R) AMPLICOR(R) CT/NG Test for the detection of chlamydia
and gonorrhea and Digene Corporation's Hybrid Capture(R) II HPV DNA Assay for
the detection of the human papillomavirus (HPV), in each case, directly from
the ThinPrep collection vial. The Company intends to continue to evaluate
additional diagnostic applications of its ThinPrep technology in testing for
the presence of other types of cancers and sexually transmitted diseases. The
Company has not yet determined which of these additional applications, if any,
it will seek to develop, commercialize and/or promote.
Dependence on Key Personnel. The Company is highly dependent on the
principal members of its management and scientific staff, the loss of whose
services might impede achievement of its research and development or strategic
objectives. The Company's success will depend on its ability to retain key
employees and to attract additional qualified employees.
Dependence on Patents, Copyrights, Licenses and Proprietary Rights; Risk of
Third-Party Claims of Infringement. The Company relies on a combination of
patents, trade secrets, copyrights, trademarks and
23
confidentiality agreements to protect its proprietary technology, rights and
know-how. In addition, the Company is the exclusive licensee of certain
patented technology for use in the field of cytology related to the fluid
pumping system used in the ThinPrep System. Failure by the Company to protect,
defend and maintain such intellectual property rights, or a third party claim
of infringement, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Legal
Proceedings".
Dependence on Single Source Suppliers. Certain key components of the
ThinPrep System, including its proprietary filter material, are currently
provided to the Company by single sources. The Company has been increasing its
inventory of these components in an effort to mitigate this risk. In the event
that the Company is unable to obtain sufficient quantities of such components
on commercially reasonable terms, or in a timely manner, the Company would not
be able to manufacture its products on a timely and cost-competitive basis,
which would have a material adverse effect on the Company's business,
financial condition and results of operations.
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. During 2000, the
Company derived approximately 1% of its revenues from sales of the ThinPrep
System to customers in countries which have converted to the Euro. 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.
Item 8. Financial Statements and Supplementary Data
The information required by this item may be found on pages F-1 through F-19
of this Form 10-K.
Item 9. Disagreements with Accountants on Accounting and Financial Disclosure
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters in the last two fiscal years.
24
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required under this item may be found under the sections
captioned "Election of Directors", "Occupations of Directors and Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement (the "2001 Proxy Statement"), which will be filed
with the Securities and Exchange Commission not later than 120 days after the
close of the Company's fiscal year ended December 31, 2000, and is
incorporated herein by reference.
Item 11. Executive Compensation
The information required under this item may be found under the section
captioned "Compensation and Other Information concerning Directors and
Officers" in the 2001 Proxy Statement, and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item may be found under the section
captioned "Securities Ownership of Certain Beneficial Owners and Management"
in the 2001 Proxy Statement, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required under this item may be found under the caption
"Certain Relationships and Related Transactions" in the 2001 Proxy Statement,
and is incorporated herein by reference.
25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Consolidated Financial Statements.
For a list of the consolidated financial information included herein, see
Index on page F-1.
(a)(2) Financial Statement Schedules.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
accompanying Consolidated Financial Statements or notes thereto.
(a)(3) List of Exhibits.
The following exhibits are filed as part of and incorporated by reference
into, this Annual Report on Form 10-K:
Exhibit
Number Description
------- -----------
3.1(2) Third Amended and Restated Certificate of Incorporation of the
Company.
3.2(2) Amended and Restated By-Laws of the Company.
3.3(9) Certificate of Amendment of Third Amended and Restated Certificate
of Incorporation.
4.1(1) Specimen certificate representing the Common Stock.
4.2(3) Rights Agreement, dated as of August 27, 1997, between Cytyc
Corporation and BankBoston, N.A (the "Rights Agreement") which
includes as Exhibit A the Form of Certificate of Designations, as
Exhibit B the Form of Rights Certificate, and as Exhibit C the
Summary of Rights to Purchase Preferred Stock.
4.3(4) Amendment No. 1 to Rights Agreement, dated as of June 22, 1998,
between Cytyc Corporation and BankBoston, N.A., amending the Rights
Agreement.
10.1(1)* 1988 Stock Plan.
10.2(1)* 1989 Stock Plan.
10.3(1)* 1995 Stock Plan.
10.4(10)* Amended and Restated 1995 Non-Employee Director Stock Option Plan.
10.5(1)* 1995 Employee Stock Purchase Plan, as amended.
10.6(1)# License Agreement between the Company and DEKA Products Limited
Partnership dated March 22, 1993.
10.7(1) Form of Indemnification Agreement.
10.8(1) Lease Agreement between the Company and BFA Realty Partnership, L.P.
d/b/a BFA, Limited Partnership of February 1996.
10.9(5) Amendment No. 1 to Lease Agreement dated as of February 1996 between
the Company and BFA Realty Partnership, L.P. d/b/a BFA, Limited
Partnership.
10.10(6)# Co-Promotion Agreement dated as of May 27, 1997 by and between Mead
Johnson & Company and the Company.
10.11(7)# Amendment No. 1 to Co-Promotion Agreement dated as of May 27, 1997
by and between Mead Johnson & Company and the Company.
10.12(8)* Cytyc Corporation Director Deferred Compensation Plan.
21.1** List of Subsidiaries of the Company.
23.1** Consent of Arthur Andersen LLP.
24.1** Power of Attorney (see signature page hereto).
26
- --------
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 333-00300).
(2) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (File No. 333-19367).
(3) Incorporated herein by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K, filed August 29, 1997 (File No. 000-27558).
(4) Incorporated herein by reference to Exhibit 4.2 to the Company's Quarterly
Report on Form 10-Q, filed August 13, 1998 (File No. 000-27558).
(5) Incorporated herein by reference to Exhibit 10.9 to the Company's Annual
Report on Form 10-K, filed March 31, 1998 (File No. 000-27558).
