SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
------------------
Commission File Number 0-23252
--------
IGEN INTERNATIONAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE
------------------------------------------------------
(State or other jurisdiction of
incorporation or organization)
16020 INDUSTRIAL DRIVE, GAITHERSBURG, MD 20877
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
301-869-9800
------------------------------------------------------
(Registrant's telephone number, including area code)
94-2852543
------------------------------------------------------
(IRS Employer
Identification No.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Act of 1934 during the
preceding 12 months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 3, 2000
----- -------------------------------
Common Stock, $0.001 par value 15,815,800
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 2000 and March 31, 2000 3
Consolidated Statements of Operations - For the three and six months ended
September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows - For the six months ended
September 30, 2000 and 1999 5
Notes to Financial Statements 6
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 18
PART II OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS 19
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
Item 6: EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
2
IGEN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
SEPTEMBER 30, 2000 MARCH 31, 2000
------------------ --------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,965 $ 3,172
Short term investments 14,535 35,314
Accounts receivable, net 6,134 5,678
Inventory 5,065 3,063
Other current assets 1,334 1,311
--------- ---------
Total current assets 36,033 48,538
--------- ---------
EQUIPMENT, FURNITURE AND IMPROVEMENTS 16,063 13,181
Accumulated depreciation and amortization (8,194) (6,773)
--------- ---------
Equipment, furniture and improvements, net 7,869 6,408
--------- ---------
NONCURRENT ASSETS:
Deferred debt issuance costs 971 1,108
Restricted cash 1,721 1,400
Other 331 344
--------- ---------
Total noncurrent assets 3,023 2,852
--------- ---------
TOTAL $ 46,925 $ 57,798
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 9,122 $ 6,838
Note payable 4,475 2,168
Deferred revenue 922 912
Obligations under capital leases 51 74
--------- ---------
Total current liabilities 14,570 9,992
--------- ---------
NONCURRENT LIABILITIES:
Note payable 25,525 27,832
Subordinated convertible debt 27,327 26,415
Convertible preferred stock dividend payable 5,413 4,380
Deferred revenue 596 880
Obligations under capital leases 83 107
--------- ---------
Total noncurrent liabilities 58,944 59,614
--------- ---------
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 shares designated, 23,220 and 23,465 shares issued and outstanding -
liquidation value of $23,220 and $23,465 plus accrued and
unpaid dividends 1 1
Common stock: $.001 par value, 50,000,000 shares authorized: 15,812,500 and
15,577,600 shares issued and outstanding 16 15
Additional paid-in capital 105,291 102,420
Stock notes receivable (3,757) -
Accumulated deficit (128,140) (114,244)
--------- ---------
Total stockholders' deficit (26,589) (11,808)
--------- ---------
TOTAL $ 46,925 $ 57,798
========= =========
See notes to financial statements.
3
IGEN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
REVENUES:
Royalty income $ 3,804 $ 2,572 $ 7,664 $ 5,617
Product sales 2,461 1,950 4,425 2,678
Contract revenue 305 300 2,055 450
--------------- ----------------- ------------------ ----------------
6,570 4,822 14,144 8,745
--------------- ----------------- ------------------ ----------------
OPERATING COSTS AND EXPENSES:
Product costs 976 682 1,570 858
Research and development 6,535 4,328 12,291 8,348
Marketing, general and administrative 4,199 3,916 8,017 7,218
Litigation costs 2,502 987 3,921 2,037
--------------- ----------------- ------------------ ----------------
14,212 9,913 25,799 18,461
--------------- ----------------- ------------------ ----------------
LOSS FROM OPERATIONS (7,642) (5,091) (11,655) (9,716)
INTEREST (EXPENSE) INCOME - NET (1,121) (398) (2,241) (845)
--------------- ----------------- ------------------ ----------------
NET LOSS (8,763) (5,489) (13,896) (10,561)
PREFERRED DIVIDENDS (544) (526) (1,086) (1,046)
---------------- ------------------ ------------------ ----------------
NET LOSS ATTRIBUTED TO COMMON
SHAREHOLDERS $ (9,307) $ (6,015) $ (14,982) $ (11,607)
=============== ================= ================== ================
BASIC AND DILUTED NET LOSS PER
SHARE $ (0.59) $ (0.39) $ (0.96) $ (0.75)
=============== ================= ================== ================
SHARES USED IN COMPUTING NET LOSS
PER SHARE 15,715 15,388 15,648 15,377
=============== ================= ================== ================
See notes to financial statements.
