Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_____________________TO_____________________
COMMISSION FILE NUMBER: 0-18700
SENTIGEN HOLDING CORP.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 9995 13-3570672
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
580 Marshall Street
Phillipsburg, New Jersey 08865
(908) 387-1673
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common stock, par
value $0.01 per share
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 Exchange 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes |_| No |X|
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, computed by reference to the price at which the Common Stock was
last sold as of the last business day of the registrant's most recently
completed second fiscal quarter (June 28, 2002) was approximately $35,615,990.
As of March 28, 2003, 7,453,044 shares of the registrant's Common Stock, par
value $.01 per share were outstanding.
Documents Incorporated By Reference: None
PART I
ITEM 1. BUSINESS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. The statements contained herein which
are not historical facts are forward-looking statements that involve known and
unknown risks and uncertainties that could significantly affect our actual
results, performance or achievements in the future and, accordingly, such actual
results, performance or achievements may materially differ from those expressed
or implied in any forward-looking statements made by us or on our behalf. These
risks and uncertainties include, but are not limited to, risks associated with
our future growth and operating results; our ability to successfully integrate
newly acquired business operations and personnel into operations; changes in
customer preferences; the ability to hire and retain key personnel; compliance
with federal or state environmental laws and other laws and changes in such laws
and the administration of such laws; risks associated with government grants and
funding of our research and development projects; dependence on certain
significant customers; protection of trademarks and other proprietary rights;
technological change, competitive factors and unfavorable general economic
conditions. These risks are included in "Item 1. Business," "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in "Exhibit 99.1: Risk Factors" included in this Form 10-K.
Actual results may vary significantly from such forward-looking statements. The
words "believe," "expect," "anticipate," "intend" and "plan" and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements that speak only as of
the date the statement was made.
GENERALLY ABOUT US
We are a holding company conducting business through two wholly owned
operating subsidiaries, Cell & Molecular Technologies, Inc., or CMT, and
Sentigen Corp. CMT is comprised of a service organization that provides contract
research and development services, and a products organization that provides
cell culture media, reagents and other research products to companies engaged in
the drug discovery process. Sentigen Corp. is engaged in scientific research to
develop assays for the screening of G Protein-Coupled Receptors, or GPCRs. These
assays potentially would have applications in drug discovery, micro-array based
detection technologies and environmentally sound pest management solutions for
agricultural and human health vectors.
We were incorporated under the laws of the State of Delaware in May 1990.
After having engaged in the acquisition and operation of different business
entities subsequent to our initial public offering in August 1990, we commenced
our current business when we acquired CMT in May 1998. CMT was incorporated on
May 6, 1997 to acquire all of the outstanding stock in each of Specialty Media,
Inc. and Molecular Cell Science, Inc., two entities operating in the
biotechnology and pharmaceutical industries since 1987 and 1991, respectively.
Sentigen Corp. was formed on February 16, 2000. We changed our name from Prime
Cellular Inc. to Sentigen Holding Corp. on June 23, 2000. On January 9, 2002,
our common stock began trading on The Nasdaq SmallCap Market under the symbol
SGHL.
We maintain principal executive offices, laboratory, manufacturing and
office/warehouse facilities in two facilities located at 580 and 445 Marshall
Street, Phillipsburg, New Jersey 08865. We maintain laboratories at 3960
Broadway, New York, New York 10032 and at 418 Industrial Drive, North Wales,
Pennsylvania 19454. We also maintain administrative offices at 434 East Cooper
Street, Aspen, Colorado 81611.
CELL & MOLECULAR TECHNOLOGIES, INC.
CMT is a Contract Research Organization, or CRO, specializing in
supporting the drug discovery process. CMT's products and services line include:
- High Throughput Screening, or HTS applications;
- contract research services; and
- the development, production and marketing of specialty cell culture
media.
Through its scientific staff, technology focus and specialty medium, CMT aims to
increase the efficiency of the drug discovery process of pharmaceutical,
biotechnology, and biomedical research organizations and optimize their
investment in new technologies and chemistry.
2
The majority of CMT's customers are engaged in the drug discovery process.
The steps in this process can generally be characterized as: (1) identification
of disease targets in the human body, (2) validation of those targets, and (3)
screening those targets against chemical entities for scientifically significant
interactions. The proliferation of new targets and technologies to this process
has shifted the resource priorities and research strategies of the entire drug
discovery industry. This industry is also facing patent expirations, more
stringent drug approval standards, and thinning product pipelines. As a result
of these factors, the race for new targets, compounds and drug candidates has
become dramatically more competitive. This new landscape has increased the
demand for research talent, laboratory capacity, creative experimental design
and tailored products. We believe that collaboration with CMT gives our
customers engaged in drug discovery enhanced access to the talent, capacity,
creativity, products and services they need to accelerate drug discovery
programs, optimize their technology investments and gain a competitive
advantage. CMT operates through two divisions -- Molecular Cell Science and
Specialty Media.
Molecular Cell Science Division (MCS)
CMT provides contract research and development services to the drug
discovery community through its Molecular Cell Science division. CMT's MCS
division provides resources in:
- Molecular and cellular biology,
- Protein biochemistry,
- Bio-processing,
- HTS applications and assay development, and
- Mouse genetics.
CMT's services are performed on a fee-for-service, fixed contract basis
that provides for payments after specific research milestones are achieved.
Research milestones are developed pursuant to the specific research goals of the
customer. CMT utilizes cost and time effective approaches in the delivery of its
services intended to result in a high level of customer service. CMT does not
receive residual or royalty payments for future discoveries or uses involving
the materials or services provided to customers.
CMT's proposals are based on collaborative discussions between the
customer's research staff and CMT's scientific staff. These discussions lead to
detailed, milestone-based research proposals that can be periodically modified
based on the data collected during the project. We believe that CMT's dynamic,
data-driven approach generally augments and complements the customer's own
research and development efforts in a cost- and time-effective manner.
Molecular and cellular biology. CMT offers an array of services to help
clone, isolate and characterize genes from viral, prokaryotic or eukaryotic
organisms. CMT's services in molecular biology include:
- construction of custom cDNA libraries,
- single cell cDNA libraries,
- genomic DNA libraries,
- size selected, normalized and subtracted libraries, and
- other custom gene libraries.
In addition, CMT provides expertise in molecular cloning and related
functions of target selected genes. CMT's custom services in this area allow our
customers to specify the vector and cell or tissue source. During 2002, CMT
began offering services for the pre-clinical analysis of chemical compound
efficacy on diminishing or eliminating pathogen infection in animal models and
other tissues using the taqman assay.
Protein biochemistry. The drug discovery community demands ever
increasing amounts and numbers of recombinant proteins for their HTS programs,
as well as, biochemical and biophysical studies. CMT meets this demand through
the production and purification of recombinant proteins from genetically
engineered hosts. CMT offers the expression of recombinant proteins in the
following cell types: (1) Escherichia coli, (2) Yeast, (3) Mammalian Cells, (4)
Insect Cells and (5) Baculovirus. CMT also performs Expression Optimization
Studies and Scale-up Process Development.
3
Bioprocessing. CMT possesses multifaceted cell culture and fermentation
capabilities and expertise, enabling it to produce whole cells, cellular
fractions or biological molecules for both research and assay purposes. CMT has
developed bioprocessing techniques and processes to move research cell lines to
the manufacturing floor. CMT aims to deliver a well-characterized process by
incorporating cell banking through upstream and downstream process development.
Using its flexible cell culture facility, CMT prepares reagents derived from a
broad range of host cell types (including whole cells, cellular fractions, or
purified biomolecule proteins) properly formatted for further characterization
or for use in screening assays. CMT also offers the production of enzymes,
receptors, substrates, growth factors and antibodies. CMT's facilities give it
both adherent (flasks, roller bottles, cell factories) and suspension
(spinners, bioreactors) culture capabilities. CMT's facilities also feature
fractionation and purification capabilities.
HTS applications and assay development. HTS utilizes sophisticated
automation and robotics to screen large quantities of cells or proteins very
rapidly. Through HTS the drug discovery community is able to rapidly screen,
identify and develop potential drug candidates for a large number of targets.
CMT provides whole cells, sub-cellular fractions, and purified proteins
for large-scale HTS programs and secondary assays. CMT tests these cells and
reagents against the customer's specified, quality control standards to assure
performance and reproducibility. The cells and reagents are delivered in the
customer-prescribed format (bulk, multi-well plates, multiple aliquots, etc.).
Customers receive cells or reagents on a regularly scheduled basis (daily,
weekly) and in a format (96 well, 384 well or other format plates) required for
the customer's HTS assays. CMT designs its services to help ease the strain on
the customer's internal resources and enable the customer's screening facilities
and equipment to maintain higher efficiency and usage times.
We believe CMT's resources in molecular biology, gene cloning, expression,
cell culture, and cell line development enables it to provide customers with a
multidisciplinary approach to assay development. CMT can transfer developed
technology back to its customers, or contract with the customer to perform the
assay at CMT's own facilities. CMT's services also include the design,
establishment, and execution of quality control standards for the new assay
system.
During 2002, CMT developed a process for the use of "division-arrested"
cells within cell-based assays for high throughput screening. This development
is intended to enable drug-screening professionals to maintain consistent
cell-counts within assays despite the increasing density of screening formats
and varying screening cycle times. We filed an application for a patent on this
process in 2002 and CMT began marketing this service to its clients in 2003.
Mouse genetics. The advent of transgenic mouse technology has allowed
researchers to study the impact of gene deletions, mutations, and additions in a
whole-animal system whose genetics are well understood and can be easily
manipulated. Based on this premise, CMT constructs mouse models of human
diseases for use in the identification and validation of potential drug
candidates. CMT is able to construct sophisticated knock-out and knock-in gene
models that can be used to study transcription activity, gene expression and
function by altering or mutating a specific gene in the mouse. CMT offers
quality-tested and proven embryonic stem cells (supplied by CMT's Specialty
Media division) from several strains of mice, including 129, C57BL6 and DBA1, as
well as mitomycin-C treated mouse embryo fibroblast feeder cells.
