Back to GetFilings.com



Table of Contents

 

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, 2003

 

¨   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 organization)    (I.R.S. Employer 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). 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 4, 2003 was 109,672,970.

 

Total Number of Pages: 19

Exhibit index located on page 19

 



Table of Contents

CYTYC CORPORATION

 

INDEX TO FORM 10-Q

 

          Page

Part I    Financial Information     
Item 1.    Condensed Consolidated Financial Statements     
     Condensed Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002    3
     Condensed Consolidated Statements of Income for the three and six months ended June 30, 2003 and 2002 (unaudited)    4
     Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 (unaudited)    5
     Notes to Condensed Consolidated Financial Statements (unaudited)    6
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    11
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    15
Item 4.    Controls and Procedures    15
Part II    Other Information     
Item 1.    Legal Proceedings    16
Item 4.    Submission of Matters to a Vote of Security Holders    16
Item 6.    Exhibits and Reports on Form 8-K    16
Signatures    18
Exhibit Index    19

 

 

2


Table of Contents

Part I    FINANCIAL INFORMATION

 

Item 1.    Condensed Consolidated Financial Statements

 

CYTYC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

     June 30,     December 31,  
     2003

    2002

 
     (unaudited)        

ASSETS

                

Current assets:

                

Cash and cash equivalents

   $ 65,322     $ 39,251  

Investment securities

     87,935       124,493  

Accounts receivable, net of allowance of $1,976 and $2,103 at June 30, 2003 and December 31, 2002, respectively

     40,799       34,066  

Inventories

     12,864       11,012  

Prepaid expenses and other current assets

     4,129       2,046  
    


 


Total current assets

     211,049       210,868  
    


 


Property and equipment, net

     28,664       27,281  
    


 


Intangible assets:

                

Patented technology, net of accumulated amortization of $232 and $227 at June 30, 2003 and December 31, 2002, respectively

     198       203  

Developed technology and know-how, net of accumulated amortization of $2,314 and $1,583 at June 30, 2003 and December 31, 2002, respectively

     16,686       17,417  

Goodwill

     91,097       91,097  
    


 


Total intangible assets

     107,981       108,717  
    


 


Deferred tax assets, net

     5,712       8,343  

Other assets, net

     4,098       6,417  
    


 


Total assets

   $ 357,504     $ 361,626  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                

Current liabilities:

                

Accounts payable

   $ 8,344     $ 7,106  

Accrued expenses

     28,805       26,711  

Deferred revenue

     2,142       2,768  
    


 


Total current liabilities

     39,291       36,585  
    


 


Non-current liabilities

     66       313  

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—123,876,026 and 123,179,055 shares in 2003 and 2002, respectively

        Outstanding—109,719,587 and 113,555,378 shares in 2003 and 2002, respectively

     1,239       1,232  

Additional paid-in capital

     396,829       392,253  

Treasury stock, at cost: 14,156,439 and 9,623,677 shares in 2003 and 2002, respectively

     (142,826 )     (92,717 )

Deferred compensation

     (178 )     (240 )

Accumulated other comprehensive income

     1,540       776  

Retained earnings

     61,543       23,424  
    


 


Total stockholders’ equity

     318,147       324,728  
    


 


Total liabilities and stockholders’ equity

   $ 357,504     $ 361,626  
    


 


 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


Table of Contents

CYTYC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2003

   2002

    2003

   2002

 

Net sales

   $ 76,688    $ 43,175     $ 149,308    $ 111,210  

Cost of sales

     15,208      11,326       27,575      23,936  
    

  


 

  


Gross profit

     61,480      31,849       121,733      87,274  
    

  


 

  


Operating expenses:

                              

Research and development

     3,822      4,502       6,777      8,692  

Sales and marketing

     21,092      18,724       40,000      35,808  

General and administrative

     6,837      5,585       12,906      12,300  

Expenses related to terminated merger

          6,114            6,114  
    

  


 

  


Total operating expenses

     31,751      34,925       59,683      62,914  
    

  


 

  


Income (loss) from operations

     29,729      (3,076 )     62,050      24,360  

Other income, net:

                              

Interest income

     679      884       1,407      1,783  

Other (expense) income

     200      (312 )     88      (263 )
    

  


 

  


Total other income, net

     879      572       1,495      1,520  
    

  


 

  


Income (loss) before provision for income taxes

     30,608      (2,504 )     63,545      25,880  

Provision (benefit) for income taxes

     12,243      (952 )     25,426      9,834  
    

  


 

  


Net income (loss)

   $ 18,365    $ (1,552 )   $ 38,119    $ 16,046  
    

  


 

  


Net income (loss) per common and potential common share:

                              

Basic

   $ 0.17    $ (0.01 )   $ 0.34    $ 0.13  
    

  


 

  


