Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934
For Fiscal Year Ended March 31, 2002
Commission File Number 0-23252
IGEN INTERNATIONAL, INC.
(Exact name of Company as specified in its charter)
DELAWARE 94-2852543
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
16020 INDUSTRIAL DRIVE, GAITHERSBURG, MD 20877
(Address of principal executive offices) (Zip Code)
301/869-9800
(Company's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.001
par value
-------------------
(Title of Class)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X___ No _______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___X_____
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Company as of June 17, 2002, computed by reference to the
closing sale price of such stock quoted on the Nasdaq National Market, was
approximately $628,877,000.
The number of shares outstanding of the Company's Common Stock as of June 17,
2002 was 23,215,738.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference into
the following parts of this Form 10-K. Certain information required in Part III
of this Annual Report on Form 10-K is incorporated from the Company's definitive
Proxy Statement relating to its Annual Meeting of Shareholders to be held on
August 28, 2002.
PART I
IN ADDITION TO HISTORICAL INFORMATION, THIS FORM 10-K CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE "SAFE HARBOR" PROVISION OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. REFERENCE IS MADE IN PARTICULAR TO
STATEMENTS REGARDING THE MARKETS AND POTENTIAL MARKETS, AND MARKET GROWTH, FOR
DIAGNOSTIC PRODUCTS, POTENTIAL IMPACT OF COMPETITIVE PRODUCTS, THE COMPANY'S
EXPECTATIONS REGARDING THE LEVEL OF ANTICIPATED ROYALTY AND REVENUE GROWTH IN
THE FUTURE, THE POTENTIAL MARKET FOR PRODUCTS IN DEVELOPMENT, FINANCING PLANS,
THE OUTCOME OF LITIGATION, THE DESCRIPTION OF THE COMPANY'S PLANS AND OBJECTIVES
FOR FUTURE OPERATIONS, ASSUMPTIONS UNDERLYING SUCH PLANS AND OBJECTIVES, THE
NEED FOR AND AVAILABILITY OF ADDITIONAL CAPITAL AND OTHER FORWARD-LOOKING
STATEMENTS INCLUDED IN ITEM 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" ("MD&A"). THE WORDS "MAY,"
"SHOULD," "WILL," "EXPECT," "COULD," "ANTICIPATE," "BELIEVE," "ESTIMATE,"
"PLAN," "INTEND" 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 CAUTIONARY
STATEMENTS MADE IN ITEM 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND IN ITEM 1 - "BUSINESS" UNDER THE
HEADING "RISK FACTORS." IGEN DISCLAIMS ANY INTENT OR OBLIGATION TO UPDATE THESE
FORWARD-LOOKING STATEMENTS.
ITEM 1. BUSINESS
SUMMARY
We develop and market products that incorporate our proprietary
electrochemiluminescence (ORIGEN (R)) technology, which permits the detection
and measurement of biological substances. We believe that ORIGEN offers
significant advantages over competing detection methods by providing a unique
combination of speed, sensitivity, flexibility and throughput in a single
technology platform. ORIGEN is incorporated into instrument systems and related
consumable reagents, and we also offer assay development and other services used
to perform analytical testing. Products based on our ORIGEN technology currently
address the following worldwide markets:
o LIFE SCIENCE - drug discovery and development, performed by pharmaceutical
and biotechnology companies, universities and other research organizations;
o CLINICAL TESTING - in vitro diagnostic testing of patient samples to
measure the presence of disease and monitor medical conditions. This
testing is performed at facilities, such as central hospital and clinical
reference laboratories, and at other locations, including sites closer to
where patient care is delivered. These sites include clinics, emergency
rooms, intensive care units and physician offices; and
o INDUSTRIAL TESTING - the testing of food and environmental samples for
safety and quality assurance purposes, products for fighting bioterrorism,
as well as agricultural and animal health testing.
1
We and our corporate collaborators have commercialized multiple product lines to
serve these markets. We estimate that approximately over 8,000 ORIGEN-based
systems have been sold or placed with customers. These sales and placements have
been made predominantly through our license arrangement with Roche Diagnostics
GmbH ("Roche"), the world's leading provider of clinical diagnostic products.
Roche has adopted ORIGEN as the integral technology for its Elecsys
immunodiagnostic product line. Roche has a license to commercialize the ORIGEN
technology solely for central hospital and clinical reference laboratories and
blood banks. For a discussion of the Roche litigation, see ITEM 3, "Legal
Proceedings".
The M-SERIES(TM) System, our product line for use by pharmaceutical and
biotechnology companies in drug discovery and development, may be used in all
phases of drug discovery, including (1) validating targets identified through
genomics, (2) screening of large numbers of compounds generated through
combinatorial chemistry, (3) re-testing and optimization of lead compounds, and
(4) clinical trial testing of drug candidates. We believe the M-SERIES System
provides a number of advantages relative to other drug discovery technologies,
including enhanced sensitivity and greater ease and speed of assay formatting.
These features are designed to enable our customers to test new biological
targets against potential drug compounds with higher levels of accuracy and
specificity and may perform highly sensitive tests more quickly and with less
cost. This should permit a drug candidate to move more rapidly into the later
stages of drug development and ultimately into the market.
The M-SERIES System is the first product that features our
electrochemiluminescence module, which we have trademarked as TRICORDER(R). The
TRICORDER, which resulted from our extensive research and development efforts,
is a self-contained, analytical operating system. By combining all of the
features necessary to perform ORIGEN-based testing in a single compact module,
the TRICORDER provides a relatively simple-to-use, highly accurate and
cost-effective system. The TRICORDER's modular nature is expected to reduce the
development time and cost required to incorporate ORIGEN technology into future
diagnostic and analytical instruments. We believe that the TRICORDER, through
its flexibility as a detection tool and its modular nature, will be the core
component for additional products that we plan to develop.
Our M-SERIES customers include many of the major pharmaceutical and
biotechnology companies in the United States and Europe. We offer our customers
the option of buying M-SERIES Systems or renting them under reagent purchase
plans. Under either option, our customers typically make commitments for
purchases of proprietary reagents. We also provide custom assay development
services based on our existing library of more than 300 assays. We market the
M-SERIES System through our sales, marketing and applications team dedicated to
the life science market.
We have also applied our ORIGEN technology to the rapidly growing market for the
detection of food and water disease causing pathogens, as well as for
bio-defense, the detection of microbes, toxins and toxic agents that may pose a
military or public health threat. We have begun commercializing our first
products for this market, the PATHIGEN panel of tests for Salmonella,
Campylobacter, Listeria and E. Coli O157, which are sold primarily as a quality
control test method to food producers, food processors and contract laboratories
for the food industry. The E. Coli test, for example, is significantly more
sensitive than any other test on the market and we believe it offers
unprecedented precision and rapid results in detecting this dangerous strain of
the food-borne pathogen. In addition, our Salmonella test was recently approved
by the National Poultry Improvement Plan as the first rapid method for the
detection of Salmonella in live poultry.
Our executive offices are located at 16020 Industrial Drive, Gaithersburg,
Maryland 20877.
2
ORIGEN TECHNOLOGY
ORIGEN is a proprietary technology based on electrochemiluminescence. ORIGEN
permits the detection and measurement of a biological substance within a given
sample. It works by labeling the targeted substance within a sample using a
compound and binding the newly labeled substance to magnetizable beads. The
beads can then be separated from the rest of the sample using a magnet. When
this newly labeled substance is stimulated, the label emits light at a
particular wavelength. The light emission can be measured with a high degree of
accuracy. The level of intensity of the light emitted depends on how much of the
label is present, which in turn is determined by how much of the targeted
substance is present for the label to attach itself to. Thus, the light
emissions permit the accurate detection and measurement of the targeted
substance. ORIGEN technology provides a single basic format that can be used to
conduct a multitude of tests, including immunodiagnostic tests, nucleic acid
probe tests and clinical chemistry tests. The ORIGEN technology is protected by
numerous patents in the United States and internationally.
We and our licensees are using the ORIGEN technology to develop and
commercialize analytical systems that offer many advantages over current
detection technologies. We believe that ORIGEN technology offers a unique
combination of improved speed, sensitivity, flexibility and output relative to
existing technologies. ORIGEN technology also generally lowers the cost of
diagnostic procedures by reducing the number of steps required in preparing a
sample for testing. Because the ORIGEN system directly measures
electrochemiluminescence, and does not require the use of enzymes in the
detection process as is common in competing systems, the ORIGEN system provides
a simplified and more stable format that can be used to test a broad range of
substances. The ORIGEN-based systems can be automated to provide in a uniform
format a large number of immunoassay, nucleic acid probe and clinical chemistry
tests. The essential component of an ORIGEN-based system is the flow cell, which
contains a magnet to separate the labeled substance from the sample being
tested, and a light detector to measure the electrochemiluminescence. The ORIGEN
flow cell has been designed so that it can be incorporated into a variety of
instruments, ranging from large central laboratory random-access systems to
small batch systems.
The major features and benefits of proprietary ORIGEN-based systems are:
o Simple Testing Format: reduces time and labor in performing a test or
series of tests. Complete automation of testing process possible.
o Flexibility: enables a single instrument to perform immunodiagnostic tests
on large and small molecules and to perform DNA and RNA tests.
o Cost: reduces costs per test by minimizing the amount of expensive reagents
needed.
o Speed: reduced time from assay set-up to detection produces rapid results.
Enables high sample throughput.
o Sensitivity: allows detection of targeted specimens at very low
concentrations.
o Precision: provides highly-reproducible measurements.
o Label Stability: extends the shelf-life of the reagent that contains the
label used in testing. Improves measurement accuracy.
3
ORIGEN-BASED PRODUCTS AND MARKETS
We believe that our ORIGEN technology is well suited for the development and
commercialization of families of instruments that can be used in all of our
target markets. The technology should permit virtually all immunodiagnostic and
nucleic acid tests to be performed on similar instrumentation using the same
detection method.
The following table summarizes ORIGEN-based products and development programs.
CUSTOMER COMMERCIAL
MARKET PRODUCT APPLICATION STATUS RIGHTS
LIFE SCIENCE MARKET M-SERIES Drug Discovery/ Development Product Sales IGEN
(M8 & M384 Analyzer and
Reagents)
M-SERIES (M-1 Drug Discovery/ Pre-Launch IGEN
Research Analyzer) Development
ORIGEN Detection System Drug Discovery/ Development Product Sales IGEN
and Reagents
C
Cell Culture Reagents Research Biologicals Product Sales IGEN
NucliSens/NASBA QR Nucleic Acid Probe Tests Product Sales BioMerieux
Sector HTS/
Sector PR High Throughput Drug Pre-Launch/ Meso Scale
Discovery/ Beta Joint Venture
Development
CLINICAL TESTING MARKET
Central Hospital/Clinical Elecsys 2010 Immunodiagnostic Tests Product Sales Roche
Reference Laboratory
Systems
Elecsys 1010 Immunodiagnostic Tests Product Sales Roche
MODULAR / E170 Immunodiagnostic Tests Product Sales Roche
NucliSens/NASBA QR Nucleic Acid Probe Tests Product Sales BioMerieux
Picolumi Immunodiagnostic Tests Product Sales Eisai (Japan)
(Japan)
Patient Care Systems Elecsys 2010/1010 Physicians' Office Lab Product Sales IGEN (1)
Immunodiagnostic Tests
4
M-SERIES (M-1 Portable Physicians' Office Development IGEN
Clinical Analyzer) Lab / Hospital
Immunodiagnostic Tests
Home Self-Testing Health Screening and Research IGEN
Monitoring
INDUSTRIAL MARKETS PATHIGEN Panel of Tests Detection of Food and Product Sales IGEN
(ORIGEN Detection System) Beverage Contaminants
M-SERIES (M-1 Analyzer) Detection of Food and Pre-Launch IGEN
Beverage Contaminants and
Biological Toxins
(1) IGEN is currently servicing customers pursuant to court judgment issued in
the litigation described in ITEM 3 - "Legal Proceedings".
LIFE SCIENCE PRODUCTS AND MARKET
The life science market focuses on providing products and services for the
discovery and development of new drugs. Our commercialization efforts in this
market center on the M-SERIES System and the ORIGEN Detection System.
Advances in the field of combinatorial chemistry, which is based on the effects
of combining different compounds to make potentially new drugs, and in the field
of biotechnology have revolutionized drug discovery. Pharmaceutical and
biotechnology companies have dramatically expanded their libraries of potential
drug candidates. Researchers have completed sequencing of the human genome,
which has greatly increased scientists' understanding of how diseases work and
the causes of disease, which in turn should provide novel targets for fighting
disease.
In order to exploit these advances, pharmaceutical and biotechnology companies
are re-engineering their drug development processes. An example of this is the
use of automation and the latest advances in technology to accelerate the
screening of existing drug compounds against the disease targets of interest.
Researchers are challenged to develop new drug screening procedures that are
faster and more efficient while reducing costs and processing larger numbers of
samples.
After identifying disease targets and synthesizing chemical compounds,
researchers attempt to find compounds that are drug candidates. This drug
discovery process involves developing the test, or assay, to determine whether a
particular compound has the desired effect on a target and then screening
compounds using that assay. Compounds of interest from the screening process
become drug candidates, which undergo further testing as part of "lead
optimization". These drug candidates are then subjected to pre-clinical and
clinical trials before becoming a drug.
M-SERIES SYSTEM. We believe that the need of pharmaceutical and biotechnology
companies to rapidly identify therapeutic targets; screen thousands of compounds
per day against those targets and then optimize the leads, has created new
opportunities for our ORIGEN technology systems in the pharmaceutical and
biotechnology industry. The M-SERIES Systems, based on the TRICORDER, build on
the applications of the ORIGEN Detection System and provide simultaneous
processing of multiple samples using ORIGEN assays. The first M-SERIES System is
the M8 Analyzer, which is compatible with multi-well microplates that are
commonly used in drug discovery and development laboratories.
5
The M8 Analyzer has been updated and is named the M-SERIES 384 Analyzer. It is
in the process of being introduced to the market with new features. Both systems
can be fully integrated with many existing automation and robotic systems and
are designed to enable researchers to test new biological targets against
potential drug compounds with higher levels of accuracy and specificity. They
may also perform highly sensitive tests more quickly and with less cost. This
may permit a drug candidate to move more rapidly into the later stages of drug
development, clinical trials and ultimately into the market.
We believe that the sensitivity and accuracy of the M-SERIES System create
advantages over many competitive detection technologies. The M-SERIES System
allows the user (1) to quickly adapt the ORIGEN technology to develop and then
perform the specific, desired assays, compared to the longer periods required by
other existing competing technologies, (2) to reduce the use of rare components,
such as proprietary compounds, antibodies or clinical trial samples, that must
be used to run assays and (3) to be more confident in the positive and negative
results the tests produce. Our expertise in developing assays allows us to
assist customers in determining whether a proposed assay is feasible and to
assist with the development and performance of assays that comply fully with the
U.S. Food and Drug Administration's (FDA) Good Manufacturing Practices (GMP).
Our M-SERIES customers include many of the major pharmaceutical and
biotechnology companies in the United States and Europe. In addition to the
M-SERIES Analyzers we sell or place, we typically receive commitments from our
customers for purchases of proprietary reagents. We also offer M-SERIES Analyzer
users custom assay development services based on our existing library of more
than 300 assays. We market the M-SERIES Analyzer directly through our sales,
marketing and applications team dedicated to the life science market.
The second product in the M-SERIES family is the M-1, which is in final
pre-launch development. The M-1 is being designed as a smaller and lower cost
M-SERIES system for use in drug discovery and development, as well as for basic
biology research such as the study of general biological processes, proteomics
and the understanding of the molecular basis of disease. In addition to
pharmaceutical and biotechnology researchers, the M-1 may be used by scientists
at academic and government research institutions. Academic customers typically
work from small research grants and a lower priced single detector system that
works with the standard microplate format is expected to be an alternative to
the use of radioisotopic assays or less sensitive ELISA based methods. ORIGEN
technology, with its mix and read assay format and high sensitivity should allow
researchers to perform multiple experiments more quickly.
ORIGEN DETECTION SYSTEM. Our strategic links with pharmaceutical and
biotechnology companies and with customers in government and academic research
centers were initially forged with the launch of the ORIGEN Detection System.
The ORIGEN Detection System is the precursor to the M-SERIES System and
established ORIGEN as a powerful detection technology for applications in life
science research. Some of these customers are performing research in areas that
are key to our strategic growth. The ORIGEN Detection System has been important
for our developments with the U.S. military and the application of ORIGEN
technology to bio-defense.
CLINICAL DIAGNOSTIC PRODUCTS AND MARKET
One of the markets that we have and will continue to target by developing and
marketing products and services based on our ORIGEN technology is the clinical
diagnostic market. The clinical diagnostic market utilizes in vitro diagnostic
testing, which is the process of analyzing blood, urine and other samples to
screen for, monitor and diagnose diseases and other medical conditions or to
determine the chemical and microbiological constituents of the samples.
6
This market is composed of various areas of clinical diagnostic testing,
including testing by central hospital laboratories and clinical reference
laboratories, as well as testing at satellite hospital laboratories and at or
near patient care centers.
HOSPITAL/REFERENCE LABORATORY SYSTEMS. One of the significant applications of
our ORIGEN technology is in large, highly automated clinical immunodiagnostic
systems used in central hospital laboratories, clinical reference laboratories
and blood banks. These laboratories constitute the vast majority of the clinical
diagnostic market today. To serve these laboratories, systems must be able to
perform a wide variety of immunodiagnostic tests on a large number of samples
reliably, cost-effectively and quickly. We and our licensees believe that
systems based on the ORIGEN technology are well-suited to serve this market and
may surpass other systems currently available in central hospital laboratories,
clinical reference laboratories and blood banks in terms of speed, cost
effectiveness and ease of use.
Roche, one of the companies that licenses our technology, presently sells three
ORIGEN-based immunoassay systems for the central hospital and clinical
reference laboratory markets: the Elecsys 1010, Elecsys 2010 and the Modular
E170. The Elecsys 2010 is designed to perform multiple screenings in a
random-access mode, while simultaneously handling tests performed on clinical
samples for which immediate results are needed, without interfering with the
system workflow. The Elecsys 2010 is designed so that it can be integrated with
Roche's clinical chemistry systems. The Elecsys 1010 is a system designed for
central hospital and clinical reference laboratory customers that have a lower
output requirement. Roche has also developed a third instrument system, the
MODULAR/E170, which incorporates ORIGEN technology. The E170 is part of Roche's
new MODULAR system that allows laboratories to create customized workstations
and has the features of the existing Elecsys line together with expanded
throughput capabilities.
Roche presently offers a panel of approximately 50 screening tests or assays,
with the Elecsys and E170 systems, including assays for infectious diseases,
anemia, cancer, heart attacks, thyroid disease and fertility/pregnancy. Roche
continues to develop additional assays that are expected to be introduced to the
market in the future. We continue to work with Roche to develop assays, for
which Roche reimburses us a portion of our development costs.
See ITEM 3 - "Legal Proceedings" for a description of our litigation with Roche.
PATIENT CARE SYSTEMS. We are independently developing ORIGEN-based products that
can be used to perform immunodiagnostic tests and chemistry tests outside of
central hospital laboratories and clinical reference laboratories. This market
includes patient care centers such as physicians' offices, ambulatory clinics,
hospital emergency rooms, surgical and intensive care units, hospital satellite
laboratories, and nurses' stations. Physicians, patients and third-party payers
have created a demand for bringing laboratory testing closer to the patient in
order to provide the medical practitioner with faster results and, in turn,
prompt feed-back to the patient. Most immunodiagnostic systems for individual
physicians and group practices have had limited market penetration because of
the lengthy turnaround time for test results, the need for skilled labor in
performing the tests and the high cost of tests. We believe that the emergence
of simple and more accurate and cost-effective diagnostic products is shifting
the site of in vitro diagnostic testing from clinical reference and central
hospital laboratories to alternative sites.
We believe that significant demand exists for clinical diagnostic products that
reduce turnaround time and cost. Our patient care system is being designed to
create tests that can provide accurate results to a physician rapidly, thereby
permitting the physician to make a more timely decision regarding the patient's
course of treatment.
7
The ORIGEN technology permits development of a system that is compact and simple
to operate at a low cost per test and the initial clinical ORIGEN-based system
being developed by the Company is utilizing the TRICORDER product platform
currently used in the life science market. The broad menu of immunoassays that
we, and companies working with us, developed for the first generation of
ORIGEN-based products can be performed on, and are expected to be available for
use with, TRICORDER-based systems. We are currently exploring collaborative
business arrangements to accelerate the commercialization of TRICORDER-based
products for multiple point-of-care applications.
We presently distribute clinical assays to approximately 60 physicians' office
laboratories in the United States that utilize Roche's Elecsys systems. Under
the final order of judgment issued in our litigation with Roche, the Court
enjoined Roche from marketing, selling, or distributing its Elecsys products
outside of Roche's licensed field of use, including to physicians' office
laboratories (POL's). We and Roche signed an agreement under which all of
Roche's POL customers in the United States were transferred to us, and Roche
provides us with reagent supply for these customers pending final resolution of
the litigation.
