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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934
For Quarter Ended September 30, 2002
Commission File Number 0-23252
IGEN INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2852543
--------- -----------
(State or other jurisdiction (IRS Employer
incorporation or organization) Identification No.)
16020 INDUSTRIAL DRIVE, GAITHERSBURG, MD 20877
-----------------------------------------------
(Address of principal executive offices) (Zip Code)
301-869-9800
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Act of 1934 during the
preceding 12 months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 30, 2002
----- -------------------------------
Common Stock, $0.001 par value 23,729,852
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets - September 30, 2002 and
March 31, 2002 1
Condensed Consolidated Statements of Operations - For the three and six
months ended September 30, 2002 and 2001 2
Condensed Consolidated Statements of Cash Flows - For the six months
ended September 30, 2002 and 2001 3
Notes to Condensed Consolidated Financial Statements 4
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
Item 3: QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 23
Item 4: CONTROLS AND PROCEDURES 23
PART II OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS 24
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
Item 6: EXHIBITS AND REPORTS ON FORM 8-K 25
SIGNATURES 25
CERTIFICATIONS 26
IGEN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30, 2002 March 31, 2002
------------------ --------------
ASSETS (Unaudited)
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 28,837 $ 69,541
Short-term investments 20,493 5,278
Accounts receivable, net 12,055 9,865
Inventory 5,051 4,491
Other current assets 1,659 1,683
--------- ---------
Total current assets 68,095 90,858
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 5,739 6,429
OTHER NONCURRENT ASSETS:
Investment in affiliate 7,578 6,243
Restricted cash 1,721 1,721
Other 829 947
--------- ---------
TOTAL $ 83,962 $ 106,198
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 7,162 $ 10,731
Current portion of note payable 5,295 5,077
Convertible preferred stock dividends payable - 3,205
Current portion of deferred revenue 396 418
Obligations under capital leases 27 56
--------- ---------
Total current liabilities 12,880 19,487
--------- ---------
NONCURRENT LIABILITIES:
Note payable 15,361 18,064
Subordinated convertible debentures 30,933 30,032
Deferred revenue 63 96
--------- ---------
Total noncurrent liabilities 46,357 48,192
--------- ---------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized,
issuable in Series: Series A, 600,000 shares designated, none issued;
Series B, 25,000 designated, none and 8,500 shares issued and outstanding -
liquidation value of $0 and $8,500 plus accrued and unpaid dividends - 1
Common stock: $0.001 par value, 50,000,000 shares authorized: 23,729,802 and
23,064,392 shares issued and outstanding 24 23
Additional paid in capital 242,489 242,228
Stock notes receivable (2,061) (3,710)
Accumulated deficit (215,727) (200,023)
--------- ---------
Total stockholders' equity 24,725 38,519
--------- ---------
TOTAL $ 83,962 $ 106,198
========= =========
See notes to condensed consolidated financial statements.
1
IGEN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
Three months ended Six months ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
REVENUES:
Royalty income $ 8,428 $ 5,772 $ 16,535 $ 11,096
Product sales 4,698 3,624 8,290 6,416
Contract fees 299 - 599 143
-------- -------- -------- --------
Total 13,425 9,396 25,424 17,655
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES:
Product costs 2,213 1,372 3,545 2,270
Research and development 6,339 5,977 12,107 14,206
Selling, general and administrative 6,319 6,025 12,253 11,520
Litigation related costs 885 3,658 2,026 7,913
-------- -------- -------- --------
Total 15,756 17,032 29,931 35,909
-------- -------- -------- --------
LOSS FROM OPERATIONS (2,331) (7,636) (4,507) (18,254)
-------- -------- -------- --------
OTHER (EXPENSE) INCOME:
Interest expense (1,444) (1,528) (2,861) (3,083)
Other income, net 465 306 1,119 563
-------- -------- -------- --------
Total (979) (1,222) (1,742) (2,520)
EQUITY IN LOSS OF AFFILIATE (5,032) (3,245) (9,455) (3,245)
-------- -------- -------- --------
NET LOSS (8,342) (12,103) (15,704) (24,019)
PREFERRED DIVIDENDS (3) (412) (201) (830)
-------- -------- -------- --------
NET LOSS ATTRIBUTED TO COMMON SHAREHOLDERS $ (8,345) $(12,515) $(15,905) $(24,849)
======== ======== ======== ========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.35) $ (0.64) $ (0.68) $ (1.33)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-
BASIC AND DILUTED 23,717 19,428 23,373 18,659
======== ======== ======== ========
See notes to condensed consolidated financial statements.
