##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
 o þ
  Shares outstanding as ofClass
    
    February 6, 2006(Common Stock, par value $.01 per share)
    
    22,539,838




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##### 



DIGENE CORPORATION
 INDEX TO FORM 10-Q
 PagePart I. Consolidated Financial Information:Item 1. Consolidated Financial StatementsConsolidated Balance Sheets  December 31, 2005 and June 30, 2005
    
    
    3Consolidated Statements of Operations  Three and six months ended December 31, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows  Six months ended December 31, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    26Part II. Other Information:Item 1. Legal Proceedings
    
    
    27Item 6. Exhibits
    
    
    28SignaturesExhibit Index
 2




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##### 



PART I. Consolidated Financial Information
 Item 1. Consolidated Financial Statements
 DIGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
 December 31,
    
    
    June 30,2005
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,112
    
    
    $
    15,789Short-term investments
    
    
    103,324
    
    
    
    30,292Accounts receivable, less allowance of approximately $313 and $288
at December 31, 2005 and June 30, 2005, respectively
    
    
    21,514
    
    
    
    20,297Inventories, net
    
    
    7,506
    
    
    
    7,197Prepaid expenses and other current assets
    
    
    3,463
    
    
    
    3,130Deferred tax asset, current
    
    
    800
    
    
    
    2,038Total current assets
    
    
    144,719
    
    
    
    78,743Property and equipment, net
    
    
    29,161
    
    
    
    10,104Deposits and other assets
    
    
    2,483
    
    
    
    2,237Deferred tax asset, net
    
    
    12,898
    
    
    
    15,761Total assets
    
    $
    189,261
    
    
    $
    106,845LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    7,501
    
    
    $
    7,807Accrued expenses
    
    
    6,767
    
    
    
    11,996Accrued payroll
    
    
    5,955
    
    
    
    5,835Current portion of long-term debt and lease obligation
    
    
    959
    
    
    
    116Total current liabilities
    
    
    21,182
    
    
    
    25,754Deferred rent
    
    
    211
    
    
    
    763Long-term debt, less current portion
    
    
    509
    
    
    
    572Lease obligation, less current portion
    
    
    18,724
    
    
    
    Minority interest
    
    
    414
    
    
    
    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, 22,481,323
and 20,037,253 shares issued and outstanding at December 31, 2005
and June 30, 2005, respectively
    
    
    225
    
    
    
    200Additional paid-in capital
    
    
    205,650
    
    
    
    140,914Accumulated other comprehensive income
    
    
    335
    
    
    
    602Accumulated deficit
    
    
    (57,989
    )
    
    
    (62,313
    )Total stockholders equity
    
    
    148,221
    
    
    
    79,403Total liabilities and stockholders equity
    
    $
    189,261
    
    
    $
    106,845
 See accompanying notes
 3




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##### 



DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(Unaudited)
    
    
    (Unaudited)Revenues:Product sales
    
    $
    36,560
    
    
    $
    26,506
    
    
    $
    69,382
    
    
    $
    52,253Other
    
    
    533
    
    
    
    446
    
    
    
    1,064
    
    
    
    911Total revenues
    
    
    37,093
    
    
    
    26,952
    
    
    
    70,446
    
    
    
    53,164Costs and expenses:Cost of product sales
    
    
    5,083
    
    
    
    5,266
    
    
    
    9,984
    
    
    
    9,791Royalty and technology
    
    
    2,091
    
    
    
    1,256
    
    
    
    3,953
    
    
    
    2,664Research and development
    
    
    3,852
    
    
    
    3,189
    
    
    
    7,617
    
    
    
    5,863Selling and marketing
    
    
    13,840
    
    
    
    10,021
    
    
    
    28,426
    
    
    
    19,316General and administrative
    
    
    6,316
    
    
    
    4,362
    
    
    
    11,864
    
    
    
    8,923Patent litigation settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,000Income (loss) from operations
    
    
    5,911
    
    
    
    2,858
    
    
    
    8,602
    
    
    
    (7,393
    )Other income (expense):Interest income
    
    
    686
    
    
    
    150
    
    
    
    971
    
    
    
    338Interest expense
    
    
    (167
    )
    
    
    (4
    )
    
    
    (164
    )
    
    
    (25
    )Other expense
    
    
    (70
    )
    
    
    (21
    )
    
    
    (45
    )
    
    
    (60
    )Income (loss) before minority
interest and income taxes
    
    
    6,360
    
    
    
    2,983
    
    
    
