<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______________ to __________________
Commission File Number 0-27558
CYTYC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 02-0407755
------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
85 Swanson Road, Boxborough, MA 01719
(Address of principal executive offices, including Zip Code)
(978) 263-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: The number of shares of the
issuer's Common Stock, $0.01 par value per share, outstanding as of November 8,
2000 was 37,564, 798.
Total Number of Pages: 17
Exhibit Index is on Page 16
1
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CYTYC CORPORATION
INDEX TO FORM 10-Q
------------------
Page
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<TABLE>
<CAPTION>
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
December 31, 1999 and September 30, 2000 3
Consolidated Statements of Income for the three and
nine months ended September 30, 1999 and 2000 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 15
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CYTYC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 29,686 $ 55,941
Short-term investments......................................................... 40,682 22,793
Accounts receivable, net of allowance for doubtful accounts of $1,134 and
$1,287 in 1999 and 2000, respectively....................................... 22,379 33,463
Inventories.................................................................... 5,427 9,700
Prepaid expenses and other current assets...................................... 783 1,056
-------- --------
Total current assets........................................................ 98,957 122,953
-------- --------
Property and equipment, net....................................................... 10,660 16,730
Intangible assets, net............................................................ -- 6,971
Other assets...................................................................... 2,711 2,376
-------- --------
Total assets................................................................ $112,328 $149,030
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ $ 4,400 $ 5,871
Accrued expenses............................................................ 11,215 11,526
Deferred revenue............................................................ 1,722 2,441
-------- --------
Total current liabilities................................................ 17,337 19,838
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value--
Authorized--5,000,000 shares
No shares issued or outstanding.......................................... -- --
Common Stock, $.01 par value--
Authorized--200,000,000 shares
Issued and outstanding: 36,139,878 shares in 1999 and
37,276,490 shares in 2000.............................................. 361 373
Additional paid-in capital................................................... 169,951 181,883
Accumulated other comprehensive loss......................................... (53) (1,171)
Accumulated deficit.......................................................... (75,268) (51,893)
-------- --------
Total stockholders' equity.............................................. 94,991 129,192
-------- --------
Total liabilities and stockholders' equity.............................. $112,328 $149,030
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
<S> <C> <C> <C> <C>
1999 2000 1999 2000
------- ------- ------- -------
Net sales............................................................ $21,331 $37,209 $56,367 $99,512
Cost of sales........................................................ 3,832 5,866 11,303 17,285
------- ------- ------- -------
Gross profit...................................................... 17,499 31,343 45,064 82,227
------- ------- ------- -------
Operating expenses:
Research and development.......................................... 4,246 3,462 9,826 10,653
Sales and marketing............................................... 11,842 14,264 31,663 41,145
General and administrative........................................ 1,254 3,539 4,690 9,784
------- ------- ------- -------
Total operating expenses....................................... 17,342 21,265 46,179 61,582
------- ------- ------- -------
Income (loss) from operations........................................ 157 10,078 (1,115) 20,645
Other income (expense), net:
Interest income................................................... 936 1,263 2,785 3,323
Other, net........................................................ -- -- 1,107 --
------- ------- ------- -------
Other income, net.............................................. 936 1,263 3,892 3,323
------- ------- ------- -------
Income before provision for income taxes............................. 1,093 11,341 2,777 23,968
Provision for income taxes........................................... -- 346 -- 592
------- ------- ------- -------
Net income........................................................... $ 1,093 $10,995 $ 2,777 $23,376
======= ======= ======= =======
Net income per common and potential common share:
Basic............................................................. $0.03 $0.30 $0.08 $0.64
