<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For Quarter Ended DECEMBER 31, 1998
Commission File Number 0-23252
IGEN INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 94-2852543
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16020 INDUSTRIAL DRIVE, GAITHERSBURG, MD 20877
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(Address of principal executive offices) (Zip Code)
301-984-8000
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(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.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT FEBRUARY 2, 1999
----- -------------------------------
<S> <C>
Common Stock, $0.001 par value 15,349,700
</TABLE>
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I FINANCIAL INFORMATION
- ------------------------------
Item 1: FINANCIAL STATEMENTS
Balance Sheets - December 31, 1998 and March 31, 1998 3
Statements of Operations - For the three and nine months ended
December 31, 1998 and 1997 4
Statements of Cash Flows - For the nine months ended
December 31, 1998 and 1997 5
Notes to Financial Statements 6
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
PART II OTHER INFORMATION
- --------------------------
Item 1: LEGAL PROCEEDINGS 16
Item 6: EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
</TABLE>
2
<PAGE>
IGEN INTERNATIONAL, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,350 $ 1,502
Short term investments 9,050 21,620
Accounts receivable, net 3,582 1,552
Inventory 1,425 1,435
Other current assets 832 864
---------------- ----------------
Total current assets 16,239 26,973
---------------- ----------------
EQUIPMENT, FURNITURE, AND IMPROVEMENTS: 8,304 7,124
Accumulated depreciation and amortization (5,002) (4,111)
---------------- ----------------
Equipment, furniture, and improvements, net 3,302 3,013
---------------- ----------------
OTHER ASSETS 385 405
---------------- ----------------
TOTAL $ 19,926 $ 30,391
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 5,177 $ 5,152
Deferred revenue 2,686 4,139
Obligations under capital leases 107 92
---------------- ----------------
Total current liabilities 7,970 9,383
---------------- ----------------
NONCURRENT LIABLITIES:
Obligations under capital leases 253 146
Convertible preferred stock dividend payable 2,007 -
---------------- ----------------
2,260 146
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (See Note 3) - -
---------------- ----------------
STOCKHOLDERS' 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: 15,331,705 and 15,261,240 shares issued and
outstanding 15 15
Additional paid-in capital 87,772 89,376
Accumulated deficit (78,092) (68,530)
---------------- ----------------
Total stockholders' equity 9,696 20,862
---------------- ----------------
TOTAL $ 19,926 $ 30,391
---------------- ----------------
---------------- ----------------
</TABLE>
See notes to financial statements.
3
<PAGE>
IGEN INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Royalty income $ 2,561 $ 1,591 $ 6,699 $ 3,182
Product sales 1,427 1,352 3,774 4,121
License fees and contract revenue 205 310 510 2,855
--------------- ------------- ------------- -------------
4,193 3,253 10,983 10,158
--------------- ------------- ------------- -------------
OPERATING COSTS AND EXPENSES:
Product costs 358 464 977 1,408
Research and development 3,798 2,888 10,234 8,493
Marketing, general and administrative 3,451 2,950 9,919 9,190
--------------- ------------- ------------- -------------
7,607 6,302 21,130 19,091
--------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (3,414) (3,049) (10,147) (8,933)
INTEREST AND OTHER INCOME - NET 172 10 585 (63)
---------------- ------------- ------------- -------------
NET LOSS $ (3,242) $ (3,039) $ (9,562) $ (8,996)
--------------- ------------- ------------- -------------
--------------- ------------- ------------- -------------
BASIC AND DILUTED LOSS PER SHARE
(Note 2) $ (0.24) $ (0.20) $ (0.72) $ (0.60)
--------------- ------------- ------------- -------------
--------------- ------------- ------------- -------------
SHARES USED IN COMPUTING NET LOSS
PER SHARE 15,322 15,157 15,306 15,082
--------------- ------------- ------------- -------------
--------------- ------------- ------------- -------------
</TABLE>
See notes to financial statements.
