<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
-------------------
Commission File Number 0-23252
--------------------
IGEN INTERNATIONAL, INC.
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-2852543
- -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16020 INDUSTRIAL DRIVE, GAITHERSBURG, MD 20877
--------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
301-984-8000
----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Act of 1934 during the
preceding 12 months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 5, 1999
----- -------------------------------
Common Stock, $0.001 par value 15,416,834
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 1999 and March 31, 1999 3
Consolidated Statements of Operations - For the three and six months ended
September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows - For the six months ended
September 30, 1999 and 1998 5
Notes to Financial Statements 6
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
Item 3: QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 18
PART II OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS 19
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
Item 6: EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
</TABLE>
2
<PAGE>
IGEN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,511 $ 720
Short term investments 20,998 33,654
Accounts receivable, net 4,477 3,252
Inventory 2,084 1,455
Other current assets 1,480 775
-------- --------
Total current assets 30,550 39,856
-------- --------
EQUIPMENT, FURNITURE AND IMPROVEMENTS 10,046 9,025
Accumulated depreciation and amortization (5,725) (5,397)
-------- --------
Equipment, furniture and improvements, net 4,321 3,628
-------- --------
NONCURRENT ASSETS:
Deferred debt issuance costs 1,240 1,361
Restricted cash 1,000 600
Other 355 378
-------- --------
Total noncurrent assets 2,595 2,339
-------- --------
TOTAL $ 37,466 $ 45,823
======== ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 7,066 $ 4,924
Deferred revenue 2,121 2,488
Obligations under capital leases 103 117
-------- --------
Total current liabilities 9,290 7,529
-------- --------
NONCURRENT LIABLITIES:
Note payable 30,000 30,000
Convertible preferred stock dividend payable 3,567 2,521
Obligations under capital leases 139 183
-------- --------
Total noncurrent liabilities 33,706 32,704
-------- --------
COMMITMENTS AND CONTINGENCIES -- --
-------- --------
STOCKHOLDERS' (DEFICIT) EQUITY:
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized,
issuable in Series: Series A, 600,000 shares designated, none issued; Series B,
25,000 shares issued and outstanding - liquidation value of $25,000,000 plus
accrued and unpaid dividends 1 1
Common stock: $.001 par value, 50,000,000 shares authorized: 15,405,000 and
15,361,400 shares issued and outstanding 15 15
Additional paid-in capital 86,854 87,413
Accumulated deficit (92,400) (81,839)
-------- --------
Total stockholders' (deficit) equity (5,530) 5,590
-------- --------
TOTAL $ 37,466 $ 45,823
======== ========
</TABLE>
See notes to financial statements.
3
<PAGE>
IGEN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Royalty income $ 2,572 $ 1,912 $ 5,617 $ 4,138
Product sales 1,950 1,091 2,678 2,347
License fees and contract revenue 300 100 450 305
------------------- --------------- ------------- -------------
4,822 3,103 8,745 6,790
------------------- --------------- ------------- -------------
OPERATING COSTS AND EXPENSES:
Product costs 682 317 858 618
Research and development 4,328 3,413 8,348 6,436
Marketing, general and administrative 4,903 3,050 9,255 6,468
------------------- --------------- ------------- -------------
9,913 6,780 18,461 13,522
------------------- --------------- ------------- -------------
LOSS FROM OPERATIONS (5,091) (3,677) (9,716) (6,732)
INTEREST (EXPENSE) INCOME - NET (398) 262 (845) 412
------------------- --------------- ------------- -------------
NET LOSS $ (5,489) $ (3,415) $ (10,561) $ (6,320)
=================== =============== ============= =============-
BASIC AND DILUTED NET LOSS PER SHARE $ (0.39) $ (0.25) $ (0.75) $ (0.48)
=================== ============== ============= =============
SHARES USED IN COMPUTING NET LOSS
PER SHARE 15,388 15,315 15,377 15,296
=================== ============== ============= =============
</TABLE>
See notes to financial statements.
