SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
QIAGEN N.V.
Spoorstraat 50
5911 KJ Venlo
The Netherlands
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F
Form 20-F X Form 40-F_______
-------
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
Yes_______ No X
-------
QIAGEN N.V.
Form 6-K
TABLE OF CONTENTS
Financial Information Page
----
Financial Statements
Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2002
and December 31, 2001 3
Condensed Consolidated Statements of Income (unaudited)
for the three and six months ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Operating and Financial Review and Prospects 19
Quantitative and Qualitative Disclosures About Market Risk 31
Other Information
Submission of Matters to a Vote of Security Holders 33
Signatures 35
Exhibit index 36
2
QIAGEN N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, December 31,
2002 2001
-------------- -------------
Assets
Current Assets:
Cash and cash equivalents $ 39,497,000 $ 56,460,000
Marketable securities 18,133,000 22,512,000
Notes receivable 4,850,000 3,844,000
Accounts receivable, net of allowance of $2,093,000
and $2,048,000 in 2002 and 2001, respectively 49,992,000 39,955,000
Income taxes receivable 2,307,000 2,439,000
Inventories 46,142,000 31,883,000
Deferred income taxes 12,287,000 11,123,000
Prepaid expenses and other 12,730,000 9,115,000
-------------- ---------------
Total current assets 185,938,000 177,331,000
Property, plant and equipment, net 197,955,000 160,365,000
Long-term marketable securities 1,557,000 2,759,000
Intangible assets, net 38,855,000 7,140,000
Deferred income taxes 1,804,000 1,804,000
Other assets 7,148,000 7,569,000
-------------- ---------------
Total assets $433,257,000 $356,968,000
============== ===============
Liabilities and Shareholders' Equity
Current Liabilities:
Lines of credit $ 1,846,000 $ 6,038,000
Short-term debt 5,914,000 281,000
Current portion of long-term debt 1,260,000 1,138,000
Current portion of capital lease obligations 1,231,000 1,085,000
Accounts payable 20,453,000 20,262,000
Accrued liabilities 24,827,000 20,235,000
Income taxes payable 9,907,000 8,434,000
Deferred income taxes 4,508,000 410,000
-------------- ---------------
Total current liabilities 69,946,000 57,883,000
-------------- ---------------
Long-Term Liabilities:
Long-term debt, net of current portion 88,389,000 70,720,000
Capital lease obligations, net of current portion 11,036,000 10,463,000
Other 3,318,000 4,927,000
-------------- ---------------
Total long-term liabilities 102,743,000 86,110,000
-------------- ---------------
Commitments and Contingencies
Shareholders' Equity:
Common shares, .01 EUR par value:
Authorized--260,000,000 shares
Issued and outstanding--145,337,208 shares in 2002
and 143,463,800 shares in 2001 1,476,000 1,458,000
Additional paid-in capital 147,606,000 123,117,000
Retained earnings 111,358,000 97,278,000
Accumulated other comprehensive income (loss) 128,000 (8,878,000)
-------------- ---------------
Total shareholders' equity 260,568,000 212,975,000
-------------- ---------------
Total liabilities and shareholders' equity $433,257,000 $356,968,000
============== ===============
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
QIAGEN N.V.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales $72,747,000 $ 66,047,000 $ 143,277,000 $ 129,193,000
Cost of sales 24,355,000 20,272,000 45,400,000 37,563,000
------------- ------------- ------------- -------------
Gross profit 48,392,000 45,775,000 97,877,000 91,630,000
------------- ------------- ------------- -------------
Operating Expenses:
Research and development 6,743,000 7,038,000 13,179,000 13,700,000
Sales and marketing 18,987,000 15,945,000 36,846,000 30,517,000
General and administrative 10,462,000 8,039,000 19,940,000 18,145,000
In-process research and development 1,200,000 - 1,200,000 -
Acquisition and related costs 1,648,000 - 1,648,000 3,000,000
------------- ------------- ------------- -------------
Total operating expenses 39,040,000 31,022,000 72,813,000 65,362,000
------------- ------------- ------------- -------------
Income from operations 9,352,000 14,753,000 25,064,000 26,268,000
------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 319,000 527,000 657,000 1,230,000
Interest expense (520,000) (171,000) (1,171,000) (691,000)
Research and development grants 201,000 231,000 337,000 417,000
Gain (loss) on foreign currency
transactions (1,263,000) 443,000 (1,403,000) 325,000
Loss from equity method investees (196,000) (493,000) (577,000) (905,000)
Other miscellaneous income
(expense), net (10,000) 1,533,000 (20,000) 1,459,000
------------- ------------- ------------- -------------
Total other income (expense) (1,469,000) 2,070,000 (2,177,000) 1,835,000
------------- ------------- ------------- -------------
Income before provision for income
taxes and minority interest 7,883,000 16,823,000 22,887,000 28,103,000
Provision for income taxes 3,314,000 5,488,000 8,812,000 10,803,000
Minority interest (5,000) - (5,000) 8,000
-------------- ------------- ------------- -------------
Net income $ 4,574,000 $ 11,335,000 $ 14,080,000 $ 17,292,000
============= ============= ============= =============
Net income per common share:
Basic and diluted $ 0.03 $ 0.08 $ 0.10 $ 0.12
============= ============= ============= =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
QIAGEN N.V.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30,
-------------------------------------
2002 2001
------------- -------------
Cash Flows From Operating Activities:
Net income $ 14,080,000 $ 17,292,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,688,000 7,313,000
Provision for losses on accounts receivable 209,000 106,000
Deferred income taxes 3,182,000 (1,699,000)
Loss (gain) on disposition of property and equipment (38,000) 29,000
Realized (gain) loss on marketable securities 11,000 (1,327,000)
Losses on equity method investees 564,000 905,000
Tax benefit on non-qualified stock options 577,000 8,472,000
In-process research and development 1,200,000 -
Minority interest (5,000) 8,000
Decrease (increase) in:
Notes receivable (604,000) 100,000
Accounts receivable (6,435,000) (5,938,000)
Inventories (8,902,000) (2,834,000)
Income tax receivable 162,000 755,000
Prepaid expenses and other (2,245,000) (3,236,000)
Other assets (370,000) (356,000)
Increase (decrease) in:
Accounts payable (2,109,000) 2,738,000
Accrued liabilities 1,998,000 6,683,000
Income taxes payable 1,367,000 1,640,000
Other 57,000 1,703,000
------------- -------------
Net cash provided by operating activities 14,387,000 32,354,000
------------- -------------
Cash Flows From Investing Activities:
Purchases of land, property and equipment (39,747,000) (48,419,000)
Proceeds from sale of property 2,057,000 84,000
Purchases of investment (188,000) (422,000)
Cash paid for acquisitions, net of cash acquired (14,487,000) -
Sale of investment - 85,000
Proceeds from sales of marketable securities 4,375,000 5,048,000
Purchases of marketable securities - (1,501,000)
Purchase of intangibles (975,000) (181,000)
------------- -------------
Net cash used in investing activities (48,965,000) (45,306,000)
------------- -------------
Cash Flows From Financing Activities:
Proceeds from lines of credit 10,922,000 12,887,000
Repayment of lines of credit (14,129,000) (9,858,000)
Proceeds from long-term debt 9,501,000 8,377,000
Repayment of long-term debt (309,000) (3,066,000)
Proceeds from short-term borrowing 4,042,000 -
Repayment of short-term borrowing (690,000) (5,522,000)
Proceeds from government grant - 3,600,000
Principal payments on capital leases (493,000) (610,000)
Issuance of common shares 2,041,000 2,017,000
------------- -------------
Net cash provided by financing activities 10,885,000 7,825,000
------------- -------------
Effect of exchange rate changes on cash and cash equivalents 6,730,000 (1,122,000)
Net (decrease) increase in cash and cash equivalents (16,963,000) (6,249,000)
Cash and cash equivalents, beginning of period 56,460,000 24,008,000
------------- -------------
Cash and cash equivalents, end of period $ 39,497,000 $ 17,759,000
============= =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
QIAGEN N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include the accounts of
QIAGEN N.V. (the Company), a company incorporated in The Netherlands, and its
wholly and majority owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated. All amounts are presented in U.S. dollars
unless otherwise indicated. Investments in affiliated companies that are 50
percent or less owned and where the Company exercises significant influence over
the operations are accounted for using the equity method. All other investments
are accounted for under the cost method.
In the opinion of management and subject to year-end audit, the
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with United States generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the Securities and Exchange Commission rules and regulations. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation have been included. The results
of operations for the interim periods are not necessarily indicative of results
that may be expected for any other interim period or for the full year. These
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 20-F for the year ended December
31, 2001.
