<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 JUNE 30, 1999
-------------
Commission File Number 0-23252
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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.
<TABLE>
<CAPTION>
Class Outstanding at August 5, 1999
----- -----------------------------
<S> <C>
Common Stock, $0.001 par value 15,375,048
</TABLE>
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
Balance Sheets - June 30, 1999 and March 31, 1999 3
Statements of Operations - For the three months ended
June 30, 1999 and 1998 4
Statements of Cash Flows - For the three months ended
June 30, 1999 and 1998 5
Notes to Financial Statements 6
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
Item 3: QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 16
PART II OTHER INFORMATION
Item 1: LEGAL PROCEEDING 16
Item 6: EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
</TABLE>
2
<PAGE>
IGEN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, 1999 March 31, 1999
------------- --------------
ASSETS (Unaudited)
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 558 $ 720
Short term investments 27,753 33,654
Accounts receivable, net 3,422 3,252
Inventory 2,198 1,455
Other current assets 1,125 775
-------- --------
Total current assets 35,056 39,856
-------- --------
EQUIPMENT, FURNITURE, AND IMPROVEMENTS 9,544 9,025
Accumulated depreciation and amortization (5,722) (5,397)
-------- --------
Equipment, furniture, and improvements, net 3,822 3,628
-------- --------
NONCURRENT ASSETS:
Deferred debt issuance costs 1,188 1,361
Restricted cash 800 600
Other 372 378
-------- --------
Total noncurrent assets 2,360 2,339
-------- --------
TOTAL $ 41,238 $ 45,823
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 5,565 $ 4,924
Deferred revenue 2,312 2,488
Obligations under capital leases 114 117
-------- --------
Total current liabilities 7,991 7,529
-------- --------
NONCURRENT LIABLITIES:
Note payable 30,000 30,000
Convertible preferred stock dividend payable 3,042 2,521
Obligations under capital leases 158 183
-------- --------
Total noncurrent liabilities 33,200 32,704
-------- --------
COMMITMENTS AND CONTINGENCIES -- --
-------- --------
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: 15,370,300 and
15,361,425 shares issued and outstanding 15 15
Additional paid-in capital 86,943 87,413
Accumulated deficit (86,912) (81,839)
-------- --------
Total stockholders' equity 47 5,590
-------- --------
TOTAL $ 41,238 $ 45,823
-------- --------
-------- --------
</TABLE>
See notes to financial statements.
3
<PAGE>
IGEN INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
--------------- -------------
<S> <C> <C>
REVENUES:
Royalty income $ 3,045 $ 2,226
Product sales 727 1,256
License fees and contract revenue 150 205
--------------- -------------
3,922 3,687
--------------- -------------
OPERATING COSTS AND EXPENSES:
Product costs 175 301
Research and development 4,021 3,023
Marketing, general and administrative 4,352 3,418
--------------- -------------
8,548 6,742
--------------- -------------
LOSS FROM OPERATIONS (4,626) (3,055)
INTEREST (EXPENSE) INCOME - NET (447) 150
--------------- -------------
NET LOSS $ (5,073) $ (2,905)
--------------- -------------
--------------- -------------
BASIC AND DILUTED LOSS PER SHARE $ (0.36) $ (0.22)
--------------- -------------
--------------- -------------
SHARES USED IN COMPUTING NET LOSS
PER SHARE 15,366 15,294
--------------- -------------
--------------- -------------
LOSS PER SHARE
Basic and diluted per common share $ (0.36) $ (0.22)
--------------- -------------
--------------- -------------
</TABLE>
See notes to financial statements.
4
<PAGE>
IGEN INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
--------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,073) $(2,905)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 497 272
Deferred revenue (176) (1,411)
Add (deduct) items not affecting cash:
Increase in accounts receivable (170) (467)
Increase in inventory (743) (96)
(Increase) decrease in other current assets (349) 12
Increase in accounts payable and accrued expenses 641 72
Decrease in other noncurrent assets 6 7
-------- -------
Net cash used in operating activities (5,367) (4,516)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for equipment, furniture and improvements (518) (323)
Purchase of short-term investments (8,455) (8,506)
Sale of short-term investments 14,356 12,787
-------- -------
Net cash provided by investing activities 5,383 3,958
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash (200) --
Issuance of common stock - net 50 291
Principal payments under capital lease obligations (28) (23)
-------- -------
Net cash (used in) provided by financing activities (178) 268
-------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (162) (290)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 720 1,502
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 558 $ 1,212
-------- -------
-------- -------
</TABLE>
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
During the quarter ended June 30, 1999 the company accrued unpaid
preferred stock dividends of approximately $520,000, but did not
incur any capital lease obligations. During the quarter ended June 30,
1998, the company accrued unpaid preferred stock dividends and
capital lease obligations of approximately $494,000 and $200,000,
respectively.
See notes to financial statements.
5
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
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 June 30, 1999 and the Company's results of operations and cash flows
for the three month periods ended June 30, 1999 and 1998. 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 $800,000 at June 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 JUNE 30, 1999
NOTES TO 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>
June 30, 1999 March 31, 1999
------------- --------------
<S> <C> <C>
Finished goods $ 460 $ 461
Work in process 1,180 137
Raw materials 558 857
----------- -----------
Total $ 2,198 $ 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 - Effective December 31, 1997, the Company adopted Statement of
Financial Accounting Standard No. 128 "Earnings per Share" ("SFAS 128"). There
was no change in loss per share reported in periods prior to the adoption of
SFAS 128. Loss per share computations at June 30, 1999 and 1998 follow:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
----------- ------------
<S> <C> <C>
Weighted average number of common shares outstanding 15,366 15,294
----------- ------------
Net loss $ (5,073) $ (2,905)
Plus accrued Series B convertible preferred stock dividend (520) (494)
----------- ------------
Loss attributable to common shareholders $ (5,593) $ (3,399)
----------- ------------
----------- ------------
Loss per share - basic and diluted $ (0.36) $ (0.22)
----------- ------------
----------- ------------
</TABLE>
Under SFAS 128, 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 June
30, 1999 have been recorded as a long-term liability in the accompanying
financial statements.
