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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-28194
DIGENE CORPORATION
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(Exact name of registrant as specified in its charter)
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DELAWARE 52-1536128
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9000 VIRGINIA MANOR ROAD
BELTSVILLE, MARYLAND 20705
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (301) 470-6500
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NOT APPLICABLE
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(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
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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 10, 1999
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Common Stock, par value $.01 per share 14,590,553
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DIGENE CORPORATION
INDEX TO FORM 10-Q
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Page
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PART I. CONSOLIDATED FINANCIAL INFORMATION:
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Item 1. Consolidated Financial Statements -
Consolidated Balance Sheets -
September 30, 1999 and June 30, 1999 1
Consolidated Statements of Operations -
Three months ended September 30, 1999 and 1998
2
Consolidated Statements of Cash Flows -
Three months ended September 30, 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and 5
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 9
PART II. OTHER INFORMATION:
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
EXHIBIT INDEX 12
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PART I. CONSOLIDATED FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DIGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
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SEPTEMBER 30, JUNE 30,
1999 1999
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(UNAUDITED)
ASSETS
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Current assets:
Cash and cash equivalents $ 7,727,603 $ 13,934,415
Short-term investments 9,594,557 4,347,084
Accounts receivable, less allowance of approximately $170,000 and,
$169,000 at September 30, 1999 and June 30, 1999, respectively 2,852,832 2,356,537
Inventories 2,969,257 2,894,210
Prepaid expenses and other current assets 1,059,847 1,388,224
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Total current assets 24,204,096 24,920,470
Property and equipment, net 1,657,558 1,737,078
Intangible assets, net 1,313,253 1,350,774
Deposits 169,370 100,157
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Total assets $ 27,344,277 $ 28,108,479
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,534,121 $ 2,503,387
Accrued expenses 920,208 809,811
Accrued payroll 1,235,923 1,108,236
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Total current liabilities 4,690,252 4,421,434
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized, 14,587,225
and 14,565,937 shares issued and outstanding at September 30, 1999
and June 30, 1999, respectively 145,872 145,659
Additional paid-in capital 72,593,153 72,514,583
Deferred stock compensation (237,375) (253,200)
Accumulated deficit (49,847,625) (48,719,997)
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Total stockholders' equity 22,654,025 23,687,045
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Total liabilities and stockholders' equity $ 27,344,277 $ 28,108,479
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DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
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THREE MONTHS ENDED
SEPTEMBER 30,
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1999 1998
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(UNAUDITED)
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Revenues:
Product sales $ 5,090,365 $ 3,604,207
Research and development contracts 127,331 -
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Total revenues 5,217,696 3,604,207
Costs and expenses:
Cost of product sales 1,676,694 975,989
Research and development 1,149,768 1,031,413
Selling and marketing 2,304,826 2,952,627
General and administrative 1,287,727 1,365,301
Amortization of intangible assets 37,521 37,521
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Loss from operations (1,238,840) (2,758,644)
Other income (expense):
Other income (expense) (29,894) 60,262
Interest income 204,670 335,414
Interest expense (97) (13,946)
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Loss from operations before income taxes (1,064,161) (2,376,914)
Provision for income taxes 63,467 64,359
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Net loss $ (1,127,628) $ (2,441,273)
============== ==============
Basic and diluted net loss per share $ (0.08) $ (0.17)
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Weighted average shares outstanding 14,579,413 14,301,516
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DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
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THREE MONTHS ENDED
SEPTEMBER 30,
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1999 1998
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(UNAUDITED)
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OPERATING ACTIVITIES
Net loss $ (1,127,628) $ (2,441,273)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and equipment 245,239 383,862
Amortization of intangible assets 37,521 37,521
Compensation expense related to stock options 15,825 -
Changes in operating assets and liabilities:
Accounts receivable (496,295) (1,230,448)
Inventories (75,047) (170,903)
Prepaid expenses and other current assets 328,377 (1,069,184)
Deposits (69,213) (33,946)
Accounts payable 30,734 (615,890)
Accrued expenses 110,397 176,359
Accrued payroll 127,687 296,786
Accrued rent - (11,991)
Deferred rent - (6,336)
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Net cash used in operating activities (872,403) (4,685,443)
INVESTING ACTIVITIES
Purchases of short-term investments (5,247,473) (3,434,280)
Capital expenditures (165,719) (315,576)
Additions to intangible assets - (862)
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Net cash used in investing activities (5,413,192) (3,750,718)
FINANCING ACTIVITIES
Exercise of Common Stock options 78,783 21,620
Principal repayments on long-term debt - (281,523)
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Net cash provided by (used in) financing activities 78,783 (259,903)
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Net decrease in cash and cash equivalents (6,206,812) (8,696,064)
Cash and cash equivalents at beginning of period 13,934,415 18,330,803
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Cash and cash equivalents at end of period $ 7,727,603 $ 9,634,739
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DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements for the three-month periods ended
September 30, 1999 and 1998 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 unaudited consolidated financial statements should be
read in conjunction with the financial statements and notes thereto included in
Digene's Annual Report on Form 10-K for the year ended June 30, 1999 filed with
the Securities and Exchange Commission.
