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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 December 31, 2002
Commission File Number 0-23252
IGEN International, Inc.
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(Exact name of registrant as specified in its charter)
DELAWARE 94-2852543
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(State or other jurisdiction (IRS Employer
incorporation or organization) Identification No.)
16020 INDUSTRIAL DRIVE, GAITHERSBURG, MD 20877
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(Address of principal executive offices) (Zip Code)
301-869-9800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Act of 1934 during the
preceding 12 months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
Indicate by check mark whether the registrant is an accelerated filer.
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 3, 2003
----- -------------------------------
Common Stock, $0.001 par value 23,747,872
IGEN International, Inc.
Form 10-Q
For the Quarter Ended December 31, 2002
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets-December 31, 2002 and
March 31, 2002 2
Condensed Consolidated Statements of Operations-For the three and nine
months ended December 31, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows-For the nine months
ended December 31, 2002 and 2001 4
Notes to Condensed Consolidated Financial Statements 5
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
Item 3: QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 25
Item 4: CONTROLS AND PROCEDURES 25
PART II OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS 26
Item 6: EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURES 26
CERTIFICATIONS 27
1
IGEN International, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, 2002 March 31, 2002
----------------- --------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 25,435 $ 69,541
Short-term investments 16,207 5,278
Accounts receivable, net 13,958 9,865
Inventory 5,482 4,491
Other current assets 3,061 1,683
--------- ---------
Total current assets 64,143 90,858
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 5,643 6,429
OTHER NONCURRENT ASSETS:
Investment in affiliate 10,337 6,243
Restricted cash 1,721 1,721
Other 919 947
--------- ---------
TOTAL $ 82,763 $ 106,198
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 11,089 $ 10,731
Current portion of notes payable 5,408 5,077
Convertible preferred stock dividends payable - 3,205
Current portion of deferred revenue 380 418
Obligations under capital leases 13 56
--------- ---------
Total current liabilities 16,890 19,487
--------- ---------
NONCURRENT LIABILITIES:
Note payable 13,966 18,064
Subordinated convertible debentures 31,384 30,032
Deferred revenue 59 96
--------- ---------
Total noncurrent liabilities 45,409 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: 23,735,077 and
23,064,392 shares issued and outstanding 24 23
Additional paid in capital 242,534 242,228
Stock notes receivable (2,061) (3,710)
Accumulated deficit (220,033) (200,023)
--------- ---------
Total stockholders' equity 20,464 38,519
--------- ---------
TOTAL $ 82,763 $ 106,198
========= =========
See notes to condensed consolidated financial statements.
2
IGEN International, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Unaudited
Three months ended Nine months ended
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
REVENUES:
Royalty income $ 10,357 $ 5,458 $ 26,892 $ 16,554
Product sales 5,745 4,516 14,035 10,932
Contract fees 149 450 748 593
-------- -------- -------- --------
Total 16,251 10,424 41,675 28,079
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES:
Product costs 2,680 1,518 6,225 3,789
Research and development 5,765 6,311 17,872 20,517
Selling, general and administrative 6,565 5,879 18,818 17,399
Litigation related costs 1,171 900 3,197 8,812
-------- -------- -------- --------
Total 16,181 14,608 46,112 50,517
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS 70 (4,184) (4,437) (22,438)
-------- -------- -------- --------
OTHER (EXPENSE) INCOME:
Interest expense (1,385) (1,502) (4,246) (4,585)
Other income, net 338 215 1,457 778
-------- -------- -------- --------
Total (1,047) (1,287) (2,789) (3,807)
EQUITY IN LOSS OF AFFILIATE (3,329) (3,756) (12,784) (7,001)
-------- -------- -------- --------
NET LOSS (4,306) (9,227) (20,010) (33,246)
PREFERRED DIVIDENDS - (349) (201) (1,179)
-------- -------- -------- --------
NET LOSS ATTRIBUTED TO COMMON SHAREHOLDERS $ (4,306) $ (9,576) $(20,211) $(34,425)
======== ======== ======== ========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.18) $ (0.48) $ (0.86) $ (1.80)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-
BASIC AND DILUTED 23,731 20,105 23,539 19,146
======== ======== ======== ========
See notes to condensed consolidated financial statements.