INDUSTRIAL PRODUCTS
We are seeking to develop further, either independently or with others,
ORIGEN-based products for use in food and water quality assurance programs and
agricultural and animal health testing. We believe that our ORIGEN-based
technology and the reagents employed to run tests, together with an easy to use,
low-cost, instrument platform, such as the M-1 System under development, should
be well-suited for these market applications.
We have recently commenced sales of our PATHIGEN panel of food pathogen tests.
This panel includes tests for E. Coli O157, Salmonella, Listeria and
Campylobacter. These tests are used as a quality control method for testing food
and beverage products, such as the meat used in hamburger, for the bacteria that
have caused numerous outbreaks of gastrointestinal and kidney-related disease
worldwide. The PATHIGEN tests are semi-automated and create a permanent record
of test results. According to published studies by the USDA and an independent
analytical laboratory in the United Kingdom, the PATHIGEN E. Coli O157 test is
significantly more sensitive than conventional tests commonly used to screen
food. Major food and beverage producers, as well as contract testing
laboratories, could become primary users of the PATHIGEN test panel. The major
advantage of the PATHIGEN tests are their ability to perform in complex samples,
like hamburger meat, in less time, and with greater sensitivity than other
available methods. Our PATHIGEN tests offers food producers the ability to
efficiently test many more food samples than with other currently available
methods.
We have also expanded our ORIGEN-based product offering to address bio-defense,
or the detection of microbes, toxins, and toxic agents that might pose a
military or public health threat. ORIGEN-based tests developed by researchers in
the U.S. Army are being used as a bio-defense detection method. We believe there
will be an increasing opportunity for use of our ORIGEN technology as a
bio-defense tool in military organizations around the world, as well as in
public health. We plan to further develop ORIGEN-based products for this
emerging market.
COLLABORATIONS
We have entered into collaborations with established diagnostic and
pharmaceutical companies. These collaborations have provided us with $84 million
in license fees over an eight-year period and product development and marketing
resources. In addition, we receive ongoing royalties from collaborators' product
sales.
8
For the three fiscal years ended March 31, 2002, 2001 and 2000 revenue from
corporate collaborators, which is represented as product-based royalty income
and contract revenue, totaled $27.5 million (65%), $20.4 million (65%) and $12.9
million (63%), respectively.
ROCHE DIAGNOSTICS GMBH. In 1992, we entered into a contract with Roche
Diagnostics GmbH (then known as Boehringer Mannheim GmbH), the largest worldwide
manufacturer of diagnostic equipment and supplies, to commercialize ORIGEN-based
clinical immunodiagnostic and nucleic acid probe systems. From fiscal year 1992
through fiscal year 2002, we generated a total of approximately $118 million in
license fees, royalties and assay development fees from Roche. Roche currently
markets three ORIGEN-based systems together with a test menu of approximately 50
different assays, including tests for infectious diseases, anemia, cancer, heart
attacks, thyroid disease and fertility/pregnancy. Roche has placed or sold
approximately 8,000 Elecsys and E170 systems worldwide.
In 1997, we filed a lawsuit in Maryland federal court against Roche Diagnostics
and in February 2002, the Court issued a final order of judgment against Roche.
See ITEM 3 - "Legal Proceedings".
We recorded royalty income from the Roche agreement of $25.7 million (61%),
$15.3 million (49%) and $11.1 million (54%) for the three fiscal years ended
March 31, 2002, 2001 and 2000 respectively.
BIOMERIEUX. We have an agreement with BioMerieux (formerly Organon Teknika B.V.)
for development and worldwide commercialization of ORIGEN-based nucleic acid
probe systems to the clinical diagnostic and life science markets. BioMerieux
specializes in hospital and blood bank products and has combined its proprietary
nucleic acid sequence based amplification technology with ORIGEN technology and
markets the NucliSens line of diagnostic virology products together with test
kits for the detection of HIV-1 RNA and CMV (cytomegalovirus). We have received
$20 million under our agreement with BioMerieux and currently receive royalties
on product sales.
EISAI CO., LTD. We have a collaboration with Eisai Co., Ltd., a leading Japanese
pharmaceutical company, to market an ORIGEN-based diagnostic system for the
clinical diagnostic market in Japan. Eisai introduced its first ORIGEN-based
product under the trade name Picolumi during 1997, and we receive royalties on
product sales. Eisai is currently marketing the Picolumi product with assays
focused primarily in the area of cancer diagnosis.
MESO SCALE DIAGNOSTICS, LLC. During August 2001, we entered into agreements with
Meso Scale Technologies, LLC. ("MST") continuing Meso Scale Diagnostics, LLC.
("MSD"), a joint venture formed solely by MST and us in 1995. MSD was formed for
the development and commercialization of products utilizing a proprietary
combination of MST's multi-array technology together with ORIGEN and other
technologies owned by us. MST is a company established and wholly-owned by the
son of IGEN's Chief Executive Officer. Under most circumstances, significant MSD
governance matters require the approval of both us and MST.
Under the amended agreements that were negotiated by an independent committee of
our Board of Directors, we hold a 31% voting equity interest in MSD, and are
entitled to a preferred return on $36.4 million of the funds previously invested
in MSD through March 31, 2002 and on additional funds we invest thereafter. This
preferred return would be payable out of a portion of both future profits and
certain third-party financings, before any payments are made to other equity
holders. MST owns the remaining 69% of the voting equity interest in MSD. We
agreed, subject to certain conditions, to fund the joint venture through
November 2003. During the 2002 calendar year, we agreed to fund MSD $21.5
million, subject to a permitted variance of fifteen percent. As of March 31,
2002, the Company has satisfied $5.3 million of this funding commitment. The
2003 calendar year funding commitment would be based on an annual budget to be
approved by a committee of our Board of Directors.
9
The funding commitment may be satisfied in part through in-kind contributions of
scientific and administrative personnel and shared facilities. If the 2003
budget is not approved by our Board of Directors, we would be required to
provide transitional funding for an additional six months, estimated at $10.7
million, and under certain conditions, MSD and MST have the right to terminate
the joint venture prior to November 2003 under certain circumstances, including
a change in control of the Company, as defined. Upon termination, expiration or
non-renewal of the joint venture agreement, MSD and MST have the right to
purchase our interest in MSD at fair market value less certain discounts.
MSD has developed two instrument systems, the Sector PR and the Sector HTS,
along with a variety of consumables which were initially introduced to the life
science market in September 2001. The first MSD beta test site was established
in March 2002.
For the years ended March 31, 2002, 2001 and 2000, we made total contributions
to MSD of $19.6 million, $8.3 million and $4.5 million, respectively. See ITEM 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and ITEM 13 "Certain Relationships and Related Transactions."
PATENTS AND OTHER PROPRIETARY RIGHTS
We pursue a policy of seeking patent protection to preserve our proprietary
technology and our right to capitalize on the results of our research and
development activities and, to the extent it may be necessary or advisable, to
exclude others from appropriating our proprietary technology. We also rely on
trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position.
We prosecute and defend our intellectual property, including our patents, trade
secrets and know-how. We regularly search for third-party patents in our fields
of endeavor, both to shape our own patent strategy as effectively as possible
and to identify licensing opportunities.
As of March 31, 2002, we owned 63 issued U.S. patents and had 23 pending U.S.
patent applications in the diagnostics field. As of that date, we owned 130
additional issued patents outside of the United States and had 68 pending patent
applications. These patents and patent applications are important to our
business and cover various aspects of our ORIGEN technology and products, as
well as the methods for their production and use. The pending patent
applications may not be granted and others may challenge our existing patents.
Our business could be harmed if we lose the patent protection we currently enjoy
or if our pending patents are not issued.
Our patents will not begin to expire until 2005; core ORIGEN patents will extend
through 2015. We continue to protect our technology with new patent filings,
which could further extend our patent coverage.
GOVERNMENT REGULATION
Our research and development, manufacturing and marketing activities of both
existing and future products are subject to regulation by numerous governmental
authorities in the United States and other countries. In the United States,
clinical diagnostic devices are subject to rigorous FDA regulation. The Federal
Food, Drug and Cosmetic Act and the Public Health Service Act govern the
testing, manufacture, safety, efficacy, labeling, storage, record keeping,
approval, advertising and promotion of our clinical products.
10
In addition to FDA regulations, we are subject to other federal and state
regulations such as occupational safety and health regulations and environmental
regulations. Product development and approval within this regulatory framework
may take a number of years and involves the expenditure of substantial
resources.
In addition, this regulatory framework may change or additional regulation may
arise at any stage of our product development, which may affect approval of or
delay an application or require additional expenditures by us.
Our regulatory strategy is to pursue development and marketing approval of
products worldwide, either independently or through corporate collaborators. We
intend to seek input from the regulatory authorities at each stage of the
clinical process to facilitate appropriate and timely clinical development. The
clinical development of certain products may be the responsibility of our
collaborators.
Clinical Diagnostic Systems
The manufacture, distribution and sale in the United States of our products for
clinical diagnostic purposes will require prior authorization by the FDA. The
FDA and similar agencies in foreign countries have promulgated substantial
regulations that apply to the testing, marketing, export and manufacturing of
diagnostic products. To obtain FDA approval of a new product for diagnostic
purposes, we or our collaborators will in most cases be required to submit proof
of the safety and efficacy of the product, or its "substantial equivalence" to
previously marketed products. Such proof typically entails clinical and
laboratory tests. The testing, preparation of necessary applications and
processing of those applications by the FDA is expensive and time consuming.
Significant difficulties or costs may be encountered in order to obtain FDA
approvals and that could delay or preclude us from marketing products for
diagnostic purposes. Furthermore the FDA may request additional data following
the original submission. Delays imposed by the governmental approval process may
materially reduce the period during which we or our collaborators will have the
exclusive right to exploit our products or technologies.
Our clinical diagnostic products are regulated as medical devices. The Roche
Elecsys clinical diagnostic products have received FDA approval. Prior to
entering commercial distribution, all medical devices must undergo FDA review
under one of two basic review procedures depending on the type of assay: a
Section 510(k) pre-market notification ("510(k)") or a pre-market approval
application ("PMA"). 510(k) notification is generally a relatively simple filing
submitted to demonstrate that the device in question is "substantially
equivalent" to another legally marketed device. Approval under this procedure
may be granted within 90 days if the product qualifies, but generally takes
longer, and may require clinical testing.
When the product does not qualify for approval under the 510(k) procedure, the
manufacturer must file a PMA to show that the product is safe and efficacious,
based on extensive clinical testing among several diverse testing sites and
population groups, and shows acceptable sensitivity and specificity. This
procedure requires much more extensive pre-filing testing than does the 510(k)
procedure and involves a significantly longer FDA review after the date of
filing. In responding to a PMA, the FDA may grant marketing approval, may
request additional information, may set restrictive limits on claims for use or
may deny the application altogether.
After product approvals have been received, they may still be withdrawn if
compliance with regulatory standards is not maintained or if problems occur
after the product reaches the market. The FDA may require surveillance programs
to monitor the effect of products that have been commercialized, and has the
power to prevent or limit further marketing of the products based on the results
of these post-marketing programs.
11
In addition to obtaining FDA approval for each product, under the PMA
guidelines, the Company must seek FDA approval of the manufacturing facilities
and procedures. The FDA will also inspect diagnostic companies on a routine
basis for regulatory compliance with its GMP.
Our products for the physician's office market will be affected by the Clinical
Laboratory Improvement Amendments of 1988 ("CLIA"), which is intended to insure
the quality and reliability of medical testing and may have the effect of
discouraging, or increasing the cost of, testing in physicians' offices.
The regulations establish requirements for laboratories in the area of
administration, participation in proficiency testing, patient test management,
quality control, personnel, quality assurance and inspection. Under these
regulations, the specific requirements that a laboratory must meet depend upon
the complexity of the tests performed by the laboratory.
Laboratory tests are categorized as either waived tests, tests of moderate
complexity or tests of high complexity. Laboratories that perform either
moderate or high complexity tests must meet standards in all areas, with the
major difference in requirements between moderate and high complexity testing
concerning quality control and personnel standards. Quality control standards
for moderate complexity testing are being implemented in stages. Personnel
standards for high complexity testing are more rigorous then those for moderate
complexity testing. In general, personnel conducting high complexity testing
will need more education and experience than those doing moderate complexity
testing. Under the CLIA regulations, all laboratories performing moderately
complex or highly complex tests will be required to obtain either a registration
certificate or certificate of accreditation from the Healthcare Financing
Administration ("HCFA").
Because the regulations' interpretation is uncertain, it is possible that
certain of our products may be categorized as tests of high complexity, in which
case penetration of the point-of-care market would be reduced since not all
laboratories would meet the standards required to conduct such tests. We
understand that laboratories, including physician office laboratories, will be
evaluating the requirements of CLIA in determining whether to perform certain
types of moderate and high complexity diagnostic tests.
Although we believe that we will be able to comply with all applicable
regulations regarding the manufacture and sale of diagnostic devices, such
regulations are always subject to change and depend heavily on administrative
interpretations. Future changes in regulations or interpretations made by the
U.S. Department of Health and Human Services, FDA, HCFA or other regulatory
bodies, with possible retroactive effect, may adversely affect us.
In addition to the foregoing, we are subject to numerous federal, state and
local laws and regulations relating to such matters as safe working conditions,
laboratory and manufacturing practices, environmental, fire hazard control, and
disposal of hazardous or potentially hazardous substances. To date, compliance
with these laws and regulations has not had a material effect on our financial
results, capital requirements or competitive position, and we have no plans for
material capital expenditures relating to such matters. However, we may be
required to incur significant costs to comply with such laws and regulations in
the future, and such laws or regulations may have a material adverse effect upon
our ability to do business.
Sales of the Company's products outside the United States are also subject to
extensive regulatory requirements, which vary widely from country to country.
The time required to obtain such approval may be longer or shorter than that
required for FDA approval.
12
Research Products
Our products that are being sold for research use only, including the M-SERIES
System, must be properly labeled as such, as required by the FDA, but do not
generally require FDA approval prior to marketing. The FDA has begun to impose
new distribution requirements and procedures on companies selling research-only
products, such as the requirement that the seller receive specified
certifications from its customers as to the customers' intended use of the
product. We expect that the FDA will develop additional restrictions of this
nature that may adversely affect us.
Environmental Regulation
Due to the nature of our current and proposed research, development and
manufacturing processes, we are subject to stringent federal, state and local
laws, rules, regulations and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, handling and disposal of
certain materials and wastes. Although we believe that we have complied with
these laws and regulations in all material respects and have not been required
to take any action to correct any noncompliance,we may be required to incur
significant costs to comply with environmental and health and safety regulations
in the future.
Reimbursement
Third-party payers, such as governmental programs and private insurance plans,
can indirectly affect the pricing or the relative attractiveness of our products
by regulating the maximum amount of reimbursement they will provide for
diagnostic testing services. In recent years, healthcare costs have risen
substantially, and third-party payers have come under increasing pressure to
reduce such costs.
In this regard, the Federal government, in an effort to reduce healthcare costs,
may take actions that may involve reductions in reimbursement rates. If the
reimbursement amounts for diagnostic testing services are decreased in the
future, it may decrease the amount which physicians, clinical laboratories and
hospitals are able to charge patients for such services and consequently the
price we and our collaborators can charge for our products.
COMPETITION
Competition varies in the three markets in which we operate. In the life science
market, competition is fragmented. To be competitive, a company must be able to
address the needs of pharmaceutical and biotechnology companies, which are
facing pressure to increase productivity while decreasing drug discovery costs
and timelines. These drug discovery companies favor detection systems that
combine automation and enhanced sensitivity with integrated equipment and
consumables.
Because our ORIGEN system encompasses all of these elements, we believe it
offers significant advantages over competing systems. In addition, we, unlike
some of our competitors, offer our customers assay development services, which
we believe enhance the speed and robustness of their screening operations.
The clinical testing market is dominated by a few large multi-national
companies, including Abbott Laboratories, Roche, Bayer and Johnson & Johnson. We
participate in this market through our license arrangements with Roche, the
world's largest provider of diagnostics products, BioMerieux and Eisai.
The industrial testing market is highly fragmented. While existing testing
methods are relatively inexpensive, these technologies are time consuming and
produce non-specific test results that are often unreliable.
13
As in the life science market, we are developing a portfolio of tests that would
offer enhanced speed, reliability and specificity in detecting pathogens and
other microbial contaminants in food, water and other industrial samples being
tested. We believe this will allow us to position ORIGEN competitively as the
detection method of choice for the industrial testing market.
Our competition will be determined in part by the potential applications for
which our products are developed and ultimately approved by regulatory
authorities. For certain of our future products, an important factor in
competition may be the timing of market introduction of our own or competing
products. Accordingly, the relative speed with which we or our corporate
collaborators can develop products, complete the clinical trials and approval
processes and supply commercial quantities of the products to the market are
expected to be important competitive factors.
We expect that competition with products approved for sale will be based, among
other things, on product efficacy, safety, reliability, availability, price and
patent protection.
Many of our existing or potential competitors have substantially greater
financial, technical and human resources than we do and may be better equipped
to develop, manufacture and market products. These companies may develop and
introduce products and processes competitive with or superior to ours.
Our competitive position also depends upon our ability to attract and retain
qualified personnel, obtain patent protection or otherwise develop proprietary
products or processes and secure sufficient capital resources for the often
substantial period between technological conception and commercial sales.
We do not hold a leading competitive position in the three principal markets in
which we compete.
MANUFACTURING
Our current commercial manufacturing operations consist of the manufacture of
the M-SERIES System and related reagents, PATHIGEN products and cell culture
research biologicals. We operate a qualified GMP and ISO 9001 facility. We use a
variety of suppliers and believe that we do not depend on any supplier that
cannot be replaced in the ordinary course of business.
Any changes in source of supply may require additional engineering or technical
development, with costs and delays that could be significant, in order to ensure
consistent and acceptable performance of the products.
We have not yet introduced clinical diagnostic products that are manufactured by
us. Initial clinical diagnostic products, based on our ORIGEN technology, are
being manufactured by corporate collaborators. We are presently evaluating plans
for future manufacturing of clinical diagnostic products that include direct or
third party manufacturing.
SALES AND MARKETING
We market the M-SERIES System and the ORIGEN Detection System, together with
related reagents and services, directly to the life science research market. In
conjunction with the U.S. and European launch of the M-SERIES System, we have
expanded our direct sales force, including the addition of application
specialists and in-house technical service personnel. We also utilize
distributors in Japan and Scandanavia. The ORIGEN cell culture products are sold
directly and through distributors. Substantial sales and marketing of products
based on our ORIGEN technology is conducted by corporate collaborators. See
"Collaborations."
14
HUMAN RESOURCES
As of May 31, 2002, IGEN employed 370 individuals full-time, of whom 277 were
engaged in research, product development, manufacturing and operations support,
55 in marketing, sales and applications support and 38 in general
administration. Of our employees, 64 have Ph.D. degrees. A significant number of
our management and professional employees have had prior experience with
pharmaceutical, biotechnology, diagnostic or medical products, computer software
or electronics companies. None of our employees are covered by collective
bargaining agreements, and management considers relations with its employees to
be good.
The ability to maintain our competitive position will depend, in part, upon our
continued ability to attract and retain qualified scientific, technical and
managerial personnel. Competition for such personnel is intense.
GEOGRAPHIC SEGMENTS
Information on domestic and foreign product sales is incorporated herein by
reference to ITEM 8 - Consolidated Financial Statements - Notes to Consolidated
Financial Statements - Note 11.
EXECUTIVE OFFICERS OF THE COMPANY
The names and ages of all executive officers at May 31, 2002 and their
respective positions and offices with us are set forth below. Each officer
serves without a set term.
NAME AGE POSITION
Samuel J. Wohlstadter 60 Chairman, Chief Executive Officer and
Director
Richard J. Massey, Ph.D. 55 President, Chief Operating Officer and
Director
George V. Migausky 47 Vice President, Chief Financial Officer and
Secretary
SAMUEL J. WOHLSTADTER is a founder of IGEN and has been our Chairman of the
Board and Chief Executive Officer since 1982. Mr. Wohlstadter has been a venture
capitalist for more than 25 years and has experience in founding, supporting and
managing high technology companies, including Amgen Inc., a biotechnology
company, and Applied Biosystems, Inc., a medical and biological research
products company. Mr. Wohlstadter is also Chief Executive Officer of Hyperion
Catalysis International, an advanced materials company, which he founded in
1981; of Pro-Neuron, Inc., a drug discovery company, which he founded in 1985;
of Proteinix Corporation, a development stage company organized to conduct
research in intracellular metabolic processes, which he founded in 1988; and of
Pro-Virus, Inc., a drug discovery company, which commenced operations in 1984.
RICHARD J. MASSEY, Ph.D. is one of our founders and has been President and Chief
Operating Officer since February 1992 and a director since 1990. He served as
Senior Vice President from 1985 to 1992. From 1981 until he joined us in 1983,
Dr. Massey was a faculty member in the Microbiology and Immunology Department at
Rush Medical Center in Chicago. Prior to that, he was Senior Research Scientist
at the Fredrick Cancer Center/National Cancer Institute.