(6) Incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q, filed August 8, 1997 (File No. 000-27558).
(7) Incorporated herein by reference to Exhibit 10.11 to the Company's Annual
Report on Form 10-K, filed March 31, 1998 (File No. 000-27558).
(8) Incorporated herein by reference to Exhibit 10.12 to the Company's Annual
Report on Form 10-K, filed March 31, 1999 (File No. 000-27558).
(9) Incorporated herein by reference to Exhibits 3, 4 to the Company's
Quarterly Report on Form 10-Q, filed August 14, 2000 (File No. 000-27558).
(10) Incorporated herein by reference to Exhibit 10 to the Company's Quarterly
Report on Form 10-Q, filed August 14, 2000 (File No. 000-27558).
* Indicates a management contract or any compensatory plan, contract or
arrangement
** Filed herewith.
# Confidential treatment granted as to certain portions.
+ Confidential treatment requested as to omitted portions pursuant to Rule
24b-2 promulgated under the Securities Exchange Act of 1934, as amended.
(b) Reports On Form 8-K
There were no reports on Form 8-K filed by the Company for the quarter
ended December 31, 2000.
(c) Exhibits
The Company hereby files as part of this Annual Report on Form 10-K the
exhibits listed in Item 14(a)(3) set forth above. Exhibits which are
incorporated herein by reference may be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, Washington, D.C.
20549, and at the SEC's regional offices located at Seven World Trade
Center, Suite 1300, New York, New York 10048, and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60611-2511. Copies of
such material may be obtained by mail from the Public Reference Section of
the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The SEC also maintains a Website that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC at the address
"http://www.sec.gov".
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 26, 2001
/s/ Patrick J. Sullivan
By: ________________________________
President, Chief Executive
Officer and
Vice Chairman of the Board of
Directors
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Cytyc Corporation, hereby
severally constitute and appoint Patrick J. Sullivan and Robert L. Bowen, and
each of them singly, our true and lawful attorneys, with full power to both of
them and each of them singly, to sign for us and in our names in the
capacities indicated below, any amendments to this Report on Form 10-K, and
generally to do all things in our names and on our behalf in such capacities
to enable Cytyc Corporation to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all the requirements of the Securities
and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant, in the capacities and on the dates indicated.
Signature Title(s) Date
--------- -------- ----
/s/ Patrick J. Sullivan President, Chief Executive March 26, 2001
___________________________________________ Officer (Principal
Patrick J. Sullivan Executive Officer) and
Vice Chairman of the
Board of Directors
/s/ Robert L. Bowen Vice President, and Chief March 26, 2001
___________________________________________ Financial Officer
Robert L. Bowen (Principal Financial
Officer and Principal
Accounting Officer)
/s/ Alfred J. Battaglia Director March 26, 2001
___________________________________________
Alfred J. Battaglia
/s/ Walter E. Boomer Director March 26, 2001
___________________________________________
Walter E. Boomer
/s/ Sally W. Crawford Director March 26, 2001
___________________________________________
Sally W. Crawford
/s/ William G. Little Director March 26, 2001
___________________________________________
William G. Little
/s/ C. William McDaniel Vice Chairman of the Board March 26, 2001
___________________________________________ of Directors
C. William McDaniel
/s/ Anna S. Richo Director March 26, 2001
___________________________________________
Anna S. Richo
/s/ Monroe E. Trout, M.D. Chairman of the Board of March 26, 2001
___________________________________________ Directors
Monroe E. Trout, M.D.
28
CYTYC CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1999 and 2000..................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1999 and 2000........................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1999 and 2000..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Cytyc Corporation:
We have audited the accompanying consolidated balance sheets of Cytyc
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1999
and 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cytyc
Corporation and subsidiaries as of December 31, 1999 and 2000 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
Boston, Massachusetts
January 22, 2001
(Except with respect to the matter
discussed in Notes 2(j) and
8(b) as to which the date is
March 5, 2001)
F-2
CYTYC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31,
------------------
1999 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents... $ 29,686 $ 61,605
Short-term investments.... 40,682 27,240
Accounts receivable, net
of allowance of $1,134
and
$1,510 at December 31,
1999 and 2000,
respectively............. 22,379 40,214
Inventories............... 5,427 11,093
Prepaid expenses and other
current assets........... 783 937
-------- --------
Total current assets.... 98,957 141,089
Property and equipment,
net........................ 10,660 21,363
Other assets................ 2,711 8,434
-------- --------
Total assets............ $112,328 $170,886
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......... $ 4,400 $ 6,043
Accrued expenses.......... 11,215 15,720
Deferred revenue.......... 1,722 2,077
-------- --------
Total current
liabilities............ 17,337 23,840
-------- --------
Commitments and
contingencies (Note 10)
Stockholders' equity:
Preferred Stock, $0.01 par
value--
Authorized--5,000,000
shares
No shares issued or
outstanding............ -- --
Common Stock, $0.01 par
value--
Authorized--200,000,000
shares
Issued and outstanding--
108,419,634 shares in
1999 and
113,039,385 in 2000.... 1,084 1,130
Additional paid-in
capital.................. 169,228 183,653
Accumulated other
comprehensive loss....... (53) (632)
Accumulated deficit....... (75,268) (37,105)
-------- --------
Total stockholders'
equity................. 94,991 147,046
-------- --------
Total liabilities and
stockholders' equity... $112,328 $170,886
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years Ended December 31,
---------------------------
1998 1999 2000
-------- -------- --------
Net sales........................................ $ 44,264 $ 81,100 $142,065
Cost of sales.................................... 11,211 15,815 24,565
-------- -------- --------
Gross profit................................... 33,053 65,285 117,500
-------- -------- --------
Operating expenses:
Research and development....................... 8,419 13,372 14,171
Sales and marketing............................ 35,332 44,017 55,162
General and administrative..................... 8,372 6,765 13,872
-------- -------- --------
Total operating expenses..................... 52,123 64,154 83,205
-------- -------- --------
Income (loss) from operations.................... (19,070) 1,131 34,295
-------- -------- --------
Other income, net:
Interest income................................ 4,291 3,790 4,734
