<PAGE> 1
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to _________
Commission file number 0-28194
DIGENE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-1536128
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9000 VIRGINIA MANOR ROAD
BELTSVILLE, MARYLAND 20705
- ---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 470-6500
--------------
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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.
Shares outstanding as of
Class November 12, 1998
- -------------------------------------- -------------------------
Common Stock, par value $.01 per share 14,331,321
- --------------------------------------------------------------------------------
<PAGE> 2
DIGENE CORPORATION
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. CONSOLIDATED FINANCIAL INFORMATION:
Item 1. Consolidated Financial Statements -
Consolidated Balance Sheets -
September 30, 1998 and June 30, 1998 1
Consolidated Statements of Operations -
Three months ended September 30, 1998 and 1997 2
Consolidated Statements of Cash Flows -
Three months ended September 30, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 5
PART II. OTHER INFORMATION:
Item 2. Changes in Securities and Use of Proceeds 9
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
EXHIBIT INDEX 13
</TABLE>
ii
<PAGE> 3
PART I. CONSOLIDATED FINANCIAL INFORMATION
ITEM 1.
DIGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
----------------- -----------------
(UNAUDITED)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 9,634,739 $ 18,330,803
Short-term investments 10,615,852 7,181,572
Accounts receivable, less allowance of approximately $209,000 at
September 30, 1998 and June 30, 1998, respectively 4,302,672 3,072,224
Inventories 3,728,192 3,557,289
Prepaid expenses and other current assets 1,629,890 560,706
----------------- -----------------
Total current assets 29,911,345 32,702,594
Property and equipment, net 2,558,958 2,627,244
Intangible assets, net 1,476,122 12,784
Deposits 130,862 96,916
----------------- -----------------
Total assets $ 34,077,287 $ 35,439,538
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,808,355 $ 2,424,245
Accrued expenses 718,423 542,064
Accrued payroll 1,052,276 755,490
Current maturities of long-term debt 271,194 552,717
----------------- -----------------
Total current liabilities 3,850,248 4,274,516
Accrued rent 42,349 54,340
Deferred rent 5,644 11,980
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized, 14,304,407 and
14,117,308 shares issued and outstanding at September 30, 1998
and June 30, 1998, respectively 143,044 141,173
Additional paid-in capital 71,893,056 70,373,310
Accumulated deficit (41,857,054) (39,415,781)
----------------- -----------------
Total stockholders' equity 30,179,046 31,098,702
----------------- -----------------
Total liabilities and stockholders' equity $ 34,077,287 $ 35,439,538
================= =================
</TABLE>
1
<PAGE> 4
DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Revenues:
Product sales $ 3,604,207 $ 2,512,010
Research and development contracts - 13,900
------------------ ------------------
Total revenues 3,604,207 2,525,910
Costs and expenses:
Cost of product sales 975,989 714,411
Research and development 1,031,413 991,139
Selling and marketing 2,952,627 1,710,916
General and administrative 1,365,301 1,031,061
Amortization of intangible assets 37,521 130,980
------------------ ------------------
Loss from operations (2,758,644) (2,052,597)
Other income (expense):
Other income (expense) 60,262 (51,267)
Interest income 335,414 189,074
Interest expense (13,946) (45,449)
------------------ ------------------
Loss from operations before income taxes (2,376,914) $ (1,960,239)
Provision for income taxes 64,359 -
------------------ ------------------
Net loss $ (2,441,273) (1,960,239)
================== ==================
Basic and diluted net loss per share $ (0.17) $ (0.17)
================== ==================
Weighted average shares outstanding 14,301,516 11,585,271
================== ==================
</TABLE>
2
<PAGE> 5
DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
1998 1997
----------------- -----------------
(UNAUDITED)
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (2,441,273) $ (1,960,239)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment 383,862 153,436
Amortization of intangible assets 37,521 130,980
Changes in operating assets and liabilities:
Accounts receivable (1,230,448) (216,336)
Due from related party - 358,251
Inventories (170,903) (842,605)
Prepaid expenses and other current assets (1,069,184) 85,503
Deposits (33,946) (121,688)
Accounts payable (615,890) (173,173)
Accrued expenses 176,359 (156,580)
Accrued payroll 296,786 96,963
Accrued rent (11,991) (11,144)
Deferred rent (6,336) (6,334)
------------------ -----------------
Net cash used in operating activities (4,685,443) (2,662,966)
INVESTING ACTIVITIES
Purchases of short-term investments (3,434,280) (2,481,183)
Maturities of short-term investments - 4,360,388
Capital expenditures (315,576) (258,134)
Additions to intangible assets (862) -
------------------ -----------------
Net cash provided by (used in) investing activities (3,750,718) 1,621,071
FINANCING ACTIVITIES
Exercise of Common Stock options 21,620 29,368
Principal repayments on long-term debt (281,523) (320,665)
------------------ -----------------
Net cash used in financing activities (259,903) (291,297)
------------------ -----------------
Net decrease in cash and cash equivalents (8,696,064) (1,333,192)
Cash and cash equivalents at beginning of period 18,330,803 8,452,864
------------------ -----------------
Cash and cash equivalents at end of period $ 9,634,739 $ 7,119,672
================== =================
</TABLE>
3
<PAGE> 6
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements for the three month periods ended
September 30, 1998 and 1997 are unaudited and include all adjustments which, in
the opinion of management, are necessary to present fairly the results of
operations for the periods then ended. All such adjustments are of a normal
recurring nature. These consolidated financial statements should be read in
conjunction with the Annual Report on Form 10-K for the year ended June 30, 1998
of Digene Corporation (the "Company"), which includes financial statements and
notes thereto for the years ended June 30, 1998, 1997 and 1996.