======= ======= ======= =======
Diluted........................................................... $0.03 $0.28 $0.07 $0.60
======= ======= ======= =======
Weighted average common and potential common shares outstanding:
Basic............................................................. 35,800 37,195 35,686 36,740
Diluted........................................................... 37,626 39,437 37,106 39,259
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................................... $ 2,777 $ 23,376
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization............................................ 1,288 2,181
Provision for doubtful accounts.......................................... 104 153
Amortization of goodwill and warrant..................................... -- 1,312
Compensation related to issuance of stock to directors................... 118 186
Changes in assets and liabilities, excluding effects of acquisition
Accounts receivable................................................... (7,383) (10,796)
Inventories........................................................... (536) (3,995)
Prepaid expenses and other current assets............................. (355) (258)
Accounts payable...................................................... 2,603 1,016
Accrued expenses...................................................... 2,348 (228)
Deferred revenue...................................................... 259 719
-------- --------
Net cash provided by operating activities.......................... 1,223 13,666
-------- --------
Cash flows from investing activities:
Acquisition of Acu-Pak, Inc. net of cash acquired........................... -- (5,760)
Decrease in other assets.................................................... 116 335
Purchases of property and equipment......................................... (2,933) (5,345)
Purchases of short-term investments......................................... (41,557) (27,917)
Proceeds from maturity of short-term investments............................ 46,796 45,799
-------- --------
Net cash provided by investing activities.......................... 2,422 7,112
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrant......................... 2,189 6,299
Proceeds from issuance of shares under Employee Stock Purchase Plan......... 37 288
-------- --------
Net cash provided by financing activities......................... 2,226 6,587
-------- --------
Effect of exchange rates on cash............................................... 95 (1,110)
-------- --------
Net increase in cash and cash equivalents...................................... 5,966 26,255
Cash and cash equivalents, beginning of period................................. 33,566 29,686
-------- --------
Cash and cash equivalents, end of period....................................... $ 39,532 $ 55,941
======== ========
Supplemental disclosure of non-cash items:
Changes in unrealized holding loss on short-term investments $ (132) $ (7)
======== ========
Issuance of common stock warrant to Quest Diagnostics, Inc -- $ 5,169
========
In connection with the acquisition of Acu-Pak, Inc., the following
noncash transaction occurred:
Fair value of assets acquired -- $ 7,173
Liabilities assumed -- (994)
-------- --------
Cash paid for acquisition and acquisition costs -- $ 6,179
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
The notes and accompanying consolidated financial statements are unaudited.
They have been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. The financial
statements should be read in conjunction with the financial statements and notes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
The information furnished reflects all adjustments, which, in the opinion
of management, are necessary for a fair presentation of results for the interim
periods. Such adjustments consisted only of normal recurring items. The interim
periods are not necessarily indicative of the results expected for the full year
or any future period.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies, as discussed below and elsewhere in
the notes to consolidated financial statements. The preparation of these
consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(2) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries: Cytyc International, S.A. (a
Swiss corporation) (including its wholly-owned subsidiaries Cytyc Swiss, S.A.,
and Cytyc SARL, whose wholly-owned subsidiaries are Cytyc Italia s.r.l. and
Cytyc France s.a.r.l.), Cytyc (Australia) PTY LIMITED (an Australian
corporation), Cytyc Canada Ltd. (a Canadian Corporation), Cytyc (UK) Limited (a
United Kingdom corporation) and Cytyc Securities Corporation (a Massachusetts
securities corporation), Cytyc R.E., Inc. (a Delaware corporation) and Cytyc NH,
Inc. (a Delaware corporation). All intercompany transactions and balances have
been eliminated in consolidation.
(3) Cash and Cash Equivalents
Cash equivalents consist of money market mutual funds, commercial paper and
U.S. government securities with original maturities of three months or less.
(4) Short-term Investments
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and
Equity Securities.