4
<PAGE>
IGEN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
1999 1998
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,561) $ (6,320)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 843 586
Deferred revenue (367) (1,333)
Add (deduct) items not affecting cash:
Increase in accounts receivable (1,225) (1,202)
Increase in inventory (629) (4)
Increase in other current assets (705) (66)
Increase (decrease) in accounts payable and accrued expenses 2,142 (316)
Decrease in other noncurrent assets 23 14
-------- --------
Net cash used in operating activities (10,479) (8,641)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for equipment, furniture and improvements (1,415) (815)
Purchase of short-term investments (11,846) (12,215)
Sale of short-term investments 24,502 20,792
-------- --------
Net cash provided by investing activitie 11,241 7,762
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash (400) --
Issuance of common stock -- net 487 330
Principal payments under capital lease obligations (58) (71)
-------- --------
Net cash provided by financing activities 29 259
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 791 (620)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 720 1,502
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,511 $ 882
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
DURING THE SIX MONTHS ENDED SEPTEMBER 30, 1999 THE COMPANY ACCRUED UNPAID
PREFERRED STOCK DIVIDENDS OF APPROXIMATELY $1 MILLION. DURING THE SIX MONTHS
ENDED SEPTEMBER 30, 1998, THE COMPANY ACCRUED UNPAID PREFERRED STOCK
DIVIDENDS AND CAPITAL LEASE OBLIGATIONS OF APPROXIMATELY $1 MILLION AND
$200,000, RESPECTIVELY.
See notes to financial statements.
5
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Basis of Presentation and Accounting Policies
The financial statements of IGEN International, Inc. (the "Company") reflect, in
the opinion of management, all adjustments, consisting only of normal and
recurring adjustments, necessary to present fairly the Company's financial
position at September 30, 1999 and the Company's results of operations for the
three and six month periods ended September 30, 1999 and 1998 and cash flows for
the same six month periods. Interim period results are unaudited and are not
necessarily indicative of results of operations or cash flows for a full year
period. The balance sheet at March 31, 1999 was derived from audited financial
statements at such date.
Pursuant to accounting requirements of the Securities and Exchange Commission
applicable to quarterly reports on Form 10-Q, the accompanying financial
statements and these notes do not include all disclosures required by generally
accepted accounting principles for complete financial statements. Accordingly,
these statements should be read in conjunction with the Company's most recent
annual financial statements included in the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1999.
2. Summary of Significant Accounting Policies
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - Cash equivalents include cash in
banks, and money market funds, securities of the U.S. Treasury and certificates
of deposit with original maturities of three months or less.
The Company has classified its short term investments, which consist of U.S.
Government Obligations and Corporate Debt-Securities, as "available for sale"
which are recorded at market value. The recorded market value approximates cost.
RESTRICTED CASH - The Company has a debt service reserve of $1 million at
September 30, 1999 that is restricted in use (see Note 3). These funds are held
in trust as collateral with increasing increments scheduled for each of the
first six quarterly note payable due dates.
CONCENTRATION OF CREDIT RISKS - The Company has invested its excess cash
generally in securities of the U.S. Treasury, money market funds, certificates
of deposit and corporate bonds. The Company invests its excess cash in
accordance with a policy objective that seeks to ensure both liquidity and
safety of principal. The policy limits investments to certain types of
instruments issued by institutions with strong investment grade credit ratings
and places restrictions on their terms and concentrations by type and issuer.
The Company has not experienced any losses on its investments due to credit
risk.
6
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
2. Summary of Significant Accounting Policies (continued)
INVENTORY is recorded at the lower of cost or market using the first-in,
first-out method and consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1999 March 31, 1999
------------------ --------------
<S> <C> <C>
Finished goods $ 643 $ 461
Work in process 762 137
Raw materials 679 857
------ ------
Total $2,084 $1,455
====== ======
</TABLE>
PROPERTY - Equipment, furniture and improvements are carried at cost.
Depreciation is computed over the estimated useful lives of the assets,
generally five years, using accelerated methods.
REVENUE RECOGNITION - Product sales revenue is recorded as products are shipped.
Nonrefundable license fees, and milestone payments in connection with research
and development contracts or commercialization agreements with corporate
partners are recognized when they are earned in accordance with the applicable
performance requirements and contractual terms. Amounts received in advance of
performance under contracts or commercialization agreements are recorded as
deferred revenue until earned.