    9,364
    
    
    
    (7,140
    )Minority interest
    
    
    (4
    )
    
    
    (41
    )
    
    
    (116
    )
    
    
    (216
    )Income (loss) before income taxes
    
    
    6,356
    
    
    
    2,942
    
    
    
    9,248
    
    
    
    (7,356
    )Provision for (benefit from)
income taxes
    
    
    3,350
    
    
    
    2,638
    
    
    
    4,924
    
    
    
    (1,386
    )Net income (loss)
    
    $
    3,006
    
    
    $
    304
    
    
    $
    4,324
    
    
    $
    (5,970
    )Basic net income (loss) per share
    
    $
    0.14
    
    
    $
    0.02
    
    
    $
    0.21
    
    
    $
    (0.30
    )Diluted net income (loss) per share
    
    $
    0.14
    
    
    $
    0.01
    
    
    $
    0.21
    
    
    $
    (0.30
    )Weighted average shares outstandingBasic
    
    
    21,094
    
    
    
    19,941
    
    
    
    20,592
    
    
    
    19,915Diluted
    
    
    21,409
    
    
    
    20,627
    
    
    
    20,938
    
    
    
    19,915
 See accompanying notes
 4




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##### 



DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Six Months EndedDecember 31,2005
    
    
    2004(Unaudited)Operating activitiesNet income (loss)
    
    $
    4,324
    
    
    $
    (5,970
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization of property and equipment
    
    
    1,980
    
    
    
    2,266Loss on disposal of fixed assets
    
    
    68
    
    
    
    169Compensation expense related to stock options
    
    
    2,783
    
    
    
    (89
    )Deferred tax benefit
    
    
    3,501
    
    
    
    (1,856
    )Minority interest
    
    
    61
    
    
    
    216Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,288
    )
    
    
    531Inventories
    
    
    (326
    )
    
    
    365Prepaid expenses and other current assets
    
    
    (369
    )
    
    
    (1,701
    )Deposits and other assets
    
    
    (248
    )
    
    
    (153
    )Accounts payable
    
    
    (251
    )
    
    
    831Accrued expenses
    
    
    2,299
    
    
    
    710Accrued patent litigation settlement
    
    
    (7,500
    )
    
    
    Accrued payroll
    
    
    133
    
    
    
    (2,172
    )Deferred rent
    
    
    42
    
    
    
    333Net cash provided by (used in) operating activities
    
    
    5,209
    
    
    
    (6,520
    )Investing activitiesPurchases of short-term investments
    
    
    (89,259
    )
    
    
    (6,043
    )Sales and maturities of short-term investments
    
    
    16,227
    
    
    
    20,172Capital expenditures
    
    
    (2,082
    )
    
    
    (3,180
    )Net cash (used in) provided by investing activities
    
    
    (75,114
    )
    
    
    10,949Financing activitiesNet proceeds from issuance of Common Stock
    
    
    60,079
    
    
    
    Exercise of common stock options
    
    
    1,897
    
    
    
    899Excess tax benefits from stock-based compensation
    
    
    601
    
    
    
    Principal payments of long-term debt
    
    
    (152
    )
    
    
    (1,402
    )Net cash provided by (used in) financing activities
    
    
    62,425
    
    
    
    (503
    )Effect of currency translations
    
    
    (197
    )
    
    
    1,208Net (decrease) increase in cash and cash equivalents
    
    
    (7,677
    )
    
    
    5,134Cash and cash equivalents at beginning of period
    
    
    15,789
    
    
    
    4,080Cash and cash equivalents at end of period
    
    $
    8,112
    
    
    $
    9,214
 See accompanying notes
 5




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##### 



DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
   2. Recent Accounting Pronouncements
  3. Public Offering of Common Stock
  6




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##### 



4. Other Balance Sheet Information
 Inventories
  December 31,
    
    
    June 30,2005
    
    
    2005(unaudited)Finished goods
    
    $
    5,325
    
    
    $
    4,642Work in process
    
    
    3,248
    
    
    
    3,343Raw materials
    
    
    1,177
    
    
    
    1,1879,750
    
    
    
    9,172Inventory reserve
    
    
    (2,244
    )
    
    
    (1,975
    )$
    7,506
    
    
    $
    7,197
 Lease Commitments
   7




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##### 



5. Income Taxes
   6. Stockholders Equity
 Common Stock and Per Share Calculation
   Three Months Ended
    
    Six Months EndedDecember 31,
    
    December 31(in thousands, except per share data)
    