Other, net..................................... 3,050 849 (13)
-------- -------- --------
Total other income, net...................... 7,341 4,639 4,721
-------- -------- --------
Income (loss) before provision for income taxes.. (11,729) 5,770 39,016
Provision for income taxes....................... -- 130 853
-------- -------- --------
Net income (loss)................................ $(11,729) $ 5,640 $ 38,163
======== ======== ========
Net income (loss) per common and potential common
share:
Basic.......................................... $ (0.11) $ 0.05 $ 0.34
======== ======== ========
Diluted........................................ $ (0.11) $ 0.05 $ 0.32
======== ======== ========
Weighted average common and potential common
shares outstanding:
Basic.......................................... 105,858 107,346 110,754
Diluted........................................ 105,858 112,530 117,960
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Accumulated
Common Stock Other
------------------ Additional Compre- Total
Comprehensive Number of Par Paid-in hensive Accumulated Stockholders'
Income (Loss) Shares Value Capital Income(Loss) Deficit Equity
------------- ----------- ------ ---------- ----------- ----------- -------------
Balance, December 31,
1997................... $ -- 104,724,576 $1,047 $164,319 $ -- $(69,179) $ 96,187
Exercise of common stock
options................ -- 1,945,110 21 903 -- -- 924
Issuance of shares under
Employee Stock Purchase
Plan................... -- 100,320 -- 231 -- -- 231
Issuance of shares under
Directors' Stock Plan.. -- 21,564 -- 88 -- -- 88
Comprehensive loss-
Net loss............... $(11,729) -- -- -- -- (11,729) (11,729)
Other comprehensive
income -
Unrealized gain on
marketable
securities............ 106 -- -- -- 106 -- 106
--------
Comprehensive loss..... $(11,623) -- -- -- -- -- --
======== ----------- ------ -------- ----- -------- --------
Balance, December 31,
1998................... -- 106,791,570 1,068 165,541 106 (80,908) 85,807
Exercise of common stock
options and warrants... -- 1,501,026 15 3,291 -- -- 3,306
Issuance of shares under
Employee Stock Purchase
Plan................... -- 97,920 -- 276 -- -- 276
Issuance of shares under
Directors' Stock Plan.. -- 29,118 -- 121 -- -- 121
Comprehensive income -
Net income............. $ 5,640 -- -- -- -- 5,640 5,640
Other comprehensive
income (loss)-
Unrealized loss on
marketable
securities............ (150) -- -- -- (150) -- (150)
Cumulative translation
adjustment............ (9) -- -- -- (9) -- (9)
--------
Comprehensive income... $ 5,481 -- -- -- -- -- --
======== ----------- ------ -------- ----- -------- --------
Balance, December 31,
1999................... -- 108,419,634 1,083 169,229 (53) (75,268) 94,991
Exercise of common stock
options................ -- 4,541,340 47 8,320 -- -- 8,367
Issuance of shares under
Employee Stock Purchase
Plan................... -- 50,025 -- 694 -- -- 694
Issuance of shares under
Directors' and
Executive Stock Plans.. -- 28,386 -- 241 -- -- 241
Issuance of common stock
warrant................ -- -- -- 5,169 -- -- 5,169
Comprehensive income--
Net income............. $ 38,163 -- -- -- -- 38,163 38,163
Other comprehensive
income (loss)-
Unrealized gain on
marketable
securities............ 165 -- -- -- 165 -- 165
Cumulative translation
adjustment............ (744) -- -- -- (744) -- (744)
--------
Comprehensive income... $ 37,584 -- -- -- -- -- --
======== ----------- ------ -------- ----- -------- --------
Balance, December 31,
2000................... 113,039,385 $1,130 $183,653 $(632) $(37,105) $147,046
=========== ====== ======== ===== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements
F-5
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------
Cash flows from operating activities:
Net income (loss)............................... $(11,729) $ 5,640 $ 38,163
Adjustments to reconcile net income (loss) to
net cash (used in)
provided by operating activities
Depreciation and amortization.................. 1,603 1,951 3,460
Provision for doubtful accounts................ 325 299 376
Amortization of warrant........................ -- -- 1,465
Compensation expense related to issuance of
stock to directors and executives............. 88 121 241
Changes in assets and liabilities, excluding
effects of acquisition--
Accounts receivable........................... (2,372) (10,130) (17,770)
Inventories................................... (732) (1,454) (5,388)
Prepaid expenses and other current assets..... 255 (133) (139)
Accounts payable.............................. (15) 1,845 1,188
Accrued expenses.............................. (126) 3,253 3,966
Deferred revenue.............................. (119) 309 355
-------- -------- --------
Net cash (used in) provided by operating
activities.................................. (12,822) 1,701 25,917
-------- -------- --------
Cash flows from investing activities:
Acquisition of Acu-Pak, Inc., net of cash
acquired....................................... -- -- (5,760)
Decrease (increase) in other assets............. 644 (878) 651
Purchases of property and equipment............. (4,577) (3,786) (10,813)
Purchases of short term investments............. (45,143) (59,882) (49,803)
Proceeds from maturity of short term
investments.................................... 47,105 55,392 63,259
-------- -------- --------
Net cash used in investing activities........ (1,971) (9,154) (2,466)
-------- -------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and
warrants....................................... 924 3,306 8,367
Proceeds from issuance of shares under Employee
Stock Purchase Plan............................ 231 276 694
-------- -------- --------
Net cash provided by financing activities.... 1,155 3,582 9,061
-------- -------- --------
Effect of exchange rate changes on cash.......... -- (9) (593)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (13,638) (3,880) 31,919
Cash and cash equivalents, beginning of year..... 47,204 33,566 29,686
-------- -------- --------
Cash and cash equivalents, end of year........... $ 33,566 $ 29,686 $ 61,605
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes...................... $ -- $ 138 $ 442
======== ======== ========
Supplemental disclosure of non-cash items:
Unrealized holding gain (loss) on short-term
investments.................................... $ 106 $ (150) $ 165
======== ======== ========
Issuance of common stock warrant to Quest
Diagnostics, Inc. ............................. $ -- $ -- $ 5,169
======== ======== ========
In connection with the acquisition of Acu-Pak,
Inc., the following
non-cash transactions occurred:
Fair value of assets acquired................... $ -- $ -- $ 7,173
Liabilities assumed............................. -- -- (994)
-------- -------- --------
Cash paid for acquisition and acquisition costs.. $ -- $ -- $ 6,179
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) The Company
Cytyc Corporation and subsidiaries (the "Company") design, develop,
manufacture and market sample preparation systems for medical diagnostic
applications. The Company's principal product, the ThinPrep System, is an
automated system for the preparation of non-gynecological samples and cervical
specimens on microscope slides.