7
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
2. Summary of Significant Accounting Policies (continued)
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, 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. Note Payable
In March 1999, the Company entered into a debt financing with John Hancock
Mutual Life Insurance Company under a Note Purchase Agreement 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. In 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 $800,000.
The Restricted Cash will have increasing increments for each of the first six
quarterly Note Payable Dates 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 totalling $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.
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
8
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
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 1992 Agreement granted
Roche rights to develop and commercialize diagnostic systems based on the
Company's ORIGEN technology for use in centralized hospital laboratories and
clinical reference laboratories 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.
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 this
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.
This litigation against Roche may have a material adverse effect upon the
Company regardless of whether the outcome is favorable or not.
9
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
NOTES TO 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.
10
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 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. Going forward,
the Company expects an increasing amount of its revenue to be derived 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 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 in the future, 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 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 update these forward-looking statements.
RESULTS OF OPERATIONS
THE QUARTER IN REVIEW
The Company reported a net loss of $5.1 million ($0.36 per share) on revenues of
$3.9 million for the first quarter ended June 30, 1999. This compares to a net
loss of $2.9 million ($0.22 per share) on revenues of $3.7 million for the same
period last year. The increase in revenue during the current quarter is
attributable to royalty income increasing 37% to $3 million from $2.2 million in
the prior year based on higher sales of product by corporate collaborators,
particularly Roche Diagnostics. This increase was partially offset by a decrease
in direct product sales by the Company to $727,000 from $1.3 million, as the
Company began shifting
11
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
its focus to the launch of the new M-SERIES-TM- High Throughput Screening
System. In August 1999, the Company commenced shipment of the production model
of its M-SERIES High Throughput Screening System.
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 is based
on reports provided by Roche which was $2.9 million and $1.9 million,
respectively, for the quarters ended June 30, 1999 and 1998.
Product costs as a percentage of product sales remained constant at 24% during
the current quarter and the corresponding prior year quarter. Research and
development expenses increased to $4 million during the current quarter from $3
million in the same prior year quarter due to higher personnel and development
expenses associated with the M-SERIES High Throughput Screening System. Sales,
marketing and administrative expenses increased to $4.4 million in the current
quarter from $3.4 million last year. This increase is due primarily to costs
associated with the Company's launch of the M-SERIES system and higher
professional and legal fees associated with the Roche litigation.
Net interest expense increased to $447,000 for the quarter ended June 30, 1999
compared to $150,000 of net interest income in the corresponding prior year
period. This was due 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 over the next several years is likely to fluctuate
substantially from quarter to quarter as a result of differences in the
timing of revenues earned from product sales, license and product development
agreements, associated costs and expenses as well as the costs associated
with the launch of the M-Series High Throughput Screening System.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through the sale of Preferred and
Common Stock, aggregating approximately $85 million through June 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
12
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
ORIGEN line of products. As of June 30, 1999, the Company had $28.3 million in
cash, cash equivalents and short term investments. Working capital was $27.1
million at June 30, 1999.
Net cash used in operating activities was $5.4 million for the three months
ended June 30, 1999, as compared to $4.5 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 quarter.
The Company used approximately $518,000 and $323,000 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 three months ended
June 30, 1999 and 1998, respectively. During the quarter ended June 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.
13
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 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 as well as 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. 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 distibution installations are planned for
completion during the fourth calendar quarter of 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 completed testing of these information technology systems that
are material to the Company's business. To the extent that these systems were
not found 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.
14
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 us 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 June 1999 and confirmed Y2K readiness of selected
Suppliers. Additional open responses continue to be monitored and the Company
hopes to have confirmed Year 2000 readiness by September 30, 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. 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.
15
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about market risks for the three months ending June 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.
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 months ended
June 30, 1999 and 1998.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
16
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 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: August 13, 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 JUNE 30, 1999
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
11.1 Computation of per share data
27. Financial Data Schedule
</TABLE>
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
-------- --------
<S> <C> <C>
Weighted average number of common shares outstanding 15,366 15,294
-------- --------
Net loss $ (5,073) $ (2,905)
Plus accrued Series B convertible preferred stock dividend (520) (494)
-------- --------
Loss attributable to common shareholders $ (5,593) $ (3,399)
-------- --------
-------- --------
Loss per share - basic and diluted $ (0.36) $ (0.22)
-------- --------
-------- --------
</TABLE>
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1999 UNAUDITED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,358<F1>
<SECURITIES> 27,753
<RECEIVABLES> 3,468
<ALLOWANCES> 46
<INVENTORY> 2,198
<CURRENT-ASSETS> 35,056
<PP&E> 9,544
<DEPRECIATION> 5,722
<TOTAL-ASSETS> 41,238
<CURRENT-LIABILITIES> 7,991
<BONDS> 0
0
1
<COMMON> 15
<OTHER-SE> 31
<TOTAL-LIABILITY-AND-EQUITY> 41,238
<SALES> 727
<TOTAL-REVENUES> 3,922
<CGS> 175
<TOTAL-COSTS> 8,548
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 447<F2>
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,073)
<EPS-BASIC> (0.36)
<EPS-DILUTED> (0.36)
<FN>
<F1>INCLUDES $800 OF RESTRICTED CASH CLASSIFIED AS A NONCURRENT ASSET
<F2>NET OF $320 INTEREST INCOME
</FN>
</TABLE>