Short-term investments consist of U.S. government securities, corporate
bonds and commercial paper with original maturities between three and twelve
months. At September 30, 2000, the Company's available-for-sale securities had
contractual maturities that expire at various dates through September 2001. The
fair value of available-for-sale securities was determined based on quoted
market prices at the reporting date for those securities. Available-for-sale
securities are shown in the consolidated financial statements at fair market
value. At September 30, 2000 and December 31, 1999, the amortized cost basis,
aggregate fair value and gross unrealized holding gains (losses) by major
security type were as follows:
6
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CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
GROSS
UNREALIZED
HOLDING
AMORTIZED GAINS FAIR
COST (LOSSES) VALUE
--------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
SEPTEMBER 30, 2000
Available-for-sale securities
Corporate bonds (average maturity of 4.5 months)..... $ 1,991 $ (2) $ 1,989
U.S. government and agency securities (average
maturity of 7.4 months)............................. 12,874 (3) 12,871
Commercial paper (average maturity of 1.9 months).... 7,935 (2) 7,933
------- ---- -------
$22,800 $ (7) $22,793
======= ==== =======
DECEMBER 31, 1999
Available-for-sale securities
U.S. government and agency securities (average
maturity of 3.9 months).............................. $20,600 $(49) $20,551
Commercial paper (average maturity of 1.2 months)..... 20,126 5 20,131
------- ---- -------
$40,726 $(44) $40,682
======= ==== =======
</TABLE>
(5) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------- --------------
(in thousands)
<S> <C> <C>
Raw material and work-in-process............... $2,927 $5,984
Finished goods................................. 2,500 3,716
------ ------
$5,427 $9,700
====== ======
</TABLE>
(6) 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 nine month
periods ended September 30, 1999 and 2000.
7
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic weighted average common shares outstanding..................... 35,800 37,195 35,686 36,740
Dilutive effect of assumed exercise of stock options and warrant..... 1,826 2,242 1,420 2,519
------ ------ ------ ------
Weighted average common shares outstanding assuming dilution......... 37,626 39,437 37,106 39,259
====== ====== ====== ======
</TABLE>
Diluted weighted average shares outstanding excludes 13,806 and 102,262
potential common shares from stock options and warrant outstanding for the three
months ended September 30, 1999 and 2000, respectively, and 580,512 and 256,547
potential common shares from stock options and warrants outstanding for the nine
months ended September 30, 1999 and 2000 as their effect would be anti-dilutive.
(7) Comprehensive Income
The components of comprehensive income for the three and nine months ended
September 30, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000 1999 2000
------- ------- ------ ------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Comprehensive income:
Net income........................................................ $1,093 $10,995 $2,777 $23,376
Other comprehensive income (loss)
Unrealized gain (loss) on short-term investments............... (4) 5 (132) (7)
Foreign currency translation................................... (87) (323) 95 (1,110)
------ ------- ------ -------
Comprehensive income................................................. $1,002 $10,677 $2,740 $22,259
====== ======= ====== =======
</TABLE>
(8) Legal Proceedings
On September 13, 1999, the Company filed a patent infringement lawsuit
against AutoCyte, Inc. in the United States District Court for the District of
Delaware. In September 1999, AutoCyte, Inc. effected a merger with NeoPath, Inc.
The combined company was renamed TriPath Imaging, Inc. ("TriPath"). In addition
to seeking a permanent injunction to stop TriPath from infringing the Company's
patent, the Company seeks damages. TriPath answered the complaint in the lawsuit
and asserted counterclaims seeking a judgment declaring that the patent at issue
is invalid and unenforceable and not infringed by TriPath. On March 10, 2000,
TriPath filed a Motion for Summary Judgement of non-infringement, which the
Company opposed. On May 16, 2000, TriPath filed a motion for leave to amend its
answer and counterclaims in order to assert counterclaims that accused Cytyc of
certain violations of federal antitrust law, making false and misleading
statements in violation of federal and state unfair competition law, tortious
interference, abuse of process, and trade libel. In addition, TriPath sought to
add certain affirmative defenses to the patent infringement claims. On June 8,
2000, the Company opposed TriPath's motion for leave to amend, and on June 30,
2000, the court denied TriPath's motion. Fact discovery closed in September
2000. On October 25, 2000, TriPath filed a motion to preclude the Company's
expert witnesses' testimony, which the Company opposed. Expert discovery is
ongoing in this case.
