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 September 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
September 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Income (unaudited)
for the three and nine months ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 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 32
Other Information
Signatures 34
Exhibit Index 35
QIAGEN N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
2002 2001
-------------- ---------------
Assets
Current Assets:
Cash and cash equivalents $ 51,786,000 $ 56,460,000
Marketable securities 11,915,000 22,512,000
Notes receivable 4,165,000 3,844,000
Accounts receivable, net of allowance of $2,449,000
and $2,048,000 in 2002 and 2001, respectively 46,921,000 39,955,000
Income taxes receivable 2,457,000 2,439,000
Inventories 49,903,000 31,883,000
Deferred income taxes 11,123,000 11,123,000
Prepaid expenses and other 13,793,000 9,115,000
-------------- ---------------
Total current assets 192,063,000 177,331,000
Property, plant and equipment, net 200,046,000 160,365,000
Long-term marketable securities 534,000 2,759,000
Intangible assets, net 39,367,000 7,140,000
Deferred income taxes 1,804,000 1,804,000
Other assets 8,704,000 7,569,000
-------------- ---------------
Total assets $ 442,518,000 $ 356,968,000
============== ===============
Liabilities and Shareholders' Equity
Current Liabilities:
Lines of credit $ 1,214,000 $ 6,038,000
Short-term debt 2,944,000 281,000
Current portion of long-term debt 1,254,000 1,138,000
Current portion of capital lease obligations 1,222,000 1,085,000
Accounts payable 18,377,000 20,262,000
Accrued liabilities 25,994,000 20,235,000
Income taxes payable 12,309,000 8,434,000
Deferred income taxes 5,160,000 410,000
-------------- ---------------
Total current liabilities 68,474,000 57,883,000
-------------- ---------------
Long-Term Liabilities:
Long-term debt, net of current portion 92,789,000 70,720,000
Capital lease obligations, net of current portion 10,716,000 10,463,000
Other 3,738,000 4,927,000
-------------- ---------------
Total long-term liabilities 107,243,000 86,110,000
-------------- ---------------
Commitments and Contingencies
Shareholders' Equity:
Common shares, .01 EUR par value:
Authorized--260,000,000 shares
Issued and outstanding--145,485,489 shares in 2002
and 143,463,800 shares in 2001 1,477,000 1,458,000
Additional paid-in capital 148,098,000 123,117,000
Retained earnings 118,647,000 97,278,000
Accumulated other comprehensive loss (1,421,000) (8,878,000)
-------------- ---------------
Total shareholders' equity 266,801,000 212,975,000
-------------- ---------------
Total liabilities and shareholders' equity $ 442,518,000 $ 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 Nine Months
Ended September 30, Ended September 30,
------------------------------- ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales $ 76,882,000 $ 63,343,000 $ 220,159,000 $ 192,537,000
Cost of sales 26,453,000 19,970,000 71,853,000 57,533,000
------------- ------------- ------------- -------------
Gross profit 50,429,000 43,373,000 148,306,000 135,004,000
------------- ------------- ------------- -------------
Operating Expenses:
Research and development 7,310,000 6,125,000 20,489,000 19,825,000
Sales and marketing 19,003,000 17,288,000 55,849,000 47,805,000
General and administrative 11,171,000 9,879,000 31,111,000 28,025,000
In-process research and development - - 1,200,000 -
Acquisition and related costs - - 1,648,000 3,000,000
------------- ------------- ------------- -------------
Total operating expenses 37,484,000 33,292,000 110,297,000 98,655,000
------------- ------------- ------------- -------------
Income from operations 12,945,000 10,081,000 38,009,000 36,349,000
------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 171,000 346,000 828,000 1,575,000
Interest expense (577,000) (213,000) (1,748,000) (904,000)
Research and development grants 133,000 419,000 470,000 836,000
Gain (loss) on foreign currency
transactions (353,000) (590,000) (1,756,000) (264,000)
Loss from equity method investees (267,000) (177,000) (844,000) (1,082,000)
Other miscellaneous income
(expense), net (63,000) 33,000 (83,000) 1,492,000
------------- ------------- ------------- -------------
Total other income (expense) (956,000) (182,000) (3,133,000) 1,653,000
------------- ------------- ------------- -------------
Income before provision for income
taxes and minority interest 11,989,000 9,899,000 34,876,000 38,002,000
Provision for income taxes 4,700,000 3,706,000 13,512,000 14,509,000
Minority interest - - (5,000) 8,000
------------- ------------- ------------- -------------
