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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______________ to __________________
Commission File Number 0-27558
CYTYC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 02-0407755
-------- ----------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
85 Swanson Road, Boxborough, MA 01719
(Address of principal executive offices, including Zip Code)
(978) 263-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: The number of shares of the
issuer's Common Stock, $0.01 par value per share, outstanding as of August 5,
2002 was 122,845,769.
Total Number of Pages: 17
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CYTYC CORPORATION
INDEX TO FORM 10-Q
Page
----
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of
December 31, 2001 and June 30, 2002 3
Consolidated Statements of Operations
for the three and six months ended
June 30, 2001 and 2002 4
Consolidated Statements of Cash Flows
for the six months ended June 30, 2001 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 17
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CYTYC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
December 31, June 30,
2001 2002
----------- --------
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 71,928 $124,455
Short-term investments .................................................... 81,314 75,732
Accounts receivable, net of allowance of $1,987 and $2,147 at
December 31, 2001 and June 30, 2002, respectively .................... 50,278 34,624
Inventories ............................................................... 10,698 11,866
Prepaid expenses and other current assets ................................. 1,583 3,039
-------- --------
Total current assets ................................................. 215,801 249,716
-------- --------
Property and equipment, net .................................................... 26,662 27,252
-------- --------
Intangible assets:
Patented technology, net of accumulated amortization of $219 at
December 31, 2001 and $224 at June 30, 2002 .......................... 211 207
Acquired developed technology and know-how, net of accumulated
amortization of $122 at December 31, 2001 and $853 at June 30, 2002 .. 18,878 18,147
Goodwill, net of accumulated amortization of $885 at December 31, 2001
and June 30, 2002, respectively ...................................... 94,881 95,257
-------- --------
Total intangible assets .............................................. 113,970 113,611
-------- --------
Deferred tax assets, net ....................................................... 23,485 18,199
Other assets, net .............................................................. 6,842 6,159
-------- --------
Total assets ......................................................... $386,760 $414,937
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 9,325 $ 8,343
Accrued expenses .......................................................... 24,789 21,218
Deferred revenue .......................................................... 1,501 1,481
-------- --------
Total current liabilities ............................................ 35,615 31,042
-------- --------
Non-current liabilities ........................................................ 837 629
-------- --------
Stockholders' equity:
Preferred Stock, $.01 par value--
Authorized--5,000,000 shares
No shares issued or outstanding ...................................... -- --
Common Stock, $.01 par value--
Authorized--200,000,000 shares
Issued and outstanding: 121,355,344 shares in 2001 and
122,843,798 shares in 2002 ........................................... 1,214 1,228
Additional paid-in capital ................................................ 376,092 391,231
Deferred compensation ..................................................... (999) (497)
Accumulated other comprehensive loss ...................................... (1,529) (272)
Accumulated deficit ....................................................... (24,470) (8,424)
-------- --------
Total stockholders' equity ........................................... 350,308 383,266
-------- --------
Total liabilities and stockholders' equity ........................... $386,760 $414,937
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
3
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2002 2001 2002
-------- -------- -------- ---------
Net sales ................................................................. $ 52,997 $ 43,175 $100,464 $111,210
Cost of sales ............................................................. 9,439 11,326 18,280 23,936
-------- -------- -------- --------
Gross profit ......................................................... 43,558 31,849 82,184 87,274
-------- -------- -------- --------
Operating expenses:
Research and development ............................................. 5,249 4,502 10,037 8,692
Sales and marketing .................................................. 14,482 18,724 28,353 35,809
General and administrative ........................................... 3,548 5,585 6,999 12,300
Expenses related to abandoned merger ................................. -- 6,114 -- 6,114
-------- -------- -------- --------
Total operating expenses ........................................ 23,279 34,925 45,389 62,915
-------- -------- -------- --------
Income (loss) from operations ............................................. 20,279 (3,076) 36,795 24,359
Other income, net:
Interest income ..................................................... 1,394 884 2,808 1,783
Other income (expense) .............................................. 37 (312) 33 (263)
Litigation settlement ............................................... -- -- 3,087 --
-------- -------- -------- --------
Other income, net 1,431 572 5,928 1,520
-------- -------- -------- --------
Income (loss) before provision for income taxes ........................... 21,710 (2,504) 42,723 25,879
Provision for income taxes ................................................ 5,701 (952) 11,164 9,835
-------- -------- -------- --------
Net income (loss) ......................................................... $ 16,009 $ (1,552) $ 31,559 $ 16,044
======== ======== ======== ========
Net income (loss) per common and potential common share:
Basic ................................................................ $0.14 $(0.01) $0.28 $0.13
======== ======== ======== ========
Diluted .............................................................. $0.13 $(0.01) $0.26 $0.13
======== ======== ======== ========
Weighted average common and potential common shares outstanding:
Basic ................................................................ 114,744 122,676 114,179 122,228
Diluted .............................................................. 119,981 122,676 119,585 125,545
The accompanying notes are an integral part of these
consolidated financial statements.
