<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 DECEMBER 31, 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 (IRS Employer
of incorporation or organization) Identification No.)
16020 INDUSTRIAL DRIVE, GAITHERSBURG, MD 20877
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(Address of principal executive offices) (Zip Code)
301-869-9800
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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.
CLASS OUTSTANDING AT FEBRUARY 4, 2000
----- -------------------------------
Common Stock, $0.001 par value 15,458,100
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
- ------------------------------
Item 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets - December 31, 1999 and March 31, 1999 3
Consolidated Statements of Operations - For the three and nine months ended
December 31, 1999 and 1998 4
Consolidated Statements of Cash Flows - For the nine months ended
December 31, 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 16
PART II OTHER INFORMATION
- --------------------------
Item 1: LEGAL PROCEEDINGS 17
Item 6: EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
</TABLE>
2
<PAGE>
IGEN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 31, 1999
----------------- --------------
ASSETS (Unaudited)
- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,974 $ 720
Short term investments 12,006 33,654
Accounts receivable, net 5,247 3,252
Inventory 2,646 1,455
Other current assets 1,294 775
---------- ----------
Total current assets 23,167 39,856
---------- ----------
EQUIPMENT, FURNITURE, AND IMPROVEMENTS 11,833 9,025
Accumulated depreciation and amortization (6,294) (5,397)
---------- ----------
Equipment, furniture, and improvements, net 5,539 3,628
---------- ----------
NONCURRENT ASSETS:
Deferred debt issuance costs 1,257 1,361
Restricted cash 1,200 600
Other 348 378
---------- ----------
Total noncurrent assets 2,805 2,339
---------- ----------
TOTAL $ 31,511 $ 45,823
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 7,090 $ 4,924
Deferred revenue 1,947 2,488
Obligations under capital leases 83 117
---------- ----------
Total current liabilities 9,120 7,529
---------- ----------
NONCURRENT LIABLITIES:
Note payable 30,000 30,000
Convertible preferred stock dividend payable 4,094 2,521
Obligations under capital leases 122 183
---------- ----------
Total noncurrent liabilities 34,216 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: 15,408,900 and
15,361,400 shares issued and outstanding 15 15
Additional paid-in capital 86,342 87,413
Accumulated deficit (98,183) (81,839)
---------- ----------
Total stockholders' equity (11,825) 5,590
---------- ----------
TOTAL $ 31,511 $ 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---- ---- ---- ----
REVENUE:
<S> <C> <C> <C> <C>
Royalty income $ 3,204 $ 2,561 $ 8,821 $ 6,699
Product sales 2,363 1,427 5,041 3,774
License fees and contract revenue 150 205 600 510
--------------- --------------- ------------- -------------
5,717 4,193 14,462 10,983
--------------- --------------- ------------- -------------
OPERATING COSTS AND EXPENSES:
Product costs 666 358 1,524 977
Research and development 4,763 3,798 13,112 10,234
Marketing, general and administrative 5,601 3,451 14,855 9,919
--------------- --------------- ------------- -------------
11,030 7,607 29,491 21,130
--------------- --------------- ------------- -------------
LOSS FROM OPERATIONS (5,313) (3,414) (15,029) (10,147)
INTEREST (EXPENSE) INCOME - NET (469) 172 (1,314) 585
--------------- ---------------- ------------- -------------
NET LOSS $ (5,782) $ (3,242) $ (16,343) $ (9,562)
=============== =============== ============= =============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.41) $ (0.24) $ (1.16) $ (0.72)
=============== =============== ============= =============
SHARES USED IN COMPUTING NET LOSS
PER SHARE 15,406 15,322 15,387 15,306
=============== =============== ============= =============
</TABLE>
See notes to financial statements.
