##### 



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, 2006
 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
 (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 RoadGaithersburg, Maryland
    
    20878(Address of principal executive offices)
    
    (Zip Code)
 (301) 944-7000
  þ o
  o þ o
 o þ
  Shares outstanding as ofClass
    
    November 1, 2006(Common Stock, par value $.01 per share)
    
    23,694,861




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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, 2006 and June 30, 2006
    
    
    3Consolidated Statements of Operations-
Three months ended September 30, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows-
Three months ended September 30, 2006 and 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18Part II. Other Information:Item 1. Legal Proceedings
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    20Item 6. Exhibits and Reports on Form 8-K
    
    
    22SignaturesExhibit Index
 2




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##### 



PART I. Consolidated Financial Information
Item 1. Consolidated Financial Statements
 DIGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    June 30,2006
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,635
    
    
    $
    8,805Short-term investments
    
    
    144,760
    
    
    
    130,452Accounts
receivable, less allowance of approximately $348 and $363 at September 30, 2006 and June 30, 2006, respectively
    
    
    25,245
    
    
    
    27,665Inventories, net
    
    
    6,134
    
    
    
    6,307Prepaid expenses and other current assets
    
    
    7,383
    
    
    
    3,718Deferred tax asset, current
    
    
    3,845
    
    
    
    4,275Total current assets
    
    
    200,002
    
    
    
    181,222Property and equipment, net
    
    
    37,780
    
    
    
    33,935Deposits and other assets
    
    
    5,747
    
    
    
    5,981Deferred tax asset, less current portion
    
    
    12,172
    
    
    
    10,748Total assets
    
    $
    255,701
    
    
    $
    231,886LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    11,728
    
    
    $
    10,716Accrued expenses
    
    
    10,899
    
    
    
    11,030Accrued payroll
    
    
    9,762
    
    
    
    11,190Current portion of long-term debt and lease obligations
    
    
    1,762
    
    
    
    1,445Total current liabilities
    
    
    34,151
    
    
    
    34,381Deferred rent
    
    
    263
    
    
    
    246Long-term debt, less current portion
    
    
    420
    
    
    
    450Lease obligations, less current portion
    
    
    23,366
    
    
    
    19,323Minority interest
    
    
    513
    
    
    
    440Stockholders 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, 23,609,084
and 23,243,586 shares issued and outstanding at September 30, 2006
and June 30, 2006, respectively
    
    
    236
    
    
    
    232Additional paid-in capital
    
    
    244,509
    
    
    
    229,996Accumulated other comprehensive income
    
    
    977
    
    
    
    692Accumulated deficit
    
    
    (48,734
    )
    
    
    (53,874
    )Total stockholders equity
    
    
    196,988
    
    
    
    177,046Total liabilities and stockholders equity
    
    $
    255,701
    
    
    $
    231,886
 See accompanying notes.
 3




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##### 



DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months EndedSeptember 30,2006
    
    
    2005(Unaudited)Revenues:Product sales
    
    $
    45,479
    
    
    $
    32,822Other
    
    
    662
    
    
    
    530Total revenues
    
    
    46,141
    
    
    
    33,352Costs and expenses:Cost of product sales
    
    
    6,138
    
    
    
    4,901Royalty and technology
    
    
    2,208
    
    
    
    1,862Research and development
    
    
    4,606
    
    
    
    3,764Selling and marketing
    
    
    16,404
    
    
    
    14,586General and administrative
    
    
    9,618
    
    
    
    5,548Income from operations
    
    
    7,167
    
    
    
    2,691Other income (expense):Interest income
    
    
    1,754
    
    
    
    285Interest expense
    
    
    (353
    )
    
    
    3Other income (expense)
    
    
    14
    
    
    
    25Income from operations before minority interest and income taxes
    
    
    8,582
    
    
    
    3,004Minority interest
    
    
    (72
    )
    
    
    (111
    )Income from operations before income taxes
    
    
    8,510
    
    
    
    2,893Provision for income taxes
    
    
    3,369
    
    
    