    2005
    
    2004
    
    2005
    
    2004Numerator:Net income (loss)
    
    $
    3,006
    
    
    $
    304
    
    
    $
    4,324
    
    
    $
    (5,970
    )Denominator:Weighted
average shares outstanding  basic
    
    
    21,094
    
    
    
    19,941
    
    
    
    20,592
    
    
    
    19,915Dilutive securities  stock options
    
    
    315
    
    
    
    686
    
    
    
    346
    
    
    
    Weighted
average shares outstanding  diluted
    
    
    21,409
    
    
    
    20,627
    
    
    
    20,938
    
    
    
    19,915Basic net income (loss) per share
    
    $
    0.14
    
    
    $
    0.02
    
    
    $
    0.21
    
    
    $
    (0.30
    )Diluted net income (loss) per share
    
    $
    0.14
    
    
    $
    0.01
    
    
    $
    0.21
    
    
    $
    (0.30
    )
  8




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##### 



Stock-Based Compensation
    9




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##### 



Three Months Ended
    
    Six Months EndedDecember 31,
    
    December 31,(in thousands, except per share data)
    
    2005
    
    2004
    
    2005
    
    2004Net income (loss), as reported
    
    $
    3,006
    
    
    $
    304
    
    
    $
    4,324
    
    
    $
    (5,970
    )Add: Stock-based non-employee
compensation (income) expense
included in reported
net income (loss), net of taxes
    
    
    
    
    
    
    37
    
    
    
    
    
    
    
    (54
    )Deduct: Stock-based employee
compensation expense as if SFAS No.
123 had been applied
to all grants
    
    
    
    
    
    
    (4,320
    )
    
    
    
    
    
    
    (7,715
    )Pro forma net income (loss)
    
    $
    3,006
    
    
    $
    (3,979
    )
    
    $
    4,324
    
    
    $
    (13,739
    )Net income (loss) per share:Basic  as reported
    
    $
    0.14
    
    
    $
    0.02
    
    
    $
    0.21
    
    
    $
    (0.30
    )Basic  pro forma
    
    $
    
    
    
    $
    (0.20
    )
    
    $
    
    
    
    $
    (0.69
    )Diluted  as reported
    
    $
    0.14
    
    
    $
    0.01
    
    
    $
    0.21
    
    
    $
    (0.30
    )Diluted  pro forma
    
    $
    
    
    
    $
    (0.20
    )
    
    $
    
    
    
    $
    (0.69
    )
  Three Months Ended
    
    Six Months EndedDecember 31, 2005
    
    December 31, 2005Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    73.4
    %
    
    
    74.1
    %Risk-free interest rate
    
    
    4.47
    %
    
    
    4.19
    %Expected life of the option term (in years)
    
    
    2.56
    
    
    
    4.21Forfeiture rate
    
    
    0.0
    %
    
    
    5.59
    %
  10




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##### 



11




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##### 



Stock Compensation Plans
       12




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##### 



Weighted-AverageShares
    
    
    Exercise PriceOutstanding at beginning of period
    
    
    3,517,880
    
    
    $
    25.22Granted
    
    
    322,124
    
    
    
    18.87Exercised
    
    
    (144,070
    )
    
    
    13.17Canceled or expired
    
    
    (94,684
    )
    
    
    28.83Outstanding at end of period
    
    
    3,601,250
    
    
    
    27.95Equity awards exercisable at end of period
    
    
    2,847,909
    
    
    
    26.21
 Comprehensive Income
  Three Months Ended December 31,
    
    
    Six Months Ended December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss), as reported
    
    $
    3,006
    
    
    $
    304
    
    
    $
    4,324
    
    
    $
    (5,970
    )Other comprehensive income:Unrealized (loss) gain on
available-for-sale
securities, net of taxes
    
    
    5
    
    
    
    (26
    )
    
    
    
    
    
    
    7Foreign currency
translation (loss) gain
    
    
    (230
    )
    
    
    922
    
    
    
    (265
    )
    
    
    1,382Comprehensive income (loss)
    
    $
    2,781
    
    
    $
    1,200
    
    
    $
    4,059
    
    
    $
    (4,581
    )
  7. Royalty and Technology
   13




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##### 



8.
    
    Warranties
  Six Months Ended December 31,2005
    
    
    2004Balance, beginning of period
    
    $
    1,137
    
    
    $
    897Warranties issued during the period
    
    
    1,375
    
    
    
    1,048Changes in liability for pre-existing
warranties during the period, including
expirations
    
    
    (1,236
    )
    
    
    (953
    )Balance, end of period
    
    $
    1,276
    
    
    $
    992
  14




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##### 



9.
    