4
<PAGE>
IGEN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
1999 1998
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(16,343) $ (9,562)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,291 891
Deferred revenue (541) (1,453)
Add (deduct) items not affecting cash:
Increase in accounts receivable (1,995) (2,030)
(Increase) decrease in inventory (1,191) 10
(Increase) decrease in other current assets (519) 32
Increase in accounts payable and accrued expenses 2,166 20
Decrease in other noncurrent assets 134 25
---------- ---------
Net cash used in operating activities
(16,998) (12,067)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for equipment, furniture and improvements (3,203) (980)
Purchase of short-term investments (12,793) (14,759)
Sale of short-term investments 34,441 27,329
---------- ---------
Net cash provided by investing activities 18,445 11,590
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash (600) --
Issuance of common stock - net 502 403
Principal payments under capital lease obligations (95) (78)
Net cash (used in) provided by financing activities ---------- ---------
(193) 325
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,254 (152)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 720 1,502
---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,974 $ 1,350
========== ==========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
DURING THE NINE MONTHS ENDED DECEMBER 31, 1999 THE COMPANY ACCRUED UNPAID
PREFERRED STOCK DIVIDENDS OF APPROXIMATELY $1.6 MILLION. DURING THE NINE
MONTHS ENDED DECEMBER 31, 1998, THE COMPANY ACCRUED UNPAID PREFERRED STOCK
DIVIDENDS AND CAPITAL LEASE OBLIGATIONS OF APPROXIMATELY $1.5 MILLION AND
$200,000, RESPECTIVELY.
See notes to financial statements.
5
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 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 December 31, 1999 and the Company's results of operations for the
three and nine month periods ended December 31, 1999 and 1998 and cash flows for
the same nine 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 $1.2 million at
December 31, 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 DECEMBER 31, 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>
DECEMBER 31, 1999 MARCH 31, 1999
----------------- --------------
<S> <C> <C>
Finished goods $ 891 $ 461
Work in process 891 137
Raw materials 864 857
------------------- ---------------
Total $ 2,646 $ 1,455
=================== ===============
</TABLE>
PROPERTY - Equipment, furniture and improvements are carried at cost.
Depreciation is computed over the estimated useful lives of the assets,
generally three to 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 December 31, 1999 and 1998
follow (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
-------------- --------------- -------------- ----------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding 15,406 15,322 15,387 15,306
------------ ------------ ------------ -----------
Net loss $ (5,782) $ (3,242) $ (16,343) $ (9,562)
Plus accrued Series B convertible
preferred stock dividend (527) (493) (1,573) (1,465)
--------------- ------------- --------------- -----------
Loss attributable to common shareholders $ (6,309) $ (3,735) $ (17,916) $ (11,027)
============ ============= ============ ============
Loss per share - basic and diluted $ (0.41) $ (0.24) (1.16) (0.72)
============= ================ ============== ============
</TABLE>
7
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 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 December 31, 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 $1.2
million at December 31, 1999. 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 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.
8
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
Costs associated with obtaining the debt financing totaling $1.4 million were
deferred and are presented as a noncurrent asset on the balance sheet. These
costs are being 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 (formerly Boehringer Mannheim GmbH). The lawsuit against Roche
is pending in the Southern Division of the United States District Court for the
District of Maryland. The lawsuit arises out of a 1992 License and Technology
Development Agreement (the "Agreement"), under which the Company has licensed
certain rights to develop and commercialize diagnostic products based on the
Company's ORIGEN -Registered Trademark- technology. In its lawsuit, 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 Court issued a preliminary injunction enjoining Roche from
marketing, selling, or distributing its Elecsys products to physicians' offices
and physicians' office laboratories, which are outside of Roche's licensed field
of use. The Court also ordered Roche to refer all physicians' offices and
physicians' office laboratory customers to the Company for future reagent supply
needs and to place all revenues derived from these unauthorized sales in escrow
pending the outcome of the litigation. Roche's appeal of the preliminary
injunction was denied in December 1999.
Roche has filed a counterclaim against the Company. Most of Roche's allegations
relate to the relationship between the Company and its Japanese licensee, Eisai,
Co., Ltd. In particular, Roche alleges that the Company breached the Agreement
by permitting Eisai to market certain ORIGEN based products in Japan.
9
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
The Company 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.
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 notified the
Company that it does not intend to collect this retroactive amount 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, and 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 the Company, 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 the Company. Recently, F. Hoffman
LaRoche, Ltd., a member of the Roche family of companies, acquired the patent
from Serono and continues in Serono's place to assert the infringement claim.
The Company does not believe it infringes the patent and intends to continue to
vigorously defend against the claim.