Diluted

   $ 0.16    $ (0.01 )   $ 0.33    $ 0.13  
    

  


 

  


Weighted average common and potential common shares outstanding:

                              

Basic

     111,069      122,676       112,244      122,228  

Diluted

     112,666      122,676       113,986      125,545  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

4


Table of Contents

CYTYC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Six Months Ended  
     June 30,  
     2003

    2002

 

Cash flows from operating activities:

                

Net income

   $ 38,119     $ 16,046  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Depreciation and amortization

     4,164       3,706  

Provision for doubtful accounts

     (127 )     175  

Amortization of warrant

           1,185  

Compensation expense related to issuance of stock to directors, executives and non-employee awards

     460       365  

Compensation expense related to stock options assumed in acquisition

     14       257  

Change in deferred tax asset

     2,631       5,285  

Tax benefit from exercise of stock options

     1,411       5,377  

Changes in assets and liabilities:

                

Accounts receivable

     (6,176 )     15,479  

Inventories

     (1,770 )     (1,168 )

Prepaid expenses and other current assets

     (2,063 )     (1,456 )

Accounts payable

     1,187       (982 )

Accrued expenses

     2,190       (4,154 )

Deferred revenue

     (634 )     (20 )
    


 


Net cash provided by operating activities

     39,406       40,095  
    


 


Cash flows from investing activities:

                

Decrease (increase) in other assets

     2,369       (498 )

Purchases of property and equipment

     (4,722 )     (3,567 )

Purchases of investments securities

     (65,817 )     (63,216 )

Proceeds from sale of investments securities

     102,298       68,752  
    


 


Net cash provided by investing activities

     34,128       1,471  
    


 


Cash flows from financing activities:

                

Purchase of treasury shares

     (50,109 )      

Proceeds from exercise of stock options

     2,127       9,021  

Proceeds from issuance of shares under Employee Stock Purchase Plan

     633       634  
    


 


Net cash (used in) provided by financing activities

     (47,349 )     9,655  
    


 


Effect of exchange rate changes on cash

     (114 )     1,306  
    


 


Net increase in cash and cash equivalents

     26,071       52,527  

Cash and cash equivalents, beginning of period

     39,251       71,928  
    


 


Cash and cash equivalents, end of period

   $ 65,322     $ 124,455  
    


 


 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

5


Table of Contents

CYTYC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Unaudited)

 

(1)   Basis of Presentation

 

The accompanying condensed consolidated financial statements of Cytyc Corporation and subsidiaries (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). 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, 2002.

 

The notes and accompanying condensed consolidated financial statements are unaudited. The information furnished reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. Such adjustments consisted only of normal recurring items. The interim periods are not necessarily indicative of the results expected for the full year or any future period.

 

The preparation of these condensed 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)   Investment Securities

 

Investment securities consist of U.S. government securities and corporate bonds. At June 30, 2003, the Company’s available-for-sale debt securities had contractual maturities at various dates through April 2005. 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, 2003 and December 31, 2002, the cost basis, aggregate fair value and gross unrealized holding gains by major security type were as follows:

 

     Cost

  

Gross

Unrealized
Holding
Gains


  

Fair

Value


     (in thousands)

June 30, 2003

                    

Available-for-sale securities

                    

U.S. government and agency securities (average maturity of 6.7 months)

   $ 54,586    $ 47    $ 54,633

Corporate bonds (average maturity of 11.6 months)

     33,172      130      33,302
    

  

  

     $ 87,758    $ 177    $ 87,935
    

  

  

December 31, 2002

                    

Available-for-sale securities

                    

U.S. government and agency securities (average maturity of 3.4 months)

   $ 86,431    $ 180    $ 86,611

Corporate bonds (average maturity of 8.5 months)

     31,898      60      31,958

Commercial paper (average maturity of 4.5 months)

     895      —        895

Certificate of deposit (average maturity of 5.1 months)

     5,015      14      5,029
    

  

  

     $ 124,239    $ 254    $ 124,493
    

  

  

 

6


Table of Contents

CYTYC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Unaudited)

 

(Continued)

 

(3)   Inventories

 

Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:

 

     June 30,    December 31,
     2003

   2002

     (in thousands)

Raw material and work-in-process.

   $ 7,983    $ 7,388

Finished goods

     4,881      3,624
    

  

     $ 12,864    $ 11,012
    

  

 

(4)   Accounting For Goodwill And Other Intangible Assets

 

Amortization expense related to identifiable other intangible assets that will continue to be amortized in the future was approximately $368,000 for the three months ended June 30, 2003 and 2002, respectively, and approximately $735,000 for the six months ended June 30, 2003 and 2002, respectively. Estimated amortization expense related to other identifiable intangible assets that will continue to be amortized is as follows:

 

     Amount

     (in thousands)

Remaining six months ending December 31, 2003

   $ 735

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

Year ending December 31, 2008

     1,470

Thereafter

     8,601
    

Total

   $ 16,686
    

 

There are no indicators requiring further impairment review as of June 30, 2003 relative to either amortizing or non-amortizing intangibles.