3
IGEN International, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
Nine months ended
December 31,
2002 2001
--------- ---------
OPERATING ACTIVITIES:
Net loss $ (20,010) $ (33,246)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 3,570 3,133
Loss on disposal of equipment 85 -
Equity in loss of affiliate 12,784 7,001
Amortization of detachable warrant value 1,051 1,049
Expense related to stock options 290 99
Changes in assets and liabilities:
Increase in accounts receivable (4,093) (3,251)
(Increase) decrease in inventory (748) 1,097
(Increase) decrease in other current assets (1,378) 69
Increase in restricted cash - (744)
Increase in accounts payable and accrued expenses 358 1,619
Decrease in deferred revenue (75) (453)
-------- --------
Net cash used for operating activities (8,166) (23,627)
-------- --------
INVESTING ACTIVITIES:
Expenditures for equipment and leasehold improvements (2,622) (4,250)
Investments in affiliate (16,878) (8,455)
Purchase of short-term investments (20,189) -
Maturities of short-term investments 5,235 -
Sales of short-term investments 3,819 -
-------- --------
Net cash used for investing activities (30,635) (12,705)
-------- --------
FINANCING ACTIVITIES:
Issuance of common stock, net 423 77,382
Payments on notes payable and capital lease obligations (3,810) (3,505)
Principal collected on note receivable 1,649 -
Preferred stock dividends paid (3,406) (3,317)
Increase in other long-term assets (161) -
-------- --------
Net cash (used for) provided by financing activities (5,305) 70,560
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (44,106) 34,228
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 69,541 15,089
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 25,435 $ 49,317
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash payments of interest $ 2,275 $ 1,700
======== ========
Accrued preferred dividends $ 201 $ 1,179
======== ========
Equipment and leashold improvement contributed to affiliate $ - $ 900
======== ========
See notes to condensed consolidated financial statements.
4
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 nine month periods ended December 31, 2002 and 2001, the
Company's financial position at December 31, 2002 and the cash flows for the
nine month periods ended December 31, 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 December 31, 2002,
the Company had unrealized losses on "available for sale" securities of
approximately $206,000. 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 credit
risk.
5
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) December 31, 2002 March 31, 2002
- -------------------------------------------------------------
Finished Goods $ 2,423 $ 2,070
Work in process 672 1,149
Raw materials 2,387 1,272
-------------- ------------
$ 5,482 $ 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) December 31, 2002 March 31, 2002
- ------------------------------------------------------------------------------
Lab instruments and equipment $ 5,432 $ 7,761
Office furniture and equipment 5,634 7,492
Leasehold improvements 3,235 2,864
--------------- -----------
14,301 18,117
Accumulated depreciation and amortization (8,658) (11,688)
---------------- -----------
$ 5,643 $ 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 December 31, 2002, software development
has been substantially completed concurrently with the establishment of
technological feasibility, and accordingly, no costs have been capitalized to
date.
6
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 December 31, 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 December 31, 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 (Series B) for
all periods during which the Series B was outstanding. Due to the Company's net
loss, the potentially dilutive common shares related to outstanding stock
options and Series B are not included in the calculation of diluted net loss per
common share.
7
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.
8
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.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation- Transition and Disclosure- an amendment of SFAS No. 123" (SFAS No.