As discussed in Note 13, the Company acquired Xeragon, Inc. and
GenoVison AS during the second quarter of 2002 in transactions accounted for as
purchases, thus, the results of operations of the acquired companies are
included in the consolidated results for the Company from the date of
acquisition. The Company acquired the Sawady Group of companies (Sawady) in
March 2001. This transaction was accounted for as pooling of interests and
accordingly, all financial information presented includes the combined balances
and results of the Company and Sawady.
6
2. Net Income Per Common Share
Net income per common share for the three and six months ended June 30,
2002 and 2001 are based on the weighted average number of common shares
outstanding and the dilutive effect of stock options outstanding.
The following schedule summarizes the information used to compute net
income per common share:
Three Months
Ended June 30,
----------------------------
2002 2001
------------ ------------
Weighted average number of common shares used
to compute basic net income per common share 144,645,000 142,816,000
Dilutive effect of stock options 1,271,000 2,215,000
------------ ------------
Weighted average number of common shares used
to compute diluted net income per common share 145,916,000 145,031,000
============ ============
Outstanding stock options having no dilutive
effect, not included in above calculation 5,415,000 2,079,000
Six Months
Ended June 30,
----------------------------
2002 2001
------------ ------------
Weighted average number of common shares used
to compute basic net income per common share 144,116,000 142,711,000
Dilutive effect of stock options 1,444,000 2,333,000
------------ ------------
Weighted average number of common shares used
to compute diluted net income per common share 145,560,000 145,044,000
============ ============
Outstanding stock options having no dilutive
effect, not included in above calculation 3,877,000 1,775,000
7
3. Comprehensive Income
The components of comprehensive income for the three- and six-month
periods ended June 30, 2002 and 2001 are as follows:
Three Months Ended June 30,
--------------------------------
2002 2001
-------------- -------------
Net income $ 4,574,000 $11,335,000
Net unrealized (loss) on marketable securities (623,000) (497,000)
Net realized loss (gain) on marketable securities 5,000 (1,324,000)
Foreign currency translation adjustment 11,999,000 (1,886,000)
-------------- -------------
Comprehensive income $ 15,955,000 $ 7,628,000
============== =============
Six Months Ended June 30,
--------------------------------
2002 2001
-------------- -------------
Net income $14,080,000 $17,292,000
Net unrealized loss on marketable securities (1,208,000) (3,891,000)
Net realized loss (gain) on marketable securities 10,000 (1,327,000)
Foreign currency translation adjustment 10,204,000 (5,312,000)
------------ -------------
Comprehensive income $ 23,086,000 $ 6,762,000
============= =============
The following table is a summary of the components of accumulated other
comprehensive loss as of June 30, 2002 and December 31, 2001:
2002 2001
-------------- -------------
Net unrealized (loss) gain on marketable securities $ (134,000) $ 1,064,000
Foreign currency translation adjustment 262,000 (9,942,000)
-------------- -------------
Accumulated other comprehensive loss $ 128,000 $ (8,878,000)
============== =============
8
4. Shareholders' Equity
The following tables details the changes in shareholders' equity since
December 31, 2001:
Accumulated
Additional Other
BALANCE AT Common Shares Paid-In Retained Comprehensive
-------------------------
DECEMBER 31, Shares Amount Capital Earnings Income (loss) Total
---------------------------------------------------------------------------------------------------------------------------
2001 143,463,800 $1,458,000 $123,117,000 $ 97,278,000 $ (8,878,000) $212,975,000
---------------------------------------------------------------------------------------------------------------------------
Net income - - - 14,080,000 - 14,080,000
Unrealized loss, net
on marketable
securities - - - - (1,208,000) (1,208,000)
Realized loss, net
on marketable
securities - - - - 10,000 10,000
Translation
adjustment - - - - 10,204,000 10,204,000
Exercise of
stock options 378,648 4,000 2,037,000 - - 2,041,000
Tax benefit in connection
with nonqualified
stock options - - 583,000 - - 583,000
Acquisition of
Xeragon, Inc. 564,334 5,000 7,995,000 - - 8,000,000
Acquisition of
GenoVision AS 930,426 9,000 13,874,000 - - 13,883,000
BALANCE AT
JUNE 30,
---------------------------------------------------------------------------------------------------------------------------
2002 145,337,208 $1,476,000 $147,606,000 $111,358,000 $128,000 $260,568,000
===========================================================================================================================
5. Provision for Income Taxes
The provision for income taxes for the three and six months ended June
30, 2002 and 2001 is based upon the estimated annualized rate for each of the
respective years.
6. Supplemental Cash Flow Information
Non-cash investing and financing activities, which are excluded from
the consolidated statements of cash flows, along with cash paid for interest and
income taxes are as follows:
Six Months Ended June 30,
------------------------------
2002 2001
-------------- --------------
Non-cash Investing and Financing Activities:
Acquisitions:
Net assets and liabilities assumed $ 5,119,000 $ -
Other intangibles $ 8,600,000 $ -
Goodwill $ 8,164,000 $ -
Issuance of common stock $ 21,883,000 $ -
Forgiveness of government grant $ 1,800,000 $ -
Property and equipment purchased
through capital leases $ - $ 457,000
9
Supplemental Cash Flow Disclosure:
Cash paid for interest $ 2,458,000 $ 997,000
Cash paid for income taxes $ 3,601,000 $ 2,445,000
7. Inventories
The components of inventories consist of the following as of June 30,
2002 and December 31, 2001:
2002 2001
----------------- -----------------
Raw materials $ 13,798,000 $ 8,786,000
Work in process 10,843,000 8,352,000
Finished goods 21,501,000 14,745,000
----------------- -----------------
Total inventories $ 46,142,000 $ 31,883,000
================= =================
8. Debt
The Company has seven separate lines of credit amounting to
approximately $9.8 million with variable interest rates. Approximately $1.8
million was utilized on these credit facilities at June 30, 2002.
At June 30, 2002, short-term debt totaled approximately $5.9 million
and was due and paid in July 2002.
At June 30, 2002, long-term debt totaling approximately $89.6 million
consisted primarily of one note payable (EUR 8.9 million, approximately $8.8
million at June 30, 2002) at a 3.75 percent interest rate in addition to
borrowings against the Company's loan facilities committed by a group of banks
led by Deutsche Bank. The EUR 8.9 million note is due in semi-annual payments of
EUR 639,000 (approximately $630,000 at June 30, 2002), with a final payment due
in March 2009. Borrowings against the Deutsche Bank facilities, which are due in
one final payment in July 2005, consisted of EUR 37.5 million (approximately
$36.9 million at June 30, 2002) at a variable interest rate of EURIBOR plus 1.2
percent, and $43.5 million at a variable interest rate of LIBOR plus 1.28
percent. The credit agreements contain financial and non-financial covenants
including but not limited to the maintenance of certain financial ratios. The
Company was in compliance with these covenants at June 30, 2002. The proceeds of
these facilities are primarily dedicated to the refinancing of previously made
acquisitions of land and the construction of manufacturing, research and
administrative facilities thereon.
9. Stock Options
In the six-month period ended June 30, 2002, the Company granted
options to purchase 1,916,000 shares of the Company's common stock. All options
were granted at fair market value at the date of grant. As of June 30, 2002,
options to purchase 9.4 million common shares were outstanding at exercise
prices ranging from $0.97 to $49.75.
10
10. Intangible Assets
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 141, "Business Combinations"
effective June 30, 2001 for business combinations that are consummated after
July 1, 2001, and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.
141 eliminates the pooling-of-interests method for business combinations and
requires use of the purchase method. SFAS No. 142 addresses how intangible
assets should be accounted for upon their acquisition as well as how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. With the adoption of this
statement on January 1, 2002, goodwill and indefinite life intangibles are no
longer subject to amortization over its estimated useful life. Elimination of
goodwill amortization would not have had a material impact on net income or
earnings per share of any of the periods presented and, as a result, the
transitional disclosures of adjusted net income excluding goodwill amortization
described by SFAS No. 142 have not been presented. Goodwill will be assessed for
impairment each year using the fair-value-based test.
