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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, 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
-----------------------------------------------
(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)
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 November 8, 2000
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Common Stock, par value $.01 per share 16,517,007
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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, 2000 and June 30, 2000 1
Consolidated Statements of Operations -
Three months ended September 30, 2000 and 1999 2
Consolidated Statements of Cash Flows -
Three months ended September 30, 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 4. Submission of Matters to a Vote of Security Holders 9
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
EXHIBIT INDEX 12
</TABLE>
<PAGE> 3
PART I. CONSOLIDATED FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DIGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
----------------- -----------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,511,327 $ 7,534,998
Short-term investments 11,115,774 12,678,819
Accounts receivable, less allowance of approximately $257,000 and
$263,000 at September 30, 2000 and June 30, 2000, respectively 3,665,830 4,787,278
Note receivable, short-term 240,000 240,000
Inventories 4,956,569 4,400,297
Prepaid expenses and other current assets 401,520 907,877
----------------- -----------------
Total current assets 29,891,020 30,549,269
Note receivable, net of current portion 120,000 160,000
Property and equipment, net 3,030,041 3,032,088
Intangible assets, net 1,163,166 1,200,687
Deposits 856,632 842,922
----------------- -----------------
Total assets $ 35,060,859 $ 35,784,966
================= =================
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 2,478,896 $ 3,828,138
Accrued expenses 1,060,859 1,026,600
Accrued payroll 1,559,550 1,426,604
--------------- ---------------
Total current liabilities 5,099,305 6,281,342
Long-term debt 1,000,000
Deferred rent 121,996 78,756
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized, 16,513,039 and
16,173,538 shares issued and outstanding at September 30, 2000
and June 30, 2000, respectively 165,130 161,735
Additional paid-in capital 86,165,520 84,846,747
Deferred stock compensation (88,377) (96,411)
Accumulated deficit (57,402,715) (55,487,203)
----------------- -----------------
Total stockholders' equity 28,839,558 29,424,868
----------------- -----------------
Total liabilities and stockholders' equity $ 35,060,859 $ 35,784,966
================= =================
</TABLE>
See accompanying notes.
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DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
2000 1999
------------------- -------------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Product sales $ 6,667,869 $ 5,090,365
Research and development contracts 504,147 127,331
------------------- -------------------
Total revenues 7,172,016 5,217,696
Costs and expenses:
Cost of product sales 2,911,863 1,676,694
Research and development 2,105,651 1,149,768
Selling and marketing 2,442,036 2,304,826
General and administrative 1,779,819 1,287,727
Amortization of intangible assets 37,521 37,521
------------------- -------------------
Loss from operations (2,104,874) (1,238,840)
Other income (expense):
Other income (expense) (32,076) (29,894)
Interest income 312,679 204,670
Interest expense (840) (97)
------------------- -------------------
Loss from operations before income taxes (1,825,111) (1,064,161)
Provision (benefit) for income taxes 90,401 63,467
------------------- -------------------
Net loss $ (1,915,512) $ (1,127,628)
=================== ===================
Basic and diluted net loss per share $ (0.12) $ (0.08)
=================== ===================
Weighted average shares outstanding 16,252,351 14,579,413
=================== ===================
</TABLE>
See accompanying notes.
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DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
2000 1999
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,915,512) $ (1,127,628)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and equipment 335,176 245,239
Amortization of intangible assets 37,521 37,521
Compensation expense related to stock options 8,034 15,825
Changes in operating assets and liabilities:
Accounts receivable 1,121,448 (496,295)
Inventories (556,272) (75,047)
Prepaid expenses and other current assets 506,357 328,377
Deposits (13,710) (69,213)
Accounts payable (1,349,242) 30,734
Accrued expenses 34,259 110,397
Accrued payroll 132,946 127,687
Deferred rent 43,240 -
----------------- -----------------
Net cash used in operating activities (1,615,755) (872,403)
INVESTING ACTIVITIES
Purchases of short-term investments (1,784,027) (5,247,473)
Maturities of short-term investments 3,347,072 -
Capital expenditures (333,129) (165,719)
----------------- -----------------
Net cash provided by (used in) investing activities 1,229,916 (5,413,192)
FINANCING ACTIVITIES
Exercise of common stock options 1,322,168 78,783
Proceeds from note receivable 40,000 -
Proceeds from note payable 1,000,000 -
----------------- -----------------
Net cash provided by financing activities 2,362,168 78,783
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 1,976,329 (6,206,812)
Cash and cash equivalents at beginning of period 7,534,998 13,934,415
----------------- -----------------
Cash and cash equivalents at end of period $ 9,511,327 $ 7,727,603
================= =================
</TABLE>
See accompanying notes.
3
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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, 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, 2000
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 our Annual Report
on Form 10-K for the year ended June 30, 2000. 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 market acceptance of our products by the worldwide
medical community; uncertainty of future profitability and cash generation from
operations; uncertainty of clinical trial results for our products under
development; risks inherent in international transactions, including those
relating to our expansion in Europe, Brazil and elsewhere; our limited sales and
marketing experience; the extent of future expenditures for sales and marketing
programs; our ability to scale up our manufacturing as product sales increase;
dependence on third-party reimbursement from government entities, managed care
organizations, and private insurance plans; dependence on Abbott Laboratories as
our principal European distributor and our distributor for certain products in
the United States; 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 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, 2000.
RESULTS OF OPERATIONS
Product sales increased to approximately $6,668,000 for the three-month period
ended September 30, 2000 from approximately $5,090,000 for the corresponding
period in 1999. The increase was due, primarily, to increased sales of our
Hybrid Capture HPV test in the United States, resulting approximately equally
from increases in volume and in average unit prices, and increased sales of
equipment, partially offset by lower sales of our Hybrid Capture HBV test,
primarily in Europe.