 

(5)   Product Warranty Obligation

 

The Company records a liability for product warranty obligations at the time of sale based upon historical warranty experience. The term of the warranty is generally twelve months. The Company also records an additional liability for specific warranty matters when they become known and are reasonably estimable. The Company’s product warranty obligations are included in accrued expenses. Changes in the product warranty obligations for the six months ended June 30, 2003 and 2002 are as follows:

 

     Six Months Ended  
     June 30,  
     2003

    2002

 
     (in thousands)  

Balance, beginning of year

   $ 1,923     $ 699  

New warranties

     92       480  

Payments

     (590 )     (400 )

Adjustments

     —         601  
    


 


Balance, June 30

   $ 1,425     $ 1,380  
    


 


 

7


Table of Contents

CYTYC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Unaudited)

 

(Continued)

 

(6)   Income Taxes

 

The Company estimated that its effective tax rate for the six months ended June 30, 2003 was 40%. 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, 2002 was 38%, which was lower due primarily to the effect of research and development credits.

 

(7)   Net Income Per Common Share

 

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. Potential common shares are calculated using the treasury stock method and represent incremental shares issuable upon exercise of the Company’s outstanding stock options. 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, 2003 and 2002.

 

     Three Months Ended    Six Months Ended
     June 30,    June 30,
     2003

   2002

   2003

   2002

     (in thousands)    (in thousands)

Basic weighted average common shares outstanding

   111,069    122,676    112,244    122,228

Dilutive effect of assumed exercise of stock options

   1,597    —      1,742    3,317
    
  
  
  

Diluted weighted average common shares outstanding

   112,666    122,676    113,986    125,545
    
  
  
  

 

Diluted weighted average common shares outstanding for the three months ended June 30, 2003 and 2002 excludes 12,141,244 and 13,143,978 potential common shares, respectively, from stock options outstanding because the exercise prices of such stock options were higher than the average price of the Company’s common stock during the period and their effect would be anti-dilutive. Diluted weighted average common shares outstanding for the six months ended June 30, 2003 and 2002 excludes 12,042,440 and 9,562,648 potential common shares, respectively, from stock options outstanding because the exercise prices of such stock options were higher than the average price of common stock during the period and their effect would be anti-dilutive.

 

(8)   Stock-Based Compensation

 

SFAS No. 123, Accounting for Stock-Based Compensation, addresses the financial accounting and reporting standards for stock or other equity-based compensation arrangements. The Company has elected to continue to use the intrinsic value-based method to account for employee stock option awards under the provisions of Accounting Principles Board Opinion (“APB”) No. 25 and provides disclosures based on the fair value method in the notes to the financial statements as permitted by SFAS No. 123.

 

Had compensation cost for the Company’s stock option plans been determined consistent with SFAS No. 123, pro forma net income (loss) and net income (loss) per share would have been:

 

8


Table of Contents

CYTYC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Unaudited)

 

(Continued)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2003

   2002

    2003

   2002

 
    

(in thousands,

except per share data)

   

(in thousands,

except per share data)

 

Net income (loss), as reported

   $ 18,365    $ (1,552 )   $ 38,119    $ 16,046  

Assumed stock compensation cost, net of tax

     13,331      12,764       26,528      27,239  
    

  


 

  


Pro forma net income (loss)

   $ 5,034    $ (14,316 )   $ 11,591    $ (11,193 )
    

  


 

  


Net income (loss) per common and potential common share:

                              

Basic — as reported

   $ 0.17    $ (0.01 )   $ 0.34    $ 0.13  
    

  


 

  


Basic — pro forma

   $ 0.05    $ (0.12 )   $ 0.10    $ (0.09 )
    

  


 

  


Diluted — as reported

   $ 0.16    $ (0.01 )   $ 0.33    $ 0.13  
    

  


 

  


Diluted — pro forma

   $ 0.04    $ (0.12 )   $ 0.10    $ (0.09 )
    

  


 

  


 

The underlying assumptions used in the Black-Scholes model are as follows:

 

     June 30,  
     2003

    2002

 

Risk-free interest rate

   2.91 %   4.46 %

Expected dividend yield

   —       —    

Expected lives

   5.30     5.00  

Expected volatility

   94 %   92 %

 

(9)   Comprehensive Income

 

Comprehensive income for the three and six months ended June 30, 2003 and 2002 was as follows:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2003

    2002

    2003

    2002

 
     (in thousands)     (in thousands)  

Net income (loss)

   $ 18,365     $ (1,552 )   $ 38,119     $ 16,046  

Other comprehensive income:

                                