2
IGEN INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
Six months ended
September 30,
2002 2001
---- ----
OPERATING ACTIVITIES
Net loss $ (15,704) $ (24,019)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 2,550 2,013
Equity in loss of affiliate 9,455 3,245
Amortization of detachable warrant value 700 700
Expense related to stock options 184 32
Changes in assets and liabilities:
Increase in accounts receivable (2,190) (2,032)
(Increase) decrease in inventory (66) 304
Decrease in other current assets 24 197
Increase in restricted cash - (525)
Increase in other long-term assets (10) -
(Decrease) increase in accounts payable and accrued expenses (3,569) 42
Decrease in deferred revenue (55) (354)
-------- --------
Net cash used for operating activities (8,681) (20,397)
-------- --------
INVESTING ACTIVITIES:
Expenditures for equipment and leasehold improvements (2,025) (2,807)
Investments in affiliate (10,790) (5,710)
Purchase of short-term investments (19,311) -
Maturities of short-term investments 2,900 -
Sales of short-term investments 1,056 -
-------- --------
Net cash used for investing activities (28,170) (8,517)
-------- --------
FINANCING ACTIVITIES:
Issuance of common stock, net 418 37,890
Payments on notes payable and capital lease obligations (2,514) (2,312)
Principal collected on note receivable 1,649 -
Preferred stock dividends paid (3,406) -
-------- --------
Net cash (used for) provided by financing activities (3,853) 35,578
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (40,704) 6,664
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 69,541 15,089
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 28,837 $ 21,753
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash payments of interest $ 1,836 $ 1,158
======== ========
Accrued preferred dividends $ 201 $ 830
======== ========
See notes to condensed consolidated financial statements.
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of IGEN
International, Inc. (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information. These financial statements should be read
together with the audited financial statements and notes for the year ended
March 31, 2002 contained in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements have been condensed or
omitted. In the opinion of the Company's management, the financial statements
reflect all adjustments necessary to present fairly the results of operations
for the three and six month periods ended September 30, 2002 and 2001, the
Company's financial position at September 30, 2002 and the cash flows for the
six month periods ended September 30, 2002 and 2001. The results of operations
for the interim period are not necessarily indicative of the results of the
entire year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 component of stockholders' equity. As of September 30, 2002,
the Company had unrealized losses on "available for sale" securities of
approximately $140,000. This amount is included in comprehensive income and has
been recorded within additional paid-in capital in the accompanying condensed
consolidated balance sheets. 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.
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
concentration of credit risk.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Restricted Cash -The Company has a debt service reserve of approximately $1.7
million that is restricted in use and held in trust as collateral (see Note 4).
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) September 30, 2002 March 31, 2002
- --------------------------------------------------------------
Finished Goods $ 2,368 $ 2,070
Work in process 1,510 1,149
Raw materials 1,173 1,272
---------- ------------
$ 5,051 $ 4,491
========= ============
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) September 30, 2002 March 31, 2002
- ----------------------------------------------------------------------------
Lab instruments and equipment $ 8,414 $ 7,761
Office furniture and equipment 8,095 7,492
Leasehold improvements 2,970 2,864
-------- --------
19,479 18,117
Accumulated depreciation
and amortization (13,740) (11,688)
-------- --------
$ 5,739 $ 6,429
======== ========
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 September 30, 2002, software development
has been substantially completed concurrently with the establishment of
technological feasibility, and accordingly, no costs have been capitalized to
date.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 September 30, 2002.
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 September 30, 2002,
accrued product warranty costs totaled $250,000 and are included in accrued
expenses.
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.
Research and Development - Research and development costs are expensed as
incurred.
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
periods 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.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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
periods have been reclassified to conform to the current period presentation.
New Accounting Standards - In June 2001, the FASB issued SFAS No. 143
"Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002.