Specialty Media Division (SM)
CMT's SM division develops, manufactures, and markets high quality
research products including:
- Media and reagents for the culture of mouse embryos;
- Murine Embryonic Stem (ES) cells and reagents;
- Reagents for gene transfer and expression; and
- Standard and custom formulated cell culture media.
4
CMT's SM division also identifies and develops custom research products
and reagents in response to customer feedback and as a result of services
performed by CMT's MCS division. CMT manufactures and distributes the
aforementioned products in the following research areas:
Mouse Embryo Media. The genetic manipulation of early stage mouse embryos
allows research scientists to develop animal models for disease states for the
purpose of elucidating the function of genes that have similarities to human
functions. CMT manufactures media and reagents that support the growth of mouse
embryos. In addition to "standard" formulations, CMT has developed novel media
formulations working in collaboration with Harvard University under a grant
funded by the National Institute of Health. While mouse embryo media
traditionally have been manufactured as liquids, CMT developed a powder format
greatly extending the media's shelf life and opening the possibility for
overseas shipment and distribution. CMT has derived several unique Murine ES
cell lines, as well as providing media and reagents qualified for the
manipulation of ES Cells.
Unique Products for General Cell Cultures. A significant portion of the SM
division's sales revenue is derived from several unique products. Cell culture
freezing media enables researchers to cryogenically archive important cell lines
for future use. CMT's line of enzyme free cell dissociation solutions allows
researchers to remove cells from the vessels on which they are grown while
retaining the functionality of the proteins on their surface. This enables the
cells to be used in assays that rely on cell surface receptors. CMT also markets
a kit containing all of the reagents necessary to introduce foreign genes into
cells, genetically altering the cell line. CMT directly markets these products
and permits their distribution by customers under that customer's private label.
Custom Media Manufacture. Researchers demand varying components and
amounts of the nutrient broths in which cells are grown. CMT produces custom
formulations, with a minimum volume of only three liters. CMT has the ability to
formulate complex media in a timely fashion and in low volumes. CMT believes
that this low minimum volume ability has enabled it to enter a niche not
otherwise occupied by the several larger companies advertising such custom
capabilities.
Sentigen Corp.
Sentigen Corp. is engaged in scientific research to develop assays for the
screening of G Protein-Coupled Receptors, or GPCRs. To date, Sentigen Corp. has
not derived any revenues from these activities. GPCRs are the largest family of
signaling molecules in the body and we believe represent the most profitable
class of targets for pharmaceutical discovery. GPCRs function as important
mediators of cellular responses to hormones, neurotransmitters, chemokines and
other factors. In addition, GPCRs are responsible for the senses of smell
(olfaction), taste and vision. GPCRs are membrane proteins with a common
structure comprising seven domains that span the cellular membrane. GPCRs bind
natural or synthetically engineered compounds (ligands) on the outside of cells
and relay a signal to the cellular interior by stimulating or inhibiting a
variety of processes within the cell. Sentigen's research is focused on two
types of assay development for GPCRs:
- Cell-based assays. Cell-based assays are employed to measure GPCR
activity (activation or deactivation) and signaling using living
cells.
- Direct molecular assays. Direct molecular assays are employed to
measure GPCR ligand binding activity and the resulting changes in
protein conformation in solution or in protein micro-arrays.
Potential applications of such assays include:
- Pharmaceutical discovery
- Micro-array based detection technologies
- Sentigen's olfaction and taste based pest management solutions
Pharmaceutical discovery. GPCRs, because of their role in many
physiological systems, have been the most effective and profitable drug targets
for pharmaceutical development. Approximately 60% of all prescription drugs on
the market interact directly or indirectly with GPCRs. There are approximately
two hundred GPCRs for which a natural ligand and physiological function are
known and understood. In addition to these two-hundred "known" GPCRs it is
believed that there are over one-thousand GPCRs for which a ligand and/or
function is not known and understood (orphan GPCRs). The assays we develop, if
successful, have the potential to screen with better selectivity and sensitivity
than the assays currently employed for GPCRs. Employing our assays against the
5
two hundred known GPCRs has the potential to identify ligands that may yield
drugs that are more effective than the drugs currently on the market. Employing
our assays against orphan GPCRs has the potential to yield a new population of
effective drug targets.
Micro-array based detection technologies. In both humans and animals, the
sense of smell is a chemical detector of extraordinary sensitivity and
selectivity. This sensory function utilizes an array of hundreds to thousands of
olfactory GPCRs in the nose, each of which recognizes and responds to a distinct
set of chemical stimuli. The brain decodes the activity of these different
receptors to gather information about the character of a smell and its
intensity. Sentigen intends to use the same biological principle to engineer
ultra-sensitive, and highly adaptable, detection systems that employ GPCR
micro-arrays for chemical recognition and analysis. These detection systems, if
successful, have the potential to be used in the detection of chemical or
biological hazards, in manufacturing and food processing, in environmental
monitoring, and in medical diagnostics.
Sentigen's olfaction and taste based pest management solutions. Sentigen
Corp. is also engaged in research to develop innovative, environmentally sound
approaches to prevent insect crop damage and the spread of human disease by
impacting insect behavior. The receptors in insects that control the sense of
smell, the primary sense that drives insect behavior, are part of the GPCR
family. We believe Sentigen Corp.'s assays could enable identification of
bioactive compounds that allow for specificity and effectiveness in insect
control.
Sentigen Corp. intends to develop its technology for insects that affect
the agricultural industry since present methods, including pesticides and
genetically modified foods, are becoming increasingly ineffective and
controversial. Over the past decade, pesticides and genetically modified foods
have been placed under intense scrutiny due to concerns over their adverse
effects upon the environment and human health. Governments are increasingly
regulating and prohibiting pesticides and genetically modified foods and public
opposition has led to a significant increase in the market for organic foods.
Sentigen Corp. also intends to develop a suite of products for the control
of insects that affect human health. Recent outbreaks of mosquito-borne
diseases, including West Nile encephalitis and dengue fever in the United
States, as well as the appearance of pesticide-resistant disease carrying
insects throughout the world have highlighted the need for safer and more
effective insect control strategies in residential areas. Biting insects are
also dependent on smell to locate human and animal prey, and Sentigen intends to
utilize its technology to develop environmentally friendly and novel approaches
to combat the threat posed by these pests.
Sentigen Corp. has an exclusive licensing agreement with The Trustees of
Columbia University in the City of New York giving us the right to patent
intellectual property and applications in the areas of chemosensation and
olfaction. We believe Columbia University is at the forefront of research in
this field, and the license covers technologies arising from the initial
discovery of vertebrate olfactory receptors and pheromone receptors and the
identification of the first insect odorant receptors in the laboratory of Dr.
Richard Axel at Columbia University. Sentigen Corp. also entered into a
consulting agreement with Dr. Richard Axel. Other consultants hired by Sentigen
include Cornelia Bargmann, PhD, a professor at the University of California, San
Francisco; Dr. Gerald M. Edelman, Director of The Neurosciences Institute,
President of Neurosciences Research Foundation, Chairman of the Department of
Neurobiology and Professor at The Scripps Research Institute; Leslie Vosshall,
PhD, an Assistant Professor and Head of Laboratory at the Rockefeller
University; and Wendell Roelofs, The Liberty Hyde Bailey Professor of Insect
Biochemistry at Cornell University's New York State Agricultural Experiment
Station.
On August 19, 2002, Sentigen Corp. was awarded a Federal Phase I Grant in
the amount of $100,003 from the National Institute of Health. The term of the
grant was from September 1, 2002 through February 28, 2003. As of December 31,
2002, Sentigen Corp. has completed the research project covered under the grant
and all funds have been received from the National Institute of Health.
6
CUSTOMERS
Cell and Molecular Technologies, Inc.
CMT provides its products and services to pharmaceutical companies,
manufacturers in the biotechnology and pharmaceutical industries, hospitals;
universities and other research institutions engaged in the drug discovery
process.
Molecular Cell Science Division. For the years ended December 31, 2002,
2001 and 2000, Merck & Co., Inc. accounted for approximately 58%, 51% and 51% of
the MCS division's annual revenues, respectively. Merck & Co. accounted for 36%,
33% and 32% of our consolidated revenues for the same periods. We believe that
this customer will continue to account for a significant portion of the MCS
division's and our consolidated revenues in the 2003 and 2004 fiscal years. We
cannot assure you, however, that this customer will continue to generate
significant revenues and the loss of this customer, or any other significant
customers, could have a material adverse effect on our business.
Specialty Media Division. For the years ended December 31, 2002, 2001 and
2000, Invitrogen accounted for approximately 18%, 20% and 24% of the SM
division's annual revenues, respectively. For the year ended December 31, 2002,
Dainippon Pharmaceuticals accounted for 11% of the SM division's annual
revenues. We believe that these customers will continue to account for a
significant portion of our revenues in the 2003 and 2004 fiscal years. We cannot
assure you, however, that these customers will continue to generate significant
revenues and the loss of these customers, or any other significant customers,
could have a material adverse effect on our business.
Sentigen Corp.
Sentigen Corp. does not have any customers and the only revenues generated
to date have been under a grant from the National Institute of Health.
SALES AND MARKETING
Cell and Molecular Technologies, Inc.
Molecular Cell Science Division. CMT has focused on providing pre-clinical
contract research and development to entities engaged in the drug discovery
process. Given the rapid development of molecular biology techniques and the
pace of innovation, CMT believes that the drug discovery community is now
focusing on HTS as opposed to more basic screening methodologies. CMT also
believes that there is an increasing trend among companies in the drug discovery
community to outsource segments of the HTS process, as well as other segments of
the drug discovery process that occur after primary HTS screens are completed.
Such outsourcing is due to a variety of factors including:
- economies of scale necessary to maintain an efficient and effective
HTS program and remain competitive in the industry;
- reduced "in-house" staffs resulting from corporate down-sizing and
investments in automation and robotics;
- expense and risk inherent in conducting segments of this process
internally; and
- expanded capabilities and flexibility offered by third party
research companies without the associated overhead.