Net income $ 7,289,000 $ 6,193,000 $ 21,369,000 $ 23,485,000
============= ============= ============= =============
Net income per common share:
Basic and diluted $ 0.05 $ 0.04 $ 0.15 $ 0.16
============= ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
QIAGEN N.V.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30,
-------------------------------------
2002 2001
------------- -------------
Cash Flows From Operating Activities:
Net income $ 21,369,000 $ 23,485,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18,045,000 11,390,000
Provision for losses on accounts receivable 67,000 469,000
Deferred income taxes 5,086,000 (2,031,000)
Loss (gain) on disposition of property and equipment (56,000) 15,000
Net realized (gain) loss on marketable securities 44,000 (1,302,000)
Losses on equity method investees 844,000 1,082,000
Tax benefit on non-qualified stock options 623,000 11,308,000
In-process research and development 1,200,000 -
Minority interest (5,000) 8,000
Decrease (increase) in:
Notes receivable (16,000) (21,000)
Accounts receivable (3,399,000) (8,946,000)
Inventories (12,783,000) (3,692,000)
Income tax receivable 39,000 1,110,000
Prepaid expenses and other (3,113,000) (5,422,000)
Other assets (1,021,000) 179,000
Increase (decrease) in:
Accounts payable (4,917,000) (1,008,000)
Accrued liabilities 2,145,000 7,945,000
Income taxes payable 3,887,000 1,524,000
Other (167,000) 1,710,000
------------- -------------
Net cash provided by operating activities 27,872,000 37,803,000
------------- -------------
Cash Flows From Investing Activities:
Purchases of land, property and equipment (47,552,000) (73,278,000)
Proceeds from sale of property 1,734,000 201,000
Purchases of investment (189,000) (1,325,000)
Cash paid for acquisitions, net of cash acquired (13,228,000) -
Sale of investment - 85,000
Proceeds from sales of marketable securities 10,563,000 15,518,000
Purchases of marketable securities - (1,565,000)
Loan to related party - (1,765,000)
Purchase of intangibles (1,619,000) (124,000)
------------- -------------
Net cash used in investing activities (50,291,000) (62,253,000)
------------- -------------
Cash Flows From Financing Activities:
Proceeds from lines of credit 11,847,000 16,719,000
Repayment of lines of credit (17,180,000) (13,871,000)
Proceeds from long-term debt 15,519,000 11,948,000
Repayment of long-term debt (1,501,000) (3,964,000)
Proceeds from short-term borrowing 2,780,000 588,000
Repayment of short-term borrowing (292,000) (5,191,000)
Proceeds from government grant - 3,600,000
Principal payments on capital leases (770,000) (887,000)
Issuance of common shares 2,247,000 2,799,000
------------- -------------
Net cash provided by financing activities 12,650,000 11,741,000
------------- -------------
Effect of exchange rate changes on cash and cash equivalents 5,095,000 (2,000)
Net (decrease) increase in cash and cash equivalents (4,674,000) (12,711,000)
Cash and cash equivalents, beginning of period 56,460,000 24,008,000
------------- -------------
Cash and cash equivalents, end of period $ 51,786,000 $ 11,297,000
============= =============
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 the 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
GenoVision 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 nine months ended
September 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 September 30,
-----------------------------------------
2002 2001
----------------- ----------------
Weighted average number of common shares
used to compute basic net income per
common share 145,427,000 143,063,000
Dilutive effect of stock options 549,000 1,853,000
----------------- ----------------
Weighted average number of common shares
used to compute diluted net income per
common share 145,976,00 144,916,000
================= ================
Outstanding stock options having no dilutive
effect, not included in above calculation 8,072,000 2,944,000
================= ================
Nine Months
Ended September 30,
-----------------------------------------
2002 2001
----------------- ----------------
Weighted average number of common shares used
to compute basic net income per common share 144,553,000 142,828,000
Dilutive effect of stock options 1,214,000 2,206,000
----------------- ----------------
Weighted average number of common shares used
to compute diluted net income per common share 145,767,000 145,034,000
================= ================
Outstanding stock options having no dilutive
effect, not included in above calculation 5,538,000 1,929,000
================= ================
7
3. Comprehensive Income