The following sets forth the intangible assets by major asset class as
of June 30, 2002 and December 31, 2001:
2002 2001
-------------- ---------------
Amortized Intangible assets:
Patent and license rights $ 5,811,000 $ 4,323,000
Developed technology 11,800,000 3,200,000
Accumulated amortization (3,462,000) (2,642,000)
Unamortized Intangible assets:
Goodwill 24,706,000 2,259,000
-------------- ---------------
Net intangible assets $ 38,855,000 $ 7,140,000
============== ===============
The changes in the carrying amount of goodwill for the six months ended
June 30, 2002 is as follows:
Balance at December 31, 2001 $ 2,259,000
Acquisitions 22,334,000
Effect of foreign currency translation 113,000
--------------
Balance at June 30, 2002 $ 24,706,000
==============
11
Amortization expense on intangible assets totaled approximately
$625,000 and $369,000, respectively, for the three- and six-month periods ended
June 30, 2002. The Company has completed the fair-value based test for
impairment of goodwill and intangible assets and no impairment losses have been
recorded during the quarter. Amortization expense for the next five years is
expected to be approximately:
2002 $ 2,031,000
2003 $ 2,054,000
2004 $ 1,919,000
2005 $ 1,782,000
2006 $ 1,573,000
2007 $ 1,116,000
11. Segment and Related Information
Summarized financial information concerning the Company's reportable
segments is shown in the following tables:
Three Months Ended June 30,
-----------------------------------
Net Sales 2002 2001
--------- ------------- --------------
Germany $ 34,088,000 $ 28,670,000
United States 57,298,000 38,561,000
Switzerland 7,948,000 7,219,000
Japan 8,296,000 7,445,000
United Kingdom 4,423,000 3,792,000
Other Countries 6,721,000 4,331,000
------------- -------------
Subtotal 118,774,000 90,018,000
Intersegment Elimination (46,027,000) (23,971,000)
------------- -------------
Total $ 72,747,000 $ 66,047,000
============= =============
Six Months Ended June 30,
-----------------------------------
Net Sales 2002 2001
--------- ------------- --------------
Germany $ 69,972,000 $ 58,957,000
United States 104,179,000 72,887,000
Switzerland 13,549,000 13,700,000
Japan 17,123,000 17,174,000
United Kingdom 9,698,000 7,891,000
Other Countries 11,942,000 8,523,000
------------- -------------
Subtotal 226,463,000 179,132,000
Intersegment Elimination (83,186,000) (49,939,000)
------------- -------------
Total $ 143,277,000 $ 129,193,000
============= =============
12
Net sales are attributed to countries based on the location of the
Company's subsidiary. During the second quarter of 2002, QIAGEN Sciences, Inc.,
our new facility on the East Coast, commenced operations. QIAGEN Sciences sells
only to other QIAGEN subsidiaries, and as a result, reported net sales and
reported intercompany sales for the United States for 2002 are higher than
compared to prior periods.
Three Months Ended June 30,
-----------------------------------
Intersegment Sales 2002 2001
------------------ ------------ ------------
Germany $(23,106,000) $(18,030,000)
United States (17,971,000) (1,278,000)
Switzerland (4,933,000) (4,663,000)
Japan (17,000) -
------------ ------------
Total $(46,027,000) $(23,971,000)
============ ============
Six Months ended June 30,
-----------------------------------
Intersegment Sales 2002 2001
------------------ ------------ ------------
Germany $(48,585,000) $(38,608,000)
United States (26,423,000) (2,471,000)
Switzerland (8,138,000) (8,860,000)
Japan (40,000) -
------------ ------------
Total $(83,186,000) $(49,939,000)
============ ============
All intersegment sales are accounted for by a formula based on local
list prices and are eliminated in consolidation.
Three Months Ended June 30,
---------------------------------
Operating Income (Loss) 2002 2001
----------------------- ------------ ------------
Germany $ 6,785,000 $ 6,285,000
United States 3,711,000 5,326,000
Switzerland 421,000 1,436,000
Japan 1,617,000 1,259,000
United Kingdom 860,000 929,000
Other Countries (706,000) 440,000
The Netherlands (523,000) (506,000)
------------ ------------
Subtotal 12,165,000 15,169,000
Intersegment Elimination (2,813,000) (416,000)
------------ ------------
Total $ 9,352,000 $ 14,753,000
============ ============
13
Six Months Ended June 30,
---------------------------------
Operating Income (Loss) 2002 2001
----------------------- ------------ ------------
Germany $ 17,487,000 $ 13,047,000
United States 5,265,000 8,995,000
Switzerland 402,000 2,285,000
Japan 3,826,000 617,000
United Kingdom 2,152,000 2,160,000
Other Countries (120,000) 1,012,000
The Netherlands (941,000) (1,513,000)
------------ ------------
Subtotal 28,071,000 26,603,000
Intersegment Elimination (3,007,000) (335,000)
------------ ------------
Total $ 25,064,000 $ 26,268,000
============ ============
The Netherlands operating loss primarily resulted from general and
administrative expenses. The intersegment elimination represents the elimination
of intercompany profit.
Operating income in Germany increased primarily as a result of higher
gross margin partially offset by approximately $1.6 million of equipment
impairment related to the acquisition of GenoVison AS in the second quarter of
2002. The higher gross margin is primarily reflects a different product mix in
Q2 2002 compared to Q2 2001. Purification consumable products carry a higher
gross profit than many of the Company's other products, such as instrumentation
and synthetic nucleic acid products.
Although revenues increased in the first quarter of 2002, operating
income for the United States decreased in 2002 compared to 2001. Revenues were
negatively impacted in the Unites States by slowed research spending by
pharmaceutical companies in the United States. Thus, operating expenses incurred
in anticipation of higher net sales levels as well the impact of fixed costs,
such as deprecation and amortization costs, which are not significantly impacted
by net sales, resulted in lower operating income in the 2002 periods compared to
2001. Further, QIAGEN Sciences commenced operations in 2002, and as a result
incurred higher operating costs in 2002 than compared to 2001.
Operating income in Switzerland decreased primarily due to lower gross
margins and higher general and administrative costs in 2002 compared to 2001 at
QIAGEN Instruments AG. Lower gross margins resulted from the introduction of new
instruments, such as the BioRobot MDx, the LiquiChip Workstation and the
SensiChip Array Detection System, and accessories such as the BioRobot
RapidPlate and the BioRobot Twister Robotic Arm Systems. General and
administrative costs were higher primarily as a result of higher operating costs
of a recently expanded facility.
Operating income in Japan increased primarily as a result improvements
in operations that resulted in lower general and administrative expenses since
the March 2001 acquisition of Sawady Technologies. Further, operating income
during the first quarter of 2001 was lower in Japan and the Netherlands due to
acquisition charges recorded related to the acquisition of Sawady.
14
During the second quarter, the Company recorded a charge for in-process
research and development of $1.2 million related to the acquisition of GenoVison
AS (discussed further in Note 13). This charge was reflected in the purchase
accounting for GenoVision AS, which is located in Norway and included in the
Other Countries segment.
June 30, December 31,
Assets 2002 2001
------ ---------------- ---------------
Germany $ 229,397,000 $ 186,489,000
United States 159,317,000 129,015,000
Switzerland 21,965,000 19,480,000
Japan 27,841,000 21,484,000
United Kingdom 9,815,000 6,475,000
Other Countries 46,284,000 9,601,000
The Netherlands 152,840,000 122,318,000
---------------- ---------------
Subtotal 647,459,000 494,862,000
Intersegment Elimination (214,202,000) (137,894,000)
---------------- ---------------
Total $ 433,257,000 $ 356,968,000
================ ===============
Assets of the Netherlands include cash and cash equivalents, investments,
prepaid assets and certain intangibles. The intersegment elimination represents
intercompany investments and advances. Assets of Other Countries includes the
assets of GenoVison AS, which was acquired in the second quarter of 2002 and
resulted in goodwill and intangibles of approximately $22.8 million.
12. Commitments and Contingencies
During the first quarter of 2002, construction of an approximately 200,000
square foot facility at QIAGEN Sciences, Inc. (Sciences) located in Germantown,
Maryland was completed. In addition to the main building, a DNA production
facility was added at a total cost of approximately $5.3 million, which was
completed during the second quarter 2002, and an RNA production facility is
currently under construction for estimated cost of approximately $2.5 million
with expected completed in the first half of 2003.
During October 2000, the Company began construction of two new facilities
in Germany with estimated completion during the fourth quarter of 2002. The
estimated cost for these facilities is approximately EUR 57.6 million
(approximately $56.8 million at June 30, 2002) of which EUR 50.4 million
(approximately $49.7 million) has been incurred.
From time to time the Company may be party to legal proceedings incidental
to its business. Certain claims, suits or complaints arising out of the normal
course of business have been filed or were pending against the Company. Although
it is not possible to predict the outcome of such litigation, based on the facts
known to the Company and after consultation with legal counsel, management
believes that such litigation will not have a material adverse effect on its
financial position or results of operations.
