<PAGE> 1
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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 March 31, 2000
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
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(Exact name of registrant as specified in its charter)
DELAWARE 52-1536128
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1201 CLOPPER ROAD
GAITHERSBURG, MARYLAND 20878
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 944-7000
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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
--- ---
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 May 9, 2000
- -------------------------------------- -----------------------
Common Stock, par value $.01 per share 15,983,041
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DIGENE CORPORATION
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. CONSOLIDATED FINANCIAL INFORMATION:
Item 1. Consolidated Financial Statements -
Consolidated Balance Sheets -
March 31, 2000 and June 30, 1999 1
Consolidated Statements of Operations -
Three months ended March 31, 2000 and 1999;
Nine months ended March 31, 2000 and 1999; 2
Consolidated Statements of Cash Flows -
Nine months ended March 31, 2000 and 1999 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 8
PART II. OTHER INFORMATION:
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
EXHIBIT INDEX 11
</TABLE>
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PART I. CONSOLIDATED FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DIGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
--------------- ----------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,870,136 $ 13,934,415
Short-term investments 15,640,920 4,347,084
Accounts receivable, less allowance of approximately $268,000 and $170,000
at March 31, 2000 and June 30, 1999, respectively 5,176,255 2,356,537
Inventories 3,394,616 2,894,210
Prepaid expenses and other current assets 1,376,104 1,388,224
--------------- ----------------
Total current assets 32,458,031 24,920,470
Property and equipment, net 2,318,451 1,737,078
Intangible assets, net 1,247,017 1,350,774
Deposits 844,658 100,157
--------------- ----------------
Total assets $ 36,868,157 $ 28,108,479
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,674,820 $ 2,503,387
Accrued expenses 1,083,258 809,811
Accrued payroll 1,049,118 1,108,236
-------------- --------------
Total current liabilities 5,807,196 4,421,434
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized,15,919,039
and 14,565,937 shares issued and outstanding at March 31, 2000
and June 30, 1999, respectively 159,190 145,659
Additional paid-in capital 84,164,477 72,514,583
Deferred stock compensation (205,725) (253,200)
Accumulated deficit (53,056,981) (48,719,997)
--------------- ----------------
Total stockholders' equity 31,060,961 23,687,045
--------------- ----------------
Total liabilities and stockholders' equity $ 36,868,157 $ 28,108,479
=============== ================
</TABLE>
1
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DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------------- ---------------------------------
2000 1999 2000 1999
----------------- ---------------- --------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 5,964,711 $ 4,634,602 $ 16,144,490 $ 12,091,578
Research and development
contracts 158,515 156,754 448,160 310,615
----------------- ---------------- --------------- ----------------
Total revenues 6,123,226 4,791,356 16,592,650 12,402,193
Costs and expenses:
Cost of product sales 2,192,569 1,695,700 5,502,536 4,100,255
Research and development 1,791,766 1,291,693 4,169,466 3,508,239
Selling and marketing 2,796,040 2,343,533 7,546,192 7,949,753
General and administrative 1,707,336 1,161,548 4,635,657 3,808,744
Amortization of intangible assets 37,522 37,522 112,565 112,565
----------------- ---------------- --------------- ----------------
Loss from operations (2,402,007) (1,738,640) (5,373,766) (7,077,363)
Other income (expense):
Other income (expense) 526,212 (235,551) 486,862 (177,245)
Interest income 294,970 225,049 720,500 832,226
Interest expense (442) - (540) (21,087)
----------------- ---------------- --------------- ----------------
Loss from operations before income
taxes (1,581,267) (1,749,142) (4,166,944) (6,443,469)
Provision (benefit) for income taxes 51,426 (13,926) 170,040 120,037
----------------- ---------------- --------------- ----------------
Net loss $ (1,632,693) $ (1,735,216) $ (4,336,984) $ (6,563,506)
================= ================= =============== ================
Basic and diluted net loss per share $ (0.10) $ (0.12) $ (0.29) $ (0.46)
================= ================= =============== ================
Weighted average shares outstanding 15,873,924 14,334,094 15,053,100 14,320,153
================= ================= =============== ================
</TABLE>
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DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
----------------------------------
2000 1999
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(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,336,984) $ (6,563,506)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and equipment 750,485 1,089,911
Amortization of intangible assets 103,757 117,114
Compensation expense related to stock options 47,475 -
Changes in operating assets and liabilities:
Accounts receivable (2,819,718) (1,762,709)
Inventories (500,406) 379,770
Prepaid expenses and other current assets 12,120 (1,202,274)
Deposits (744,501) (30,816)
Accounts payable 1,171,433 (835,658)
Accrued expenses 273,447 142,785
Accrued payroll (59,118) 56,435
Accrued rent - (32,216)
Deferred rent - (11,980)
--------------- ----------------
Net cash used in operating activities (6,102,010) (8,653,144)
INVESTING ACTIVITIES
Purchases of short-term investments (19,216,523) (6,186,202)
Maturities of short-term investments 7,922,687 8,957,960
Capital expenditures (1,331,858) (614,243)
Additions to intangible assets - (862)
--------------- ----------------
Net cash (used in) provided by investing activities (12,625,694) 2,156,653
FINANCING ACTIVITIES
Net proceeds from issuance of Common Stock 10,403,904 -
Exercise of Common Stock options 1,259,521 109,409
Principal repayments on long-term debt - (551,715)
--------------- ----------------
Net cash provided by (used in) financing activities 11,663,425 (442,306)
--------------- ----------------
Net decrease in cash and cash equivalents (7,064,279) (6,938,797)
Cash and cash equivalents at beginning of period 13,934,415 18,330,803
--------------- ----------------
Cash and cash equivalents at end of period $ 6,870,136 $ 11,392,006
=============== ================
</TABLE>
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DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements for the three- and nine-month periods
ended March 31, 2000 and 1999 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 consolidated financial statements and notes thereto
included in our 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.