4
<PAGE>
IGEN INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net loss $ (9,562) $ (8,996)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 891 857
Deferred revenue (1,453) 181
Add (deduct) items not affecting cash:
(Increase) decrease in accounts receivable (2,030) 860
Decrease in inventory 10 487
Decrease (increase) in other current assets 32 (195)
Decrease in other non-current assets 20 29
Increase accounts payable and accrued expenses 25 440
---------- ----------
Net cash used in operating activities (12,067) (6,337)
---------- ----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Expenditures for equipment, furniture and improvements (980) (353)
Purchases of short-term investments (14,759) (14,816)
Sale of short-term investments 27,329 --
---------- ----------
Net cash provided by (used in) investing activities 11,590 (15,169)
---------- ----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Repayment of notes receivable from sale of common stock, net -- 24
Issuance of convertible preferred stock, net -- 23,625
Issuance of common stock - net 403 597
Payments under capital lease obligations (78) (122)
---------- ----------
Net cash provided by financing activities 325 24,124
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (152) 2,618
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,502 790
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,350 $ 3,408
---------- ----------
---------- ----------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
DURING THE NINE MONTHS ENDED DECEMBER 31, 1998, THE COMPANY INCURRED CAPITAL
LEASE OBLIGATIONS AND ACCRUED BUT UNPAID PREFERRED STOCK DIVIDENDS OF
APPROXIMATELY $200,000 AND $1.5 MILLION, RESPECTIVELY. THERE WERE NO SUCH
COMPARABLE ITEMS FOR THE PERIOD ENDED DECEMBER 31, 1997.
See notes to financial statements.
5
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
NOTES TO 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 December 31, 1998 and the Company's results of operations for the
three and nine month periods ended December 31, 1998 and 1997 and cash flows for
the nine month periods ended December 31, 1998 and 1997. 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, 1998 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, 1998.
2. Summary of Significant Accounting Policies
Cash Equivalents and Short-Term Investments - Cash equivalents include cash in
banks, money market funds, securities of the U.S. Treasury and certificates of
deposit with original maturities of three months or less.
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 investments grade credit ratings
and places restrictions on their terms and concentrations by type and issuer.
Inventory - 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>
DECEMBER 31, 1998 MARCH 31, 1998
----------------- ----------------
<S> <C> <C>
Finished goods $ 882 $ 824
Work in process 146 117
Raw materials 397 494
---------- ----------
Total $ 1,425 $ 1,435
---------- ----------
---------- ----------
</TABLE>
6
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
2. Summary of Significant Accounting Policies (continued)
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, option 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. Royalty income is recorded in
conjunction with licensees' reports furnished to the Company.
Loss Per Share - Loss per share computations at December 31, 1998 and 1997
follow:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
1998 1997 1998 1997
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding 15,322 15,157 15,306 15,082
------------ ------------ ----------- ---------
Net loss $ (3,242) $ (3,039) $ (9,562) $ (8,996)
Plus accrued Series B convertible preferred
stock dividend (493) - (1,465) -
------------ ------------ ----------- ---------
Loss attributable to common shareholders $ (3,735) $ (3,039) $ (11,027) $ (8,996)
------------ ------------ ----------- ---------
------------ ------------ ----------- ---------
Loss per share - basic and diluted $ (0.24) $ (0.20) $ (0.72) $ (0.60)
------------ ------------ ----------- ---------
------------ ------------ ----------- ---------
</TABLE>
Under SFAS 128, accrued Series B preferred stock dividends increase 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 December
31, 1998 have been recorded as a long-term liability in the accompanying
financial statements.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
REPORTING COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION, both of which are effective for the
Company's fiscal year 1999. SFAS No. 130 requires businesses to disclose
7
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
comprehensive income (loss) and its components in the financial statements.
During the three and nine months ended December 31, 1998 and 1997, the Company's
comprehensive income (loss) approximated its net income (loss) for the period.
SFAS No. 131 redefines how operating segments are determined and requires
disclosure of certain financial and descriptive information about the Company's
operating segments. The Company is continuing to review what operating segments
that it may report on upon adoption of SFAS No. 131.