15
During the normal course of business, the Company is subject to audit by
taxing authorities for varying periods in various tax jurisdictions. During June
2001, a tax audit in Germany for the years 1994 through 1997 was concluded. The
Company has received notification that the taxing authorities are examining the
treatment of expenses related to stock options, which are required to be accrued
when vested under the German Commercial Code, due to a reimbursement agreement
between QIAGEN N.V. and QIAGEN GmbH which requires that QIAGEN GmbH make
payments to QIAGEN N.V. of an amount equal to the spread on stock option
exercises. Based on the advice received from tax experts and its tax advisors,
the Company has accrued for the expense of the stock options in the statutory
financial statements, but such expenses are not recorded in the consolidated
financial statements prepared under U.S. GAAP. The matter being examined by the
taxing authorities is whether the option expenses are deductible for tax
purposes on an accrual basis or only on a payment basis upon the exercise of the
options. Accordingly, should the taxing authorities ultimately conclude that the
stock option expenses are not deductible for tax purposes on an accrual basis,
there would be no income statement impact or impact on earnings per share to the
Company's U.S. GAAP financial statements although the Company may be required to
make additional significant tax payments, the amount of which cannot be
estimated at this time. However, the Company believes its position will be
upheld.
13. Acquisitions
On June 14, 2002, the Company completed the acquisition of GenoVision AS
located in Oslo, Norway. GenoVision AS was formed in 1998 and has two wholly
owned and one majority owned subsidiaries. Subject to the terms of the
acquisition agreement, the Company paid approximately $13.9 million in cash and
issued 930,426 shares of common stock (valued at approximately $13.9 million) in
exchange for all the capital stock of GenoVision AS. The Company has agreed to
pay an earn-out of up to $3.0 million based on GenoVision's performance in the
twelve months following the acquisition. In connection with this merger, the
Company recorded acquisition costs of approximately $2.8 million, which include
$1.2 million of in process research and development and $1.6 million for
equipment impairment. The Company believes that the acquisition will provide
QIAGEN with unique, automated solutions for the purification of nucleic acids
based on GenoVision's proprietary magnetic particle technologies. The
acquisition, accounted for as a purchase under APB Opinion No. 16, included the
purchase of all of the stock of GenoVision AS, which, including acquisition
costs, resulted in a total purchase price of $29.1 million. A portion of the
purchase price has been allocated to the assets acquired and liabilities assumed
based on the estimated fair market value at June 30, 2002. Independent
appraisers utilizing proven valuation procedures and techniques determined the
value of the intangible assets acquired. These intangible assets include
acquired in-process research and development, developed technology and know-how,
and goodwill. As a result of the appraisal, $3.6 million was allocated to
developed technology and will be amortized straight line over ten years,
$700,000 was allocated for contractual worldwide rights of sequence specific
primers for gene-based tissue typing, and will be amortized straight line over
three and one-half years, and approximately $18.5 million was allocated to
goodwill. A charge of $1.2 million for purchased in-process research and
development was included in the Company's second quarter 2002 results. This
charge represents the estimated fair value based on risk-adjusted cash flows
related to the in-process research
16
and development projects. At the date of acquisition, the development of these
projects had not yet reached technological feasibility and the research and
development in progress had no alternative future uses. The results of
GenoVision operations prior to the date of acquisition were not significant. The
results of operations of the acquired company are included in the consolidated
results for the Company from the date of acquisition.
On April 17, 2002, the Company completed the acquisition of Xeragon, Inc.
of Huntsville, Alabama, pursuant to an agreement and plan of merger with Xeragon
dated as of March 28, 2002. In connection with this acquisition, the Company
issued 564,334 common shares valued at $8.0 million, to the shareholders of
Xeragon in exchange for all of the outstanding capital stock of Xeragon. The
acquisition qualifies as a tax-free reorganization. Established in 2001, Xeragon
is a market and technology leader for products and services focusing on
synthetic nucleic acids, particularly siRNA. The acquisition, accounted for as a
purchase under APB Opinion No. 16, included the purchase of all of the stock of
Xeragon, Inc., which, including acquisition costs, resulted in a total purchase
price of $8.2 million. A portion of the purchase price has been allocated to the
assets acquired and liabilities assumed based on the estimated fair market value
at April 17, 2002. These intangible assets include developed technology and
goodwill. As a result of the appraisal, $4.0 million was allocated to developed
technology and will be amortized straight line over ten years, $300,000 was
allocated to non-compete agreements to be amortized straight line over three
years, and approximately $3.8 million was allocated to goodwill. The results of
operations of the acquired company are included in the consolidated results for
the Company from the date of acquisition. Since Xeragon, Inc. was established
late in 2001, the results of operations prior to the date of acquisition were
not significant. Subsequent to the acquisition, the Company transferred
ownership of Xeragon, Inc., to QIAGEN Sciences, Inc., located in Germantown,
Maryland.
On March 31, 2001, the Company completed the acquisition of the Sawady
Group of companies (Sawady) located in Tokyo, Japan. Under the terms of the
agreement QIAGEN N.V. issued 854,987 shares of its common stock, valued at the
time of the closing at approximately $18.0 million, in exchange for all of the
outstanding capital stock of Sawady Technology Co., Ltd., Omgen Co., Ltd. and a
majority position in Accord Co., Ltd., the three companies comprising the Sawady
Group of companies. To date, the minority interest position in Accord Co., Ltd.,
a passive trading company, has not been significant. The Sawady Group of
companies was managed and structured as one organization, but was organized as
three companies to meet the tax planning and other preferences of its
shareholders. In connection with this merger, the Company recorded acquisition
and related charges of approximately $3.0 million, which include approximately
$1.0 million of direct transaction costs, (primarily legal and other
professional fees) and approximately $2.0 million of expenses primarily relating
to the relocation, closure and elimination of leased facilities, such as
duplicate field offices.
The merger was accounted for as a pooling of interests and accordingly, the
accompanying financial statements and footnotes include the operations of Sawady
for 2001. For the three-months ended March 31, 2001, the Sawady revenues were
approximately $2.8 million, and the Sawady net income was approximately
$144,000.
17
14. New Pronouncements
In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability be recognized for exit and disposal costs only when the liability has
been incurred and when it can be measured at fair value. The statement is
effective for exit and disposal activities that are initiated after December 31,
2002. The Company does not expect that the adoption of SFAS No. 146 will have a
material impact on its financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." In addition to amending or rescinding other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions, SFAS No. 145 precludes
companies from recording gains and losses from the extinguishment of debt as an
extraordinary item. The statement is effective January 1, 2003 and is not
anticipated to have any impact on the Company's financial position, results of
operations or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. The statement is effective January 1, 2002 and is not anticipated to
have any impact on the Company's financial position, results of operations or
cash flows.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. This statement is effective on January 1, 2003 with earlier application
encouraged. The Company is currently reviewing this statement and has not yet
determined its impact, if any, on the Company's financial position, results of
operations or cash flows.
18
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Note regarding Forward-Looking Statements and Risk Factors
The Company's future operating results may be affected by various risk
factors, many of which are beyond the Company's control. Certain of the
statements included in this report may be forward-looking statements within the
meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and
Section 21E of the U.S. Securities Exchange Act of 1934, as amended, including
statements regarding potential future increases in net sales, gross profit, net
income and the Company's liquidity. Such statements are based on management's
current expectations and are subject to a number of factors and uncertainties
that could cause actual results to differ materially from those described in the
forward-looking statements. The Company cautions investors that there can be no
assurance that actual results or business conditions will not differ materially
from those projected or suggested in such forward-looking statements as a result
of various factors. Factors which could cause such results to differ materially
from those described in the forward-looking statements include those set forth
in the risk factors below. As a result, the Company's future development efforts
involve a high degree of risk. For further information, refer to more specific
risks and uncertainties discussed in the Company's Annual Report on Form 20-F
for the year ended December 31, 2001. When considering forward-looking
statements, you should keep in mind that the risk factors could cause our actual
results to differ significantly from those contained in any forward-looking
statement.
Difficulties in managing or an inability to manage our growth or the
expansion of our operations could adversely affect our business
Our business has grown rapidly, with total net revenues increasing from
$75.4 million in 1997 to $263.8 million in 2001. We have recently opened our new
research and manufacturing facility in Germantown, Maryland, upgraded our
operating and financial systems and expanded the geographic area of our
operations, resulting in substantial growth in the number of our employees, as
well as increased responsibility for both existing and new management personnel.
The rapid expansion of our business and growth in personnel may place a strain
on our management and operational systems. Our future operating results will
depend on the ability of our management to continue to implement and improve our
research, product development, sales and marketing and customer support
programs, enhance our operational and financial control systems, expand, train
and manage our employee base, and effectively address new issues related to our
growth as they arise. There can be no assurance that we will be able to manage
our recent or any future expansion successfully, and any inability to do so
could have a material adverse effect on our results of operations.