The components of comprehensive income for the three- and nine-month
periods ended September 30, 2002 and 2001 are as follows:
Three Months Ended September 30,
--------------------------------------------
2002 2001
----------------- ------------------
Net income $ 7,289,000 $ 6,193,000
Net unrealized loss on marketable securities (1,045,000) (684,000)
Net realized loss on marketable securities 26,000 25,000
Foreign currency translation adjustment (530,000) 4,428,000
----------------- ------------------
Comprehensive income $ 5,740,000 $ 9,962,000
================= ==================
Nine Months Ended September 30,
--------------------------------------------
2002 2001
----------------- ------------------
Net income $ 21,369,000 $ 23,485,000
Net unrealized loss on marketable securities (2,254,000) (4,575,000)
Net realized loss (gain) on marketable securities 36,000 (1,302,000)
Foreign currency translation adjustment 9,675,000 (883,000)
----------------- ------------------
Comprehensive income $ 28,826,000 $ 16,725,000
================= ==================
The following table is a summary of the components of accumulated
other comprehensive loss as of September 30, 2002 and December 31, 2001:
2002 2001
----------------- ------------------
Net unrealized (loss) gain on marketable securities $ (1,153,000) $ 1,064,000
Foreign currency translation adjustment (268,000) (9,942,000)
----------------- ------------------
Accumulated other comprehensive loss $ (1,421,000) $ (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 - - - 21,369,000 - 21,369,000
Unrealized loss, net on
marketable securities - - - - (2,254,000) (2,254,000)
Realized loss, net on
marketable securities - - - - 36,000 36,000
Translation adjustment - - - - 9,675,000 9,675,000
Exercise of stock options 490,014 4,000 2,243,000 - - 2,247,000
Tax benefit in connection
with nonqualified stock
options - - 666,000 - - 666,000
Common stock issued for
intangible asset 40,126 1,000 249,000 - - 250,000
Acquisition of Xeragon,
Inc. 561,123 5,000 7,949,000 - - 7,954,000
Acquisition of GenoVision
AS 930,426 9,000 13,874,000 - - 13,883,000
BALANCE AT SEPTEMBER 30,
--------------------------------------------------------------------------------------------------------------------------------
2002 145,485,489 $1,477,000 $148,098,000 $118,647,000 $(1,421,000) $266,801,000
================================================================================================================================
5. Provision for Income Taxes
The provision for income taxes for the three and nine months ended
September 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:
Nine Months Ended September 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 $ -
9
Forgiveness of government grant $ 1,800,000 $ -
Property and equipment purchased
through capital leases $ 3,000 $ 456,000
Intangible asset acquired with stock $ 250,000 $ -
Supplemental Cash Flow Disclosure:
Cash paid for interest $ 4,528,000 $ 1,015,000
Cash paid for income taxes $ 2,984,000 $ 1,895,000
7. Inventories
The components of inventories consist of the following as of September
30, 2002 and December 31, 2001:
2002 2001
------------ ------------
Raw materials $ 17,583,000 $ 8,786,000
Work in process 10,678,000 8,352,000
Finished goods 21,642,000 14,745,000
------------ ------------
Total inventories $ 49,903,000 $ 31,883,000
============ ============
8. Debt
The Company has seven separate lines of credit amounting to
approximately $9.6 million with variable interest rates. Approximately $1.2
million was utilized on these credit facilities at September 30, 2002.
At September 30, 2002, short-term debt totaled approximately $2.9
million and was due and paid in October 2002.
At September 30, 2002, long-term debt totaling approximately $94.0
million consisted primarily of one note payable (EUR 8.3 million, approximately
$8.2 million at September 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 8.3 million note is due in semi-annual
payments of EUR 639,000 (approximately $627,000 at September 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
42.8 million (approximately $42.0 million at September 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 September 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.
10
9. Stock Options
In the nine-month period ended September 30, 2002, the Company granted
options to purchase 3,272,000 shares of the Company's common stock. All options
were granted at fair market value at the date of grant. As of September 30,
2002, options to purchase 10.4 million common shares were outstanding at
exercise prices ranging from $0.97 to $49.75.