148). This statement amends SFAS No. 123 "Accounting for Stock Based
Compensation" (SFAS No. 123) to provide alternative methods of voluntarily
transitioning to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure requirements of
SFAS No. 123 to require disclosure of the method used to account for stock-based
employee compensation and the effect of the method on reported results in both
annual and interim financial statements. This pronouncement is effective for
both annual and interim periods beginning after December 15, 2002. The Company
is in the process of evaluating the impact that will result from adopting SFAS
No. 148 and is therefore unable to disclose its expected effects on the
Company's financial position and results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 addresses variable interest
entities and provides a framework through which an enterprise assesses
consolidation of that entity. FIN 46 is effective immediately for variable
interest entities created or acquired after January 31, 2003 and is effective
April 1, 2004 for variable interest entities created or acquired on or before
January 31, 2003. The Company is in the process of evaluating the impact that
will result from adopting FIN 46 and is therefore unable to disclose its
expected effects on the Company's financial position and 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.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 $53.2 million of the funds previously invested
in MSD through December 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 to fund the joint venture through its expiration date of
November 30, 2003. Funding for the period from January 1, 2003 to November 30,
2002 is $20.6 million, subject to a permitted variance of fifteen percent, and
is based on an annual budget approved by an independent 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.
The MSD joint venture will expire on November 30, 2003, and may be extended by
mutual agreement of the parties. If the term of the joint venture is not
extended, the Company, MSD and MST have agreed to work in good faith and use
reasonable efforts to secure third-party funding for MSD. MST and MSD have the
right to terminate the joint venture prior to November 30, 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, and many of the licenses and other arrangements
among the Company, MSD and MST will continue indefinitely.
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
contributions to MSD since July 1, 2001 were recorded as Investment in Affiliate
and the Company has recorded approximately 100% of MSD's losses since that date
as Equity in Loss of Affiliate. Prior to that 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.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 December 31, 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.
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 December 31, 2002.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. STOCKHOLDERS' EQUITY
In 1997, the Company issued 25,000 shares of 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. In fiscal
2003, through the redemption date, 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 arose 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 the jury
rendered a verdict that Roche had materially breached the license agreement, had
violated its duty to the Company of good faith and fair dealing, and had engaged
in unfair competition against the Company. In February 2002, the Court issued a
final order of judgment that confirmed the jury's decisions to award $105
million in compensatory damages and $400 million in punitive damages, entitled
the Company to terminate the Agreement, and directed 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.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 judgment also 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
the 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.
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 appealed certain aspects of the judgment to the U.S. Court of Appeals for
the Fourth Circuit. In connection with 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.
Roche's obligation to pay the $505 million of monetary damages awarded to the
Company is suspended until completion of the appeal process. 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.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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. No appeal was filed by the Brown Simpson plaintiff and
the decision in that case is now final. In June 2002, the Paskowitz plaintiff
filed an appeal to the Court of Special Appeals in Maryland seeking review only
for one direct claim. The Circuit Court dismissal of all other claims in the
Paskowitz complaint is now final. A decision of the Court of Special Appeals is
anticipated in the near future. The Company believes that the remaining claim of
Paskowitz is without merit and intends to continue to vigorously oppose it.
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'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(R) technology for the clinical
diagnostic, life science and biodefense / industrial markets. We currently
derive a majority of our revenue from royalties received from licensees that
develop and market certain ORIGEN-based systems.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We also generate sales of our own products, particularly the M-SERIES(R) System
and related consumable reagents and biodefense testing products for homeland
security. 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 December 31, 2002, we had an accumulated
deficit of $220 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.
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 and other filings
previously made with the Securities and Exchange Commission. We disclaim any
intent or obligation to update these forward-looking statements.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Quarter and Nine Months Ended December 31, 2002 and 2001.
Revenues. Total revenues for the quarter and nine months ended December 31, 2002
were $16.3 million and $41.7 million, respectively. This represents increases of
$5.8 million (56%) and $13.6 million (48%), respectively, when compared with the
same prior year periods. The revenue growth for the 2002 periods was primarily
due to increases in product sales and royalty income.