On May 12, 2000, the Company filed a lawsuit against TriPath in the United
States District Court for the District of Massachusetts. The Company seeks
damages and injunctive relief and alleges that TriPath engaged in false and
misleading description, representation, advertising and promotion, unfair
competition, commercial disparagement, and interference with Cytyc's
advantageous business relationships. On June 5, 2000, the Massachusetts District
Court stayed the case until the Delaware District Court, where the Company's
lawsuit for patent infringement is pending against TriPath, ruled upon whether
there should be two proceedings and, if not, where the dispute should be
litigated. The Court lifted the stay on September 28, 2000, and discovery is
beginning in this case. The lawsuit is in its earliest stages.
8
<PAGE>
CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company designs, develops, manufactures and markets a sample
preparation system for medical diagnostic applications. The ThinPrep(R) System
consists of the ThinPrep(R) Processor and related disposable reagents, filters
and other supplies. The Company has marketed the ThinPrep System for use in non-
gynecological testing applications since 1991. On May 20, 1996, the Company
received premarket approval ("PMA") from the United States Food and Drug
Administration ("FDA") to market the ThinPrep 2000 Processor and related
reagents for cervical cancer screening as a replacement for the conventional Pap
smear method. On November 6, 1996, the FDA cleared expanded product labeling for
the ThinPrep System to include the claim that the ThinPrep 2000 System is
significantly more effective in detecting low grade and more severe lesions than
the conventional Pap smear method in a variety of patient populations. The
expanded labeling also indicates that the specimen quality using the ThinPrep
System is significantly improved over that of the conventional Pap smear method.
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. On February 25, 1997, the FDA approved the
Company's supplemental PMA application for use of a combination of an
endocervical brush and spatula sampling devices, which is a commonly used method
of collecting samples for conventional Pap smears. On September 4, 1997, the FDA
approved the Company's supplemental PMA application for the testing for the
human papillomavirus ("HPV") directly from a single vial of patient specimen
collected in a ThinPrep solution using the Hybrid Capture HPV I DNA Assay of
Digene Corporation. In March 1999, the FDA approved the use of Hybrid Capture II
DNA Assay from a single vial of patient specimen collected in ThinPrep solution.
In the third quarter of 1999, the Company announced that it had successfully
completed feasibility studies of the ThinPrep Imaging System(TM) to aid in
cervical cancer screening and is currently developing the product in preparation
for clinical trials. In May 2000, the FDA approved the ThinPrep(R) 3000
Processor, the Company's next-generation processor.
In the past, the Company has 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 System, ThinPrep 3000 Processor, and ThinPrep Imaging System,
expansion of the Company's manufacturing facilities, and the establishment of a
sales and marketing organization. The Company may experience losses in the
future due to domestic and international marketing and sales activities and new
product development efforts. The operating results of the Company have
fluctuated significantly in the past on an annual and a quarterly basis. The
Company expects that its operating results will fluctuate significantly from
quarter to quarter in the future depending on a number of factors, including the
extent to which the Company's products continue to gain market acceptance, the
rate and size of expenditures incurred for domestic and international sales and
distribution activities, the timing and level of reimbursement for the ThinPrep
System by third-party payors, and other factors, many of which are outside the
Company's control.
The Company occupies a 97,000 square foot facility in Boxborough,
Massachusetts. The Company has installed automated customized equipment for the
high-volume manufacture of disposable filters for use in connection with the
ThinPrep System. In January 2000, the Company acquired approximately 2.7 acres
of land and facilities of Acu-Pak, Inc., a contract packager in Londonderry, New
Hampshire that was manufacturing, filling vials containing and distributing the
Company's solutions for all of its ThinPrep line of products for $5.9 million in
cash. The Company accounted for the acquisition as a purchase and is amortizing
goodwill associated with the purchase over seven years beginning in January
2000.
