<Page>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
ACT OF 1934
For Quarter Ended June 30, 2001
Commission File Number 0-23252
IGEN INTERNATIONAL, INC.
-------------------------------------
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 94-2852543
(State or other jurisdiction (IRS Employer
incorporation or organization) Identification No.)
</Table>
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.
<Table>
<Caption>
CLASS OUTSTANDING AT JULY 23, 2001
----- ----------------------------
Common Stock, $0.001 par value 19,350,512
</Table>
1
<Page>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
INDEX
<Table>
<Caption>
PAGE
----
PART I FINANCIAL INFORMATION
Item 1: CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets - June 30, 2001 and March 31, 2001 3
Consolidate Statements of Operations - For the three months ended
June 30, 2001 and 2000 4
Consolidated Statements of Cash Flows - For the three months ended
June 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
Item 3: QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 19
PART II OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS 20
Item 6: EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
</Table>
2
<Page>
IGEN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
JUNE 30, 2001 MARCH 31, 2001
------------- --------------
ASSETS (Unaudited)
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 18,151 $ 4,872
Short term investments 9,141 10,217
Accounts receivable, net 7,101 5,863
Inventory 5,223 4,995
Other current assets 1,464 1,834
---------------- ----------------
Total current assets 41,080 27,781
---------------- ----------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS 19,719 18,106
Accumulated depreciation and amortization (10,923) (10,021)
---------------- ----------------
Equipment and leasehold improvements, net 8,796 8,085
---------------- ----------------
NONCURRENT ASSETS:
Restricted cash 2,394 2,120
Other 1,072 1,147
---------------- ----------------
Total noncurrent assets 3,466 3,267
---------------- ----------------
TOTAL $ 53,342 $ 39,133
============== ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 11,537 $ 13,170
Note payable 4,767 4,668
Deferred revenue 815 794
Obligations under capital leases 53 53
---------------- ----------------
Total current liabilities 17,172 18,685
---------------- ----------------
NONCURRENT LIABILITIES:
Note payable 21,912 23,142
Subordinated convertible debentures 28,680 28,229
Convertible preferred stock dividend payable 5,539 5,121
Deferred revenue 152 273
Obligations under capital leases 42 56
---------------- ----------------
Total noncurrent liabilities 56,325 56,821
---------------- ----------------
STOCKHOLDERS' DEFICIT:
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized,
Issuable in Series: Series A, 600,000 shares designated, none issued; Series B,
25,000 designated, 18,220 shares issued and outstanding-liquidation value of
18,220 plus accrued and unpaid dividends 1 1
Common stock: $.001 par value, 50,000,000 shares authorized: 18,733,500 and
17, 261,400 shares issued and outstanding 19 17
Additional paid-in capital 152,949 124,816
Stock notes receivable (3,710) (3,710)
Accumulated deficit (169,414) (157,497)
---------------- ----------------
Total stockholders' deficit (20,155) (36,373)
---------------- ----------------
TOTAL $ 53,342 $ 39,133
============== =============
</Table>
See notes to consolidated financial statements.
3
<Page>
IGEN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30,
2001 2000
---- ----
REVENUES:
Royalty income $ 5,324 $ 3,860
Product sales 2,791 1,964
Contract fees 143 1,750
----------------- ---------------
8,258 7,574
----------------- ---------------
OPERATING COSTS AND EXPENSES:
Product costs 740 594
Research and development 8,346 5,755
Selling, general and administrative 5,531 3,819
Litigation costs 4,260 1,419
----------------- ---------------
18,877 11,587
----------------- ---------------
LOSS FROM OPERATIONS (10,619) (4,013)
INTEREST EXPENSE -NET (1,298) (1,118)
----------------- ---------------
NET LOSS (11,917) (5,131)
PREFERRED DIVIDENDS (418) (542)
----------------- ---------------
NET LOSS ATTRIBUTED TO COMMON SHAREHOLDERS $ (12,335) $ (5,673)
=========== ==========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.69) $ (0.36)
============= ===========
SHARES USED IN COMPUTING NET LOSS PER SHARE 17,878 15,589
============ ==========
</Table>
See notes to consolidated financial statements.