Unrealized gains (losses) on investment securities, net of tax

     (207 )     220       (45 )     (49 )

Foreign currency translation adjustments, net of tax

     372       1,622       809       1,306  
    


 


 


 


Comprehensive income

   $ 18,530     $ 290     $ 38,883     $ 17,303  
    


 


 


 


 

(10)   Stock Repurchase Program

 

The Company has established a stock repurchase program, with authority to spend up to $200,000,000, plus the cost of purchasing additional shares in an amount equal to the number of shares issued to the Company’s stock option holders upon exercise of their stock options. This reflects an increase of $50,000,000 in the total amount authorized for the repurchase of common stock, which was authorized by the board of directors in July 2003. As of June 30, 2003, the Company had repurchased 14,156,439 shares under the program, with an aggregate cost of approximately $142,826,095, of which 3,271,562 shares were repurchased during the three months ended June 30, 2003 for cash of $34,486,006 and 4,532,762 shares were repurchased during the six months ended June 30, 2003 for cash of $50,108,840. As of June 30, 2003, all of the 14,156,439 repurchased common shares were held in treasury.

 

9


Table of Contents

CYTYC CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Unaudited)

 

(Continued)

 

(11)   Recent Accounting Pronouncements

 

In November 2002, the Emerging Issues Task Force (“EITF”) issued EITF No. 00-21, Revenue Arrangements with Multiple Deliverables. Under EITF 00-21, revenues for contracts which contain multiple deliverables are allocated among the separate units based on their relative fair values. The provisions of EITF 00-21 are effective for contracts entered into in fiscal periods beginning after June 15, 2003 and any multiple element contracts will be evaluated under EITF 00-21 beginning on July 1, 2003. The provisions of EITF 00-21 are not expected to have a significant effect on the Company’s results of operations or financial position.

 

(12)   Commitments and Contingencies

 

On June 16, 2003, the Company filed a suit for Declaratory Judgment in United States District Court for the District of Massachusetts asking the court to determine and declare that certain of TriPath Imaging, Inc.’s patents are invalid and not infringed by Cytyc’s ThinPrep® Imaging System. On June 17, TriPath Imaging, Inc. announced that it had filed a lawsuit against Cytyc Corporation in the United States District Court for the Middle District of North Carolina alleging patent infringement, false advertising, defamation, intentional interference, unfair competition, and unfair and deceptive trade practices. Because these litigation matters are in a preliminary stage, management is unable to express an opinion as to their likely outcome or an estimate of the possible loss or range of loss. Nevertheless, the Company believes that the claims against Cytyc are without merit and intends to vigorously defend this suit.

 

 

10


Table of Contents

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with our consolidated financial statements and the related notes appearing in our annual report on Form 10-K for the year ended December 31, 2002. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth elsewhere in this Form 10-Q.

 

Overview

 

Cytyc designs, develops, manufactures and markets a sample preparation system for medical diagnostic applications. Our ThinPrep® 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 general, non-gynecological testing applications. The ThinPrep System, which was cleared for marketing as a replacement for the conventional Pap smear method for cervical cancer screening by the United States Food and Drug Administration (“FDA”) in 1996, is designed to reduce the incidence of false negative diagnoses, improve slide quality, reduce inconclusive and inadequate slide samples and enable a single collected patient sample to be used for additional diagnostic testing.

 

In 2002, we introduced the FirstCyte Breast Test, which is currently used as a risk assessment tool for women who are at high risk for breast cancer. The test detects atypical changes in cells lining the milk ducts, where an estimated 95 percent of all breast cancers originate. By identifying high risk women who are harboring atypical ductal epithelial cells and who are apparently at highest risk for developing breast cancer, the FirstCyte Breast Test assists in decision making about appropriate preventative measures and enables doctors to move to a paradigm of predicting and preventing breast cancer, rather than the current paradigm of detection and treatment. Our existing ThinPrep System can serve as a laboratory platform for preparing the cell specimen slide from the FirstCyte Breast Test, which is a form of general cytology screening.

 

In June 2003, we received FDA approval for our ThinPrep Imaging System. The ThinPrep Imaging System is an interactive computer system that will assist cytotechnologists in the primary screening and diagnosis of ThinPrep Pap Test slides. The system combines imaging technology to identify diagnostic fields of interest with an automated microscope to facilitate locating these fields. Shipment of the ThinPrep Imaging System began in June 2003 following the FDA approval.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. A “critical accounting policy” is one which is both important to the portrayal of our financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We continuously evaluate our critical accounting policies and estimates, including those related to revenue recognition, valuation of long-lived assets, deferred taxes and the allowance for doubtful accounts. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Revenue recognition. Our revenue recognition policy is significant because revenue is a key component of our results of operations. We follow very specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue policy. For example, revenue is not recognized from sales transactions unless the collection of the resulting receivable is reasonably assured. We assess the likelihood of collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. If it is determined that collection is not reasonably assured, revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of cash. Additionally, we do not recognize revenue from sales of processors when we have an obligation to perform installation and training which is deemed to be critical to the functionality of the processor until completion of the required installation and training. In instances where installation and training are not deemed to be critical to the functionality of the processor, we estimate and accrue the cost to provide such installation and training and recognize those costs when the related

 

11


Table of Contents

revenue is recognized. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter.