4
IGEN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
SIX MONTHS ENDED
SEPTEMBER 30,
2000 1999
-------- --------
OPERATING ACTIVITIES:
Net loss $(13,896) $(10,561)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,470 843
Deferred revenue (274) (367)
Add (deduct) items not affecting cash:
Increase in accounts receivable (456) (1,225)
Increase in inventory (2,002) (629)
Increase in other current assets (23) (705)
Increase in accounts payable and accrued expenses 2,284 2,142
Decrease in other noncurrent assets 13 23
-------- --------
Net cash used for operating activities (11,884) (10,479)
-------- --------
INVESTING ACTIVITIES:
Expenditures for equipment, furniture and improvements (2,882) (1,415)
Purchase of short-term investments (5,367) (11,846)
Sale of short-term investments 26,146 24,502
-------- --------
Net cash provided by investing activities 17,897 11,241
-------- --------
FINANCING ACTIVITIES:
Restricted cash (321) (400)
Issuance of common stock - net 148 487
Payments under capital lease obligations (47) (58)
-------- --------
Net cash (used for) provided by financing activities (220) 29
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,793 791
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,172 720
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,965 $ 1,511
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
DURING THE SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999, THE COMPANY ACCRUED
UNPAID PREFERRED STOCK DIVIDENDS OF APPROXIMATELY $1.1 MILLION AND $1
MILLION, RESPECTIVELY. DURING THE SIX MONTHS ENDED SEPTEMBER 30, 2000, THE
COMPANY ISSUED 180,000 SHARES OF COMMON STOCK IN CONNECTION WITH THE
EXERCISE OF CERTAIN STOCK OPTIONS IN EXCHANGE FOR NOTES RECEIVABLE OF $3.7
MILLION.
See notes to financial statements.
5
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The financial statements of IGEN International, Inc. (the "Company") reflect, in
the opinion of management, all adjustments, consisting only of normal and
recurring adjustments, necessary to present fairly the Company's financial
position at September 30, 2000 and the Company's results of operations for the
three and six month period ended September 30, 2000 and 1999 as well as cash
flows for the six month periods ended September 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 $1.7 million at
September 30, 2000 that is restricted in use and is held in trust as collateral
(see Note 3).
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.
RECLASSIFICATION - Certain prior period amounts have been reclassified to
conform with current period presentation.
6
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
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):
SEPTEMBER 30, 2000 MARCH 31, 2000
------------------ --------------
Finished goods $ 1,459 $ 1,041
Work in process 1,985 1,074
Raw materials 1,621 948
---------- ----------
Total $ 5,065 $ 3,063
========== ==========
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, 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 SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED 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. Additional collateral is represented by a Restricted
Cash account which had a balance of $1.7 million as of 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 due January 2005. The debentures
call for 5% 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.
5. STOCK NOTES RECEIVABLE
In connection with the exercise of employee stock options in July 2000, the
Company granted loans in the principal amount of $3.7 million, maturing in July
2008. The loans are 6.62% simple interest, full recourse against all assets of
the borrowers, collateralized by the pledge of 180,000 shares of the Company's
common stock, owned by the borrowers.
8
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
6. 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 August 2000, the Company filed an
Amended Complaint alleging additional counts of breach of contract, as well as a
claim for unfair competition. 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 a percentage of the revenue 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.
9
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
Roche filed a counterclaim against the Company alleging breach of contract,
fraud, and tortious interference. Roche's counterclaim focuses principally on
the relationship between the Company and its Japanese licensee, Eisai Company,
Ltd. In particular, Roche alleges that the Company improperly permitted Eisai to
commercialize certain ORIGEN-based products in Japan. IGEN has moved to dismiss
the fraud and tortious interference claims, which motion is pending before the
Court.
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. The Company has filed its answer in this action denying infringement and
seeking declaratory judgment of non-infringement, unenforceability and
invalidity. There can be no assurance that the results of this litigation will
not have a material adverse effect on the Company, its business prospects and
its future financial results.
10
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER, 2000
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 Eisai and
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. The lawsuit requests injunctive relief against Hitachi.
11
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 results of operations in the future,
potential for additional strategic alliances, anticipated level of capital
expenditures, the potential success of the M-SERIES M-8 upgrade program, the
potential impact of ongoing 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.
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.