4
<Page>
IGEN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30,
2001 2000
-------------- -------------
OPERATING ACTIVITIES:
Net loss $ (11,917) $ (5,131)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 1,077 865
Amortization of detachable warrant value 350 362
Changes in assets and liabilities:
Increase in accounts receivable (1,238) (1,648)
Increase in inventory (228) (1,629)
Decrease in other current assets 371 102
Decrease in deferred revenue (99) (280)
(Decrease) increase in accounts payable and accrued expenses (1,633) 1,750
------------- ------------
Net cash used for operating activities (13,317) (5,609)
------------- ------------
INVESTING ACTIVITIES:
Expenditures for equipment and leasehold improvements (1,613) (1,106)
Purchase of short-term investments (16,115) (4,871)
Sale and maturities of short-term investments 17,192 15,202
------------- ------------
Net cash (used for) provided by investing activities (536) 9,225
------------- ------------
FINANCING ACTIVITIES:
Issuance of common stock-net 28,551 112
Payments on notes payable (1,131) -
Payments on capital lease obligations (14) (26)
Restricted cash (274) (200)
------------- ------------
Net cash provided by (used for) financing activities 27,132 (114)
------------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,279 3,502
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,872 3,172
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,151 $ 6,674
============= ============
</Table>
See notes to consolidated financial statements.
5
<Page>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements 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, 2001 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 month period ended June 30, 2001, the Company's financial position
at June 30, 2001 and the cash flows for the three month period ended June 30,
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 EQUIVALENTS AND SHORT-TERM INVESTMENTS - 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. The Company has classified its
short-term investments consisting of U.S. Government Obligations and Corporate
Debt-Securities as "available for sale". These available for sale securities are
accounted for at their fair value and unrealized gains and losses on these
securities, if any, are reported as a separate component of stockholders'
equity. The Company uses the specific identification on computing realized
gains and losses on sale of investments.
RESTRICTED 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.
CASH - The Company has a debt service reserve of $1.7 million at June 30, 2001
that is restricted in use and held in trust as collateral (see Note 4). In
conjunction with the Roche Diagnostics (Roche) litigation, the Company has
escrowed a total of $673,100 related to Physician's Office Laboratory sales (see
Note 7).
6
<Page>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INVENTORY is recorded at the lower of cost or market using the first-in,
first-out method and consists of the following (in thousands):
<Table>
<Caption>
JUNE 30, 2001 MARCH 31, 2001
------------- --------------
Finished goods $ 611 $ 1,028
Work in process 2,019 1,912
Raw materials 2,593 2,055
---------- ----------
Total $ 5,223 $ 4,995
========== ==========
</Table>
EQUIPMENT AND LEASEHOLD IMPROVEMENTS are carried at cost. Depreciation is
computed over the estimated useful lives of the assets, generally three to five
years, using accelerated methods, except for leasehold improvements, which are
amortized on a straight-line basis over the lesser of the life of the lease or
the asset's useful life.
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 June 30 and March 31, 2001, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The following disclosures of estimated
fair value were determined by management using available market information and
appropriate valuation methodologies. The fair value of the Company's financial
instruments, including cash equivalents, accounts receivable, accounts payable,
accrued expenses, notes payable and long-term debt approximate their carrying
values. Disclosure about fair values of financial instruments is based on
pertinent information available to management as of June 30, 2001. Although
management is not aware of any factors that would significantly affect the
reasonableness of the fair value amounts, current estimates of fair value may
differ significantly from the amounts presented to them.
COMPREHENSIVE INCOME - The Company has no significant elements of comprehensive
income other than net loss.