In 1991, the Company commenced commercial sales of ThinPrep Processors,
reagents, filters and related supplies for non-gynecological diagnostic
applications to clinical laboratories and hospitals. On May 20, 1996, the
Company received clearance from the U.S. Food and Drug Administration to
market the ThinPrep System for cervical cancer screening.
In the past, the Company incurred substantial losses, principally from
expenses associated with obtaining FDA approval of the ThinPrep System,
engineering and development efforts related to the ThinPrep System, expansion
of the Company's manufacturing facilities and the establishment of a sales and
administrative organization. The Company continues to be subject to certain
risks common to medical device companies in similar stages of development,
including dependence on a single product, extensive government regulation,
uncertainty of market acceptance, and uncertainty of future profitability.
(2) Summary of Significant Accounting Policies
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.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries: Cytyc International, S.A. (a
Swiss corporation) (including its wholly-owned subsidiaries Cytyc Swiss, S.A.,
and Cytyc SARL, whose wholly-owned subsidiaries are Cytyc Italia s.r.l. and
Cytyc France s.a.r.l.), Cytyc (Australia) PTY LIMITED (an Australian
corporation), Cytyc Canada Ltd. (a Canadian Corporation), Cytyc (UK) Limited
(a United Kingdom corporation) and Cytyc Securities Corporation
(a Massachusetts securities corporation), Cytyc R.E., Inc. (a Delaware
corporation) and Cytyc NH, Inc. (a Delaware corporation). All intercompany
transactions and balances have been eliminated in consolidation.
(b) Revenue Recognition
The Company recognizes product revenue upon shipment, provided that there is
persuasive evidence of an arrangement, there are no uncertainties regarding
acceptance, the sales price is fixed or determinable, collection of the
resulting receivable is probable and only perfunctory Company obligations
included in the arrangement remain to be completed. Deferred revenue
represents amounts relating to deferred interest recorded in connection with
sales-type finance leases with customers and amounts related to product billed
for which revenue has not been recognized.
(c) Cash and Cash Equivalents
Cash equivalents consist of money market mutual funds, commercial paper and
U.S. Government securities with original maturities of three months or less.
F-7
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(d) 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.
At December 31, 2000, the Company's available-for-sale securities had
contractual maturities that expire at various dates through December 2001. 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 December 31, 2000 and 1999, the amortized cost basis, aggregate fair
value and gross unrealized holding gains (losses) by major security type are
as follows:
Amortized Gross Unrealized Fair
Cost Holding Gains(Losses) Value
--------- --------------------- -------
(in thousands)
December 31, 2000
Available-for-sale securities
U.S. Government and Agency securities
(average maturity of 8.2 months)..... $14,535 $ 21 $14,556
Corporate Bonds (average maturity of
9.4 months).......................... 1,691 6 1,697
Commercial Paper (average maturity of
2.5 months).......................... 10,999 (12) 10,987
------- ---- -------
$27,225 $ 15 $27,240
======= ==== =======
December 31, 1999
Available-for-sale securities
U.S. Government and Agency securities
(average maturity of 3.9 months)..... $20,600 $(49) $20,551
Commercial Paper (average maturity of
1.2 months).......................... 20,126 5 20,131
------- ---- -------
$40,726 $(44) $40,682
======= ==== =======
(e) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk are principally cash, cash equivalents, short-term investments
and accounts receivable. The Company places its investments in highly rated
financial institutions. Concentration of credit risk with respect to accounts
receivable is limited to certain customers to whom the Company makes
substantial sales. To reduce risk, the Company routinely assesses the
financial strength of its customers and, as a consequence, believes that its
accounts receivable credit risk exposure is limited. The Company maintains an
allowance for potential credit losses but historically has not experienced any
significant credit losses related to an individual customer or groups of
customers in any particular industry or geographic area.
(f) Dependence on Single Source Suppliers
Certain key components of the ThinPrep System, including its proprietary
filter material, are currently provided to the Company by single sources. The
Company has been increasing its inventory-on-hand of these components in an
effort to mitigate this risk. In the event that the Company is unable to
obtain sufficient quantities of such components on commercially reasonable
terms, or in a timely manner, the Company would not be able to manufacture its
products on a timely and cost-competitive basis, which would have a material
adverse effect on the Company's business, consolidated financial position and
results of operations.