4
CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
2001 2002
-------- --------
Cash flows from operating activities:
Net income ........................................................... $ 31,559 $ 16,044
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................... 1,749 3,708
Provision for doubtful accounts ................................. 189 175
Amortization of warrant ......................................... 1,057 1,185
Non-cash gain on settlement of litigation ....................... (2,712) --
Compensation related to issuance of stock to directors and
executives ................................................. 359 365
Compensation related to options assumed in acquisition .......... -- 257
Change in deferred tax asset .................................... 11,341 5,285
Tax benefit from exercise of options ............................ -- 5,377
Changes in assets and liabilities, excluding effects of
acquisition:
Accounts receivable ........................................ (4,517) 15,479
Inventories ................................................ 1,265 (1,168)
Prepaid expenses and other current assets .................. (1,165) (1,456)
Accounts payable ........................................... (431) (982)
Accrued expenses ........................................... (468) (4,154)
Deferred revenue ........................................... (387) (20)
-------- --------
Net cash provided by operating activities ............. 37,839 40,095
-------- --------
Cash flows from investing activities:
Increase in other assets ............................................. (611) (498)
Purchases of property and equipment .................................. (3,891) (3,567)
Purchases of short-term investments .................................. (71,035) (63,216)
Proceeds from maturity of short-term investments ..................... 35,659 68,752
-------- --------
Net cash (used in) provided by investing activities ... (39,878) 1,471
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options .............................. 6,236 9,021
Proceeds from issuance of shares under Employee Stock Purchase Plan .. 529 634
-------- --------
Net cash provided by financing activities ............. 6,765 9,655
-------- --------
Effect of exchange rates on cash .......................................... (924) 1,306
-------- --------
Net increase in cash and cash equivalents ................................. 3,802 52,527
Cash and cash equivalents, beginning of period ............................ 61,605 71,928
-------- --------
Cash and cash equivalents, end of period .................................. $ 65,407 $124,455
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
5
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The notes and accompanying consolidated financial statements are unaudited.
They have been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. The financial
statements should be read in conjunction with the financial statements and notes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2001.
The information furnished reflects all adjustments, which, in the opinion
of management, are necessary for a fair presentation of results for the interim
periods. Such adjustments consisted only of normal recurring items and
approximately $6.1 million in non-recurring expenses in the second quarter of
2002 related to the abandoned merger with Digene Corporation ("Digene") which
was terminated June 30, 2002. The interim periods are not necessarily indicative
of the results expected for the full year or any future period.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies, as discussed below and elsewhere in
the notes to consolidated financial statements. The preparation of these
consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(2) Summary of Significant Accounting Policies
a.) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly- owned subsidiaries: Cytyc International, Inc. (a
Delaware corporation), Cytyc Europe, S.A. (a Swiss corporation) (including its
wholly-owned subsidiaries Cytyc Swiss, S.A., and Cytyc SARL, whose wholly-owned
subsidiaries are Cytyc Italia S.R.L. and Cytyc France S.A.RL.), Cytyc
(Australia) PTY Limited (an Australian corporation), Cytyc Canada, Limited (a
Canadian corporation), Cytyc (UK) Limited (a United Kingdom corporation), Cytyc
Germany GmbH (a German company), Cytyc Securities Corporation (a Massachusetts
securities corporation), Cytyc Interim, Inc. (a Delaware corporation), Cytyc
Healthcare Ventures, LLC (a Delaware limited liability company), Cytyc Health
Corporation (a Delaware corporation), Cytyc Iberia, S.A. (a Spanish company) and
Cruiser, Inc. (a Delaware corporation). All intercompany transactions and
balances have been eliminated in consolidation.
b.) Short-term Investments
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and
Equity Securities.
Short-term investments consist of U.S. government securities, corporate
bonds and commercial paper with original maturities between three and twelve
months. At June 30, 2002, the Company's available-for-sale securities had
contractual maturities that expire at various dates through June 2003. The fair
value of available-for-sale securities was determined based on quoted market
prices at the reporting date for those securities. Available-for-sale securities
are shown in the consolidated financial statements at fair market value. At June
30, 2002 and December 31, 2001, the amortized cost basis, aggregate fair value
and gross unrealized holding gains by major security type were as follows:
6
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Gross
Unrealized
Holding
Amortized Gains Fair
Cost (Losses) Value
--------- ---------- -----
(in thousands)
June 30, 2002
-------------
Available-for-sale securities
U.S. government and agency securities (average
maturity of 5.8 months)................................ $60,387 $60 $60,447
Corporate bonds (average maturity of 5.4 months)........ 12,687 4 12,691
Commercial paper (average maturity of 1.5 months)....... 2,594 -- 2,594
------- --- -------
$75,668 $64 $75,732
======= === =======
December 31, 2001
-----------------
Available-for-sale securities
U.S. government and agency securities (average
maturity of 3.9 months)................................ $55,711 $44 $55,755
Corporate bonds (average maturity of 5.0 months)........ 22,601 68 22,669
Commercial paper (average maturity of 1.2 months)....... 2,889 1 2,890
------- --- -------
$81,201 $113 $81,314
======= === =======
c.) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
December 31, June 30,
2001 2002
---- ----
(in thousands)
Raw material and work-in-process......... $6,377 $7,167
Finished goods 4,321 4,699
------- -------
$10,698 $11,866
======= =======
d.) Income Taxes
The Company estimated that its effective tax rate for the three and six
months ended June 30, 2002 was 38%. The effective tax rate represents the
Company's estimate of the rate expected to be applicable for the full fiscal
year. The Company's tax rate for the three and six months ended June 30, 2001
was 26%, due primarily to the effect of net operating loss carryforwards, the
application of the federal alternative minimum tax and certain state minimum
taxes.