The cost per ThinPrep(R) Pap Test(TM), plus a laboratory mark-up, is
generally billed by laboratories to third-party payors and results in a higher
amount for the ThinPrep Pap Test than the current billing for conventional Pap
tests. Successful sales of the ThinPrep System for cervical cancer screening in
the United States and other countries will depend on the availability of
adequate reimbursement from third-party payors such as private insurance plans,
managed care organizations and Medicare and Medicaid. In the United States, the
current rate of reimbursement to laboratories from managed care organizations
and other third-party payors to screen conventional Pap smears ranges from
approximately $6.00 to $36.00 per test, with $17.00 as the most common rate of
reimbursement. Although many health insurance companies have added the ThinPrep
Pap Test to their coverage, there can be no assurance
9
<PAGE>
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.
The Company expects to continue significant expenditures for sales and
marketing activities of the ThinPrep System and ThinPrep 3000 Processor for
cervical cancer screening in 2000. There can be no assurance that the Company's
current and planned sales and marketing activities will result in increased net
sales or will succeed in promoting the ThinPrep System to health care providers,
third-party payors or clinical laboratories.
The Company expects to increase its expenditures in 2000 for research and
development to fund development of the ThinPrep Imaging System, as well as
follow-on products and additional applications of ThinPrep technology. There can
be no assurance that the Company will obtain necessary regulatory approvals or
successfully develop such imaging technology or any other ThinPrep technology.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 and 1999
Net sales increased to $37.2 million in the third quarter of 2000 from
$21.3 million for the same period of 1999, an increase of 74%. 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 $31.3 million
in the third quarter of 2000 from $17.5 million for the same period of 1999, an
increase of 79%, and the gross margin increased to 84% in the third quarter of
2000 from 82% for the same period of 1999. ThinPrep Pap Tests in the United
States generally have a higher gross margin than the ThinPrep 2000 Processor or
international sales of either tests or processors. Management attributes the
increase in gross margin to the fact that sales of the ThinPrep Pap Test in the
United States represented a larger portion of revenue in the third quarter of
2000 and to reduction in the costs to manufacture its ThinPrep Pap Test.
Total operating expenses increased to $21.3 million in the third quarter of
2000 from $17.3 million for the same period of 1999, an increase of 23%.
Research and development costs decreased to $3.5 million in the third quarter of
2000 from $4.2 million for the same period of 1999, a decrease of 18%, primarily
as a result of the timing of engineering costs associated with the Company's
ThinPrep Imaging System development activities. The Company expects that
research and development expenses will increase in the succeeding quarters as a
result of the development costs for the imaging system. Sales and marketing
costs increased to $14.3 million in the third quarter of 2000 from $11.8 million
for the same period of 1999, an increase of 20%. This increase primarily
reflects expenses associated with marketing costs related to production, direct
to consumer advertising, medical education programs and increased international
sales personnel, the opening of new branches and physician advertising programs.
The Company expects that sales and marketing costs will increase in succeeding
quarters as a result of increased expenditures for personnel, physician and
consumer marketing programs and commissions expense. General and administrative
costs increased to $3.5 million in the third quarter of 2000 from $1.3 million
for the same period of 1999, an increase of 182%, primarily due to litigation
expenses associated with the patent infringement and other lawsuits (see "Legal
Proceedings") and increased personnel costs. In the third quarter of 1999, the
Company revised its estimate and reversed $700,000 in legal expenses which had
been accrued for certain litigation which was favorably settled during the
second quarter of 1999. Excluding the reversal, general and administrative
expenses would have increased 80% over the 1999 quarter.
Interest income increased to $1.3 million in the third quarter of 2000 from
$0.9 million for the same period of 1999, an increase of 35%, due to both higher
interest rates and higher cash balances available for investment.
Nine Months Ended September 30, 2000 and 1999
Net sales increased to $99.5 million in the first nine months of 2000 from
$56.4 million for the same period of 1999, an increase of 77%. 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 $82.2 million
in the first nine months of 2000 from $45.1 million for the same period of 1999,
an increase of 82%, and the gross margin increased to 83% in the first nine
months of 2000 from 80% for the same period of 1999. Management attributes the
increase in gross margin in 2000 primarily to increased sales of the higher
gross margin ThinPrep Pap Test in the United States as compared to domestic
sales of the ThinPrep 2000 Processor or international sales of either tests or
processors and to reduction in the costs to manufacture its ThinPrep Pap Test.