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 September 30, 2002 and December 31, 2001:
2002 2001
------------ ------------
Amortized Intangible assets:
Patent and license rights $ 6,257,000 $ 4,323,000
Developed technology 11,832,000 3,200,000
Accumulated amortization (4,135,000) (2,642,000)
Unamortized Intangible assets:
Goodwill 25,413,000 2,259,000
------------ ------------
Net intangible assets $ 39,367,000 $ 7,140,000
============ ============
The changes in the carrying amount of goodwill for the nine months
ended September 30, 2002 is as follows:
Balance at December 31, 2001 $ 2,259,000
Acquisitions 22,987,000
Effect of foreign currency translation 167,000
------------
Balance at September 30, 2002 $ 25,413,000
============
11
Amortization expense on intangible assets totaled approximately
$659,000 and $1,284,000, respectively, for the three- and nine-month periods
ended September 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 of intangibles for the next five
years is expected to be approximately:
2003 $ 2,102,000
2004 $ 1,986,000
2005 $ 1,883,000
2006 $ 1,553,000
2007 $ 1,096,000
11. Segment and Related Information
Summarized financial information concerning the Company's reportable
segments is shown in the following tables:
Three Months Ended September 30,
-----------------------------------
Net Sales 2002 2001
--------- ------------- -------------
Germany $ 31,617,000 $ 28,454,000
United States 59,763,000 38,424,000
Switzerland 7,380,000 5,708,000
Japan 8,449,000 8,036,000
United Kingdom 4,637,000 4,266,000
Other Countries 7,952,000 4,080,000
------------- -------------
Subtotal 119,798,000 88,968,000
Intersegment Elimination (42,916,000) (25,625,000)
------------- -------------
Total $ 76,882,000 $ 63,343,000
============= =============
Nine Months Ended September 30,
-----------------------------------
Net Sales 2002 2001
--------- ------------- -------------
Germany $ 101,589,000 $ 87,411,000
United States 163,942,000 111,311,000
Switzerland 20,929,000 19,408,000
Japan 25,572,000 25,210,000
United Kingdom 14,335,000 12,157,000
Other Countries 19,894,000 12,604,000
------------- -------------
Subtotal 346,261,000 268,101,000
Intersegment Elimination (126,102,000) (75,564,000)
------------- -------------
Total $ 220,159,000 $ 192,537,000
============= =============
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 September 30,
---------------------------------------
Intersegment Sales 2002 2001
------------------ ------------- -------------
Germany $ (17,770,000) $ (21,068,000)
United States (19,252,000) (1,165,000)
Switzerland (5,053,000) (3,392,000)
Japan 20,000 -
Other Countries (861,000) -
------------- -------------
Total $ (42,916,000) $ (25,625,000)
============= =============
Nine Months ended September 30,
---------------------------------------
Intersegment Sales 2002 2001
------------------ ------------- -------------
Germany $ (66,355,000) $ (59,676,000)
United States (45,675,000) (3,636,000)
Switzerland (13,191,000) (12,252,000)
Japan (20,000) -
Other Countries (861,000) -
------------- -------------
Total $(126,102,000) $ (75,564,000)
============= =============
All intersegment sales are accounted for by a formula based on local list
prices and are eliminated in consolidation.
Three Months Ended September 30,
---------------------------------------
Operating Income (Loss) 2002 2001
----------------------- ------------- -------------
Germany $ 5,453,000 $ 6,623,000
United States 3,932,000 1,838,000
Switzerland 256,000 268,000
Japan 1,580,000 1,554,000
United Kingdom 972,000 914,000
Other Countries (196,000) 177,000
The Netherlands (637,000) (494,000)
------------- -------------
Subtotal 11,360,000 10,880,000
Intersegment Elimination 1,585,000 (799,000)
------------- -------------
Total $ 12,945,000 $ 10,081,000
============= =============
13
Nine Months Ended September 30,
---------------------------------------
Operating Income (Loss) 2002 2001
----------------------- ------------- -------------
Germany $ 22,940,000 $ 19,670,000
United States 9,197,000 10,833,000
Switzerland 658,000 2,553,000
Japan 5,406,000 2,171,000
United Kingdom 3,124,000 3,074,000
Other Countries (316,000) 1,189,000
The Netherlands (1,578,000) (2,007,000)
------------- -------------
Subtotal 39,431,000 37,483,000
Intersegment Elimination (1,422,000) (1,134,000)
------------- -------------
Total $ 38,009,000 $ 36,349,000
============= =============
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 margins partially offset by approximately $1.6 million of equipment
impairment related to the acquisition of GenoVision AS in the second quarter of
2002. The higher gross margin is primarily reflects a different product mix in
Q3 2002 compared to Q3 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 2002, operating income for the United
States decreased in 2002 compared to 2001. Revenues were negatively impacted in
the United States by slowed research spending by pharmaceutical companies in the
United States in the first part of 2002. 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 earlier 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 GenoVision 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.