LOSS PER SHARE - Loss per share computations at September 30, 1999 and 1998
follow (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------------- --------------- -------------- ----------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding 15,388 15,315 15,377 15,296
-------- -------- -------- --------
Net loss $ (5,489) $ (3,415) $(10,561) $ (6,320)
Plus accrued Series B convertible
preferred stock dividend (526) (478) (1,046) (972)
-------- -------- -------- --------
Loss attributable to common shareholders $ (6,015) $ (3,893) $(11,607) $ (7,292)
======== ======== ======== ========
Loss per share - basic and diluted $ (0.39) $ (0.25) $ (0.75) $ (0.48)
======== ======== ======== ========
</TABLE>
7
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
2. Summary of Significant Accounting Policies (continued)
Under Statement of Financial Accounting Standard No. 128 "Earnings per Share",
accrued Series B preferred stock dividends are added to the net loss for the
purpose of computing loss per share. Generally, dividends are payable upon
conversion, maturity or redemption and the Company may periodically elect to pay
dividends in stock rather than cash. Accrued dividends through September 30,
1999 have been recorded as a long-term liability in the accompanying financial
statements.
NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which was
effective for the Company's fiscal year 1999. SFAS No. 131 redefines how
operating segments are determined and requires disclosure about products,
services, major customers and geographic areas. The Company operated as one
business segment with a group of similar products.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 is
effective for years beginning after June 15, 2000 and requires the recognition
of all derivatives at fair value as either assets or liabilities in the
statement of financial position. The Company does not believe that adoption of
SFAS No. 133 will have a material impact on its financial position or results of
operations.
3. Note Payable
In March 1999, the Company entered into a debt financing with John Hancock
Mutual Life Insurance Company under a Note Purchase Agreement ("Note") from
which the Company received $30 million. The seven year, 8.5% Senior Secured
Notes mature in 2006 with quarterly interest only payments of $637,500 through
September 2000. Beginning December 2000, principal and interest installments of
$1.7 million will be due quarterly through March 2006.
Collateral for the debt is represented by royalty payments and rights of the
Company to receive monies due pursuant to the License Agreement with Roche.
Additional collateral is represented by a Restricted Cash balance of $1 million.
The Company is required to make quarterly deposits to a Restricted Cash account,
for the life of the Note, in increasing increments for each of the first six
quarterly Note Payable Dates beginning with the quarter end June 30, 1999, to a
maximum of $1.7 million. Covenants within the Note Agreement include compliance
with annual and quarterly Royalty Payment Coverage Ratios which are tied to
royalty payments and debt service.
Costs associated with obtaining the debt financing totaling $1.4 million were
deferred and are represented as a noncurrent asset on the balance sheet. These
costs will be amortized over the seven year life of the Note.
8
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
4. Litigation
ROCHE DIAGNOSTICS ("ROCHE")
On September 15, 1997, the Company filed a lawsuit in Maryland against Roche
Diagnostics GmBH (then known as Boehringer Mannheim GmbH or BMG), a German
company, to which the Company has licensed certain rights to develop and
commercialize diagnostic products based on the Company's ORIGEN technology. BMG
was acquired by F. Hoffman LaRoche during 1998 and is referred to herein as
Roche. The lawsuit against Roche is pending in the Southern Division of the
United States District Court for the District of Maryland. The Company's dispute
with Roche arises out of a 1992 License and Technology Development Agreement
(the "Agreement"), pursuant to which Roche developed and launched its "Elecsys"
line of diagnostic products, which is based on ORIGEN technology. The Company
alleges that Roche has failed to perform certain material obligations under the
Agreement, including development and commercialization of ORIGEN technology
according to the contractual timetable; exploitation of the license to the
extent contemplated by the parties; phase out of certain non-royalty-bearing
product lines; exploitation of ORIGEN technology only within Roche's licensed
fields; proper treatment of intellectual property rights regarding ORIGEN
technology; maintenance of records essential to the computation of royalties;
and proper computation of royalties. In its lawsuit, the Company seeks damages
as well as injunctive and declaratory relief, including a judicial determination
of its entitlement to terminate the Agreement. The Company voluntarily has
agreed not to terminate the Agreement unless and until the Court determines its
entitlement to do so.