GEORGE V. MIGAUSKY has been our Chief Financial Officer since 1985, assuming
that position on a full-time basis in 1992. Between 1985 and 1992, in addition
to serving as our Chief Financial Officer on a part-time basis, Mr. Migausky
also served as financial advisor to several other privately held companies.
Prior to joining us in 1985, he spent nine years in financial management and
public accounting positions, most recently as a Manager with the High Technology
Group of Deloitte & Touche.
15
OTHER KEY MANAGEMENT
In addition to our executive officers and directors, we have the following
managers directing key functions:
NAME AGE POSITION
Daniel Abdun-Nabi................ 47 General Counsel
Gerald Andros.................... 40 Director of Sales
David Boudreau................... 45 Director of Operations
R. Don Elsey..................... 48 Director of Finance and Administration
Stephen Kondor................... 47 General Manager - Clinical Diagnostics
Robert Proulx.................... 45 General Manager - Life Science Business
DANIEL ABDUN-NABI joined us in September 1999 as General Counsel. He is
responsible for all areas of corporate law, including advising us about our
domestic and international legal matters, and he provides guidance in developing
legal and business strategies and negotiating financial transactions. From 1990
to September 1999, Mr. Abdun-Nabi was Senior Vice President - Legal Affairs &
General Counsel for North American Vaccine, Inc., where he oversaw domestic and
international legal issues for that pharmaceutical company and its operating
subsidiaries. Prior to that, Mr. Abdun-Nabi spent several years in private
practice in Washington, D.C. and served for three years as an attorney with the
Division of Corporation Finance at the SEC.
GERALD ANDROS has been our Director of Sales for Life Science since 1994. He is
responsible for sales of ORIGEN products both in the United States and
internationally. Prior to joining us, Mr. Andros spent six years working in
sales management, marketing and sales training for Abbott Laboratories, where he
focused on sales of immunoassay, chemistry and hematology product lines.
DAVID BOUDREAU joined us in August 1999 as Director of Operations. He is
responsible for manufacturing, logistics and inventory management. From 1995 to
August 1999, Mr. Boudreau served as Director of Manufacturing Operations at
i-Stat, a medical diagnostics company, where he handled operational planning and
supply chain management for the United States and Canada. Prior to that he held
the position of Manufacturing Manager at Analog Devices Inc. and worked as a
process engineer at Chevron USA.
R. DON ELSEY joined us in May 2000 as Director of Finance and Administration. He
is responsible for the accounting, treasury, risk management, and human
resources functions for us. From April 1998 to February 2000, Mr. Elsey served
as Director of Finance at PE Biosystems. From 1980 to April 1998, Mr. Elsey held
a variety of financial management positions with International Business
Machines, Inc.
STEPHEN KONDOR joined us in September 2001 as General Manager, Clinical
Diagnostics. He has 22 years experience in the medical device, clinical
diagnostic, and life science markets, including 14 years for Abbott Labs
Diagnostic Products Division where during his tenure, he held various sales,
marketing, and business general management positions most recently as Worldwide
Commercial Director for the Hematology Business Unit. Mr. Kondor was Senior Vice
President at Avocet Medical from January 2000 until joining us in September
2001, where he was responsible for marketing products to the point of care
clinical diagnostic community. From 1996 to 2000, he was Executive Vice
President World Wide Marketing & Sales at Biometric Imaging, Inc.
16
ROBERT PROULX joined us in March 2000 as General Manager of the Life Sciences
Business. Mr. Proulx has primary responsibility for managing sales, marketing
and product development efforts for our life science research
business. From 1989 to February 2000 Mr. Proulx held various positions at
Packard Instrument Company, Inc., which specializes in instrumentation and
reagents for the life science research market. Immediately prior to leaving
Packard, Mr. Proulx served as Vice President, Marketing.
RISK FACTORS
IF THE COMPANIES THAT LICENSE TECHNOLOGY FROM US DO NOT EFFECTIVELY DEVELOP AND
MARKET PRODUCTS BASED ON THAT TECHNOLOGY, OUR REVENUE WOULD BE ADVERSELY
AFFECTED.
The success of our business depends, in large part, on how effectively the
companies to which we have licensed our technology develop and market that
technology. If these companies do not effectively develop and market products
based on this technology, our revenues would decrease.
We have licensed our technology to BioMerieux, Eisai Co., Ltd., and Roche
Diagnostics GmbH for selected markets and uses. Our license agreements with each
of these companies allow each company to develop products using our technology
and to manufacture and sell those products in selected markets. In return for
the right to use our technology, each of these companies must pay royalties to
us based on revenues they receive from sales of products based on our
technology. These royalties are a significant part of our overall revenue.
For example, they accounted for 64% of our revenue in fiscal year 2002. We have
brought a lawsuit against Roche, one of our licensees, in part because we
believe Roche has not properly calculated and paid royalties to us. See the risk
factor immediately below for a more detailed description of this litigation and
the risks it poses to us. Similar or other problems may arise with other
companies to whom we license our technology.
WE ARE SUING THE LARGEST LICENSEE OF OUR TECHNOLOGY, AND THE OUTCOME OF THAT
LITIGATION COULD MATERIALLY ADVERSELY AFFECT OUR REVENUES AND FINANCIAL
CONDITION.
We have an ongoing lawsuit against Roche, which is the largest licensee of our
technology in terms of royalty income accounting for over 90% of our royalty
income in fiscal 2002. The lawsuit centers on a number of claims we assert
against Roche in which we allege that they failed to comply with the terms of
our license agreement with them. Roche filed a counterclaim against us in the
lawsuit alleging, among other things, that we breached the Roche license
agreement by permitting Eisai Co. Ltd., another of our licensees, to market some
ORIGEN-based products in Japan.
The United States District Court issued a final order of judgment in our case
against Roche that awarded us $105 million in compensatory damages and $400
million in punitive damages, confirmed our right to terminate the Roche license
agreement, directed and commanded Roche to grant to us for use in our retained
fields a license to all improvements developed by Roche under the agreement,
including Roche's Elecsys(R) diagnostics product line, and barred Roche from
marketing, selling, placing or distributing outside of its licensed field any
products, including its Elecsys diagnostics product line, that are based on our
ORIGEN(R) technology. We have voluntarily agreed not to terminate the license
agreement until an appellate court determines that we are entitled to do so;
however, we have already notified Roche that the license agreement will
terminate automatically once the judgment is affirmed by the Court of Appeals.
17
The final judgment issued in this case also found in our favor and against Roche
on all of Roche's counterclaims, except for one in which we were ordered to pay
$500,000. Roche has filed a notice of appeal. During the appeal process, Roche
is obligated to continue to comply with the terms of the license agreement.
The risks involved in the litigation include:
- - The appellate court may modify or overturn some or all of the judgment
favorable to us including the finding that Roche materially breached the
license agreement, the scope and extent of the improvements awarded to us,
the amount of compensatory and punitive damages, or the favorable findings
relating to Roche's counterclaims against us.
- - The appellate court could overturn some or all of the judgment and order a
new trial on those issues. For example, if the court orders a new trial on
whether or not Roche miscalculated and underpaid royalties, breached its
duty of good faith and fair dealing, or engaged in unfair competition
against us, the amount of damages awarded in a new trial could be lower
than the amount already awarded to us.
- - If the court orders a new trial on any of the issues, we might need to
continue expending significant amounts of money and management time in
pursuing our claims against Roche. This time and money will then be
unavailable for use in the development of our business.
- - If the appellate court upholds the judgment that Roche materially breached
the license agreement, and the license agreement is terminated, our royalty
revenues would suffer unless and until we were able to introduce new
products and generate revenues on our own or find one or more comparable
replacements for Roche.
- - We may not be able to find a suitable replacement for Roche or successfully
introduce new products on our own following termination of the license. Our
ability to successfully commercialize new products, including products
based on the improvements awarded to us in this litigation, is subject to
numerous risks and uncertainties including risks relating to:
- the need for governmental approvals;
- our ability to compete effectively;
- our ability to effectively manufacture and market new products;
- our ability to attract and retain employees;
- our need for additional financing;
- our dependence on suppliers; and
- the other risks applicable to our business as more completely
described herein and in other filings with the SEC.
While an appeal is pending, Roche may divert its attention from selling the
licensed products that generate royalties to us and focus its energies instead
to find alternative products to develop and market.
18
While an appeal is pending, Roche may continue to market and sell other Roche
products that compete with its ORIGEN-based products, thereby lowering the
royalty revenues that we would have otherwise received if Roche had sold more
ORIGEN-based products instead of its other competing products.
We also sued Hitachi Ltd. which manufactures diagnostic equipment based on
ORIGEN technology for Roche. On June 13, 2002, we and Hitachi reached agreement
that settled this lawsuit. In the past, Roche has attempted to sue us for
interfering with its contract with Hitachi because we filed this lawsuit. That
claim was twice dismissed by the court. Roche may, following this settlement
agreement, try to bring this claim against us again.
FAILURE TO MEET OUR DEBT OBLIGATIONS COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION; IN ADDITION, OUR DEBT SERVICE OBLIGATIONS
COULD IMPAIR OUR OPERATING FLEXIBILITY.
We have a total debt balance at March 31, 2002 of $53.2 million. There is a
possibility that we may be unable to generate cash or arrange financing
sufficient to pay the principal of, interest on and other amounts due in respect
of our indebtedness when due, or in the event any of our indebtedness is
accelerated.
Termination of the license agreement with Roche would cause approximately $23.1
million of our debt payment obligations as of March 31, 2002, under our 8.5%
senior secured notes to accelerate. The note purchase agreement for the 8.5%
senior secured notes also contains covenants that limit our ability to take
specified actions, including incurring additional secured debt and amending our
license agreement with Roche, which could affect our ability to resolve issues
that are being litigated through an amendment to the existing license agreement
with Roche. These restrictions may limit our operating flexibility, as well as
our ability to raise additional capital.
In addition, our substantial leverage may require that we dedicate a substantial
portion of our expected cash flow from operations to service our indebtedness,
which would reduce the amount of our expected cash flow available for other
purposes, including working capital and capital expenditures.
In January 2000, we sold $35 million in aggregate principal amount of 5%
subordinated convertible debentures due 2005. Unless and until holders of the
debentures convert their debentures into Common Stock, we are required to make
semi-annual interest payments of $875,000 through 2005. If we are unable to meet
our obligations under the subordinated convertible debentures, the debenture
holders could require us to repay the principal amount of, and accrued interest
on, the subordinated convertible debentures, and we may not have sufficient
financial resources or be able to arrange sufficient financing to make those
payments when required.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO INCUR FUTURE LOSSES.
We have experienced significant operating losses each year since our inception,
and we expect those losses to continue. We also have an accumulated deficit. Our
losses have resulted principally from costs incurred in research and
development, litigation costs, selling costs and other general and
administrative costs. We expect to incur additional operating losses as a result
of increases in expenses for manufacturing, marketing and sales capabilities,
litigation costs and expenses, research and product development, the transfer
and commercialization of improvements from Roche, general and administrative
costs and our share of losses in MSD.
19
We may not achieve profitability in the future. Our ability to become profitable
in the future will depend on, among other things, our ability to:
- - expand the commercialization of our existing products;
- - upgrade and enhance the M SERIES product capabilities;
- - introduce new products into the market, including products for the
markets currently served by Roche following termination of Roche's
license with us;
- - develop our marketing capabilities cost-effectively;
- - develop sales and distribution capabilities cost-effectively; and
- - establish successful collaborations with corporate partners to develop
and commercialize products that incorporate our technologies.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND THESE
FLUCTUATIONS MAY CAUSE OUR STOCK PRICE TO FALL.
Our quarterly operating results depend upon:
- - the volume and timing of orders for M-SERIES or other products;
- - the timing of instrument deliveries and installations;
- - the success of M-SERIES upgrades and enhancements;
- - variations in revenue recognized from royalties and other contract
revenues;
- - our mix of products sold;
- - whether our instruments are sold to or placed with customers;
- - the timing of our introduction of new products;
- - our competitors' introduction of new products;
- - variations in expenses we incur in connection with the operation of our
business, including costs associated with the transfer of improvements
from Roche to us, research and development costs including costs
associated with developing and commercializing new products for the
markets currently served by Roche, and sales and marketing costs,
including costs for upgrading the M-SERIES products;
- - our share of losses in MSD;
- - our manufacturing capabilities; and
- - the volume and timing of product returns and warranty claims.
20
These factors may cause our quarterly operating results to fluctuate
significantly, which in turn, may cause our stock price to fall. In addition,
because our revenues and operating results are volatile and difficult to
predict, we believe that period-to-period comparisons of our results of
operations are not a good indication of our future performance.
WE MAY NOT BE ABLE TO RAISE SUFFICIENT ADDITIONAL CAPITAL TO SUCCESSFULLY
DEVELOP OUR BUSINESS.
We need substantial amounts of money to fund our operations. Our access to funds
could be negatively impacted by many factors, including the results of pending
litigation, the volatility of the price of Common Stock, continued losses from
operations, acceleration of debt payment obligations resulting from termination
of the license agreement with Roche and other factors.
We may need to raise substantial amounts of money to fund a variety of future
activities integral to the development of our business, including the following:
- - for research and development in order to successfully develop our
technologies, including to develop new products for the clinical
diagnostic markets that are currently being served by Roche;
- - to obtain regulatory approval for some of our products;
- - to file and prosecute patent applications in order to protect our
technology;
- - to respond to innovations that our competitors develop;
- - to continue to aggressively pursue our ongoing litigation against Roche;
- - to retain qualified employees, particularly in light of intense competition
for qualified scientists and engineers;
- - to make new arrangements to market our technology, including the
markets currently being served by Roche following the termination of
our license agreement with Roche;
- - to continue to fund investments in MSD;
- - to manufacture products ourselves or through a third party; and
- - to market different products to different markets, either through
building our own sales and distribution capabilities or relying on a
third party.
We may not have access to enough funds to successfully develop our business. We
may try to raise necessary additional capital by issuing additional debt or
equity securities. Holders of debt securities would have priority over our
equity holders with respect to the proceeds from the sale of our assets in the
event of liquidation of our business, and any debt financings we obtain may
contain restrictive terms that limit our operating flexibility. If, on the other
hand, we raise additional capital by selling more common or preferred stock, the
holdings of existing stockholders would be diluted.
If we are unable to raise additional capital, we may have to scale back, or even
eliminate, some programs. Alternatively, we may have to consider pursuing
arrangements with other companies, which may not be on terms favorable.
21
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST MORE ESTABLISHED COMPANIES AND
INSTITUTIONS, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
We are a relatively young company in a highly competitive industry. We compete
against established companies and research and academic institutions, and we
expect this competition to intensify. Many of these companies and institutions
have one or more competitive advantages over us, including:
- - more money to invest;
- - greater expertise and resources in developing, manufacturing, marketing and
selling products;
- - a larger, more experienced workforce; and
- - more experience in obtaining regulatory approval for clinical diagnostic
products.
As a result, we may not be able to compete successfully against our current or
future competitors. This could have a material adverse effect on our business,
financial condition and revenue.
OUR PRODUCTS MAY BECOME OBSOLETE IF WE EXPERIENCE DIFFICULTIES OR DELAYS IN
PRODUCT DEVELOPMENT.
The market for our products is characterized by rapidly changing technology,
evolving industry standards, the need for updated and effective technology and
new product introduction. Our future success will depend in part upon our
ability to enhance existing products and to develop and introduce new or
enhanced products. We may not be able to avoid the obsolescence of our products
due to rapid technological change and evolving industry standards. The
development of new or enhanced products is a complex and uncertain process
requiring the accurate anticipation of technological and market trends as well
as precise technological execution. We have and may continue to experience
design, development, implementation and other difficulties that could delay or
prevent our introduction of new or enhanced products or affect the performance
of existing products. These difficulties and delays have caused, and may
continue to cause, our expenses to increase and our product sales to fluctuate.
WE DEPEND ON HIGHLY TRAINED AND SKILLED EMPLOYEES AND MANAGEMENT, AND WE MAY NOT
BE ABLE TO ATTRACT AND RETAIN SUFFICIENT PERSONNEL.
We need to hire additional staff and to retain existing staff, both of which are
difficult in today's competitive marketplace. Because we are a technology
company, we depend heavily on scientists and engineers to develop products and
to build a successful business. Research and development efforts could suffer if
we are not able to hire and retain enough qualified scientists and engineers. We
compete with other technology companies and research and academic institutions
for experienced scientists. Many of these companies and institutions have
greater resources than we do and thus may be in a better position to attract
desirable candidates.
In addition to scientists, we will also need to hire managers as the business
grows. We will need managers who are able to address the need for regulatory,
manufacturing and marketing capabilities. If we are not able to hire managers
with these skills, or develop expertise in these areas, our business prospects
could suffer.
22
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS FOR MATERIALS USED IN MANUFACTURING
OUR PRODUCTS, AND ANY INTERRUPTION IN THE SUPPLY OF THOSE MATERIALS COULD HAMPER
OUR ABILITY TO MANUFACTURE PRODUCTS AND MEET CUSTOMER ORDERS.
We depend on vendors to supply key materials that we use in our products. Some
of these materials are available only from limited sources. In the event of a
reduction in, interruption of, or degradation in the quality of the supply of
any of our required materials, or an increase in the cost of obtaining those
materials, we would be forced to locate an alternative source of supply. If no
alternative source were available or if an alternative source were not available
on a timely basis or at a reasonable cost or otherwise on acceptable terms, our
ability to manufacture one or more of our products would be delayed or halted.
Any changes in sources of supply may require additional engineering or technical
development in order to ensure consistent and acceptable performance of the
products. If any of these events occur, product costs may increase, we might be
unable to deliver products timely, we could lose sales as well as customers, and
our business would be significantly harmed as a result.
WE MUST OBTAIN FDA APPROVAL TO MARKET OUR CLINICAL DIAGNOSTIC PRODUCTS, WHICH IS
OFTEN COSTLY AND TIME CONSUMING, AND IF WE DO NOT OBTAIN THE NECESSARY APPROVAL
OUR BUSINESS PROSPECTS WOULD SUFFER.
The FDA regulates many areas in which we conduct research and in which we
develop, produce and market products. In particular, we must obtain FDA approval
before we can market clinical diagnostic products such as those we are currently
developing for the patient care market. The approval process is often costly and
time consuming. We may not be successful in obtaining FDA approval for any of
our clinical diagnostic products, which would materially adversely affect our
future prospects.
In order to obtain FDA approval in the United States, we, or the companies with
whom we work, will need to either obtain pre-market application approval or
pre-market notification clearance from the FDA. In order to obtain pre-market
notification clearance, we must submit data from clinical trials demonstrating
that new clinical diagnostic systems are substantially equivalent to diagnostic
systems that the FDA has already approved. If a product is subject to the
substantial equivalence requirement, neither we, nor any of our licensees can
sell that system for clinical use in the United States until the FDA determines
that a new ORIGEN-based system is substantially equivalent to a previously
approved system. Typically, the FDA review process takes 90 days, but the FDA's
review could take longer. In addition, we may not be able to demonstrate
substantial equivalence for future diagnostic systems.
If we do not successfully demonstrate substantial equivalence, or if we are
required to obtain pre-market application approval as an initial matter, we will
have to conduct extensive clinical testing of these products, which could take
years to complete. Extensive testing could involve substantial additional costs
and might delay bringing clinical diagnostic products to market, weakening our
competitive position. If we fail to obtain FDA approval for new products
altogether, we will be unable to market our ORIGEN-based systems at all for
clinical use in the United States.
WE ARE SUBJECT TO EXTENSIVE, ONGOING GOVERNMENT REGULATION, WHICH MAY INVOLVE
SIGNIFICANT COSTS AND MAY RESTRICT OUR ABILITY TO CONDUCT BUSINESS.
We expect that we may need to spend a substantial amount of money to comply on
an ongoing basis with the regulations of the FDA and other government agencies.
Government agencies, such as the FDA and the Environmental Protection Agency,
regulate manufacturers of diagnostic products and the manufacturing process
itself.
23
The costs of complying with governmental regulations and any restrictions that
government agencies might impose could have a significant impact on our
business. As we increase our manufacturing, these costs will increase.
Whether we manufacture products ourselves or contract with another company to
manufacture products based on our technology, the FDA will continually review
and periodically inspect the manufacturing process. If the FDA were to discover
a problem with our products, the manufacturing process or the manufacturing
facility, the FDA could place restrictions on these products and on the
manufacturer. For example, the FDA could require us to recall, or even totally
withdraw, a product from the market or close a manufacturing facility. In
addition to FDA regulations, the process of manufacturing products is subject to
a variety of environmental and safety laws and regulations, including laws and
regulations governing the use and disposal of hazardous materials. If we fail to
comply with these laws or regulations, our business and financial condition
could be materially adversely affected.
WE HAVE LIMITED MANUFACTURING AND MARKETING EXPERIENCE, WHICH PUTS US AT A
COMPETITIVE DISADVANTAGE.