F-8
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(g) Depreciation and Amortization
The Company provides for depreciation and amortization by charges to
operations, on a straight-line basis, in amounts estimated to allocate the
cost of the assets over their estimated useful lives as follows:
Estimated
Asset Classification Useful Life
-------------------- -----------
Production equipment........................................... 3-7 Years
Research equipment............................................. 3-7 Years
Furniture, fixtures and computer equipment..................... 2-7 Years
Leasehold improvements......................................... Life of lease
(h) Other Assets
Other assets consist of long-term lease receivables from the sale of
ThinPrep Processors.
(i) Research and Development Costs
The Company charges research and development costs to operations as
incurred.
(j) 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 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 years ended December 31, 1998, 1999 and 2000.
Years Ended December
31,
-----------------------
1998 1999 2000
------- ------- -------
Basic weighted average common shares outstanding...... 105,858 107,346 110,754
Dilutive effect of assumed exercise of stock options
and warrant.......................................... -- 5,184 7,206
------- ------- -------
Weighted average common shares outstanding assuming
dilution............................................. 105,858 112,530 117,960
======= ======= =======
Diluted weighted average shares outstanding excludes 3,484,936 and 86,183
and 317,006 potential common shares from stock options and warrant outstanding
for the years ended December 31, 1998, 1999, and 2000, respectively, as their
effect would be anti-dilutive.
In accordance with the provisions of SFAS No. 128, and as a result of the
January 2000 and March 2001 stock splits, the Company has retroactively
restated prior years' earnings per share (see Note 8).
(k) Post-Retirement and Post-Employment Benefits
The Company has no obligations for post-retirement or post-employment
benefits.
F-9
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(l) Reporting Comprehensive Income (Loss)
SFAS No. 130 Reporting Comprehensive Income establishes standards for the
reporting and display of comprehensive income (loss) and its components in the
consolidated financial statements. Comprehensive income (loss) is the total of
net income (loss) 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 has chosen to disclose
comprehensive income (loss) in the accompanying consolidated statements of
stockholders' equity.
(m) Segment and Enterprise-Wide Reporting
SFAS No. 131 Disclosures About Segments of an Enterprise and Related
Information requires certain financial and supplementary information to be
disclosed on an annual and interim basis for each reportable operating segment
of an enterprise, as defined. The Company derives substantially all of its
operating revenue from the sale and support of one group of similar products
and services. Accordingly, based on the criteria set forth in SFAS No. 131,
the Company currently operates in one segment, medical diagnostic equipment.
SFAS No. 131 also requires that certain enterprise-wide disclosures be made
related to products and services, geographic areas and significant customers.
Primarily all of the Company's assets are located within the United States.
During 1998, 1999 and 2000, the Company derived its sales from the following
countries (as a percentage of net sales):
Years Ended
----------------
1998 1999 2000
---- ---- ----
United States.............................................. 89% 92% 92%
Other...................................................... 11% 8% 8%
--- --- ---
100% 100% 100%
=== === ===
In 1999 and 2000, sales to one customer represented approximately 11% and 19%,
respectively, of net sales. No one customer accounted for 10% or more of net
sales in 1998.
(n) Translation of Foreign Currencies
The accounts of the Company's foreign subsidiaries are translated in
accordance with SFAS No. 52, Foreign Currency Translation. Accordingly, assets
and liabilities of the Company's foreign subsidiaries are translated at the
rates of exchange in effect at year-end. Revenues and expenses are translated
using exchange rates in effect during the year. Prior to 1999, the functional
currency of these subsidiaries was determined to be the U.S. dollar. As a
result, foreign currency translation and transaction gains or losses for all
years prior to 1999 have been included in the accompanying consolidated
statements of operations. However, in 1999, due to the growth in the cash
flows of the subsidiaries and other factors, the Company determined that the
functional currency of its subsidiaries should be the local currency. As a
result, gains and losses from foreign currency translation are credited or
charged to cumulative translation adjustment included in stockholders' equity
in accumulated other comprehensive income (loss) in the accompanying
consolidated balance sheets. The Company realized net foreign currency
transaction losses of approximately $9,000, $292,000, and $16,000 in 1998,
1999, and 2000 respectively.
(o) Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to
record derivatives on the balance sheet as assets or liabilities,
F-10
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
measured at fair value. Gains or losses resulting from changes in the values
of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. SFAS No. 133, as
amended by SFAS No. 137, will be effective for the Company's year ending
December 31, 2001. This statement is not expected to have a significant impact
on the Company, its consolidated financial position or results from
operations.
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition, was issued
in December 1999. SAB 101 specifies delivery and performance obligations that
must be met before revenue can be recognized. The Company was required to
adopt this new accounting principle through a cumulative charge to the
statement of operations, in accordance with Accounting Principles Board
Opinion (APB) No. 20, Accounting Changes, no later than financial quarters
beginning after March 2000. The adoption of SAB 101 did not have a significant
impact on the Company's financial position or results of operations.
(p) Fair Value of Financial Instruments
The estimated fair market values of the Company's financial instruments,
which include marketable securities, accounts receivable, investment in sales-
type leases and accounts payable approximate their carrying values.
(q) Acquisition of Acu-Pak, Inc.
On January 3, 2000, the Company acquired Acu-Pak, Inc. ("Acu-Pak"), a
contract packager in Londonderry, New Hampshire, that was manufacturing,
filling vials containing and distributing all of the Company's solutions for
its ThinPrep line of products. In connection with the acquisition, the Company
paid approximately $6.0 million in cash, of which approximately $2.5 million
was allocated to land and building, approximately $0.4 million to equipment,
and approximately $3.1 million to goodwill. The Company accounted for the
acquisition as a purchase and is amortizing goodwill associated with the
purchase over seven years which began in January 2000. Pro forma information
has not been presented herein because of immateriality.
(r) Agreement with Quest Diagnostics, Inc.