 

Valuation of Long-Lived Assets and Deferred Taxes. We assess the impairment of identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If it is determined that the carrying value of intangible, long-lived assets and goodwill might not be recoverable based upon the existence of one or more indicators of impairment, we would measure any impairment based on a projected discounted cash flow method. No such impairment charges have been recorded to date. In 2002, Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, became effective and as a result, we ceased amortization of goodwill. In lieu of amortization, we are required to perform an impairment review annually, or earlier if indicators of potential impairment exist. Based on our annual impairment review during 2002, the carrying amount of goodwill did not exceed its fair value and, accordingly, no impairment loss exists. We have determined that there are no indicators requiring further impairment review as of June 30, 2003. At June 30, 2003, we have $108.0 million of intangible assets, of which $91.1 million represents goodwill. An impairment to our intangible assets could result in a material, non-cash expense in our consolidated statement of income. The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions, to fully recover the net carrying value of the assets. If these estimates and related assumptions change in the future, we may be required to record a valuation allowance against our deferred tax assets resulting in additional income tax expense in our consolidated statement of income.

 

Allowance for Doubtful Accounts. We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past.

 

The above list is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2002, which contain accounting policies and other disclosures required by generally accepted accounting principles in the United States.

 

Results of Operations

 

Three Months Ended June 30, 2003 and 2002

 

Net sales increased to $76.7 million in the second quarter of 2003 from $43.2 million for the same period of 2002, an increase of 78%. The increase was primarily due to higher shipment volume levels and, to a lesser extent, improved average pricing levels of our ThinPrep Pap Test for cervical cancer screening in the United States. The significant increase in shipment volume in the second quarter of 2003 as compared to the second quarter of 2002 was due primarily to changes in inventory management by some of our laboratory customers, which impacted their ordering patterns during 2002, as well as overall growth in market conversion to the ThinPrep Pap Test. Gross profit was $61.5 million in the second quarter of 2003, compared to $31.8 million for the same period of 2002, and the gross margin increased to 80% in the second quarter of 2003 from 74% for the same period of 2002. The increase related primarily to the increased volume of shipments of our higher margin ThinPrep Pap Test as well as overall favorable pricing.

 

Total operating expenses decreased to $31.8 million in the second quarter of 2003 from $34.9 million for the same period of 2002, a decrease of 9%, largely due to a one-time charge of $6.1 million in the second quarter of 2002 to write off costs related to the terminated merger with Digene Corporation. Research and development costs decreased to $3.8 million in the second quarter of 2003 from $4.5 million for the same period of 2002, a decrease of 15%, primarily as a result of lower engineering and regulatory costs associated with our ThinPrep Imaging System development activities. Sales and marketing costs increased to $21.1 million in the second quarter of 2003 from $18.7 million for the same period of 2002, an increase of 13%. This increase reflects higher marketing costs related, in part, to the launch of the ThinPrep Imaging System and additional costs to expand the market and customer base for the FirstCyte Breast Test domestically and the ThinPrep Pap Test on a worldwide basis, as well as the impact of

 

12


Table of Contents

the weaker U.S. dollar on worldwide expenditures. General and administrative costs increased to $6.8 million in the second quarter of 2003 from $5.6 million for the same period of 2002, an increase of 22%, largely due to increased business insurance expenditures.

 

Interest income decreased to $0.7 million in the second quarter of 2003 from $0.9 million for the same period of 2002, a decrease of 23%, due primarily to lower interest rates and a lower cash balance available for investment.

 

We estimated that our effective tax rate for the three months ended June 30, 2003 was 40%. The effective tax rate represents our estimate of the rate expected to be applicable for the full fiscal year. Our tax rate for the three months ended June 30, 2002 was 38%, which was lower due primarily to the effect of research and development credits.

 

Six Months Ended June 30, 2003 and 2002

 

Net sales increased to $149.3 million in the six months ending June 30, 2003 from $111.2 million for the same period of 2002, an increase of 34%. The increase was primarily due to higher shipment volume levels and improved average pricing levels of our ThinPrep Pap Test for cervical cancer screening in the United States. The increase in shipment volume in the first two quarters of 2003 as compared to the same period of 2002 was due primarily to changes in inventory management by some of our laboratory customers, which impacted their ordering patterns during 2002, as well as overall growth in market conversion to the ThinPrep Pap Test. Gross profit was $121.7 million in the first two quarters of 2003, compared to $87.3 million for the same period of 2002, and the gross margin increased to 82% in the first two quarters of 2003 from 78% for the same period of 2002. The increase related primarily to the increased volume of shipments and favorable pricing of our higher margin ThinPrep Pap Test.

