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, 2000
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Commission File Number 0-23252
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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)
301-869-9800
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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
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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 July 24, 2000
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Common Stock, $0.001 par value 15,802,865
1
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
PAGE
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PART I FINANCIAL INFORMATION
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Item 1: FINANCIAL STATEMENTS
Balance Sheets - June 30, 2000 and March 31, 2000 3
Statements of Operations - For the three months ended
June 30, 2000 and 1999 4
Statements of Cash Flows - For the three months ended
June 30, 2000 and 1999 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 15
PART II OTHER INFORMATION
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Item 1: LEGAL PROCEEDING 16
Item 6: EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
2
IGEN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, 2000 March 31, 2000
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ASSETS (Unaudited)
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CURRENT ASSETS:
Cash and cash equivalents $ 6,674 $ 3,172
Short term investments 24,983 35,314
Accounts receivable, net 7,326 5,678
Inventory 4,692 3,063
Other current assets 1,209 1,311
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Total current assets 44,884 48,538
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EQUIPMENT, FURNITURE AND IMPROVEMENTS 14,287 13,181
Accumulated depreciation and amortization (7,463) (6,773)
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equipment, furniture and improvements, net 6,824 6,408
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NONCURRENT ASSETS:
Deferred debt issuance costs 1,039 1,108
Restricted cash 1,600 1,400
Other 338 344
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Total noncurrent assets 2,977 2,852
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TOTAL $ 54,685 $ 57,798
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
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CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 8,588 $ 6,838
Note payable 3,321 2,168
Deferred revenue 1,512 1,792
Obligations under capital leases 60 74
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Total current liabilities 13,481 10,872
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NONCURRENT LIABLITIES:
Note payable 26,679 27,832
Subordinated convertible debt 26,877 26,415
Convertible preferred stock dividend payable 4,921 4,380
Obligations under capital leases 95 107
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Total noncurrent liabilities 58,572 58,734
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STOCKHOLDERS' DEFICIT:
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 designated, 23,465 shares issued and outstanding -
liquidation value of $23,465 plus accrued and unpaid dividends 1 1
Common stock: $.001 par value, 50,000,000 shares authorized: 15,600,500 and
15,577,600 shares issued and outstanding 15 15
Additional paid-in capital 101,991 102,420
Accumulated deficit (119,375) (114,244)
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Total stockholders' deficit (17,368) (11,808)
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TOTAL $ 54,685 $ 57,798
========= =========
See notes to financial statements.
3
IGEN INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
THREE MONTHS ENDED
JUNE 30,
2000 1999
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REVENUES:
Royalty income $ 3,860 $ 3,045
Product sales 1,964 727
Contract fees 1,750 150
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7,574 3,922
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OPERATING COSTS AND EXPENSES:
Product costs 594 175
Research and development 5,755 4,021
Marketing, general and administrative 5,238 4,352
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11,587 8,548
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LOSS FROM OPERATIONS (4,013) (4,626)
INTEREST (EXPENSE) INCOME - NET (1,118) (447)
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NET LOSS (5,131) (5,073)
PREFERRED DIVIDENDS (542) (520)
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NET LOSS ATTRIBUTED TO COMMON SHAREHOLDERS
$ (5,673) $ (5,593)
======== ========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.36) $ (0.36)
======== ========
SHARES USED IN COMPUTING NET LOSS
PER SHARE 15,589 15,366
======== ========
See notes to financial statements.
4
IGEN INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
THREE MONTHS ENDED
JUNE 30,
2000 1999
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OPERATING ACTIVITIES:
Net loss $ (5,131) $ (5,073)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,221 497
Deferred revenue (280) (176)
Add (deduct) items not affecting cash:
Increase in accounts receivable (1,648) (170)
Increase in inventory (1,629) (743)
Decrease (increase) in other current assets 102 (349)
Increase in accounts payable and accrued expenses 1,750 641
Decrease in other noncurrent assets 6 6
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Net cash used for operating activities (5,609) (5,367)
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INVESTING ACTIVITIES:
Expenditures for equipment, furniture and improvements (1,106) (518)
Purchase of short-term investments (4,871) (8,455)
Sale of short-term investments 15,202 14,356
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Net cash provided by investing activities 9,225 5,383
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FINANCING ACTIVITIES:
Restricted cash (200) (200)
Issuance of common stock - net 112 50
Principal payments under capital lease obligations (26) (28)
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Net cash used for financing activities (114) (178)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,502 (162)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,172 720
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,674 $ 558
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
DURING THE QUARTERS ENDED JUNE 30, 2000 AND 1999, THE COMPANY ACCRUED
UNPAID PREFERRED STOCK DIVIDENDS OF APPROXIMATELY $542,000 AND
$520,000, RESPECTIVELY.
