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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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 incorporation or (I.R.S. Employer
organization) Identification No.)
85 Swanson Road, Boxborough, MA 01719
(Address of principal executive offices, including Zip Code)
(978) 263-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: The number of shares of the
issuer's Common Stock, $0.01 par value per share, outstanding as of May 8, 2000
was 36,678,450.
Total Number of Pages: 17
Exhibit Index is on Page 16
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1
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CYTYC CORPORATION
INDEX TO FORM 10-Q
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Page
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Part I Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
December 31, 1999 and March 31, 2000 3
Consolidated Statements of Operations
for the three months ended March 31, 1999 and 2000 4
Consolidated Statements of Cash Flows
for the three months ended March 31, 1999 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Part II Other Information
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
2
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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, March 31,
1999 2000
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 29,686 $ 50,438
Short-term investments................................................................. 40,682 12,519
Accounts receivable, net of allowance for doubtful accounts of $1,134 and $1,204 in
1999 and 2000, respectively....................................................... 22,379 26,754
Inventories............................................................................ 5,427 6,046
Prepaid expenses and other current assets.............................................. 783 1,140
-------- --------
Total current assets............................................................. 98,957 96,897
-------- --------
Property and equipment, net................................................................. 10,660 13,754
Intangibles, net............................................................................ -- 7,831
Other assets................................................................................ 2,711 2,585
-------- --------
Total assets..................................................................... $112,328 $121,067
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................................... $ 4,400 $ 3,530
Accrued expenses....................................................................... 11,215 9,195
Deferred revenue....................................................................... 1,722 1,693
-------- --------
Total current liabilities........................................................ 17,337 14,418
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value--
Authorized--5,000,000 shares
No shares issued or outstanding...................................................... -- --
Common Stock, $.01 par value--
Authorized--60,000,000 shares
Issued and outstanding: 36,139,878 shares in 1999 and 36,345,832 shares in 2000...... 361 363
Additional paid-in capital............................................................. 169,951 176,449
Accumulated other comprehensive loss................................................... (53) (536)
Accumulated deficit.................................................................... (75,268) (69,627)
-------- --------
Total stockholders' equity....................................................... 94,991 106,649
-------- --------
Total liabilities and stockholders' equity....................................... $112,328 $121,067
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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CYTYC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 2000
------- -------
<S> <C> <C>
Net sales................................................................. $16,205 $28,778
Cost of sales............................................................. 3,533 5,306
------- -------
Gross profit......................................................... 12,672 23,472
------- -------
Operating expenses:
Research and development............................................. 2,201 3,420
Sales and marketing.................................................. 9,161 12,513
General and administrative........................................... 1,595 2,789
------- -------
Total operating expenses........................................ 12,957 18,722
------- -------
Income (loss) from operations............................................. (285) 4,750
Other income (expense), net:
Interest income...................................................... 917 985
Other, net........................................................... 25 (4)
------- -------
Other income, net............................................... 942 981
------- -------
Income before provision for income taxes.................................. 657 5,731
Provision for income taxes................................................ -- 90
------- -------
Net income................................................................ $ 657 $ 5,641
======= =======
Net income per common and potential common share:
Basic................................................................ $ 0.02 $ 0.16
======= =======
Diluted.............................................................. $ 0.02 $ 0.14
======= =======
Weighted average common and potential common shares outstanding:
Basic................................................................ 35,620 36,252
Diluted.............................................................. 36,870 39,167
</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>
Three Months Ended
March 31,
1999 2000
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 657 $ 5,641