10
<PAGE>
Total operating expenses increased to $61.6 million in the first nine
months of 2000 from $46.2 million for the same period of 1999, an increase of
33%. Research and development costs increased to $10.7 million in the first nine
months of 2000 from $9.8 million for the same period of 1999, an increase of 8%,
primarily as a result of prototype material costs associated with the Company's
ThinPrep Imaging System development activities. The Company expects that
research and development expenses will increase in the succeeding quarters as a
result of the development costs for the imaging system. Sales and marketing
costs increased to $41.1 million in the first nine months of 2000 from $31.7
million for the same period of 1999, an increase of 30%. This increase primarily
reflects expenses associated with personnel costs and commissions related to
increased sales and increased medical education programs, increased
international expenses associated with increased international sales personnel,
and opening of new branches and physician advertising programs. The Company
expects that sales and marketing costs will increase in succeeding quarters as a
result of increased expenditures for personnel, physician and consumer marketing
programs and commission expense. General and administrative costs increased to
$9.8 million in the first nine months of 2000 from $4.7 million for the same
period of 1999, an increase of 109%, primarily due to litigation expenses
associated with the patent infringement and other lawsuits (see "Legal
Proceedings") and increased personnel costs. In the third quarter of 1999, the
Company revised its estimate and reversed $700,000 in legal expenses which had
been accrued for certain litigation which was favorably settled during the
second quarter of 1999. Excluding the reversal, general and administrative
expenses would have increased 82% over 1999.
Interest income increased to $3.3 million in the first nine months of 2000
from $2.8 million for the same period of 1999, an increase of 19%, due primarily
to higher interest rates in 2000. The Company also recorded $1.1 million in
other income during the first nine months of 1999 resulting from favorable
settlement of certain litigation.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have significantly exceeded its
revenue, resulting in an accumulated deficit of $51.9 million as of September
30, 2000. The Company has funded its operations primarily through the private
placement and public sale of equity securities and exercise of stock options and
warrants aggregating $182.3 million, net of offering expenses. At September 30,
2000, the Company had cash, cash equivalents and short-term investments of $78.7
million. Cash provided by the Company's operations during the nine months ended
September 30, 2000, was $13.7 million compared to $1.2 million in cash provided
by the Company's operations for the same period in 1999, primarily as a result
of significantly higher net income. The increase in accounts receivable of $10.8
million during the first nine months of 2000 was primarily due to significant
growth in sales during 2000 compared to 1999. Net inventories increased
approximately $4.0 million during the nine months ended September 30, 2000
primarily due to increased raw material purchases for ThinPrep 3000 production
and higher finished goods for increased filter and solution demand.
The Company's capital expenditures for the nine months ended September 30,
2000 and 1999 were $5.3 million excluding the acquisition of Acu-Pak, and $2.9
million, respectively. The increase was due primarily to production equipment
which was partially offset by a decrease in leasehold improvements and furniture
and fixture purchases.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the resources required to further develop its
marketing and sales capabilities, both domestic and international, the extent to
which such activities generate market acceptance and demand for the ThinPrep
System for cervical cancer screening and additional applications of its ThinPrep
technology. The Company's liquidity and capital requirements will also depend
upon the progress of the Company's research and development programs to develop
follow-on products including the ThinPrep Imaging System, the receipt of and the
time required to obtain regulatory clearances and approvals, and the resources
the Company devotes to developing, manufacturing and marketing its products. In
addition, the Company's capital requirements will depend on the extent of
potential liabilities, if any, and costs associated with existing or future
litigation (see "Legal Proceedings"). There can be no assurance that the Company
will not require additional financing or will not in the future seek to raise
additional funds through bank facilities, debt or equity offerings or other
sources of capital. Additional funding may not be available when needed or on
terms acceptable to the Company, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
INCOME TAXES
The Company's estimated effective tax rate for the three months ended
September 30, 2000 was 3.1%, due primarily to the effect of net operating loss
carryforwards and the application of the federal alternative minimum tax and
certain state minimum taxes. The effective tax rate represents the Company's
estimate of the rate expected to be applicable for the full fiscal year.