See notes to financial statements.
5
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
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, 2000 and the Company's results of operations and cash flows
for the three month periods ended June 30, 2000 and 1999. 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, 2000 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, 2000.
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 cost that approximates market value.
RESTRICTED CASH - The Company has a debt service reserve of $1.6 million at June
30, 2000 that is restricted in use (see Note 3). These funds are held in trust
as collateral with increasing increments to a maximum of $1.7 million.
CONCENTRATION OF CREDIT RISK - 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
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
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):
June 30, 2000 March 31, 2000
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Finished goods $1,772 $1,041
Work in process 1,539 1,074
Raw materials 1,381 948
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Total $4,692 $3,063
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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, except for leasehold improvements, which are
amortized on a straight-line basis over the life of the lease.
REVENUE RECOGNITION - Product sales revenue is recorded as products are shipped.
Nonrefundable license fees, milestone payments and service fees 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 - The Company uses Statement of Financial Accounting Standard No.
128 "Earnings per Share" ("SFAS 128") for the calculation of basic and diluted
earnings per share. The Company's loss has been adjusted by dividends
accumulated on the Company's Series B Convertible Preferred Stock to compute
basic and diluted loss per share.
NEW ACCOUNTING STANDARDS - 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 Company's financial statements. The Company does not
believe that adoption of SFAS No. 133 will have a material impact on its
financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS (SAB No. 101). SAB
No. 101 is effective for the Company for the period ending March 31, 2001 and
provides the SEC's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company is in the process of
evaluating the effects of implementing SAB No. 101.
7
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
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 Company's license agreement with
Roche Diagnostics GmbH (Roche). Additional collateral is represented by a
Restricted Cash account which has a balance of $1.6 million as of June 30, 2000
and will increase to a maximum of $1.7 million in the quarter ending September
30, 2000. Covenants within the Note include compliance with annual and quarterly
Royalty Payment Coverage Ratios which are tied to royalty payments and debt
service.
4. SUBORDINATED CONVERTIBLE DEBENTURES
In January 2000, the Company completed a placement of $35 million principal
amount of Subordinated Convertible Debentures. The 5% debentures, if not
converted, mature January 2005 with semi-annual interest payments to be made in
cash or an equivalent value of common stock. The debentures are immediately
convertible into 1,129,032 shares of the Company's common stock, which
represents a $31 per share conversion price.
As part of this financing, the Company also issued detachable warrants to
purchase 282,258 shares of common stock with an exercise price of $31 per share.
Using the Black-Scholes model and the relative fair value of the warrants and
the debentures at the time of issuance, these warrants were valued at
approximately $7 million. The detachable warrant value has been recorded as a
reduction of the face value of the convertible debentures. Costs associated with
placing the debentures totaling $1.9 million, were deferred and have been netted
against the recorded convertible debenture balance. The convertible debenture
discount consisting of the warrant value and debt issuance costs is being
amortized over the five year life of the debentures.
8
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
5. 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 licensed to
Roche certain rights to develop and commercialize diagnostic products based on
the Company's ORIGEN(R) 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 and payment 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 and in May 2000, the Company and Roche
signed an agreement under which Roche transferred to the Company all of its
physician office laboratory customers in the United States. Roche signed this
agreement to comply with the preliminary injunction issued by the Court. This
transfer involves approximately 60 diagnostic systems in U.S. physicians'
offices. In addition to these systems, the Company continues to believe that an
estimated 225 systems outside the United States fall within the scope of the
preliminary injunction and intends to pursue the disposition of those additional
systems during the course of litigation with Roche.