The results of the Company's operations for any interim period are not
necessarily indicative of the results of the Company's operations for any other
interim period or for a full fiscal year.
2. NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No.
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities, except as required by Staff Accounting Bulletin No. 98
("SAB 98"). The definition of diluted earnings per share is very similar to the
previous definition of fully diluted earnings per share. All net loss per share
amounts for all periods have been presented, and where appropriate restated, to
conform to the SFAS No. 128 requirements.
3. ACQUISITION
On July 1, 1998, the Company issued 181,884 shares of its Common Stock, par
value $0.01 per share, as consideration for its purchase of all of the
outstanding capital stock of Viropath B.V., a company with limited liability,
registered at Amsterdam, the Netherlands ("Viropath"). The 181,884 shares of the
Company's Common Stock were recorded at $8.247 per share, in accordance with the
Stock Purchase Agreement, and resulted in total consideration of approximately
$1,500,000. The Company is obligated to pay royalties on future sales of
Viropath's licensed products, not to exceed $1,000,000. The acquisition has been
accounted for using the purchase method of accounting. The Company has allocated
the excess of the purchase price over the fair market value of the acquired net
assets as goodwill, which is being amortized on a straight-line basis over ten
years. The operating results of Viropath are included in the Company's financial
statements since the effective date of the acquisition. The operating results of
Viropath are not considered material to the consolidated financial statements of
the Company, and accordingly, pro forma financial information has not been
presented for this acquisition.
4
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS.
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the Consolidated Financial
Statements and the related Notes thereto included elsewhere in this report and
in the Annual Report on Form 10-K for the year ended June 30, 1998 of Digene
Corporation (the "Company"). Statements regarding the Company's expectations as
to financial results and other aspects of its business set forth below or
otherwise made in writing or orally by the Company may constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Although the Company believes that its expectations are
based on reasonable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results will not
differ materially from its expectations. Factors that might cause or contribute
to such differences include, but are not limited to, uncertainty of future
profitability, uncertainty of clinical trial results, uncertainty of market
acceptance, risks inherent in international transactions, limited sales and
marketing experience, dependence on third-party reimbursement, competition,
dependence on European distributor, extent of government regulations, delay in
or failure to obtain regulatory approvals, uncertainty regarding patents and
proprietary rights, and the inability to obtain requisite additional financing.
RESULTS OF OPERATIONS
Product sales increased to $3,604,000 for the three month period ended September
30, 1998 from $2,512,000 for the corresponding period in 1997. The increase was
due, primarily, to increased sales of the Company's Hybrid Capture tests,
primarily its HPV test, partially offset by lower sales of equipment and
non-core products.
Research and development contract revenues decreased to $0 for the three month
period ended September 30, 1998 from $14,000 for the corresponding period in
1997. The decrease was due, primarily, to the completion of contract research
activities during fiscal 1998.
Cost of product sales increased to $976,000 for the three month period ended
September 30, 1998 from $714,000 for the corresponding period in 1997. Gross
margin on product sales increased to 73% for the three month period ended
September 30, 1998 from 72% for the corresponding period in 1997.
Research and development expenses increased to $1,031,000 for the three month
period ended September 30, 1998 from $991,000 for the corresponding period in
1997. The increase was due, primarily, to the hiring of additional personnel,
offset by decreased laboratory supply expenses.
5
<PAGE> 8
Selling and marketing expenses increased to $2,953,000 for the three month
period ended September 30, 1998 from $1,711,000 for the corresponding period in
1997. The increase was due, primarily, to substantial increases in sales and
marketing programs and to the hiring of additional selling and marketing
personnel in conjunction with the Company's efforts to increase product sales.