RESULTS OF OPERATIONS
THE QUARTER AND SIX MONTHS IN REVIEW
REVENUES. Total revenues increased $1.7 million (36%) and $5.4 million (62%) for
the quarter and six months ended September 30, 2000 to $6.5 million and $14.1
million, respectively, from $4.8 million and $8.7 million. Revenue growth for
the current quarter was due to increases in royalty income and product sales
while the increase for the first six months of fiscal 2001 was attributable to
growth in all revenue components - royalty income, product sales, and contract
revenue.
12
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Royalty income increased to $3.8 million and $7.7 million for the quarter and
six months ended September 30, 2000, which represent increases of 48% and 36%,
respectively, over the $2.6 million and $5.6 million for the quarter and six
months ended September 30, 1999. Royalties from Roche represent approximately
$3.6 million (94%) and $7.2 million (94%) of the total royalty income for the
quarter and first six months of fiscal 2001 as compared to approximately $2.2
million (85%) and $5.1 million (90%) for the same periods last year. 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 arising out of this agreement. One
of the disputes in the litigation relates to Roche's computation of royalties to
which the Company is entitled under the agreement.
Product sales increased to $2.5 million and $4.4 million for the quarter and
first six months of the current year, which represent increases of 26% and 65%
over the prior year's product sales of $2 million and $2.7 million for the same
periods last year. The growth for the current quarter is primarily due to
revenue generated from the sale of clinical diagnostic assays to physician
office laboratory (POL) customers in the United States. The Company began
serving these POL customers in June 2000 when Roche transferred the customers in
order to comply with a court ordered preliminary injunction. The product sales
increase for the first six months of the current year was primarily attributable
to growth of the M-SERIES line of instrumentation and consumable products, which
commenced sales in the second quarter of fiscal 2000, together with the current
quarter increase in POL sales described above. Contributing to this growth in
revenue was a distribution agreement the Company signed during the current
quarter with Sumitomo Corporation for the life science market in Japan.
OPERATING COSTS AND EXPENSES. Product costs were $ 976,000 (40% of product
sales) and $1.6 million (35% of product sales) for the quarter and six months
ended September 30, 2000. This compares with product costs of $682,000 (35% of
product sales) and $858,000 (32% of product sales) for the quarter and six
months ended September 30, 1999. During the current quarter, the Company
instituted a program to retrofit M-Series M-8 analyzers in the field with new
software and hardware components resulting in higher product costs. Excluding
expenses associated with the retrofitting, product costs were approximately
$700,000 (28% of product sales) in the current quarter and $1.3 million (29% of
product sales) for the current six month period. The change in product cost
margins (excluding the retrofit costs) is attributable to a change in product
sales mix between instruments and reagents as well as the POL sales, which
commenced in June 2000. This retrofit program was substantially completed during
the quarter ended September 30, 2000.
13
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Research and development (R&D) expenses were $6.5 million and $12.3 million for
the quarter and six months ended September 30, 2000. This represents increases
in R& D expenses of $2.2 million (51%) from $4.3 million in the same quarter
last year and $3.9 million (47%) from $8.3 million in the same period last year.
These increases were due primarily to ongoing development associated with the
M-SERIES System, development of new assays for the drug discovery and
development market as well as R&D expenditures on new systems for the M-Series
product family. During implementation of the M-SERIES M-8 upgrade programs in
the current quarter, the Company identified additional system upgrade
requirements that are being addressed through ongoing R&D efforts. There can be
no assurances that the recently completed upgrade program will not require
additional work or that the Company will successfully develop new system
improvements.
Marketing, general and administrative expenses (excluding Roche litigation
costs) were $4.2 million in the current quarter and $8 million in the first six
months of the current year, which represents increases of $283,000 (7%) and
$799,000 (11%) from the $3.9 million and $7.2 million incurred in the same prior
year periods. These increases were due primarily to higher sales and marketing
costs related to the M-SERIES System. Costs related to the Company's litigation
with Roche (see Note 6 in Notes to Consolidated Financial Statements) were $2.5
million and $3.9 million for the quarter and six months ended September 30, 2000
compared to $987,000 and $2 million in the same prior year periods. Litigation
costs increased due to expanded legal discovery work and new motions and filings
with the court.
INTEREST AND OTHER EXPENSE. Interest expense, net of other income, increased
$723,000 and $1.4 million during the quarter and six months ended September 30,
2000 due to interest on higher debt balances during the periods. The Company
issued $35 million of convertible debentures in January 2000 resulting in higher
interest expense in the current periods. This includes non-cash interest charges
during the current quarter and first six months of approximately $450,000 and
$900,000, respectively, principally related to amortization of the value of
warrants issued in connection with the convertible debentures.