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. As partial consideration for the exclusive nature of the
relationship, Cytyc issued Quest Diagnostics a warrant to purchase 900,000
shares of Common Stock at an exercise price of $10.14 per share. The Company
calculated the fair value of the warrant to be approximately $5.2 million and
is amortizing such amount as a reduction in revenue over the three-year term
of the agreement.
(3) Allowance for Doubtful Accounts
A summary of the allowance for doubtful accounts activity is as follows:
December 31,
--------------------
1998 1999 2000
---- ------ ------
(in thousands)
Balance, beginning of year............................. $672 $ 913 $1,134
Amounts provided....................................... 325 299 656
Amounts written off.................................... (84) (78) (280)
---- ------ ------
Balance, end of year................................... $913 $1,134 $1,510
==== ====== ======
F-11
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
December 31,
--------------
1999 2000
------ -------
(in thousands)
Raw materials and work-in-process............................ $2,927 $ 6,353
Finished goods............................................... 2,500 4,740
------ -------
$5,427 $11,093
====== =======
Work-in-process and finished goods inventories consist of materials, labor
and manufacturing overhead.
(5) Property and Equipment
Property and equipment is stated at cost and consists of the following:
December 31,
---------------
1999 2000
------- -------
(in thousands)
Production equipment...................................... $ 6,445 $ 6,688
Research equipment........................................ 1,109 357
Furniture, fixtures and computer equipment................ 5,477 8,366
Leasehold improvements.................................... 3,407 3,223
Land...................................................... -- 579
Building.................................................. -- 1,872
Construction in process................................... 215 9,287
------- -------
16,653 30,372
Less--Accumulated depreciation and amortization........... 5,993 9,009
------- -------
$10,660 $21,363
======= =======
(6) Accrued Expenses
Accrued expenses consist of the following:
December 31,
---------------
1999 2000
------- -------
(in thousands)
Accrued compensation...................................... $ 5,042 $ 6,313
Accrued consulting fees................................... 1,703 2,991
Accrued legal fees........................................ 294 839
Accrued sales and VAT taxes............................... 1,081 2,702
Other accruals............................................ 3,095 2,875
------- -------
$11,215 $15,720
======= =======
(7) Income Taxes
The Company provides for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires the recognition of deferred
tax assets and liabilities for the expected future tax
F-12
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
consequences of temporary differences between the financial statement and tax
bases of assets and liabilities, as measured by the enacted tax rates assumed
to be in effect when these differences reverse.
As of December 31, 2000, the Company has available net operating loss
carryforwards for federal tax purposes of approximately $67.2 million and
research and development tax credit carryforwards of approximately $3.1
million to reduce future income taxes, if any. In addition, the Company has
net operating loss carryforwards for state tax purposes of approximately $43.9
million and other tax credit carryforwards of $2.2 million. These
carryforwards expire at various dates through 2020, and are subject to review
and possible adjustment by the Internal Revenue Service.
The Internal Revenue Code ("IRC") contains provisions that may limit the
amount of net federal operating loss and credit carryforwards that the Company
may utilize in any one year in the event of certain cumulative changes in
ownership over a three-year period. In the event the Company has had a change
of ownership, as defined in IRC Section 382, utilization of the carryforwards
may be restricted.
The approximate income tax effect of each type of temporary difference and
carryforward is as follows:
December 31,
----------------
1999 2000
------- -------
(in thousands)
Net operating loss carryforwards....................... $22,704 $26,671
Research and development and other tax credit
carryforwards......................................... 2,269 5,274
Capitalized research and development expenses.......... 4,204 4,073
Nondeductible accruals................................. 1,382 1,152
Other temporary differences............................ 1,218 818
------- -------
Deferred tax asset..................................... 31,777 37,988
Valuation allowance.................................... (31,777) (37,988)
------- -------
Net deferred tax asset................................. $ -- $ --
======= =======
Due to the uncertainty surrounding the realization of the deferred tax
asset, the Company has provided a full valuation allowance against this
amount.
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
December 31,
----------------------
1998 1999 2000
------ ------ ------
Income tax provision at federal statutory rate... 35.0% 35.0% 35.0%
Permanent differences............................ 0.00 1.40 1.83
Research and development credit carryforwards.... 0.00 (0.94) (3.30)
Changes in valuation allowance................... (35.00) (35.33) (33.37)
State tax provision.............................. 0.00 0.98 0.33
Other............................................ 0.00 0.00 1.63
------ ------ ------
Effective tax rate............................... 0.00% 1.11% 2.12%
====== ====== ======
During the years ended December 31, 1999 and 2000, the Company recorded a
provision for income taxes of approximately $130,000 and $853,000,
respectively. This amount relates to federal alternative minimum tax and
certain state minimum tax liabilities.
F-13
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8) Stockholders' Equity
(a) Common Stock Reserved
As of December 31, 2000, the Company has reserved 15,520,743 shares of
Common Stock for issuance as follows:
Number of
Shares
----------
Employee and Director stock option plans........................ 14,132,178
Quest Warrant................................................... 900,000
Employee stock purchase plan.................................... 488,565
----------
15,520,743
==========
(b) Stock Splits
In December 1999, the Board of Directors approved a two-for-one split of the
Company's Common Stock to be effected in the form of a 100% stock dividend.
The additional shares were distributed on or about January 31, 2000 to
stockholders of record on January 14, 2000. All share and per share data
presented herein has been retroactively restated to give effect to this stock
split.
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.
(c) Preferred Stock
The Company's Bylaws provide for and the Board of Directors and stockholders
authorized 5,000,000 shares of $0.01 par value Preferred Stock. The Board of
Directors has the authority to issue such shares in one or more series and to
fix the relative rights and preferences without further vote or action by the
stockholders. The Board of Directors has no present plans to issue any shares
of Preferred Stock.