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 the Company'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 also
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 DECEMBER 31, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
5. Subsequent Event
During January 2000, the Company completed a private placement of $35 million
principal amount of 5% Subordinated Convertible Debentures due 2005. The
Debentures are convertible into the Company's common stock at $31 per share,
which represented a 10% premium on the trailing average closing prices for a 25
trading day period prior to the pricing of the financing. As part of this
financing the Company also issued warrants to purchase 282,258 shares of its
common stock at the conversion price. Interest on the debentures is due
semi-annually on January 15 and July 15 and may be paid in cash or an equivalent
value of the Company's common stock at the Company's option. The Debentures are
redeemable in whole, or in part, at the option of the Company at any time after
January 11, 2003 at a price equal to the principal, plus accrued and unpaid
interest (if any) to the redemption date.
11
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company has devoted substantial resources to the research and development of
its proprietary technologies, primarily the ORIGEN -Registered Trademark-
technology for the clinical diagnostic and life science markets. The Company
currently derives most of its revenue from royalties that it receives from its
corporate collaborators that develop and market certain ORIGEN-based systems.
The Company also generates sales of its own products, particularly the
M-SERIES-TM- Systems and related consumable reagents, which commenced shipping
in August 1999. The Company may also 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 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 NINE MONTHS IN REVIEW
The Company reported a 36% increase in total revenues to $5.7 million for the
quarter ended December 31, 1999, compared to $4.2 million for the same period
last year. For the nine months ended December 31, 1999, total revenues increased
32% to $14.5 million compared to $11 million in the prior year. The Company
reported a net loss of $5.8 million ($0.41 per share) for the current quarter
compared with a net loss of $3.2 million ($0.24 per share) last year. For the
nine months ended December 31, 1999, the net loss was $16.3 million ($1.16 per
share) compared to a net loss of $9.6 million ($0.72 per share) for the same
prior year period.
12
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Revenue for the quarter ended December 31, 1999 included $2.4 million of product
sales, an increase of 66% over the prior year. For the nine months ended
December 31, 1999, product sales increased to $5 million from $3.8 million in
the prior year. These increases are attributable to revenues derived from the
Company's M-SERIES Systems and related consumable reagents.
Royalty revenue for the current quarter increased by 25% over the prior year to
$3.2 million despite the continuation of a new deduction from royalties reported
by Roche Diagnostics which began during the quarter ended September 30, 1999, as
discussed below. For the nine months ended December 31, 1999, royalty revenue
increased 32% to $8.8 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, which is based on reports provided by Roche, was $7.9 million
and $6 million, respectively, for the nine months ended December 31, 1999 and
1998 and $2.9 million and $2.6 million, respectively, for the three months ended
December 31, 1999 and 1998.
During the quarter ended September 30, 1999, the Company 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. 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 notified the Company that it does not intend
to collect this retroactive amount pending ongoing settlement discussions
between the Company and Roche. The Company believes the deduction and its
retroactive application are not accordance with the Agreement and that it has
meritorious defenses, and the Company intends to vigorously oppose these claims.
Product costs as a percentage of product sales increased to 28% and 30%,
respectively, for the quarter and nine months ended December 31, 1999 compared
to 25% and 26%, respectively, for the quarter and nine months ended December 31,
1998. These increases were the result of higher product costs associated with
the new M-SERIES System and related consumable reagents, which commenced
shipping in August, 1999.
13
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Research and development expenses increased to $4.8 million and $13.1 million,
respectively, for the quarter and nine months ended December 31, 1999, from $3.8
million and $10.2 million, respectively, for the same prior year periods. These
increases were due primarily to additional costs for new personnel as part of
the Company's expanding work in assay development and to higher development
costs associated with the M-SERIES family of products. Marketing, general and
administrative expenses increased to $5.6 million and $14.9 million,
respectively, for the quarter and first nine months of the current year, from
$3.5 million and $9.9 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.
Net interest expense increased to $469,000 and $1.3 million, respectively, for
the quarter and nine months of the current year compared to net interest income
of $172,000 and $585,000 for 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 factors, which include the volume and timing
of orders for M-SERIES or other products; the timing of instrument deliveries
and installations; variations in revenue recognized from royalties and other
contract revenues; the mix of products sold; whether instruments are sold to or
placed with customers; the timing of the introduction of new products;
competitors' introduction of new products; variations in expenses incurred in
connection with the operation of the business, including legal fees, research
and development costs and sales and marketing costs; manufacturing capabilities;
and the volume and timing of product returns and warranty claims.