NET LOSS. The net loss for the quarter and six months ended September 30, 2000
was $8.8 million ($0.59 per share) and $13.9 million ($0.96 per share),
respectively. This compares to net losses of $5.5 million ($0.39 per share) and
$10.6 million ($0.75 per share) in the same periods last year.
14
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
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, product upgrade and enhancement costs; 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, the Roche litigation, selling
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, including
legal costs associated with the ongoing litigation with Roche. 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;
develop sales and distribution capabilities cost-effectively; complete new
business arrangements; and resolve the litigations with Roche.
LIQUIDITY AND CAPITAL RESOURCES
Through September 30, 2000, the Company has financed its operations through the
sale of Preferred and Common Stock, aggregating approximately $85 million
through September 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 subordinated convertible debentures in
15
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
January 2000. Under the Hancock financing, the Company has made 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 $1.7 million at 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. 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 September 30, 2000, the Company had $23.5 million in cash, cash
equivalents and short term investments with working capital of $21.5 million.
Net cash used in operating activities increased to $11.9 million for the six
months ended September 30, 2000, as compared to $10.5 million for the
corresponding prior year period, due principally to a higher net loss (net of
increased depreciation and amortization of $1.6 million).
The Company used approximately $2.9 million and $1.4 million of cash for
investing activities in the six months ended September 30, 2000 and 1999,
respectively, 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. Lease payments,
which the Company is obligated through September 2001, approximate $80,000
(including interest) under capital lease agreements while operating lease
commitments for facility and equipment approximate $2 million. The Company
has committed to future capital contributions of approximately $3.9 million
under the MSD joint venture. This joint venture, until extended or renewed,
would expire in November 2000. The Company has not made a decision on
extending or renewing this joint venture. This decision is currently being
evaluated and will be made by an independent committee of the Company's Board
of Directors.
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 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.
16
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
The Company needs substantial amounts of money to fund operations. In this
regard, the Company has ongoing discussions with third parties, including
multinational corporations, regarding various business arrangements including
distribution, marketing, research and development, joint venture and other
business agreements, which could provide for substantial up-front fees or
payments. Further, the Company is considering and evaluating the advisability
and feasibility of a variety of financing alternatives, including issuance of
additional debt or equity securities. Although the Company presently has no
commitment or obligations with respect to any of the foregoing, such agreements
may be reached, possibly in the near term, although there can be no assurances
in this regard. There can be no assurance that the Company will successfully
complete any of the foregoing arrangements and 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 and royalties, will be
adequate to fund operations through the middle of calendar year 2001. 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 licenses or entering into
joint ventures, on terms and conditions that may not be favorable to the
Company.
The Company and Roche are actively engaged in settlement discussions with
respect to a near-term resolution of the litigations between the parties on
mutually agreeable terms. There can be no assurance as to when or if the
parties will reach resolution of these litigations, or settlement
discussions, or that such resolutions will be on favorable terms and
conditions. 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, if at
all.
17
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
The Company does not expect that failure to prevail in the Hitachi litigation
(see Note 6 in Notes to Consolidated Financial Statements) by itself would have
a material adverse effect on the Company's revenue or sales, because 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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about market risks for the three and six months ended September 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.
18
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER, 2000
PART II OTHER INFORMATION
Item 1: Legal Proceedings
The information required under this item is incorporated
herein by reference to Note 6 in Part I, Item 1 - Notes to
Consolidated Financial Statements.
Item 4: Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of IGEN
International, Inc. was held on September 14, 2000.
(b) Robert Salsmans and Anthony Rees were elected to the
Board of Directors at the Annual Meeting. The directors
of the Company whose term of office as directors
continued after the meeting were Samuel J. Wohlstadter,
Richard J. Massey, Joop Sistermans and Richard Cass.
(c) The matters voted upon at the meeting and the voting of
shareholders with respect thereto are as follows:
The election of each of Robert Salsmans and Anthony Rees
to the Board of Directors to hold office for a three-year
term and until his successor is elected and has qualified,
or until such director's earlier death, resignation or
removal. The voting results, with approximately 13.3
million (85%) of the shares voting, were as follows:
SALSMANS REES
For: 12,634,751 12,629,899
Withheld: 711,311 716,163
19
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
3.4 Bylaws
27 Financial Data Schedule
(b) Reports on Form 8-K
On October 2, 2000, the Company filed a report on Form 8-K
reporting information under Item 5, Other Events.
20
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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: NOVEMBER 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)
21
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.4 Bylaws
27 Financial Data Schedule
22