2. PRIVATE OFFERING
On December 23, 1999, we and certain of our stockholders completed a private
placement of 1,500,000 shares of common stock to selected institutional and
other accredited investors. Of these shares, 900,000 were sold by us and
600,000 were sold by the selling stockholders. The net proceeds to us, after
underwriters' commissions and expenses, were $10,404,000.
3. SALE OF PRODUCT LINE
On March 24, 2000, we completed the sale of our Molecular Biology Reagents
("MBR") product line and related assets to KD Medical, Inc. This transaction
involved the sale of our MBR product line and the associated manufacturing
equipment, as well as the raw material and finished goods inventory for the
product line. As consideration for this sale, we received $200,000 in cash and
a promissory note in the amount of $400,000 payable in monthly installments of
$20,000 plus 8% accrued interest from July 1, 2000 through February 1, 2002. In
addition, no later than June 2000, we will receive approximately $75,000 for
the remaining raw material and finished goods inventory transferred as of March
31, 2000. A gain of approximately $515,000 was recorded on the sale of this
product line and is included in the Other income (expense) line of our
Consolidated Statements of Operations.
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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 our 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; delays, other disruptions and related expenses
resulting from our relocation to, and the start-up of manufacturing operations
at, our new leased facility in Gaithersburg, Maryland; the timing of the market
launch of our CT/GC product in the United States; delay in or failure to obtain
regulatory approvals for our products in development; uncertainty of clinical
trial results for our products under development; dependence on Abbott
Laboratories as our principal European distributor; uncertainty of market
acceptance of our products by the worldwide medical community; dependence on
third-party reimbursement from government entities, managed care organizations,
and private insurance plans; 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; uncertainty regarding
patents and proprietary rights in connection with our products; our ability to
obtain requisite additional financing to fund our operations beyond fiscal
2001; and other factors as set forth under the caption "Additional
Considerations" in our Annual Report on Form 10-K for the year ended June 30,
1999.
RESULTS OF OPERATIONS
Product sales increased to $5,965,000 and $16,144,000 for the three- and
nine-month periods ended March 31, 2000, respectively, from $4,635,000 and
$12,092,000 for the corresponding periods in 1999. The increase was due to
increased sales of our Hybrid Capture tests, primarily HPV and HBV, and related
equipment, partially offset by lower sales of our non-core products.
Research and development contract revenues increased to $159,000 and $448,000
for the three- and nine-month periods ended March 31, 2000, respectively, from
$157,000 and $311,000 for the corresponding periods in 1999. The increase was
due to our performance of contract research activities, primarily under a
research contract with the National Institutes of Health for the development of
tests for herpes simplex virus.
5
<PAGE> 8
Cost of product sales increased to $2,193,000 and $5,503,000 for the three- and
nine-month periods ended March 31, 2000, respectively, from $1,696,000 and
$4,100,000 for the corresponding periods in 1999. Gross margin on product sales
remained unchanged at 63% and 66% for the three- and nine-month periods ended
March 31, 2000 as compared to the corresponding periods in 1999.
Research and development expenses increased to $1,792,000 and $4,169,000 for
the three- and nine-month periods ended March 31, 2000, respectively, from
$1,292,000 and $3,508,000 for the corresponding periods in 1999. The increase
was due, primarily, to external professional service expenditures.
Selling and marketing expenses increased to $2,796,000 and decreased to
$7,546,000 for the three- and nine-month periods ended March 31, 2000,
respectively, from $2,344,000 and $7,950,000 for the corresponding periods in
1999. The increase in the three-month period was due, primarily, to increases
in sales and marketing programs and to the hiring of additional selling and
marketing personnel in conjunction with our efforts to increase product sales.
The decrease in the nine-month period was due, primarily, to lower external
marketing expenditures as a result of our Marketing and Distribution Agreement
with Abbott, partially offset by increased spending on marketing tradeshows and
conferences and the hiring of additional selling and marketing personnel.
General and administrative expenses increased from $1,707,000 and $4,636,000
for the three- and nine-month periods ended March 31, 2000, respectively, from
$1,162,000 and $3,809,000 for the corresponding periods in 1999. The increase
was due, primarily, to costs associated with the move to our new leased
facility in Gaithersburg, Maryland and increased professional service expenses.