The Company has elected early adoption of this pronouncement and it was
implemented as of April 1, 2002. This implementation of SFAS No. 143 did not
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 No. 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 adopted SFAS
No. 144 as of April 1, 2002 and implementation did not have a material effect on
the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
(SFAS No. 145). SFAS No. 145 requires the classification of gains and losses
from extinguishments of debt as extraordinary items only if they meet certain
criteria for such classification in APB No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions." Any
gain or loss on extinguishments of debt classified as an extraordinary item in
prior periods that does not meet the criteria must be reclassified as other
income or expense. These provisions are effective for fiscal years beginning
after May 15, 2002. Additionally, SFAS No. 145 requires sale-leaseback
accounting for certain lease modifications that have economic effects similar to
sale-leaseback transactions. These lease provisions are effective for
transactions occurring after May 15, 2002. SFAS No. 145 will not have a material
effect on the Company's financial position or results of operations.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146 replaces Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs incurred in a Restructuring)." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company does not expect the adoption of
SFAS No. 146 to have a material effect on its financial position or results of
operations.
3. 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 $47.2 million of the funds previously invested
in MSD through September 30, 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 in the amount of
$21.5 million, subject to a permitted variance of fifteen percent. As of
September 30, 2002, the Company has satisfied $16.1 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.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
If the 2003 budget is not approved by the Company's Board of Directors, it would
be required to provide transitional funding for an additional six months,
estimated to be approximately $11.8 million, and under certain conditions, MSD
and MST have the right to terminate the joint venture and purchase the Company's
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, have been 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 during the three months ended June 30,
2001.
4. NOTE PAYABLE
In March 1999, the Company entered into a debt financing with John Hancock
Mutual Life Insurance Company under a Note Purchase Agreement from which the
Company received $30 million. The 8.5% Senior Secured Notes mature in March
2006. The Company is required to make quarterly principal and interest payments
of $1.7 million in each fiscal year through March 2006.
Collateral for the debt is represented by royalty payments and rights of the
Company to receive monies due pursuant to the Company's license agreement with
Roche. Additional collateral is represented by a Restricted Cash account, which
had a balance of $1.7 million at September 30, 2002. Loan covenants include
compliance with annual and quarterly Royalty Payment Coverage Ratios which are
tied to royalty payments and debt service.
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 in 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.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 $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 September 30, 2002.
6. STOCKHOLDERS' EQUITY
In 1997, the Company issued 25,000 shares of Series B Convertible Preferred
Stock (Series B) with a stated value of $1,000 per share which were convertible
into shares of Common Stock of the Company at a rate of $13.96 per share. On
July 9, 2002, the Company redeemed all previously unconverted Series B shares
for their liquidation value. During the six months ended September 30, 2002,
8,500 shares of Series B were converted into 608,880 shares of Common Stock and
dividends totaling $3.4 million were paid to Series B holders in connection with
these conversions. There are no remaining Series B shares outstanding and all
Series B dividend obligations have been satisfied. The Series B dividend payable
balance at March 31, 2002 has been reclassified to current liabilities in the
accompanying condensed consolidated balance sheets.
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
2007. The loans are 6.62% simple interest (paid annually), full recourse loans
against all assets of the borrowers, collateralized by the pledge of shares of
the Company's common stock owned by the borrowers. In September 2002, one loan
totaling $1.6 million was fully repaid, with interest.
7. 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.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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. 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 Agreement until an appellate court
determines that it is entitled to do so, the Company has notified Roche that the
Agreement will terminate automatically if and when 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 (effective upon
termination of the Agreement), as well as for the Company's retained fields.
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 for 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, 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.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 filed a
notice of appeal on the judgment issued under the Roche counterclaim and has
since voluntarily dismissed its appeal. 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.
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. In May 2002, the court
issued an opinion and order dismissing all claims asserted against all of the
defendants in both cases. In June 2002, an appeal was filed by the Paskowitz
plaintiff. No appeal was filed by the Brown Simpson plaintiff and the decision
in that case is now final. The Company believes that the claims are without
merit and it intends to vigorously oppose the appeal filed in this case.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 2. MANAGEMENT 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(R) 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(R) 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 September 30, 2002, we had an accumulated deficit
of $216 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.
In addition to historical information, this document contains forward-looking
statements within the meaning of the "safe-harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
Reference is made in particular to statements regarding the markets and
potential markets and market growth for diagnostic products, potential impact of
competitive products, our expectations regarding the level of anticipated
royalty and revenue growth in the future, the potential market for products in
development, prospects for future business arrangements with third parties,
financing plans, the outcome of litigation, our 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 this document.