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YEAR 2000 READINESS DISCLOSURE AND RELATED INFORMATION
Until recently, many computer programs were written using two digits rather
than four digits to define the applicable year in the twentieth century. Such
software may recognize a date using "00" as the year 1900 rather than the year
2000. In addition, the year 2000 is a special case leap year. The consequences
of this issue may include systems failures, data corruption and business process
interruption to the extent companies fail to upgrade, replace or otherwise
address year 2000 problems. The year 2000 problem may also result in additional
business and competitive differentiation. Problems associated with the year 2000
problem may not become apparent until some time after January 2000.
The Company has completed its assessment of the potential impact of the
year 2000 problem on the Company's products, internal information systems and
third-party suppliers, payors and laboratory customers, and has finalized a year
2000 contingency plan for all mission critical systems. The plan includes an
assessment of possible contingencies and responsive remediation plans if any of
these systems are determined to have year 2000 issues. The costs incurred by the
Company through September 30, 2000 to address year 2000 compliance efforts were
approximately $40,000.
On the basis of its assessment, the Company believes that all of its
products are year 2000 compliant and that its internal information systems will
not experience material disruption as a result of year 2000 issues. However,
because of the many uncertainties associated with year 2000 compliance efforts
by the Company's third-party payors, laboratory customers and suppliers and
because any assessment by the Company of the year 2000 readiness of such third-
party payors, laboratory customers and suppliers is necessarily based primarily
on information provided by such parties, there can be no assurance that the
impact on the Company of any resulting year 2000 disruptions with respect to
such parties will not be material.
IMPACT OF EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Economic
and Monetary Union established fixed conversion rates between their existing
sovereign currencies and the Euro, and adopted the Euro as their common legal
currency. The Euro is currently being traded on currency exchanges and is
available for non-cash transactions. For a three-year transition period, both
the Euro and each participating country's sovereign currency will remain legal
currency. After June 30, 2002, the Euro will be the sole legal tender for the
participating countries.
A significant amount of uncertainty exists as to the interpretation of
certain Euro regulations and the effect that the Euro will have on the
marketplace, including its impact on currency exchange rate risk, pricing,
competition, contracts, information systems and taxation. The Company derived
approximately 1% of its revenues from sales of the ThinPrep System to customers
in countries which have converted to the Euro for the first nine months of 2000
which was billed in local currencies. The Company is currently evaluating Euro-
related issues and the impact that the introduction of the Euro may have on the
Company's business and results of operations. The Company expects to take
appropriate actions based on the results of its evaluation. The Company has not
yet determined the costs of addressing Euro-related issues, but does not expect
such costs to be material. Because the Company's evaluation of Euro-related
issues is at an early stage and is ongoing, however, there can be no assurance
that such issues and their related costs will not have a material adverse effect
on the Company's business, financial condition and results of operations.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
The forward looking statements in this Quarterly Report on Form 10-Q are
made under the safe harbor provisions of Section 21E of the Securities Exchange
Act of 1934, as amended. The Company's operating results and financial condition
have varied and may in the future vary significantly depending on a number of
factors. Statements in this Form 10-Q which are not strictly historical
statements, including, without limitation, statements regarding current or
future financial performance, management's plans and objectives for future
operations, domestic and international marketing and sales plans, product plans
and performance, availability of reimbursement for the Company's product,
potential savings to the health care system, management's assessment of market
factors, as well as statements regarding the strategy and plans of the Company,
constitute forward-looking statements that involve risks and uncertainties. The
following factors, among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this report and
presented elsewhere by management from time to time. The Company's risk factors
include its dependence on a single product, uncertainty of FDA
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approval and market acceptance and the additional cost related thereto, a
limited number of customers and a lengthy sales cycle, limited marketing and
sales experience, dependence on timely and adequate levels of third-party
reimbursement, CPT code implementation delays and delays in reimbursement, a
limited operating history, risks associated with commercialization, a history of
losses, potential fluctuations in future quarterly results, management of
growth, extensive government regulation, intense competition, risks associated
with the Euro conversion, potential liabilities and costs associated with any
existing or future litigation, uncertainty of additional applications and
dependence on single source suppliers. Such factors, among other risks detailed
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1999 filed with the Securities and Exchange Commission, may have a material
adverse effect upon the Company's business, financial condition and results of
operations. Because of these and other factors, past financial performance
should not be considered an indication of future performance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments. The Company does not participate in derivative
financial instruments, other financial instruments for which the fair value
disclosure would be required under SFAS No. 107, or derivative commodity
instruments. All of the Company's investments are in short-term, investment-
grade commercial paper, corporate bonds and U.S. Government and agency
securities that are carried at fair value on the Company's books. Accordingly,
the Company has no quantitative information concerning the market risk of
participating in such investments.