The sales and marketing activities of this division consist primarily of the
following:
- advertisements in trade magazines, newsletters, scientific journals
and the general press;
- meetings and consultations with research executives at
pharmaceutical, biotechnology and other companies engaged in the
drug discovery process; and
- exhibitions at industry trade-shows and conventions
7
Specialty Media Division. CMT's SM division markets its products to specialized
aspects of the cell culture market. CMT believes that, while the overall
available revenue from this area is less than other areas of the market, the
potential margins are greater. Moreover, in serving these areas, CMT has built
up significant customer loyalty and name recognition, despite relatively minimal
marketing activities. CMT's sales efforts are coordinated by its Chief Operating
Officer, whose duties include oversight of production and development, direct
sales and distributor arrangements. CMT also utilizes distributor services of
Fisher Scientific, VWR Scientific, and Deinippon Pharmaceuticals (Japan), which
are responsible primarily for sales to customers not serviced directly by CMT.
Sentigen Corp.
For the years ended December 31, 2002, 2001 and 2000, Sentigen Corp. did
not engage in any sales activities. Sentigen Corp. has been focused on research
and development, and has participated in various scientific and industry
conferences and met with leading agricultural and biotechnology companies in an
effort to raise awareness of its technologies among constituents in the
pharmaceutical, agricultural and human health communities.
MANUFACTURING, SUPPLIERS AND INVENTORY
Cell and Molecular Technologies, Inc.
The manufacturing, order fulfillment and shipping functions for CMT are
accomplished at its Phillipsburg facilities. CMT maintains adequate inventory at
its Phillipsburg facilities to support all of its direct sales needs.
Molecular Cell Science Division. CMT has numerous alternative sources of
supplies with respect to all of the critical components used in the delivery of
its contract research and development services.
Specialty Media Division. We purchase the raw materials used in SM's
manufacturing process from a variety of third-party suppliers and is generally
not dependent on any one supplier or group of suppliers. Raw fetal bovine serum
is a significant raw material in SM's manufacturing process. Although there is a
well-established market for fetal bovine serum, its price has risen
significantly because the supply of healthy lots has become increasingly
constrained due to environmental and health factors such as mad-cow disease.
While SM has changed its purchasing habits to accommodate these difficulties we
cannot assure you that SM's business will not be adversely affected by any
shortage in the future.
Sentigen Corp.
The research and development operations of Sentigen Corp. including
purchasing are accomplished at the 3960 Broadway, New York, New York location.
Sentigen Corp. has numerous alternative sources of supplies with respect to all
of its research operations.
COMPETITION
Cell and Molecular Technologies, Inc.
Generally, CMT competes with a combination of national and regional
entities ranging from large companies engaging in contract research &
development or reagent services to companies specializing in one particular
aspect of research and development or media production. Some of these companies
have captured a significant, and in certain cases controlling, share of the
market.
Many competitors have achieved significant national, regional and local
brand name and product recognition. These competitors also engage in frequent
and extensive advertising and promotional programs, both generally and in
response to efforts by other competitors entering the market or existing
competitors introducing new products. Many of these companies have substantially
greater financial, technical, marketing, personnel and other resources than CMT.
8
CMT believes that entry barriers to these markets are significant,
involving the high costs of specialized scientific equipment, the need to
recruit highly trained professional scientific staff with industrial and
academic experience, and the ability to offer a wide range of services and
expertise. CMT's ability to compete successfully in the industry is affected by
these and other factors, including without limitation price of services, ease of
use, reliability, customer support, geographic coverage and industrial and
general economic trends. In addition, research and development services involve
customers dependent upon government grants and other institutional funding.
CMT believes it can compete effectively based on its ability to provide
its customers with both (1) contract research and development services for early
stage/pre-clinical research and development in the pharmaceutical and
biotechnology industries and (2) the preparation of reagents for cell culture,
molecular biology, and mouse genetics in the international academic and
industrial research markets. CMT believes there are a number of large
competitors that have substantially greater resources than it; however, such
competitors have well-established businesses in only one of these areas.
Available contract research services have for the most part focused on
delivering routine technology at low cost. In contrast, CMT offers, in addition
to the full range of research and development services, complete experimental
design and consultation throughout the performance of its services.
Molecular Cell Science Division. CMT believes that the contract research
and development business can be divided into four markets, consisting of:
- Low End Research and Development. Services performed in this market
are characterized by low margins and strong competition. These
services are generally simple, process-oriented engagements. These
services tend not to lead to higher end, more complex projects. This
market is comprised of small local vendors, some of which have grown
to cover larger markets. CMT offers services in this area, including
those offered by its competitors, usually as part of a larger
customer engagement.
- Specialty Research and Development. Services performed in this
market tend to be technical and/or target focused. These services
can lead to new and more complex projects and have the opportunity
to grow significantly in scope. The identification, validation and
supply of HTS targets is a rapidly growing segment of the specialty
research and development business.
- High End Research and Development. Services performed in this market
tend to be high margin, highly skilled technical and mechanical
matters, requiring significant intellectual input, problem solving
capabilities and access to academics. These services often require
the development of new high-end technologies and lead to more
complex projects.
- Technology Platform Research and Development. This market is
comprised of companies that have based their business on performing
drug screening and/or licensing their proprietary technology to
companies for their in-house screening programs. These relationships
are generally associated with significant licensing costs and
downstream royalties. The application and/or licensing of such
proprietary technology platforms involve large contracts and is
highly competitive. Competition arises from the development of
alternative and competing technologies designed to yield results
ever more quickly and inexpensively.
Specialty Media Division. We believe that the SM market is dominated by a
few very large companies with a number of minor participants. Historically, the
revenue producers in the SM market have been a limited number (fewer than 20) of
manufacturers of public-domain media formulations (mostly developed in the
1960's) and the fetal bovine serum that has been used to supplement media. CMT
believes that mostly price-based competition exists in this area.
Sentigen Corp.
Sentigen Corp. is engaged in scientific research to develop assays for the
screening of GPCRs. The assays have applications in drug discovery, micro-array
based detection technologies and environmentally sound pest management solutions
for agricultural and human health vectors. Sentigen Corp.'s future competitive
position depends on its ability to develop a product that will be more
economically feasible and at the same time more effective than the assays
currently employed. While we believe that the Sentigen Corp. approach is unique
and will provide a new technological solution, there are several other platforms
developed in the pharmaceutical and biotechnology industries that could compete
with or replace our anticipated technology.
9
GOVERNMENT REGULATION
We are subject to many laws and governmental regulations and changes in
these laws and regulations, or their interpretation by government agencies and
the courts, occur frequently.
Environmental Regulation. Our operations are subject to various evolving
federal, state and local laws and regulations relating to the protection of the
environment, which laws govern, among other things, emissions to air, discharges
to ground, surface water, and groundwater, and the generation, handling,
storage, transportation, treatment and disposal of a variety of hazardous and
non-hazardous substances and wastes. Federal and state environmental laws and
regulations often require manufacturers to obtain permits for these emissions
and discharges. Failure to comply with environmental laws or to obtain, or
comply with, the necessary state and federal permits can subject the
manufacturer to substantial civil and criminal penalties. CMT operates a
manufacturing facility and both CMT and Sentigen Corp. operate laboratory
facilities. Although we believe that these facilities are in substantial
compliance with all applicable material environmental laws, it is possible that
there are material environmental liabilities of which we are unaware. If the
costs of compliance with the various existing or future environmental laws and
regulations, including any penalties that may be assessed for failure to obtain
necessary permits, exceed our budgets for those items, our business could be
adversely affected. In addition, liability to third parties could have a
material adverse effect on our business. For the years ended December 31, 2002,
2001 and 2000, we did not make any material expenditure with respect to such
matters.
Potential Environmental Cleanup Liability. The Federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended, and many
similar state statutes, impose joint and several liability for environmental
damages and cleanup costs on past or current owners and operators of facilities
at which hazardous substances have been discharged, as well as on persons who
generate, transport, or arrange for disposal of hazardous wastes at a particular
site. In addition, the operator of a facility may be subject to claims by third
parties for personal injury, property damage or other costs resulting from
contamination present at or emanating from property on which its facility is
located. Furthermore, certain business operations of CMT also involve shipping
hazardous waste off-site for disposal. As a result, we could be subject to
liability under these statutes. Furthermore, we cannot assure you that our
subsidiaries or we will not be subject to liability relating to manufacturing
facilities owned or operated by us currently or in the past. For the years ended
December 31, 2002, 2001 and 2000, we did not make any material expenditure with
respect to such matters.
Permits. In connections with its business operations, CMT has obtained
permits from the New Jersey Department of Environmental Protection as both a
hazardous waste and medical waste generator. We believe that our compliance with
these regulations, however, is on a voluntary basis since our operations produce
insufficient levels of chemical waste. We further believe that none of our
medical waste is deemed infectious. In addition, both CMT and Sentigen Corp.
have obtained permits from the Nuclear Regulatory Commission for the use of
radioisotopes in connection with its research functions.
Other Regulations. In addition to the foregoing, we may be subject to
various other federal, state and local regulatory and licensing requirements as
the same are promulgated from time to time by the Environmental Protection
Agency, Food and Drug Administration, Nuclear Regulatory Commission, the New
Jersey Department of Environmental Protection and other federal, state and local
regulatory agencies. Failure on our part to comply with any of these
requirements could result in the imposition of fines by governmental authorities
or awards of damages to private litigants. We have made, and will continue to
make, capital and other expenditures necessary to monitor and to comply with any
applicable regulations. For the years ended December 31, 2002, 2001 and 2000, we
did not make any material expenditure with respect to such matters.