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Depreciation and amortization....................................... 357 671
Provision for doubtful accounts..................................... -- 70
Amortization of goodwill and warrant................................ -- 451
Compensation related to issuance of stock to directors.............. 93 120
Changes in assets and liabilities, excluding effects of acquisition
Accounts receivable............................................ (298) (4,004)
Inventories.................................................... (130) (341)
Prepaid expenses and other current assets...................... 221 (342)
Accounts payable............................................... 68 (1,325)
Accrued expenses............................................... 388 (2,559)
Deferred revenue............................................... 46 (29)
-------- -------
Net cash provided by (used in) operating activities....... 1,402 (1,647)
-------- -------
Cash flows from investing activities:
Acquisition of Acu-Pak, Inc. net of cash acquired........................ -- (5,760)
Decrease in other assets................................................. 148 127
Purchases of property and equipment...................................... (1,111) (859)
Purchases of short-term investments...................................... (13,701) (2,698)
Proceeds from maturity of short-term investments......................... 21,746 30,848
-------- -------
Net cash provided by investing activities................. 7,082 21,658
-------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrant...................... 53 1,211
-------- -------
Net cash provided by financing activities................. 53 1,211
-------- -------
Net increase in cash and cash equivalents..................................... 8,537 21,222
Effect of exchange rates on cash.............................................. -- (470)
Cash and cash equivalents, beginning of period................................ 33,566 29,686
-------- -------
Cash and cash equivalents, end of period...................................... $ 42,103 $50,438
======== =======
Supplemental disclosure of non-cash items:
Changes in unrealized holding gain (loss) on short-term investments......... $ 45 $ (13)
======== =======
Issuance of common stock warrant to Quest Diagnostics, Inc.................. -- $ 5,169
======== =======
In connection with the acquisition of Acu-Pak, Inc. (see note 9), 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
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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 and commercial
paper with original maturities between three and twelve months. At March 31,
2000, the Company's available-for-sale securities had contractual maturities
that expire at various dates through December 2000. The fair value of
available-for-sale securities was determined based on quoted market prices at
the reporting date for those securities. Available-for-sale securities are
shown in the consolidated financial statements at fair market value. At March
31, 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>
March 31, 2000
--------------
Available-for-sale securities
U.S. government and agency securities (average
maturity of 4.0 months).............................. $10,639 $(12) $10,627
Commercial paper (average maturity of 2.9 months).... 1,893 (1) 1,892
------- ---- -------
$12,532 $(13) $12,519
======= ==== =======
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, March 31,
------------ ---------
1999 2000
---- ----
(in thousands)
<S> <C> <C>
Raw material and work-in-process.......... $2,927 $3,846
Finished goods............................ 2,500 2,200
------ ------
$5,427 $6,046
====== ======
</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 reflects the potential
dilution that could occur if the income were divided by the weighted-average
number of common and potential common shares outstanding during the period.
Diluted 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 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 months ended March 31, 1999 and 2000.
7
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CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 2000
---- ----
<S> <C> <C>
Basic weighted average common shares outstanding.................. 35,620 36,252
Dilutive effect of assumed exercise of stock options and warrant.. 1,250 2,915
------ ------
Weighted average common shares outstanding assuming dilution...... 36,870 39,167
====== ======
</TABLE>
Diluted weighted average shares outstanding excludes 522,205 and 19,843
potential common shares from stock options and warrant outstanding as of March
31, 1999 and 2000, respectively, as their effect would be anti-dilutive. In
accordance with the provisions of SFAS No. 128, and as a result of the January
2000 stock split (see Note 11), the Company has retroactively restated prior
years' net income per share.
(7) Reporting Comprehensive Income
The Company follows the provisions of SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting and display of
comprehensive income (loss) and its components in the financial statements.
Comprehensive income is the total of net income and all other nonowner changes
in equity including such items as unrealized holding gains/losses on securities
classified as available-for-sale, foreign currency translation adjustments and
minimum pension liability adjustments. The Company's comprehensive income for
the three months ended March 31, 1999 and 2000 was $718,000 and $5,158,000
respectively.
(8) Legal Proceedings
On September 13, 1999, the Company filed a patent infringement lawsuit
against AutoCyte, Inc. ("AutoCyte") in the United States District Court for the
District of Delaware. In addition to seeking a permanent injunction to stop
AutoCyte from infringing the Company's patent, the Company seeks damages.