We lack experience in large-scale manufacturing, which could hamper our ability
to manufacture existing products or new products that we develop. We have two
options to address this issue. First, we could expand our internal ability to
manufacture products. Second, we could contract with a third party to
manufacture for us products based on our technology. If, however, we are unable
to expand our own manufacturing capability or find a suitable manufacturer on
acceptable terms in a timely manner, we may be unable to meet demand for
existing products and could be delayed in introducing new products to the
market. Failure to meet demand for existing products or delays in introducing
new products could put us at a competitive disadvantage and could harm our
financial condition or our business prospects.
We will also need to develop greater selling, marketing and distribution
capabilities. To market clinical diagnostic products directly to customers, and
not through a licensee, we need to develop a substantial sales force with
technical expertise. We also need to establish a distribution system to support
the sales force. Alternatively, we could license or contract with another
company to provide sales and distribution services for products, in much the
same way as we have done with Roche, Eisai and BioMerieux. We may not be able to
develop a sufficient sales and distribution force or find a suitable company to
fill that role for us.
THE SUCCESS OF OUR BUSINESS DEPENDS ON PATENTS THAT WILL EXPIRE AND THAT MUST BE
ACTIVELY PURSUED AND PROTECTED.
Our business depends heavily on patents that will expire over time and may be
challenged or circumvented by competitors. Patents allow us to prevent others,
for a time, from using our inventions to compete against us. Our business
success or failure will depend, in part, on our ability to obtain and maintain
adequate patent protection for the ORIGEN technology. Our current patents or
future patents may not adequately protect our technology from being used by our
competitors.
Because there is no consistent policy governing the scope of claims in medical
patents, patent protection is uncertain. Companies may, for example, challenge
and invalidate patents or circumvent valid claims in patents, all of which could
make it necessary for us to defend our patents in litigation. Litigation over
patents poses the following risks to our business:
- - Litigation costs can be extremely high, which could drain our financial
resources.
- - Litigation over our patents could discourage other companies from
working with us to develop and market new products based on technology
covered by these disputed patents.
- - If we lose some patent protection as a result of litigation, our
competitive advantage could be eroded.
24
OUR BUSINESS WOULD BE HARMED IF WE VIOLATE THE PATENT RIGHTS OF OTHERS.
Our business success or failure will also depend, in part, on the patent rights
of others. We license technology from other companies and academic institutions.
Because access to this technology is necessary to our business, we must be
certain that we comply with these license agreements. Our business could be
harmed if we breached any of these license agreements and lost the rights to use
this patented technology or if we were unable to renew existing licenses on
acceptable terms or get additional licenses that we may need on acceptable
terms.
We must also make sure that we do not infringe the patent rights of others. If
we were to infringe others' patent rights we could be exposed to the following
risks:
- - We could be required to alter, or abandon, our products or processes.
- - We could be required to obtain a license from the patent holder.
- - We could lose customers that are reluctant to continue using our products
or doing business with us.
- - We could be forced to abandon development work that we had begun with
respect to these products.
- - We could be required to pay damages that could be substantial.
If we infringe others' patent rights, our business could be damaged if we were
unable to make necessary alterations or obtain a necessary license on acceptable
terms.
In addition, we may need to litigate the scope and validity of patents held by
others and such litigation could be a substantial cost for us.
WE RELY ON TRADE SECRETS AND OTHER INFORMATION THAT CANNOT BE PROTECTED BY
PATENTS, AND WE FACE RISKS THAT THIS INFORMATION WILL BE DISCLOSED TO OTHERS.
In addition to patents, we also rely in our business on trade secrets, know-how
and other proprietary information. If this information were disclosed to
competitors, our business would suffer. We seek to protect this information, in
part, by entering into confidentiality agreements with licensees, employees and
consultants, which prohibit these parties from disclosing our confidential
information. These agreements may not provide adequate protection for our trade
secrets, know-how and other proprietary information or ensure that the
information we share with others during the course of our business will remain
confidential. We may not have sufficient legal remedies under the agreements or
otherwise to correct or compensate for unauthorized disclosures or sufficient
resources to seek redress.
RESTRICTIONS ON HEALTH CARE COSTS AND HEALTH CARE AND INSURANCE FINANCING
PRACTICES COULD LIMIT DEMAND FOR OUR PRODUCTS.
In the United States and elsewhere, demand for clinical diagnostic testing is
dependent, in part, on consumers' ability to be reimbursed for the cost of the
tests by third-party payers, such as government agencies, health maintenance
organizations and private insurers. Medicaid and other third-party payers are
increasingly challenging the prices charged for medical services, including
clinical diagnostic tests. They are also attempting to contain costs by limiting
their coverage of, and the amount they will reimburse for, clinical diagnostic
tests and other health care products.
25
Without adequate coverage and reimbursement, consumer demand for clinical
diagnostic tests may decrease. Decreased demand would likely cause sales of our
clinical diagnostic products, and sales by our licensees, to fall since fewer
tests would be performed or prices would be lowered, or both. Reduced sales or
royalty income would hurt our business and our business prospects.
In many foreign markets, governments directly set the prices that clinical
diagnostic companies may charge for their products and services. In the United
States, a number of legislative and regulatory proposals aimed at changing the
health care system have been proposed in recent years. Foreign and domestic
legislative and regulatory initiatives that limit health care coverage may have
a materially adverse effect on our business and our business prospects.
WE ARE EXPOSED TO PRODUCT LIABILITY RISKS THAT, IF NOT ADEQUATELY COVERED BY
INSURANCE, MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION.
We may not be able to adequately insure against risk of product liability. As we
begin marketing products, we may face product liability for claims and lawsuits
brought by customers. Damages awarded in product liability cases can be very
large. While we have product liability insurance, this coverage is limited. We
may not have adequate product liability insurance to cover us against our
potential liabilities or be able to maintain current levels of product liability
insurance on acceptable terms, if at all. Claims or losses in excess of our
current or future product liability insurance coverage could have a material
adverse effect on our financial condition.
MEMBERS OF OUR MANAGEMENT TEAM EXERCISE SIGNIFICANT CONTROL OVER IGEN AND MAY BE
ABLE TO CONTROL THE OUTCOME OF PROPOSED CORPORATE ACTIONS SUPPORTED OR OPPOSED
BY OTHER IGEN STOCKHOLDERS.
Our officers and directors in aggregate, own or have the right to purchase,
approximately 28% of Common Stock and our Chief Executive Officer owns
approximately 21% of the Common Stock at January 17, 2002. As a result, certain
of our officers and directors have significant influence over the election of
directors and may be able to control the outcome of proposed corporate actions
supported or opposed by other IGEN stockholders.
FAILURE TO MANAGE OUR GROWTH COULD ADVERSELY AFFECT OUR BUSINESS.
We have grown rapidly and expect to continue to grow by hiring new employees in
all areas of our operations, increasing our presence in existing markets and
introducing new products we develop into new potential high-growth markets. Our
growth has placed, and continues to place, a strain on our management and our
operating and financial systems.
As we grow, our personnel, systems, manufacturing capabilities and resources,
procedures and controls may be inadequate to support future operations. In order
to accommodate the increased operations for sales and marketing, research and
development, facilities and administration, we will need to hire, train and
retain the appropriate personnel. We may also need to improve our financial and
management controls, reporting systems and operating systems. We may encounter
difficulties in developing and implementing other new systems.
In response to our growth, we have recently implemented a new enterprise
resource planning system in order to automate all of our accounting,
manufacturing, sales and purchasing. If the enterprise resource planning system
fails to operate as we expect or experiences delays or interruptions, our
operations, as well as our ability to manage our increased growth, could be
materially adversely affected.
26
PROVISIONS OF OUR GOVERNING DOCUMENTS MAY DETER OTHERS FROM ATTEMPTING TO
ACQUIRE US.
Our governing documents contain provisions designed to prevent hostile
takeovers, which may limit the ability of stockholders to sell their stock at a
premium in a takeover. According to our governing documents, stockholders can
only act at annual meetings or at special meetings of stockholders. Stockholders
are not allowed to act by written consent. In addition, stockholders are not
allowed to call for a special meeting. Only our board of directors, the chairman
of the board or the president may call a special meeting. These provisions may
make it difficult for stockholders to force us to hold special meetings. These
provisions may also limit the ability of stockholders to consider transactions
that they may want to approve, such as a hostile takeover of us.
Our governing documents also contain other provisions that could make it more
difficult for a change in control to be effected. Our board of directors can
issue preferred stock and can determine the rights of those preferred
stockholders without the approval of holders of Common Stock. For example, our
board of directors could give preferred stockholders one or more votes on issues
on which holders of Common Stock vote. This could have the effect of diluting
the voting rights of holders of Common Stock, which might further discourage
other companies from trying to acquire us.
In addition, our certificate of incorporation contains provisions dividing our
board of directors into three classes. Each class serves until the third
succeeding annual meeting, and one class is elected at each annual meeting of
stockholders.
As a result, even if our stockholders might prefer to effect a change sooner, it
could take at least two annual meetings of stockholders to change a majority of
the members of the board of directors.
Furthermore, our certificate of incorporation authorizes, and we have adopted, a
preferred share purchase rights plan, commonly referred to as a "poison pill."
Under the rights plan, we made a dividend distribution to the stockholders of
record on November 6, 1996 of one right to purchase from us one one-hundredth of
a share of our preferred stock for each outstanding share of our Common Stock.
The terms of the rights and the circumstances under which they may be exercised
are contained in a rights agreement, which has been filed with the SEC.
These terms have been designed to deter hostile takeovers of us, even though our
stockholders might favor a takeover, especially if it were to afford them an
opportunity to sell their stock at a price above the prevailing market rate.
OUR STOCK PRICE IS VOLATILE AND COULD DROP PRECIPITOUSLY AND UNEXPECTEDLY.
Our Common Stock currently trades on The Nasdaq National Market. The prices of
publicly traded stock often fluctuate. The price of our stock may rise or fall
dramatically, even though our business performance has not changed. In the past,
the stock price of technology companies has been especially volatile. We expect
that this will continue to be the case.
In addition to these fluctuations, an investment in our stock could be affected
by a wide variety of factors that relate to our business and industry, many of
which are outside of our control. For example, the value of our Common Stock
could be affected by:
- - new product introductions;
- - innovations by competitors;
27
- - our competitors' announcements of their financial results;
- - the failure of our operating results to meet or exceed the expectations of
investors and analysts;
- - changes in financial estimates and recommendations by security analysts;
- - general economic conditions;
- - disputes over patents or other proprietary rights;
- - new or existing litigation, including our litigation with Roche;
- - publicity;
- - regulations;
- - market conditions; and
- - fluctuations in our performance and the performances of our licensees.
On May 22, 2002, we notified holders of the outstanding Series B shares that we
plan to redeem those shares on July 9, 2002 for their liquidation value. We
expect that holders will elect to convert their Series B shares into our common
stock prior to that date, which could lead to volatility in our stock price.
WE DO NOT PLAN TO PAY ANY CASH DIVIDENDS ON OUR COMMON STOCK.
We have never paid cash dividends on our Common Stock and we have no plans to
pay cash dividends in the foreseeable future.
THE VALUE OF THE COMMON STOCK MAY BE DILUTED IN THE FUTURE.
Our officers, directors, employees and consultants have options to purchase a
significant aggregate amount of our Common Stock. If they exercise their options
and purchase Common Stock, our Common Stock will be diluted. In addition, we
currently have preferred stockholders and convertible debenture holders who have
the right to convert their preferred shares and debentures, as the case may be,
to Common Stock. Our Common Stock would be diluted if these preferred
stockholders or convertible debenture holders decide to convert their securities
in the future. Moreover, our Common Stock could be further diluted if we issue
additional Common Stock or securities convertible into Common Stock in the
future, which we may need to do to raise funds for our business.
Sales of additional shares of our Common Stock or the conversion of securities
into our Common Stock could cause the market price of our Common Stock to
decrease.
ITEM 2. PROPERTIES
Our principal administrative, marketing, manufacturing and research and
development facilities consist of approximately 116,000 square feet located in
four buildings in Gaithersburg, Maryland. Our leases expire at various times
from 2005 through 2010. We have an additional 23,000 square feet of leased
research and development and sales facilities in Vienna, Virginia; San Diego,
California; and Oxford, England. We believe that current facilities should be
adequate for anticipated expansion needs.
28
ITEM 3. LEGAL PROCEEDINGS
ROCHE DIAGNOSTICS (ROCHE)
In 1997, the Company filed a lawsuit against Roche Diagnostics GmbH (formerly
Boehringer Mannheim GmbH) 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 technology. In its lawsuit, the Company
alleged that Roche failed to perform certain material obligations under the
Agreement and engaged in unfair competition against the Company.
The jury trial in this litigation was completed in January 2002, and in February
2002, the Court issued a final order of judgment that awarded the Company $105
million in compensatory damages and $400 million in punitive damages, confirmed
the Company's right to terminate the Agreement, and directed and
commanded Roche to grant to the Company for use in its retained fields a license
to certain improvements developed by Roche under the Agreement.
Roche was also ordered, at its sole cost and expense, to deliver such
improvements to the Company and to provide all other information and materials
required or necessary to enable the Company to commercialize these improvements.
Improvements, as defined in the judgment, include Roche's Elecsys(R) 1010, 2010
and E170 lines of clinical diagnostic immunoassay analyzers, the tests developed
for use on those systems, and Roche's nucleic acid amplification technology
called PCR. The jury further concluded that Roche violated its duty to the
Company of good faith and fair dealing, engaged in unfair competition against
the Company, and materially breached the license agreement.
The judgment bars Roche from marketing, selling, placing or distributing outside
of its licensed field any products, including its Elecsys diagnostics product
line, that are based on the Company's ORIGEN(R) technology. While the Company
has voluntarily agreed not to terminate the License Agreement until an appellate
court determines that it is entitled to do so, the Company has notified Roche
that the License Agreement will terminate automatically once the Company's right
is affirmed by the appellate court. Upon termination, Roche will be prohibited
from commercializing all ORIGEN-based products in all fields. At that time, the
Company will be free to operate, either independently or with new partners, in
all fields, including those currently licensed to Roche.
Roche filed counterclaims against the Company alleging, among other things, that
IGEN breached the License Agreement by permitting Eisai Co., Ltd., another of
the Company's licensees, to market certain ORIGEN-based products in Japan. The
final judgment issued in the litigation found in the Company's favor and against
Roche on all of Roche's counterclaims, except for one in which we were ordered
to pay $500,000.
Roche has filed a notice of appeal with the U.S. Court of Appeals for the Fourth
Circuit. In connection with the filing of that appeal, Roche posted a $600
million bond to support its financial obligations to the Company under the
judgment. During the appeal process, which the Company expects will be completed
in 2003, Roche is obligated to continue to comply with the terms of the
Agreement, including its obligation to continue to pay the Company
royalties on Roche's sales of royalty-bearing products and to share and deliver
improvements.
29
Roche's obligation to pay the $505 million of monetary damages awarded to the
Company is suspended until completion of the appeal process. The Company has
also filed a notice of appeal on the judgment issued under the Roche
counterclaim. Although the Company will vigorously oppose Roche's appeal, Roche
may ultimately prevail in its attempt to modify or overturn the judgment issued
in this litigation.
In 1998, a subsidiary of Ares-Serono ("Serono") filed a patent infringement
claim against the Company, Roche and BioMerieux (formerly Organon Teknika) in
the U.S. District Court, District of Delaware. The action claimed that a Serono
patent was being infringed by the parties. Subsequently, F. Hoffman LaRoche,
Ltd., a member of the Roche family of companies, acquired the patent from Serono
and continued in Serono's place to assert the infringement claim against the
Company and BioMerieux. A trial was held on this matter during February 2001.
During November 2001, a settlement was reached between the Company and Roche
under which Roche dismissed with prejudice all claims against the Company, paid
the Company $5.7 million as reimbursement for legal fees incurred in the
litigation and granted the Company a fully paid-up, perpetual, worldwide,
non-exclusive license (with the right to grant sublicenses) to the patent in
suit.
HITACHI
In 1997, IGEN International K.K., a Japanese subsidiary of the Company, filed a
lawsuit in Tokyo District Court against Hitachi Ltd. ("Hitachi"). The lawsuit
sought to enjoin Hitachi from infringing a license registration held by IGEN
K.K. and Eisai Co., Ltd., a company to which IGEN has licensed ORIGEN technology
rights. The lawsuit requested injunctive relief preventing Hitachi from
manufacturing, using or selling the Elecsys 2010, which incorporates the
Company's patented ORIGEN technology, in Japan. On June 13, 2002, Hitachi and
the Company reached an agreement to settle this litigation and the case has been
dismissed.
OTHER PROCEEDINGS
In February 2001, Brown Simpson Strategic Growth Fund L.P., Brown Simpson
Strategic Growth Fund, Ltd. and Brown Simpson Partners I (collectively "Brown
Simpson") initiated a shareholder derivative lawsuit for and on behalf of the
shareholders of the Company in the Circuit Court for Montgomery County, Maryland
against four of the Company's current directors, two former directors, three
executive officers and the Company as a nominal defendant. In the complaint, the
Brown Simpson alleged breach of fiduciary duties by the named individual
defendants in connection with transactions between the Company and other
entities in which certain directors and officers are alleged to have an
interest, including the Meso Scale Diagnostics, LLC. joint venture.
In March 2001, a second shareholder derivative lawsuit was filed by Laurence
Paskowitz in the Circuit Court for Montgomery County, Maryland with allegations
substantially the same as those set forth in the complaint filed by Brown
Simpson. The complaint was later amended to add direct claims against the
defendants and to seek class action certification for those direct claims.
Both lawsuits sought principally the following: that the defendants hold in
trust and be required to account for and restore to the Company damages that
IGEN has allegedly sustained by reason of the allegations and relief relating to
board and management composition. The Paskowitz complaint also sought damages
for a class of IGEN shareholders for the direct claims against the individual
defendants. The complaints did not include any claims against the Company.
The Company and the individual defendants filed motions to dismiss or, in the
alternative, for summary judgment in both lawsuits. On May 15, 2002, following
hearings in December 2001 and March 2002, the court issued an opinion and order
dismissing all claims asserted against all of the defendants. On June 19, 2002,
an appeal was filed by one of the plaintiffs.
30
The Company believes that the claims are without merit and it intends to
vigourously oppose the appeal filed in this case.
The Company is involved, from time to time, in various other legal proceedings
arising in the ordinary course of business. In the opinion of management, the
Company does not believe that any legal proceedings described as Other
Proceedings will have a material adverse impact on its financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders of the Company during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is quoted on The Nasdaq National Market under the
symbol IGEN. As of June 17, 2002, there were approximately 8,300 holders of
record of the Company's Common Stock. No cash dividends have been paid on the
Common Stock to date, and the Company currently intends to retain any earnings
for development of the Company's business.
The following table sets forth, for periods indicated, the range of high and low
closing sales prices of the Common Stock as quoted on The Nasdaq National
Market.
FISCAL 2002 HIGH LOW
First Quarter $ 26.00 $ 16.75
Second Quarter $ 32.72 $ 23.55
Third Quarter $ 40.52 $ 26.98
Fourth Quarter $ 44.23 $ 35.84
FISCAL 2001
First Quarter $ 23.50 $ 12.88
Second Quarter $ 21.88 $ 15.75
Third Quarter $ 24.88 $ 10.25
Fourth Quarter $ 18.94 $ 11.06
The following table sets forth, as of March 31, certain information with respect
to compensation plans under which the Company's common stock is authorized for
issuance.
EQUITY COMPENSATION PLAN INFORMATION
- -------------------------------- ------------------------- -------------------- -----------------------------
PLAN CATEGORY NUMBER OF SECURITIES TO WEIGHTED AVERAGE NUMBER OF SECURITIES
BE ISSUED UPON EXERCISE EXERCISE PRICE OF REMAINING AVAILABLE FOR
OF OUTSTANDING OPTIONS, OUTSTANDING FUTURE ISSUANCE UNDER
WARRANTS AND RIGHTS OPTIONS, WARRANTS EQUITY COMPENSATION PLANS
AND RIGHTS (EXCLUDING SECURITIES
(A) (B) REFLECTED IN COLUMN (A))
(C)
- -------------------------------- ------------------------- -------------------- -----------------------------
EQUITY COMPENSATION PLANS
APPROVED BY SECURITY HOLDERS 1,335,829 $13.31 822,558
- -------------------------------- ------------------------- -------------------- -----------------------------
EQUITY COMPENSATION PLANS NOT
APPROVED BY SECURITY HOLDERS 0 Not applicable 250,000
- -------------------------------- ------------------------- -------------------- -----------------------------
TOTAL 1,335,829 $13.31 1,072,558
- -------------------------------- ------------------------- -------------------- -----------------------------
31
DESCRIPTION OF 2001 BROAD BASED OPTION PLAN
The 2001 Broad Based Plan provides for the grant of options for up to 250,000
shares of the Company's common stock. As of March 31, 2002, no options have been
granted under this plan. The purpose of the plan is to attract and retain the
services of selected employees. The plan is administered by a committee of the
Board of Directors, which has the authority to interpret, and grant options
under, the plan. Options may only be granted to employees who are not officers
or directors of the Company. The exercise price for options granted under the
plan may not be less than fair market value of the Common Stock on the date of
grant. Options will vest in accordance with a schedule determined by the
committee and will have a term of up to ten years. The plan will terminate on
July 24, 2010, although the Board may suspend or terminate the plan at any time.