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
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
During fiscal 2000, 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. In 1999, 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
against the Company and Organon Teknika. 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 Eisai Company, Ltd. The lawsuit requests injunctive relief
against Hitachi.
10
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
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(R) technology for the
clinical diagnostic and life science markets. The Company currently derives most
of its revenue from royalties that it receives from licensees that develop and
market certain ORIGEN-based systems. The Company also generates sales of its own
products, particularly the M-SERIES(TM) System and related consumable reagents,
which commenced shipping in the second quarter of fiscal 2000. 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 potential market for diagnostic products,
potential impact of competitive products, the Company's expectations relating to
the level of anticipated royalty and revenue growth in the future, the potential
market for products in development, the outcome of litigation, the Company's
plans and objectives for future operations, assumptions underlying such plans
and objectives, and other forward-looking statements included in this document.
The words "may", "will", "expect", "intend", "estimate", "anticipate",
"believe", "plan" and similar expressions have been used in this document to
identify forward-looking statements. We have based these forward-looking
statements on our current views with respect to future events and financial
performance. Such statements are based on management's current expectations and
are subject to a number of 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, 2000
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
REVENUES. Total revenues for the quarter ended June 30, 2000 increased by
approximately $3.7 million or 93% to $7.6 million from $3.9 million in the same
quarter of the prior year. The revenue growth for the current quarter was due to
increases in all revenue components - royalty income, product sales and contract
fees.
Royalty income was $3.9 million in the quarter ended June 30, 2000, an increase
of 27% over the prior year's royalty income of $3 million. Royalties from Roche
represent approximately $3.7 million (95%) of the total royalty income for the
current quarter as compared to approximately $2.9 million (95%) for the prior
year's quarter. Roche launched its Elecsys product line in 1996, which is based
on IGEN's ORIGEN technology that was licensed to Roche under a 1992 license
agreement. The Company is involved in litigation with Roche
11
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
arising out of this agreement. One of the disputes in the litigation relates to
the computation of royalties to which the Company is entitled under the
agreement.
Product sales were $2 million in the current quarter, an increase of 170% over
the prior year's product sales of $727,000. This growth was led by the M-SERIES
line of instrumentation and consumable products, which commenced sales in the
second quarter of fiscal 2000. Compared to the sequentially preceding quarter
ended March 31, 2000, M-Series instrument orders have been lower, as customers
wait for hardware and software upgrades. These upgrades are necessary to correct
hardware and software problems with customer units in the field. Hardware
problems encountered have been corrected and customer's systems are being
retrofitted in the field. A software upgrade has been released for installation
at customer sites. Most hardware and software upgrades are expected to be
installed by the end of the quarter ending September 30, 2000.
Contract fees were $1.75 million in the current quarter compared to $150,000 in
the prior year. Contract fees for the quarter ended June 30, 2000 are attributed
to an agreement with Bayer Diagnostics ("Bayer"). Initially, the Company
provided Bayer with access to certain information about previously developed
ORIGEN technology for which Bayer paid the Company $ 1.75 million. The two
companies will also conduct a joint program to explore new products based on the
Company's TRICORDER diagnostic detection module and Bayer's clinical products,
for the hospital point-of-care testing market.
OPERATING COSTS AND EXPENSES. Product costs were $594,000 (30% of product sales)
for the quarter ended June 30, 2000 compared to $175,000 (24% of product sales)
for 1999. The change in product cost margins is attributable to a change in
product sales mix between instruments, services and reagents related to the
M-SERIES product launch.
Operating costs, excluding product costs, increased to $11 million in the
quarter ended June 30, 2000 compared to $8.4 million during the same quarter
in 1999. During the current quarter, research and development costs increased
$1.8 million (43%) to $5.8 million from $4 million in 1999. Of this increase,
approximately $ 1.6 million was due to higher personnel and development
expenses primarily associated with development of the M-SERIES System and
related assays; development of additional instrumentation for the M-SERIES
line of products to meet the expanding needs of the drug discovery and
development market; and approximately $ 200,000 of the increase was for
research and development expenses associated with the MesoScale Diagnostics
(MSD) joint venture. Marketing, general and administrative expenses were $5.2
million in the current quarter, an increase of $800,000 (20%) over the prior
year's total of $4.4 million. This increase was due primarily to higher
professional and legal fees associated with the Company's litigation with
Roche and higher sales and marketing costs related to the launch of the
M-SERIES System.