AutoCyte has answered the complaint in the lawsuit and has asserted
counterclaims seeking a judgment declaring that the patent at issue is invalid
and unenforceable and not infringed by AutoCyte. On March 10, 2000, AutoCyte
filed a Motion for Summary Judgment of non-infringement, which the Company has
opposed. The lawsuit is in the early stages of discovery.
(9) Acquisition of Acu-Pak, Inc.
On January 3, 2000, the Company acquired Acu-Pak, Inc. ("Acu-Pak"), a
contract packager in Londonderry, New Hampshire, that was manufacturing, filling
and distributing all of the Company's solutions for its ThinPrep line of
products. In connection with this acquisition, the Company paid approximately
$5,919,000 in cash for all outstanding shares of Acu-Pak common stock as well as
for the land and building being used by Acu-Pak. The Company has treated the
acquisition as a purchase for accounting purposes and is amortizing goodwill
associated with the purchase over seven years beginning in January 2000.
Amortization of goodwill included in the three-month period ended March 31, 2000
was approximately $111,200.
The aggregate purchase price consisted of the following (in thousands):
Cash $5,919
Liabilities assumed 994
Acquisition costs 260
------
$7,173
======
8
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CYTYC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The purchase price has been allocated to the acquired assets as follows (in
thousands):
Current assets $1,153
Land and building 2,450
Equipment 456
Goodwill 3,114
------
$7,173
======
(10) Quest Diagnostics, Inc. Warrant
As of January 1, 2000, the Company entered into a supply and co-marketing
agreement with Quest Diagnostics, Inc. to market the Company's principal
product, the ThinPrep(R) Pap Test, as Quest Diagnostics' exclusive liquid-based
cervical cancer screening methodology. As consideration for the exclusive
nature of the relationship, Cytyc granted Quest Diagnostics a warrant to
purchase 300,000 shares of common stock at $30.42 per share. The Company
calculated the value of the warrant to be approximately $5.2 million and will
amortize such amount as a charge to the consolidated statements of operations
over the three-year term of the warrant.
(11) Stock Split
In December 1999, the Board of Directors approved a two-for-one split of
the Company's Common Stock to be effected in the form of a 100% stock dividend.
The additional shares were distributed on January 31, 2000 to stockholders of
record on January 14, 2000. All share and per share data presented herein has
been retroactively restated to give effect to this stock split.
9
<PAGE>
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 System
consists of the ThinPrep 2000 Processor and related disposable reagents, filters
and other supplies. The Company has marketed the ThinPrep System for use in non-
gynecological testing applications since 1991. On May 20, 1996, the Company
received premarket approval ("PMA") from the United States Food and Drug
Administration ("FDA") to market the ThinPrep 2000 Processor and related
reagents for cervical cancer screening as a replacement for the conventional Pap
smear method. On November 6, 1996, the FDA cleared expanded product labeling for
the ThinPrep System to include the claim that the ThinPrep 2000 System is
significantly more effective in detecting low grade and more severe lesions than
the conventional Pap smear method in a variety of patient populations. The
expanded labeling also indicates that the specimen quality using the ThinPrep
System is significantly improved over that of the conventional Pap smear method.
On February 25, 1997, the FDA approved the Company's supplemental PMA
application for use of a combination of an endocervical brush and spatula
sampling devices, which is a commonly used method of collecting samples for
conventional Pap smears. On September 4, 1997, the FDA approved the Company's
supplemental PMA application for the testing for the human papillomavirus
("HPV") directly from a single vial of patient specimen collected in a ThinPrep
solution using the Hybrid Capture HPV I DNA Assay of Digene Corporation. In
March 1999, the FDA approved the use of Hybrid Capture II DNA Assay from a
single vial of patient specimen collected in ThinPrep solution. The Company
commenced the full-scale commercial launch of the ThinPrep System for cervical
cancer screening in the United States in 1997 and in selected international
markets in 1998. The Company completed clinical trials for the ThinPrep(R) 3000
Processor, the Company's next-generation processor, and submitted a supplemental
PMA application to the FDA in October 1999. 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 has since
accelerated product development activities related thereto.