e.) Net Income Per Common Share
The Company follows the provisions of SFAS No. 128, Earnings per Share,
which requires companies to report both basic and diluted per share data, for
all periods for which an income statement is presented. Basic net income per
share is computed by dividing net income by the weighted average number of
common shares outstanding. Diluted net income per share is computed by dividing
net income by the weighted average number of common shares and potential common
shares from outstanding stock options and warrants. Potential common shares are
calculated using the treasury stock method and represent incremental shares
issuable upon exercise of the Company's outstanding stock options and warrant.
The following table provides a reconciliation of the denominators used in
calculating basic and diluted net income per share for the three and six months
ended June 30, 2001 and 2002.
7
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Three Months Six Months
Ended Ended
June 30, June 30,
2001 2002 2001 2002
---- ---- ---- ----
Basic weighted average common shares outstanding.................. 114,744 122,676 114,179 122,228
Dilutive effect of assumed exercise of stock options and warrant.. 5,237 -- 5,406 3,317
------- ------- ------- -------
Weighted average common shares outstanding assuming dilution...... 119,981 122,676 119,585 125,545
======= ======= ======= =======
Diluted weighted average shares outstanding excludes 1,879,276 and
13,143,978 potential common shares from stock options and warrant outstanding
for the three months ended June 30, 2001 and 2002, respectively, and 4,354,941
and 9,562,648 potential common shares from stock options and a warrant
outstanding for the six months ended June 30, 2001 and 2002, respectively, as
their effect would be anti-dilutive.
f.) Comprehensive Income
The components of accumulated other comprehensive income for the three and
six months ended June 30, 2001 and 2002 are as follows:
Three Months Six Months
Ended Ended
June 30, June 30,
2001 2002 2001 2002
---- ---- ---- ----
(in thousands)
Comprehensive income:
Net income (loss)........................................... $16,009 $(1,552) $31,559 $16,044
Other comprehensive income (loss)
Unrealized gain (loss) on short-term investments...... (6) 220 77 (49)
Foreign currency translation.......................... (825) 1,622 (924) 1,306
------- -------- ------- -------
Comprehensive income $15,178 $290 $30,712 $17,301
======= ======== ======= =======
g.) Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that upon
adoption, amortization of goodwill will cease and instead, the carrying value of
goodwill will be evaluated for impairment on an annual basis. Identifiable
assets will continue to be amortized over their useful lives and reviewed for
impairment in accordance with SFAS No. 121. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001. On January 1, 2002, the Company adopted
these statements. Adoption of SFAS No. 142 reduced annual amortization expense
by approximately $450,000. The adoption of SFAS No. 142 had no other effects on
the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets which supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, and
the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations - Report the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. SFAS No. 144 requires that companies (1) recognize an impairment
loss only if the carrying amount of a long-lived asset is not recoverable based
on its undiscounted future cash flows and (2) measure an impairment loss as the
difference between the carrying amount and fair value of the asset. In addition,
SFAS No. 144 provides guidance on accounting and disclosure issues surrounding
long-lived assets to be disposed of by sale. The adoption of this statement did
not have a material impact on the Company's financial position or results of
operations.
(3) Accounting For Goodwill And Other Intangible Assets
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all
business combinations initiated after June 30, 2001, to be accounted for using
the purchase method. SFAS No. 141 also specifies criteria that acquired
intangible assets must meet to be recognized and reported apart from goodwill.
The adoption of SFAS No. 141 did not have a material effect on the Company's
consolidated financial position or results of operations.
8
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
SFAS No. 142 requires that goodwill and intangible assets with indefinite
lives no longer be amortized but instead be measured for impairment at least
annually, or whenever events indicate that there may be an impairment. The
Company adopted SFAS No. 142 effective January 1, 2002. In connection with the
SFAS No. 142 transitional goodwill impairment evaluation, the Company was
required to perform an assessment of whether there was an indication that
goodwill was impaired as of the date of adoption. Through an independently
obtained appraisal, it was determined that the carrying amount of goodwill did
not exceed the fair value, and as a result no transitional impairment loss
exists.