7
<Page>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
REVENUE RECOGNITION - Product sales revenue is recorded as products are shipped
and title is transferred. Royalty income is recorded based on information
provided by licensees. Service contract revenue is deferred at the time of sale
and is recognized ratably over the period of performance. Contract license fees,
milestone payments and service fees in connection with research and development
contracts or commercialization agreements are recognized when they are earned in
accordance with the applicable performance requirements and contract terms.
Amounts received in advance of performance under contracts or commercialization
agreements are recorded as deferred revenue until earned.
LOSS PER SHARE - The Company uses Statement of Financial Accounting Standard
(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.
3. EQUITY FINANCING AGREEMENT
During February 2001, the Company entered into an agreement with Acqua
Wellington North American Equities Fund LLC (Acqua) for an equity financing
facility covering the sale of up to $60 million of common stock over the
subsequent 28 months. All shares of common stock sold to Acqua have been
registered under a shelf-registration statement covering up to 3 million shares
of common stock. The Company will control the amount and timing of additional
stock sales that may be made under the terms of this agreement. Each sale will
be made under the shelf-registration statement at a 4.75-6% discount to the
market at the time of the sale. There are no commissions, warrants or other
direct costs associated with these sales. Under this facility, the Company sold
2,462,500 shares to Acqua for $41 million through June 30, 2001, including
1,461,500 shares for $28.5 million during the quarter 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 (Note) from which
the Company received $30 million. The seven year, 8.5% Senior Secured Notes
mature in 2006 with principal and interest installments of $1.7 million due
quarterly through March 2006. The Company is required to make note principal and
interest payments of $6.9 million in each fiscal year through 2006.
Collateral for the debt is represented by royalty payments and rights of the
Company to receive monies due pursuant to the Company's license agreement with
Roche. Additional collateral is represented by a Restricted Cash account, which
had a balance of $1.7 million at June 30, 2001. Covenants within the Note
include compliance with annual and quarterly Royalty Payment Coverage Ratios
which are tied to royalty payments and debt service.
8
<Page>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. SUBORDINATED CONVERTIBLE DEBENTURES
In January 2000, the Company completed a placement of $35 million principal
amount of Subordinated Convertible Debentures. The 5% debentures, if not
converted, mature January 2005 with semi-annual interest payments to be made in
cash or an equivalent value of common stock. The debentures are immediately
convertible into 1,129,032 shares of the Company's common stock, which
represents a $31 per share conversion price.
As part of this financing, the Company also issued detachable warrants to
purchase 282,258 shares of common stock with an exercise price of $31 per share.
Using the Black-Scholes model and the relative fair value of the warrants and
the debentures at the time of issuance, these warrants were valued at
approximately $7 million. The detachable warrant value has been recorded as a
reduction of the face value of the convertible debentures. Costs associated with
placing the debentures totaling $1.9 million were deferred and have been netted
against the recorded convertible debenture balance. The convertible debenture
discount consisting of the warrant value and debt issuance costs is being
amortized over the five-year life of the debentures.
6. STOCK NOTES RECEIVABLE
In connection with the exercise of stock options by officers in July 2000, the
Company granted loans in the principal amounts of $3.7 million, maturing in July
2007. The loans are 6.62% simple interest (paid annually), full recourse loans
against all assets of the borrowers, collateralized by the pledge of 180,000
shares of the Company's common stock owned by the borrowers
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
alleges that Roche has failed to perform certain material obligations under the
Agreement, including development and commercialization of ORIGEN technology
according to the contractual timetable; exploitation of the license to the
extent contemplated by the parties; phase out of certain non-royalty-bearing
product lines; exploitation of ORIGEN technology only within Roche's licensed
fields; proper treatment of intellectual property rights regarding ORIGEN
technology; maintenance of records essential to the computation of royalties;
and proper computation and payment of royalties. On August 18, 2000, the Company
filed an Amended Complaint in the lawsuit asserting additional breach of
contract claims and a claim for unfair competition.