The number of shares related to outstanding options will be subject to
adjustment for stock dividends, splits and other similar events. If any
outstanding option expires, or is terminated or canceled without being
exercised, then the shares underlying the option will again be available for
grant under the plan. In the event of a dissolution, liquidation, merger, or
other corporate reorganization, any surviving corporation will be required to
assume the outstanding options, substitute similar options, or allow the
outstanding options to continue. If any surviving corporation fails to do so,
then the outstanding options will become immediately exercisable and will expire
if not exercised before the stated event.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below with respect to the Company's
consolidated statements of operations for each of the years in the three-year
period ended March 31, 2002 and with respect to the consolidated balance sheets
at March 31, 2002 and 2001 are derived from, and are qualified by reference to,
the consolidated financial statements that have been audited by Deloitte &
Touche LLP, independent auditors, and are included elsewhere in this Form 10-K.
The statement of operations data for each of the years in the two-year period
ended March 31, 1999, and the balance sheet data at March 31, 2000, 1999 and
1998 are derived from audited financial statements not included in this Form
10-K.
32
The following selected financial data should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Form 10-K.
Fiscal Years Ended March 31, 2002 2001 2000 1999 1998
-------------------------------------------------------------
(In thousands, except per share data)
Statements of Operations Data:
Revenues:
Product sales $ 14,583 $ 10,913 $ 7,743 $ 4,949 $ 5,614
Royalty income 26,768 16,157 12,218 9,439 5,024
Contract fees 696 4,292 700 510 2,795
--------- --------- --------- --------- ---------
Total 42,047 31,362 20,661 14,898 13,433
--------- --------- --------- --------- ---------
Operating Costs and Expenses:
Product costs 5,937 3,625 2,262 1,340 1,716
Research and development 27,203 28,497 18,665 14,271 11,615
Selling, general and administrative 24,164 16,849 13,989 10,676 10,897
Litigation costs 11,299 13,782 6,295 2,571 864
--------- --------- --------- --------- ---------
Total 68,603 62,753 41,211 28,858 25,092
--------- --------- --------- --------- ---------
Loss from operations (26,556) (31,391) (20,550) (13,960) (11,659)
Other (expense) income, net (5,023) (4,867) (11,855) 651 (171)
Equity in loss of affiliate (10,947) - - - -
--------- --------- --------- --------- ---------
Loss before cumulative effect of
accounting change (42,526) (36,258) (32,405) (13,309) (11,830)
Cumulative effect of accounting change - (6,995) - - -
--------- --------- --------- --------- ---------
Net loss (42,526) (43,253) (32,405) (13,309) (11,830)
Preferred dividends (1,402) (2,052) (2,137) (1,980) (541)
--------- --------- --------- --------- ---------
Net loss attributed to common stockholders $ (43,928) $ (45,305) $ (34,542) $ (15,289) $ (12,371)
========= ========= ========= ========= =========
Basic and diluted net loss per common share $ (2.20) $ (2.84) $ (2.24) $ (1.00) $ (0.82)
========= ========= ========= ========= =========
Shares used in computing net loss per common share 19,947 15,929 15,415 15,318 15,116
========= ========= ========= ========= =========
At March 31, 2002 2001 2000 1999 1998
-------------------------------------------------------------
Balance Sheet Data: (In thousands)
Cash, cash equivalents and short-term
investments $ 74,819 $ 15,089 $ 38,486 $ 34,374 $ 23,122
Working capital 73,416 9,096 38,537 32,327 17,590
Total assets 106,198 39,133 57,798 45,823 30,391
Long term obligations 51,397 56,821 59,605 32,704 146
Accumulated deficit (200,023) (157,497) (114,244) (81,839) (68,530)
Stockholders' equity (deficit) 38,519 (36,373) (11,808) 5,590 20,862
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
We have devoted substantial resources to the research and development of our
proprietary technologies, primarily the ORIGEN technology for the clinical
diagnostic, life science and industrial markets. We currently derive a majority
of our revenue from royalties received from licensees that develop and market
certain ORIGEN-based systems. We also generate sales of our own products,
particularly the M-Series System and related consumable reagents. We may
selectively pursue additional strategic alliances, which could result in
additional license fees or contract revenues. Since inception, we have incurred
significant losses and, as of March 31, 2002, we had an accumulated deficit of
$200 million. We expect to continue to incur substantial research and
development, manufacturing scale-up and general and administrative costs
associated with our operations. As a result, we will need to generate higher
revenue from present levels to achieve profitability.
RESULTS OF OPERATIONS
YEARS ENDED MARCH 31, 2002 AND 2001.
REVENUES. Total revenues for the fiscal year ended March 31, 2002 increased by
approximately $10.6 million or 34% to $42.0 million from $31.4 million in fiscal
2001. The revenue growth for fiscal 2002 was due to increases in product sales
and royalty income. Product sales were $14.6 million in fiscal 2002, an increase
of 34% over the prior year's product sales of $10.9 million. This growth in
product sales was led by the M-SERIES line of instrumentation and consumable
life science products ($3.2 million), as well as, the revenue generated from the
sale of clinical diagnostic assays to physician office laboratory (POL)
customers in the United States, which increased by $500,000. We began serving
these POL customers in June 2000 when Roche transferred the customers in order
to comply with a court ordered preliminary injunction. In February 2002, the
Maryland federal court issued a final order of judgment against Roche which does
not require Roche to renew existing POL contracts, some of which are scheduled
to expire during fiscal 2003. Should POL customer contracts not be renewed,
future POL product sales would experience a decline.
Royalty income was $26.8 million in fiscal 2002, an increase of 66% over the
prior year's royalty income of $16.2 million. Royalties from Roche represent
approximately $25.7 million (96%) of the total royalty income for fiscal 2002 as
compared to approximately $15.3 million (94%) for fiscal 2001. These increases
are attributable to higher Roche sales of its Elecsys and E170 product lines,
which are based on IGEN's ORIGEN technology that was licensed to Roche under a
1992 license agreement, as well as certain modifications made by Roche to their
methodology for computing royalties as a result of the litigation. While we are
not satisfied that Roche is properly calculating and paying the required
royalties, the recent changes in the way in which Roche calculates and pays its
royalties to us is expected to have a continued positive impact on our royalty
income in future periods. However, we have notified Roche that their license to
sell ORIGEN-based products will be terminated once our right to do so is
affirmed on appeal, in which case our royalty income from Roche would cease. See
Item 3, "Legal Proceedings".
Contract revenue in the current fiscal year decreased to $696,000 from $4.3
million last year. The current year fees related primarily to work completed in
conjunction with the development of assays for Roche. The prior year's contract
fees were primarily from non-recurring amounts received in connection with our
preliminary alliance with Bayer Diagnostics ("Bayer").
34
OPERATING COSTS AND EXPENSES. Product costs were $5.9 million (41% of product
sales) for fiscal 2002 compared to $3.6 million (33% of product sales) for
fiscal 2001. Included in product costs for fiscal 2002 is a write-off of $1.1
million of TRICORDER detection module costs, previously recorded as fixed
assets. The TRICORDER modules are incorporated into customers M-SERIES systems
and continue to be utilized by customers to generate ongoing reagent product
sales. The impact on prior individual annual periods was not significant.
Excluding the $1.1 million expense, product costs were 33% of product sales for
fiscal 2002.
Research and development expenses decreased $1.3 million (5%) in fiscal year
2002 to $27.2 million from $28.5 million in fiscal year 2001. Excluding funding
of the MSD joint venture activities prior to the amendment and extension of the
MSD joint venture agreements in August 2001, research and development expense
was $24.8 million in 2002 and $20.2 million in 2001. This increase in research
and development expense of $4.6 million (23%) is primarily due to ongoing
development costs and product enhancements associated with the M-SERIES family
of products, development of new assays for the life sciences market and research
and development of new systems and technologies, including hospital
point-of-care products. We expect research and development costs to increase as
product development and core research continue to expand. See "Equity in Loss of
Affiliate" below for a discussion of MSD activity in fiscal 2002.
Selling, general and administrative expenses were $24.2 million in fiscal 2002,
an increase of $7.3 million (43%) over the prior year's total of $16.9 million.
This increase was primarily attributable to additional personnel costs of $4.6
million required to support the growth in sales and customers, as well as legal
and other expenses of $1.6 million largely associated with the amendment and
extension of the MSD joint venture.
Costs related to our litigation with Roche were offset by a settlement payment
we received from Roche related to the Delaware litigation during the current
year. Under the terms of the settlement, Roche dismissed, with prejudice, all
claims against us, reimbursed us for our legal fees incurred in defending this
Delaware litigation which totalled approximately $5.7 million and granted us a
fully paid-up, perpetual, worldwide, non-exclusive license (with the right to
sublicense) under the patent in suit. Absent this Delaware settlement, costs
related to our litigation with Roche increased $3.2 million (23%) to $17.0
million in fiscal 2002 from $13.8 million in fiscal 2001. The increases are
attributable to expanded activities in several areas, including pre-trial
motions and the preparation and conduct of the trial that ran from October 2001
through January 10, 2002. The increased litigation costs also included financial
and legal advisory fees associated with settlement discussions with Roche. With
the completion of the Roche trial in January 2002, litigation costs are expected
to decline in future periods.
We have engaged a law firm in connection with the Roche litigation and various
other matters. A partner of the law firm is one of our directors. We recorded
approximately $11.2 million and $5.8 million in legal fees with the law firm for
the years ended March 31, 2002 and 2001, respectively.
Certain of our officers are also shareholders of several other companies, which
are considered our affiliates for the purpose of this discussion. We have shared
services arrangements with these affiliated companies. These shared services
include accounting, human resources and other administrative services, as well
as facility related costs and services. Shared services costs allocated to
affiliated companies, other than MSD, totaled $1.3 million and $1.4 million for
the years ended March 31, 2002 and 2001, respectively, which reduced certain
Operating Costs and Expenses for the respective years. Amounts allocated to
affiliated companies are based upon costs incurred by us and are determined
through allocation methods that include time spent and square footage utilized.
Amounts due from affiliated companies under the shared services arrangement was
approximately $35,000 at March 31, 2002.
INTEREST AND OTHER EXPENSE. Interest and other expense, net of interest income,
were $5 million in fiscal 2002 and $4.9 million in fiscal 2001.
35
EQUITY IN LOSS OF AFFILIATE. In August 2001, we entered into agreements with MST
continuing MSD, a joint venture formed solely by IGEN and MST in 1995. MSD was
formed for the development and commercialization of products utilizing a
propriety combination of MST's multi-array technology together with ORIGEN and
other technologies owned by us. In conjunction with the amended agreements and
the progress made by MSD in the development of its products, we determined that
future contributions to MSD would be made based on the future investment benefit
to be obtained by us. Our contributions to MSD since July 1, 2001 were recorded
as "Investment in Affiliate" and we have recorded 100% of MSD's losses since
this date as Equity in Loss of Affiliate. MSD incurred a net loss of $13.5
million and $6.2 million for the years ended March 31, 2002 and 2001,
respectively. See ITEM 1 "Business-Collaborations", and ITEM 13 "Certain
Relationships and Related Transactions".
36
NET LOSS. The net loss for fiscal year 2002 was $42.5 million ($2.20 per common
share, after consideration of the effect of preferred dividends) compared to a
net loss of $43.3 million ($2.84 per common share, after consideration of the
effect of preferred dividends) in fiscal year 2001. The loss in the prior year
comparable period included a one-time, non-cash charge of $7.0 million ($0.44
per share) to record the cumulative effect of an accounting change resulting
from the adoption of Emerging Issue Task Force Release No. 00-27.
Results of operations in the future are likely to fluctuate substantially from
quarter to quarter as a result of various 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; whether POL customers' contracts are renewed;
whether Roche will continue to supply service and assays to POL customers; 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; equity in loss of affiliate; 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 from a
combination of lower royalty revenue than the Company believes it is entitled to
under the license agreement with Roche, costs incurred in research and
development, Roche 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, general and administrative costs
and equity in loss of affiliate, offset in part by lower Roche litigation costs
beginning in fiscal 2003. 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, sales and distribution capabilities cost-effectively; and
complete new business arrangements.
As of March 31, 2002, we had net operating loss and general business credit tax
carryforwards of approximately $181 million which expire at various times
through 2022, including $5.2 million during 2003. Our ability to utilize net
operating loss and general business credit tax carry forwards may be subject to
an annual limitation in future periods pursuant to the "change in ownership
rules" under Section 382 of the Internal Revenue Service Code of 1986, as
amended.
YEARS ENDED MARCH 31, 2001 AND 2000.
REVENUES. Total revenues for the fiscal year ended March 31, 2001 increased by
approximately $10.7 million or 52% to $31.4 million from $20.7 million in fiscal
2000. The revenue growth for fiscal 2001 was due to increases in all revenue
categories - product sales, royalty income and contract fees.
Product sales were $10.9 million in fiscal year 2001, an increase of 41% over
the prior year's product sales of $7.7 million.This growth of $3.2 million was
from the M-SERIES line of instrumentation and consumable life science products
($1.2 million) as well as new revenue generated from the sale of clinical
diagnostic assays to physician office laboratory (POL) customers in the United
States which totaled $2.0 million in fiscal 2001.
37
We began serving these POL customers in June 2000 when Roche transferred the
customers in order to comply with a court ordered preliminary injunction. The
growth of M-SERIES product sales was due to shipments under distribution
agreements that we signed during fiscal 2001.
Royalty income was $16.2 million in fiscal 2001, an increase of 32% over the
prior year's royalty income of $12.2 million. Royalties from Roche represent
approximately $15.3 million (94%) of the total royalty income for fiscal 2001 as
compared to approximately $11.1 million (91%) for fiscal 2000. This increase is
attributable to higher Roche sales of its Elecsys product line, which is based
on our ORIGEN technology licensed to Roche under a 1992 agreement. We are
involved in litigation with Roche arising out of this agreement. One of the
disputes in the litigation relates to the computation of royalties to which we
believe we are entitled to under the Agreement.
Contract revenue in the current fiscal year increased to $4.3 million from
$700,000 last year. This increase is attributable to our alliance with Bayer
that commenced in fiscal 2001 under which the two companies explored new
products for the hospital point-of-care testing market.
OPERATING COSTS AND EXPENSES. Product costs were $3.6 million (33% of product
sales) for fiscal 2001 compared to $2.3 million (29% of product sales) for
fiscal 2000. The decrease in product margins is attributable to M-SERIES
retrofit costs of approximately $500,000 in 2001, offset by a change in product
sales mix between lower margin instrumentation (37% of sales in fiscal 2001
versus 39% of sales in fiscal 2000) and higher margin consumable reagents and
assays (63% of sales in fiscal 2001 versus 61% of sales in fiscal 2000).
Research and development costs increased $9.8 million (53%) in fiscal 2001 to
$28.5 million from $18.7 million in fiscal 2000. This increase was due to
personnel and development expenses of $6.0 million primarily associated with
enhancements and development of the M-SERIES line of products, including new
assays for life science and hospital point-of-care; and research and development
expenses associated with the MSD joint venture which increased $3.8 million in
2001.
Selling, general and administrative expenses were $16.9 million in fiscal 2001,
an increase of $2.9 million (20%) over the prior year's total of $14 million.
This increase was due primarily to higher sales and marketing costs related to
expanding the launch of the M-SERIES System throughout the United States, Europe
and Japan.
Costs associated with our litigation with Roche increased to $13.8 million in
fiscal 2001 from $6.3 million in fiscal 2000. This increase was due to expanded
activities, including work related to a court-appointed Special Master's
examination of Roche's books and records; preparation and presentation of
several motions, including motions for summary judgment; preparation for and
participation in a trial in Delaware in February, 2001; and preparation for a
trial in Maryland that was scheduled to commence in October 2001. The increased
litigation costs also include financial and legal advisors' fees associated with
settlement discussions.
INTEREST AND OTHER EXPENSE. Interest expense, net of other income, excluding a
non-recurring charge in 2000, increased $2.6 million in fiscal 2001 due to
interest on higher debt balances during the year and a full year's amortization
of the detachable warrant value associated with the convertible debentures
issued in January 2000. In fiscal 2000, we also recorded a non-cash charge of
$9.6 million related to the beneficial conversion element of the convertible
debentures and related warrants. The convertible debentures have a one-time
beneficial conversion feature measured as the difference between the conversion
price and the fair value of our common stock at the time of the issuance of
debentures.
38
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. During fiscal 2001, we adopted the
provisions of Emerging Issues Task Force (EITF) Release No. 00-27, "Application
of EITF Issue No. 98-5, Accounting for Convertible Securities and Beneficial
Conversion Features". This standard established new guidelines for convertible
securities and beneficial conversion features. The change in methods resulted in
a one-time, non-cash charge that was recorded during the year as a cumulative
effect of a change in accounting. Prior year financial statements have not been
restated to reflect the change in accounting. The effect of the change on our
Statement of Operations for the year ended March 31, 2001 was to increase the
net loss by $7 million ($0.44 per share).
NET LOSS. Excluding the non-recurring, non-cash charge of $7 million ($0.44 per
share) taken for the cumulative effect of accounting change, the net loss was
$36.3 million ($2.40 per share, after consideration of the effect of preferred
dividends) in fiscal 2001. Including this charge, the net loss was $43.3 million
($2.84 per share, after consideration of the effect of preferred dividends). In
fiscal 2000, including the non-cash charge, the net loss was $32.4 million
($2.24 per share, after consideration of the effect of preferred dividends).
Excluding the non-cash charge of $9.9 million ($0.64 per share) taken to account
for the beneficial conversion element of the convertible debentures and related
warrants issued January 2000, the net loss was $22.5 million ($1.60 per share,
after consideration of the effect of preferred dividends).
LIQUIDITY AND CAPITAL RESOURCES
We have financed operations through the sale of preferred and common stock, debt
financings and the placement of convertible debentures. In addition, we have
received funds from research and licensing agreements, sales of our ORIGEN line
of products and royalties from product sales by licensees.
As of March 31, 2002, we had $74.8 million in cash, cash equivalents and
short-term investments, with working capital of $73.4 million.
Net cash used in operations was $27.0 million, $27.4 million and $23.8 million
during the years ended March 31, 2002, 2001 and 2000, respectively. The increase
in cash used in 2002 and 2001 from 2000 was due primarily to higher operating
losses incurred during each period, as well as increased working capital
requirements.
We used approximately $5.6 million, $4.9 million, and $4.6 million of cash for
the acquisition of equipment and leasehold improvements during the years ended
March 31, 2002, 2001 and 2000, respectively. Our contributions to MSD for the
year ended March 31, 2002 totaled $19.6 million.
We believe material commitments for capital expenditures may be required in a
variety of areas, such as product development programs. We have not, at this
time, made commitments for any such capital expenditure or secured additional
sources to fund such commitments. Our material future obligations are as
follows:
Years Ended March 31,
----------------------------------------------------------------------------
2008 and
Contractual Obligations (in thousands) Total 2003 2004 2005 2006 2007 Thereafter
----------------------------------------------------------------------------
Notes payable $ 23,141 $ 5,077 $ 5,523 $ 6,007 $ 6,534 $ - $ -
Subordinated convertible debentures 35,000 - - 35,000 - - -
MSD funding commitment 26,955 21,580 5,375 - - - -
Operating and capital leases 8,782 2,304 2,476 2,331 652 357 662
Interest obligations 9,656 3,565 3,112 2,628 351 - -
-------- -------- -------- -------- -------- -------- --------
Total contractual obligations $103,534 $ 32,526 $ 16,486 $ 45,966 $ 7,537 $ 357 662
======== ======== ======== ======== ======== ======== ========
39
During August 2001, we entered into agreements with MST continuing MSD, a joint
venture formed solely by IGEN and MST in 1995. Under the amended joint venture
agreements, we agreed, subject to certain conditions, to fund the joint venture
through November 2003. During the 2002 calendar year, we agreed to fund MSD
$21.5 million, subject to a permitted variance of fifteen percent. As of March
31, 2002, the Company satisfied $5.3 million of this funding commitment. The
2003 calendar year funding commitment is based on an annual budget to be
approved by a committee of our Board of Directors. The funding commitment may be
satisfied in part through in-kind contributions of scientific and administrative
personnel and shared facilities. If the 2003 budget is not approved by our Board
of Directors, we would be required to provide transitional funding for an
additional six months, estimated at $11.0 million, and under certain conditions,
MSD and MST have the right to terminate the joint venture and purchase our
interest in MSD at fair market value less certain discounts. The MSD funding
commitment in the table above includes operating and capital lease commitments
expected to be incurred by us as part of our funding commitment to MSD. These,
amounts are excluded from the operating and capital lease commitment line in
the table.
We have a substantial amount of indebtedness, and there is a possibility that we
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, our
indebtedness may require that we dedicate a substantial portion of our 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.