 

Total operating expenses decreased to $59.7 million in the first two quarters of 2003 from $62.9 million for the same period of 2002, a decrease of 5%, largely due to a one-time charge of $6.1 million in the second quarter of 2002 to write off costs related to the terminated merger with Digene Corporation. Research and development costs decreased to $6.8 million for the first two quarters of 2003 from $8.7 million for the same period of 2002, a decrease of 22%, primarily as a result of lower engineering and regulatory costs associated with our ThinPrep Imaging System development activities. Sales and marketing costs increased to $40.0 million in the first two quarters of 2003 from $35.8 million for the same period of 2002, an increase of 12%. This increase reflects higher marketing costs related, in part, to the launch of the ThinPrep Imaging System in the second quarter of 2003 and additional costs to expand the market and customer base for the FirstCyte Breast Test domestically and the ThinPrep Pap Test on a worldwide basis, as well as the impact of the weaker U.S. dollar on worldwide expenditures. General and administrative costs increased to $12.9 million in the first two quarters of 2003 from $12.3 million for the same period of 2002, an increase of 5%, largely due to increased business insurance expenditures.

 

Interest income decreased to $1.4 million in the first two quarters of 2003 from $1.8 million for the same period of 2002, a decrease of 21%, due primarily to lower interest rates and a lower cash balance available for investment.

 

We estimated that our effective tax rate for the six months ended June 30, 2003 was 40%. Our tax rate for the six months ended June 30, 2002 was 38%, which was lower due primarily to the effect of research and development credits.

 

Liquidity and Capital Resources

 

At June 30, 2003, we had cash, cash equivalents and investment securities totaling $153.3 million. Cash provided by operations was $39.4 million during the six months ended June 30, 2003, compared to $40.1 million during the same period 2002. The cash flows provided by operations in the six months ended June 30, 2003 primarily reflect improving operating results and collection of accounts receivable. Cash flows provided by operations in the same period of 2002 primarily reflect net income generated during the period as well as collection of outstanding receivables.

 

Our investing activities during the six months ended June 30, 2003 provided cash of $34.1 million primarily as a result of $36.5 million in net proceeds from the sale of investment securities, offset in part by capital expenditures of $4.7 million, which included the purchase of machinery and office equipment for our distribution center in Methuen, Massachusetts. Our investing activities during the same period of 2002 generated cash of $1.5 million largely as a result of $5.5 million in net proceeds from the sale of investment securities.

 

13


Table of Contents

Our financing activities during the six months ended June 30, 2003 used cash of $47.3 million, primarily related to the repurchase of 4.5 million shares of our common stock for cash of $50.1 million, partially funded by proceeds from the exercise of common stock options and the Employee Stock Purchase Plan of $2.1 million and $0.6 million, respectively. Our financing activities during the six months ended June 30, 2002 generated cash of $9.7 million primarily as a result of proceeds from the exercise of stock options. In July 2003, the board of directors authorized an increase of $50.0 million in the total amount authorized to repurchase our common stock under our stock repurchase program, raising the total amount authorized for repurchase to $200.0 million.

 

As of June 30, 2003, we had the following addition to the contractual cash obligations described in our annual report on Form 10-K for the fiscal year ended December 31, 2002 (in thousands):

 

 

     Payments Due by Period

Contractual Obligations


   Total

   Less than
1 Year


  

1-3

Years


  

4-5

Years


   After 5
Years


Collaborative research

   $ 1,788    $ 875    $ 913    —      —  

 

We expect that our cash and cash equivalents, investment securities and cash flows from operating activities will be sufficient to meet our projected operating cash needs, including capital expenditures, lease and purchase commitments, tax payments and other strategic initiatives.

 

Recent Accounting Pronouncements

 

In November 2002, the Emerging Issues Task Force (“EITF”) issued EITF No. 00-21, Revenue Arrangements with Multiple Deliverables. Under EITF 00-21, revenues for contracts which contain multiple deliverables are allocated among the separate units based on their relative fair values. The provisions of EITF 00-21 are effective for contracts entered into in fiscal periods beginning after June 15, 2003 and any multiple element contracts will be evaluated under EITF 00-21 beginning on July 1, 2003. The provisions of EITF 00-21 are not expected to have a significant effect on our results of operations or financial position.