TRADEMARKS, PROPRIETARY INFORMATION AND PATENTS
CMT utilizes certain proprietary information in connection with the
provision of its services and the manufacture and sale of its products,
including processes and formulas with respect to cell and embryo culture media
and reagents, and gene expression systems that are proprietary to CMT. CMT
relies on customary principles of "work-for-hire" as well as technical measures
to establish and protect the ideas, concepts, and documentation of its
proprietary technology and know-how and, in certain instances, have entered into
non-disclosure agreements with customers and employees. Such methods, however,
may not afford complete protection, and we cannot assure you that third parties
will not independently develop such know how or obtain access to know-how,
ideas, concepts, and documentation. Although CMT believes that its technology
has been developed independently and does not infringe
10
on the proprietary rights of others, we cannot assure you that the technology
does not and will not so infringe or that third parties will not assert
infringement claims against us in the future. In the case of infringement, CMT
would, under certain circumstances, be required to modify our products or obtain
a license. We cannot assure you that we will have the financial or other
resources necessary to successfully defend a patent infringement or other
proprietary rights infringement action or that we could modify our products or
obtain a license if we were required to do so. Failure to do any of the
foregoing could have a material adverse effect on our business. If our products
or technologies are deemed to infringe upon the rights of others, we could be
liable for damages, which could have a material adverse effect on us.
Cell & Molecular Technologies
During 1999, CMT applied to the United States Patent and Trademark Office
for a trademark, EmbryoMax(R). In 2002 CMT was awarded the trademark. The
EmbryoMax(R) trademark pertains to Specialty Media's mouse embryo culture media
and reagents offered by Specialty Media to support the generation of transgenic
mice.
Sentigen Corp.
On April 10, 2000, Sentigen Corp. entered into a license agreement with
The Trustees of the Columbia University in New York for an exclusive worldwide
right to Columbia's patent applications and other proprietary rights in the
areas of insect chemosensation and olfaction. In consideration of the license
agreement, Columbia was issued 75,000 shares of our stock and will receive
royalties of 1% of the net sales of any licensed products or services. The value
of this license agreement is recorded as license costs, net of accumulated
amortization on our consolidated balance sheet. The value of the license
reflects the closing share price of our common stock on April 10, 2000, less
accumulated amortization.
PRODUCT LIABILITY
As a manufacturer of certain products, we may be exposed to product
liability claims by consumers. We have obtained product liability insurance
coverage in the aggregate amount of $2 million ($1 million per occurrence), and
an umbrella policy that provides a $10 million coverage (per occurrence or in
the aggregate). Although we believe that this amount of insurance is sufficient,
we cannot assure you that it will provide coverage for any claim against us or
will be sufficient to cover all possible liabilities. In the event a successful
suit is brought against us, unavailability or insufficiency of insurance
coverage could have a material adverse effect on our operations. Moreover, any
adverse publicity arising from claims made against us, even if such claims were
not successful, could adversely affect the reputation and sales of our products
and services.
EMPLOYEES
As of December 31, 2002, we had 42 full-time and three part-time
employees. These employees were engaged as follows:
- 17 in contract research and development services;
- nine in research and development;
- five in media production;
- five in accounting and administration;
- four in executive positions;
- two in customer support;
- two in warehousing, shipping and receiving; and
- one in sales and marketing.
None of our employees are covered by collective bargaining agreements. We
believe that we have a good relationship with our employees.
11
HISTORY OF SENTIGEN HOLDING CORP.
We were incorporated under the laws of the State of Delaware in May 1990
under the name Prime Cellular, Inc. originally to provide management services,
including business planning, marketing, engineering, design and construction
consulting services, to rural service area cellular telephone licensees.
However, preferences of owners of construction permits and the deterioration in
general economic conditions subsequent to Prime Cellular's initial public
offering in early August 1990 negatively impacted its business plan and Prime
Cellular soon determined that it was prudent for it to explore other uses for
its funds.
On May 29, 1998, a newly formed wholly owned subsidiary of Prime Cellular
acquired, by merger, the business operations of CMT. Pursuant to the Merger
Agreement, dated May 29, 1998, the subsidiary was merged into CMT and all of the
outstanding shares of capital stock of CMT were converted into an aggregate of
1,611,000 shares of our common stock, representing approximately 26.4% of our
issued and outstanding common stock following the merger. CMT was treated as the
acquirer for financial accounting purposes. In connection with the merger, we
changed our fiscal year end from May 31 to December 31, which year-end
corresponds with the fiscal year end for CMT.
We formed Sentigen Corp. as a wholly owned subsidiary in February of 2000.
We changed our name to Sentigen Holding Corp. on June 23, 2000, at which time
our ticker symbol on the OTCBB changed to SGHL. In November 2000, we consummated
a private placement in which we sold 863,834 shares of our common stock at $6.00
per share for aggregate gross proceeds of $5,183,004. On January 9, 2002 our
common stock began trading on The Nasdaq SmallCap Market under the symbol SGHL.
CMT maintains an internet address at www.cmt-inc.net and
www.specialtymedia.com. Sentigen Corp. maintains an internet address at
www.sentigencorp.com. At present, Sentigen Corp.'s website is in development.
Historically we have not made available copies of our SEC filings at our
internet address as such filings are readily available, among other places, from
the SEC's Web site. We do, however, intend to make these filings available at
our internet address in the near future. In advance of that time, we would be
pleased to make available paper or electronic copies of these filings upon
request. Such requests should be directed to Fredrick B. Rolff at (908) 387-1673
or by writing to us at Sentigen Holding Corp., 580 Marshall Street,
Phillipsburg, NJ 08865 Attention: Investor Relations.
12
ITEM 2. PROPERTIES
Since June 1998, our executive offices have been located at 580 Marshall
Street, Phillipsburg, New Jersey. Our Phillipsburg facility consists of
approximately 6,651 square feet of laboratory, manufacturing and
office/warehouse space. The property is owned by our wholly owned subsidiary,
CMT, and is occupied by CMT's Specialty Media division. We acquired the
Phillipsburg facility as part of our acquisition of CMT. The facility is subject
to a note, dated February 10, 1997, bearing interest at 5.00% and having a
balance as of December 31, 2002, of $251,732. This note is secured by a mortgage
on the property. We also lease the following properties:
Company Purpose and Terms
- ------- -----------------
CMT In November 2001, CMT signed a 44-month lease for
approximately 11,000 square feet of laboratory and
office/warehouse space at 445 Marshall Street, Phillipsburg,
New Jersey . The MCS division occupies this property. Rental
expense totaled $144,793 for the year ended December 31,
2002.
CMT In March 2001, CMT signed a 3-year lease for approximately
3,000 square feet of laboratory space at 418 Industrial
Drive, North Wales, Pennsylvania. This space is used to
accommodate the HTS applications and assay development
services group. Rental expense totaled $18,000 for the year
ended December 31, 2002. In February 2003, CMT signed a
3-year lease to expand this location by an additional 3,000
square feet. Rental expense for the expansion area will be
approximately $1,500 per month.
Sentigen In May 2000, Sentigen Corp. leased approximately 2,000 square
Corp. feet of laboratory space at 3960 Broadway, New York, New
York. The lease expired in April 2002, and we are currently
operating on a month-to-month basis. In June 2001, we leased
additional administrative space at this same location, which
lease terminated on June 30, 2002. Rental expense for these
two facilities totaled $82,440 for the year ended December
31, 2002.
Sentigen We lease approximately 980 square feet of administrative
Holding office space for use by the Board of Directors and Executive
Corp. Officers of our Company at 434 East Cooper Street, Aspen,
Colorado. This lease expires April 30, 2003; however, we
intend to renew this lease, should the lease terms be
acceptable to us. Rental expense totaled $38,654 for the year
ended December 31, 2002.
We routinely evaluate our facilities for adequacy in light of our plans
for growth. Our plans may require us to lease additional facilities in the
future.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On January 9, 2002 our common stock began trading on The Nasdaq SmallCap
Market under the symbol SGHL. Prior to that date our common stock was traded on
the OTC Bulletin Board. The following table sets forth the high and low bid
prices for our common stock as reported on the OTC Bulletin Board or The Nasdaq
SmallCap Market, as applicable, and the high and low bid prices from January 1,
2003 until March 28, 2003. The prices represent inter-dealer quotations, which
do not include retail markups, markdowns or commissions and may not necessarily
represent actual transactions.
Period High ($) Low ($)
------- -------- -------
2001
Fourth quarter $5.7500 $4.5999
Third quarter 7.0000 5.5000
Second quarter 7.0000 5.7500
First quarter 7.0000 4.5625
2002
Fourth quarter $5.1500 $4.4100
Third quarter 5.0900 4.0000
Second quarter 6.9000 4.7800
First quarter 6.8000 4.0000
2003
First quarter $5.7500 $4.7300
(through March 28, 2003)
On March 28, 2003, the last sale price for our common stock was $5.00, as
reported by The Nasdaq SmallCap Market. As of March 28, 2003, we had 7,453,044
shares of common stock outstanding and approximately 338 holders of record of
our common stock.
DIVIDEND POLICY
To date, we have not declared or paid any cash dividends on our common
stock. The payment of dividends, if any, in the future is within the discretion
of the Board of Directors and will depend upon our earnings, our capital
requirements and financial condition and other relevant factors. We currently
intend to retain all earnings, if any, to finance the continued growth and the
development of our business. We do not expect to declare or pay any cash
dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SHARES
None.
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected statement of operations data for the years ended
December 31, 2000, 2001 and 2002 and the selected balance sheet data endedas of
December 31, 2001 and 2002 have been derived from our audited consolidated
financial statements and accompanying notes that are included elsewhere in this
Form 10-K. The selected statement of operations data for the years ended
December 31, 1998 and 1999 and the selected balance sheet data as of December
31, 1998, 1999 and 2000 have been derived from our audited financial statements
and accompanying notes which are not included within this Form 10-K. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and the notes thereto appearing elsewhere in this
report.