The results of our operations for any interim period are not necessarily
indicative of the results of our operations for any other interim period or for
a full fiscal year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS.
The following discussion of our financial condition and results of operations
should be read in conjunction with our Consolidated Financial Statements and
the related Notes thereto included elsewhere in this report and in Digene's
Annual Report on Form 10-K for the year ended June 30, 1999. Some of the
information that follows are not statements of historical fact, and reflect our
intent, belief or expectations regarding the anticipated effect of events,
circumstances and trends. Such statements should be considered as forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Although we believe that our expectations are based on
reasonable assumptions within the bounds of our knowledge of our business and
operations, there can be no assurance that actual results will not differ
materially from our expectations. Factors that might cause or contribute to
such differences include: uncertainty of future profitability and cash
generation from operations; manufacturing delays while awaiting regulatory
approval for our new manufacturing facility and other disruptions relating to
our relocation to the new facility; uncertainty of clinical trial results for
our products under development; uncertainty of market acceptance of our
products by the worldwide medical community; risks inherent in international
transactions, including those relating to our expansion in Europe, Brazil and
elsewhere; our limited sales and marketing experience with a direct sales
force; the extent of future expenditures for sales and marketing programs;
dependence on third-party reimbursement from government entities, managed care
organizations, and private insurance plans; dependence on Abbott Laboratories
as our principal European distributor; delay in or failure to obtain regulatory
approvals for our products in development; uncertainty regarding patents and
proprietary rights in connection with our products; our ability to obtain
requisite additional financing to fund our operations beyond calendar 2000; and
other factors as set forth under the caption "Additional Considerations" in our
Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Product sales increased to $5,090,000 for the three-month period ended
September 30, 1999 from $3,604,000 for the corresponding period in 1998. The
increase was due primarily to increased sales of our Hybrid Capture tests,
primarily HBV, and related equipment, partially offset by lower sales of our
non-core products.
Research and development contract revenues increased to $127,000 for the
three-month period ended September 30, 1999 from $0 for the corresponding
period in 1998. The increase was due to our performance of contract research
activities, primarily under a major research contract with the National
Institutes of Health for the development of tests for herpes simplex virus.
Cost of product sales increased to $1,677,000 for the three-month period ended
September 30, 1999 from $976,000 for the corresponding period in 1998. Gross
margin on product sales decreased to 67% for the three-month period ended
September 30, 1999 from 73% for the
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corresponding period in 1998. The percentage decrease was due, primarily, to
changes in product mix reflecting proportionately greater sales of lower margin
equipment in the 1999 period than in the 1998 period.
Research and development expenses increased to $1,150,000 for the three-month
period ended September 30, 1999 from $1,031,000 for the corresponding period in
1998. The increase was due, primarily, to external professional service
expenditures.
Selling and marketing expenses decreased to $2,305,000 for the three-month
period ended September 30, 1999 from $2,953,000 for the corresponding period in
1998. The decrease was due, primarily, to lower external marketing professional
expenditures as a result of our Marketing and Distribution Agreement with
Abbott, partially offset by increased spending on marketing tradeshows and
conferences.
General and administrative expenses were relatively unchanged at $1,288,000 for
the three-month period ended September 30, 1999 compared to $1,365,000 for the
corresponding period in 1998.