 

Certain Factors Which May Affect Future Results

 

The forward-looking statements in this Form 10-Q are made under the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Our 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, research and development plans, regulatory uncertainties, potential savings to the healthcare system, management’s assessment of market factors, costs related to current or future litigation, as well as statements regarding our strategy and plans, constitute forward-looking statements that involve risks and uncertainties. In some cases these forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “expect,” “project,” “predict,” “potential” or the negative of these words or comparable words. The factors listed under “Certain Factors Which May Affect Future Results” in our annual report on Form 10-K for the fiscal year ended December 31, 2002, 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 our business, financial condition, and results of operations. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, you are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made.

 

14


Table of Contents

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

 

Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments. We do not participate in derivative financial instruments, other financial instruments for which the fair value disclosure would be required under SFAS No. 107, Disclosures about Fair Value of Financial Instruments, or derivative commodity instruments. All of our investments are in investment-grade U.S. government securities and corporate bonds, which are carried at fair value on our books.

 

Primary Market Risk Exposures. Our primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. Our investment portfolio of cash equivalents and investment securities is subject to interest rate fluctuations, but we believe this risk is immaterial due to the short-term nature of these investments. Our business outside the United States is conducted in local currency. We have no foreign exchange contracts, option contracts, or other foreign hedging arrangements. There can be no assurance that the costs associated with our foreign operations will not be affected by exchange fluctuations between the United States and the local currencies where we do business. We estimate that any market risk associated with our foreign operations is not significant and is unlikely to have a material adverse effect on our business, financial condition or results of operations.

 

Item 4.    Controls and Procedures

 

(a)   Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in timely notification to them of information we are required to disclose in our periodic SEC filings and in ensuring that this information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations.

 

(b)   Changes in Internal Control. During the period covered by this report, there have been no significant changes in our internal control over financial reporting that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

 

15


Table of Contents

PART II    OTHER INFORMATION

 

Item 1.    Legal Proceedings

 

On June 16, 2003, we filed a suit for Declaratory Judgment in United States District Court for the District of Massachusetts asking the court to determine and declare that certain of TriPath Imaging, Inc.’s patents are invalid and not infringed by Cytyc’s ThinPrep Imaging System. On June 17, TriPath Imaging, Inc. announced that it had filed a lawsuit against Cytyc Corporation in the United States District Court for the Middle District of North Carolina alleging patent infringement, false advertising, defamation, intentional interference, unfair competition, and unfair and deceptive trade practices. Because these litigation matters are in a preliminary stage, management is unable to express an opinion as to their likely outcome or an estimate of the possible loss or range of loss. Nevertheless, we believe that the claims against Cytyc are without merit and intend to vigorously defend this suit.

 

Item 4.    Submission of Matters to a Vote of Security Holders.

 

At Cytyc’s annual meeting of stockholders held on May 15, 2003 (the “2003 Annual Meeting”), our stockholders took the following actions:

 

  1.   The approval of management’s nominees as Class I Directors to the board of directors with the nominees receiving the following votes:

 

     For

   Withheld

Sally W. Crawford

   89,505,762    1,657,882

William McDaniel

   84,888,258    5,973,736

Patrick J. Sullivan

   89,520,713    1,642,931

 

Each of the Class I Directors will serve for a three year term expiring at Cytyc’s Annual Meeting of stockholders in 2006, 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 2003 Annual Meeting. No other persons were nominated or received votes for election as directors of Cytyc at the 2003 Annual Meeting.

 

  2.   Cytyc’s stockholders ratified the selection of Deloitte & Touche LLP as Cytyc’s independent auditors for the fiscal year ending December 31, 2003. With respect to such matter, the votes were cast as follows: 83,039,928 shares were voted for the proposal, 8,065,178 shares were voted against the proposal and 58,538 shares were abstained from voting on the proposal.

 

In addition, on July 18, 2003, Cytyc’s board of directors appointed three new members to the board: Daniel J. Levangie, a Class II Director, to serve a term expiring at Cytyc’s Annual Meeting of Stockholders in 2004; Brock Hattox, a Class III Director, to serve a term expiring at Cytyc’s Annual Meeting of Stockholders in 2005; and Wayne Wilson, a Class I Director, to serve a term expiring at Cytyc’s Annual Meeting of Stockholders in 2006; or until each respective individual’s successor has been duly elected and qualified, or until his earlier resignation or removal.

 

Further, on August 8, 2003, William H. Longfield retired from the board of directors of Cytyc for personal reasons, contemporaneously with his retirement as Chairman and Chief Executive Officer of CR Bard, Inc.

 

Item   6.    Exhibits and Reports on Form 8-K.

 

  (a)   Exhibits

 

 

    Exhibit No.

  

Description


    3.1(1)    Third Amended and Restated Certificate of Incorporation of Cytyc Corporation.
    3.2(1)    Amended and Restated By-Laws of Cytyc Corporation.
    3.3(2)    Certificate of Amendment of Third Amended and Restated Certificate of Incorporation.
    4.1(3)    Specimen certificate representing the Common Stock.
    4.2(4)    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.