Other income (expense) increased to $526,000 and $487,000 for the three- and
nine-month periods ended March 31, 2000 from $(236,000) and $(177,000) for the
corresponding periods in 1999. The increase was due, primarily, to the sale of
our MBR product line in March 2000, which resulted in a gain of approximately
$515,000 in the third quarter of fiscal 2000.
Interest income increased to $295,000 and decreased to $721,000 for the three-
and nine-month periods ended March 31, 2000, respectively, from $225,000 and
$832,000 for the corresponding periods in 1999. The increase in the three-month
period was due to higher average cash and cash equivalents balances, primarily
as a result of our receipt of net proceeds from a common stock offering in
December 1999. The decrease in the nine-month period was due to lower average
cash and cash equivalents 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 $53,057,000 at March 31, 2000. We have
funded our operations primarily through the sale of equity securities and
revenues from product sales and research and development contracts. We have
experienced negative cash flows from operations of $6,102,000 and $8,653,000
for the nine months ended March 31, 2000 and 1999, respectively.
6
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Capital expenditures increased to $1,332,000 for the nine months ended March
31, 2000 from $614,000 for the corresponding period in 1999. The increase was
due, primarily, to purchases of capital equipment for our new leased facility
in Gaithersburg, Maryland.
In December 1999, we established an equipment leasing facility with Mellon US
Leasing with a total commitment of $750,000. We intend to use such facility to
fund the lease of furniture and equipment, including telecommunications
equipment, for our new leased facility in Gaithersburg, Maryland. As of March
31, 2000, we have used approximately $570,000 of such commitment.
In February 2000, we received an equipment loan facility of $1,000,000 from the
State of Maryland. Approximately $500,000 worth of fixed asset additions,
previously financed with cash, is expected to be converted to this facility
during the fourth quarter of fiscal 2000. The remaining $500,000 will be
applied as we continue to acquire fixed assets, primarily manufacturing
equipment, for our Gaithersburg facility.
On December 23, 1999, we completed a private offering of 900,000 shares of our
common stock, the net proceeds of which, after underwriters' commissions and
expenses, were $10,404,000.
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
fiscal year 2001. 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 and timely commercialization of
our products, progress in our product development efforts and the magnitude and
scope of such efforts, progress with pre-clinical studies and clinical trials,
progress in our regulatory affairs activities, the cost and 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 additional
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. Other than our
equipment leasing facilities with Mellon US Leasing and the State of Maryland,
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 adversely affected.
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YEAR 2000 COMPLIANCE
During 1999, we completed the process of preparing for the potential impact of
the Year 2000 date change 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. We did not
experience any difficulties related to the Year 2000 date change on December
31, 1999, and we have not experienced any such difficulties to date in calendar
year 2000. Although considered unlikely, unanticipated problems in our core
business processes, including problems associated with non-compliant third
parties and disruptions to the economy in general, could still occur despite
our efforts to date to remediate affected systems and develop contingency
plans. We will continue to monitor all business processes, including
interaction with our customers, vendors and other third parties, throughout
2000, and we will address any issues that arise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risk associated with changes in foreign currency
exchange rates and interest rates. Our exchange rate risk comes from our
operations in Europe, South America and Asia. 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 nine-month periods ended March 31, 2000 and
1999, respectively. Interest rate exposure is primarily limited to the $20.5
million of cash equivalents and short-term investments owned by us. None of
these funds are invested in foreign currencies and we do not intend to alter
our investment profiles to permit such investments. Such securities are debt
instruments that generate interest income for us 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, typically less than twelve-month,
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),
in April 2000 we obtained an exclusive license to an issued United States
patent covering one of the HPV types utilized in our Hybrid Capture II HPV
Test.
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. Our
discussions with Enzo are continuing. 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 March 31,
2000.
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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.
<TABLE>
<CAPTION>
DIGENE CORPORATION
<S> <C>
Date: May 12, 2000 By: /s/ Charles M. Fleischman
-------------------------------- ----------------------------
Charles M. Fleischman
President,
Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer)
Date: May 12, 2000 By: /s/ Joseph P. Slattery
------------------------------- -------------------------
Joseph P. Slattery
Vice President, Finance
(Principal Accounting Officer)
</TABLE>
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
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<S> <C> <C>
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
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 6,870,136
<SECURITIES> 15,640,920
<RECEIVABLES> 5,444,230
<ALLOWANCES> 267,975
<INVENTORY> 3,394,616
<CURRENT-ASSETS> 32,458,031
<PP&E> 6,954,228
<DEPRECIATION> 4,635,777
<TOTAL-ASSETS> 36,868,157
<CURRENT-LIABILITIES> 5,807,196
<BONDS> 0
0
0
<COMMON> 159,190
<OTHER-SE> 30,901,771
<TOTAL-LIABILITY-AND-EQUITY> 36,868,157
<SALES> 16,144,490
<TOTAL-REVENUES> 16,592,650
<CGS> 5,502,536
<TOTAL-COSTS> 9,672,002
<OTHER-EXPENSES> (486,862)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 540
<INCOME-PRETAX> (4,166,944)
<INCOME-TAX> 170,040
<INCOME-CONTINUING> (4,336,984)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,336,984)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>