We need substantial amounts of money to fund operations. In this regard, from
time to time we have 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, we are considering and evaluating the advisability and feasibility of a
variety of financing alternatives, which could be completed in the near term,
including issuance of additional debt or equity securities. There can be no
assurance that we 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 our common stock,
continuing losses from operations and other factors. We believe that existing
capital resources, together with revenue from product sales, royalties and
contract fees will be adequate to fund operations through calendar year 2003. If
we are unable to raise additional capital, we may have to scale back, or even
eliminate, some programs. Alternatively, we may 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 us.
Roche has the right to continue to market its Elecsys products within its
licensed field until our right to terminate their license is affirmed on appeal.
In connection with the litigation with Roche, we have notified Roche that the
license agreement will terminate upon the appellate court affirming our right to
do so. Termination of the license agreement would have a material adverse effect
on our revenues unless, and until, we enter into a strategic partnership with
another company that is able to develop and commercialize diagnostic instruments
within the field presently licensed to Roche. There can be no assurance that we
would be able to enter into such a strategic partnership on favorable terms, if
at all.
CRITICAL ACCOUNTING POLICIES.
Our significant accounting policies are more fully described in Note 1 to our
Consolidated Financial Statements. However, certain accounting policies are
particularly important to the portrayal of our financial position and results of
operations and require the application of significant judgments by our
management. As a result they are subject to an inherent degree of uncertainty.
In applying those polices, our management uses its judgment to determine the
appropriate assumptions to be used in the determination of certain estimates.
40
These estimates are based on our historical experience, terms of existing
contracts, our observance of trends in the industry, information provided by our
customers, and information available from other outside sources, as appropriate.
Our significant accounting polices include:
Inventory - We carry our inventory at the lower of cost or market using the
first-in, first-out method. We apply judgment in determining the provisions for
slow moving, excess and obsolete inventory based on historical experience,
anticipated product demand and changes in product design.
Equipment and Leasehold Improvements - Our equipment and leasehold improvements
are carried at cost. Depreciation on equipment and furniture is computed over
the estimated useful lives of the assets, generally three to five years, using
straight line or accelerated methods. Leasehold improvements are amortized on a
straight-line basis over the life of the lease. We apply judgment in determining
the appropriate useful life of these assets.
Revenue Recognition - We derive revenue principally from three sources: product
sales, royalty income and contract fees. Product sales revenue is generally
recognized when contractual obligations have been satisfied, title and risk of
loss has been transferred to the customer and collection of the resulting
receivable is reasonably assured. Rental revenue associated with instruments
that are leased is recognized ratably over the life of the lease agreements. We
make estimates of allowances for doubtful accounts based on the age of
receivables, individual customer profiles and historical experience.
Royalty income is recorded when earned based on information provided by
licensees.
Revenue from services performed under contracts is recognized over the term of
underlying customer contract or at the end of the contract, when obligations
have been satisfied. For services performed on a time and material basis,
revenue is recognized upon performance. Amounts received in advance of
performance under contracts or commercialization agreements are recorded as
deferred revenue until earned.
Capitalized Software Costs - We record software development costs in accordance
with SFAS No. 86 "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed." We apply our judgment in determining when
software being developed has reached technological feasibility, and at that
point we would capitalize software development costs. Through March 31, 2002,
software development has been substantially completed concurrently with the
establishment of technological feasibility, and accordingly, no costs have been
capitalized to date.
Equity Accounting - We account for our ownership in the MSD joint venture on the
equity method as we have determined that we do not control MSD's operations.
Factors considered in determining our level of control include the fact that
we own less than 50% of the voting equity interest in MSD; that we do not have
exclusive authority over MSD decision making and have no ability to unilaterally
modify the joint venture agreements; and that we have the right to appoint
only one out of two seats on MSD's board of managers. See Note 6 of Notes to
Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS.
In June 1998, the Financial Accounting Standards Board (FASB) Issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133).
SFAS 133 is effective for the years beginning after June 15, 2000 and requires
the recognition of derivatives at fair value as either assets or liabilities in
the Company's financial statements. The Company has adopted SFAS 133 and
determined that it did not have a material effect on the Company's financial
position or results of operations for the year ended March 31, 2002.
41
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS 143 is effective for fiscal years
beginning June 15, 2002. The Company does not expect that the implementation of
SFAS 143 will have a material effect on the Company's financial position or
results of operations.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets" (SFAS 144) which supersedes SFAS No.121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and
the accounting and reporting provisions of APB No. 30, "Reporting the Results of
Operations, Reporting and Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for
the disposal of segment business. This statement is effective for fiscal years
beginning December 15, 2001. SFAS No. 144 retains many of the provisions of SFAS
No. 121 but addresses certain implementation issues associated with that
Statement. The Company does not expect that the implementation of SFAS 144 will
have a material effect on the Company's financial position or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in interest rates do not affect interest expense incurred on the
Company's long-term borrowings because they bear interest at a fixed rate. The
principal terms of this debt are as follows:
- - Note payable with John Hancock Life Insurance Company: $30 million
principal, seven year, 8.5% Senior Secured Notes secured by future
royalty revenue from Roche, maturing in 2006 with quarterly interest
only payments through September 2000 and quarterly principal and
interest payments through March 2006.
- - Subordinated convertible debentures: $35 million principal, 5% interest
maturing January 2005 with semi-annual interest payments in cash or
equivalent value of Common Stock.
However, the Company runs a risk that market rates will decline and that the
interest rate will exceed those based on the then-current market rate. The
Company is currently not using interest rate derivative instruments to manage
its exposure to interest rate changes.
Interest income earned on the Company's investment portfolio is affected by
changes in the general level of interest rates. 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 is exposed to changes in exchange rates where it sells direct in
local currencies, primarily in the United Kingdom and Germany. Certain other
foreign sales are denominated in U.S. dollars and have no exchange rate risk.
Gains and losses resulting from foreign currency transactions have historically
not been material.
42
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
Independent Auditors' Report 44
Consolidated Statements of Operations for the Years 45
Ended March 31, 2002, 2001 and 2000
Consolidated Balance Sheets at March 31, 2002 and 2001 46
Consolidated Statements of Cash Flows for the Years 47
Ended March 31, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity (Deficit) for the Years 48
Ended March 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements 49
We also incorporate herein by this reference Meso Scale Diagnostics LLC. (A
Development Stage Company), Financial Statements at December 31, 2001 and 2000,
and for the Three Years in the period Ended December 31, 2001, and for the
period November 30, 1995 (Inception) Through December 31, 2001, and Independent
Auditors' Report filed as Exhibit 99.1 to this report.
43
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF IGEN INTERNATIONAL, INC.:
We have audited the accompanying consolidated balance sheets of IGEN
International, Inc. (the "Company") as of March 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended March 31, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
March 31, 2002 and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
McLean, Virginia
May 22, 2002
(June 19, 2002 as to Note 12 of Notes to Consolidated Financial Statements)
44
IGEN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended March 31,
------------------------------
REVENUES: 2002 2001 2000
------------------------------
Product sales $ 14,583 $ 10,913 $ 7,743
Royalty income 26,768 16,157 12,218
Contract fees 696 4,292 700
-------- -------- --------
Total 42,047 31,362 20,661
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Product costs 5,937 3,625 2,262
Research and development 27,203 28,497 18,665
Selling, general, and administrative 24,164 16,849 13,989
Litigation costs 11,299 13,782 6,295
-------- -------- --------
Total 68,603 62,753 41,211
-------- -------- --------
LOSS FROM OPERATIONS (26,556) (31,391) (20,550)
-------- -------- --------
OTHER (EXPENSE) INCOME:
Beneficial conversion feature of debentures - - (9,597)
Interest expense (6,059) (6,336) (3,617)
Other income, net 1,036 1,469 1,359
-------- -------- --------
Total (5,023) (4,867) (11,855)
-------- -------- --------
EQUITY IN LOSS OF AFFILIATE (10,947) - -
-------- -------- --------
LOSS BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE (42,526) (36,258) (32,405)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE - (6,995) -
-------- -------- --------
NET LOSS (42,526) (43,253) (32,405)
PREFERRED DIVIDENDS (1,402) (2,052) (2,137)
-------- -------- --------
NET LOSS ATTRIBUTED TO COMMON STOCKHOLDERS $(43,928) $(45,305) $(34,542)
======== ======== ========
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Loss before cumulative effect of accounting change $ (2.20) $ (2.40) $ (2.24)
Cumulative effect of accounting change - (0.44) -
-------- -------- --------
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (2.20) $ (2.84) $ (2.24)
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-
BASIC AND DILUTED 19,947 15,929 15,415
======== ======== ========
See notes to consolidated financial statements.
45
IGEN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
March 31,
------------------------
ASSETS 2002 2001
------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 69,541 $ 15,089
Short-term investments 5,278 -
Accounts receivable, net 10,259 5,863
Inventory 3,331 4,995
Other current assets 1,289 1,834
--------- ---------
Total current assets 89,698 27,781
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 7,589 8,085
OTHER NONCURRENT ASSETS:
Investment in affiliate 6,243 -
Restricted cash 1,721 2,120
Other 947 1,147
--------- ---------
TOTAL $ 106,198 $ 39,133
========= =========
LIABILITIES AND STOCKHOLDERS'EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 5,830 $ 10,147
Accrued expenses 2,542 1,942
Accrued wages and benefits 2,359 1,081
Current portion of note payable 5,077 4,668
Deferred revenue 418 794
Obligations under capital leases 56 53
--------- ---------
Total current liabilities 16,282 18,685
--------- ---------
NONCURRENT LIABILITIES:
Note payable 18,064 23,142
Subordinated convertible debentures 30,032 28,229
Convertible preferred stock dividend payable 3,205 5,121
Deferred revenue 96 273
Obligations under capital leases - 56
--------- ---------
Total noncurrent liabilities 51,397 56,821
--------- ---------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY (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, 8,500 and 18,220 shares issued and outstanding -
liquidation value of $8,500 and $18,220 plus accrued and unpaid dividends 1 1
Common stock: $0.001 par value, 50,000,000 shares authorized: 23,064,392
and 17,261,400 shares issued and outstanding 23 17
Additional paid-in capital 242,228 124,816
Stock notes receivable (3,710) (3,710)
Accumulated deficit (200,023) (157,497)
--------- ---------
Total stockholders' equity (deficit) 38,519 (36,373)
--------- ---------
TOTAL $ 106,198 $ 39,133
========= =========
See notes to consolidated financial statements.
46
IGEN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended March 31,
------------------------------------
2002 2001 2000
------------------------------------
OPERATING ACTIVITIES:
Net loss $ (42,526) $ (43,253) $ (32,405)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 5,968 3,955 2,063
Equity in loss of affiliate 10,947 - -
Beneficial conversion feature of convertible debenture - 6,995 9,597
Common stock issued in payment of interest 1,757 875 -
Amortization of detachable warrant value 1,419 1,412 300
Expense related to stock options 219 - -
Changes in assets and liabilities:
Increase in accounts receivable (4,396) (185) (2,426)
Decrease (increase) in inventory 1,664 (1,932) (1,608)
Decrease (increase) in other current assets 545 (523) (536)
Decrease (increase) restricted cash 399 (399) -
(Decrease) increase in accounts payable and accrued expenses (2,439) 6,332 1,914
Decrease in deferred revenue (553) (725) (696)
--------- --------- ---------
Net cash used for operating activities (26,996) (27,448) (23,797)
--------- --------- ---------
INVESTING ACTIVITIES:
Expenditures for equipment and leasehold improvements (5,642) (4,925) (4,550)
Investments in affiliate (16,351) - -
Sales of short-term investments - 12,949 10,544
Maturities of short-term investments - 3,099 5,079
Purchases of short-term investments (5,278) (1,559) (13,529)
Increase in other assets (85) - -
--------- --------- ---------
Net cash (used for) provided by investing activities (27,356) 9,564 (2,456)
--------- --------- ---------
FINANCING ACTIVITIES:
Issuance of common stock, net 116,844 12,870 553
Payments on note payable and capital lease obligations (4,722) (2,262) (119)
Preferred stock dividends paid (3,318) (1,311) (279)
Proceeds from subordinated convertible debentures - - 35,000
Disbursements for debt issuance costs - - (1,896)
Increase in restricted cash - (321) (800)
--------- --------- ---------
Net cash provided by financing activities 108,804 8,976 32,459
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 54,452 (8,908) 6,206
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 15,089 23,997 17,791
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 69,541 $ 15,089 $ 23,997
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments of interest $ 2,506 $ 3,599 $ 2,583
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued in exchange for notes receivable $ - $ 3,710 $ -
========= ========= =========
Accrued preferred dividends $ 1,402 $ 2,052 $ 2,137
========= ========= =========
Equipment and leasehold improvements contributed to affiliate $ 839 $ - $ -
========= ========= =========
See notes to consolidated financial statements.
47
IGEN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
Notes
Receivable
From
Convertible Additional Sale of Accum-
Preferred Stock Common Stock Paid - in Subscribed ulated
Shares Amount Shares Amount Capital Stock Deficit Total
BALANCE at April 1, 1999 25 $ 1 15,361 $ 15 $ 87,413 $ - $ (81,839) $ 5,590
Issuance of shares of common stock - - 107 - 553 - - 553
Preferred stock converted (2) - 110 - - - - -
Preferred stock, dividends payable - - - - (2,137) - - (2,137)
Detachable warrant value - - - - 6,995 - - 6,995
Beneficial conversion feature of
convertible debenture - - - - 9,596 - - 9,596
Net loss - - - - - - (32,405) (32,405)
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCE at March 31, 2000 23 1 15,578 15 102,420 - (114,244) (11,808)
Issuance of shares of common stock - - 1,307 $ 2 17,453 (3,710) - 13,745
Preferred stock converted (5) - 376 - - - - -
Preferred stock, dividends payable - - - - (2,052) - - (2,052)
Beneficial conversion feature of
convertible debentures - - - - 6,995 - - 6,995
Net loss - - - - - - (43,253) (43,253)
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCE at March 31, 2001 18 1 17,261 17 124,816 (3,710) (157,497) (36,373)
Issuance of shares of common stock - - 5,107 5 118,596 - - 118,601
Preferred stock converted (9) - 696 1 (1) - - -
Preferred stock, dividends payable - - - - (1,402) - - (1,402)
Expense related to stock options - - - - 219 - - 219
Net loss - - - - - - (42,526) (42,526)
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCE at March 31, 2002 9 $ 1 23,064 $ 23 $ 242,228 $ (3,710) $ (200,023) $ 38,519
========= ========= ========= ========= ========= ========= ========= =========
See notes to consolidated financial statements.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity - IGEN International, Inc. (the Company)
develops, manufactures, and markets products that permit the detection and
measurements of biological substances utilizing its patented ORIGEN(R)
technology, which is based on electrochemiluminescence. The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries, IGEN Europe, Inc. and IGEN International, K.K. All significant
inter-company transactions and balances have been eliminated.
Estimates and Reclassifications- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates. Certain amounts from the prior years
have been reclassified to conform to the current year presentation.
Cash and Cash Equivalents- Cash and cash equivalents include cash in banks,
money market funds, securities of the U.S. Treasury, and certificates of deposit
with original maturities of three months or less.
Short-Term Investments - Short-term investments consist primarily of corporate
debt-securities that are classified as "available for sale". These available for
sale securities, which are all due within one year, are accounted for at their
fair value and unrealized gains and losses on these securities, if any, are
reported as a separate component of stockholders' equity. The Company uses the
specific identification method in computing realized gains and losses on the
sale of investments which are included in results of operations as generated.
Any realized and unrealized gains or losses were not material as of and for the
years ended March 31, 2002, 2001 and 2000.
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.
Restricted Cash -The Company has a debt service reserve of approximately $1.7
million at March 31, 2002 and 2001 that is restricted in use and held in trust
as collateral (See Note 4). During fiscal 2002 and 2001, in conjunction with the
Roche Diagnostics (Roche) litigation, the Company escrowed approximately $1.0
million and $400,000, respectively related to Physician's Office Laboratory
sales. The cumulative escrow total of $1.4 million was released to the Company
without restriction upon conclusion of the Roche trial in January 2002 (See
Note 12).
Inventory - Inventory is recorded at the lower of cost or market using the
first-in, first-out method and consists of the following:
(in thousands) 2002 2001
- ------------------------------------------------------------------
Finished Goods $ 910 $ 1,028
Work in process 1,149 1,912
Raw materials 1,272 2,055
--------- ---------
Total $ 3,331 $ 4,995
========= ========
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Equipment and Leasehold Improvements - Equipment and leasehold improvements are
carried at cost. Depreciation on equipment and furniture is computed over the
estimated useful lives of the assets, generally three to five years, using
straight-line or accelerated methods. Leasehold improvements are amortized on a
straight-line basis over the life of the lease.
Equipment and leasehold improvements consist of the following:
(in thousands) 2002 2001
-------------------------------------------------------------------------
Lab instruments and equipment $ 9,076 $ 8,074
Office furniture and equipment 7,492 6,559
Leasehold improvements 2,864 3,473
---------- ----------
19,432 18,106
Accumulated depreciation and amortization (11,843) (10,021)
---------- ----------
$ 7,589 $ 8,085
========== ==========
Other Noncurrent Assets - Other noncurrent assets include purchased product
technology rights of $340,000 which are amortized on a straight-line basis over
the estimated economic lives of such assets, ranging from five to fourteen
years. Accumulated amortization was $301,000 and $277,000 at March 31, 2002 and
2001, respectively. Other noncurrent assets also include Deferred Debt Issuance
Costs of approximately $1.4 million which are amortized using the effective
interest method over the terms of the debt agreements. Accumulated amortization
was $806,000 and $545,000 at March 31, 2002 and 2001, respectively.
Capitalized Software Costs - Software development costs incurred subsequent to
the establishment of technological feasibility are capitalized in accordance
with SFAS No. 86 "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed." Through March 31, 2002, software development has
been substantially completed concurrently with the establishment of
technological feasibility, and accordingly, no costs have been capitalized to
date.
Evaluation of Long-lived Assets - The Company evaluates the potential impairment
of long-lived assets based upon projections of undiscounted cash flows whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. Management believes no impairment of these assets
exists as of March 31, 2002 and 2001.
Fair Value of Financial Instruments - The following disclosures of estimated
fair value were determined by management using available market information and
appropriate valuation methodologies. The fair value of the Company's financial
instruments, including cash equivalents, accounts receivable, accounts payable,
accrued expenses, notes payable, and long-term debt approximate their carrying
values. Disclosure about fair values of financial instruments is based on
pertinent information available to management as of March 31, 2002. Although
management is not aware of any factors that would significantly affect the
reasonableness of the fair value amounts, current estimates of fair value may
differ significantly from the amounts presented to them.
Warranty Costs - The Company generally warrants its products against defects in
materials and workmanship for one year after sale and provides for estimated
future warranty costs at the time revenue is recognized. At March 31, 2002 and
2001, accrued product warranty costs totaled $170,000 and $225,000,
respectively, and are included in accrued expenses.
Comprehensive Income - The Company has no significant elements of comprehensive
income other than net loss.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenue Recognition - The Company derives revenue principally from three
sources: product sales, royalty income and contract fees. Product sales revenue
is generally recognized when contractual obligations have been satisfied, title
and risk of loss have been transferred to the customer and collection of the
resulting receivable is reasonably assured.
Rental revenue associated with instruments that are leased is recognized ratably
over the life of the lease agreements. Royalty income is recorded when earned,
based on information provided by licensees. Revenue from services performed
under contracts is recognized over the term of the underlying customer contract
or at the end of the contract, when obligations have been satisfied. For
services performed on a time and material basis, revenue is recognized upon
performance. Estimates of allowances for doubtful accounts are based on the age
of receivables, individual customer profiles and historical experience.
Amounts received in advance of performance under contracts or commercialization
agreements are recorded as deferred revenue until earned.
Foreign Currency - Gains and losses from foreign currency transactions such as
those resulting from the settlement of foreign receivables or payables, are
included in the results of operations as incurred. These amounts were not
material during the years ended March 31, 2002, 2001 and 2000.
Research and Development - Research and development costs are expensed as
incurred.
Deferred Income Taxes - Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
Loss Per Share - The Company uses Statement of Financial Accounting Standard
(SFAS) No. 128 "Earnings per Share" 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 for all years
presented. Due to the Company's net loss, the potentially dilutive common shares
related to outstanding stock options and Series B Convertible Preferred Stock
are not included in the calculation of diluted net loss per common share.
Cumulative Effect of Accounting Change - During the year ended March 31, 2001,
the Company adopted the provisions of Emerging Issues Task Force (EITF) Release
No. 00-27, "Application of EITF Issue No. 98-5, Accounting for Convertible
Securities and Beneficial Conversion Features". This standard established new
guidelines for convertible securities with beneficial conversion features. The
EITF requires conversion options to be calculated using the effective conversion
price based on the proceeds allocated to the convertible instruments.
Previously, the Company had calculated the beneficial conversion feature of
Subordinated Convertible Debentures, issued in January 2000, using the stated
conversion price (See Note 5). The change in methods resulted in a one-time,
non-cash charge that was recorded during the year ended March 31, 2001 as a
cumulative effect of accounting change. Prior year financial statements have not
been restated to reflect the change in accounting. The effect of the change on
the Company's Consolidated Statement of Operations for the year ended March 31,
2001 was to increase the net loss by approximately $7 million ($0.44 per share).