Had the provisions of SFAS No. 142 been applied for the three and six
months ended June 30, 2001 and 2002, the Company's net income (loss) and net
income (loss) per share would have been as follows:
Three Months Six Months
Ended Ended
June 30, June 30,
2001 2002 2001 2002
---- ---- ---- ----
(in thousands, except per share data)
Reported net income (loss) $16,009 $(1,552) $31,559 $16,044
Effect of SFAS No. 142, net of tax 81 -- 163 --
------- -------- ------- -------
Adjusted net income (loss) $16,090 $(1,552) $31,722 $16,044
======= ======== ======= =======
Reported basic net income (loss) per common share $ 0.14 $ (0.01) $ 0.28 $ 0.13
Effect of SFAS No. 142, net of tax -- -- -- --
------- -------- ------- -------
Adjusted basic net income (loss) per common share $ 0.14 $ (0.01) $ 0.28 $ 0.13
======= ======== ======= =======
Reported diluted net income (loss) per common share $ 0.13 $ (0.01) $ 0.26 $ 0.13
Effect of SFAS No. 142, net of tax -- -- 0.01 --
------- -------- ------- -------
Adjusted diluted net income (loss) per common share $ 0.13 $ (0.01) $ 0.27 $ 0.13
======= ======== ======= =======
Amortization expense related to identifiable intangible assets that will
continue to be amortized in the future was approximately $1,450 and $367,560 for
the three months ended June 30, 2001 and 2002, respectively and $1,450 and
$735,120 for the six months ended June 30, 2001 and 2002, respectively.
Additional amortization expense in the three and six months ended June 30, 2001
related to goodwill that ceased to be amortized with the adoption of SFAS No.
142 was approximately $110,470 and $220,939, respectively. Estimated
amortization expense related to identifiable intangible assets that will
continue to be amortized is as follows:
Amount
(in thousands)
Remaining six months ending December 31, 2002 $ 735
Year ending December 31, 2003 1,470
Year ending December 31, 2004 1,470
Year ending December 31, 2005 1,470
Year ending December 31, 2006 1,470
Year ending December 31, 2007 1,470
Thereafter 10,269
-------
Total $18,354
=======
9
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A summary of Cytyc's intangible assets as of June 30, 2002 is as follows:
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
(in thousands)
Amortized intangible assets:
Patented Technology $ 431 $ 224 $ 207
Acquired Developed Technology and Know-how 19,000 853 18,147
------- ------ --------
Subtotal $19,431 $1,077 18,354
======= ======
Goodwill 95,257
--------
Total $113,611
========
(4) Pro Duct Health, Inc. and Digene Acquisitions
On November 30, 2001, the Company completed the acquisition of Pro Duct
Health, Inc. ("Pro Duct") for an aggregate purchase price of approximately $184
million. The results of operations of Pro Duct have been included in the
accompanying financial statements from the date of acquisition. The initial
estimated purchase price allocation has been adjusted through June 30, 2002,
resulting in an increase to goodwill of $376,000. In connection with the
acquisition, the Company committed to a plan to abandon certain leased
facilities and did so on April 1, 2002 with the exception of 3,500 square feet
of office space. The Company had accrued approximately $787,000 at December 31,
2001 for the abandonment of the leased facility, representing the present value
of future minimum lease payments less estimated sub-lease receipts.
Approximately $207,000 has been paid by the Company to the lessor through June
30, 2002, leaving a balance of $580,000.
On June 24, 2002 the Company announced that the U.S. Federal Trade
Commission ("FTC") had voted to seek to block Cytyc's proposed acquisition of
Digene. The five-member commission authorized the staff to seek a court order to
halt the acquisition. On June 30, 2002 the Company and Digene terminated their
merger agreement, and, accordingly, the Company expensed approximately $6.1
million in prepaid acquisition costs.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company designs, develops, manufactures and markets a sample
preparation system for medical diagnostic applications. The Company's
ThinPrep(R) System consists of the ThinPrep Processor, and related disposable
reagents, filters and other supplies. The Company has marketed the ThinPrep
System for use in non-gynecological testing applications since 1991. On May 20,
1996, the Company received premarket approval ("PMA") from the United States
Food and Drug Administration ("FDA") to market the ThinPrep System for cervical
cancer screening as a replacement for the conventional Pap smear method. On
November 6, 1996, the FDA cleared expanded product labeling for the ThinPrep
System to include the claim that the ThinPrep System is significantly more
effective in detecting low grade and more severe lesions than the conventional
Pap smear method in a variety of patient populations. The expanded labeling also
indicates that the specimen quality using the ThinPrep System is significantly
improved over that of the conventional Pap smear method. On February 25, 1997,
the FDA approved the Company's PMA Supplement Application for use of a
combination of an endocervical brush and spatula sampling devices, which is a
commonly used method of collecting samples for conventional Pap smears.
On September 4, 1997, the FDA approved the Company's PMA Supplement
Application for the testing for the human papillomavirus ("HPV") directly from a
single vial of patient specimen collected in ThinPrep solution using the Hybrid
Capture HPV DNA Assay of Digene. In March 1999, the FDA approved the use of
Digene's Hybrid Capture II HPV DNA Assay from a single vial of patient specimen
collected in ThinPrep solution.