During 1998, the Company filed a motion for preliminary injunction in its
Maryland lawsuit against Roche. In that motion, the Company requested that the
court enjoin Roche from marketing, selling, or distributing its Elecsys products
outside of Roche's licensed field of use. The Agreement granted Roche rights to
develop and commercialize diagnostic systems based on the Company's ORIGEN
technology for use in centralized hospital laboratories, clinical reference
laboratories and bloodbanks only. The Company retains the rights to exploit its
ORIGEN technology in all other clinical diagnostic markets. The Company learned
that Roche was marketing Elecsys products outside of its licensed field of use
and therefore asked the court to enjoin Roche from selling outside of its
licensed field and, in particular, to physicians' offices and physicians' office
laboratories. The Company also sought additional relief, including an order
requiring Roche to refer all customers outside of Roche's licensed field to the
Company for future reagent supply needs and to place all revenues derived from
unauthorized sales in escrow pending the outcome of the litigation. The Court
granted IGEN's motion in July 1998 and issued a preliminary injunction in
October 1998. Roche has appealed the preliminary injunction, which is still
pending.
9
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
In December 1998, Roche filed a counterclaim against the Company asserting five
causes of action: fraud, breach of contract, tortious interference with business
relations, unjust enrichment/equitable recoupment, and reformation. The Company
believes that Roche's claims are unfounded. In March 1999, the Company moved to
dismiss Roche's claims for fraud, tortious interference with business relations,
unjust enrichment/equitable recoupment and reformation. The Company also moved
the court to dismiss a portion of Roche's breach of contract claim and to strike
Roche's request for punitive damages and injunctive relief. After being served
with the Company's motion to dismiss, Roche dropped its complaint for contract
reformation and part of its tortious interference claim. In June 1999, the Court
dismissed Roche's claims for fraud, tortious interference, and unjust
enrichment/equitable recoupment and struck down Roche's request for punitive
damages and injunctive relief. The Court declined to dismiss Roche's breach of
contract counterclaim at that time, so that claim will proceed. Roche filed an
Amended Counterclaim on July 13, 1999, which, consistent with the Court's June 9
ruling, contains only one count (breach of contract). The Company filed an
Answer to Roche's Amended Counterclaim on July 29, 1999.
The Company recently received notice from Roche that royalty payments due to
the Company are now being reduced through an additional deduction from sales
on which the royalty is based. The Company has notified Roche that it objects
to this latest calculation which it does not believe is in accordance with
the Agreement. The financial impact of this adjustment for the current
quarter was to lower royalties by approximately $600,000. Additionally, Roche
has also claimed that the Company owes Roche $2.6 million in royalties
previously paid to the Company as a result of a retroactive application of
this additional deduction back to 1997. Roche has agreed, however, not to
seek to collect this retroactive deduction pending ongoing settlement
discussions between the Company and Roche. The Company believes the deduction
and its retroactive application are not in accordance with the Agreement,
that it has meritorious defenses and intends to vigorously oppose these
claims.
This litigation against Roche may have a material adverse effect upon the
Company regardless of whether the outcome is favorable or not.
In June 1998, a subsidiary of Ares-Serono ("Serono") filed a patent infringement
claim against IGEN, Roche and Organon Teknika in the U.S. District Court in
Delaware. The action claims that Serono's patent "A Method of Assay Employing a
Magnetic Electrode" is being infringed by IGEN. Recently, the patent was
acquired by F. Hoffman LaRoche International, Ltd., who is continuing to assert
the infringement claim. The Company does not believe it infrings the patent and
intends to continue to vigorously defend the claim.
10
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
HITACHI
In December 1997, IGEN International K.K., a Japanese subsidiary of the Company,
filed a lawsuit in Tokyo District Court against Hitachi Ltd. ("Hitachi"). The
lawsuit seeks to enjoin Hitachi from infringing IGEN K.K.'s license registration
(known in Japan as a "senyo-jisshi-ken") to prevent Hitachi from manufacturing,
using or selling the Elecsys 2010 Instrument, which incorporates IGEN's patented
ORIGEN technology, in Japan. Hitachi is the sole manufacturer for Roche of the
Elecsys 2010 immunoassay instrument. Roche is licensed to market the Elecsys
2010 worldwide, except in Japan, to central hospital laboratories and clinical
reference laboratories. The Company's ORIGEN technology is licensed in Japan to
IGEN K.K. and to Eisai Company, Ltd. The lawsuit requests injunctive relief
against Hitachi.