9
<Page>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
In its lawsuit, the Company seeks compensatory and punitive damages as well as
injunctive and declaratory relief, including a judicial determination of its
entitlement to terminate the Agreement. The Company voluntarily has agreed not
to terminate the Agreement unless and until the Court determines its entitlement
to do so.
In April 2001, the Court granted judgment in the Company's favor on one count of
the Company's Amended Complaint, ruling that Roche breached the Agreement by
taking unsubstantiated "rental surcharge" deductions against reported sales of
royalty-bearing products. On June 1, 2001 the Company filed four additional
motions for summary judgment. Those counts allege, respectively, that Roche
breached the Agreement by selling products based on the Company's technology
outside of Roche's licensed field, by failing to ensure that Roche affiliates
who market products based on the Company's technology comply fully with the
terms of the Agreement, by continuing to improve and develop a competing product
line after the launch of the products based on the Company's technology, and by
settling out of a third-party infringement action (brought by Laboratories
Serono S.A) without the Company's knowledge or consent. These pending motions,
scheduled to be presented on August 10, 2001 ask the Court to decide these four
counts without trial.
During 1998, the Court issued a preliminary injunction enjoining Roche from
marketing, selling, or distributing its Elecsys products to physicians' offices
and physicians' office laboratories, which are outside of Roche's licensed field
of use. The Court also ordered Roche to refer all physicians' offices and
physicians' office laboratory customers to the Company for future reagent supply
needs and to place all revenues derived from these unauthorized sales in escrow
pending the outcome of the litigation. In May 2000, the Company and Roche signed
an agreement under which Roche transferred to the Company all of its physician
office laboratory customers in the United States. This transfer involved
approximately 60 diagnostic systems in U.S. physicians' offices. In addition to
these systems, the Company continues to believe that Roche has placed other
ORIGEN-based systems outside of its licensed market and the Company intends to
pursue those allegations during the course of the litigation with Roche.
Roche had filed a counterclaim against the Company. Most of Roche's
counterclaims were dismissed by the Court. The remaining counterclaim for
breach of contract allegations relate principally to the relationship between
the Company and Eisai, Co., Ltd. Eisai has held a license in Japan to ORIGEN
technology since 1990, which is more than two years before Roche signed the
Agreement with the Company. Roche is alleging that the Company breached the
Agreement by permitting Eisai to market certain ORIGEN-based products in
Japan in violation of Roche's rights.
10
<Page>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
During fiscal 2000, the Company had received notice from Roche that Roche was
reducing royalty payments due to the Company through a "rental surcharge"
deduction that Roche contends it is entitled to take from royalty-bearing sales
revenues. Additionally, Roche had issued a "debit note" claiming that the
Company owed Roche $2.6 million in royalties previously paid to the Company as a
result of a retroactive application of the rental surcharge deduction back to
1997. In April 2001, the Court granted the Company's motion for a judgment that
Roche's implementation of the rental surcharge deduction breached the Agreement.
In May 2001, Roche notified the Company that it was canceling the debit note
pursuant to the court ruling. Roche also had modified its calculation of
royalties based on the court ruling.
This litigation against Roche may have a material adverse effect upon the
Company regardless of whether the outcome is favorable or not.
In June 1998, a subsidiary of Ares-Serono ("Serono") filed a patent
infringement claim against the Company, Roche and Organon Teknika in the U.S.
District Court in Delaware. The action claims that Serono's patent "A Method
of Assay Employing a Magnetic Electrode" is being infringed by the Company
and its licensees. Subsequently, F. Hoffman LaRoche, Ltd., a member of the
Roche family of companies, acquired the patent from Serono and continued in
Serono's place to assert the infringement claim against the Company and
Organon Teknika. A trial was held in Delaware on this matter during February
2001. There has been no decision rendered by the Court. The Company does not
believe it infringes the patent, believes the patent to be invalid and
unenforceable and intends to continue to vigorously defend against the claim.