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, 1999 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. LITIGATION
BOEHRINGER MANNHEIM ("ROCHE")
On September 15, 1997, the Company filed a lawsuit in Maryland against
Boehringer Mannheim GmbH, now known as Roche Diagnostics a subsidiary of
Hoffman-LaRoche Ltd. (referred to herein as Roche), to which the Company has
licensed certain rights to develop and commercialize diagnostic products
based on the Company's ORIGEN technology. That lawsuit 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 has agreed not to
terminate the Agreement unless and until the Court determines its entitlement
to do so. Roche recently filed counter claims against the Company alleging
among other things, that IGEN breached its obligations under the Agreement by
permitting other licensees to exercise certain rights to IGEN's
electrochemiluminescence ("ECL") technology, by failing to share certain ECL
improvements with Roche, and by declining to defend Roche in a patent
lawsuit. Roche also alleges that IGEN has misrepresented its own intentions
with respect to the expansion of rights granted to Eisai Co., Ltd. under a
license agreement. Roche further alleges that the Company has interfered with
Roche's business relationships by filing a lawsuit against Hitachi in Japan
and by seeking a preliminary injunction to enjoin Roche from exploiting ECL
technology in certain markets.
8
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
On July 27, 1998, the Maryland court enjoined Roche from marketing its Elecsys
products in physician's office laboratories, ordered Roche to escrow all
revenues from past sales to physician's office laboratories pending the outcome
of the litigation, and required Roche to transfer all of its current Elecsys
customers that are physician's office laboratories to IGEN for ongoing supply
needs. The litigation against Roche may have a material adverse effect upon the
Company regardlers of whether the outcome is favorable or not.
HITACHI
In December 1997, IGEN International K.K., a Japanese subsidiary of the Company,
field a lawsuit in Tokyo District Court against Hitachi Ltd. ("Hitachi"). This
lawsuit seeks to enjoin Hitachi from manufacturing, using or selling the Elecsys
2010 immunoassay instrument in Japan. The lawsuit also seeks to enjoin Hitachi
from infringing the subsidiary's license registration, known in Japan as a
"senyo-jisshi-ken," in connection with the development of the Mosys ("Modular")
instrument. Hitachi is the sole manufacturer for Roche of the Elecsys 2010
immunoassay instrument. Roche sells the Elecsys 2010 worldwide to central
hospital laboratories and clinical reference laboratories. The Company's
Japanese subsidiary alleges that both the Elecsys 2010 and the Modular are based
on ORIGEN technology. The Company's ORIGEN technology is licensed to its
Japanese subsidiary and to Eisai K.K. pursuant to a "senyo-jisshi-ken." The
Company's Japanese subsidiary further alleges that Hitachi's manufacture and
sale of the Elecsys 2010 and development of the Modular violate the
"senyo-jisshi-ken." Hitachi alleges that its manufacture and sale of clinical
diagnostic instruments in Japan are under a license from Roche and that Roche
has an exclusive, worldwide license from the Company. Hitachi further alleges
that it is not developing the Modular. The lawsuit requests injunctive relief
against Hitachi and destruction of the Elecsys 2010 and Modular instruments in
Hitachi's possession.
9
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company devotes substantially all of its resources to the research and
development of its proprietary technologies, primarily the ORIGEN(R) 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. Beginning in the fourth quarter of fiscal 1997, the
Company's revenues from license fees and contract research were substantially
replaced by royalties based on corporate licensees' product sales. In the near
term, the Company may selectively pursue additional strategic alliances,
although over time, it expects an increasing amount of its revenues to be
derived from sales of its products and royalties from corporate collaborations.
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, trends in financial or operational
performance, 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
regard to Year 2000 issues and other forward-looking statements. In addition,
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, 1998 previously filed with the Securities and
Exchange Commission. The Company disclaims any intent or obligation to update
these forward-looking statements.
RESULTS OF OPERATIONS
THE QUARTER AND NINE MONTHS IN REVIEW
The Company reported a net loss of $3.2 million ($0.24) per share on revenue of
$4.2 million for its third quarter ended December 31, 1998. This compares with a
net loss of $3 million ($0.20 per share) on revenue of $3.3 million during the
same period last year. For the nine months ended December 31, 1998, the Company
reported a net loss of $9.6 million ($0.72 per share) on revenue of $11 million
as compared to a net loss of $9 million ($0.60 per share) on revenue of $10.2
million for the same prior year period.