 

16


Table of Contents
    Exhibit No.

  

Description


    4.3(5)    Amendment No. 1 to Rights Agreement, dated as of June 22, 1998, between Cytyc Corporation and BankBoston, N.A., amending the Rights Agreement.
    4.4*    Amended and Restated Director Compensation Method Plan.
    31.1*    Certification of Patrick J. Sullivan, Chief Executive Officer and President, pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    31.2*    Certification of Robert L. Bowen, Vice President and Chief Financial Officer, pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    32.1*    Certification of Patrick J. Sullivan, Chief Executive Officer and President, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    32.2*    Certification of Robert L. Bowen, Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)   Incorporated by reference to the exhibits to our Registration Statement on Form S-1 (File No. 333-19367).
(2)   Incorporated herein by reference to the exhibits to our Quarterly Report on Form 10-Q, filed August 14, 2000.
(3)   Incorporated herein by reference to the exhibits to our Registration Statement on Form S-1 (File No. 333-00300).
(4)   Incorporated herein by reference to Exhibit 4.1 to our Current Report on Form 8-K, filed August 29, 1997.
(5)   Incorporated herein by reference to Exhibit 4.2 to our Quarterly Report on Form 10-Q, filed August 13, 1998.
 *   Filed herewith.

 

(b)    Reports on Form 8-K

 

There were four reports on Form 8-K filed by Cytyc during the quarter ended June 30, 2003.

 

On April 23, 2003, we filed a current report on Form 8-K to disclose that we issued a press release announcing our earnings for the quarter ended March 31, 2003. A copy of the release was furnished as an exhibit pursuant to Item 12 under Item 9 of such Form 8-K.

 

On May 8, 2003, we filed a current report on Form 8-K to disclose that we issued a press release announcing a new agreement with Quest Diagnostics to market the ThinPrep® Pap Test. A copy of the release was furnished as an exhibit under Item 9 of such Form 8-K.

 

On June 9, 2003, we filed a current report on Form 8-K to disclose that we issued a press release announcing that the U.S. Food and Drug Administration had approved our ThinPrep Imaging System for commercial use. A copy of the release was filed as an exhibit to such Form 8-K.

 

On June 17, 2003, we filed a current report on Form 8-K to disclose that we issued a press release announcing that we had filed suit for declaratory judgment regarding certain of TriPath Imaging, Inc.’s patents. A copy of the release was filed as an exhibit to such Form 8-K.

 

Subsequent Form 8-K Filings

 

On July 23, 2003, we filed a current report on Form 8-K to disclose that we issued a press release announcing our earnings for the quarter ended June 30, 2003. A copy of the release was furnished as an exhibit pursuant to Item 12 under Item 9 of such Form 8-K.

 

On July 24, 2003, we also filed a current report on Form 8-K to disclose that we issued a press release announcing that our board of directors authorized an additional $50 million for our stock repurchase program. A copy of the release was filed as an exhibit to such Form 8-K.

 

17


Table of Contents

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: August 8, 2003

By:    /s/    Robert L. Bowen                            

        Robert L. Bowen

        Vice President, Chief Financial Officer and

        Treasurer (Principal Financial Officer and

        Principal Accounting Officer)

 

18


Table of Contents

EXHIBIT INDEX

 

Exhibit No.

 

Description


3.1(1)   Third Amended and Restated Certificate of Incorporation of Cytyc Corporation.
3.2(1)   Amended and Restated By-Laws of Cytyc Corporation.
3.3(2)   Certificate of Amendment of Third Amended and Restated Certificate of Incorporation.
4.1(3)   Specimen certificate representing the Common Stock.
4.2(4)   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(5)   Amendment No. 1 to Rights Agreement, dated as of June 22, 1998, between Cytyc Corporation and BankBoston, N.A., amending the Rights Agreement.
4.4 *   Amended and Restated Director Compensation Method Plan.
31.1*   Certification of Patrick J. Sullivan, Chief Executive Officer and President, pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Certification of Robert L. Bowen, Vice President and Chief Financial Officer, pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*   Certification of Patrick J. Sullivan, Chief Executive Officer and President, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*   Certification of Robert L. Bowen, Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)   Incorporated by reference to the exhibits to our Registration Statement on Form S-1 (File No. 333-19367).
(2)   Incorporated herein by reference to the exhibits to our Quarterly Report on Form 10-Q, filed August 14, 2000.
(3)   Incorporated herein by reference to the exhibits to our Registration Statement on Form S-1 (File No. 333-00300).
(4)   Incorporated herein by reference to Exhibit 4.1 to our Current Report on Form 8-K, filed August 29, 1997.
(5)   Incorporated herein by reference to Exhibit 4.2 to our Quarterly Report on Form 10-Q, filed August 13, 1998.

* Filed herewith.

 

 

19