General and administrative expenses increased to $1,365,000 for the three month
period ended September 30, 1998 from $1,031,000 for the corresponding period in
1997. The increase was due, primarily, to the hiring of additional
administrative personnel, as well as costs associated with the Company's
expansion into markets in Europe and Brazil.
Amortization of intangible assets decreased to $38,000 for the three month
period ended September 30, 1998 from $131,000 for the corresponding period in
1997. The decrease was due to the write-off of customer lists in full in fiscal
1998 pursuant to Statement of Position 98-5, "Reporting the Costs of Start-up
Activities", which were previously being amortized over time.
Interest income increased to $335,000 for the three month period ended September
30, 1998 from $189,000 for the corresponding period in 1997. The increase was
due to an increase in the Company's cash, cash equivalents and short-term
investments as a result of the Company's public offering of 2,250,000 shares of
its common stock in October 1997, partially offset by the Company's continuing
negative cash flows.
Interest expense decreased to $14,000 for the three month period ended September
30, 1998 from $45,000 for the corresponding period in 1997. The decrease was due
to a decrease in indebtedness related to the Company's expansion into the
European market.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in accumulated deficit of approximately $41,857,000 at
September 30, 1998. The Company has funded its operations primarily through the
sale of equity securities. The Company experienced negative cash flows from
operations of $4,685,000 and $2,663,000 for the three months ended September 30,
1998, and 1997, respectively.
Capital expenditures increased to $316,000 for the three months ended September
30, 1998 from $258,000 for the corresponding period in 1997, due, primarily, to
the acquisition of equipment placed at customer sites to perform the Company's
tests.
The Company does not have any bank financing arrangements. The Company's
indebtedness consists, primarily, of notes payable related to its expansion into
the European market.
6
<PAGE> 9
On October 20, 1997, the Company completed a public offering of 2,250,000 shares
of its common stock, the net proceeds of which, after underwriters' commissions
and expenses, were $20,654,000.
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to complete its planned product development efforts, expand
its sales and marketing activities and expand its manufacturing capabilities.
The Company expects that its existing capital resources will be adequate to fund
the Company's operations through calendar 1999. No assurances can be given that
there will be no changes in the Company that would consume a significant amount
of its available resources before that time. The Company's future capital
requirements and the adequacy of available funds will depend on numerous
factors, including the successful commercialization of its products, progress in
its product development efforts and the magnitude and scope of such efforts,
progress with preclinical studies and clinical trials, progress in its
regulatory affairs activities, the cost and timing of expansion of manufacturing
capabilities, the expansion of the Company's direct European sales operations,
the development and maintenance of effective sales and marketing activities, the
cost of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
and the development of strategic alliances for the marketing of its products. To
the extent that the Company's existing capital resources and funds generated
from the Company's operations, if any, are insufficient to meet current or
planned operating requirements, the Company will be required to obtain
additional funds through equity or debt financing, strategic alliances with
corporate partners and others, or through other sources. The Company does not
have any committed sources of additional financing, and there can be no
assurance that additional funding, if necessary, will be available on acceptable
terms, if at all. If adequate funds are not available, the Company may be
required to delay, scale back or eliminate certain aspects of its operations or
attempt to obtain funds through arrangements with collaborative partners or
others that may require the Company to relinquish rights to certain of its
technologies, product candidates, products or potential markets. If adequate
funds are not available, the Company's business, financial condition and results
of operations will be materially and adversely effected.
YEAR 2000 COMPLIANCE
The Company is working to resolve the potential impact of the year 2000 on the
ability of the Company's computerized information programs and systems and
certain manufacturing and other equipment to accurately process information that
may be date-sensitive. Any of the Company's technology that recognizes a date
using "00" as the year 1900 rather than the year 2000 could result in errors or
system failures.
7
<PAGE> 10
The Company has substantially completed an assessment of its computer programs
and telephone systems and has identified those programs and systems that are
presently not year 2000 compliant. The Company is in the process of assessing
its manufacturing and other equipment, as well as communicating with significant
vendors or customers to determine their respective states of readiness. The
Company expects to complete this assessment in early 1999.
In connection with the planned relocation of the Company's business to a new
facility in Gaithersburg, Maryland in September 1999, the Company expects to
replace most of its programs, systems and manufacturing and other equipment with
new programs, systems and equipment which the suppliers will certify to be year
2000 compliant. By the summer of 1999 the Company plans to upgrade, to the
extent necessary, any of its existing programs, systems and equipment that will
be transferred to the new facility. If the relocation is significantly delayed,
which the Company does not presently anticipate, the Company expects to expand
the upgrade and replacement phase to include the necessary upgrade and
replacement of programs, systems and equipment which are located at its existing
facilities but which the Company does not plan to use at the new facility. The
cost of these contingent upgrades and replacements is presently unknown.