Interest income decreased to $205,000 for the three-month period ended
September 30, 1999 from $335,000 for the corresponding period in 1998. The
decrease was due to lower average cash and cash equivalent balances primarily
as a result of negative cash flows from operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, our expenses have significantly exceeded our revenues,
resulting in an accumulated deficit of $49,848,000 at September 30, 1999. We
have funded our operations primarily through the sale of equity securities. We
have experienced negative cash flows from operations of $872,000 and $4,685,000
for the three months ended September 30, 1999 and 1998, respectively.
Capital expenditures decreased to $165,000 for the three months ended September
30, 1999 from $316,000 for the corresponding period in 1998, due primarily to
changes in certain of our distribution agreements requiring a smaller
investment in equipment.
We do not have any bank financing arrangements.
We have incurred negative cash flows from operations since our inception, and
have expended, and expect to continue to expend in the future, substantial
funds to complete our planned product development efforts, expand our sales and
marketing activities and expand our manufacturing capabilities. We expect that
our existing capital resources will be adequate to fund our operations through
calendar year 2000. We cannot give assurances that there will be no changes
that would consume a significant amount of our available resources before that
time. Our future capital requirements and the adequacy of available funds will
depend on numerous factors, including the successful commercialization of our
products, progress in our product development efforts and the magnitude and
scope of such efforts, progress with preclinical studies and clinical trials,
progress in our regulatory affairs activities, the cost and
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timing of expansion of our manufacturing capabilities, 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 our products. To the
extent that our existing capital resources and funds generated from operations
are insufficient to meet current or planned operating requirements, we will be
required to obtain additional funds through equity or debt financing, strategic
alliances with corporate partners and others, or through other sources.
Although we expect to seek additional equity financing, we do 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, we may be required to delay, scale
back or eliminate certain aspects of our operations or attempt to obtain funds
through arrangements with collaborative partners or others that may require us
to relinquish rights to certain of our technologies, product candidates,
products or potential markets. If adequate funds are not available, our
business, financial condition and results of operations will be materially and
adversely affected.
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YEAR 2000 READINESS DISCLOSURE
We are working to resolve the potential impact of the year 2000 on the ability
of our computerized information programs and systems and certain manufacturing
and other equipment to accurately process information that may be
date-sensitive. Any of our technology that recognizes a date using "00" as the
year 1900 rather than the year 2000 could result in errors or system failures.
We have completed an assessment of our manufacturing and research equipment,
computer programs and telephone systems and have identified the
mission-critical equipment, computer programs and systems that were not year
2000 compliant, more than 90% of which have been upgraded and/or
vendor-certified for year 2000 compliance. We have also tested a majority of
such mission-critical equipment, computer programs and systems for year 2000
compliance. We have substantially completed our upgrade and replacement
activities and expect to complete the remainder of our testing activities by
December 1999. We have obtained year 2000 readiness disclosures from
approximately 60% of our critical service providers, suppliers and customers.
While relatively few have reported full year 2000 readiness, none have
indicated concern regarding their ability to attain readiness before problems
might occur. We have not independently verified the accuracy of the year 2000
readiness disclosures of such service providers, suppliers and customers.
In connection with our planned move to a new facility in Gaithersburg, Maryland
in December 1999, we have upgraded or replaced the mission-critical computer
programs, systems and manufacturing and other equipment with new computer
programs, systems and equipment which the suppliers have certified or are
expected to certify to be year 2000 compliant. We have also made the necessary
year 2000-related changes to the few systems, such as our existing telephone
system, that we do not intend to relocate to the new facility and have
developed contingency plans. We do not expect that continuing our operations in
our existing space, if necessary, would be materially impacted by the advent of
the year 2000.