There was no effect on loss before the cumulative effect of the accounting
change for the year ended March 31, 2001.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
New Accounting Standards - In June 1998, the Financial Accounting Standards
Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133). SFAS 133 is effective for years beginning after
June 15, 2000 and requires the recognition of derivatives at fair value as
either assets or liabilities in the Company's financial statements. The Company
has adopted SFAS 133 and determined that it did not have a material effect on
the Company's financial position or results of operations for the year ended
March 31, 2002.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. The Company does not expect that the
implementation of SFAS 143 will have a material effect on the Company's
financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets" (SFAS 144) which supersedes SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and
the accounting and reporting provisions of APB No. 30, "Reporting the Results of
Operations, Reporting and Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for
the disposal for a segment of business. This statement is effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 retains many of the
provisions of SFAS No. 121 but addresses certain implementation issues
associated with that Statement. The Company does not expect that the
implementation of SFAS 144 will have a material effect on the Company's
financial position or results of operations.
2. LICENSE AND RESEARCH AGREEMENTS
In 1992, the Company entered into an agreement with Roche Diagnostics, under
which that company was granted rights to develop and market certain clinical
diagnostic systems worldwide based on the Company's ORIGEN technology. Under the
terms of the agreement, the Company has received license payments of $50
million. This agreement also provides the Company with additional payments for
certain product development work, as well as royalties on product sales. The
Company is currently in litigation with Roche (See Note 12).
During 1993, the Company entered into a $20 million license and stock purchase
agreement with BioMerieux (formerly Organon Teknika, B.V.) Under this agreement,
the Company sold 346,135 shares of Common Stock, granted a license to develop
and market certain diagnostic systems worldwide utilizing the Company's ORIGEN
technology and agreed to invest $5 million in research and development under a
joint development program. Among other things, the agreement provides for
royalty payments to the Company on product sales and for product supply
arrangements between the parties. The Company recorded royalty income of
$252,000, $276,000 and $495,000 for the fiscal years ended March 31, 2002 2001,
and 2000, respectively.
During 1990, the Company granted a license to Eisai Co., Ltd., to market in
Japan certain clinical diagnostic systems based on the Company's ORIGEN
technology. The agreement provided license fees of $8 million tied to the
achievement of product development milestones. This agreement also provides for
royalty payments to the Company on product sales. In 1997, the Company received
$2.8 million as an advance royalty payment of which approximately $2.7 million
has been recognized as revenue through March 31, 2002.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. STOCKHOLDERS' EQUITY (DEFICIT)
Convertible Preferred Stock - The Company has issued 25,000 shares of Series B
Convertible Preferred Stock (Series B) with a stated value of $1,000 per share
which are convertible into shares of Common Stock of the Company at a rate of
$13.96 per share.
As of March 31, 2002 and 2001, outstanding Series B shares totaled 8,500 and
18,220, which had liquidation values of $8.5 million and $18.2 million,
respectively, plus accrued and unpaid dividends. A total of 16,500 shares of
Series B have been converted into 1,181,948 shares of Common Stock through March
31, 2002. Upon conversion, the Company paid dividends of $3.3 million, $1.3
million and $279,000 during the years ended March 31, 2002, 2001 and 2000,
respectively. The remaining 8,500 unconverted Series B shares may be converted
into 608,883 shares of Common Stock. The Series B holders are entitled to a
dividend payment of 7.75% compounded annually on the stated value of the stock.
The Company may elect to make the dividends payable in common shares at a rate
of $13.96 per share, rather than making the dividend payment in cash. If the
Company elected to pay such dividends in shares of Common Stock, it may issue up
to 760,430 shares to the holders of Series B. On May 22, 2002, the Company
notified holders of the outstanding Series B shares that it planned to redeem
those shares on July 9, 2002 for their liquidation value. Holders may elect to
convert their Series B shares into Common Stock of the Company before the
Company redeems the stock.
Shareholder Rights Plan - In 1996, the Board of Directors adopted a shareholder
rights plan and declared a dividend of one preferred share purchase right for
each outstanding share of the Company's Common Stock (par value $.001 per
share). Each Right entitles the registered holder to purchase from the Company
one one-hundredth of a share of Series A Junior Participating Preferred Stock,
par value $.001 per share, at a price of $65.00 per one one-hundredth of a
Preferred Share, subject to adjustment. The Rights will be exercisable only if a
person or group (other than certain affiliates of the Company) acquires 15% or
more of the Common Stock or announces a tender offer that would result in that
person or group acquiring 15% or more of the Common Stock. Once exercisable, the
Plan allows stockholders (other than the acquirer) to purchase Common Stock or
securities of the acquirer having a then current market value of two times the
exercise price of the Right. The Rights are redeemable for $.01 per Right
(subject to adjustment) at the option of the Board of Directors. Until a right
is exercised, the holder of the Right has no rights as a stockholder of the
Company. The Rights will expire in 2006 unless redeemed by the Company prior to
that date.
Stock Option Plan - The Company has adopted the 1994 Stock Option Plan under
which 2,500,000 shares of Common Stock have been reserved for issuance upon
exercise of options granted to employees or consultants and the 1994
Non-Employee Directors Stock Option Plan under which 150,000 shares of Common
Stock have been reserved for issuance upon exercise of options granted to
Non-Employee Directors. The 1994 Stock Option Plan replaced the 1985 Stock
Option Plan which expired in February 1995 and continues to have unexercised
options. The Option Plans provide for the granting of both incentive stock
options intended to qualify as such under Section 422 of the Internal Revenue
Code of 1986, as amended, and other stock options that do not so qualify.
In fiscal 2002, the Company adopted the 2001 Broad Based Option Plan under which
250,000 shares of Common Stock have been reserved for issuance under the plan.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the option activity is as follows:
2002 2001 2000
----------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year 2,244 $ 9.40 1,652 $ 7.78 1,805 $ 7.77
Granted 79 25.38 867 14.98 - -
Exercised (957) 5.27 (241) 17.06 (81) 6.81
Cancelled/forfeited (30) 11.64 (34) 9.32 (72) 8.62
----- ------- ----- ------ ----- ------
Outstanding at year-end 1,336 $ 13.31 2,244 $ 9.40 1,652 $ 7.78
===== ======= ===== ====== ===== ======
Options exercisable at year-end 735 1,414 1,372
Options available for future grant 1,073 134 151
Weighted average fair value of
options granted during the year $ 15.68 $ 9.66 $ -
The following table summarizes information about stock options outstanding at
March 31, 2002 (shares in thousands):
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life (Years) Price Exercisable Price
Range of Exercise Prices
$ 4.57 - $ 7.50 360 4.66 $ 5.63 348 $ 5.62
8.75 - 11.56 388 7.31 10.92 195 10.36
12.75 - 18.00 47 6.71 14.66 25 14.25
18.75 - 27.52 541 8.23 20.01 167 19.39
----- ---- ------- --- -------
4.57 - 27.52 1,336 6.95 $ 13.31 735 $ 10.30
===== ==== ======= === =======
In August 2000, the Company granted 75,000 non-qualified stock options in
connection with a consulting arrangement for services to be provided to the
Company. The consultant is also the sole owner of MST (see Note 6). As a result
of certain events in fiscal 2002 and pursuant to Financial Accounting Standards
Board Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation-an Interpretation of APB Opinion No. 25" and EITF 96-18,
"Accounting for Equity Instruments That are Issued to Other Than Employees
For Acquiring, or in Conjunction with Selling, Goods or Services", the Company
began recognizing expense on a monthly basis as the options are earned and vest,
based upon fair value calculated in accordance with the Black-Scholes option
pricing model. Changes in the fair market value of the unvested options will
result in changes in future expense recognition. The options vest ratably over a
five-year period through August 2005 and the Company recorded $219,000 of
non-cash expense during the year ended March 31, 2002.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As permitted by SFAS 123, the Company continues to measure compensation expense
for its stock-based employee compensation plans using the intrinsic value method
prescribed by Accounting Principals Board Statement No. 25, Accounting for Stock
Issued to Employees.
Pro forma disclosures of the effect on net loss and loss per share as if the
fair value-based method prescribed by SFAS 123 had been applied is provided in
the table below.
2002 2001 2000
----------- ----------- ----------
Net loss (in thousands)
As reported $ (42,526) $ (43,253) $ (32,405)
Pro forma (45,974) (46,142) (34,455)
Basic loss per share
As reported $ (2.20) $ (2.84) $ (2.24)
Pro forma (2.38) (3.03) (2.37)
The fair value of the option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
2002 2001 2000
---- ---- ----
Expected dividend yield 0% 0% 0%
Expected stock price volatility 71% 71% 68%
Risk-free interest rate 4.3% 5.5% 6.3%
Expected option term 5 Years 5 Years 5 Years
Stock Notes Receivable - In connection with the exercise of stock options by
officers in July 2000, the Company granted loans in the principal amounts of
$3.7 million, maturing in July 2008. The loans are 6.62% simple interest (paid
annually), full recourse loans against all assets of the borrowers,
collateralized by the pledge of 180,000 shares of the Company's Common Stock
owned by the borrowers.
Equity Financings - The Company has completed stock purchase and sale agreements
with certain institutional investors for the private placement of the Company's
common stock. During the years ended March 31, 2002 and 2001, the Company sold
4,093,698 and 1,000,975 shares of its common stock for aggregate net proceeds of
approximately $112.2 million and $12.5 million, respectively.
4. NOTE PAYABLE
In March 1999, the Company entered into a debt financing 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 principal and interest
installments of $1.7 million due quarterly through March 2006. The Company is
required to make note principal and interest payments of approximately $6.9
million in each fiscal year through 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. Additional collateral is represented by restricted cash (see Note 1) ,
which had a balance of approximately $1.7 million at March 31, 2002 and 2001.
Covenants within the Note include compliance with annual and quarterly Royalty
Payment Coverage Ratios, which are tied to royalty payments and debt service.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. 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.
The debentures had a one-time beneficial conversion feature totaling $9.6
million measured as the difference between the conversion price of $31 per share
and the fair value of the Common Stock at the time of the issuance of the
debentures. This beneficial conversion feature was recorded as a one-time,
non-cash charge to interest expense in fiscal 2000. See Note 1, "Cumulative
Effect of Accounting Change" for a description of the effect of a change in
accounting in fiscal 2001 related to the convertible debentures.
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 $7.0 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 approximately $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. All warrants
remain outstanding as of March 31, 2002.
6. MESO SCALE DIAGNOSTICS JOINT VENTURE
During August 2001, the Company entered into agreements with Meso Scale
Technologies, LLC. ("MST") continuing Meso Scale Diagnostics, LLC. ("MSD"), a
joint venture formed solely by the Company and MST in 1995. MSD was formed for
the development and commercialization of products utilizing a proprietary
combination of MST's multi-array technology together with ORIGEN and other
technologies owned by the Company. MST is a company established and wholly-owned
by the son of IGEN's Chief Executive Officer. Under most circumstances,
significant MSD governance matters require the approval of both the Company and
MST.
Under the amended agreements that were negotiated by an independent committee of
the Company's Board of Directors, the Company holds a 31% voting equity interest
in MSD. It also owns 100% of the non-voting equity interest in MSD and is
entitled to a preferred return on $36.4 million of the funds previously invested
in MSD through March 31, 2002 and on additional funds it invests thereafter.
This preferred return would be payable out of a portion of both future profits
and certain third-party financings, before any payments are made to other equity
holders. MST owns the remaining 69% of the voting equity interest in MSD. The
Company agreed, subject to certain conditions, to fund the joint venture through
November 2003. During the 2002 calendar year, the Company agreed to fund MSD
$21.5 million, subject to a permitted variance of fifteen percent. As of March
31, 2002, the Company has satisfied $5.3 million of this funding commitment. The
2003 calendar year funding commitment would be based on an annual budget to be
approved by a committee of the Company's Board of Directors. The funding
commitment may be satisfied in part through in-kind contributions of scientific
and administrative personnel and shared facilities.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
If the 2003 budget is not approved by our Board of Directors, the Company would
be required to provide transitional funding for an additional six months,
estimated to be approximately $11.0 million, and under certain conditions, MSD
and MST have the right to terminate the joint venture and purchase our interest
in MSD at fair market value less certain discounts.
MST and MSD have the right to terminate the joint venture prior to November 2003
under certain circumstances, including a change in control of the Company, as
defined. Upon termination, expiration or non-renewal of the joint venture
agreement, MSD and MST have the right to purchase the Company's interest in MSD
at fair market value less certain discounts.
Since inception of the joint venture, the Company has utilized the equity method
to account for the investment. In conjunction with the amended agreements and
the progress made by MSD in the development of its products, the Company has
determined that future contributions to MSD would be made based on the future
investment benefit to be obtained by the Company. Therefore, the Company's share
of MSD losses, since July 1, 2001, totaling $10.9 million, were recorded as
Equity in Loss of Affiliate. Prior to this date, the Company accounted for its
equity investments in MSD as research and development funding and accordingly,
recorded all MSD investments as research and development expenses as incurred.
These research and development expenses totaled $2.4 million, $8.3 million and
$4.5 million for the years ended March 31, 2002, 2001 and 2000. During the years
ended March 31, 2002, 2001 and 2000, operating costs allocated to MSD by the
Company in connection with shared personnel and facilities totaled $11.4
million, $5.6 million and $4.1 million, respectively. Since July 1, 2001, these
allocated operating costs reduced certain Operating Costs and Expenses and
increased Equity in Loss of Affiliate in the accompanying Consolidated
Statements of Operations. At March 31, 2002, the Company's Investment in
Affiliate totaled $6.2 million.
Summarized financial information for MSD (unaudited) is as follows (in
thousands):
Years Ended March 31,
------------------------------------------------
2002 2001 2000
------------ ------------ -----------
Operating expenses $ 13,560 $ 6,185 $ 4,282
Net loss 13,541 6,185 4,282
March 31,
-------------------------------
2002 2001
------------- ------------
Current assets $ 4,571 $ 41
Total assets 8,305 1,430
Current liabilities 885 140
Total liabilities 931 140
Total members' equity 7,374 1,290
7. INCOME TAXES
For the years ended March 31, 2002, 2001 and 2000, the Company recorded no
federal or state income tax expense and did not owe or pay federal or state tax,
as calculated by applying statutory rates to pretax income.
As of March 31, 2002, the Company has available for income tax reporting
purposes net operating loss and general business credit carryforwards
approximating $175.4 million and $5.8 million, respectively. Approximately $9.7
million of the net operating loss carryforward results from the exercise of
nonqualified stock options. Utilization of net operating loss carryforwards
related to stock-based compensation will result in the benefit being credited to
stockholders' equity.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The use of the Company's net operating loss carryforward may be significantly
reduced if substantial changes in stock ownership take place. The carryforwards
expire as follows (in thousands):
2003 $ 5,242
2004 6,847
2005 3,297
2006 170
2007 198
2008 through 2022 165,395
------------
Total $ 181,149
============
The approximate tax effects of temporary differences that gave rise to the
Company's deferred tax assets are as follows:
(in thousands)
2002 2001
----------- -------------
Deferred tax assets
Deferred revenue $ 198 $ 412
Investment in affiliate 1,674 -
Net operating loss and tax credit carryforwards 73,475 54,833
Other 1,020 624
------------ ------------
Total deferred tax asset 76,367 55,869
Less: valuation allowance (76,367) (55,869)
------------ -------------
Net deferred tax assets $ - $ -
============ =============
Due to uncertainties surrounding realizability, a valuation allowance equal to
the total net deferred tax assets has been provided as of March 31, 2002 and
2001. The increase in the valuation allowance on the deferred tax asset was
$20.5 million and $14.9 million for the years ended March 31, 2002 and 2001,
respectively.
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate is as follows:
2002 2001 2000
-------------------------------------------
Statutory federal rate (34.0%) (34.0%) (34.0%)
State income taxes, net of valuation allowance 0.0 0.0 0.0
Beneficial conversion - 5.5 10.1
Valuation allowance 33.7 28.4 23.8
Other 0.3 0.1 0.1
--------- ---------- ----------
Effective tax rates 0.0% 0.0% 0.0%
========== ========== ==========
8. EMPLOYEE SAVINGS PLAN
The Company has an Employee Savings Plan qualifying under Section 401(k) of the
Internal Revenue Code and subject to the Employee Retirement Income Security Act
of 1974, as amended. The Company made discretionary contributions of $237,000,
$299,000 and $240,000 for the years ended March 31, 2002, 2001 and 2000,
respectively.
The Company is not obligated under any postretirement benefit plan.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. RELATED PARTIES
Certain officers of the Company are also shareholders of several other
companies, which are considered affiliates of the Company for the purpose of
this disclosure. The Company has shared services arrangements with these
affiliated companies. These shared services include accounting, human resources
and other administrative services, as well as facility related costs and
services. Shared services costs allocated to affiliated companies, other than to
MSD (See Note 6), totaled $1.3 million, $1.4 million, and $1.8 million for the
years ended March 31, 2002, 2001 and 2000, respectively, which reduced certain
Operating Costs and Expenses in the accompanying Consolidated Statements of
Operations for the respective years. Amounts allocated to affiliated companies
are based upon costs incurred by the Company and are determined through
allocation methods that include time spent and square footage utilized. Amounts
due from affiliated companies under the shared services arrangements, were
approximately $35,000 and $20,000 at March 31, 2002 and 2001, respectively.
The Company has engaged a law firm in connection with the Roche litigation and
various other matters. A partner of the law firm is a director of the Company.
The Company recorded approximately $11.2 million, $5.8 million and $2.1 million
in legal fees with the law firm for the years ended March 31, 2002, 2001 and
2000, respectively. Amounts due to the law firm totaled $1.7 million and $2.1
million as of March 31, 2002 and 2001, respectively.
The Company has licensed certain diagnostic technologies from affiliated
companies and has licensed certain pharmaceutical technologies to affiliated
companies. No royalties have ever been earned or accrued under these license
agreements.
10. COMMITMENTS
Capital Leases - The Company is obligated under capital lease agreements for
certain equipment. These agreements expire during the year ending March 31,
2003. The aggregate discounted lease payments are recorded as a liability, and
the fair market value of the related leased assets are capitalized and amortized
over the assets estimated useful lives. Total assets capitalized pursuant to
such agreements were approximately $350,000 at March 31, 2002 and 2001 with
accumulated amortization totaling approximately $307,000 and $285,000 at March
31, 2002 and 2001, respectively.
Operating Leases - The Company leased office, laboratory and manufacturing
facilities pursuant to operating leases expiring at various times through fiscal
2010. Rent expense for facility and equipment operating leases totaled
approximately $2.6 million, $2.4 million and $1.8 million for the years ended
March 31, 2002, 2001 and 2000, respectively.
At March 31, 2002, the future minimum operating lease payments are as follows
(in thousands):
2003 $ 2,777
2004 2,608
2005 2,331
2006 652
2007 357
2008 and thereafter 662
----------
Total $ 9,387
==========
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. SEGMENT INFORMATION
The Company operates in one business segment. It is engaged in the development
and commercialization of ORIGEN-based products for the detection and measurement
of biological substances. Product sales by region are as follows (in thousands):
2002 2001 2000
------------ ------------ ------------
United States $ 10,050 $ 6,349 $ 6,186
United Kingdom 2,456 612 566
All other foreign 2,077 3,952 991
------------ ------------ -------------
Total $ 14,583 $ 10,913 $ 7,743
============ ============ =============
Substantially all assets are held in the United States.
Except for royalty and contract revenue from Roche, no single customer accounted
for more than 10% of total revenue. Revenue from Roche totaled 63%, 50% and 54%
of total revenues for the years ended March 31, 2002, 2001 and 2000,
respectively. Roche is the only customer with an account receivable balance that
exceeds 10% of total outstanding receivables. The amount receivable from Roche
totaled 65% and 68% of total accounts receivable at March 31, 2002 and 2001,
respectively.
12. LITIGATION
ROCHE
In 1997, the Company filed a lawsuit against Roche Diagnostics GmbH (formerly
Boehringer Mannheim GmbH) 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 technology. In its lawsuit, the Company
alleged that Roche failed to perform certain material obligations under the
Agreement and engaged in unfair competition against the Company.
The jury trial in this litigation was completed in January 2002, and in February
2002, the Court issued a final order of judgment that awarded the Company $105
million in compensatory damages and $400 million in punitive damages, confirmed
the Company's right to terminate the Agreement, and directed and commanded Roche
to grant to the Company for use in its retained fields a license to certain
improvements developed by Roche under the Agreement. Roche was also ordered, at
its sole cost and expense, to deliver such improvements to the Company and to
provide all other information and materials required or necessary to enable the
Company to commercialize these improvements. Improvements, as defined in the
judgment, include Roche's Elecsys(R) 1010, 2010 and E170 lines of clinical
diagnostic immunoassay analyzers, the tests developed for use on those systems,
and Roche's nucleic acid amplification technology called PCR. The jury further
concluded that Roche violated its duty to the Company of good faith and fair
dealing, engaged in unfair competition against the Company, and materially
breached the Agreement.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The judgment bars Roche from marketing, selling, placing or distributing outside
of its licensed field any products, including its Elecsys diagnostics product
line, that are based on the Company's ORIGEN(R) technology. While the Company
has voluntarily agreed not to terminate the Agreement until an appellate court
determines that it is entitled to do so, the Company has notified Roche that the
Agreement will terminate automatically once the Company's right to do so is
affirmed by the appellate court. Upon termination, Roche will be prohibited from
commercializing all ORIGEN-based products in all fields. At that time, the
Company will be free to operate, either independently or with new partners, in
all fields, including those currently licensed to Roche.