The Company commenced the full-scale commercial launch of the ThinPrep
System for cervical cancer screening in the United States in 1997 and in
selected international markets in 1998. In May 2000, the FDA approved the
Company's PMA Supplement Application to market the ThinPrep(R) 3000 Processor,
the Company's next-generation processor for automated sample preparation. In
August 2001, the FDA approved the Company's PMA Supplement Application for the
inclusion of data describing the detection of High-Grade Squamus Intraepithelial
Lesions with the ThinPrep Pap Test. In January 2002, the Company submitted a PMA
Application to
10
the FDA for the ThinPrep Imaging System to aid in cervical cancer screening. In
June 2002, the FDA approved the Company's PMA Supplement Application to allow
for testing for Chlamydia Trachomatis ("CT") and Neisseria Gonorrhea ("NG")
directly from the ThinPrep Pap Test vial using Roche Diagnostics Corporation
("RDC") COBAS AMPLICOR(TM) automated system.
Prior to 2000, the Company incurred substantial losses, principally from
expenses associated with obtaining FDA approval of the Company's ThinPrep System
for cervical cancer screening, engineering and development efforts related to
the ThinPrep 2000 Processor, ThinPrep 3000 Processor and ThinPrep Imaging
System, expansion of the Company's manufacturing facilities and the
establishment of a marketing and sales organization. The Company may experience
losses in the future as it expands its domestic and international marketing and
sales activities and continues its product development efforts. The operating
results of the Company have fluctuated significantly in the past on an annual
and a quarterly basis. The Company expects that its operating results may
fluctuate significantly from quarter to quarter in the future depending on a
number of factors, including the extent to which the Company's products continue
to gain market acceptance, the rate and size of expenditures incurred as the
Company expands its domestic and establishes its international sales and
distribution networks, the timing and level of reimbursement for the Company's
products by third-party payors, and other factors, many of which are outside the
Company's control.
In November 2001, as part of its acquisition of Pro Duct, a manufacturer of
medical devices in Menlo Park, California, the Company entered into a lease for
a 35,000 square feet facility. The lease of this facility terminates on April
30, 2003. The Company has subleased approximately 17,000 square feet of office
space in Menlo Park, California to a third party for eighteen months ending
April 30, 2003. In connection with the acquisition, the Company committed to a
plan to abandon the leased facilities and did so on April 1, 2002 with the
exception of 3,500 square feet of office space. The Company had accrued
approximately $787,000 at December 31, 2001 for the abandonment of the leased
facility, representing the present value of future minimum lease payments less
estimated sub-lease receipts. Approximately $207,000 has been paid by the
Company to the lessor through June 30, 2002, leaving a balance of $580,000.
The cost per ThinPrep(R) Pap Test(TM), plus a laboratory mark-up, is
generally billed by laboratories to third-party payors and results in a higher
amount for the ThinPrep Pap Test than the current billing for conventional Pap
tests. Successful sales of the ThinPrep System for cervical cancer screening in
the United States and other countries will depend on the availability of
adequate reimbursement from third-party payors such as private insurance plans,
managed care organizations and Medicare and Medicaid. Although many health
insurance companies have added the ThinPrep Pap Test to their coverage, there
can be no assurance that third-party payors will provide or continue to provide
such coverage, that reimbursement levels will be adequate or that health care
providers or clinical laboratories will use the ThinPrep System for cervical
cancer screening in lieu of the conventional Pap smear method.
Since January 1, 1998, the Company's laboratory customers have been able to
request reimbursement for the ThinPrep Pap Test from health insurance companies
and the Center for Medicare and Medicaid Services ("CMS") using a newly assigned
Common Procedure Technology ("CPT") code specifically for liquid-based monolayer
cervical cell specimen preparation. CPT codes are assigned, maintained and
revised by the CPT Editorial Board, which is administered by the American
Medical Association, and are used in the submission of claims to third-party
payors for reimbursement for medical services. CMS has established a national
fee of $28 for the CPT codes describing the ThinPrep Pap Test. This
reimbursement level is nearly double the level of reimbursement for the
conventional Pap smear.
The Company's direct sales force is actively working with current
laboratory customers and health insurance companies to facilitate reimbursement
under the new CPT code. As of June 30, 2002, based on information provided to
the Company, the Company believes that all of the 379 health insurance companies
which announced coverage of the ThinPrep Pap Test have implemented the new CPT
code and have established a reimbursement amount. There are approximately six
hundred managed care organizations and other third party payors in the United
States. There can be no assurance, however, that reimbursement levels under the
new CPT code will be adequate.
The Company expects to continue its significant expenditures for sales and
marketing activities of the ThinPrep System for cervical cancer screening and
the ductal lavage device acquired from Pro Duct in 2001.
In January 2001, the Company entered into an agreement with Digene,
exclusive in the United States and Puerto Rico, to co-promote the benefits of
testing for HPV using Digene's Hybrid Capture(R) II HPV DNA Assay directly from
the ThinPrep collection vial. The companies expect that the co-promotion program
will initially focus
11
on promoting Digene's HPV DNA test, using the residual material in ThinPrep
collection vials, as the optimal patient management strategy for borderline
cytology results.
On June 24, 2002 the Company announced that the FTC had voted to seek to
block Cytyc's proposed acquisition of Digene. The five-member commission
authorized the staff to seek a court order to halt the acquisition. On June 30,
2002 the Company and Digene terminated their merger agreement, and, accordingly,
the Company expensed approximately $6.1 million in prepaid acquisition costs.