10
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
During the current quarter, revenue increased by 29% over the prior year's
quarter. This is attributable to higher royalties on sales of products by
corporate collaborators, particularly Roche Diagnostics ("Roche"), whose Elecsys
series of immunodiagnostic products are based on IGEN's proprietary ORIGEN(R)
technology. Revenues for the current quarter are also 35% higher than the
immediately preceeding quarter ended September 30, 1998 due to a combination of
increased product sales (31%) and royalty income (34%). For the nine months
ended December 31, 1998, revenue increased by $825,000 (8%) over the prior year.
This increase was due to higher royalty income ($3.5 million or 111%) which was
primarily offset by a $2 million non-recurring license fee received from Eisai
last year coupled with lower contract revenue and product sales which decreased
$347,000 (8%).
In 1992, the Company entered into a License and Technology Development 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. One of the
disputes at issue in the litigation relates to the computation of royalties to
which the Company is entitled. Royalty income recorded by the Company based on
reports provided by Roche, which the Company believes are understated, was $2.4
million and $6 million, respectively, during the quarter and nine months ended
December 31, 1998.
Product costs for the three and nine months ended December 31, 1998 decreased to
approximately 26% from 34% in the corresponding prior year periods. This
decrease is attributable to discontinued sales to Organon Teknika whose license
arrangement with the Company provided for product sales at a transfer price
equal to the Company's fully burdened manufacturing cost, with no gross margin
on such sales. Research and development expenses increased to $3.8 million for
the three months ended December 31, 1998 from $2.9 million in the prior year
while increasing to $10.2 million from $8.5 million for the nine months ended
December 31, 1998, when compared with the same prior year period. These
increases can be attributed to increased development costs from higher internal
and contract staffing levels for the ORIGEN M-SERIES system. Marketing, general
and administrative expenses increased to $3.5 million in the current quarter
from $3 million in the comparable prior year quarter while increasing to $9.9
million for the nine months ended December 31, 1998 from $9.2 million in the
same prior year period. This increase is attributable primarily to higher
professional fees from the Roche litigation.
Interest and other income (net) increased to $172,000 and $585,000 for the
quarter and nine months ended December 31, 1998 compared to net interest income
of $10,000 and net interest expense of $63,000, respectively, in the
corresponding prior year periods. This change was due to an increase in interest
income from a higher balance of short term investments coupled with a decrease
in interest expense on the interest bearing royalty advance from Roche which was
extinguished during the quarter ended September 30, 1998.
Results of operations over the next several years are likely to fluctuate
substantially from quarter to quarter as a result of differences in the timing
of revenues earned under license and product development agreements, and
associated product development expenses.
11
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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. A primary component of this program is the installation of a new 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 (regardless of concerns about the Y2K
problem) in order to fully integrate its financial systems with its
manufacturing and distribution systems and provide for the growth of its
business. The Company plans to complete installation of the new system in
mid-1999.
Most of the Company's other information technology systems, including desktop
computers, server computer equipment and installed commercial application
software, are relatively new and have been designed with the Y2K issue in mind.
The Company has begun testing of these information technology systems that are
material to the Company's business, and anticipates that testing will be
completed in mid-1999. To the extent that these systems are found not to be Y2K
compliant, the Company believes that any material issues can be resolved by
installing commercially available upgrades.
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
these third parties to ascertain their awareness of the problem and their plans
to address the Y2K issue. Roche has indicated to us that its Elecsys products
are currently Y2K compliant or can be made Y2K compliant with a currently
available software upgrade.
12
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 hopes to have
assessed survey responses by March 31, 1999 and confirmed year 2000 readiness of
selected Suppliers by May 31, 1999. 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.
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. Although 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, 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 collaborator 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.
13
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through placements of preferred and
common stock, aggregating approximately $85 million through December 31, 1998.