19
We may have difficulty integrating acquisitions of technologies and
businesses
During the past several years we have consummated a number of acquisitions
of companies, through which we have gained access to technologies and products
that complement our internally developed product lines. In the future, we may
acquire additional technologies, products or businesses to expand our existing
and planned business. We may not be able to achieve the benefits expected from
any potential acquisition in a reasonable time frame, or at all. Acquisitions
would expose us to the risks associated with the:
. assimilation of new technologies, operations, sites and personnel;
. diversion of resources from our existing business and technologies;
. inability to generate revenues to offset associated acquisition costs;
. inability to maintain uniform standards, controls, and procedures;
. inability to maintain relationships with employees and customers as a
result of any integration of new management personnel;
. issuance of dilutive equity securities;
. incurrence or assumption of debt; or
. additional expenses associated with future amortization or impairment of
acquired intangible assets or potential businesses.
Our failure to address these risks successfully could have a material adverse
effect on our business.
Exchange rate fluctuations may adversely affect our business
Since we currently market our products in over 42 countries throughout the
world, a significant portion of our business is conducted in currencies other
than the U.S. dollar, our reporting currency. As a result, fluctuations in value
relative to the U.S. dollar of the currencies in which we conduct our business
have caused and will continue to cause foreign currency transaction gains and
losses. Foreign currency transaction gains and losses arising from normal
business operations are charged against earnings in the period incurred. Due to
the number of currencies involved, the variability of currency exposures and the
potential volatility of currency exchange rates, we cannot predict the effects
of exchange rate fluctuations upon future operating results. While we engage in
foreign exchange hedging transactions to manage our foreign currency exposure,
there can be no assurance that our hedging strategy will adequately protect our
operating results from the effects of future exchange rate fluctuations.
20
We heavily rely on air cargo carriers and other overnight logistics services
The Company's customers within the scientific research markets typically do
not keep a significant inventory of QIAGEN products and consequently require
overnight delivery of purchases. As such, the Company heavily relies on air
cargo carriers such as FedEx and UPS. If overnight services are suspended or
delayed and other delivery carriers cannot provide satisfactory services,
customers may suspend a significant amount of work requiring nucleic acid
purification. If there are no adequate delivery alternatives available, sales
levels could be negatively affected.
Our continued growth is dependent on the development and success of new
products
Our continued growth is dependent on new product introductions that are
well received in the market. We focus our product development efforts on
expanding our existing products and developing innovative new products in
selected areas where we have expertise and have identified substantial unmet
market needs. There can be no assurance that we will be able to introduce new
products or that new product releases will be successfully launched and received
by our customers.
Operating Results
Net Sales
Net sales for the three months ended June 30, 2002 increased 10% to $72.7
million from $66.0 million in the same period of 2001. Net sales in the United
States increased to $39.3 million in 2002 from $37.3 million in 2001, and net
sales outside the United States increased to $33.4 million in 2002 from $28.8
million in 2001.
Net sales within the United States increased primarily due to net sales at
QIAGEN, Inc., located in Valencia. QIAGEN, Inc. reported an increase of 10% (or
$2.9 million) during the second quarter of 2002 over the comparable period in
2001, offset by lower sales at QIAGEN Operon, Inc. located in Alameda. Net sales
at QIAGEN Operon decreased 10% (or $763,000) in the second quarter of 2002
compared to the second quarter of 2001.
Although revenues increased in the first quarter of 2002, revenues were
negatively impacted in the Unites States by slowed research spending by
pharmaceutical companies in the United States. This primarily impacted our sales
of synthetic nucleic acid products as well as instrumentation products.
Outside of the United States, the increase in net sales was primarily due
to growth at QIAGEN S.A., located in France, which reported an increase of 51%
($853,000), QIAGEN K.K., located in Japan, which reported an increase of 16%
($793,000), and QIAGEN Ltd, located in England, which reported an increase of
17% (or $630,000) for the second quarter of 2002 compared to the comparable
quarter of 2001. All of the Company's other subsidiaries outside of the United
States reported results in the second quarter of 2002 that were higher than
results from the comparable period in 2001.
21
For the six months ended June 30, 2002, net sales increased 11% to $143.3
million from $129.2 million in the same period of 2001. Net sales in the United
States increased to $77.8 million in 2002 from $70.4 million in 2001, and net
sales outside the United States increased to $65.5 million in 2002 from $58.8
million in 2001. As in the three-month period, the net increase within the
United States was primarily attributable to net sales at QIAGEN Inc., and QIAGEN
Operon. QIAGEN Inc. reported an increase of 18% (or $8.0 million) for the six
months ended June 30, 2002 over the comparable period in 2001, which was
partially offset by a reported decrease at QIAGEN Operon of 8% (or $1.0
million). Outside of the United States, net sales continued to be affected by
growth at QIAGEN Ltd. and QIAGEN S.A., which reported increases of 23% (or $1.8
million) and 37% (or $1.2 million) respectively for the six months ended June
30, 2002 compared to the comparable period of 2001.
While sales of consumable products increased during the quarter, the
Company expects, as disclosed in previous filings, a slower rate of sales growth
for the range of products designed for large-scale plasmid DNA applications as
the market for such products matures. QIAGEN regularly introduces new products
in order to extend the life of its existing product lines as well as to address
new market opportunities. In the second quarter of 2002, QIAGEN released
DyeEx(TM) 2.0 Spin Kits and MinElute(R) 96 UF PCR Purification Kits for DNA
cleanup. The LiquiChip(TM) Protein Suspension Array System was launched,
providing multiplex bead-based protein assays. The following new Array-Ready
Oligo Sets(TM) were also launched: the C. elegans Genome Oligo Set Version 1.0,
the Arabidopsis Genome Oligo Set Version 1.0, and the Human Signal Transduction
Subset. In addition, new technology was developed for fully automated RNA
purification using the new RNeasy(R) 96 BioRobot 8000 Kit.
Changes in exchange rates continued to affect the growth rate of net sales
for the three- and six-month periods ended June 30, 2002. A significant portion
of the Company's revenues is denominated in European Union euros. Using
identical foreign exchange rates for both periods, net sales would have
increased approximately 9% and 12%, as compared to the reported increases of 10%
and 11%, for the three-month and six-month periods ended June 30, 2002,
respectively. See "Currency Fluctuations."
Gross Profit
Gross profit was $48.4 million or 67% of net sales in the quarter ended
June 30, 2002 as compared to $45.8 million or 69% of net sales for the same
period in 2001. The absolute dollar increase is attributable to the increase in
net sales. Gross profit was partially impacted as manufacturing overhead was
incurred at the Company's new Germantown manufacturing facility, which could not
be fully utilized due to lower than expected sales levels. Additionally, the
Company's separation and purification consumable products carry a higher gross
profit than many of the Company's other products, such as instrumentation and
synthetic nucleic acid products. Fluctuations in the product mix can lead to
fluctuations in gross profit. The Company continues to develop additional
instrumentation products that meet the needs of the molecular diagnostic and
genomics markets and anticipates future increases in sales of instrumentation
products. New instrumentation products introduced in 2002 include the BioRobot
MDx, the LiquiChip Workstation and the SensiChip Array Detection System, and
accessories such as the BioRobot RapidPlate and the BioRobot Twister Robotic Arm
Systems. Further, the Company expects growth in the European and Japanese
markets of its synthetic nucleic acid products.
22
Gross profit for the six month period ended June 30, 2002 was $97.9 million
or 68% of net sales as compared to $91.6 million or 71% of net sales for the
same period in 2001.
Research and Development
Research and development expenses decreased 4% to $6.7 million (9% of net
sales) in the quarter ended June 30, 2002 compared with $7.0 million (11% of net
sales) for the same period in 2001. As the Company continues expansion of its
research and development facilities and new product development capabilities,
additional research and development expense will be incurred related to facility
costs and obtaining and retaining employees for the research and development
efforts. The Company's U.S. research and development facility located in
Germantown, Maryland, is anticipated to include research and development
activities. The Company has a strong commitment to research and development, as
demonstrated by the recent expansion of the German research facility along with
the new U.S. facility, and anticipates that absolute research and development
expenses may increase significantly.
For the year to date period ended June 30, 2002, research and development
expenses decreased 4% to $13.2 million (9% of net sales) compared to $13.7
million (11% of net sales) for the same period in 2001.