The Company expects to continue its expenditures in 2002 for research and
development to fund follow-on studies of the ductal lavage device acquired from
Pro Duct, as well as follow-on products and additional applications of ThinPrep
technology. The Company also expects that expenses for the Thin Prep Imaging
System development activities will continue to decrease in 2002.
Results of Operations
Three Months Ended June 30, 2002 and 2001
Net sales decreased to $43.2 million in the second quarter of 2002 from
$53.0 million for the same period of 2001, a decrease of 19%. The decrease was
primarily due to decreased U.S. sales of the Company's ThinPrep Pap Test for
cervical cancer screening due to changes in ordering patterns by some of the
Company's laboratory customers. Gross profit decreased to $31.8 million in the
second quarter of 2002 from $43.6 million for the same period of 2001, a
decrease of 27%, and the gross margin decreased to 74% in the second quarter of
2002 from 82% for the same period of 2001. The decrease related primarily to
less revenue in the Thin Prep Pap Test product line in the U.S. which generates
the highest gross margin as a percentage of total revenue, decreased average
selling prices for the Thin Prep Pap Test in the U.S. due to customer mix and a
larger percentage of sales to international customers in the quarter which have
lower average selling prices.
Total operating expenses increased to $34.9 million in the second quarter
of 2002 from $23.3 million for the same period of 2001, an increase of 50%.
Excluding costs related to the abandoned merger with Digene of $6.1 million,
total operating expenses would have increased 24%. Research and development
costs decreased to $4.5 million in the second quarter of 2002 from $5.2 million
for the same period of 2001, a decrease of 14%, primarily as a result of
decreased engineering costs associated with the Company's ThinPrep Imaging
System development activities. The Company expects to continue its expenditures
in 2002 for research and development to fund follow-on studies of the ductal
lavage device acquired from Pro Duct, as well as follow-on products and
additional applications of Thin Prep technology. The Company expects that
research and development expenses for the imaging system will decrease in the
remainder of 2002. Sales and marketing costs increased to $18.7 million in the
second quarter of 2002 from $14.5 million for the same period of 2001, an
increase of 29%. This increase primarily reflects U.S. sales force personnel and
meetings costs and costs associated with expansion in international
subsidiaries. The Company expects that sales and marketing costs may increase in
succeeding quarters as a result of increased expenditures for personnel,
marketing programs and commissions expense. General and administrative costs
increased to $5.6 million in the second quarter of 2002 from $3.5 million for
the same period of 2001, an increase of 57%, primarily due to increased
personnel costs, legal and professional fees, increased consulting costs related
to business development and generally expansion of all infrastructure
departments to support the Company's growth including human resources,
information systems and finance.
On June 24, 2002 the Company announced that the FTC had voted to seek to
block Cytyc's proposed acquisition of Digene. The five-member commission
authorized the staff to seek a court order to halt the acquisition. On June 30,
2002 the Company and Digene terminated their merger agreement, and, accordingly,
the Company expensed approximately $6.1 million in prepaid acquisition costs.
Interest income decreased to $0.9 million in the second quarter of 2002
from $1.4 million for the same period of 2001, a decrease of 37%, due primarily
to lower interest rates.
The Company estimated that its effective tax rate for the three months
ended June 30, 2002 was 38%. The effective tax rate represents the Company's
estimate of the rate expected to be applicable for the full fiscal year. The
Company's tax rate for the three months ended June 30, 2001 was 26%, due
primarily to the effect of net operating loss carryforwards, the application of
the federal alternative minimum tax and certain state minimum taxes.
12
Six Months Ended June 30, 2002 and 2001
Net sales increased to $111.2 million in the first six months of 2002 from
$100.5 million for the same period of 2001, an increase of 11%. The increase was
primarily due to increased sales of the Company's ThinPrep Pap Test for cervical
cancer screening in the United States. Gross profit increased to $87.3 million
in the first six months of 2002 from $82.2 million for the same period of 2001,
an increase of 6%. The gross margin decreased to 78% in the first six months of
2002 as compared to 82% for the same period of 2001, primarily due to lower
average selling prices in the first six months of 2002 and to a lesser extent a
larger percentage of total revenue with international customers who have lower
average selling prices.
Total operating expenses increased to $62.9 million in the first six months
of 2002 from $45.4 million for the same period of 2001, an increase of 39%.
Excluding costs related to the abandoned Digene merger of $6.1 million, total
operating expenses would have increased 25%. Research and development costs
decreased to $8.7 million in the first six months of 2002 from $10.0 million for
the same period of 2001, a decrease of 13%, primarily as a result of lower
engineering costs associated with the Company's ThinPrep Imaging System
development activities. Sales and marketing costs increased to $35.8 million in
the first six months of 2002 from $28.4 million for the same period of 2001, an
increase of 26%. This increase primarily reflects expenses associated with
expansion in international subsidiaries and U.S. sales force meeting, travel and
personnel costs. General and administrative costs increased to $12.3 million in
the first six months of 2002 from $7.0 million for the same period of 2001, an
increase of 76%, primarily due to a combination of increased personnel costs and
professional fees shared equally by legal, business development and finance
departments whose infrastructure grew to support the Company.