FISCAL YEAR ENDED DECEMBER 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Total revenues $ 7,217,446 $ 6,080,198 $ 4,729,503 $3,916,581 $ 2,127,233
------------ ------------ ------------ ---------- ------------
Income after
direct costs $ 4,654,350 $ 3,804,142 $ 2,838,854 $2,290,378 $ 786,540
Operating expenses 5,276,486 4,826,954 3,083,238 1,809,614 1,604,210
------------ ------------ ------------ ---------- ------------
(Loss) income from
operations (622,136) (1,022,812) (244,384) 480,764 (817,670)
Interest income, net of
interest expense 235,956 508,345 191,991 160,350 118,996
Income tax expense 135,851 133,122 74,322 -- --
------------ ------------ ------------ ---------- ------------
Net (loss) income $ (522,031) $ (647,589) $ (126,715) $ 641,114 $ (698,674)
============ ============ ============ ========== ============
Earnings (loss) per
share of common stock
Basic $ (0.07) $ (0.09) $ (0.02) $ 0.11 $ (0.16)
============ ============ ============ ========== ============
Diluted $ (0.07) $ (0.09) $ (0.02) $ 0.10 $ (0.16)
============ ============ ============ ========== ============
BALANCE SHEET DATA:
Working capital $ 9,811,764 $ 9,929,995 $ 5,462,235 $5,386,910 $ 4,910,420
------------ ------------ ------------ ---------- ------------
Total assets $ 13,148,435 $ 12,862,944 $ 13,419,909 $7,428,682 $ 11,825,683
------------ ------------ ------------ ---------- ------------
Long - Term Debt $ 1,031,161 $ 914,110 $ 635,001 $1,092,095 $ 826,024
------------ ------------ ------------ ---------- ------------
Stockholders' Equity $ 10,870,489 $ 10,950,382 $ 11,351,799 $5,734,091 $ 5,074,283
------------ ------------ ------------ ---------- ------------
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a holding company conducting business through two wholly owned
operating subsidiaries, CMT and Sentigen Corp. CMT is comprised of a service
organization that provides contract research and development services, and a
products organization that provides cell culture media, reagents and other
research products to companies engaged in the drug discovery process. Sentigen
Corp. is engaged in scientific research to develop assays for the screening of G
Protein-Coupled Receptors, or GPCRs. These assays potentially would have
applications in drug discovery, micro-array based detection technologies and
environmentally sound pest management solutions for agricultural and human
health vectors.
CMT operates through two divisions -- Molecular Cell Science, or MCS and
Specialty Media, or SM. MCS provides contract research and development services
and High Throughput Screening applications and services to companies engaged in
the drug discovery process. SM develops, manufactures, markets and sells
specialty cell culture media, reagents and other research products.
SIGNIFICANT ACCOUNTING POLICIES
Cell & Molecular Technologies, Inc.
We evaluate the performance of CMT through its two divisions (both are
treated as separate business segments). Revenue, income after direct costs and
net income are used to measure and evaluate the financial results of CMT.
Revenue Recognition. The MCS division's services are performed on a
fee-for-service, fixed contract basis that provides for payments after specific
research milestones are achieved. Revenues from the MCS division are recognized
using the percentage-of-completion method for fixed price contracts extending
over more than one accounting period. Work-in-process, representing time and
costs incurred on projects in process in excess of amounts billed to customers,
are recorded as "Unbilled services" in our consolidated balance sheets. Unearned
revenue represents amounts billed in excess of costs incurred and are recorded
as liabilities in our consolidated balance sheets. Revenues from the product
sales of the SM division are recognized upon transfer of title to the product,
which generally occurs upon shipment to the customer.
Direct Costs. The following major classes of direct costs for the MCS
division include: (1) costs incurred for direct materials used in the services
performed under research contracts, (2) an allocation of the compensation costs
for the time incurred on such contracts by our scientists, (3) an allocation of
indirect materials costs for general laboratory expenses incurred for the
benefit of all contracts in process, and (4) an allocation of certain general
and administrative expenses incurred by CMT. The direct costs of the SM division
represent the direct costs of research products sold, including an allocation of
the compensation costs for production personnel, and an allocation of certain
general and administrative expenses incurred by CMT. The inventory of the SM
division is determined using the FIFO (first-in, first-out) method of
accounting.
Selling, General and Administrative Expenses. The following major classes
of selling, general and administrative expenses incurred by CMT include: (1) the
compensation and employee benefit costs of CMT's management, sales, and
administrative staff, (2) the compensation and employee benefit costs for the
time of scientific and production personnel spent on selling, general and
administrative activities, (3) facilities rental, utilities, communication costs
and related operating expenses, (4) marketing, sales and advertising costs, (5)
business travel expenses, (6) commercial and product liability insurance costs,
(7) repairs and maintenance costs on facilities and laboratory equipment and (8)
professional fees for legal and accounting services.
Sentigen Corp.
The operations of Sentigen Corp. are reflected as research and development
expenses in our consolidated statements of operations. Sentigen Corp's
operations, since its inception in February 2000, consist entirely of research
and development. We expense research and development costs as such costs are
incurred.
16
On August 19, 2002, Sentigen Corp. was awarded a Federal Phase I Grant in
the amount of $100,003 from the National Institute of Health. The term of the
grant was from September 1, 2002 through February 28, 2003. The grant provides
for the direct costs of a specific project within Sentigen Corp.'s overall
research program (budgeted in the grant for $75,000) as well as an allocation
for the facilities and administrative costs of Sentigen Corp. related to the
project (budgeted in the grant at $25,003). As of December 31, 2002, Sentigen
Corp. completed the research project covered under the grant and all funds have
been received from the National Institute of Health. The receipt of grant funds
was accounted for as revenue, the direct costs of the project were accounted for
as direct costs and the related facilities and administrative costs were shown
as operating expenses in our consolidated statements of operations.
Sentigen Holding Corp.
The expenses of Sentigen Holding Corp. are reflected as "Corporate
overhead" expenses in our consolidated statements of operations and include the
following major classes: (1) compensation and employee benefits cost for our
chairman of the board, chief financial officer, and administrative assistant,
(2) professional fees for legal and accounting services, (3) office rental,
utilities and communication costs, (4) stock market listing fees and (5)
business travel expenses.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. We base these estimates and assumptions upon
historical experience and existing, known circumstances. Actual results could
differ from those estimates. Specifically, management must make estimates in the
following areas:
Allowance for doubtful accounts. We provide a reserve against our
receivables for estimated losses that may result from our customers' inability
to pay. We determine the amount of the reserve by analyzing known uncollectible
accounts, aged receivables, historical losses and our customers'
credit-worthiness. Amounts later determined and specifically identified to be
uncollectible are charged or written off against this reserve. To minimize the
likelihood of uncollectible accounts, customers' credit-worthiness is reviewed
periodically based on our experience with the account and external credit
reporting services (if necessary) and adjusted accordingly. Should a customer's
account become past due, we generally place a hold on the account and
discontinue further shipments or services to that customer, minimizing further
risk of loss. Additionally, our policy is to fully reserve for all accounts with
aged balances greater than one year. Reserves are fully provided for all
expected or probable losses of this nature.
Inventory adjustments. Inventories are stated at the lower of cost or
market. We review the components of our inventory on a regular basis for excess,
obsolete and impaired inventory based on estimated future usage and sales. Our
stock levels generally do not exceed one quarter's expectation of usage or
sales. Inventories were stated at $212,104 and no reserve for impairment or
obsolescence was necessary as of December 31, 2002.
Impairment of intangibles. Our intangible assets consist primarily of
license costs of $369,353 as of December 31, 2002, and are the result of our
exclusive licensing agreement with the Trustees of Columbia University. The
value of the license reflects the closing share price of our common stock on
April 10, 2000 (the closing date of our agreement with the Trustees of Columbia
University) less accumulated amortization. The value of the license is subject
to an amortization period of 17 years. We review the value of the license for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be fully recoverable. A review for
impairment includes comparing the carrying value of the license to an estimate
of the undiscounted net future cash inflows over the life of the license. The
license is considered to be impaired when the carrying value exceeds the
calculation of the undiscounted net future cash inflows or fair market value. An
impairment loss in the amount of the excess would be recognized in our
consolidated statements of operations if the carrying value exceeded the fair
market value of the license. We believe no such loss is necessary as of December
31, 2002.
17
Revenue recognition. Revenues from the MCS division are recognized using
the percentage-of-completion method for fixed price contracts.
Percentage-of-completion is determined based on the proportion of completed
costs to total anticipated costs on each contract. We use estimates of remaining
costs to complete each contract to determine the revenue and profitability on
each contract. We reevaluate these estimates periodically and such reevaluations
may, in the future, lead to changes in the rate of profitability on each
contract. There were no contracts where the expected costs exceeded the contract
price. All contract receivables are due within one year.
Stock-based compensation. SFAS No. 123 "Accounting for Stock-Based
Compensation", encourages, but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. We continue to
account for stock-based compensation to employees using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". APB No. 25 requires no recognition of compensation
expense for the stock-based compensation arrangements provided by us where the
exercise price is equal to the market price at the date of the grants. Options
issued to non-employees are valued at the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. The expense for options issued to non-employees is recorded
as stock based compensation in our consolidated statements of operations. The
fair value of each option grant is estimated using the Black-Scholes option
pricing model.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 2002 TO YEAR ENDED DECEMBER 31, 2001
Revenues. Revenues for the year ended December 31, 2002 were $7,217,446
compared to revenue of $6,080,198 for the year ended December 31, 2001. This
increase of $1,137,248, or 19%, was the result of an increase of: $549,690, or
14%, in contract revenue from CMT's MCS division, an increase of $487,555, or
22%, in revenue from CMT's SM division, and a Federal Phase I grant award from
the National Institute of Health to Sentigen Corp. for $100,003. Other than the
Federal Phase I grant award received by Sentigen Corp., our revenues for 2002
were entirely attributable to the operations of CMT and its two divisions, MCS
and SM.