Sales and Marketing
Sales and marketing expenses increased 19% to $19.0 million (26% of net
sales) in the second quarter of 2002 from $15.9 million (24% of net sales) in
the second quarter of 2001. The increase in sales and marketing expenses
reflects the Company's continued expansion of its sales force and advertising
efforts in connection with the sale of its existing products and the
introduction of new products. Such efforts contributed to the growth in net
sales in the second quarter of 2002. Increased sales and marketing costs are
primarily associated with personnel, commissions, advertising, publications,
freight and logistics expenses and other promotional items. Additionally, the
Company launched its Customer Relationship Management system (CRM) during the
first quarter of 2002, and accordingly, began recording amortization. The
Company anticipates that selling and marketing costs will continue to increase
along with new product introductions and continued growth in sales of the
Company's products. However, sales and marketing expenses had been incurred in
anticipation of higher than experienced net sales levels, leading to a higher
level of sales and marketing expenses as a percentage of net sales.
Sales and marketing expenses increased 21% to $36.8 million (26% of net
sales) in the six month period ended June 30, 2002 from $30.5 million (24% of
net sales) in the comparable period of 2001.
23
General and Administrative
General and administrative expenses increased 30% to $10.5 million (14% of
net sales) in the second quarter of 2002 from $8.0 million (12% of net sales) in
the second quarter of 2001. This absolute dollar increase primarily represents
the increased costs related to the support of the Company's growing
administrative infrastructure that is expanding to accommodate the Company's
continued growth. General and administrative expenses attributed to QIAGEN
Sciences, Inc., which commenced operations in 2002, totaled $1.2 million in the
second quarter of 2002 compared to $262,000 in 2001. General and administrative
costs were also higher at QIAGEN Instruments ($834,000 in the second quarter of
2002 compared to $437,000 in 2001) primarily as a result of higher operating
costs related to a recently expanded facility. Further, administrative expenses
had been incurred in anticipation of higher than experienced net sales levels,
leading to a higher level of administrative expenses as a percentage of net
sales.
For the six month period ended June 30, 2002, general and administrative
expenses increased 10% to $19.9 million (14% of net sales) from $18.1 million
(14% of net sales) in the same period 2001.
Acquisition and Related Costs
On June 14, 2002, the Company completed the acquisition of GenoVision AS
located in Oslo, Norway. In connection with this merger, the Company recorded
acquisition costs of approximately $2.8 million, which include $1.2 million of
in process research and development and $1.6 million for equipment impairment.
On March 31, 2001, the Company acquired the Sawady Group of companies
located in Tokyo, Japan. Acquisition and related charges were approximately $3.0
million, which include approximately $1.0 million of direct transaction costs,
(primarily legal and other professional fees) and approximately $2.0 million
primarily relating to the relocation, closure and elimination of leased
facilities, such as duplicate field offices.
Other Income (Expense)
Other expense was $1.5 million in the second quarter of 2002 compared to
other income of $2.1 million in the second quarter of 2001. This increase in
expense was mainly due to increased losses on foreign currency transactions on
intercompany loans and interest expense, along with lower other miscellaneous
income, interest income and research and development grant income. These
decreases were partially offset by lower losses on equity method investees.
Loss from foreign currency transactions increased to a loss of $1.3 million
in the second quarter of 2002 from income of $443,000 in the same period of
2001. The loss from foreign currency transactions reflects net effects from
conducting business in currencies other than the U.S. dollar. QIAGEN N.V.'s
functional currency is the U.S. dollar and its subsidiaries' functional
currencies are the European Union euro, the British pound, the Swiss franc, the
U.S. dollar, the Australian dollar, the Canadian dollar, and the Japanese yen.
The loss in the second quarter of
24
2002 is primarily due to unsettled intercompany balances at quarter end. The
intercompany balance that contributed most of the $1.3 million loss from foreign
currency transactions was settled after the end of the quarter. See "Currency
Fluctuations."
Interest expense increased to $520,000 in the second quarter of 2002
compared to $171,000 for the same period of 2001. Actual interest costs
increased primarily as a result of the Company's additional long-term borrowings
related to new facility construction and are partially offset by the
capitalization of interest related to the new German and U.S. facility
construction in accordance with Financial Accounting Standard No. 34.
Other miscellaneous expense decreased to $10,000 in the second quarter of
2002 from income of $1.5 million for the same period in primarily due to the
approximate $1.4 million gain on the sale of a financial asset in the second
quarter of 2001.
In the three-month period ended June 30, 2002, interest income decreased to
$319,000 from $527,000 in the same period of 2001. Interest income is derived
mainly from the Company's investment of funds in investment grade,
interest-bearing marketable securities. As of June 30, 2002, the Company had
approximately $18.1 million invested in such securities. The weighted average
interest rates on the Company's marketable securities portfolio ranged from
1.99% to 2.22% in 2002, compared to 5.55% to 6.33% in 2001.
In the three-month period ended June 30, 2002, research and development
grant income from European as well as German state and federal government grants
decreased to $201,000 from $231,000 in the same period of 2001. The Company
conducts significant research and development activities in Germany, and expects
to continue to apply for such research and development grants in the future.
In the second quarter of 2002, the Company recorded net losses from equity
method investees of $196,000 compared to $493,000 in the first quarter of 2001.
The second quarter 2002 loss represents the Company's share of losses from its
equity investment in PreAnalytiX. The first product of PreAnalytiX, the PAXgene
Blood RNA System was launched in April 2001. It is expected that PreAnalytiX
will launch further products in late 2002 and in August 2002, PreAnalytiX
announced that they have been successful in forming agreements with
pharmaceutical companies including GlaxoSmithKline for the use of the
PreAnalytiX system. PreAnalytiX is expected to report net losses for QIAGEN's
fiscal 2002. As previously disclosed, the Company intends to continue to make
strategic investments in complementary businesses as the opportunities arise.
Accordingly, the Company may continue to record losses on equity investments in
start-up companies based on the Company's ownership interest in such companies.
Provision for Income Taxes
The Company's effective tax rate increased to 42% in the second quarter of
2002 from 33% in the second quarter of 2001. The increase is partially due to
the lack of a tax benefit associated with some of the acquisition costs in 2002.
Without the acquisition costs in 2002, the Company's effective tax rate would
have been 36%. Further, the effective tax rate in the second quarter of 2001 was
low due to the fact that an approximately $1.4 million gain on the sale of a
25
financial asset in the Netherlands was not taxable. The Company's operating
subsidiaries are exposed to effective tax rates ranging from approximately 8% to
approximately 42%. Fluctuation in the distribution of pre-tax income among these
entities can lead to fluctuations of the effective tax rate in the Company's
consolidated financial statements
Minority Interest
The minority interest in expense of $5,000 represents the minority position
of Particles Solutions AS which is 60% owned by GenoVison AS. The Company
acquired GenoVison AS on June 14, 2002.
Previously, the Company had a 60 percent interest in its Japanese
subsidiary, QIAGEN K.K. The Company acquired the minority shareholders' interest
in QIAGEN K.K. during the first quarter of 2001. The minority interest in income
of $8,000 in 2001 represents the last month of the minority interest's share in
income at QIAGEN K.K.
Critical Accounting Policies
The preparation of our financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
assumptions that affect the reported amounts of assets, liabilities and
disclosure of contingencies as of the date of the financial statements, as well
as the reported amounts of revenues and expenses during the reporting period.
Critical accounting policies are those that require the most complex or
subjective judgments often as a result of the need to make estimates about the
effects of matters that are inherently uncertain. Thus, to the extent that
actual events differ from management's estimates and assumptions, there could be
a material impact to the financial statements. The Company's critical accounting
policies are those related to revenue recognition, accounts receivable,
investments, goodwill and other intangibles, and income taxes.
The below listing is not intended to be a comprehensive list of all our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting principles
in the United States, with limited or no need for management's judgment. There
are also areas in which management's judgment in selecting available
alternatives may or may not produce a materially different result. See our
audited December 31, 2001 consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 20-F which contain a description
of accounting policies and other disclosures required by generally accepted
accounting principles in the United States.
Revenue Recognition. The Company recognizes revenue in accordance with SEC
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB 101), as amended by SAB 101A and 101B. SAB 101 requires that four basic
criteria must be met before revenue can be recognized: (1) persuasive evidence
of an arrangement exists; (2) delivery has occurred or services have been
rendered; (3) the fee is fixed and determinable; and (4) collectibility is
reasonably assured. Determination of criteria (3) and (4) could require
management's judgments regarding the fixed nature of the fee charged for
services rendered and products delivered and the collectibility of those fees.
Should changes in
26
conditions cause management to determine that these criteria are not met for
certain future transactions, revenue recognized for any reporting period could
be adversely affected.
