##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 OR
 o
    
    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
  Delaware
    
    52-1536128(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)1201 Clopper RoadGaithersburg, Maryland
    
    20878(Address of principal executive offices)
    
    (Zip Code)
 (301) 944-7000
  þ o
 þ o
 o þ
  Shares outstanding as ofClass
    
    October 31, 2005(Common Stock, par value $.01 per share)
    
    20,138,224




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##### 



DIGENE CORPORATION
 INDEX TO FORM 10-Q
 PagePart I. Consolidated Financial Information:Item 1. Consolidated Financial StatementsConsolidated Balance Sheets- September 30, 2005 and June 30, 2005
    
    
    3Consolidated Statements of Operations- Three months ended September 30, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows- Three months ended September 30, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22Part II. Other Information:Item 1. Legal Proceedings
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 6. Exhibits and Reports on Form 8-K
    
    
    26SignaturesExhibit Index
 2




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##### 



PART I. Consolidated Financial Information
Item 1. Consolidated Financial Statements
 DIGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    June 30,2005
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    9,202
    
    
    $
    15,789Short-term investments
    
    
    38,468
    
    
    
    30,292Accounts receivable, less allowance of approximately $339 and $288
    
    
    20,940
    
    
    
    20,297at September 30, 2005 and June 30, 2005, respectivelyInventories, net
    
    
    7,376
    
    
    
    7,197Prepaid expenses and other current assets
    
    
    2,719
    
    
    
    3,130Deferred tax asset, current
    
    
    2,198
    
    
    
    2,038Total current assets
    
    
    80,903
    
    
    
    78,743Property and equipment, net
    
    
    9,955
    
    
    
    10,104Deposits and other assets
    
    
    2,261
    
    
    
    2,237Deferred tax asset, net
    
    
    14,597
    
    
    
    15,761Total assets
    
    $
    107,716
    
    
    $
    106,845LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    7,522
    
    
    $
    7,807Accrued expenses
    
    
    8,988
    
    
    
    11,996Accrued payroll
    
    
    6,115
    
    
    
    5,835Current portion of long-term debt
    
    
    116
    
    
    
    116Total current liabilities
    
    
    22,741
    
    
    
    25,754Deferred rent
    
    
    793
    
    
    
    763Long-term debt, less current portion
    
    
    538
    
    
    
    572Minority interest
    
    
    464
    
    
    
    353Stockholders equity:Preferred stock, $0.10 par value, 1,000,000 shares authorized, no shares
issued and outstanding
    
    
    
    
    
    
    Common
stock, $0.01 par value, 50,000,000 shares authorized, 20,116,773 and 20,037,253 shares issued and outstanding at September 30, 2005
and June 30, 2005, respectively
    
    
    201
    
    
    
    200Additional paid-in capital
    
    
    143,413
    
    
    
    140,914Accumulated other comprehensive income
    
    
    561
    
    
    
    602Accumulated deficit
    
    
    (60,995
    )
    
    
    (62,313
    )Total stockholders equity
    
    
    83,180
    
    
    
    79,403Total liabilities and stockholders equity
    
    $
    107,716
    
    
    $
    106,845
 See accompanying notes.
 3




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DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months EndedSeptember 30,2005
    
    
    2004(Unaudited)Revenues:Product sales
    
    $
    32,822
    
    
    $
    25,747Other
    
    
    530
    
    
    
    464Total revenues
    
    
    33,352
    
    
    
    26,211Costs and expenses:Cost of product sales
    
    
    4,901
    
    
    
    4,525Royalty and technology
    
    
    1,862
    
    
    
    1,408Research and development
    
    
    3,764
    
    
    
    2,673Selling and marketing
    
    
    14,586
    
    
    
    9,296General and administrative
    
    
    5,548
    
    
    
    4,561Patent litigation settlement
    
    
    
    
    
    
    14,000Income (loss) from operations
    
    
    2,691
    
    
    
    (10,252
    )Other income (expense):Interest income
    
    
    285
    
    
    
    189Interest expense
    
    
    3
    
    
    
    (21
    )Other income (expense)
    
    
    25
    
    
    
    (38
    )Income (loss) before minority interest and income taxes
    
    
    3,004
    
    
    
    (10,122
    )Minority interest
    
    
    (111
    )
    
    
    (175
    )Income (loss) before income taxes
    
    
    2,893
    
    
    
    (10,297
    )Provision for (benefit from) income taxes
    
    
    1,575
    
    
    
    (4,024
    )Net income (loss)
    
    $
    1,318
    
    
    $
    (6,273
    )Basic net income (loss) per share
    
    $
    0.07
    
    
    $
    (0.32
    )Diluted net income (loss) per share
    
    $
    0.06
    
    
    $
    (0.32
    )Weighted average shares outstandingBasic
    
    
    20,088
    
    
    
    19,888Diluted
    
    
    20,465
    
    
    
    19,888
 See accompanying notes.
 4




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DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Three Months EndedSeptember 30,2005
    
    
    2004(Unaudited)Operating activitiesNet income (loss)
    
    $
    1,318
    
    
    $
    (6,273
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization of property and equipment
    