There can be no assurance that this litigation will not have a material
adverse affect on the Company or its business. The Company believes that,
should the court find the patent valid and infringed, such ruling would not
have a material adverse effect on the Company's claims against Roche pending
before the U.S. District Court in Maryland.
HITACHI
In December 1997, IGEN International K.K., a Japanese subsidiary of the Company,
filed a lawsuit in Tokyo District Court against Hitachi Ltd. ("Hitachi"). The
lawsuit seeks to enjoin Hitachi from infringing IGEN K.K.'s license registration
(known in Japan as a "senyo-jisshi-ken") to prevent Hitachi from manufacturing,
using or selling the Elecsys 2010 Instrument, which incorporates the Company's
patented ORIGEN technology, in Japan. Hitachi is the sole manufacturer for Roche
of the Elecsys 2010 immunoassay instrument. Roche is licensed to market the
Elecsys 2010 worldwide, except in Japan, to central hospital laboratories and
clinical reference laboratories. The Company's ORIGEN technology is also
licensed in Japan to Eisai Company, Ltd. The lawsuit requests injunctive relief
against Hitachi.
11
<Page>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
OTHER MATTERS
In February, 2001, Brown Simpson Strategic Growth Fund L.P. ("Brown Simpson")
initiated a shareholder derivative lawsuit for and on behalf of the shareholders
of the Company in the Circuit Court of 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, stating that it holds 100 shares of the Company's common stock, alleges
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 its Meso Scale
Diagnostics, LLC joint venture.
In March, 2001, a second shareholder derivative lawsuit was filed by Laurence
Paskowitz in Circuit Court for Montgomery County, Maryland, for and on behalf of
the shareholders of the Company. The lawsuit names as defendants all of the
Company's existing officers and directors, two former directors and the Company
as a nominal defendant. The allegations and the relief sought in this complaint
are substantially the same as those set forth in the complaint filed by Brown
Simpson.
The Company and the individual defendants have filed a motion to dismiss and a
motion of summary judgment in both of the shareholders derivative lawsuits. The
Circuit Court recently stayed both proceedings, including all discovery, until
mid-August 2001, at which time the court will consider all pending motions.
In 2000, the Board of Directors established an independent committee to evaluate
substantially similar issues as those raised in both shareholder complaints.
Both lawsuits seek 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 complaints do not include any claims against the
Company.
The Company believes that the claims are wholly without merit and that
meritorious defenses are available. The Company intends to vigorously contest
and defend against these claims and to assert all of its legal rights in this
matter, including all counterclaims. This lawsuit is not expected to have a
material, adverse effect on the Company's financial position, results of
operations or cash flows.
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, based
on review with legal counsel, the Company does not believe that any such legal
proceedings will have a material adverse impact on our financial position,
results of operations or cash flows.
12
<Page>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
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 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(TM) 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 June 30, 2001, we had an accumulated deficit of
$169 million. We expect to continue to incur substantial research and
development, manufacturing and general and administrative costs associated with
our operations. As a result, we will need to generate higher revenue 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 potential market and market growth for diagnostic
products, potential impact of competitive products, the Company's expectations
regarding the level of anticipated royalty and revenue growth in the future, the
potential market for products in development, financing plans, the outcome of
litigation, the Company's plans and objectives for future operations,
assumptions underlying such plans and objectives, the need for and availability
of additional capital and other forward-looking statements included in 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 the Company's Annual Report on Form 10-K for the year
ended March 31, 2001 previously filed with the Securities and Exchange
Commission. The Company disclaims any intent or obligation to update these
forward-looking statements.
13
<Page>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (unaudited) (continued)
RESULTS OF OPERATIONS
THE QUARTER IN REVIEW
REVENUES. Total revenue for the quarter ended June 30, 2001 increased 9% to $8.3
million from $7.6 million in the same quarter last year. The revenue growth for
the current quarter was due to increases in product sales and royalty income.