Accounts Receivable. The Company's accounts receivable are unsecured, and
the Company is at risk to the extent such amounts become uncollectible. The
Company continually monitors accounts receivable balances, and provides for an
allowance for doubtful accounts at the time collection may become questionable
based on payment history or age of the receivable. Since a significant portion
of our customers are funded through academic or government funding arrangements,
past history may not be representative of the future. As a result, we may have
write-offs of accounts receivable in excess of previously estimated amounts or
may in certain periods increase or decrease the allowance based on management's
current estimates.
Investments. The Company has equity investments accounted for under the
cost method. The Company periodically reviews the carrying value of these
investments for permanent impairment, considering factors such as the most
recent stock transactions, book values from the most recent financial
statements, and forecasts and expectations of the investee. Estimating the fair
value of these non-marketable equity investments in life science companies is
inherently subjective, and if actual events differ from management's
assumptions, it could require a write-down of the investment which could
materially impact our financial position and results of operations. In addition,
generally accepted accounting principles require different methods of accounting
for an investment depending on the level of control that is exerted by the
Company. Assessing the level of control involves subjective judgments. If
management's assumptions with respect to control differ in future periods and
thus require the Company to account for these investments under a method other
than the cost method, it could have a material impact to the financial
statements.
Goodwill and Other Intangible Assets. Through December 31, 2001, goodwill
and other intangible assets were amortized over their estimated useful lives.
Until the end of 2001, the Company periodically assessed the recoverability of
goodwill based on projections of the undiscounted future cash flows of the
acquired assets. Based on these assessments there had been no impairment of
these assets. In connection with the adoption of SFAS No. 142, "Goodwill and
Other Intangible Assets", amortization over the previously identified lives of
intangible assets ceased as of December 31, 2001, and indefinite life
intangibles will henceforth be assessed for impairment each year using a
fair-value-based test. Both the previously applied test based on future cash
flows and the newly required fair-value-based tests require that management make
assumptions and estimates. Although the Company believes its assumptions and
estimates are reasonable, they involve inherently subjective judgments. If
actual events differ from management's assumptions and estimates it could
produce a materially different result.
Income Taxes. The calculation of the Company's tax provision is complex due
to the international operations and multiple taxing jurisdictions in which the
Company operates. The Company has significant deferred tax assets due to net
operating losses (NOL) in the United States and other countries, realization of
which is not assured and is dependent on generating sufficient taxable income in
the future. Management believes it is more likely than not that the Company will
generate sufficient taxable income to utilize all NOL carryforwards. To the
extent that the Company's estimates of future taxable income are insufficient to
utilize all available
27
NOL's, a valuation allowance will be recorded in the provision for income taxes
in the period the determination is made, and the deferred tax assets will be
reduced by this amount, which could be material. Further, the Company's holding
company, located in The Netherlands, has had a history of losses and thus also
has a sizeable NOL. Due to the history of losses of the holding company, the
Company has recorded a full valuation allowance against this deferred tax asset.
Should the holding company be profitable in the future and lead management to
believe that it is more likely than not that we will realize all or a portion of
the NOL, then the estimated realizable value of the deferred tax asset would be
recorded and we would provide for taxes at the current tax rate. In the event
that actual events differ from management's estimates, or to the extent that
these estimates are adjusted in the future, any changes to the valuation
allowance could materially impact our financial position and results of
operations.
Recently Issued Accounting Standards
In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability be recognized for exit and disposal costs only when the liability has
been incurred and when it can be measured at fair value. The statement is
effective for exit and disposal activities that are initiated after December 31,
2002. The Company does not expect that the adoption of SFAS No. 146 will have a
material impact on its financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." In addition to amending or rescinding other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions, SFAS No. 145 precludes
companies from recording gains and losses from the extinguishment of debt as an
extraordinary item. The statement is effective January 1, 2003 and is not
anticipated to have any impact on the Company's financial position, results of
operations or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. The statement is effective January 1, 2002 and is not anticipated to
have any impact on the Company's financial position, results of operations or
cash flows.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. This statement is effective on January 1, 2003 with earlier application
encouraged. The Company is currently reviewing this statement and has not yet
determined its impact, if any, on the Company's financial position, results of
operations or cash flows.
28
Liquidity and Capital Resources
To date, the Company has funded its business primarily through internally
generated funds, debt and the private and public sales of equity. As of June 30,
2002 and December 31, 2001, the Company had cash and cash equivalents along with
investments in current marketable securities of $57.6 million and $79.0 million,
respectively, and working capital of $116.0 million and $119.4 million,
respectively. Cash and cash equivalents are primarily held in U.S. dollars,
other than those cash balances maintained in the local currency of the
subsidiary to meet local working capital needs. At June 30, 2002, cash and cash
equivalents had decreased to $39.5 million from $56.5 million at December 31,
2001 primarily due to cash used in investing activities of $49.0 million, offset
by cash provided by operations of $14.4 million and cash provided by financing
activities of $10.9 million.
For the six-month period ended June 30, 2002 and 2001, the Company
generated net cash from operating activities of $14.4 million and $32.3 million,
respectively. Cash provided by operating activities decreased in the six-month
period ended June 30, 2002 over the same period in 2001 primarily due to higher
increases in depreciation and amortization, deferred taxes and inventories
offset by decreases in accrued liabilities and accounts payable. Inventories
increased to $46.1 million at June 30, 2002 from $31.9 million at December 31,
2001 primarily due to increased inventories at QIAGEN Sciences, Inc, which began
manufacturing and warehousing activities in 2002. During the second quarter of
2002, QIAGEN, Inc., located in Valencia, transferred all consumable inventory to
QIAGEN Sciences. QIAGEN, Inc. continues to warehouse instrumentation products.
Instrumentation inventories at QIAGEN, Inc. are higher as a result of the new
product introductions. Further, the increase in inventory includes the
acquisition of GenoVision AS in June 2002, which added approximately $2.2
million in inventory, and the impact of exchange rates of approximately $3.2
million. Accounts receivable increased to $50.0 million at June 30, 2002 from
$40.0 million at December 31, 2002 primarily due to increased sales.
Additionally, the acquisition of GenoVision AS added approximately $1.4 million
to accounts receivable, and the impact of exchange rates totaled approximately
$2.5 million. Depreciation and amortization expense increased in the nine-month
period ended June 30, 2002 to $11.7 million compared to $7.3 million in the same
period 2001. This increase is primarily represents the increased depreciation of
new facilities at QIAGEN Sciences and QIAGEN Instruments as well as the $1.6
million equipment impairment related to the acquisition of GenoVision AS.
Additionally, the Company launched its Customer Relationship Management system
(CRM) during the first quarter of 2002, and accordingly, began recording
amortization. Since the Company relies heavily on cash generated from operating
activities to fund its business, a decrease in demand for the Company's product
or significant technological advances of competitors would have a negative
impact on the Company's liquidity.
Approximately $49.0 million of cash was used in investing activities during
the first six months of 2002, compared to $45.3 million for the same period of
2001. Investing activities during the six-month period ended June 30, 2002
consisted principally of the purchases of property and equipment in connection
with the expansion of the Company's production operations, and cash paid for
acquisitions. During the second quarter the Company acquired GenoVison AS for a
purchase price of approximately $27.8 million, of which one half was in
29
cash and paid direct acquisition costs of approximately $1.6 million. Cash used
in investing activities was partially offset by proceeds from the sale of
marketable securities.
Financing activities provided $10.9 million in cash during the second
quarter of 2002, compared to $7.8 million provided in 2001. Cash provided during
the second quarter was primarily the result of proceeds from lines of credit,
long-term debt and short-term borrowings along with proceeds from the issuance
of common shares as a result of stock option exercises. These proceeds were
partially offset by repayments of borrowings and capital lease payments.
The Company has credit lines totaling $9.8 million at variable interest
rates of which approximately $1.8 million was utilized as of June 30, 2002. In
addition, as of June 30, 2002 the Company had capital lease obligations in the
amount of $12.3 million. The Company also carries $89.6 million of long-term
debt that consists mainly of three notes payable, two of which are at a variable
rates due in one payment in July 2005 totaling approximately $80.4 million, and
one note at a fixed rate of 3.75% due in semi-annual payments through March 2009
of EUR 639,000.
At June 30, 2002, the Company continued the construction on two new German
facilities, with estimated completion before the end of 2002. The total
estimated cost for these facilities is approximately EUR 57.6 million
(approximately $56.8 million at June 30, 2002) of which EUR 50.4 million
(approximately $49.7 million) has been incurred. Cash flows from operations and
bank loans will continue to fund the estimated costs to complete these projects.