An analysis of our revenues during 2002 from the MCS division is as
follows:
For the Year Ended
December 31,
------------ Percent
2002 2001 Change
---- ---- ------
HTS contract $2,004,000 $1,745,020 15%
All other contracts 2,451,239 2,160,529 13%
---------- ----------
Total $4,455,239 $3,905,549 14%
========== ==========
The 14% increase from the MCS division was due in part to the
renegotiation, as of January 1, 2002, of a significant contract for
high-throughput screening, or HTS, services from a pay-per-service contract to a
retainer contract. The new retainer contract provides for payments of $167,000
per month, regardless of the volume of services performed. The term of the
contract was for one year and ended on December 31, 2002. We provided more HTS
services to this customer during the year ended December 31, 2002 compared to
the year ended December 31, 2001 and, under the old pay-per-service agreement,
would have also shown an increase in revenues from this contract. On December
20, 2002 this contract was renewed for a term of one-year and provides for
payments of $200,000 per month beginning in January 2003. The 13% growth from
other contracts was driven by: (1) mouse genetics services, (2) protein
expression services and (3) services for the pre-clinical analysis of compound
efficacy on diminishing or eliminating pathogen infection.
18
Revenues from the SM division grew 22% for the year ended December 31,
2002 from the year ended December 31, 2001. This growth was driven by four
factors:
- an increase in sales of the SM division's line of Murine Embryonic
stem cells and feeder cells as well as media associated with this
product line;
- increase in sales of the SM division's proprietary formulations sold
under private label;
- an increase in sales to Japan through the SM division's distributor,
the research products division of Dainippon Pharmaceuticals; and
- price increases implemented as of January 1, 2002.
Income after Direct Costs and Gross Margin. Income after direct costs for
the year ended December 31, 2002 was $4,654,350 compared to income after direct
costs of $3,804,142 for the year ended December 31, 2001. Gross margin for the
year ended December 31, 2002 (excluding income after direct costs from the
Federal Phase I grant award received by Sentigen Corp.) was 65% compared to 63%
for the year ended December 31, 2001. This increase was driven by reduced direct
materials costs for the MCS division, offset in part by rising serum costs in
the SM division.
Operating Expenses. Operating expenses for the year ended December 31,
2002 were $5,276,486 compared to $4,826,954 for the year ended December 31,
2001. This increase of $449,532, or 9%, was primarily attributable to an
increase of $434,825 in selling, general and administrative expenses due to the
increased rental and facilities expenses relating to the opening of CMT's new
facility in Phillipsburg, New Jersey, as well as increases in salaries and
employee health insurance expenses at CMT, and increases in CMT's advertising,
marketing and sales costs. A portion of the increase in operating expenses also
was due to an increase of $94,379 in depreciation and amortization due to
capital expenditures made in connection with CMT's new facilities and an
increase of $149,291 in stock based compensation. These increases were partially
offset by a decrease of $119,794 in the research and development costs of
Sentigen Corp. due to the receipt of the grant from the National Institute of
Health, and a decrease of $134,172 in corporate overhead driven by reduced
professional fees.
Loss from Operations. Loss from operations for the year ended December 31,
2002 was $622,136 compared to a loss from operations of $1,022,812 for the year
ended December 31, 2001. The components of this 39% improvement were as follows:
For the Year Ended
December 31,
------------ Percent
2002 2001 Change
---- ---- ------
CMT $ 1,600,950 $ 1,360,025 18%
Sentigen Corp. (1,124,787) (1,151,408) 2%
Holding company
expenses (1,098,299) (1,231,429) 11%
----------- -----------
Total $ (622,136) $(1,022,812) 39%
=========== ===========
Income from operations for CMT increased by 18% which was due to its 17%
increase in revenues. Loss from operations attributable to Sentigen Corp.
improved by 2% which was due to the grant award from the NIH, offset by higher
stock-based compensation costs. Sentigen Corp's operations consist entirely of
research and development activities. Loss from operations attributable to
holding company-related expenses improved by 11% which was largely attributable
to lower professional fees.
Interest Income. Interest income, net of interest expenses declined by
$272,389, or 54%, due to the fall in yields on U.S. Treasury and money market
securities.
19
COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000
Revenues. Revenue for the year ended December 31, 2001 was $6,080,198
compared to $4,729,503 for the year ended December 31, 2000. This increase of
$1,350,695, or 29%, was the result of an $880,478, or 29%, increase in revenues
from the MCS division and a $470,217, or 28%, increase in revenues from the SM
division.
Revenue growth through MCS was attributable to more aggressive HTS
programs employed by our customers. Revenues from the MCS division also grew in
part due to increased sales and marketing efforts. Revenue growth through SM was
attributable to a more effective sales and marketing program, increased business
from companies private labeling our media, and increased sales of our cell line
based products.
Income After Direct Costs and Gross Margin. Income after direct costs for
the year ended December 31, 2001 was $3,804,142 compared to income after direct
costs of $2,838,854 for the year ended December 31, 2000. Gross margin for the
year ended December 31, 2001 was 63% compared to 60% for the year ended December
31, 2000. This increase was due to pricing increases implemented at the
beginning of 2001 and a shift in our revenue mix towards sales of higher margin
contract R&D relationships and media products.
Operating Expenses. Selling, general and administrative costs of CMT
increased from $1,420,588 for the year ended December 31, 2000 to $2,027,716 for
the year ended December 31, 2001. This increase of $607,128, or 43%, was
attributable to the increased infrastructure costs resulting from our new North
Wales, Pennsylvania facility, additional hiring of new employees and increased
sales and marketing activity.
Research and development costs increased from $467,567 for the year ended
December 31, 2000 to $1,022,490 for the year ended December 31, 2001. Prior to
May 2000, we did not conduct significant research activities. Consequently,
research and development costs for the year ended December 31, 2000 represent
only seven months of activity.
Corporate overhead increased from $698,601 for the year ended December 31,
2000 to $1,219,476 for the year ended December 31, 2001. The $520,875, or 75%,
increase was attributable to higher personnel and professional costs.
Non-cash charges for stock-based compensation decreased from $213,729 for
the year ended December 31, 2000 to $73,146 for the year ended December 31,
2001. The decrease of $140,583, or 66%, was attributable to certain changes we
made to the consulting agreements with our scientific consultants. Under our new
agreements, dated December 3, 2001, the consultants' remaining unvested options
will vest based on the sole discretion of our Board of Directors. The amendments
to the agreements constituted a change in accounting resulting in low charges
for non-cash stock based compensation for the unvested options of these
consultants, accounting for the decrease.
Depreciation and amortization increased from $282,753 for the year ended
December 31, 2000 to $484,126 for the year ended December 31, 2001. The increase
of $201,373, or 71%, was attributable to the increased equipment expenditures in
2001 associated with the build-out of CMT's new North Wales, Pennsylvania
facility, and its expansion at the 445 Marshall Street, Phillipsburg, New Jersey
site.
Interest income, net of interest expenses increased by $316,354, which was
directly attributable to the investment of proceeds from our November 2000
private placement.
Our income tax provision increased from $74,322 for the year ended
December 31, 2000 to $133,122 for the year ended December 31, 2001. This
increase was attributable to the increase in our income from operations,
primarily as a result of increased income from CMT.
As a result of the foregoing, our net loss increased from $126,715 for the
year ended December 31, 2000 to $647,589 for the year ended December 31, 2001.
20
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002 we had $4,819,967 in cash, $5,307,419 in investment
securities and working capital of $9,811,764. During the year ended December 31,
2002 we financed our operations primarily through working capital and we
financed capital expenditures through bank loans.
We believe our financial resources will be sufficient to fund our
operations and capital requirements for at least the next 12 months. However, we
may, in the future, need to obtain additional debt or equity financing to meet
our liquidity needs. It is possible that any such financing may be dilutive to
our stockholders and the terms of any debt financings likely could contain
restrictive covenants limiting our ability to do certain things, including
paying dividends. Our ability to obtain financing depends upon the status of our
future business prospects, as well as conditions prevailing in the capital
markets.
Cell & Molecular Technologies, Inc.
In October 2002, CMT leased equipment for use in the performance of
certain contracts in the MCS division. The lease qualified for treatment as a
capital lease for accounting purposes. At the inception of the lease, we
recorded the equipment on our balance sheet and an offsetting capital lease
liability of $95,945. We used fixed interest rate of 7.40% to approximate the
borrowing rate for the lease. The equipment will be depreciated on a
straight-line basis through the term of the lease that expires in September
2005. Through December 31, 2002, we made rental payments of $9,017. Of those
payments, we applied $7,885 to the capital lease liability and $1,132 to
interest expense. As of December 31, 2002 the total remaining lease obligation
amounted to $88,060.
During the first quarter of 2001 we leased approximately 3,000 square feet
of laboratory space to accommodate CMT's High Throughput Screening applications
and assay development services group. In connection with this new facility, CMT
borrowed $404,337 under a $720,000 loan commitment to finance capital equipment
expenditures. In March 2002, CMT borrowed the remaining $315,663 available under
this loan commitment to finance capital expenditures made in connection with our
new facility in Phillipsburg, New Jersey. We are required to repay this loan,
which bears interest at a fixed rate of 7.40%, over a seven year period that
commenced in June 2002. The terms of the loan require CMT to maintain annual
cash flow equal to 1.25 to 1.00 times the total annual debt service of CMT and a
ratio of debt to net worth of 3.00 to 1.00. CMT complied with these terms as of
and for the year ended December 31, 2002. Sentigen Holding Corp. guarantees this
obligation of CMT. The unpaid principal balance on this loan at December 31,
2002 was $673,548.
Five stockholders and one affiliate of a stockholder advanced an aggregate
of $500,000 to CMT in 1997. The promissory notes had an interest rate of 5%,
payable at maturity, and had an original due date of July 14, 2002. As a result
of the CMT merger, the above loans' maturity dates were accelerated to May 1,
2000. During 1999, the stockholders agreed to extend the above loans' maturity
date to May 1, 2001. In July 2001, the stockholders agreed to further extend the
maturity date of the loans until September 1, 2001, at which time we repaid
principal and interest of $603,125 to retire these obligations.
Sentigen Corp.