We are in the process of testing our upgraded or replaced computer programs,
systems and equipment and will continue the testing throughout the remainder of
calendar 1999. Based on information developed to date as a result of our
assessment and testing efforts, we do not anticipate that the total cost of
upgrading or replacing our computer programs, systems and equipment will be
material. In anticipation of possible year 2000-related failures and possible
delays in our manufacturing processes in connection with our planned
relocation, we are also formulating contingency plans, including the
stockpiling of product inventory during the second quarter of fiscal 2000. If
we, or any third parties upon which we rely, are unable to address the year
2000 issue in a timely and successful manner, our business could be materially
adversely affected.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Digene is subject to market risk associated with changes in foreign currency
exchange rates and interest rates. Our exchange rate risk is limited to our
operations in Europe and South America. We do not believe that the impact from
foreign currency exchange rate fluctuations will have a material impact on our
financial statements. The net impact of foreign exchange activities on earnings
was immaterial for the three-month periods ended September 30, 1999 and 1998,
respectively. Interest rate exposure is primarily limited to the $9.6 million
of short-term investments owned by us. Such securities are debt instruments
which generate interest income for Digene on excess cash balances. We do not
actively manage the risk of interest rate fluctuations; however, such risk is
mitigated by the relatively short term, less than 12 months, nature of these
investments. We do not consider the present rate of inflation to have a
significant impact on our business.
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
With respect to our products for the detection of human papillomavirus (HPV),
we continue to negotiate with a third party regarding a license to a pending
United States patent application which might cover one of the HPV types
utilized in our Hybrid Capture II HPV Test. If the patent issues and if a
license is necessary, our failure to successfully negotiate a license on
commercially reasonable terms, or at all, may require us to redesign our Hybrid
Capture II HPV Test to exclude this HPV type. Such exclusion could result in
delays in approval for marketing of the redesigned Hybrid Capture II HPV Test
in the United States and could have a material adverse effect on our business,
financial condition and results of operations.
In June 1999, Enzo Biochem, Inc. ("Enzo") filed an action in the U.S. District
Court for the State of New York against Chugui Pharmaceutical Co., Ltd and its
subsidiaries Chugui Pharma U.S.A., Inc. and Gen-Probe Incorporated, bioMerieux,
Inc. and Becton Dickenson and Company for infringement of Enzo's United States
patent covering genetic probes for detecting Neisseria gonorrhoeae. In October
1999, Enzo contacted Digene to determine whether Digene's Hybrid Capture II
Gonorrhea Test might infringe such patent. We have evaluated this matter and
its potential impact on our gonorrhea test. After consultation with our patent
counsel, we believe that the Enzo United States patent is invalid. We cannot
assure you that we will not become involved in litigation with Enzo.
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 Digene'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
Digene's Annual Report on Form 10-K for the year ended June 30, 1999)
4.1 Form of Common Stock Certificate (Incorporated by reference to Exhibit
4.1 to Digene's Registration Statement on Form S-1 (File No. 333-2968))
27 Financial Data Schedule
(b) Reports on Form 8-K
Digene did not file any reports on Form 8-K during the quarter ended September
30, 1999.
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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.
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DIGENE CORPORATION
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Date: November 12, 1999 By: /s/ Charles M. Fleischman
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Charles M. Fleischman
President,
Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1999 By: /s/ Joseph P. Slattery
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Joseph P. Slattery
Vice President, Finance
and Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
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Exhibit No. Description Page
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3.1 Amended and Restated Certificate of Incorporation
(Incorporated by reference to Exhibit 3.1 to Digene'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 Digene's Annual Report on Form 10-K for the
year ended June 30, 1999)
4.1 Form of Common Stock Certificate (Incorporated by reference
to Exhibit 4.1 to Digene's Registration Statement on
Form S-1 (File No. 333-2968))
27 Financial Data Schedule
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,727,603
<SECURITIES> 9,594,557
<RECEIVABLES> 3,021,491
<ALLOWANCES> 168,659
<INVENTORY> 2,969,257
<CURRENT-ASSETS> 24,204,096
<PP&E> 5,796,342
<DEPRECIATION> 4,138,784
<TOTAL-ASSETS> 27,344,277
<CURRENT-LIABILITIES> 4,690,252
<BONDS> 0
0
0
<COMMON> 145,872
<OTHER-SE> 22,508,153
<TOTAL-LIABILITY-AND-EQUITY> 27,344,277
<SALES> 5,090,365
<TOTAL-REVENUES> 5,217,696
<CGS> 1,676,694
<TOTAL-COSTS> 2,826,462
<OTHER-EXPENSES> 29,894
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> (1,064,161)
<INCOME-TAX> 63,467
<INCOME-CONTINUING> (1,127,628)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,127,628)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