    1,575Net income
    
    $
    5,141
    
    
    $
    1,318Basic net income per share
    
    $
    0.22
    
    
    $
    0.07Diluted net income per share
    
    $
    0.22
    
    
    $
    0.06Weighted average shares outstandingBasic
    
    
    23,445
    
    
    
    20,088Diluted
    
    
    23,879
    
    
    
    20,465
 See accompanying notes.
 4




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##### 



DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Three Months EndedSeptember 30,2006
    
    
    2005(Unaudited)Operating activitiesNet income
    
    $
    5,141
    
    
    $
    1,318Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization of property and equipment
    
    
    1,525
    
    
    
    879Amortization of intangible assets
    
    
    125
    
    
    
    Loss on disposal of fixed assets
    
    
    15
    
    
    
    24Stock-based compensation expense
    
    
    2,113
    
    
    
    1,353Deferred tax asset
    
    
    1,777
    
    
    
    697Minority interest
    
    
    72
    
    
    
    111Changes in operating assets and liabilities:Accounts receivable
    
    
    2,509
    
    
    
    (621
    )Inventories
    
    
    177
    
    
    
    (168
    )Prepaid expenses and other current assets
    
    
    676
    
    
    
    403Deposits and other assets
    
    
    112
    
    
    
    (24
    )Accounts payable
    
    
    (1,615
    )
    
    
    (266
    )Accrued expenses
    
    
    (177
    )
    
    
    737Accrued patent litigation settlement
    
    
    
    
    
    
    (3,750
    )Accrued payroll
    
    
    (1,453
    )
    
    
    284Deferred rent
    
    
    17
    
    
    
    30Net cash provided by operating activities
    
    
    11,014
    
    
    
    1,007Investing activitiesPurchases of short-term investments
    
    
    (45,253
    )
    
    
    5,286Sales and maturities of short-term investments
    
    
    31,181
    
    
    
    (13,472
    )Capital expenditures
    
    
    (2,483
    )
    
    
    (755
    )Net cash (used in) investing activities
    
    
    (16,555
    )
    
    
    (8,941
    )Financing activitiesExercise of common stock options
    
    
    8,387
    
    
    
    1,147Excess tax benefit from stock based compensation
    
    
    1,158
    
    
    
    312Principal payments of long-term debt
    
    
    (271
    )
    
    
    (34
    )Net cash provided by financing activities
    
    
    9,274
    
    
    
    1,425Effect of currency translations
    
    
    97
    
    
    
    (78
    )Net increase (decrease) in cash and cash equivalents
    
    
    3,830
    
    
    
    (6,587
    )Cash and cash equivalents at beginning of year
    
    
    8,805
    
    
    
    15,789Cash and cash equivalents at end of period
    
    $
    12,635
    
    
    $
    9,202
 See accompanying notes.
 5




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DIGENE CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
    2. Recent Accounting Pronouncements
    6




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3. Other Balance Sheet Information
 Inventories
  September 30,
    
    
    June 30,2006
    
    
    2006(unaudited)Finished goods
    
    $
    3,140
    
    
    $
    4,204Work in process
    
    
    2,964
    
    
    
    2,739Raw materials
    
    
    2,061
    
    
    
    1,7738,165
    
    
    
    8,716Inventory reserve
    
    
    (2,031
    )
    
    
    (2,409
    )$
    6,134
    
    
    $
    6,307
 4. Income Taxes
   5. Stockholders Equity
 Common Stock and Per Share Calculation
  7




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Three Months EndedSeptember 30,(in thousands, except per share data)
    
    2006
    
    
    2005Numerator:Net income
    
    $
    5,141
    
    
    $
    1,318Denominator:Weighted average shares outstanding  basic
    
    
    23,445
    
    
    
    20,088Dilutive securities  stock options
    
    
    434
    
    
    
    377Weighted average shares outstanding  diluted
    
    
    23,879
    
    
    
    20,465Basic net income per share
    
    $
    0.22
    
    
    $
    0.07Diluted net income per share
    
    $
    0.22
    
    
    $
    0.06
  Stock-Based Compensation
     8




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Comprehensive Income
  Three Months Ended September 30,2006
    