Excluding non-recurring royalties and contract fees in both periods, total
revenue increased 32%.
Royalty income was $5.3 million in the quarter ended June 30, 2001, an increase
of 38% over the prior year's royalty income of $3.9 million. Royalties from
Roche represent approximately $5.1 million (96%) of the total royalty income for
the current quarter as compared to approximately $3.7 million (95%) for the
prior year's quarter. The current quarter included approximately $550,000 for a
non-recurring, royalty payment attributable to prior periods based on a
retroactive recalculation of royalties by Roche. Roche launched its Elecsys
product line in 1996, which is based on IGEN's ORIGEN technology that was
licensed to Roche under a 1992 license agreement. The Company is involved in
litigation with Roche arising out of this agreement. One of the disputes in the
litigation relates to the computation of royalties to which the Company believes
it is entitled under the agreement.
Product sales were $2.8 million in the current quarter, an increase of 42% over
the prior year's product sales of $2 million. This growth in product sales was
led by the M-SERIES line of instrumentation and consumable products, as well as
revenue generated from the sale of clinical diagnostics assays to physician
office laboratory (POL) customers in the United States. We began serving these
POL customers in June 2000 when Roche transferred the customers in order to
comply with a court ordered preliminary injunction.
Contract fees in the current quarter were $143,000 compared to $1,750,000 in
the prior year's quarter. The prior year's fee was from a non-recurring
amount received in connection with our alliance with Bayer Diagnostics.
OPERATING COSTS AND EXPENSES. Product costs were $740,000 (27% of product sales)
for the quarter ended June 30, 2001 compared to $594,000 (30% of product sales)
for 2000. The change in product cost margins is attributable to increased
product sales of higher margin consumable reagents related to the M-SERIES and
POL products.
14
<Page>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (unaudited) (continued)
During the current quarter, research and development costs increased $2.5
million (45%) to $8.3 million from $5.8 million in 2000. This increase was due
to ongoing development costs associated with enhancements to the M-SERIES(TM)
system related assays; development of additional instrumentation, including new
assays, for the M-SERIES line of products to meet the expanding needs of the
drug discovery and development market; development associated with designing
hospital point-of-care products; and research with development expenses
associated with the Meso Scale Diagnostics (MSD) joint venture. Selling,
general, and administrative expenses were $5.5 million in the first quarter of
2001, an increase of $1.7 million (45%) over the prior year's total of $3.8
million. This increase was due primarily to higher sales, marketing and
customer-support costs related to expanding the launch of the M-SERIES System
throughout the United States, Europe and Japan, as well as legal expenses
associated with a possible extension of the MSD joint venture.
Costs related to IGEN's litigation with Roche increased to $4.3 million in the
current first quarter from $1.4 million in the same period last year. This
increase was attributable to expanded activities in several areas, such as work
related to a court-appointed Special Master's examination of Roche's books and
records, which the Company expects will be completed in August 2001; preparation
and presentation of several motions, including motions for summary judgment; and
preparation for a trial scheduled to start on October 23, 2001. The increased
litigation costs also include financial and legal advisors' fees associated with
settlement discussions.
INTEREST AND OTHER EXPENSE. Interest expense, net of interest income, increased
$180,000 during the quarter ended June 30, 2001 due to reduced interest income
on lower cash balances during the period.
NET LOSS. The net loss for quarter ended June 30, 2001 was $11.9 million ($0.69
per common share, after consideration of the effect of preferred dividends)
compared to a net loss of $5.1 million ($0.36 per common share, after
consideration of the effect of preferred dividends) in the same prior year
quarter.
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; the mix of products sold; whether instruments are
sold to or placed with customers; the timing of the introduction of new
products; competitors' introduction of new products; variations in expenses
incurred in connection with the operation of the business, including legal fees,
research and development costs and sales and marketing costs; manufacturing
capabilities; and the volume and timing of product returns and warranty claims.