Primary Market Risk Exposures. The Company's primary market risk exposures
are in the areas of interest rate risk and foreign currency exchange rate risk.
The Company's investment portfolio of cash equivalents is subject to interest
rate fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments. The Company's business outside the
United States is conducted in local currency transactions. The Company has no
foreign exchange contracts, option contracts, or other foreign hedging
arrangements. However, the Company estimates that any market risk associated
with its foreign operations is not significant and is unlikely to have a
material adverse effect on the Company's business, financial condition and
results of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On September 13, 1999, the Company filed a patent infringement lawsuit
against AutoCyte, Inc. in the United States District Court for the District of
Delaware. In September 1999, AutoCyte, Inc. effected a merger with NeoPath, Inc.
The combined company was renamed TriPath Imaging, Inc. ("TriPath"). In addition
to seeking a permanent injunction to stop TriPath from infringing the Company's
patent, the Company seeks damages. TriPath answered the complaint in the lawsuit
and asserted counterclaims seeking a judgment declaring that the patent at issue
is invalid and unenforceable and not infringed by TriPath. On March 10, 2000,
TriPath filed a Motion for Summary Judgement of non-infringement, which the
Company opposed. On May 16, 2000, TriPath filed a motion for leave to amend its
answer and counterclaims in order to assert counterclaims that accused Cytyc of
certain violations of federal antitrust law, making false and misleading
statements in violation of federal and state unfair competition law, tortious
interference, abuse of process, and trade libel. In addition, TriPath sought to
add certain affirmative defenses to the patent infringement claims. On June 8,
2000, the Company opposed TriPath's motion for leave to amend, and on June 30,
2000, the court denied TriPath's motion. Fact discovery closed in September
2000. On October 25, 2000, TriPath filed a motion to preclude the Company's
expert witnesses' testimony, which the Company opposed. Expert discovery is
ongoing in this case.
On May 12, 2000, the Company filed a lawsuit against TriPath in the United
States District Court for the District of Massachusetts. The Company seeks
damages and injunctive relief and alleges that TriPath engaged in false and
misleading description, representation, advertising and promotion, unfair
competition, commercial disparagement, and interference with Cytyc's
advantageous business relationships. On June 5, 2000, the Massachusetts District
Court stayed the case until the Delaware District Court, where the Company's
lawsuit for patent infringement is pending against TriPath, ruled upon whether
there should be two proceedings and, if not, where the dispute should be
litigated. The Court lifted the stay on September 28, 2000, and discovery is
beginning in this case. The lawsuit is in its earliest stages.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company for the
quarter ended September 30, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYTYC CORPORATION
Date: November 13, 2000 By: /s/ Joseph W. Kelly
--------------------
Joseph W. Kelly
Senior Vice President, Chief
Financial Officer and
Treasurer
(Principal Financial and Accounting
Officer)
By: /s/ Leslie Teso-Lichtman
-------------------------
Leslie Teso-Lichtman
Vice President & Controller
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EXHIBIT INDEX
Exhibit
Number Description Page
----------------- ------------------------------------------------------ ----
27 Financial Data Schedule 17
16