In May 2001, the Company obtained two new loan facilities (one EUR
denominated, one USD denominated) totaling approximately $92.8 million at June
30, 2002, each with an initial term of two years. In July 2002, the facilities
were revised and now require repayment in July 2005. The primary intended use of
the proceeds from these facilities is the refinancing of previously made
acquisitions of land and the construction of manufacturing, research and
administrative facilities at these sites. At June 30, 2002, approximately $80.4
million had been drawn against these facilities, and is included in long-term
debt.
The Company believes that funds from operations, together with the proceeds
from its public and private sales of equity, and availability of financing
facilities as needed, will be sufficient to fund the Company's planned
operations and expansion during the coming year.
Employees
At June 30, 2002 the Company had 1,674 employees. There have been no
changes to the Supervisory or Managing Boards described in the Company's Annual
Report for the year ended December 31, 2001 reported on Form 20-F.
30
Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk relates primarily to interest rate exposures on
cash, marketable securities and borrowings and foreign currency exposures on
intercompany transactions. The overall objective of the Company's risk
management is to reduce the potential negative earnings effects from changes in
interest and foreign exchange rates. Exposures are managed through operational
methods and financial instruments. The Company does not use financial
instruments for trading or other speculative purposes.
Interest Rate Risk
Interest income earned on the Company's investment portfolio is affected by
changes in the relative levels of market interest rates. The Company only
invests in high-grade investment securities. For the year ended June 30, 2002,
the weighted average interest rate on the Company's marketable securities
portfolio was 1.99% to 2.22%.
Borrowings against lines of credit are at variable interest rates. At June
30, 2002, the Company had $1.8 million of outstanding lines of credit with an
average interest rate of 4.79% at June 30, 2002. A hypothetical adverse 10
percent movement in market interest rates would not have materially impacted the
Company's financial statements.
In May 2001, the Company obtained loan facilities committed by a group of
banks led by Deutsche Bank for long-term borrowings at variable interest rates.
Borrowings against these facilities, which are due in one final payment in July
2005, consisted of EUR 37.5 million (approximately $36.9 at March 30, 2002) at a
variable interest rate of EURIBOR plus 1.2%, and $43.5 million at a variable
interest rate of LIBOR plus 1.28%. A hypothetical adverse 10% movement in market
interest rates would decrease 2002 earnings by approximately $82,000, based on
the quarter-end interest rate, a loan balance consistent with that at
quarter-end and a constant foreign exchange rate.
Currency Fluctuations
The Company operates on an international basis. A significant portion of
its revenues and expenses are earned and incurred in currencies other than the
U.S. dollar. The euro is the most significant such currency, with others
including the British pound, Japanese yen, Swiss franc, and Canadian and
Australian dollars. Fluctuations in the value of the currencies in which the
Company conducts its business relative to the U.S. dollar have caused and will
continue to cause U.S. dollar translations of such currencies to vary from one
period to another. Due to the number of currencies involved, the constantly
changing currency exposures, and the potential substantial volatility of
currency exchange rates, the Company cannot predict the effect of exchange rate
fluctuations upon future operating results. However, because the Company has
substantial expenses as well as revenues in each of its principal functional
currencies, the exposure of its financial results to currency fluctuations is
reduced. The Company seeks to mitigate what it believes to be a significant
portion of the remaining risk through hedging transactions. In general terms,
appreciation of the U.S. dollar against the Company's other foreign currencies,
such as occurred in 2001 and 2002 with respect to the euro, will decrease
31
reported net sales. However, this impact normally will be at least partially
offset in the results of operations by gains or losses from foreign currency
transactions.
Currency Hedging
In the ordinary course of business, the Company purchases foreign currency
exchange options to manage potential losses from foreign currency exposures.
These options give the Company the right, but not the obligation, to sell
foreign currencies in exchange for U.S. dollars at predetermined exchange rates.
The principle objective of such options is to minimize the risks and/or costs
associated with global financial and operating activities. The Company does not
utilize financial instruments for trading or other speculative purposes. At June
30, 2002, the Company did not have any outstanding options.
Foreign Currency Exchange Rate Risk
The Company's principal production and manufacturing facility is located in
Germany and intercompany sales of inventory expose the Company to foreign
currency exchange rate risk. Intercompany sales of inventory are generally
denominated in the local currency of the subsidiary purchasing the inventory in
order to centralize foreign currency risk with the Company's German subsidiary.
Payment for intercompany purchases of inventory is required within 30 days from
invoice date. The delay between the date the German subsidiary records revenue
and the date when the payment is received from the purchasing subsidiaries
exposes the Company to foreign exchange risk. The exposure results primarily
from those transactions between Germany and the U.S.
The foreign currency exchange rate risk is partially offset by transactions
of the German subsidiary denominated in U.S. dollars. Hedging instruments
include foreign currency put options that are purchased to protect the existing
and/or anticipated receivables resulting from intercompany sales from Germany to
the U.S. These options give the Company the right, but not the obligation, to
sell foreign currencies in exchange for U.S. dollars at predetermined exchange
rates. Management does not believe that the Company's exposure to foreign
currency exchange rate risk is material.
32
Submission of Matters to a Vote of Security Holders
QIAGEN's 2002 Annual General Meeting of Shareholders (the Annual Meeting) was
held on June 14, 2002. The following actions were taken at the Annual Meeting,
for which proxies were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended:
1. A proposal to adopt the Annual Accounts of QIAGEN N.V. for the year
ended December 31, 2001, including the allocation of profits to
reserve as determined by the Supervisory Board was approved by a vote
of 23,303,729 for versus 2,426 against. There were 231,313
abstentions.
2. A proposal to approve the management performed by the Managing Board
and the Supervision performed by the Supervisory Board during the
fiscal year ended December 31, 2001 and to discharge the Managing
Board and the Supervisory Board from liability with respect to the
exercise of their duties during the fiscal year ended December 31,
2001 was approved by a vote of 23,306,236 for versus 39,108 against.
There were 192,124 abstentions.
3. A proposal to reappoint Dr. Heinrich Hornef, Mr. Erik Hornnaess, Prof.
Dr. Manfred Karobath, Prof. Dr. Detlev H. Riesner, Mr. Jochen Walter,
and Dr. Franz A. Wirtz and as members of the Supervisory Board to
serve until the Annual General Meeting to be held in 2003 was approved
by a vote of 23,524,391 for versus 4,371 against. There were 8,706
abstentions.
4. A proposal to reappoint Dr. Metin Colpan and Mr. Peer M. Schatz as
members of the Managing Board to serve until the Annual General
Meeting to be held in 2003 was approved by a vote of 23,521,528 for
versus 7,065 against. There were 8,875 abstentions.
5. A proposal to appoint Arthur Andersen LLP as auditors of the Company
for the fiscal year ended December 31, 2002 was approved by a vote of
23,385,039 for versus 140,450 against. There were 11,979 abstentions.
6. A proposal to designate the Managing Board as corporate body
authorized, after approval of the Supervisory Board, to appoint one of
the following KPMG, Ernst & Young, Deloitte & Touche or
PricewaterhouseCoopers as auditor of the Company for the fiscal year
ending December 31, 2002 in the event that the Managing Board believes
that Arthur Andersen LLP is not in a position to fulfill its duties as
auditor of the Company was approved by a vote of 23,591,887 for versus
1,916 against. There were 3,665 abstentions.
7. A proposal to extend the authorization of the Supervisory Board
pursuant to Article 4 of the Articles of Association of the Company
(i) to resolve upon the issue of shares to a maximum of the authorized
capital of the Company and to determine the price and further terms
and conditions of such share issues, (ii) to limit or exclude any
pre-emptive rights to which shareholders may be entitled, and (iii) to
grant rights to subscribe for
33
shares to a maximum of the authorized capital of the Company until
June 14, 2007 was approved by a vote of 21,151,073 for versus
2,228,372 against. There were 158,023 abstentions.
8. A proposal to extend the authorization of the Managing Board to cause
the Company to acquire shares in its own share capital until December
14, 2003, subject to the terms and conditions described was approved
by a vote of 23,252,318 for versus 130,275 against. There were 154,875
abstentions.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
QIAGEN N.V.
By:
/s/ Peer M. Schatz
------------------------
Peer M. Schatz
Chief Financial Officer
Date: August 30, 2002
35
EXHIBIT INDEX
Exhibit No. Exhibit
99.1 Press Release dated June 10, 2002
99.2 Press Release dated July 3, 2002
99.3 Press Release dated August 5, 2002
99.4 Press Release dated August 5, 2002
99.5 Press Release dated August 16, 2002
36