September 30, December 31,
Assets 2002 2001
------ -------------------- -------------------
Germany $ 236,621,000 $ 186,489,000
United States 161,307,000 129,015,000
Switzerland 22,986,000 19,480,000
Japan 27,949,000 21,484,000
United Kingdom 10,104,000 6,475,000
Other Countries 43,697,000 9,601,000
The Netherlands 150,993,000 122,318,000
-------------------- -------------------
Subtotal 653,657,000 494,862,000
Intersegment Elimination (211,139,000) (137,894,000)
-------------------- -------------------
Total $ 442,518,000 $ 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 GenoVision AS, which was acquired in the second
quarter of 2002 and resulted in goodwill and intangibles of approximately $23.5
million.
12. Commitments and Contingencies
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 $56.5 million at September 30, 2002) of which EUR 52.1 million
(approximately $51.1 million) has been incurred.
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. During the second quarter 2002, a synthetic
DNA production facility was added at a total cost of approximately $5.3 million.
Currently, build-out of a synthetic RNA production facility is underway along
with finishing work on some administration space for estimated cost of
approximately $3.4 million with expected completion in the first half of 2003.
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. 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 $14.3 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 `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 $29.5 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 $18.9 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 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.
16
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 561,123 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.
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 September 30, 2002 increased 21% to
$76.9 million from $63.3 million in the same period of 2001. Net sales in the
United States increased to $40.5 million in 2002 from $37.3 million in 2001, and
net sales outside the United States increased to $36.4 million in 2002 from
$26.1 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 11%
(or $3.2 million) during the third 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 11% (or $776,000) in the third quarter of 2002
compared to the third quarter of 2001. The decrease in net sales at Operon was
primarily the result of higher sales discounts due to greater price competition
in the synthetic DNA market. Further, GenoVision Inc, which was acquired in the
second quarter of 2002 and is located in Philadelphia, reported sales of
$872,000 in the third quarter of 2002.
Outside of the United States, the increase in net sales was primarily
due to growth at QIAGEN GmbH, located in Germany, which reported an increase of
84% ($6.2 million), QIAGEN K.K., located in Japan, which reported an increase of
16% ($793,000), and QIAGEN S.A., located in France, which reported an increase
of 34% (or $554,000) for the third quarter of 2002 compared to the comparable
quarter of 2001. Additionally, GenoVision AS Vertriebs-GmbH, which was acquired
in the second quarter of 2002 and is located in Austria, reported sales of $1.3
million in the third quarter of 2002.
21
For the nine months ended September 30, 2002, net sales increased 14% to
$220.2 million from $192.5 million in the same period of 2001. Net sales in the
United States increased 10% to $118.3 million in 2002 from $107.7 million in
2001, and net sales outside the United States increased 20% to $101.9 million in
2002 from $84.9 million in 2001. As in the three-month period ended September
30, 2002, 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 13% (or $11.3 million) for the nine months ended September 30, 2002 over the
comparable period in 2001, which was partially offset by a reported decrease at
QIAGEN Operon of 9% (or $1.8 million). Outside of the United States, net sales
continued to be affected by growth at QIAGEN GmbH, QIAGEN Ltd. and QIAGEN S.A.,
which reported increases of 25% (or $6.9 million), 18% (or $2.2 million) and 36%
(or $1.8 million) respectively for the nine months ended September 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 third quarter of 2002, QIAGEN introduced two new
array systems, a new BioRobot, and several new kits. The SensiChip(TM) DNA Array
System (developed by QIAGEN and Zeptosens AG) provides complete microarray
solutions and the QIAGEN(R) HiLight(TM) Array Detection System uses
non-fluorescent Resonance Light Scattering (RLS) Technology for highly sensitive
array detection. The LabelStar(TM) Array Kit provides cDNA labeling and cleanup
prior to microarray analysis. The BioRobot(R) MDx was launched, providing
automated solutions for clinical laboratories. The new QIAamp(R) Virus BioRobot
MDx Kit and QIAamp DNA Blood BioRobot MDx Kits are specifically for use on the
BioRobot MDx. Ni-NTA Superflow Columns were introduced for automated protein
purification, and the PhosphoProtein Purification Kit for use in proteomic
studies was also released. The RNAlater(TM) TissueProtect Tubes were launched
for stabilization and protection of RNA in tissues. Two new products for PCR
were developed: The QIAGEN Multiplex PCR Kit, for fast and efficient multiplex
PCR and the QIAGEN A-addition kit, for efficient modification of blunt-ended PCR
products. In addition, the Cancer siRNA Oligo Set was launched for
gene-silencing applications, which was the first set of disease-specific siRNAs
for the life sciences market.