On June 24, 2002 the Company announced that the FTC had voted to seek to
block Cytyc's proposed acquisition of Digene. The five-member commission
authorized the staff to seek a court order to halt the acquisition. On June 30,
2002 the Company and Digene terminated their merger agreement, and, accordingly,
the Company expensed approximately $6.1 million in prepaid acquisition costs.
Interest income decreased to $1.8 million in the first six months of 2002
from $2.8 million for the same period of 2001, a decrease of 37%, due to lower
interest rates. The Company also recorded $3.1 million during the first six
months of 2001 as other income relating to the settlement of certain litigation.
The settlement consisted of cash and stock. The stock has been recorded at the
discounted value of its guaranteed price two years from the date of the
settlement.
The Company estimated that its effective tax rate for the six months ended
June 30, 2002 was 38%. The effective tax rate represents the Company's estimate
of the rate expected to be applicable for the full fiscal year. The Company's
tax rate for the six months ended June 30, 2001 was 26%, due primarily to the
effect of net operating loss carryforwards, the application of the federal
alternative minimum tax and certain state minimum taxes.
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded its
revenue, resulting in an accumulated deficit of $8.4 million as of June 30,
2002. Although the Company generated cash of $52.5 million in the first six
months of 2002, the Company had previously funded its operations primarily
through the private placement and public sale of equity securities and exercise
of stock options and warrants aggregating $204.3 million, net of offering
expenses. At June 30, 2002, the Company had cash, cash equivalents and
short-term investments of $200.2 million. Cash provided by the Company's
operations was $37.8 million and $40.1 million during the first six months of
2001 and 2002, respectively, primarily as a result of net income generated in
each period and a decrease in accounts receivable in the 2002 period. Net
accounts receivable decreased by $15.5 million to approximately $34.6 million
during the first six months of 2002 due to lower sales and improved collections.
Net inventories increased approximately $1.2 million from December 31, 2001 to
June 30, 2002 due primarily to increased finished goods produced prior to the
Company revising its sales forecast in the second quarter of 2002.
The Company's investing activities used cash of approximately $39.9 million
during the first six months of 2001 and generated cash of approximately $1.5
million during the first six months of 2002. The Company's investing activities
included capital expenditures for the six months ended June 30, 2001 and 2002 of
$3.9 million and $3.6 million, respectively. The Company's investing activities
utilized cash of approximately $35.4 million for the net sales and purchases of
short-term investments for the first six months of 2001 and generated cash of
$5.5 million in proceeds from the net activity of short-term investments in the
first six months of 2002.
The Company's financing activities generated cash of approximately $6.8
million and $9.7 million in the first six months of 2001 and 2002, respectively.
The Company's financing activities consisted primarily of proceeds from the
exercise of common stock options.
13
The Board of Directors has authorized an additional $50 million for the
repurchase of shares of the Company's common stock. The Board of Directors has
also authorized the Company to repurchase shares of the Company's common stock
equal in number to shares issued to option holders upon exercise of their
Company stock options. The total amount authorized for the repurchase program is
currently $100 million plus the cost of purchasing shares equivalent to the
number of options exercised.
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, including the ductal lavage device acquired from Pro Duct. The
Company's liquidity and capital requirements will also depend upon the progress
of the Company's research and development programs to develop follow-on products
including the ductal lavage device acquired from Pro Duct, the receipt of and
the time required to obtain regulatory clearances and approvals, and the
resources the Company devotes to developing, manufacturing and marketing its
products. In addition, the Company's capital requirements will depend on the
extent of potential liabilities, if any, and costs associated with any future
litigation. There can be no assurance that the Company will not require
additional financing or will not in the future seek to raise additional funds
through bank facilities, debt or equity offerings or other sources of capital.
Additional funding may not be available when needed or on terms acceptable to
the Company, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
Critical Accounting Policies
We considered the disclosure requirements of Financial Reporting Release
("FRR") No. 60, Cautionary Advice Regarding Disclosure About Critical Accounting
Policies, and FRR No. 61, Commission Statement about Management's Discussion and
Analysis of Financial Condition and Results of Operations, and concluded that
nothing materially changed during the quarter that would warrant further
disclosure under these releases.
Certain Factors Which May Affect Future Results
The forward looking statements in this Quarterly Report on Form 10-Q are
made under the safe harbor provisions of Section 21E of the Securities Exchange
Act of 1934, as amended. The Company's operating results and financial condition
have varied and may in the future vary significantly depending on a number of
factors.