15
<Page>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company has experienced significant operating losses each year since
inception and expects those losses to continue. Losses have resulted from a
combination of lower royalty revenue than the Company believes it is entitled to
under the License Agreement with Roche, costs incurred in research and
development, Roche litigation costs, selling costs and other general and
administrative costs. The Company expects to incur additional operating losses
as a result of increases in expenses for manufacturing, marketing and sales
capabilities, research and product development and general and administrative
costs. The Company's ability to become profitable in the future will depend,
among other things, on its ability to expand the commercialization of existing
products; introduce new products into the market; develop marketing, sales and
distribution capabilities cost-effectively; complete new business arrangements;
and resolve the litigation with Roche.
LIQUIDITY AND CAPITAL RESOURCES
Through June 30, 2001, the Company has financed operations through the sale of
Preferred and Common Stock, aggregating approximately $127 million; the
placement of a $30 million debt financing with John Hancock Life Insurance
Company in March 1999; and a $35 million private placement of subordinated
convertible debentures in January 2000. Under the Hancock financing, the Company
is obligated to make quarterly principal and interest payments of $1.7 million
through March 2006. Under the subordinated convertible debentures, unless and
until the holders of the debentures convert their debentures into common stock,
the Company will be required to make semi-annual interest payments of $875,000
through January 2005. Interest payments may be made in cash or an equivalent
value of common stock. In addition, the Company has received funds from
collaborative research and licensing agreements, sales of its ORIGEN-based line
of products and royalties from product sales by licensees.
During February 2001, the Company entered into an agreement with Acqua
Wellington North American Equities Fund LLC ("Acqua") for an equity financing
facility covering the sale of up to $60 million of the Company's common stock
over the subsequent 28 months. Under this facility, the Company has sold
2,462,500 shares to Acqua for $41 million through June 30, 2001, including
1,461,500 shares for $28.5 million during the quarter ended June 30, 2001. All
shares of common stock sold to Acqua are registered under a shelf-registration
statement covering up to 3 million shares of common stock. The Company will
control the amount and timing of additional sales that may be under the terms of
this agreement. Each sale will be made under the shelf-registration statement at
4.75-6% discount to the market at the time of the sale. There are no
commissions, warrants or other direct costs associated with these sales.
16
<Page>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
As of June 30, 2001, the Company had $27.3 million in cash, cash equivalents and
short-term investments with working capital of $23.9 million.
Cash used in operations increased to $13.3 million for the three months ended
June 30, 2001, as compared to $5.6 million for the corresponding prior year
period, primarily due to a higher net loss.
The Company used approximately $1.6 million and $1.1 million of cash for the
acquisition of equipment and leasehold improvements during the quarters ended
June 30, 2001 and 2000, respectively. The Company believes material commitments
for capital expenditures may be required in a variety of areas, such as product
development programs. The Company has not, at this time, made commitments for
any such capital expenditure or secured additional sources to fund such
commitments.
For fiscal 2002, future minimum lease payments for which the Company is
obligated under capital lease agreements approximate $66,000 (including
interest) while facility and equipment operating lease commitments approximate
$2.3 million.
During 1995, the Company established Meso Scale Diagnostics, LLC ("MSD"), a
joint venture company formed for the development and commercialization of
products utilizing a proprietary combination of multi-array technology together
with ORIGEN and other technologies owned by the Company. The joint venture was
initially scheduled to expire in November 2000 with extensions through April
2001 at which time MST extended the term of the joint venture for up to 180 days
under an automatic extension provision in the joint venture agreement. The
Company, through an independent committee of its Board of Directors, is
currently negotiating with MST the terms under which the MSD joint venture may
be continued. Although the Company is not committed to any specific level of, or
term for further funding of the joint venture, the Company is presently funding
MSD's ongoing research, development and capital equipment costs, as well as
certain patent costs of MST, while the independent committee is negotiating with
MST the terms under which the joint venture may be continued. A new agreement
may require the Company to make future capital contributions to the joint
venture, in amounts that could be substantial. Due to the complexities of the
issues, negotiations and agreements involved there can be no assurance that a
definitive agreement to continue the joint venture will be reached
The Company has a substantial amount of indebtedness, and there is a possibility
that the Company 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,
the Company indebtedness may require that it dedicate a substantial portion of
its expected cash flow from operations to service indebtedness, which would
reduce the amount of expected cash flow available for other purposes, including
working capital and capital expenditures.