(d) Stockholders' Rights Plan
On August 6, 1997 the Board of Directors declared a dividend of one
Preferred Stock purchase right for each outstanding share of the Company's
Common Stock to stockholders of record at the close of business on September
5, 1997. Each right entitles the holder to purchase from the Company a unit
consisting of one one-hundredth of a share of Series A Junior Participating
Preferred Stock, $0.01 par value, at a purchase price of $110 per unit,
subject to adjustment.
(e) Warrants
At December 31, 1998, a warrant to purchase 12,000 shares of Common Stock at
an exercise price of $1.67 per share was outstanding and exercisable. The
warrant was exercised in January 1999. On January 1, 2000, the Company issued
to Quest Diagnostics Incorporated a warrant to purchase up to 900,000 shares
of Common Stock at an exercise price equal to $10.14 per share. The warrant
was issued in consideration of entering into a multi-year joint-marketing
agreement. The warrant is exercisable at any time on or before January 31,
2002 and contains a cashless exercise feature.
F-14
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Stock Option and Employee Stock Purchase Plans
During 1995, the Board of Directors and stockholders approved the 1995 Stock
Option Plan, (the "1995 Plan"). The aggregate number of shares of Common Stock
that may be issued pursuant to the 1995 Plan is 6,000,000 plus, effective as
of January 1, 1997 and each year thereafter, the excess, if any, of (i) five
percent of the total number of shares of Common Stock issued and outstanding
as of December 31 of the preceding year or then reserved for issuance upon the
exercise or conversion of outstanding options, warrants or convertible
securities, over (ii) the number of shares then remaining reserved and
available for grant under the 1995 Plan, subject to certain adjustments,
provided, however, that in no event shall more than 12,000,000 shares of
Common Stock be issued pursuant to incentive stock options under the 1995
Plan. At December 31, 2000, 1,142,895 shares were available for future grant
under the 1995 Plan.
In January 1998 and 1999, the Company approved for grant an aggregate of
6,000 shares of Common Stock to six directors (500 shares each, vesting
equally each month during 1998 and 1999, respectively). In January 2000, the
Company approved for grant an aggregate of 3,334 shares of Common Stock to 7
directors (500 shares each for 5 directors and 417 shares each for 2
directors, vesting equally each month during 2000). As of December 31, 2000,
options to purchase 657,744 shares of common stock were outstanding under the
1989 Stock Plan. No further options may be issued under the 1989 Stock Option
Plan.
The Board of Directors and stockholders approved the 1995 Director Stock
Option Plan pursuant to which options to purchase up to 1,500,000 shares of
Common Stock were authorized for future issuance. In January 1996, the Company
granted options to purchase 630,000 shares of Common Stock to seven directors
under this plan at an exercise price equal to $2.67 per share. In January 1998
the Company granted options to purchase 270,000 Common Shares to three
directors under the 1995 Director Option Plan. In 2000 the Company granted
options to purchase 360,000 Common Shares to four directors under the 1995
Director Stock Option Plan. At December 31, 2000, the Company had 480,000
shares available for future grants under the 1995 Director Stock Option Plan.
F-15
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following schedule summarizes the activity under the Company's stock
option plans for the three years ended December 31, 2000.
Weighted
Number Average
of Shares Option Price Exercise Price
---------- ------------ --------------
Outstanding, December 31, 1997.......... 10,299,792 $0.08-$ 5.58 $1.82
Granted............................... 4,126,500 1.29- 4.15 2.87
Exercised............................. (1,945,110) 0.08- 3.88 0.44
Canceled.............................. (1,467,276) 0.10- 5.58 3.16
---------- ------------ -----
Outstanding, December 31, 1998.......... 11,013,906 0.08- 5.58 2.29
Granted............................... 2,962,500 2.33- 7.83 3.50
Exercised............................. (1,493,856) 0.08- 4.63 2.16
Canceled.............................. (736,134) 0.08- 6.01 3.01
---------- ------------ -----
Outstanding, December 31, 1999.......... 11,746,416 0.10- 7.83 2.56
Granted............................... 6,107,025 9.90-21.63 16.02
Exercised............................. (4,541,340) 9.17-22.77 15.56
Canceled.............................. (924,489) 2.33-19.33 6.61
---------- ------------ -----
Outstanding, December 31, 2000.......... 12,387,612 $0.10-$21.63 9.16
========== ============ =====
Exercisable, December 31, 2000.......... 2,832,494 $0.10-$19.19 3.51
========== ============ =====
Exercisable, December 31, 1999.......... 4,357,590 $0.10-$ 6.72 2.02
========== ============ =====
Exercisable, December 31, 1998.......... 2,714,436 $0.08-$ 5.58 2.29
========== ============ =====
The following table summarizes information about stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------------ ------------------------
Weighted
Range of Average Weighted Weighted
Exercise Number of Remaining Average Number of Average
Prices Shares Contractual Life Exercise Price Shares Exercise Price
- -------- ---------- ---------------- -------------- --------- --------------
$ 0.10-
$ 2.46 1,506,294 6.15 $ 1.52 944,619 $1.05
$ 2.46-
$ 2.69 1,500,300 7.26 2.67 15,300 2.52
$ 2.71-
$ 3.25 1,597,161 8.10 3.11 451,963 3.14
$ 3.27-
$ 4.50 1,740,321 6.86 3.98 1,146,274 4.10
$ 4.52-
$11.29 1,280,511 8.81 9.50 219,651 8.73
$12.17-
$15.19 1,759,200 9.33 13.71 -- --
$15.42-
$19.19 984,000 9.60 15.99 54,687 15.93
$19.25-
$19.25 165,000 9.93 19.25 -- --
$19.33-
$19.33 28,500 9.84 19.33 -- --
$21.63-
$21.63 1,826,325 5.03 21.63 -- --
---------- ---- ------ --------- -----
$ 0.10-
$21.63 12,387,612 7.53 $ 9.16 2,832,494 $3.51
========== ==== ====== ========= =====
The weighted average fair market value of the stock options as of the date
of grant for the years ended December 31, 1998, 1999 and 2000, was $2.21,
$3.17, and $12.72, respectively.