Changes in exchange rates continued to affect the growth rate of net sales
for the three- and nine-month periods ended September 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 18% and 14%, as compared to the reported increases of
21% and 14%, for the three-month and nine-month periods ended September 30,
2002, respectively. See "Currency Fluctuations."
22
Gross Profit
Gross profit was $50.4 million or 66% of net sales in the quarter ended
September 30, 2002 as compared to $43.4 million or 68% 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 offset by revenues 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. Therefore, higher revenues
from instrumentation and synthetic nucleic acid products as a percentage of net
sales contributed to decreased gross profit in the third quarter of 2002. 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. In the synthetic DNA
market there has been greater price competition, resulting in greater discounts,
and as a result the gross margins on these products are lower in 2002 than
compared to 2001.
Gross profit for the nine-month period ended September 30, 2002 was $148.3
million or 67% of net sales as compared to $135.0 million or 70% of net sales
for the same period in 2001.
Research and Development
Research and development expenses increased 19% to $7.3 million (10% of net
sales) in the quarter ended September 30, 2002 compared with $6.1 million (10%
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 will 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 September 30, 2002, research and
development expenses increased 3% to $20.5 million (9% of net sales) compared to
$19.8 million (10% of net sales) for the same period in 2001.
23
Sales and Marketing
Sales and marketing expenses increased 10% to $19.0 million (25% of net
sales) in the third quarter of 2002 from $17.3 million (27% of net sales) in the
third quarter of 2001. 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.
Sales and marketing expenses increased 17% to $55.8 million (25% of net
sales) in the nine month period ended September 30, 2002 from $47.8 million (25%
of net sales) in the comparable period of 2001.
General and Administrative
General and administrative expenses increased 13% to $11.2 million (15% of
net sales) in the third quarter of 2002 from $9.9 million (16% of net sales) in
the third quarter of 2001. This absolute dollar increase primarily represents
the increased costs related to the support of the Company's 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 third quarter of 2002
compared to $557,000 in 2001. General and administrative costs were also higher
at QIAGEN Instruments ($799,000 in the third quarter of 2002 compared to
$523,000 in 2001) primarily as a result of higher operating costs related to a
recently expanded facility. The GenoVision companies, which were acquired late
in the second quarter of 2002, reported general and administrative expenses of
$373,000 in the third quarter of 2002. 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 nine month period ended September 30, 2002, general and
administrative expenses increased 11% to $31.1 million (14% of net sales) from
$28.0 million (15% 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.
24
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 $956,000 in the third quarter of 2002 compared to
$182,000 in the third quarter of 2001. This increase in expense was mainly due
to increased interest expense and losses on equity method investees, along with
lower other interest income, research and development grant income and
miscellaneous income. These decreases were partially offset by lower losses on
foreign currency transactions.
Loss from foreign currency transactions decreased to a loss of $353,000 in
the third quarter of 2002 from a loss of $590,000 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. See "Currency
Fluctuations."
Interest expense increased to $577,000 in the third quarter of 2002
compared to 213,000 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 $63,000 in the third quarter of
2002 from income of $33,000 for the same period in 2001.
In the three-month period ended September 30, 2002, interest income
decreased to $171,000 from $346,000 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 September 30, 2002, the Company
had approximately $11.9 million invested in such securities. The weighted
average interest rates on the Company's marketable securities portfolio ranged
from 1.98% to 2.22% in 2002, compared to 5.03% to 5.82% in 2001.
In the three-month period ended September 30, 2002, research and
development grant income from European as well as German state and federal
government grants decreased to $133,000 from $419,000 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.
25
In the third quarter of 2002, the Company recorded net losses from equity
method investees of $267,000 compared to $177,000 in the third quarter of 2001.
The third 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.