17
<Page>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company needs substantial amounts of money to fund operations. In this
regard, it has ongoing discussions with third parties, including multinational
corporations, regarding various business arrangements including distribution,
marketing, research and development, joint venture and other business
agreements, which could provide for substantial up-front fees or payments.
Further, the Company is considering and evaluating the advisability and
feasibility of a variety of financing alternatives, including issuance of
additional debt or equity securities. There can be no assurance that the Company
will successfully complete any of the foregoing arrangements and access to funds
could be adversely impacted by many factors, including the results of pending
litigation, the volatility of the price of the Company's common stock,
continuing losses from operations and other factors. The Company believes that
existing capital resources, together with revenue from product sales, royalties
and contract fees will be adequate to fund operations through fiscal year 2002.
If the Company is unable to raise additional capital, we may have to scale back,
or even eliminate, some programs. Alternatively, the Company may have to
consider pursing arrangements with other companies, such as granting licenses or
entering into joint ventures, on terms and conditions that may not be favorable
to it.
The Company is actively engaged with Roche in settlement discussions with
respect to a resolution of the litigations between the parties on mutually
agreeable terms. There can be no assurance as to when, or if, the parties will
reach resolution of these matters, or that such resolutions will be on favorable
terms and conditions. We have no reason to believe that the existence of the
Roche litigation is having a material adverse effect on Roche's sales of royalty
bearing products or that a negative result for the Company in the Roche
litigation would have a material adverse effect on Roche's sales, although there
can be no assurance that the litigation or its outcome would not have such an
effect.
As it now stands, Roche has the right to continue to market its Elecsys products
to central hospital laboratories and clinical reference laboratories during the
term of the Agreement unless and until the Company is determined to have the
right to terminate the Agreement and then determines to terminate the Agreement.
If the Company elects to terminate the Agreement, it would have a material
adverse effect on its royalty revenue from license sales unless and until the
Company entered into a strategic partnership with another company that is able
to develop and commercialize diagnostic instruments for central hospital
laboratories and clinical reference laboratories. There can be no assurance, if
the Company decided to terminate the Agreement that it would be able to enter
into such a strategic partnership on terms favorable to it, if at all.
18
<Page>
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company does not expect that failure to prevail in the Hitachi litigation by
itself would have a material adverse effect on the Company's revenue or sales,
because Hitachi would continue to manufacture Roche instruments and the Company
would continue to earn royalties in connection with Roche sales. There can be no
assurance that the Hitachi litigation would not have a material adverse effect
on the Company's intellectual property, regardless of whether the outcome of the
litigation is favorable or not. Success by the Company in the Hitachi litigation
could have a material adverse effect on the Company's royalty revenues from
sales of Elecsys products to the extent that Roche's sales of Elecsys
instruments are hindered because it needs to find a new manufacturer for its
instruments or make arrangements to have Hitachi manufacture the instruments
outside of Japan.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about market risks for the three months ending June 30, 2001 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, 2001.
19
<Page>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
<Table>
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 6: Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.15+ 1994 Non-Employee Director's Stock Option
Plan as Amended June 6, 2001.
Filed herewith.
(b) Reports on Form 8-K:
None
+ Denotes management contract or compensatory plan of arrangement.
</Table>
20
<Page>
IGEN INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
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.
<Table>
IGEN International, Inc.
Date: AUGUST 9, 2001 /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)
</Table>
21