    
    2005Net income, as reported
    
    $
    5,141
    
    
    $
    1,318Other comprehensive income:Unrealized gain (loss) on
available-for-sale securities, net of
taxes
    
    
    148
    
    
    
    (6
    )Foreign currency translation gain (loss)
    
    
    137
    
    
    
    (35
    )Comprehensive income
    
    $
    5,426
    
    
    $
    1,277
  6. Warranties
  Three Months EndedSeptember 30,2006
    
    
    2005Balance, beginning of period
    
    $
    1,503
    
    
    $
    1,137Warranties issued during the period
    
    
    913
    
    
    
    649Changes in liability for pre-existing warranties during the period
    
    
    (827
    )
    
    
    (596
    )Balance, end of period
    
    $
    1,589
    
    
    $
    1,190
  7. Contingencies
  9




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
  Overview
     10




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Results of Operations
 Three Months Ended
    
    Three Months EndedSeptember 30, 2006
    
    September 30, 2005
    
    % change(in thousands)Total revenue
    
    $
    46,141
    
    
    $
    33,352
    
    
    
    38
    %Product sales
    
    
    45,479
    
    
    
    32,822
    
    
    
    39
    %HPV test product revenue
    
    
    41,607
    
    
    
    28,392
    
    
    
    47
    %Cost of product sales
    
    
    6,138
    
    
    
    4,901
    
    
    
    25
    %Gross margin (1)
    
    
    86.5
    %
    
    
    85.1
    %
    
    
    2
    %Royalty and technology expense
    
    $
    2,208
    
    
    $
    1,862
    
    
    
    19
    %
 
 (1)
    
    We calculate gross margin as the difference between product
sales and the cost of product sales, which exclude royalty and technology
expense, as a percentage of product sales for the period. ® ®
 11




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12




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® ®
  ® ® ®
   ®
  13




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14




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Liquidity and Capital Resources
   15




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16




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Less Than
    
    
    One to Three
    
    
    Four to FiveContractual Obligations
    
    Total
    
    
    One Year
    
    
    Years
    
    
    Years
    
    
    After Five YearsLong-term debt
    
    $
    537
    
    
    $
    117
    
    
    $
    420
    
    
    $
    
    
    
    $
    Operating leases
    
    
    3,169
    
    
    
    875
    
    
    
    1,575
    
    
    
    609
    
    
    
    110Capital leases
    
    
    258
    
    
    
    108
    
    
    
    150
    
    
    
    
    
    
    
    Purchase obligations
    
    
    2,738
    
    
    
    1,488
    
    
    
    1,250
    
    
    
    
    
    
    
    Gaithersburg lease
obligations
    
    
    41,769
    
    
    
    3,817
    
    
    
    11,957
    
    
    
    8,413
    
    
    
    17,582Minimum royalty payments
    
    
    11,776
    
    
    
    1,276
    
    
    
    10,500
    
    
    
    
    
    
    
    Total contractual cash
obligations
    
    $
    60,247
    
    
    $
    7,681
    
    
    $
    25,852
    
    
    $
    9,022
    
    
    $
    17,692
 17




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Item 4. Controls and Procedures
   18




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PART II. Other Information
 Item 1. Legal Proceedings
 Digene Corporation v. Ventana Medical Systems, Inc. and Beckman Coulter, Inc.
    19




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##### 



Item 4. Submission of Matters to a Vote of Security Holders
      For:
    
    
    15,939,506Against:
    
    
    2,234,087Abstain:
    
    
    8,285Broker Non-Votes:
    
    
    2,705,023
   For:
    
    
    15,858,806Against:
    
    
    2,316,473Abstain:
    
    
    6,600Broker Non-Votes:
    
    
    2,705,022
   For:
    
    
    16,327,569Against:
    
    
    1,847,192Abstain:
    
    
    7,118Broker Non-Votes:
    
    
    2,705,022
 20




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##### 



For:
    
    
    16,158,471Against:
    
    
    2,016,185Abstain:
    
    
    7,223Broker Non-Votes:
    
    
    2,705,022
   For:
    
    
    17,272,581Against:
    
    
    892,198Abstain:
    