Roche filed counterclaims against the Company alleging, among other things, that
IGEN breached the Agreement by permitting Eisai Co., Ltd., another of the
Company's licensees, to market certain ORIGEN-based products in Japan. The final
judgment issued in the litigation found in the Company's favor and against Roche
on all of Roche's counterclaims, except for one in which the Company was ordered
to pay $500,000.
Roche has filed a notice of appeal with the U.S. Court of Appeals for the Fourth
Circuit. In connection with the filing of that appeal, Roche posted a $600
million bond to support its financial obligations to the Company under the
judgment. During the appeal process, Roche is obligated to continue to comply
with the terms of the Agreement, including its obligation to continue to pay the
Company royalties on Roche's sales of royalty-bearing products and to share and
deliver improvements. Roche's obligation to pay the $505 million of monetary
damages awarded to the Company is suspended until completion of the appeal
process. The Company has also filed a notice of appeal on the judgment issued
under the Roche counterclaim. Although the Company will vigorously oppose
Roche's appeal, Roche may ultimately prevail in its attempt to modify or
overturn the judgment issued in this litigation.
In 1998, a subsidiary of Ares-Serono ("Serono") filed a patent infringement
claim against the Company, Roche and BioMerieux (formerly Organon Teknika) in
the U.S. District Court, District of Delaware. The action claimed that a Serono
patent was being infringed by the parties. Subsequently, F. Hoffmann LaRoche,
Ltd., a member of the Roche family of companies, acquired the patent from Serono
and continued in Serono's place to assert the infringement claim against the
Company and BioMerieux. A trial was held on this matter during February 2001.
During November 2001, a settlement was reached between the Company and Roche
under which Roche dismissed with prejudice all claims against the Company, paid
the Company $5.7 million as reimbursement for legal fees incurred in the
litigation and granted the Company a fully paid-up, perpetual, worldwide,
non-exclusive license (with the right to grant sublicenses) to the patent in
suit.
HITACHI
In 1997, IGEN International K.K., a Japanese subsidiary of the Company, filed a
lawsuit in Tokyo District Court against Hitachi Ltd. ("Hitachi"). The lawsuit
sought to enjoin Hitachi from infringing a license registration held by IGEN
K.K. and Eisai Co., Ltd., a company to which IGEN has licensed ORIGEN technology
rights. The lawsuit requested injunctive relief preventing Hitachi from
manufacturing, using or selling the Elecsys 2010, which incorporates the
Company's patented ORIGEN technology, in Japan. On June 13, 2002, Hitachi and
the Company reached an agreement to settle this litigation and the case has been
dismissed.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
OTHER PROCEEDINGS
In February 2001, Brown Simpson Strategic Growth Fund L.P., Brown Simpson
Strategic Growth Fund, Ltd. and Brown Simpson Partners I (collectively "Brown
Simpson") initiated a shareholder derivative lawsuit for and on behalf of the
shareholders of the Company in the Circuit Court for Montgomery County, Maryland
against four of the Company's current directors, two former directors, three
executive officers and the Company as a nominal defendant.
In the complaint, Brown Simpson alleged breach of fiduciary duties by the named
individual defendants in connection with transactions between the Company and
other entities in which certain directors and officers are alleged to have an
interest, including the Meso Scale Diagnostics, LLC. joint venture.
In March 2001, a second shareholder derivative lawsuit was filed by Laurence
Paskowitz in the Circuit Court for Montgomery County, Maryland with allegations
substantially the same as those set forth in the complaint filed by Brown
Simpson. The complaint was later amended to add direct claims against the
defendants and to seek class action certification for those direct claims.
Both lawsuits sought principally the following: that the defendants hold in
trust and be required to account for and restore to the Company damages that
IGEN has allegedly sustained by reason of the allegations and relief relating to
board and management composition. The Paskowitz complaint also sought damages
for a class of IGEN shareholders for the direct claims against the individual
defendants. The complaints did not include any claims against the Company.
The Company and the individual defendants filed motions to dismiss or, in the
alternative, for summary judgment in both lawsuits. On May 15, 2002, following
hearings in December 2001 and March 2002, the court issued an opinion and order
dismissing all claims asserted against all of the defendants. On June 19, 2002,
an appeal was filed by one of the plaintiffs. The Company believes that the
claims are without merit and it intends to vigorously oppose the appeal filed in
this case.
The Company is involved, from time to time, in various other legal proceedings
arising in the ordinary course of business. In the opinion of management, the
Company does not believe that any legal proceedings described as Other
Proceedings will have a material adverse impact on its financial position,
results of operations or cash flows.
...
13. VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's allowance for doubtful
accounts (in thousands):
Balance at Balance at
For the Years Beginning Charges to End of
Ended March 31, of Period Expense Deductions Period
2000 $ 46 $ 18 $ - $ 64
2001 64 135 (169) 30
2002 30 60 (1) 89
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. QUARTERLY OPERATING RESULTS (UNAUDITED)
For the years ended March 31, First Second Third Fourth
(In thousands, except per share data)
2002
Revenue (1) $ 8,258 $ 9,396 $ 10,424 $ 13,969
Loss from operations (2,3,4) (10,619) (7,636) (4,184) (4,117)
Net loss (4) (11,917) (12,103) (9,227) (9,279)
Basic and diluted loss per share (0.69) (0.64) (0.48) (0.43)
2001
Revenue (5) $ 7,574 $ 6,570 $ 8,500 $ 8,718
Loss from operations (4,013) (7,642) (7,807) (11,929)
Loss before cumulative effect of accounting change (5,131) (8,763) (9,047) (13,317)
Cumulative effect of accounting change (6) - - (6,995) -
Net loss (5,131) (8,763) (16,042) (13,317)
Loss before cumulative effect of accounting change (per share) - - (0.60) -
Cumulative effect of accounting change (per share) - - (0.44) -
Basic and diluted loss per share (0.36) (0.59) (1.04) (0.83)
(1) Revenues for the first and fourth quarters includes $550,000 and $3.2
million, respectively of Roche royalties relating to modifications made by
Roche to their methodology for computing royalties.
(2) Operating costs and expenses for the third quarter have been reduced by a
reimbursement of $5.7 million resulting from the settlement of the Delaware
litigation with Roche.
(3) Operating costs and expenses for the fourth quarter includes a write-off of
$1.1 million of TRICORDER detection modules previously recorded as fixed
assets. The impact on individual prior interim and annual periods was not
significant.
(4) See Note 6 of Notes to Consolidated Financial Statements for a description
of the recording of losses related to the MSD investment.
(5) Revenues for the first and fourth quarters includes $1.8 million and $2.0
million, respectively related to contract revenue from the alliance with
Bayer Diagnostics.
(6) See Note 1 of Notes to Consolidated Financial Statements for a description
of the cumulative effect of accounting change.
The sum of quarterly per share amounts may not be equal to per share amounts
reported for year-to date periods. This is due to changes in the number of
weighted average shares outstanding and the effects of rounding for each period.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
Certain information required by Part III is omitted from this Report in that the
Company will file a definitive proxy statement pursuant to Regulation 14A (the
"Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference. Only those sections of the Proxy Statement which
specifically address the items set forth herein are incorporated by reference.
63
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
(a) Directors. The information with respect to directors required
under this item is incorporated herein by reference to the
section captioned "Election of Directors" in the Company's
Proxy Statement with respect to the Annual Meeting of
Shareholders to be held on August 28, 2002.
(b) Executive Officers and Significant Employees. The information with
respect to executive officers and significant employees required
under this item is incorporated herein by reference to Part I,
Item 1, Business - Executive Officers of the Company, and
- Other Key Management of this Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required under this item is incorporated herein by reference to
the sections entitled "Election of Directors -- Compensation for Directors", and
- --Compensatiom Commitee Interlocks and Insider Participation", and
"Executive Compensation", in the Company's Proxy Statement with respect to the
Annual Meeting of Shareholders to be held on August 28, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required under this item is incorporated herein by reference to
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Proxy Statement with respect to the Annual Meeting
of Shareholders to be held on August 28, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required under this item is incorporated herein by reference to
the section entitled "Certain Transactions" in the Company's Proxy Statement
with respect to the Annual Meeting of Shareholders to be held on August 28,
2002.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Index to Financial Statements.
-----------------------------
The financial statements listed in the Index to Financial Statements are filed
as part of this Annual Report on Form 10-K. See ITEM 8 - Consolidated Financial
Statements and Supplementary Data.
(a) (2) Index to Financial Statement Schedules.
--------------------------------------
All schedules are omitted because they are not applicable, or not required, or
because the required information is included in the financial statements or
notes thereto.
(a) (3) Index to Exhibits.
The Exhibits filed as part of this Form 10-K are listed on and incorporated by
reference to the Exhibit Index immediately following the Signature page to this
Form 10K.
(b) Reports on Form 8-K:
The Company filed reports on Form 8-K under Item 5,
Other Events on January 11, 2002; February 20, 2002;
March 15, 2002;
64
(c) Exhibits. The Exhibits filed as part of this Form
10-K are listed on and incorporated by reference to
the Exhibit Index immediately following the
Signature page to this Form 10K.
(d) Financial Statement Schedules. All schedules are
omitted because they are not applicable, or not
required, or because the required information is
included in the financial statements or notes
thereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
IGEN International, Inc.
June 28, 2002 By: /s/ Samuel J. Wohlstadter
-----------------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Signature Title Date
/s/ Samuel J. Wohlstadter Chief Executive Officer June 28, 2002
- -------------------------
Samuel J. Wohlstadter (Principal Executive Officer); Director
/s/ George V. Migausky Vice President June 28, 2002
- ----------------------
George V. Migausky and Chief Financial Officer
(Principal Financial and Accounting
Officer)
/s/ Richard J. Massey President, Chief Operating Officer; June 28, 2002
- ---------------------
Richard J. Massey Director
/s/ Richard Cass Director June 28, 2002
- ----------------
Richard Cass
/s/ Anthony Rees Director June 28, 2002
- ----------------
Anthony Rees
/s/ Robert Salsmans Director June 28, 2002
- -------------------
Robert Salsmans
/s/ Joop Sistermans Director June 28, 2002
- -------------------
Joop Sistermans
65
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
2.1(4) Agreement and Plan of Merger effective November 19, 1996 (by virtue
of a reincorporation), by and between IGEN, Inc., a California
corporation and IGEN International, Inc. a Delaware corporation.
3.1(4) Certificate of Incorporation, as filed with the Secretary of State of
the State of Delaware on August 30, 1996.
3.2(4) Certificate of Designation of Series A Junior Participating Preferred
Stock, as filed with the Secretary of State of the State of Delaware
on November 18, 1996.
3.3(8) Certificate of Designation of Series B Convertible Preferred Stock, as
filed with the Secretary of State of the State of Delaware on
December 18, 1997.
3.4(4) Bylaws, as currently in effect.
4.1(7) Form of Specimen Right Certificate.
4.2(7) Rights Agreement, dated November 6, 1996, between the Company and The
First National Bank of Boston.
4.3(9) Note Purchase Agreement between the Company and the purchasers named
therein dated as of March 22, 1999.
4.4(10) Securities Purchase Agreement, dated as of January 11, 2000, among
Company and the Purchasers listed on Schedule I thereto.
4.5(8) Purchase Agreement for the Series B Convertible Preferred Stock
between the Company and the purchasers named therein dated as of
December 16, 1997.
10.1(11) Common Stock Purchase Agreement between IGEN International, Inc. and
Acqua Wellington North American Equities Fund, Ltd. dated as of
February 9, 2001.
10.2(11) Common Stock Purchase Agreement between IGEN International, Inc. and
Acqua Wellington North American Equities Fund, Ltd. dated February 9,
2001.
10.3(3*) Agreement between the Company and Eisai Co., Ltd. dated May 25, 1990.
10.4(1) Supplemental Agreement between Eisai Co., Ltd. and the Company.
10.5(3*) License and Development Technology Agreement between the Company and
Boehringer Mannheim GmbH dated September 23, 1992.
10.6(2) Advanced Royalty Agreement between the Company and Boehringer
Mannheim GmbH dated January 9, 1997.
10.7(3) License Agreement between the Company and Hyperion Catalysis
International ("Hyperion") dated October 10, 1993 as amended
March 15, 1990.
10.8(3) Common Stock Purchase Agreement between the Company and Organon
Teknika B.V. ("Organon") dated May 19, 1993.
10.9(3*) License and Technology Development agreement between the Company and
Organon dated May 19, 1993.
10.10(3*) Term Sheet for Consolidation of Research Projects between the Company
and Proteinix Corporation dated December 14, 1993.
66
INDEX TO EXHIBITS (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
10.11(3*) Term Sheet for consolidation of Cancer Research Projects between the
Company and Pro-Neuron, Inc. dated December 14, 1993.
10.12(3) Form of Indemnity Agreement entered into between the Company and its
directors and officers.
10.13(3+) 1985 Stock Option Plan, as amended, and related Form of Incentive
Stock Option Grant and Form of Nonqualified Stock Option Grant.
10.14(5+) 1994 Stock Option Plan as amended in 1998.
10.15(5+) 1994 Non-Employee Directors Stock Option Plan, and related Form of
Incentive Stock Option Grant.
10.16(5) Lease Agreement between the Company and W-M 16020 Limited Partnership
dated October 5, 1994.
10.17(5) Agreement for Purchase and Sale of Joint Venture Interest between the
Company and Hyperion, dated December 28, 1994.
10.18(6*) Joint Venture Agreement, dated as of November 30, 1995, between Meso
Scale Diagnostics, LLC. ("MSD"), Meso Scale Technologies, LLC.
("MST") and the Company.
10.19(6) Limited Liability Company Agreement, dated as of November 30, 1995,
between MSD, MST and the Company.
10.20(6*) IGEN/MSD License Agreement, dated as of November 30, 1995, between MSD
and the Company.
10.21(6+) Indemnification Agreement, dated as of November 30, 1995, between the
Company and Jacob Wohlstadter.
10.22(12) Letter Agreement dated November 29, 2000 between Meso Scale
Technologies, LLC., Meso Scale Diagnostics, LLC. and IGEN
International, Inc.
10.23(15*)Amendment No.1 to Joint Venture Agreement between Meso Scale
Diagnostics, LLC., Meso Scale Technologies, LLC., and IGEN
International, Inc. dated August 15, 2001.
10.24(15) First Amendment of Limited Liability Company Agreement of Meso Scale
Diagnostics, LLC. dated August 15, 2001 between IGEN International,
Inc. and Meso Scale Technologies, LLC.
10.25(15*)Amendment No.1 to IGEN/MSD License Agreement dated August 15, 2001
between Meso Scale Diagnostics, LLC. and IGEN International, Inc.
10.26(15) MSD/MST Sublicense Agreement dated November 31, 1995 between Meso
Scale Diagnostics, LLC. and Meso Scale Technologies, LLC.
10.27(15*)Amendment No. 1 to MSD/MST Sublicense Agreement dated August 15, 2001
between Meso Scale Technologies, LLC. and IGEN International, Inc.
10.28(15+)Consulting Agreement between IGEN International, Inc. and Jacob N.
Wohlstadter dated November 31, 1996.
10.29(15+)Indemnification Agreement between IGEN International, Inc., Jacob N.
Wohlstadter and JW Consulting Services, LLC. dated November 30, 1996.
10.30(15+*)Employment Agreement between Meso Scale Diagnostics, LLC., IGEN
International, Inc., Meso Scale Technologies, LLC. and Jacob
N. Wohlstadter dated August 15, 2001.
10.31(19+)Indemnification Agreement between IGEN International, Inc. and Jacob
N. Wohlstadter dated October 6, 2001.
10.32(13+)Amended Restated Promissory Note effective as of July 22, 2000
between Samuel J. Wohlstadter and the Company.
67
10.33(13+)Stock Pledge Agreement effective as of July 22, 2000 between Samuel
J. Wohlstadter and the Company.
10.34(13+)Amended Restated Promissory Note effective as of July 22, 2000
between Richard J. Massey and the Company.
10.35(13+)Stock Pledge Agreement effective as of July 22, 2000 between Richard
J. Massey and the Company.
10.36(18+)IGEN International, Inc. 2001 Broad Based Stock Option Plan .
10.37(17) Common Stock Purchase Agreement between IGEN International, Inc. and
Acqua Wellington Private Placement Fund, Ltd. dated December 17, 2001.
10.38(17) Common Stock Purchase Agreement between IGEN International, Inc. and
Acqua Wellington Opportunity I Limited dated December 17, 2001.
10.39(17) Registration Rights Agreement between IGEN International, Inc. and
Acqua Wellington Private Placement Fund, Ltd. dated December 17, 2001.
10.40(17) Registration Rights Agreement between IGEN International, Inc. and
Acqua Wellington Opportunity I Limited dated December 17, 2001.
10.41(23) Common Stock Purchase Agreement between IGEN International, Inc. and
Brown Simpson Partners I, Ltd. dated December 26, 2001.
10.42(23) Registration Rights Agreement between IGEN International, Inc. and
Brown Simpson Partners I, Ltd. dated December 26, 2001.
10.43(21) Common Stock Purchase Agreement between IGEN International, Inc. and
Acqua Wellington Private Placement Fund, Ltd. dated March 8, 2002.
10.44(21) Common Stock Purchase Agreement between IGEN International, Inc. and
Acqua Wellington Opportunity I Limited dated March 8, 2002.
10.45(21) Registration Rights Agreement between IGEN International Inc. and
Acqua Wellington Private Placement Fund, Ltd. dated March 8, 2002.
10.46(21) Registration Rights Agreement between IGEN International, Inc. and
Acqua Wellington Opportunity I Limited dated March 8, 2002.
10.47(14+)Amended 1994 Non-Employee Directors' Stock Option Plan dated June 6,
2001.
10.48(19+)Termination Protection Program.
10.49(20) Final Order of Judgment issued in IGEN International, Inc. v. Roche
Diagnostics GmbH dated February 15, 2002.
99.1 Meso Scale Diagnostics LLC.(A Development Stage Company), Financial
Statements at December 31, 2001 and 2000, and for the Three Years
Ended December 31, 2001, and for the period November 30, 1995
(Inception) Through December 31, 2001, and Independent Auditors'
Report. Filed herewith.
23.1 Consent of Deloitte & Touche LLP. Filed herewith.
+ Denotes management contract or compensatory plan or arrangement.
* Denotes confidential treatment applied.
(1) Previously filed as an exhibit to the Company's Form 10-Q for the
quarter ended September 30, 1997.
(2) Previously filed as an exhibit to the Company's Annual Report on Form
10-K, as amended, for the fiscal year ended March 31, 1997.
(3) Previously filed as an exhibit to the Registration Statement on Form
S-1, as amended (Registration No. 33-72992).
(4) Previously filed as an exhibit to the Company's Form 10-Q for the
quarter ended November 14, 2000.
(5) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1995.
(6) Previously filed as an exhibit to the Company's Form 10-Q for the
quarter ended December 31, 1995.
(7) Previously filed as an exhibit to the Company's Form 8-A filed
December 10, 1996.
69
(8) Previously filed as an exhibit to the Company's Registration Statement
on Form S-3, as amended (Registration No. 333-45355).
(9) Previously filed as an exhibit to the Company's Form 10-K for the
fiscal year ended March 31, 1999.
(10) Previously filed as an exhibit to the Company's Form 8-K on January
12, 2000.
(11) Previously filed as an exhibit to the Company's Form 8-K on February
12, 2001.
(12) Previously filed as an exhibit to the Company's Form 8-K on December
12, 2000.
(13) Previously filed as an exhibit to the Company's Form 10-K for the
fiscal year ended March 31, 2001.
(14) Previously filed as an exhibit to the Company's Form 10-Q for the
quarter ended June 30, 2001.
(15) Previously filed as an exhibit to the Company's Form 8-K as amended on
September 5, 2001.
(16) Previously filed as an exhibit to the Company's Form 10-Q for the
quarter ended September 30, 2001.
(17) Previously filed as an exhibit to the Company's Form 8-K on December
19, 2001.
(18) Previously filed as an exhibit to the Company's Registration Statement
on Form S-8 (Registration No. 333-76624).
(19) Previously filed as an exhibit to the Company's Form 10-Q for the
quarter ended December 31, 2001.
(20) Previously filed as an exhibit to the Company's Form 8-K on February
20, 2002.
(21) Previously filed as an exhibit to the Company's Form 8-K on March 15,
2002.
(22) Previously filed as an exhibit to the Company's Registration Statement
on Form S-3 (Registration No. 333-76760).
70