    
    879
    
    
    
    1,104Loss on disposal of fixed assets
    
    
    24
    
    
    
    77Compensation expense related to stock options
    
    
    1,353
    
    
    
    (149
    )Deferred tax benefit
    
    
    697
    
    
    
    (3,699
    )Minority interest
    
    
    111
    
    
    
    175Changes in operating assets and liabilities:Accounts receivable
    
    
    (621
    )
    
    
    (1,225
    )Inventories
    
    
    (168
    )
    
    
    25Prepaid expenses and other current assets
    
    
    403
    
    
    
    229Deposits and other assets
    
    
    (24
    )
    
    
    (40
    )Accounts payable
    
    
    (266
    )
    
    
    (1,018
    )Accrued expenses
    
    
    737
    
    
    
    31Accrued patent litigation settlement
    
    
    (3,750
    )
    
    
    14,000Accrued payroll
    
    
    284
    
    
    
    (430
    )Deferred rent
    
    
    30
    
    
    
    6Net cash provided by operating activities
    
    
    1,007
    
    
    
    2,813Investing activitiesPurchases of short-term investments
    
    
    5,286
    
    
    
    (6,401
    )Sales and maturities of short-term investments
    
    
    (13,472
    )
    
    
    6,191Capital expenditures
    
    
    (755
    )
    
    
    (1,295
    )Net cash used in investing activities
    
    
    (8,941
    )
    
    
    (1,505
    )Financing activitiesExercise of common stock options
    
    
    1,459
    
    
    
    146Principal payments of long-term debt
    
    
    (34
    )
    
    
    (1,373
    )Net cash provided by (used in) financing activities
    
    
    1,425
    
    
    
    (1,227
    )Effect of currency translations
    
    
    (78
    )
    
    
    286Net (decrease) increase in cash and cash equivalents
    
    
    (6,587
    )
    
    
    367Cash and cash equivalents at beginning of period
    
    
    15,789
    
    
    
    4,080Cash and cash equivalents at end of period
    
    $
    9,202
    
    
    $
    4,447
 See accompanying notes.
 5




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DIGENE CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
    2. Recent Accounting Pronouncements
  3. Other Balance Sheet Information
 Inventories
  September 30,
    
    
    June 30,2005
    
    
    2005(unaudited)Finished goods
    
    $
    5,194
    
    
    $
    4,642Work in process
    
    
    3,295
    
    
    
    3,343Raw materials
    
    
    1,024
    
    
    
    1,1879,513
    
    
    
    9,172Inventory reserve
    
    
    (2,137
    )
    
    
    (1,975
    )$
    7,376
    
    
    $
    7,197
 6




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4.
    
    Income Taxes
   5. Stockholders Equity
 Common Stock and Per Share Calculation
   Three Months EndedSeptember 30,(in thousands, except per share data)
    
    2005
    
    
    2004Numerator:Net income (loss)
    
    $
    1,318
    
    
    $
    (6,273
    )Denominator:Weighted average shares outstanding  basic
    
    
    20,088
    
    
    
    19,888Dilutive securities  stock options
    
    
    377
    
    
    
    Weighted average shares outstanding  diluted
    
    
    20,465
    
    
    
    19,888Basic net income (loss) per share
    
    $
    0.07
    
    
    $
    (0.32
    )Diluted net income (loss) per share
    
    $
    0.06
    
    
    $
    (0.32
    )
  7




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Stock-Based Compensation
     Three Months Ended September 30,2005
    
    
    2004(in thousands, except per share data)Net income (loss), as reported
    
    $
    1,318
    
    
    $
    (6,273
    )Add: Stock-based non-employee compensation (income) expense
included in reported net income (loss), net of taxes
    
    
    
    
    
    
    (79
    )Deduct: Stock-based employee compensation expense
if SFAS No. 123 had been applied to all grants
    
    
    
    
    
    
    (3,396
    )Pro forma net income (loss)
    
    $
    1,318
    
    
    $
    (9,748
    )Net income (loss) per share:Basic  as reported
    
    $
    0.07
    
    
    $
    (0.32
    )Basic  pro forma
    
    $
    0.07
    
    
    $
    (0.49
    )Diluted  as reported
    
    $
    0.06
    
    
    $
    (0.32
    )Diluted  pro forma
    
    $
    0.06
    
    
    $
    (0.49
    )
 8




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Dividend yield
    
    
    0.00
    %Expected volatility
    
    
    74.2
    %Risk-free interest rate
    
    
    4.07
    %Expected life of the option term (in years)
    
    
    4.8Forfeiture rate
    
    
    5.5
    %
         Stock Compensation Plans
        Weighted-AverageShares
    
    
    Exercise PriceOutstanding at beginning of
period
    
    
    3,517,880
    
    
    $
    25.22Granted
    
    
    240,217
    
    
    
    21.49Exercised
    
    
    (79,520
    )
    
    
    14.42Canceled or expired
    
    
    (52,150
    )
    
    
    24.75Outstanding at end of period
    
    
    3,626,427
    
    
    
    25.21Exercisable at end of
period
    
    
    2,847,223
    
    
    