The Company has experienced significant operating losses each year since
inception and expects those losses to continue. Losses have resulted principally
from costs incurred in research and development and from litigation costs,
selling costs and other general and administrative costs.
The Company expects to incur additional operating losses as a result of
increases in expenses for manufacturing, marketing and sales capabilities,
research and product development and general and administrative costs. The
Company's ability to become profitable in the future will depend, among other
things, on its ability to expand the commercialization of existing products;
introduce new products into the market; develop marketing capabilities
cost-effectively, and develop sales and distribution capabilities
cost-effectively.
14
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
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 the sale of Preferred and Common
Stock, aggregating approximately $85 million through December 31, 1999. In March
1999, the Company completed a $30 million debt financing with John Hancock Life
Insurance Company, and in January 2000 the Company completed a private placement
of $35 million principal amount of convertible debentures.
As of December 31, 1999, the Company had $14 million in cash, cash equivalents
and short term investments (excluding proceeds from the convertible debentures
issued in January 2000). Working capital was $14 million at December 31, 1999.
Including net proceeds at the time the convertible debentures were issued in
January 2000, as of December 31, 1999 the Company would have had $47 million in
cash, cash equivalents and short-term investments and working capital of $47
million.
Net cash used in operating activities was $17 million for the nine months ended
December 31, 1999, as compared to $12.1 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.
The Company used approximately $3.2 million and $1 million of net cash for
investing activities (excluding 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 nine
months ended December 31, 1999 and 1998, respectively. 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
15
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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, if at all.
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.
The Company has a substantial amount of indebtedness, and there is a possibility
that it may be unable to generate cash or arrange financing sufficient to pay
the principal of, interest on and other amounts due with respect to indebtedness
when due, or in the event any of it is accelerated. In addition, substantial
leverage may require that the Company dedicate a substantial portion of its
expected cash flow from operations to service indebtedness, which would reduce
the amount of expected cash flow available for other purposes, including working
capital and capital expenditures.
The Company needs substantial amounts of money to fund operations. Access to
funds could be negatively impacted by many factors, including the results of
pending litigation, the volatility of the price of the Company's common stock,
continued losses from operations and other factors.
The Company may need to raise substantial amounts of money to fund a variety of
future activities integral to the development of its business. The Company may
try to raise necessary additional capital by issuing additional debt or equity
securities. If the Company is unable to raise additional capital, it may have to
scale back, or even eliminate, some programs. Alternatively, it may have to
consider pursing arrangements with other companies, such as granting licenses or
entering into joint ventures.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about market risks for the three and nine months ended December 31,
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.
16
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 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 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K:
On January 12, 2000, the Registrant filed under Item 5, "Other Events", a report
with regard to the sale of $35 million in aggregate principal amount of 5%
Subordinated Convertible Debentures due 2005 and warrants to purchase up to
282,258 shares of the Company's common stock.
On January 27, 2000, the Registrant filed under Item 5 "Other Events," a report
with regard to the U.S. Court of Appeals for the Fourth Circuit's affirming a
preliminary injunction that the U.S. District Court of the District of Maryland
had issued against Roche Diagnostics, GmbH, the diagnostics unit of F. Hoffman
La Roche.
17
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 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: FEBRUARY 14, 2000 /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)
18
<PAGE>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
27 Financial Data Schedule
19
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<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Consolidated
Balance Sheets 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-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,174<F1>
<SECURITIES> 12,006
<RECEIVABLES> 5,271
<ALLOWANCES> 24
<INVENTORY> 2,646
<CURRENT-ASSETS> 23,167
<PP&E> 11,833
<DEPRECIATION> 6,294
<TOTAL-ASSETS> 31,511
<CURRENT-LIABILITIES> 9,120
<BONDS> 0
0
1
<COMMON> 15
<OTHER-SE> (11,841)
<TOTAL-LIABILITY-AND-EQUITY> 31,511
<SALES> 5,041
<TOTAL-REVENUES> 14,462
<CGS> 1,524
<TOTAL-COSTS> 29,491
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,314<F2>
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,343)
<EPS-BASIC> $(1.16)
<EPS-DILUTED> $(1.16)
<FN>
<F1>includes $1,200 of restricted cash
<F2>net of interest income, $857
</FN>
</TABLE>