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
marketing and sales organization. The Company may experience losses in the
future as it expands its domestic and international marketing and sales
activities and continues its new product development efforts. The operating
results of the Company have fluctuated significantly in the past on an annual
and a quarterly basis. The Company expects that its operating results will
fluctuate significantly from quarter to quarter in the future depending on a
number of factors, including the extent to which the Company's products continue
to gain market acceptance, the rate and size of expenditures incurred as the
Company expands its domestic and international sales and distribution networks,
the timing and level of reimbursement for the ThinPrep System by third-party
payors, and other factors, many of which are outside the Company's control.
The Company occupies a 97,000 square foot facility in Boxborough,
Massachusetts. The Company has installed automated customized equipment for the
high-volume manufacture of disposable filters for use in connection with the
ThinPrep System. 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 will amortize
goodwill associated with the purchase over seven years beginning in January
2000.
The cost per ThinPrep Pap Test, plus a laboratory mark-up, is generally
billed by laboratories to third-party payors and results in a higher amount for
the ThinPrep 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 that third-party payors will provide
or continue to provide such coverage, that reimbursement levels will be adequate
10
<PAGE>
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 its significant expenditures for sales and
marketing activities of the ThinPrep System for cervical cancer screening in
2000. During 1997, the Company entered into a co-promotion agreement with Mead
Johnson to promote the ThinPrep Pap Test to obstetricians and gynecologists in
the United States. The Mead Johnson agreement expired on December 31, 1998;
however, Mead Johnson received a residual payment of approximately $1.6 million
in February 2000 based on 1999 product sales. There can be no assurance that the
Company's current and planned sales and marketing activities will result in
increased net sales, that the Company's direct sales force will succeed in
promoting the ThinPrep System to health care providers, third-party payors or
clinical laboratories, or that additional marketing and sales channels will be
successfully established.
The Company expects to increase its expenditures 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 March 31, 2000 and 1999
Net sales increased to $28.8 million in the first quarter of 2000 from
$16.2 million for the same period of 1999, an increase of 78%. 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 $23.5 million
in the first quarter of 2000 from $12.7 million for the same period of 1999, an
increase of 85%, and the gross margin increased to 82% in the first quarter of
2000 from 78% for the same period of 1999. 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 first quarter of 2000.
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.
Total operating expenses increased to $18.7 million in the first quarter of
2000 from $13.0 million for the same period of 1999, an increase of 44%.
Research and development costs increased to $3.4 million in the first quarter of
2000 from $2.2 million for the same period of 1999, an increase of 55%,
primarily as a result 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 $12.5 million in the first quarter of 2000 from $9.2 million
for the same period of 1999, an increase of 37%. This increase primarily
reflects expenses associated with the commissions related to increased sales,
increased medical education program expense, and increased international sales
personnel. 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 $2.8 million in the first quarter of 2000 from
$1.6 million for the same period of 1999, an increase of 75%, primarily due to
litigation expenses associated with the patent infringement lawsuit (see "Legal
Proceedings") and increased personnel costs.
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded its
revenue, resulting in an accumulated deficit of $69.6 million as of March 31,
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 $176.8 million, net of offering expenses. At March 31,
2000, the Company had cash, cash equivalents and short-term investments of $63.0
million. Cash used by the Company's operations during the first quarter of 2000,
excluding the effects of the acquisition of Acu-Pak, Inc., was $1.6 million
compared to $1.4 million in cash provided by the Company's operations for the
same period in 1999, primarily as a result of an increase in accounts receivable
and a decrease in accrued expenses partially offset by higher net income. The
increase in accounts receivable of $4.0 million during the first quarter of 2000
was primarily due to growth in sales during the first quarter of the year. Net
inventories increased approximately $0.3 million from December 31, 1999 to March
31, 2000 primarily due to increased raw material purchases for planned ThinPrep
3000 production.