11
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company has devoted substantially all of its resources to the research and
development of its proprietary technologies, primarily the ORIGEN-Registered
Trademark- technology for clinical diagnostic and life science research
products. Historically, the Company's sources of revenue have consisted
primarily of license or research payments pursuant to licensing or collaborative
research agreements. The Company has entered into arrangements with corporate
collaborators that provide for the development and marketing of certain
ORIGEN-based systems. These agreements provide fees and royalties payable to the
Company in exchange for licenses to produce and sell products. The Company
currently derives most of its revenue from sales of its products and royalties
from its corporate collaborators; however, the Company may selectively pursue
additional strategic alliances which could result in additional license fees or
contract revenues.
In addition to historical information, this document contains forward-looking
statements within the meaning of the "safe-harbor" provisions of the Private
Securities Litigation Reform Act of 1995. Reference is made in particular to
statements regarding the Company's expectations with respect to the level of
anticipated royalty and revenue growth, the outcome of litigation, new product
plans and business prospects, the Company's plans and objectives for future
operations, assumptions underlying such plans and objectives, the Company's
plans and expectations with respect to the Year 2000 issues and other
forward-looking statements. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as "may", "will",
"expect", "intend", "estimate", "anticipate", "believe" or "continue" or the
negative thereof or variations thereon or similar terminology. Such statements
are based on management's current expectations and are subject to a number of
factors, risks and uncertainties which could cause actual results to differ
materially from those described in the forward-looking statements. In
particular, careful consideration should be given to the cautionary statements
in the "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and to the risks and uncertainties detailed in the Company's
Annual Report on Form 10-K for the year ended March 31, 1999 previously filed
with the Securities and Exchange Commission. The Company disclaims any intent or
obligation to continually update these forward-looking statements.
RESULTS OF OPERATIONS
THE QUARTER AND SIX MONTHS IN REVIEW
The Company reported a net loss of $5.5 million ($0.39 per share) on revenues of
$4.8 million for the second quarter ended September 30, 1999. This compares to a
net loss of $3.4 million ($0.25 per share) on revenue of $3.1 million for the
same period last year. For the six months ended September 30, 1999, the Company
reported a net loss of $10.6 million ($0.75 per share) on revenue of $8.7
million. This compares with a net loss of $6.3 million ($0.48 per share) on
revenue of $6.8 million for the same prior year period.
12
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Revenue increased $1.7 million (55%) to $4.8 million for the current quarter and
increased $1.9 million (28%) to $8.7 million for the six months ended September
30, 1999 when compared to the same prior year periods. The current quarter
increase was attributable to new product sales associated with the launch of the
M-Series Screening System, which commenced shipping in August 1999, and higher
royalty income. The revenue increase for the six month period in 1999 was
primarily due to a $1.5 million (37%) increase in royalty income to $5.6
million.
In 1992, the Company entered into a License and Technology Development
Agreement ("Agreement") with Roche. Pursuant to the Agreement, Roche launched
its Elecsys product line in 1996, which is based on the Company's ORIGEN
technology. The Company is involved in litigation with Roche arising out of
this Agreement. Among the disputes at issue in the litigation is how sales
and royalties are computed, as well as, improper record-keeping by Roche.
Royalty income recorded by the Company is based on reports provided by Roche,
which was $5.1 million and $3.7 million, respectively, for the six months
ended September 30, 1999 and 1998 and $2.2 million and $1.8 million,
respectively, for the three months ended September 30, 1999 and 1998. The
Company recently received notice from Roche that royalty payments due to the
Company are now being reduced through an additional deduction from sales on
which the royalty is based. The Company has notified Roche that it objects to
this latest calculation which it does not believe is in accordance with the
Agreement. The financial impact of this adjustment for the current quarter
was to lower royalties by approximately $600,000.
Additionally, Roche has also claimed that the Company owes Roche $2.6 million
in royalties previously paid to the Company as a result of a retroactive
application of this additional deduction back to 1997. Roche has agreed,
however, not to seek to collect this retroactive deduction pending ongoing
settlement discussions between the Company and Roche. The Company believes
the deduction and its retroactive application are not in accordance with the
Agreement, that it has meritorious defenses and intends to vigorously oppose
these claims. Although the Company cannot predict what amount Roche will
deduct in future quarters under this additional deduction, the Company
believes that it is likely that Roche will continue to take a comparable
deduction in future periods.