Research and development contract revenues increased to approximately $504,000
for the three-month period ended September 30, 2000 from approximately $127,000
for the corresponding period in 1999. The increase was due, primarily, to
recognition of royalty revenue under certain contracts.
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Cost of product sales increased to approximately $2,912,000 for the three-month
period ended September 30, 2000 from approximately $1,677,000 for the
corresponding period in 1999. Gross margin on product sales decreased to 56% for
the three-month period ended September 30, 2000 from 67% for the corresponding
period in 1999. The decrease was primarily a result of product mix and
inventory-related adjustments, as well as the impact of foreign exchange rates
on our average unit prices.
Research and development expenses increased to approximately $2,106,000 for the
three-month period ended September 30, 2000 from approximately $1,150,000 for
the corresponding period in 1999. The increase was due, primarily, to increases
in facilities costs, clinical trials, outside professional fees and laboratory
supplies.
Selling and marketing expenses increased to approximately $2,442,000 for the
three-month period ended September 30, 2000 from approximately $2,305,000 for
the corresponding period in 1999. The increase was due, primarily, to increases
in personnel and travel costs in conjunction with our efforts to increase
product sales.
General and administrative expenses increased to approximately $1,780,000 for
the three-month period ended September 30, 2000 from approximately $1,288,000
for the corresponding periods in 1999. The increase was due, primarily, to
increases in personnel costs and professional fees.
Interest income increased to approximately $313,000 for the three-month period
ended September 30, 2000 from approximately $205,000 for the corresponding
period in 1999. The increase was due to higher average cash and cash equivalents
balances, primarily as a result of the investment of the proceeds of our private
placement completed in December 1999, partially offset by negative cash flows
from operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, our expenses have significantly exceeded our revenues,
resulting in an accumulated deficit of approximately $57,403,000 at September
30, 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
approximately $1,576,000 and approximately $872,000 for the three months ended
September 30, 2000 and 1999, respectively.
Capital expenditures increased to approximately $333,000 for the three months
ended September 30, 2000 from approximately $166,000 for the corresponding
period in 1999. The increase was due, primarily, to expenditures associated with
our occupation of 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 used such facility to fund
furniture and equipment leases, including telecommunications equipment, for our
new leased facility in Gaithersburg, Maryland. As of June 30, 2000, when this
commitment expired, we had used approximately $571,000 of the commitment.
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In February 2000, we received an equipment loan facility of $1,000,000 from the
State of Maryland. Approximately $503,000 worth of fixed asset additions,
previously financed with cash, was converted to this facility during July 2000.
The remaining $497,000 in funding available was converted to this facility
during September 2000.
We anticipate that working capital requirements will increase moderately for the
foreseeable future due to increasing accounts receivable as a result of expected
revenue growth. 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 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
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
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. 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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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 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, 2000 and 1999,
respectively. Interest rate exposure is primarily limited to the $16.2 million
of cash equivalents and short-term investments owned by us. 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 certain 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following is a summary of the final voting results from the
October 26, 2000 Annual Meeting of stockholders of Digene. The number of shares
present in person or by proxy at the Annual Meeting were 15,295,383, or 94% of
the outstanding shares of common stock.
1. Election of Directors.
Two of Digene's six directors had terms that expired and stood for
re-election at the Annual Meeting. These two directors, who are listed below,
received the most votes cast for the election of directors.
<TABLE>
<CAPTION>
Name For Withhold Authority
---- --- ------------------
<S> <C> <C>
John H. Landon 14,956,539 338,844
John J. Whitehead 14,955,839 339,544
</TABLE>
2. Approval of an Amendment to the 1999 Incentive Plan.
Digene proposed an amendment to its 1999 Incentive Plan to increase
the number of shares of common stock issuable under the Plan from 1,000,000 to
2,000,000 shares. The proposal received a majority of the votes present and
entitled to be cast.
<TABLE>
<CAPTION>
<S> <C>
For: 8,051,536
Against: 2,780,862
Abstain: 28,307
Broker Non-Votes: 4,434,678
</TABLE>
3. Approval of Amendments to the Omnibus Plan.
Digene proposed amendments to the Omnibus Plan to modify the change
in control provisions in the Plan to eliminate the termination of stock options
upon a change in control or other fundamental transaction and to provide for the
treatment of stock options upon any such event. The proposal received a majority
of the votes present and entitled to be cast.
<TABLE>
<CAPTION>
<S> <C>
For: 13,987,877
Against: 1,265,518
Abstain: 41,988
Broker Non-Votes: 0
</TABLE>
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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))
10.1 Digene Corporation Amended and Restated 1997 Stock Option Plan
10.2 Digene Corporation Amended and Restated Directors' Stock Option Plan
10.3 Digene Corporation Amended and Restated Omnibus Plan
10.4 Digene Corporation Amended and Restated 1999 Incentive Plan
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, 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: November 14, 2000 By: /s/ Charles M. Fleischman
------------------------------------- -----------------------------------
Charles M. Fleischman
President,
Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer)
Date: November 14, 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))
10.1 Digene Corporation Amended and Restated 1997 Stock Option Plan
10.2 Digene Corporation Amended and Restated Directors' Stock Option Plan
10.3 Digene Corporation Amended and Restated Omnibus Plan
10.4 Digene Corporation Amended and Restated 1999 Incentive Plan
27 Financial Data Schedule
</TABLE>
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