In June 2001, Sentigen Corp. borrowed an additional $60,000 under its
existing $500,000 loan facility. This facility has a term of five years, may be
used to finance capital expenditures and bears interest at 8.75%. Sentigen
Holding Corp. guarantees this obligation of Sentigen Corp. The loan also
requires that Sentigen Holding Corp. keep unencumbered liquid assets equaling
two-times the combined outstanding loan balances for Sentigen and CMT. As of
December 31, 2002 and the date of filing of this report, Sentigen Corp. had
borrowed a total of $300,000 under this facility, and the unpaid principal
balance on this loan at December 31, 2002 was $158,698. On February 5, 2003 we
renegotiated the interest rate on this borrowing from the fixed rate of 8.75% to
a variable interest rate. The variable interest rate is the prime plus 1.00%
with a minimum interest rate of 5.50%.
Sentigen Corp. was formed in February of 2000 and is focusing on research
and development activities. Our licensing agreement with The Trustees of the
Columbia University in New York required us to contribute a minimum of
$1,000,000 into Sentigen Corp. within one year of the date of the agreement (by
April 2001) or we must have been involved in active negotiations to raise
$1,000,000 in additional funding. We satisfied this provision through the
consummation of our private placement in November 2000 in which we sold 863,834
shares of our common stock at $6.00 per share for aggregate gross proceeds of
$5,183,004.
21
Another provision of the agreement calls for a minimum of $50,000 per six
month period or $100,000 per annual period to be spent on bona fide research and
development of the patents and licenses subject to the agreement from the second
through the fourth years of the agreement (April 2002 through April 2004) or we
must be involved in active negotiation to raise $1,000,000 in additional
funding. We satisfied this provision through April 2002 and 2003 (the second and
third fiscal years of the license agreement). We believe that we have enough
capital resources to meet the financial requirements of this provision for the
agreement years 2004 and beyond.
There is no assurance that the technology involved in the research and
development activities related to the licensing agreement with The Trustees of
Columbia University will prove to be productive. In the event we decide to
terminate such activities, there will be associated costs to us, such as payment
to employees and expenses related to the closing of our facility at 3960
Broadway, New York, New York. No provisions have been made for such possible
further expense.
COMMITMENTS UNDER DEBT OBLIGATIONS AND LEASES
We were in compliance with all debt covenants as of and for the year ended
December 31, 2002. Principal maturities of long-term debt over the next five
years are as follows:
December 31, 2003 $ 235,234
2004 217,267
2005 136,349
2006 118,209
2007 127,538
Thereafter 374,312
-------
$ 1,208,909
===========
The estimated future minimum rental payments under capital and
operating-type leases over the next three years are as follows:
Capital Operating
------- ---------
For the year ending December 31, 2003 $ 36,067 $ 228,315
2004 36,067 204,347
2005 27,050 147,764
-------- ----------
Minimum rental payments $ 99,184 $ 580,426
==========
Less interest-portion of rental payments (11,124)
---------
Capital lease obligation $ 88,060
========
INFLATION
Inflation has historically not had a material effect on our operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations." This standard eliminates the pooling method of
accounting for business combinations initiated after June 30, 2001 and addresses
the accounting for intangible assets and goodwill acquired in a business
combination. The adoption of SFAS No. 141 did not have a material effect on our
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible
Assets," which revises the accounting for purchased goodwill and intangible
assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives
are no longer amortized, but are tested for impairment annually or in the event
of an impairment indicator. SFAS 142 was effective January 1, 2002. The adoption
of SFAS No. 142 did not have a material effect on our financial position or
results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The standard requires entities to record the fair value
of a liability for an asset retirement obligation in the period in
22
which it is incurred. SFAS No. 143 is effective for all fiscal years beginning
after June 15, 2002. We do not expect SFAS No. 143 to 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 or Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 144 requires that long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or discontinued operations. Therefore,
discontinued operations will no longer be measured at net realizable value or
include amounts for operating losses that have not yet occurred. SFAS No. 144
also broadens the reporting of discontinued operations to include all components
of an entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of their entity
in a disposal transaction. SFAS No. 144 was effective January 1, 2002. The
adoption of SFAS No. 144 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 4, 44 and 64, Amendment of FASB Statement 13, and Technical
Corrections." SFAS No. 145 is effective January 1, 2003. Among other things,
SFAS No. 145 requires that gains or losses on the extinguishment of debt will
generally be required to be reported as a component of income from continuing
operations and will no longer be classified as an extraordinary item. We do not
expect the provisions of SFAS No. 145 to have a material impact on its financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) 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 that a liability be recorded for such activities when the liability is
actually incurred, and unlike EITF 94-3, the existence of a plan does not
necessarily support the basis for the recording of a liability. SFAS No. 146 is
effective for all exit or disposal activities initiated after December 31, 2002.
We will be required to adopt this SFAS on such activities beginning January 1,
2003.
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 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for the year ended December 31, 2002 and the
appropriate disclosures have been included herein.
The following table reconciles net loss and diluted earnings per share
(EPS), as reported, to pro-forma net loss and diluted EPS, as if we had expensed
the grant date fair value of stock options as permitted by SFAS No. 123, as
amended by SFAS No. 148, since it permits alternative methods of adoption.
2002 2001 2000
--------- --------- ---------
Net Income (Loss):
As reported $(522,031) $(647,589) $(126,715)
Pro-forma expense as if
stock options were charged
against net loss (192,051) (236,780) (206,326)
--------- --------- ---------
Pro-forma net loss using the fair
value method $(714,082) $(884,369) $(333,041)
========= ========= =========
Diluted EPS:
As reported $ (0.07) $ (0.09) $ (0.02)
Pro-forma using the fair
value method $ (0.10) $ (0.12) $ (0.05)
23
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting And Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of this interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The interpretation also requires enhanced and additional
disclosures of guarantees in financial statements ending after December 15,
2002. In the normal course of business, we do not issue guarantees to
third-parties; accordingly, this interpretation does not effect the disclosures
included herein.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an interpretation of ARB 51." FIN No. 46 defines when a
business enterprise must consolidate a variable interest entity. This
interpretation applies immediately to variable interest entities created after
January 31, 2003. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. We have determined
that it is not reasonably possible that we will be required to consolidate or
disclose information about a variable interest entity upon the effective date of
this interpretation.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk for the effect of interest rate changes on
our U.S. Treasury securities, money market securities and variable rate bank
debt. We are not currently exposed to any foreign currency risks. Other
information relating to quantitative and qualitative disclosure about market
risk is set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Our exposure to market risk for changes in interest rates relates
primarily to our cash, investment securities and our long-term debt. We
generally invest our excess cash in U.S. Treasury securities of short- to
intermediate-term and money market mutual funds. Fixed rate securities may have
their fair market value adversely affected due to a rise in interest rates, and
we may suffer losses in principal if forced to sell securities that have
declined in market value due to changes in interest rates prior to maturity.
As of December 31, 2002, we have total debt of $1,296,969, including an
obligation under capital lease of $88,060. The remaining debt consists of three
bank notes used for equipment financing and a mortgage on our executive office
at 580 Marshall Street, Phillipsburg, New Jersey. Our payment commitments under
these debt instruments are comprised of interest and principal payments. We may
incur additional interest expense over the repayment period with increases in
the prime rate of interest.
On February 5, 2003, CMT renegotiated the interest rate on its equipment
loan, maturing August 2004 from a fixed rate of 8.75% to a variable interest
rate. The variable interest rate is the prime rate of interest plus 1.00% with a
minimum interest rate of 5.50%.
On February 5, 2003, Sentigen Corp. renegotiated the interest rate on its
equipment loan, maturing May 2005 from a fixed rate of 8.75% to a variable
interest rate. The variable interest rate is the prime rate of interest plus
1.00% with a minimum interest rate of 5.50%.
The interest rate on CMT's mortgage obligation maturing in August 2017 is
a variable interest rate which resets every 3 years. The interest rate reset in
February 2003 from an interest rate of 9.50% to a rate of 5.00%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information appears in a separate section of this report following
Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
25
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The following are our current executive officers, directors and key
employees:
NAME AGE POSITION
---- --- --------
EXECUTIVE OFFICERS AND DIRECTORS:
Joseph K. Pagano 58 Chairman of the Board,
Chief Executive Officer
and President
Fredrick B. Rolff 31 Chief Financial Officer
Thomas Livelli 50 Director, Chief Executive
Officer and President of
CMT
Frederick R. Adler 77 Director
Gerald Greenwald 67 Director
Joel M. Pearlberg 65 Director
Samuel A. Rozzi 57 Director
KEY EMPLOYEES:
Kevin J. Lee, PhD 40 Executive Vice President
- Research, Sentigen
Corp.
Richard Malavarca 50 Chief Operating Officer
and Vice President of CMT
JOSEPH K. PAGANO has served as our President since June 1994. Mr. Pagano
has also served as a Director since 1991, as Chairman of the Board since June
1996 and as Chief Financial Officer from June 1994 until July 1996. >From 1991
until April 1999, we engaged Mr. Pagano as a consultant, commencing an
employment relationship thereafter. Mr. Pagano has been a private investor for
more than the past five years. Mr. Pagano has been active in venture capital for
over 20 years, with investments in a wide variety of industries, including
information and technology, medical equipment, biotechnology, communications,
retailing and outsourcing. He was a founding investor in Ribi Immunochem, one of
the earliest biotechnology companies to go public and one of the first to focus
on cancer vaccines. He participated in the early round financing of Amcell
Cellular Communication, which was sold to Comcast. He was a founding investor of
NMR of America, the first MRI center business to go public and was also a
founding Shareholder and Director of Office Depot, the first office warehouse to
go public.
FREDRICK B. ROLFF, has served as our Chief Financial Officer since January
2001. Mr. Rolff joined our company in November 2000 as corporate controller.
>From April 1999 until November 2000, Mr. Rolff was Director, Financial Strategy
for Rare Medium Group, Inc., an Internet development and venture capital firm.