Product costs as a percentage of product sales increased to 35% and 32%,
respectively, for the quarter and six months ended September 30, 1999 compared
to 29% and 26%, respectively, for the quarter and six months ended September 30,
1998. These increases were the result of production costs associated with the
new M-Series product line which commenced shipping in August, 1999.
13
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Research and development expenses increased to $4.3 million and $8.3 million,
respectively, for the quarter and six months ended September 30, 1999, from $3.4
million and $6.4 million, respectively, for the same prior year periods. These
increases were due to higher personnel and development costs associated with the
M-Series System. Sales, marketing and administrative expenses increased to $4.9
million and $9.3 million, respectively, for the quarter and first six months of
the current year, from $3.1 million and $6.5 million, respectively, for the same
periods last year. These increases were due primarily to higher costs associated
with the Roche litigation as well as increases in sales and marketing expenses
associated with the Company's launch of the M-Series System.
Net interest expense increased approximately $660,000 and $1.3 million,
respectively, for the second quarter and first six months of the current year
when compared to the same prior year periods. This was due primarily to an
increase in interest expense associated with the $30 million debt financing
completed in March 1999. See "Liquidity and Capital Resources" below.
Results of operations in the future are likely to fluctuate substantially from
quarter to quarter as a result of differences in the timing of revenues earned
from product sales, new product launches, license and product development
agreements, associated costs and expenses, as well as costs associated with the
launch of the M-SERIES System and litigation related costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through the sale of Preferred and Common
Stock, aggregating approximately $85 million through September 30, 1999. In
March 1999, the Company completed a $30 million debt financing with John Hancock
Life Insurance Company. In addition, the Company has received funds from
collaborative research and licensing agreements and sales of its ORIGEN line of
products. As of September 30, 1999, the Company had $22.5 million in cash, cash
equivalents and short term investments. Working capital was $21.3 million at
September 30, 1999.
Net cash used in operating activities was $10.5 million for the six months ended
September 30, 1999, as compared to $8.6 million for the corresponding prior year
period. This increase in net cash used was due primarily to the higher net loss
incurred during the current period.
14
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company used approximately $1.4 million and $815,000 of net cash for
investing activities, exclusive of short-term investment transactions used to
provide cash for operations, which substantially related to the acquisition of
laboratory equipment, furniture and leasehold improvements during the six months
ended September 30, 1999 and 1998, respectively. During the six months ended
September 30, 1998, the Company financed approximately $200,000 of these capital
expenditures through long-term third-party financing. The Company believes
material commitments for capital expenditures may be required in a variety of
areas, such as product development programs. The Company has not, at this time,
made commitments for any such capital expenditures or secured additional sources
to fund such commitments.
The Company has no reason to believe that the existence of the Roche litigation
is having a material adverse effect on Roche's sales pursuant to the Agreement
or that a negative result for the Company in the Roche litigation would have a
material adverse effect on Roche's sales, although there can be no assurance
that the litigation or its outcome would not have such an effect. As it now
stands, Roche has the right to continue to market its Elecsys products to
central hospital laboratories and clinical reference laboratories during the
term of the Agreement unless and until the Company is determined to have the
right to terminate the Agreement and then determines to terminate the Agreement.
If the Company elects to terminate the Agreement, it would have a material
adverse effect on the Company's royalty revenue from license sales unless and
until the Company entered into a strategic partnership with another company that
is able to develop and commercialize diagnostic instruments for central hospital
laboratories and clinical reference laboratories. There can be no assurance, if
the Company decided to terminate the Agreement, that the Company would be able
to enter into such a strategic partnership on terms favorable to the Company.
The Company does not expect that failure to prevail in the Hitachi litigation by
itself would have a material adverse effect on the Company's revenue or sales,
since Hitachi would continue to manufacture Roche instruments and the Company
would continue to earn royalties in connection therewith. There can be no
assurance that the Hitachi litigation would not have a material adverse effect
on the Company's intellectual property, regardless of whether the outcome of the
litigation is favorable or not. Success by the Company in the Hitachi litigation
could have a material adverse effect on the Company's royalty revenues from
sales of Elecsys products to the extent that Roche's sales of Elecsys
instruments are hindered because it needs to find a new manufacturer for its
instruments or make arrangements to have Hitachi manufacture the instruments
outside of Japan.