The words "may", "should", "could", "will", "expect", "intend", "estimate",
"anticipate", "believe", "plan" and similar expressions have been used in this
document to identify forward-looking statements. We have based these
forward-looking statements on our current views with respect to future events
and financial performance. Such statements are based on management's current
expectations and are subject to a number of risks and uncertainties which could
cause actual results to differ materially from those described in the
forward-looking statements.
13
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In particular, careful consideration should be given to the cautionary
statements in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and to the risks and uncertainties detailed in our
Annual Report on Form 10-K for the year ended March 31, 2002 previously filed
with the Securities and Exchange Commission. We disclaim any intent or
obligation to update these forward-looking statements.
RESULTS OF OPERATIONS
QUARTER AND SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2001.
REVENUES. Total revenues for the quarter and six months ended September 30, 2002
were $13.4 million and $25.4 million, respectively. This represents increases of
$4.0 million (43%) and $7.7 million (44%), respectively, when compared with the
same prior year periods. The revenue growth for the 2002 periods was due to
increases in all revenue categories - product sales, royalty income and contract
fees.
Product sales were $4.7 million and $8.3 million during the quarter and first
six months of the current year, which represent increases of 30% and 29%,
respectively, over the prior year's product sales of $3.6 million and $6.4
million for the same respective periods. This growth in product sales was from
the M-SERIES line of life science products (an increase of $300,000 and $700,000
for the quarter and six month periods), and new sales of bio-defense products
for detection of biological agents or toxins (an increase of $800,000 and $1.2
million for the quarter and six month periods). In order to meet increased
demand, we are accelerating delivery of bio-defense products to the Department
of Defense and will fulfill its current production contract by the end of
December 2002. We anticipate that ongoing bio-defense initiatives will generate
product sales of $2 million during the quarter ending December 31, 2002, and
double-digit percentage revenue increases in fiscal year 2004. Sales to
physician office laboratory (POL) customers were unchanged in all periods. 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 $8.4 million and $16.5 million during the quarter and six
months ended September 30, 2002, an increase of 46% and 49%, respectively, over
the same prior year periods. Royalties from Roche represent approximately $8.2
million (97%) and $16.0 million (97%) of the total royalty income for the
current quarter and six month period, respectively compared to $5.4 million
(94%) and $10.5 million (95%) in the comparable prior year periods.
14
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
These increases are attributable to higher Roche sales of its Elecsys and E170
product lines, which are based on our 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 and paying royalties as a result of the
litigation. 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.
Contract fees for the current quarter and six months ended increased to $299,000
and $599,000 respectively from $0 and $143,000 in the comparable prior year
periods. These fees related primarily to work completed in conjunction with the
development of clinical assays for Roche. Should the Roche license be
terminated, revenue from these fees would cease.
OPERATING COSTS AND EXPENSES. Product costs were $2.2 million (47% of product
sales) and $3.5 million (43% of product sales) for the quarter and six months
ended September 30, 2002 compared to $1.4 million (38% of product sales) and
$2.3 million (35% of product sales) for the quarter and six months ended
September 30, 2001. In addition to costs from higher product sales, product
costs in the current year increased due to costs incurred in connection with the
recent launch of our new M-SERIES 384 instrument for life science customers
($200,000 and $300,000 in the current quarter and six month period), and third
party leasing costs incurred by us related to instruments being used by POL
customers, which were previously paid by Roche ($300,000 in both the current
quarter and six month periods). The third party leasing costs are expected to
decrease to approximately $140,000 for the quarter ended December 31, 2002 and
may continue to decrease as the applicable leases expire.
Research and development expenses increased $300,000 (6%) in the quarter ended
September 30, 2002, to $6.3 million from $6.0 million, and decreased $2.1
million (15%) from $14.2 million to $12.1 million for the six months ended
September 30, 2002.
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 $6.0 million and $11.8 million in the comparable prior
year quarter and six month period. Research and development expenses primarily
relate 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.
15
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We expect research and development costs to increase as product development and
core research continue to expand, including costs associated with our efforts in
developing bio-defense testing products. See "Equity in Loss of Affiliate" below
for a discussion of MSD activity in the quarter and six months ended September
30, 2002.
Selling, general and administrative expenses were $6.3 million and $12.3 million
in the quarter and six months ended September 30, 2002, an increase of $300,000
(5%) and $700,000 (6%) over the same prior year periods. These increases were
primarily attributable to additional personnel costs required to support the
growth in sales and customers.