    
    17,100Broker Non-Votes:
    
    
    2,705,022
   For:
    
    
    20,874,187Against:
    
    
    9,853Abstain:
    
    
    2,860Broker Non-Votes:
    
    
    1
 21




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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
    
    Amended and Restated 1996 Omnibus Plan.10.2
    
    Amended and Restated 1997 Stock Option Plan.10.3
    
    Amended and Restated Directors Equity Compensation Plan10.4
    
    Amended and Restated Equity Incentive Plan10.4(a)
    
    Amendment to the Amended and Restated Equity Incentive Plan  Stock Option and Restricted Stock
Unit Awards to Employees Working in France (incorporated by reference to Exhibit 10.13(a) to
Digenes Annual Report on Form 10-K for the fiscal year ended June 30, 2006).10.5
    
    Form of Employment Agreement between Digene and James H. Godsey, Ph.D. (incorporated by
reference to Exhibit 10.2 to Digenes Quarterly Report on Form 10-Q for the quarter ended March
31, 2006).10.6
    
    Form of Change in Control Employment Agreement between Digene and James H. Godsey, Ph.D.
(incorporated by reference to Exhibit 10.4 to Digenes Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006).10.7
    
    Employment Separation and Release Agreement, dated August 15, 2006, between Digene
Corporation and Charles M. Fleischman (incorporated by reference to Exhibit 99.1 to Digenes
Current Report on Form 8-K filed August 24, 2006).10.8
    
    Non-Employee Director Compensation Policy (incorporated by reference to Exhibit 10.1 to
Digenes Current Report on Form 8-K filed on October 31, 2006).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.
 22




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SIGNATURES
  DIGENE CORPORATION
 Date:    November 6, 2006
    By:
    /s/ Joseph P. SlatteryJoseph P. SlatteryChief Financial Officer and Senior Vice
President
(Principal Financial Officer and
Principal Accounting Officer)




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EXHIBIT INDEX
 Exhibit No.
    
    
    
    Description3.1
    
    
    
    Amended and Restated Certificate of Incorporation of
Digene (Incorporated by reference to Exhibit 3.1 to
Digenes Registration Statement on Form S-1 (File No.
333-2968) dated March 29, 1996).3.2
    
    
    
    Amended and Restated Bylaws of Digene (Incorporated by
reference to Exhibit 3.2 to Digenes Annual Report on
Form 10-K for the fiscal year ended June 30, 1999).4.1
    
    
    
    Specimen Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 to Digenes Registration
Statement on Form S-1 (File No. 333-2968) dated March
29, 1996).10.1
    
    *
    
    Amended and Restated 1996 Omnibus Plan.10.2
    
    *
    
    Amended and Restated 1997 Stock Option Plan.10.3
    
    *
    
    Amended and Restated Directors Equity Compensation Plan10.4
    
    *
    
    Amended and Restated Equity Incentive Plan10.4(a)
    
    
    
    Amendment to the Amended and Restated Equity Incentive
Plan  Stock Option and Restricted Stock Unit Awards to
Employees Working in France (incorporated by reference
to Exhibit 10.13(a) to Digenes Annual Report on Form
10-K for the fiscal year ended June 30, 2006).10.5
    
    
    
    Form of Employment Agreement between Digene and
James H. Godsey, Ph.D. (incorporated by reference to
Exhibit 10.2 to Digenes Quarterly Report on Form 10-Q
for the quarter ended March 31, 2006).10.6
    
    
    
    Form of Change in Control Employment Agreement
between Digene and James H. Godsey, Ph.D. (incorporated
by reference to Exhibit 10.4 to Digenes Quarterly
Report on Form 10-Q for the quarter ended March 31,
2006).10.7
    
    
    
    Employment Separation and Release Agreement, dated
August 15, 2006, between Digene Corporation and Charles
M. Fleischman (incorporated by reference to Exhibit
99.1 to Digenes Current Report on Form 8-K filed
August 24, 2006).10.8
    
    
    
    Non-Employee Director Compensation Policy
(incorporated by reference to Exhibit 10.1 to Digenes
Current Report on Form 8-K filed on October 31, 2006).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.