    26.28
 Comprehensive Income
  Three Months Ended September 30,2005
    
    
    2004Net income (loss), as reported
    
    $
    1,318
    
    
    $
    (6,273
    )Other comprehensive income:Unrealized (loss) gain on
available-for-sale securities, net of
income tax (benefit) expense of $(4)
and $10, respectively
    
    
    (6
    )
    
    
    32Foreign currency translation (loss) gain
    
    
    (35
    )
    
    
    460Comprehensive income (loss)
    
    $
    1,277
    
    
    $
    (5,781
    )
 6. Royalty and Technology
   9




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7. Warranties
  Three Months EndedSeptember 30,2005
    
    
    2004Balance, beginning of period
    
    $
    1,137
    
    
    $
    897Warranties issued during the period
    
    
    649
    
    
    
    518Changes in liability for pre-existing
warranties during the period, including
expirations
    
    
    (596
    )
    
    
    (458
    )Balance, end of period
    
    $
    1,190
    
    
    $
    957
  10




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8. Contingencies
  11




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
  Overview
    12




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13




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Results of Operations
 Three Months Ended
    
    
    Three Months EndedSeptember 30, 2005
    
    
    September 30, 2004
    
    
    % change(in thousands)Total revenue
    
    $
    33,352
    
    
    $
    26,211
    
    
    
    27
    %Product sales
    
    
    32,822
    
    
    
    25,747
    
    
    
    27
    %HPV test product revenue
    
    
    28,392
    
    
    
    22,449
    
    
    
    26
    %Cost of product sales
    
    
    4,901
    
    
    
    4,525
    
    
    
    8
    %Gross margin (1)
    
    
    85
    %
    
    
    83
    %
    
    
    2
    %Royalty and technology expense
    
    $
    1,862
    
    
    $
    1,408
    
    
    
    32
    %
 
 (1)
    
    We calculate gross margin as the difference between product sales and the cost
of product sales, which exclude royalty and technology fees, as a percentage of product sales for
the period. Ô
   14




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15




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TM
 TM
    16




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Liquidity and Capital Resources
  17




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18




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Less Than
    
    
    One to Three
    
    
    Four to FiveOne Year
    
    
    Years
    
    
    Years
    
    
    After Five YearsContractual Obligations
    
    Total
    
    
    (Fiscal 2006)
    
    
    (Fiscal 2007-2009)
    
    
    (Fiscal 2010-2011)
    
    
    (After fiscal 2011)Long-term debt
    
    $
    654
    
    
    $
    116
    
    
    $
    353
    
    
    $
    185
    
    
    $
    Operating leases
    
    
    14,344
    
    
    
    3,561
    
    
    
    9,798
    
    
    
    976
    
    
    
    9Purchase obligations
    
    
    2,835
    
    
    
    1,870
    
    
    
    965
    
    
    
    
    
    
    
    Minimum royalty
payments
(1)
    
    
    14,858
    
    
    
    858
    
    
    
    10,500
    
    
    
    3,500
    
    
    
    Total contractual cash
obligations
    
    $
    32,691
    
    
    $
    6,405
    
    
    $
    21,616
    
    
    $
    4,661
    
    
    $
    9
 
 (1)
    
    On October 14, 2004, we paid Enzo $16.0 million under the terms of the
Agreement. Of the $16.0 million payment, $2.0 million will be used to offset future minimum
royalty payments. As of September 30, 2005, we have used approximately $1.6 million of the $2.0
million prepayment. 19




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Item 4. Controls and Procedures
   20




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PART II. Other Information
 Item 1. Legal Proceedings
 Digene Corporation v. Ventana Medical Systems, Inc. and Beckman Coulter, Inc.
   Third Wave Technologies, Inc. v. Digene Corporation
  21




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Item 4. Submission of Matters to a Vote of Security Holders
      For:
    
    
    14,581,648Against:
    
    
    2,262,458Abstain:
    
    
    15,525Broker Non-Votes:
    
    
    2,406,679
   For:
    
    
    15,250,113Against:
    
    
    1,601,774Abstain:
    
    
    7,745Broker Non-Votes:
    
    
    2,406,678
 22




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For:
    
    
    13,784,966Against:
    
    
    3,042,506Abstain:
    
    
    32,160Broker Non-Votes:
    
    
    2,406,678
 23




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##### 



Item 6. Exhibits
 Exhibit No.
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to
Digenes Registration Statement on Form S-1 (File No. 333-02968)).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. 333-02968)).31.1
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer32
    
    Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.
 24




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SIGNATURES
  DIGENE CORPORATIONDate:    November 2, 2005
    By:
    /s/ Charles M. FleischmanCharles M. FleischmanPresident, Chief Operating Officer and 
      Chief Financial Officer 
      (Principal Financial Officer)Date:    November 2, 2005
    By:
    /s/ Joseph P. SlatteryJoseph P. SlatterySenior Vice President, Finance and 
     Information Systems 
     (Principal Accounting Officer)




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##### 



EXHIBIT INDEX
 Exhibit No.
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to
Digenes Registration Statement on Form S-1 (File No. 333-02968)).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. 333-02968)).31.1
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.32
    
    Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.