INTEREST AND OTHER EXPENSE. Interest expense, net of other income, increased
$671,000 during the quarter ended June 30, 2000 due to interest on higher debt
balances during the period. The Company issued $35 million of convertible
debentures in January 2000. The Company also recorded as interest, non-cash
charges
12
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
during the current quarter of approximately $450,000, principally related to
amortization of the value of the warrants issued in connection with the
convertible debentures.
NET LOSS. The net loss for both quarters ended June 30, 2000 and 1999 was $5.1
million ($0.36 per share).
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.
During fiscal 2000, 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. Roche has also claimed that the Company
owes it $2.6 million in royalties previously paid to the Company as a result of
a retroactive application of this deduction back to 1997. The Company has
notified Roche that it objects to this latest calculation which it does not
believe is in accordance with the Agreement. Roche has notified the Company that
it does not intend to collect this retroactive amount pending ongoing settlement
discussions between the Company and Roche. There can be no assurances that Roche
will not unilaterally seek to collect this claim by withholding unrelated future
royalty payments from the Company. In the event that Roche should do so, the
Company's results of operations would be adversely affected for the period or
periods in which the royalty payments are withheld.
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.
LIQUIDITY AND CAPITAL RESOURCES
Through June 30, 2000, the Company has financed its operations through the sale
of Preferred and Common Stock, aggregating approximately $85 million through
June 30, 2000; the placement of a $30 million debt financing with John Hancock
Life Insurance Company in March 1999; and a $35 million private placement of
13
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
subordinated convertible debentures in January 2000. Under the Hancock
financing, the Company is obligated to make quarterly interest only payments of
$637,500 through September 2000. Beginning in December 2000, principal and
interest installments of $1.7 million will be due quarterly through March 2006.
In addition the Company is required to maintain a restricted cash account, which
had a balance of $1.6 million as of June 30, 2000 and will increase to a maximum
of $1.7 million during the quarter ending September 30, 2000. Under the
subordinated convertible debentures, unless and until the holders of the
debentures convert their debentures into common stock, the Company will be
required to make semi-annual interest payments of $875,000, beginning July 2000.
Interest payments may be made in cash or an equivalent value of common stock. In
addition, the Company has received funds from collaborative research and
licensing agreements and sales of its ORIGEN line of products.
As of June 30, 2000, the Company had $31.7 million in cash, cash equivalents and
short term investments. Working capital was $31.4 million at June 30, 2000.
Net cash used in operating activities remained relatively constant increasing to
$5.6 million for the three months ended June 30, 2000, as compared to $5.4
million for the corresponding prior year period.
The Company used approximately $1.1 million and $518,000 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. Fiscal 2001
lease payments which the Company is obligated under capital lease agreements
approximate $96,000 (including interest) and facility and equipment operating
lease commitments approximate $1.8 million. The Company has also committed to
future capital contributions of approximately $4 million under the MSD joint
venture which until extended or renewed, would expire in November 2000.
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 expenditure
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
14
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 adversely impacted by many factors, including the results of
pending litigation, the volatility of the price of the Company's common stock,
continuing losses from operations and other factors. The Company anticipates
that existing capital resources, together with revenue from product sales, will
be adequate to fund operations through the middle of calendar year 2001.
The Company may need to raise substantial amounts of money to fund a variety of
future activity 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 pursuing arrangements with other companies, such as granting licensees
or entering into joint ventures.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about market risks for the three months ending June 30, 2000 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, 2000.
15
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
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, 2000 and 1999.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
16
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
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 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)
17
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
EXHIBIT INDEX
-------------
Exhibit Number Description
- -------------- -------------------------------
11.1 Computation of per share data
27 Financial data schedule
18