    Contingencies
  15




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
  Overview
 ®
    16




---



##### 



Results of Operations
 Three Months Ended December 31,
    
    
    Six Months Ended December 31,%
    
    
    
    
    
    
    
    
    
    
    %2005
    
    
    2004
    
    
    change
    
    
    2005
    
    
    2004
    
    
    change($ in thousands)Total revenue
    
    $
    37,093
    
    
    $
    26,952
    
    
    
    38
    %
    
    $
    70,446
    
    
    $
    53,164
    
    
    
    33
    %Product sales
    
    
    36,560
    
    
    
    26,506
    
    
    
    38
    %
    
    
    69,382
    
    
    
    52,253
    
    
    
    33
    %HPV test product revenue
    
    
    32,302
    
    
    
    22,341
    
    
    
    45
    %
    
    
    60,694
    
    
    
    44,790
    
    
    
    36
    %Cost of product sales
    
    
    5,083
    
    
    
    5,266
    
    
    
    (3
    )%
    
    
    9,984
    
    
    
    9,791
    
    
    
    2
    %Gross margin (1)
    
    
    86
    %
    
    
    80
    %
    
    
    7
    %
    
    
    86
    %
    
    
    81
    %
    
    
    5
    %Royalty and technology
expense
    
    $
    2,091
    
    
    $
    1,256
    
    
    
    66
    %
    
    $
    3,953
    
    
    $
    2,664
    
    
    
    48
    %
 
 (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.  17




---



##### 



Ô
     18




---



##### 



® TM
 19




---



##### 



TM
     20




---



##### 



21




---



##### 



Liquidity and Capital Resources
    22




---



##### 



23




---



##### 



24




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##### 



Less Than
    
    
    One to Three
    
    
    Four to FiveContractual Obligations
    
    Total
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    After Five YearsLong-term debt
    
    $
    625
    
    
    $
    116
    
    
    $
    509
    
    
    $
    
    
    
    $
    Operating leases
    
    
    2,063
    
    
    
    804
    
    
    
    1,052
    
    
    
    207
    
    
    
    Purchase obligations
    
    
    2,153
    
    
    
    1,651
    
    
    
    502
    
    
    
    
    
    
    
    Gaithersburg lease
obligation
    
    
    43,850
    
    
    
    3,021
    
    
    
    11,764
    
    
    
    8,277
    
    
    
    20,788Minimum royalty payments
    
    
    14,000
    
    
    
    3,500
    
    
    
    10,500
    
    
    
    
    
    
    
    Total contractual cash
obligations
    
    $
    62,691
    
    
    $
    9,092
    
    
    $
    24,327
    
    
    $
    8,484
    
    
    $
    20,788
 25




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##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Item 4. Controls and Procedures
   26




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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
   27




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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)).10.1*
    
    Fourth Amendment to Lease, dated
November 15, 2005, between Digene Corporation and
ARE-Metropolitan Grove I, LLC.10.2
    
    Digene Corporation Amended and
Restated 1999 Incentive Plan, as amended (Incorporated by reference
to Exhibit 4.1 to Digenes Registration Statement on
Form S-8 (File No. 333-131592)).10.3
    
    Digene Corporation Amended and
Restated Directors Equity Compensation Plan (Incorporated by
reference to Exhibit 4.2 to Digenes Registration Statement
on Form S-8 (File No. 333-131592)).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.
 
 *
    
    Filed herewith. 28




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##### 



SIGNATURES
  DIGENE CORPORATIONDate:    February 8, 2006
    By:
    /s/ Charles M. FleischmanCharles M. FleischmanPresident, Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer)Date:    February 8, 2006
    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)).10.1*
    
    Fourth Amendment to Lease, dated
November 15, 2005, between Digene Corporation and ARE-Metropolitan
Grove, I, LLC.10.2
    
    Digene Corporation Amended and
Restated 1999 Incentive Plan, as amended (Incorporated by reference to
Exhibit 4.1 to Digenes Registration Statement on Form S-8 (File No.
333-131592)).10.3
    
    Digene Corporation Amended and Restated Directors Equity
Compensation Plan (Incorporated by reference to Exhibit 4.2
to Digenes Registration Statement on Form S-8 (File No. 333-131592)).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.
 
 *
    
    Filed Herewith