Product sales were $5.7 million and $14.0 million during the quarter and nine
months of the current year, which represent increases of 27% and 28%,
respectively, over the prior year's product sales of $4.5 million and $10.9
million for the same respective periods. This growth in product sales was from
the M-SERIES line of life science products (an increase of $100,000 and $700,000
for the quarter and nine month periods), and new sales of biodefense products
for detection of biological agents or toxins (an increase of $1.1 million and
$2.4 million for the quarter and nine month periods). We anticipate that our
ongoing biodefense initiatives will generate double-digit percentage biodefense
related sales increases in fiscal year 2004.
Sales to physician office laboratory (POL) customers totaling $600,000 and $1.9
million in the current quarter and nine month period were unchanged from the
prior year. 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 years 2003 and
2004. Should POL customer contracts not be renewed, future POL product sales
would experience a decline.
Royalty income was $10.4 million and $26.9 million during the quarter and nine
months ended December 31, 2002, an increase of 90% and 62%, respectively, over
the same prior year periods. Royalties from Roche represent approximately $10.0
million (97%) and $26.1 (97%) of the total royalty income for the current
quarter and nine month period, respectively, compared to $5.2 million (95%) and
$15.9 million (96%) in the comparable prior year periods. 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.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
Contract fees for the current quarter and nine months period were $100,000 and
$700,000, respectively and $500,000 and $600,000 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 $2.7 million (47% of product
sales) and $6.2 million (44% of product sales) for the quarter and nine months
ended December 31, 2002 compared to $1.5 million (34% of product sales) and $3.8
million (35% of product sales) for the quarter and nine months ended December
31, 2001.
Product costs, as a percentage of product sales 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 (9% and 5% of product sales in the
current quarter and nine month periods), and third party leasing costs incurred
by us related to instruments being used by POL customers, which were previously
paid by Roche (2% and 3% of product sales in the current quarter and nine month
periods), as well as a change in the product mix (instrumentation vs. consumable
reagents) from the prior year.
Research and development expenses decreased by $500,000 (9%) and $2.6 million
(13%) to $5.8 million and $17.9 million in the quarter and nine months ended
December 31, 2002, from $6.3 million and $20.5 million. 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
$18.1 million in the comparable prior year nine 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. 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
biodefense testing products.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Selling, general and administrative expenses were $6.6 million and $18.8 million
in the quarter and nine months ended December 31, 2002, an increase of $700,000
(12%) and $1.4 million (8%) over the same prior year periods. These increases
were primarily attributable to additional personnel and support costs required
to generate the growth in sales and customers.
Costs related to our litigation with Roche, which include financial and legal
advisory fees associated with settlement discussions, were $1.2 million and $3.2
million for the quarter and nine months ended December 31, 2002, respectively.
For the prior year periods, these costs were $900,000 and $8.8 million,
respectively (both prior year amounts being net of a $5.7 million settlement
payment for a patent infringement action made by Roche to us). Excluding the
prior year's settlement payment, litigation costs in the current year periods
declined from 2001, due to 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 $2.8 million for the quarter and nine months ended
December 31, 2002, respectively and $1.3 million and $3.8 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 $4.3 million ($0.18 per common
share) compared to a net loss of $9.2 million ($0.48 per common share, after
consideration of the effect of preferred dividends) in the same prior year
quarter. The net loss for the nine months ended December 31, 2002 was $20.0
million ($0.86 per common share, after consideration of the effect of preferred
dividends) compared to a net loss of $33.2 million ($1.80 per common share,
after consideration of the effect of preferred dividends) for the nine months
ended December 31, 2001.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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; timing of any termination of our license to Roche;
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 and costs for 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; the continued supply of the materials that we use in our products;
manufacturing capabilities; and the volume and timing of product returns and
warranty claims.
We have experienced significant 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 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 December 31,
2002, the Company had $41.6 million in cash, cash equivalents and short-term
investments with working capital of $47.3 million.