Costs related to our litigation with Roche, which include financial and legal
advisory fees associated with settlement discussions, decreased $2.8 million
(76%) and $5.9 million (74%) to $900,000 and $2.0 million for the quarter and
six months ended September 30, 2002, respectively. These decreases are
attributable to the reduced legal fees since the conclusion of the Roche jury
trial in January 2002 and the completion of post-trial motions in April 2002.
INTEREST AND OTHER EXPENSE. Interest and other expense, net of interest income,
were $1.0 million and $1.7 million for the quarter and six months ended
September 30, 2002, respectively and $1.2 million and $2.5 million in the prior
year's periods. These decreases resulted from a growth in interest income in the
current year periods due to higher cash balances.
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 approximately 100% of MSD's losses since that
date as Equity in Loss of Affiliate.
NET LOSS. The net loss for current quarter was $8.3 million ($0.35 per common
share) compared to a net loss of $12.1 million ($0.64 per common share, after
consideration of the effect of preferred dividends) in the same prior year
quarter.
16
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The net loss for the six months ended September 30, 2002 was $15.7 million
($0.68 per common share, after consideration of the effect of preferred
dividends) compared to a net loss of $24.0 million ($1.33 per common share,
after consideration of the effect of preferred dividends) for the six months
ended September 30, 2001.
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 and cost of M-SERIES product upgrades; 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.
We have experienced significant operating losses each year since inception and
expect those losses to continue. Losses have resulted from a combination of
lower royalty revenue than we believe we are entitled to under the license
agreement with Roche, costs incurred in research and development, Roche
litigation costs, our share of losses in affiliate, 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, 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. Our ability to become profitable in the future will
depend, among other things, on our 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.
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 September 30,
2002, the Company had $49.3 million in cash, cash equivalents and short-term
investments with working capital of $55.2 million.
17
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Net cash used in operations decreased to $8.7 million for the six months ended
September 30, 2002, as compared to $20.4 million for the corresponding prior
year period, primarily due to a lower net loss and the reclassification of MSD
contributions to an "investing activity" in the current period. See "Equity in
Loss of Affiliate".
We used $2.0 million and $2.8 million of cash for the acquisition of equipment
and leasehold improvements during the six months ended September 30, 2002 and
2001, respectively. We believe material commitments for capital expenditures and
expanded facilities 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 expenditures or expanded facilities and have not secured additional
sources, if necessary, to fund such commitments. If we were unable to fund such
commitments, we may have to scale back or even eliminate some programs.
Net cash used in financing activities totaled $3.9 million for the six months
ended September 30, 2002. This use of funds was primarily due to debt service of
$2.5 million and Series B dividend payments of $3.4 million offset by stock
issuances yielding proceeds of $400,000 and the receipt of $1.6 million
resulting from the repayment of a loan by an officer.
Six Months
Ended Years Ended March 31,
March 31
--------- ---------------------------------------------------------
2008 and
Contractual Obligations (in thousands) Total 2003 2004 2005 2006 2007 Thereafter
- -------------------------------------- ----- ---- ---- ---- ---- ---- ----------
Note payable $20,656 $ 2,592 $ 5,523 $ 6,007 $ 6,534 $ - $ -
Subordinated convertible debentures 35,000 - - 35,000 - - -
MSD funding commitment 17,234 11,334 5,900 - - - -
Operating and capital leases 7,625 1,141 2,482 2,331 652 357 662
Interest obligations 8,257 2,166 3,112 2,628 351 - -
------- ------- ------- ------- ------- ------- -------
Total contractual obligations $88,772 $17,233 $17,017 $45,966 $ 7,537 $ 357 $ 662
======= ======= ======= ======= ======= ======= =======
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
September 30, 2002, we have satisfied $16.1 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.
18
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 $11.8 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 operating and capital lease commitments in the table above exclude amounts
expected to be allocated to MSD to meet a portion of our funding commitment.
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.
19
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Termination of the license agreement would have a material adverse effect on our
revenues unless, and until, we enter into one or more strategic relationships
with other companies that are able to develop and commercialize diagnostic
instruments within the field presently licensed to Roche. There can be no
assurance that we will be able to enter into one or more strategic relationships
on favorable terms, if at all.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are more fully described in Note 2 to our
Condensed 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 policies, our management uses its judgment to
determine the appropriate assumptions to be used in the determination of certain
estimates.