In addition, the Company has received funds from collaborative research and
licensing agreements, royalty payments and sales of its ORIGEN line of products.
As of December 31, 1998, the Company had $10.4 million in cash, cash equivalents
and short term investments. Working capital was $8.3 million at December 31,
1998.
Net cash used in operating activities was $12.1 million for the nine months
ended December 31, 1998, as compared to $6.3 million for the corresponding prior
year period. This increase in net cash used was due primarily to recognition of
revenue in the current year that was previously received and recorded as
deferred revenue in the prior year. In addition, the Company has recorded
royalty income which has a receivable balance of approximately $2.2 million at
December 31, 1998, due primarily from Roche.
The Company used approximately $980,000 and $353,000 of net cash for investing
activities related to the acquisition of computer system components, laboratory
equipment, furniture and leasehold improvements during the nine months ended
December 31, 1998 and 1997, respectively. During the current fiscal year, the
Company financed approximately $200,000 of additional 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 affect on Roche sales pursuant to the Agreement or
that a negative result for the Company in the Roche litigation would have a
material adverse affect on Roche's sales, although there can be no assurance
that the litigation or its outcome would not have such an effect. On July 27,
1998, the Maryland court enjoined Roche from marketing its Elecsys products in
physician's office laboratories ("POL's"), required it to escrow all revenues
from past sales to POL's pending the outcome of the litigation, and ordered
Roche to transfer all of its current Elecsys customers that are POL's to IGEN
for ongoing supply needs. 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 terms 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.
14
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 will 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 instruments are
hindered because it needs to find a new manufacturer for its instruments.
The Company has incurred and expects to incur substantial additional research
and development expenses, manufacturing costs and marketing and distribution
expenses and costs related to the Roche litigation in the future. 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. To provide for financial flexibility and increased liquidity, the
Company has recently received two commitments for a secured debt financing of up
to $30 million. Funding is subject to certain conditions and the Company
anticipates that it will complete this financing prior to the end of the current
fiscal year. Additional equity or debt financing may be obtained, 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.
15
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The information required under this item is incorporated
herein by reference to Part I, Item 1 - Notes to Financial
Statements.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
11.1 Statements regarding computation of per share earnings
for the three and nine months ended December 31, 1998
and 1997.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
16
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
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: FEBRUARY 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)
17
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
- ----------------- ----------------------------- ----
<S> <C> <C>
11.1 Computation of per share data 13
</TABLE>
18
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
----------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 15,322 15,157 15,306 15,082
----------- ------------- ------------- ---------------
Net loss $ (3,242) $ (3,039) $ (9,562) $ (8,996)
Plus accrued Series B convertible preferred stock dividend (493) - (1,465) -
----------- ------------- ------------- ---------------
Loss attributable to common shareholders $ (3,735) $ (3,039) $ (11,027) $ (8,996)
----------- ------------- ------------- ---------------
----------- ------------- ------------- ---------------
Loss per share - basic and diluted $ (0.24) $ (0.20) $ (0.72) $ (0.60)
----------- ------------- ------------- ---------------
----------- ------------- ------------- ---------------
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,350
<SECURITIES> 9,050
<RECEIVABLES> 3,614
<ALLOWANCES> (32)
<INVENTORY> 1,425
<CURRENT-ASSETS> 16,239
<PP&E> 8,304
<DEPRECIATION> (5,002)
<TOTAL-ASSETS> 19,926
<CURRENT-LIABILITIES> 7,970
<BONDS> 0
0
1
<COMMON> 15
<OTHER-SE> 9,680
<TOTAL-LIABILITY-AND-EQUITY> 19,926
<SALES> 3,774
<TOTAL-REVENUES> 10,983
<CGS> 977
<TOTAL-COSTS> 21,130
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (585)<F1>
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,562)
<EPS-PRIMARY> (0.72)<F2>
<EPS-DILUTED> (0.72)<F2>
<FN>
<F1>Interest and other income - net
<F2>Includes Series B convertible preferred stock dividend of $1.5 million
</FN>
</TABLE>