F-16
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In October 1995, the FASB issued SFAS No. 123, which requires the
measurement of the fair value of stock-based compensation to be included in
the statement of operations or disclosed in the notes to the financial
statements. The Company has determined that it will continue to account for
stock-based compensation for employees under APB Opinion No. 25, Accounting
for Stock Issued to Employees, and elect the disclosure-only alternative under
SFAS No. 123 for stock-based compensation awarded in 1998, 1999 and 2000 using
the Black-Scholes option pricing model prescribed by SFAS No. 123. The
underlying assumptions used are as follows:
December 31,
----------------
1998 1999 2000
---- ---- ----
Risk-free interest rate.................................... 5.52% 5.42% 6.07%
Expected dividend yield.................................... -- -- --
Expected lives............................................. 5.00 5.00 5.00
Expected volatility........................................ 98% 98% 105%
Had compensation cost for the Company's stock option plans and Employee
Stock Purchase Plan been determined consistent with SFAS No. 123, pro forma
net income (loss) and net income (loss) per share would have been:
December 31,
------------------------
1998 1999 2000
-------- ------ -------
(in thousands, except per
share data)
Net income (loss)--
As reported................................... $(11,729) $5,640 $38,163
Pro forma..................................... (15,696) 164 21,450
Net income (loss) per share, as reported--
Basic......................................... $ (0.11) $ 0.05 $ 0.34
Diluted....................................... (0.11) 0.05 0.32
Net income (loss) per share, pro forma--
Basic......................................... $ (0.15) $ -- $ 0.19
Diluted....................................... (0.15) -- 0.18
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
During 1995, the Board of Directors and stockholders approved the 1995
Employee Stock Purchase Plan pursuant to which 840,000 shares of Common Stock
could be issued. Purchase price is determined by taking the lesser of 85% of
the closing price on the first or last day of the period. During 2000, 50,025
shares of common stock were issued at the purchase prices of $12.92 and $14.67
per share. As of December 31, 2000, 488,565 shares were available for future
issuance under the 1995 Employee Stock Purchase Plan.
F-17
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Commitments and Contingencies
(a) Lease Commitments
The Company leases its facilities under non-cancelable operating leases
which have expiration dates ranging from 2002 through 2007.
At December 31, 2000, future minimum annual lease payments under these
leases are as follows:
Amount
(in thousands)
--------------
2001.......................................................... $ 1,597
2002.......................................................... 1,520
2003.......................................................... 1,454
2004.......................................................... 1,444
2005.......................................................... 268
Thereafter.................................................... 6
-------
$ 6,289
=======
Rent expense under operating leases totaled approximately $1,226,000,
$1,507,000 and $1,654,000 in 1998, 1999 and 2000, respectively.
(b) Litigation
On September 13, 1999, the Company filed a patent infringement lawsuit
against AutoCyte, Inc. in the United States District Court for the District of
Delaware. In September 1999, AutoCyte, Inc. effected a merger with NeoPath,
Inc. The combined company was renamed TriPath Imaging, Inc. ("TriPath").
TriPath answered the complaint in the lawsuit and asserted counterclaims
seeking a judgment declaring that the patent at issue was invalid and
unenforceable and not infringed by TriPath. On January 8, 2001, the Company
announced that the parties had settled the litigation. On January 11, 2001,
the court signed and entered a consent judgment confirming the validity and
enforceability of the patent at issue.
On May 12, 2000, the Company filed a lawsuit against TriPath in the United
States District Court for the District of Massachusetts, alleging that TriPath
engaged in false and misleading description, representation, advertising and
promotion, unfair competition, commercial disparagement, and interference with
Cytyc's advantageous business relationships. On January 8, 2001, the Company
announced that the parties had settled the litigation and the parties filed a
Stipulation of Dismissal dismissing all claims and counterclaims with
prejudice.
(c) Royalties
The Company is the exclusive licensee of certain patented technology used in
the ThinPrep System. In consideration for this license, the Company has agreed
to pay a royalty equal to 1% of net sales of the ThinPrep Processor, filter
cylinder disposable products that are used with the ThinPrep System, and
improvements made by the Company relating to such items. In connection with
this license, royalty payments for the years ended December 31, 1998, 1999 and
2000 were $211,000, $439,000 and $725,000, respectively.
(11) Employee Benefit Plan
The Company maintains an employee benefit plan under Section 401(k) of the
Internal Revenue Code. The Plan allows for employees to defer a portion of
their salary up to the maximum allowed under IRS rules. The Company made
contributions to the Plan totaling $109,833, $132,160 and $430,124 during
1998, 1999 and 2000, respectively.
F-18
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(12) Summary of Quarterly Data (Unaudited)
A summary of quarterly data follows (in thousands, except per share data):
1999 Quarter Ended
-------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Net sales......................... $16,205 $18,831 $21,331 $24,733
Gross profit...................... 12,672 14,893 17,499 20,221
Operating profit (loss)........... (285) (987) 157 2,246
Net income........................ 657 1,027 1,093 2,863
Earnings per share:
Basic........................... 0.00 0.01 0.01 0.03
Diluted......................... 0.01 0.01 0.01 0.02
2000 Quarter Ended
-------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Net sales......................... $28,778 $33,525 $37,209 $42,553
Gross profit...................... 23,472 27,412 31,343 35,273
Operating profit.................. 4,750 5,817 10,078 13,650
Net income........................ 5,641 6,740 10,995 14,787
Earnings per share:
Basic........................... 0.05 0.06 0.10 0.13
Diluted......................... 0.05 0.06 0.09 0.12
F-19