15
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company has incurred and expects to incur substantial additional research
and development expenses, manufacturing costs and marketing and distribution
expenses for the M-Series and other products as well as costs related to the
on-going Roche litigation. It is the Company's intention to selectively seek
additional collaborative or license agreements with suitable corporate
collaborators, although there can be no assurance the Company will be able to
enter into such agreements or that amounts received under such agreements will
reduce substantially the Company's funding requirements. Additional equity or
debt financing may be required, but there can be no assurance that these funds
will be available on favorable terms, if at all.
The Company's future capital requirements depend on many factors, including
continued scientific progress in its diagnostics programs, the magnitude of
these programs, the time and costs involved in obtaining regulatory approvals,
the costs involved in filing, prosecuting and enforcing patent claims, competing
technological and market developments, changes in its existing license and other
agreements, the ability of the Company to establish development arrangements,
the cost of manufacturing scale-up and effective commercialization activities
and arrangements.
YEAR 2000 ISSUE
The Year 2000 ("Y2K") issue results from computer programs and hardware that are
unable to distinguish between the Year 1900 and the Year 2000; accordingly,
computer systems that have time-sensitive calculations may not properly
recognize the Year 2000. This could result in system failures or
miscalculations, causing disruptions of the Company's operations, including,
without limitation, research, manufacturing, distribution, and other business
activities. The Y2K problem may affect the Company's computer hardware,
software, systems, devices and applications, and may also affect products
manufactured by collaborators using the Company's technology.
The Company has conducted a review of its systems to identify those areas that
could be affected by the Y2K problem and has established a program to address
Y2K issues. The Company is installing a Y2K compliant Enterprise Resource
Planning ("ERP") computer system, which will perform substantially all of the
central data processing tasks of the Company. The Company is installing this
system in order to fully integrate its financial systems with its manufacturing
and distribution systems and provide for the growth of its business and not as a
concern about the Y2K problem. The Company has completed installation of the
financial systems. While existing manufacturing and distribution systems are Y2K
compliant, the new manufacturing and distribution installations are planned for
completion during the fourth calendar quarter of 1999.
16
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Most of the Company's other information technology systems, including desktop
computers, R&D equipment, server computer equipment and installed commercial
application software, are relatively new and have been designed with the Y2K
issue in mind. The Company has completed testing of these information technology
systems that are material to the Company's business. To the extent that these
systems were found not to be Y2K compliant, the Company believes that any
material issues can be resolved by installing commercially available upgrades
and is in the process of doing so.
In addition to reviewing its systems, the Company has also considered the impact
of the Y2K issue on products that it manufactures and on products manufactured
by collaborators using the Company's technology. In all material respects,
products manufactured by the Company are Y2K compliant. The Company is aware
that certain products manufactured by collaborators using the Company's
technology may utilize calendar dates. Where known, the Company has contacted
collaborators to ascertain their awareness of the problem and their plans to
address the Y2K issue. Roche has indicated to the Company that its Elecsys
products are currently Y2K compliant or can be made Y2K compliant with a
currently available software upgrade.
The Company has identified critical providers of information, goods and services
("Suppliers") in order to assess their Y2K compliance and has sent
questionnaires to such critical Suppliers. Although the Company cannot control
the response time of Suppliers to its surveys, the Company has assessed survey
responses received through September 1999 and confirmed Y2K readiness of
selected Suppliers. Additional open responses continue to be monitored. The
Company has not identified critical Suppliers that are not Y2K compliant. The
Company does not intend to contact entities that are not critical and cannot
guarantee that such entities will be Y2K compliant. There can be no assurance
that the Company's Suppliers are, or will be, Y2K compliant or that a failure of
timely Y2K compliance on the part of the Suppliers would not have a material
adverse effect on the Company.
The Company's business operations are also dependent upon the Y2K readiness of
infrastructure suppliers in areas such as utilities, communications,
transportation and other services. The Company has been unable to assess the
likelihood, length or effects of failures by any of these suppliers and there
can be no assurance that such failures will not have a material adverse effect
on the Company.