The Company's capital expenditures for the quarters ended March 31, 2000
and 1999 were $3.8 million and $1.1 million, respectively. The increase was due
primarily to the acquisition of the land and building of Acu-Pak.
11
<PAGE>
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 3000 Processor and ThinPrep Imaging
System, the receipt of and the time required to obtain regulatory clearances and
approvals, and the resources the Company devotes to developing, 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 March
31, 2000 was 16%, 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.
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 the end of fiscal 1999 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 3% of its revenues from sales of the ThinPrep System to customers
in countries which have converted to the Euro for the first quarter 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
12
<PAGE>
take appropriate actions based on the results of its evaluation. The Company has
not yet determined the costs of addressing Euro-related issues, but does not
expect such costs to be material. Because the Company's evaluation of Euro-
related issues is at an early stage and is ongoing, however, there can be no
assurance that such issues and their related costs will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
Certain Factors Which May Affect Future Results
The Company does not provide financial performance forecasts. The forward
looking statements in this Quarterly Report on Form 10-Q are made under the safe
harbor provisions of Section 21E of the Securities Exchange Act of 1934, as
amended. The Company's operating results and financial condition have varied and
may in the future vary significantly depending on a number of factors.
Statements in this Form 10-Q which are not strictly historical statements,
including, without limitation, statements regarding current or future financial
performance, management's plans and objectives for future operations, domestic
and international marketing and sales plans, product plans and performance,
availability of reimbursement for the Company's product, potential savings to
the health care system, management's assessment of market factors, as well as
statements regarding the strategy and plans of the Company, constitute forward-
looking statements that involve risks and uncertainties. The following factors,
among others, could cause actual results to differ materially from those
contained in forward-looking statements made in this report and presented
elsewhere by management from time to time. The Company's risk factors include
its dependence on a single product, uncertainty of FDA 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, risks associated with
potential year 2000 software disruptions involving certain third party
customers, suppliers and payors of the Company, a limited operating history,
risks associated with commercialization, a history of losses, potential
fluctuations in future quarterly results, 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 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. ("AutoCyte") in the United States District Court for the
District of Delaware. In addition to seeking a permanent injunction to stop
AutoCyte from infringing the Company's patent, the Company seeks damages.
AutoCyte has answered the complaint in the lawsuit and has asserted
counterclaims seeking a judgment declaring that the patent at issue is invalid
and unenforceable and not infringed by AutoCyte. On March 10, 2000, AutoCyte
filed a Motion for Summary Judgment of non-infringement, which the Company has
opposed. The lawsuit is in the early stages of discovery.
13
<PAGE>
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 March 31, 2000.
14
<PAGE>
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: May 11, 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
15
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
- ------ ----------- ----
27 Financial Data Schedule 17
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 50,438
<SECURITIES> 12,519
<RECEIVABLES> 27,958
<ALLOWANCES> 1,204
<INVENTORY> 6,046
<CURRENT-ASSETS> 96,897
<PP&E> 20,418
<DEPRECIATION> 6,664
<TOTAL-ASSETS> 121,067
<CURRENT-LIABILITIES> 14,418
<BONDS> 0
0
0
<COMMON> 363
<OTHER-SE> 106,286
<TOTAL-LIABILITY-AND-EQUITY> 121,067
<SALES> 28,778
<TOTAL-REVENUES> 29,759
<CGS> 5,306
<TOTAL-COSTS> 18,722
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,731
<INCOME-TAX> 90
<INCOME-CONTINUING> 5,641
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,641
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.14
</TABLE>