The Company plans to begin testing any upgraded or replaced programs, systems
and equipment when the new facility is sufficiently complete to enable testing,
which is expected to provide adequate time to complete all testing and to
implement any necessary contingency plans. Based on information developed to
date as a result of its assessment efforts, the Company does not anticipate that
the cost of upgrading or replacing its programs, systems and equipment will be
material to the Company. If the Company and third parties upon which it relies
are unable to address the year 2000 issue in a timely and successful manner, the
Company's business could be materially adversely affected.
8
<PAGE> 11
PART II. OTHER INFORMATION
<TABLE>
<S> <C>
Item 2. Changes in Securities and Use of Proceeds
Effective date of the registration for which the
use of proceeds information is being disclosed: May 21, 1996
SEC file number assigned to the registration statement: 0-28194
Offering commencement date: May 22, 1996
(Offering was not terminated before the sale of
all securities registered)
Names of managing underwriters: UBS Securities LLC
Montgomery Securities
Title of security: Common Stock, par value $.01 per share
</TABLE>
<TABLE>
<S> <C>
FOR THE ACCOUNT OF THE ISSUER
Amount registered 3,000,000
Aggregate price of offering amount registered $ 34,500,000
Amount sold 3,000,000
Aggregate offering price of amount sold $ 34,500,000
DIRECT OR INDIRECT PAYMENTS TO OTHERS FOR:
Underwriting discounts and commissions $ 2,415,000
Other expenses $ 1,180,000
------------------------
TOTAL EXPENSES $ 3,595,000
NET OFFERING PROCEEDS TO THE ISSUER $ 30,905,000
DIRECT OR INDIRECT PAYMENTS TO OTHERS FOR:
Construction of plant, building and facilities $ 327,000
Purchases and installations of machinery and equipment $ 2,849,000
Repayment of indebtedness $ 2,931,000
Working capital $ 21,511,000
Other purposes
Payments re: Murex Agency Agreement $ 3,287,000
------------------------
TOTAL $ 30,905,000
</TABLE>
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<PAGE> 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Registrant held on October 29,
1998, the holders of Common Stock elected the following uncontested nominees as
directors of the Company to hold office until the year 2001 annual meeting of
stockholders or until their successors are duly elected and qualified:
<TABLE>
<CAPTION>
VOTES VOTES
NOMINEE FOR WITHHELD
- ------- --- --------
<S> <C> <C>
Charles M. Fleischman 12,459,792 38,755
Joseph M. Migliara 12,459,782 38,765
</TABLE>
There were no broker non-votes in the election of directors.
10
<PAGE> 13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation (Incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on Form
S-1 (File No. 333-2968))
3.2 Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-1 (File No. 333-2968))
4.1 Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1
to the Company's Registration Statement on Form S-1 (File No. 333-2968))
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed the following Report on Form 8-K during the quarter ended
September 30, 1998:
<TABLE>
<CAPTION>
Date of Report Items Reported
-------------- --------------
<S> <C> <C>
July 1, 1998 9
</TABLE>
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<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
DIGENE CORPORATION
<S> <C>
Date: November 13, 1998 By: /s/ Charles M. Fleischman
------------------------------------- -------------------------------
Charles M. Fleischman
Executive Vice President,
Chief Operating Officer,
Chief Financial Officer
(Principal Financial Officer)
Date: November 13, 1998 By: /s/ Joseph P. Slattery
------------------------------------ --------------------------------
Joseph P. Slattery
Vice President, Finance,
and Controller
(Principal Accounting Officer)
</TABLE>
12
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<S> <C> <C> <C>
3.1 Amended and Restated Certificate of Incorporation
(Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (File No. 333-2968))
3.2 Amended and Restated Bylaws (Incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on
Form S-1 (File No. 333-2968))
4.1 Form of Common Stock Certificate (Incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (File No. 333-2968))
27 Financial Data Schedule
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,634,739
<SECURITIES> 10,615,852
<RECEIVABLES> 4,511,513
<ALLOWANCES> 208,841
<INVENTORY> 3,728,192
<CURRENT-ASSETS> 29,911,345
<PP&E> 6,486,993
<DEPRECIATION> 3,928,035
<TOTAL-ASSETS> 34,077,287
<CURRENT-LIABILITIES> 3,850,248
<BONDS> 0
0
0
<COMMON> 143,044
<OTHER-SE> 30,036,002
<TOTAL-LIABILITY-AND-EQUITY> 34,077,287
<SALES> 3,604,207
<TOTAL-REVENUES> 3,604,207
<CGS> 975,989
<TOTAL-COSTS> 2,007,402
<OTHER-EXPENSES> (60,262)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,946
<INCOME-PRETAX> (2,376,914)
<INCOME-TAX> 64,359
<INCOME-CONTINUING> (2,441,273)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,441,273)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