The Company has not incurred, and does not expect to incur, material costs in
conjunction with its Y2K remediation plan. The majority of the costs incurred to
date are related to the installation of the ERP system. As described above, the
Company did not undertake this project to specifically address the Y2K issue and
the installation has not been accelerated or otherwise modified as a result of
the Y2K issue.
17
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
At the current time, the Company anticipates that its critical information and
non-information technology systems will be Y2K compliant in all material
respects before January 1, 2000. The Company does not expect, in view of its Y2K
readiness efforts and diversity of its suppliers and customers, the occurrence
of Y2K failures to have a material adverse effect on the financial position or
results of operations of the Company, however there can be no assurance of
complete Y2K compliance.
Contingency plans for information technology systems generally anticipate use of
standard, non-customized replacement modules in the event of contingencies. Work
with major collaborators and vendors to date has indicated a high awareness of
the issues and plans to address them. Alternative vendors are available for most
major supplies and raw materials. Nonetheless, it is not possible for the
Company to fully assess the likelihood or magnitude of consequences from vendor
or collaborator Y2K compliance issues. While there are no indications of major
revenue disruptions from actions of such third parties, there can be no
assurance at this time as to the future impacts of Y2K actions or inactions by
collaborators or vendors.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about market risks for the three and six months ended September 30,
1999 does not differ materially from that discussed under Item 7A. of the
Company's Annual Report on Form 10-K for the year ended March 31, 1999.
18
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
PART II OTHER INFORMATION
Item 1: Legal Proceedings
The information required under this item is incorporated
herein by reference to Note 4 in Part I, Item 1 - Notes to
Financial Statements.
Item 4: Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of IGEN
International, Inc. was held on September 15, 1999.
(b) Samuel J. Wohlstadter and William J. O'Neill were
elected to the Board of Directors at the Annual
Meeting. The directors of the Company whose term of
office as directors continued after the meeting are
Richard J. Massey, Edward B. Lurier and Robert
Salsmans.
(c) The matters voted upon at the meeting and the voting
of shareholders with respect thereto are as follows:
The election of each of Samuel J. Wohlstadter and
William J. O'Neill to the Board of Directors to hold
office for a three-year term and until his successor
is elected and has qualified, or until such
director's earlier death, resignation or removal. The
voting results, with approximately 14.5 million (95%)
of the shares voting, were as follows:
<TABLE>
<CAPTION>
Wohlstadter O'Neill
------------ -------
<S> <C> <C>
For: 14,489,869 14,501,219
Withheld: 49,077 37,727
Abstain: 0 0
</TABLE>
The ratification of the selection of Deloitte &
Touche LLP as independent auditors of the Company for
its fiscal year ended March 31, 2000. The voting
results were as follows:
<TABLE>
<S> <C> <C>
For: 14,506,057
Withheld: 13,747
Abstain: 19,142
</TABLE>
19
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
20
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
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.
IGEN International, Inc.
Date: November 12, 1999 /s/George V. Migausky
----------------- ------------------------------------
George V. Migausky
Vice President of Finance and Chief
Financial Officer
(On behalf of the Registrant and as
Principal Financial Officer)
21
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
EXHIBIT INDEX
Exhibit Number Description
- -------------- ------------
27 Financial Data Schedule
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 UNAUDITED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,511<F1>
<SECURITIES> 20,998
<RECEIVABLES> 4,526
<ALLOWANCES> (49)
<INVENTORY> 2,084
<CURRENT-ASSETS> 30,550
<PP&E> 10,046
<DEPRECIATION> 5,725
<TOTAL-ASSETS> 37,466
<CURRENT-LIABILITIES> 9,290
<BONDS> 0
0
1
<COMMON> 15
<OTHER-SE> (5,530)<F2>
<TOTAL-LIABILITY-AND-EQUITY> 37,466
<SALES> 2,678
<TOTAL-REVENUES> 8,745
<CGS> 858
<TOTAL-COSTS> 18,461
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 845<F3>
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,561)
<EPS-BASIC> (0.75)
<EPS-DILUTED> (0.75)
<FN>
<F1>Includes $1 million of restricted cash, classified as a noncurrent asset
<F2>stockholder's deficit
<F3>net of interest income of $587
</FN>
</TABLE>