Other income and expense decreased to a loss of $3.1 million in the first
nine months of 2002 from income of $1.7 in the first nine months of 2001. This
decrease was mainly due to decreased interest income, increased interest
expense, decreased research and development grant income, and decreased
miscellaneous income/expense, partially offset by decreased losses on equity
method investee. Other miscellaneous income/expense decreased primarily due to
the approximate $1.4 million gain on the sale of a financial asset in the second
quarter of 2001.
Provision for Income Taxes
The Company's effective tax rate increased to 39% in the third quarter of
2002 from 37% in the third quarter of 2001. 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. Further, the increase is partially due to the
lack of a tax benefit associated with the amortization of developed technology
acquired in the recent acquisitions.
Minority Interest
The minority interest expense of $5,000 represents the minority position of
Particles Solutions AS, which is 60%, owned by GenoVision AS. The Company
acquired GenoVision 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.
26
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 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.
27
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 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
28
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.
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 September 30, 2002 and December 31, 2001, the Company had cash and cash
equivalents along with investments in current marketable securities of $63.7
million and $79.0 million, respectively, and working capital of $123.6 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 September 30, 2002,
cash and cash equivalents had decreased to $51.8 million from $56.5 million at
December 31, 2001 primarily due to cash used in investing activities of $50.3
million, offset by cash provided by operations of $27.9 million and cash
provided by financing activities of $12.7 million.
29
For the nine-month period ended September 30, 2002 and 2001, the
Company generated net cash from operating activities of $27.9 million and $37.8
million, respectively. Cash provided by operating activities decreased in the
nine-month period ended September 30, 2002 over the same period in 2001
primarily due to higher increases in inventories offset by decreases in accrued
liabilities and the tax benefit on non-qualified stock options. Inventories
increased to $49.9 million at September 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 $1.4 million in inventory at September 30, 2002. The tax benefit
on non-qualified stock options decreased to $623,000 at September 30, 2002 from
$11.3 million at December 31, 2001 due to fewer stock option exercises as a
result of a lower stock price during the nine-month period ended September 30,
2001. 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 $50.3 million of cash was used in investing activities
during the first nine months of 2002, compared to $62.3 million for the same
period of 2001. Investing activities during the nine-month period ended
September 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 GenoVision AS for total consideration of approximately $28.1
million, of which $14.3 was in cash. Cash used in investing activities was
partially offset by proceeds from the sale of marketable securities. As the
capital investment programs are nearing completion, we believe that the cash
flow required for investing will be substantially lower in 2003.
Financing activities provided $12.7 million in cash during the first
nine months of 2002, compared to $11.7 million provided in 2001. Cash provided
during the third 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 $9.6 million at variable interest
rates of which approximately $1.2 million was utilized as of September 30, 2002.
In addition, as of September 30, 2002 the Company had capital lease obligations
in the amount of $11.9 million. The Company also carries $92.8 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 $85.5
million, and one note at a fixed rate of 3.75% due in semi-annual payments
through March 2009 of EUR 639,000.
During the third quarter of 2002, the Company substantially completed
the construction of two new facilities in Germany, with estimated completion
before the end of 2002. The total
30
estimated cost for these facilities is approximately EUR 57.6 million
(approximately $56.5 million at September 30, 2002) of which EUR 52.1 million
(approximately $51.1 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 $92.5 million at
September 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 September 30, 2002,
approximately $85.5 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 September 30, 2002 the Company had 1,675 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.
31
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 September
30, 2002, the weighted average interest rate on the Company's marketable
securities portfolio was 1.98% to 2.22%.
Borrowings against lines of credit are at variable interest rates. At
September 30, 2002, the Company had $1.2 million of outstanding lines of credit
with an average interest rate of 4.82% at September 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 4.28 million (approximately $42.0 million at
September 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 $263,000, 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 occured in 2001 and 2002 with respect to the euro, will decrease
32
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 September 30, 2002, the Company had one option contract for
$600,000, which expired at the end of October 2002.
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.
33
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: November 14, 2002
34
EXHIBIT INDEX
Exhibit No. Exhibit
2.6 Third Supplement to the Credit Agreement for a Club Deal of May 28,
2001 between QIAGEN GmbH, Deutsche Bank AG, Stadtsparkasse
Dusseldorf, and IKB Deutsche Industriebank AG, dated July 31, 2002
99.1 Press Release dated October 2, 2002
99.2 Press Release dated October 2, 2002
99.3 Press Release dated October 28, 2002
35