Net cash used in operations decreased to $8.2 million for the nine months ended
December 31, 2002, as compared to $23.6 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".
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We used $2.6 million and $4.3 million of cash for the acquisition of equipment
and leasehold improvements during the nine months ended December 31, 2002 and
2001, respectively. We believe material commitments for capital expenditures and
additional or expanded facilities may be required in a variety of areas, such as
product development programs. We have not, at this time, made material
commitments for any such capital expenditures or 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
or plans.
Net cash used in financing activities totaled $5.3 million for the nine months
ended December 31, 2002. This use of funds was primarily due to debt service of
$3.8 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.
Our material future obligations are as follows:
Three
Months
Ended
March 31 Years ended March 31,
-------- ---------------------------------------------------------
2008 and
Contractual Obligations (in thousands) Total 2003 2004 2005 2006 2007 Thereafter
- -------------------------------------- ----- ---- ---- ---- ---- ---- ----------
Notes payable $19,374 $ 1,310 $ 5,523 $ 6,007 $ 6,534 $ - $ -
Subordinated convertible debentures 35,000 - - 35,000 - - -
MSD funding commitment 20,600 5,618 14,982 - - - -
Operating and capital leases 7,033 549 2,482 2,331 652 357 662
Interest obligations 7,381 1,290 3,112 2,628 351 - -
------- ------- ------- ------- ------- ------- -------
Total contractual obligations $89,388 $ 8,767 $26,099 $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 to fund the joint venture through its expiration date of
November 30, 2003. Funding for the period from January 1, 2003 to November 30,
2003 is $20.6 million, subject to a permitted variance of fifteen percent, and
is based on an annual budget approved by an independent 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.
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.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The MSD joint venture will expire on November 30, 2003 and may be extended by
mutual agreement of the parties. If the term of the joint venture is not
extended, IGEN, MSD and MST have agreed to work in good faith and use reasonable
efforts to secure third party funding for MSD. MST and MSD have the right to
terminate the joint venture prior to November 30, 2003 under certain
circumstances, including a change in control of IGEN, 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, and many of the licenses and other arrangements among IGEN,
MSD and MST will continue indefinitely.
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. Termination of the license
agreement with Roche would cause approximately $19.4 million of our debt payment
obligations as of December 31, 2002, under our 8.5% senior secured notes to
accelerate. 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, establishment of
new business arrangements, the status of new product launches 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
fiscal year 2004. 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.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
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 December 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 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.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
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 our financial position or results of operations.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation- Transition and Disclosure- an amendment of SFAS No. 123" (SFAS No.
148). This statement amends SFAS No. 123 "Accounting for Stock Based
Compensation" (SFAS No. 123) to provide alternative methods of voluntarily
transitioning to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure requirements of
SFAS No. 123 to require disclosure of the method used to account for stock-based
employee compensation and the effect of the method on reported results in both
annual and interim financial statements. This pronouncement is effective for
both annual and interim periods beginning after December 15, 2002. We are in the
process of evaluating the impact that will result from adopting SFAS No. 148 and
are therefore unable to disclose its expected effects on our financial position
and results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 addresses variable interest
entities and provides a framework through which an enterprise assesses
consolidation of that entity. FIN 46 is effective immediately for variable
interest entities created or acquired after January 31, 2003 and is effective
April 1, 2004 for variable interest entities created or acquired on or before
January 31, 2003. We are in the process of evaluating the impact that will
result from adopting FIN 46 and are therefore unable to disclose its expected
effects on our financial position and results of operations.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about market risks for the nine months ending December 31, 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
IGEN 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.
25
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 (see Note 7).
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 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: February 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)
26
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: February 14, 2003
/s/Samuel J. Wohlstadter
- ------------------------
Samuel J. Wohlstadter
Chairman of the Board and Chief Executive Officer
27
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: February 14, 2002
/s/George V. Migausky
- ---------------------
George V. Migausky
Vice President and Chief Financial Officer
28