Statements in this Form 10-Q which are not strictly historical statements,
including, without limitation, statements regarding management's expectations
for future growth and plans and objectives for future management and operations,
domestic and international marketing and sales plans, product plans and
performance and potential savings to the health care system, management's
assessment of market factors, statements concerning the integration of Pro Duct,
as well as statements regarding the strategy and plans of the Company,
constitute forward-looking statements that involve risks and uncertainties. The
following factors, among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this report and
presented elsewhere by management from time to time. The Company's risk factors
include, risks associated with the integration of ProDuct, its dependence on a
single product, uncertainty of FDA approval and market acceptance and the
additional cost related thereto, limited marketing and sales experience,
dependence on timely and adequate levels of third-party reimbursement, a limited
number of customers and a lengthy sales process, a limited operating history,
risks associated with acquisitions including diversion of management's attention
from other important business concerns, use of significant amounts of cash,
potential dilutive issuances of equity securities, incurrence of debt or
amortization expenses related to certain intangible assets, future impairment
charges related to diminished fair value of businesses acquired as compared to
their net book value, difficulties associated with assimilating and integrating
the personnel, operations and technologies of the acquired companies, failure to
retain key personnel, loss of key customers, customer dissatisfaction or
performance problems with the acquired company, the costs associated with the
integration of acquired operations and assumption of unknown liabilities,
management of growth, intense competition, potential fluctuations in future
quarterly results, limited foreign sales capabilities, uncertainty of additional
applications, dependence on key personnel, dependence on protection of patents,
copyrights, licenses and proprietary rights, risk of third-party claims of
infringement and dependence on single source suppliers. Such factors, among
other risks detailed in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001 filed with the Securities and Exchange Commission,
may have a material adverse effect upon the Company's business, financial
condition and results of operations. Because of these and other factors, past
financial performance should not be considered an indication of future
performance.
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments. The Company does not participate in derivative
financial instruments, other financial instruments for which the fair value
disclosure would be required under SFAS No. 107, or derivative commodity
instruments. All of the Company's investments are in short-term,
investment-grade commercial paper, corporate bonds and U.S. Government and
agency securities that are carried at fair value on the Company's books.
Accordingly, the Company has no quantitative information concerning the market
risk of participating in such investments.
Primary Market Risk Exposures. The Company's primary market risk exposures
are in the areas of interest rate risk and foreign currency exchange rate risk.
The Company's investment portfolio of cash equivalents is subject to interest
rate fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments. The Company's business outside the
United States is conducted in local currency transactions. The Company has no
foreign exchange contracts, option contracts, or other foreign hedging
arrangements. However, the Company estimates that any market risk associated
with its foreign operations is not significant and is unlikely to have a
material adverse effect on the Company's business, financial condition and
results of operations.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
At the Company's annual meeting of stockholders held on May 22, 2002 (the
"2002 Annual Meeting"), the Company's stockholders took the following actions:
1. The Company's stockholders elected Marc C. Breslawsky, William H.
Longfield, and Anna S. Richo as Class II Directors, each to serve for
a three year term expiring at the Company's Annual Meeting of
stockholders in 2005, or until his or her successor has been duly
elected and qualified or until his or her earlier resignation or
removal. Election of the directors was determined by a plurality of
the votes cast at the 2002 Annual Meeting. With respect to such
matter, the votes were cast as follows 110,749,875 shares were voted
for the election of Mr. Breslawsky, 111,548,538 shares were voted for
the election of Mr. Longfield, 110,750,393 shares were voted for the
election of Ms. Richo, 990,302 shares were withheld from the election
of Mr. Breslawsky, 191,639 shares were withheld from the election of
Mr. Longfield and 989,784 shares were withheld from the election of
Ms. Richo. No other persons were nominated or received votes for
election as directors of the Company at the 2002 Annual Meeting. The
other directors of the Company whose terms of office continued after
the 2002 Annual Meeting were Walter E. Boomer, Sally W. Crawford,
William G. Little, Joseph B. Martin, M.D., Ph.D., C. William McDaniel
and Patrick J. Sullivan.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
------------
None
(b) Reports on Form 8-K
-----------------------
There were two reports on Form 8-K filed by the Company for the
quarter ended June 30, 2002.
On May 28, 2002, the Company filed a current report on Form 8-K
announcing the dismissal of Arthur Andersen LLP as the Company's
independent public accountants and the engagement of Deloitte & Touche
LLP as the Company's independent public accountants for fiscal 2002. A
copy of the letter from Arthur Andersen LLP to the Securities and
Exchange Commission dated May 28, 2002, along with the Company's press
release announcing the changes in certifying accountants, were
attached and incorporated by reference therein.
15
On June 26, 2002, the Company filed a current report on Form 8-K
announcing that the U.S. Federal Trade Commission voted to authorize
its staff to seek an injunction to block the Company's proposed
acquisition of Digene Corporation. A copy of the Company's press
releases announcing the FTC injunction was attached and incorporated
by reference therein.
Subsequent 8-K Filings
On July 1, 2002, the Company filed a current report on Form 8-K
announcing that Digene terminated their definitive merger agreement
with the Company. A copy of the Company's press release announcing the
termination was attached and incorporated by reference therein.
On August 6, 2002, the Company filed a current report on Form 8-K
announcing an increase in their stock repurchase program which was
previously announced on January 31, 2002. A copy of the Company's
press release announcing the increase in the program was incorporated
by reference therein.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYTYC CORPORATION
Date: August 13, 2002 By: /s/ Robert L. Bowen
--------------------
Robert L. Bowen
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
By: /s/ Leslie Teso-Lichtman
------------------------
Leslie Teso-Lichtman
Vice President & Controller
17