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 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. We make estimates of allowances for
doubtful accounts based on the age of receivables, individual customer profiles
and historical experience.
20
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 September 30,
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 3 of Notes to
Condensed Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations" (SFAS No. 143). SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. We have elected early adoption of
this pronouncement and it was implemented as of April 1, 2002. The
implementation of SFAS No. 143 did not have a material effect on our financial
position or results of operations.
21
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets" (SFAS No. 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. We adopted SFAS No. 144 as of April 1, 2002 and
implementation did not have a material effect on our financial position or
results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
(SFAS No. 145). SFAS No. 145 requires the classification of gains and losses
from extinguishments of debt as extraordinary items only if they meet certain
criteria for such classification in APB No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business , and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions". Any
gain or loss on extinguishments of debt classified as an extraordinary item in
prior periods that does not meet the criteria must be reclassified as other
income or expense. These provisions are effective for fiscal years beginning
after May 15, 2002. Additionally, SFAS No. 145 requires sale-leaseback
accounting for certain lease modifications that have economic effects similar to
sale-leaseback transactions. These lease provisions are effective for
transactions occurring after May 15, 2002. SFAS No. 145 will not have a material
effect on our financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146 replaces Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs incurred in a Restructuring)". SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. We do not expect the adoption of SFAS No. 146
to have a material effect on its financial position or results of operations.
22
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information about market risks for the three months ending September 30, 2002
does not differ materially from that discussed under Item 7A of the Company's
Annual Report on Form 10-K for the year ended March 31, 2002.
ITEM 4: CONTROLS AND PROCEDURES
The Company's management, including the Chairman of the Board & Chief Executive
Officer (serving as the principal executive officer) and Chief Financial
Officer, have conducted an evaluation of the effectiveness of disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that
evaluation, the Chairman of the Board & Chief Executive Officer and the Chief
Financial Officer have concluded that the disclosure controls and procedures are
effective in ensuring that all material information required to be filed in this
quarterly report has been made known to them in a timely fashion. There have
been no significant changes in internal controls, or in other factors that could
significantly affect internal controls, subsequent to the date the Chairman of
the Board and Chief Financial Officer completed their evaluation.
23
PART II OTHER INFORMATION
Item 1: Legal Proceedings
The information required under this item is incorporated
herein by reference to Part I, Item 1 - Notes to Consolidated
Financial Statements.
Item 4: Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Shareholders of IGEN International, Inc. was
held on August 28, 2002.
(b) Samuel J. Wohlstadter and Richard Cass were elected to the Board
of Directors at the Annual Meeting. The directors of the Company
whose term of office as directors continued after the meeting were
Richard J. Massey, Joop Sistermans, Robert Salsmans, and Anthony
Rees.
(c) The matters voted upon at the meeting and the voting of
shareholders with respect thereto are as follows:
The election of Samuel J. Wohlstadter and Richard Cass to the
Board of Directors to hold office for a three-year term and until
his successor is elected and has qualified, or until such
directors earlier death, resignation or removal. The voting
results, with approximately 20.3 million (86%) of the shares
voting, were as follows:
Wohlstadter Cass
----------- ----------
For: 19,395,110 20,032,194
Withheld: 904,331 267,247
The ratification of the selection of Deloitte & Touche LLP as
independent auditors of the Company for its fiscal year ending
March 31, 2003. The voting results, with approximately 20.3
million (86%) of the shares, voting were as follows:
For: 20,029,901
Against: 261,658
Abstain: 7,882
24
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits:
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
The Company filed reports on Form 8-K under Item 5,
Other Events on August 14, 2002, September 30, 2002
and October 3, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IGEN International, Inc.
Date: November 14 , 2002 /s/ George V. Migausky
------------------ ----------------------
George V. Migausky
Vice President of Finance and
Chief Financial Officer
(On behalf of the Registrant and as
Principal Financial Officer)
25
IGEN INTERNATIONAL, INC.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Samuel J. Wohlstadter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IGEN International,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the"Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Samuel J. Wohlstadter
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Samuel J. Wohlstadter
Chairman of the Board and Chief Executive Officer
26
IGEN INTERNATIONAL, INC.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, George V. Migausky, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IGEN International,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ George V. Migausky
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George V.Migausky
Vice President and Chief Financial Officer
27