>From January 1998 until April 1999, Mr. Rolff attended Fordham University
Graduate School of Business, where he earned an MBA in Finance. From September
1993 until January 1998, Mr. Rolff was employed by KPMG LLP where he provided
audit and business advisory services to private and public companies in the
financial services industry. Mr. Rolff holds a BS in Accounting from Villanova
University, is a Certified Public Accountant and a candidate in the Chartered
Financial Analyst program. Mr. Rolff is the nephew of Samuel A. Rozzi.
THOMAS LIVELLI has been a Director since June 1998. He has been the
President and Chief Executive Officer of CMT since May 1997. He was also
President of CMT's predecessor company from 1987 until May 1997. From January
1986 until July 1997, Mr. Livelli was a laboratory manager at the Howard Hughes
Medical Institute at Columbia University. Prior to 1986, Mr. Livelli worked at
Merck Research Laboratories and Cistron Biotechnology, directing their
respective gene expression programs. While at Cistron, Mr. Livelli was a
visiting scholar at Columbia University. Mr. Livelli maintains a part-time
faculty appointment at Columbia University College of Physicians & Surgeons in
the Department of Neurobiology and Behavior.
26
FREDERICK R. ADLER has been a Director since May 1996. Mr. Adler is
Managing Director of Adler & Company, a venture capital management firm he
organized in 1968, and a general partner of its related investment funds. Since
January 1996, Mr. Adler has been of counsel to the law firm of Fulbright &
Jaworski L.L.P. and was a senior partner in the firm for more than five years
prior to that.
GERALD GREENWALD has been a Director since June 2001. Mr. Greenwald
recently founded Greenbriar Equity Group with Joel Beckman and Reginald Jones.
Greenbriar Equity Group has formed a strategic alliance with Berkshire Partners
to make private equity investments in the global transportation sector. Mr.
Greenwald is presently Chairman Emeritus of UAL Corporation and United Airlines,
its principal subsidiary. From 1994 until his retirement in July 1999, Mr.
Greenwald was Chairman and Chief Executive Officer of United Airlines. Mr.
Greenwald has also served as Managing Director of Dillon Read & Co., an
investment banking company, and as President of Olympia & York Developments,
Ltd., a real estate development company. His career started in the automobile
industry at Ford Motor Company, where he held several positions including
Controller, Director of Ford's operations in Europe and as President of Ford of
Venezuela. Mr. Greenwald later was employed by Chrysler Corporation, where he
held various positions, including Corporate Controller and Chief Financial
Officer, before being promoted to Vice Chairman, where he shared full
responsibility with the Chief Executive Officer for the operations of the
company. Mr. Greenwald graduated cum laude from Princeton University's Woodrow
Wilson School and received a masters degree in economics from Wayne State
University. Mr. Greenwald is a member of the Board of Directors of Aetna, Inc.
His term began in September 1993 and expires in April 2006. Mr. Greenwald is
also a member of the Board of Directors of Calpine Corp. His term began in July
2001 and expires in July 2003.
JOEL M. PEARLBERG has been a Director since February 2001. Mr. Pearlberg
is General Partner of Steinhardt Partners, L.P., a private hedge fund he joined
in January 1991. Mr. Pearlberg graduated from New York University with a B.S. in
Accounting and is a Certified Public Accountant. In 1962, he joined the public
accounting firm of Harry Goodkin & Co. where he rose to the position of Managing
Partner. In April 1983, he started the firm of J.M. Pearlberg & Company, a
public accounting firm specializing in investment partnerships, security
taxation and tax planning for high net worth individuals. In April 1989, he
joined HPB Associates, L.P., a private investment partnership as Controller.
SAMUEL A. ROZZI has been a Director since January 1997. He previously
served as a Director from 1991 until June 1996. Mr. Rozzi has been the President
of Corporate National Realty, Inc., a corporate real estate brokerage and
services firm, since September 1988. Mr. Rozzi is the uncle of Fredrick B.
Rolff.
KEVIN J. LEE, PHD has served as the Executive Vice President - Research
for our wholly owned subsidiary, Sentigen Corp. since March 2000. Since 1985,
Dr. Lee has been using molecular genetic techniques to study neurobiology in the
fruit fly Drosophila melanogaster and the mouse at various universities
including the University of California and the Massachusetts Institute of
Technology. When working with Drs. Lily and Yuh Nung Jan at the University of
California at San Francisco, he was involved in the cloning of the Shaker
potassium channel gene. Dr. Lee was also a pioneer in the development of
enhancer trapping, a technique that has had a profound impact on gene discovery
and analysis in Drosophila. In subsequent work with Dr. Hermann Steller at MIT,
he used these techniques to analyze the development of the visual system in the
fruit fly. Dr. Lee is a graduate of the University of Michigan and MIT, Dr. Lee
was a postdoctoral fellow and an Associate Research Scientist in the Center for
Neurobiology and Behavior at Columbia University where he worked with Dr. Thomas
Jessell. Dr. Lee was a National Science Foundation fellow at MIT and a Life
Sciences Foundation Fellow of the Howard Hughes Medical Institute at Columbia
University.
RICHARD MALAVARCA has been Vice President of CMT and its predecessor
company since 1987 and Chief Operating Officer of CMT since January 2000. Mr.
Malavarca served as a Director of ours from June 1998 to December 2000. Prior to
May 1987, Mr. Malavarca held positions with the Harvard Medical School, The
Roche Institute for Molecular Biology, Merck Research Laboratories and Cistron
Biotechnology in basic research involving developmental biology, molecular and
cell biology.
Directors are elected annually by the stockholders. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board of
Directors.
27
SCIENTIFIC CONSULTANTS
In connection with the formation of Sentigen Corp. we engaged a group of
scientists to act as consultants to Sentigen Corp. in the field of olfaction and
chemosensation. The consultants generally advise us concerning long-term
scientific planning, research and development, and also evaluate our research
programs, recommend personnel to us and advise us on specific scientific and
technical issues. None of our consultants is employed by us and they may have
commitments to, or consulting or advisory contracts with, their employers or
other entities that may conflict or compete with their obligations to us. These
consultants were issued stock options and will be compensated at the rate of
$2,500 plus out-of-pocket expenses for each formal meeting. On December 3, 2001
we restructured the consulting agreements with all but one consultant to provide
unvested stock options granted to such consultants will vest based on the sole
discretion of the Board of Directors instead of in accordance with a
pre-determined vesting schedule.
The consultants to Sentigen Corp. are:
Dr. Richard Axel Professor at Columbia University
Cornelia Bargmann, PhD Professor at the University of
California, San Francisco
Dr. Gerald M. Edelman Director of The Neurosciences Institute,
President of Neurosciences Research
Foundation, Chairman of the Department
of Neurobiology and Professor at The
Scripps Research Institute
Wendell L. Roelofs, PhD Liberty Hyde Bailey Professor of Insect
Biochemistry at Cornell University's New
York State Agricultural Experiment
Station
Leslie Vosshall, PhD Assistant Professor and Head of
Laboratory at the Rockefeller University
DR. RICHARD AXEL is a graduate of Columbia College and The Johns Hopkins
School of Medicine. In early work, Dr. Axel and his colleagues developed gene
transfer techniques that permitted the introduction of virtually any gene into
any cell, allowing analysis of gene function in vivo. These experiments in cell
transformation led to the isolation and functional analysis of the gene for the
T-cell surface protein, CD4, the cellular receptor for HIV.
More recently, Dr. Axel has been applying the techniques of molecular
biology to problems in neurobiology and his work has been largely concerned with
the molecular logic of olfactory perception. This research has provided
important insights into how the recognition of odors is translated into an
internal representation of sensory quality in the brain.
In recognition of his work in molecular genetics, Dr. Axel has received
numerous awards: the Passano Foundation Young Scientist Award, the Alan T.
Waterman Award from the National Science Foundation, the Eli Lilly Award in
Biological Chemistry, the New York Academy of Sciences Award in Biological and
Medical Sciences, the Lounsbery Award from the National Academy of Sciences, the
John Jay Award from Columbia University, and the Science Pour L'Art Award, LMVH,
Paris. Dr. Axel was the 1996 co-recipient of the Unilever Science Award, and in
1997 was the co-recipient of the Rosenstiel Award. In 1998, he received the
Bristol Meyers Squibb Award for Excellence in Neuroscience, and in 1999, the
Hamilton Medal from Columbia University. Dr. Axel is a member of the National
Academy of Sciences, and the American Academy of Arts and Sciences.
CORNELIA BARGMANN, PHD did her graduate work with Dr. Robert Weinberg at
the Whitehead Institute for Biomedical Research, where she participated in the
discovery of several human oncogenes, and her postdoctoral work with Dr. H. R.
Horvitz at MIT, where she characterized chemosensory responses of the nematode
C. elegans.
Her work focuses on olfactory signaling mechanisms and on the genetics of
behavior. Her lab's experimental approach combines behavioral approaches with
classical genetics and molecular biology. Dr. Bargmann's lab was the first to
identify an odorant receptor that recognizes a specific odor, and to demonstrate
that the loss of the receptor led to a behavioral defect in the odor response.
The lab demonstrated that the behavioral response to an odor is encoded by the
olfactory neuron, and that misexpressing an odorant receptor in an inappropriate
neuron can alter the behavioral response to the odor. In addition, the lab has
characterized the genetic
28
basis of natural behavioral variation, identifying a neuropeptide receptor as
the regulator of a social feeding response.
Dr. Bargmann has been the recipient of numerous prizes and awards for her
research, including the Charles W. Herrick Award, the W. Alden Spencer Award,
and the Takasago Award. She serves as an editor of the scientific journals Cell,
Neuron, and Genes and Development, and as a scientific advisor to the
Klingenstein Fund for Epilepsy Research, the National Institutes of Neurological
Disorders and Stroke, and the Damon Runyon-Walter Winchell Cancer Research Fund.
DR. GERALD M. EDELMAN has made significant research contributions in
biophysics, protein chemistry, immunology, cell biology, and neurobiology. His
early studies on the structure and diversity of antibodies led to the Nobel
Prize for Physiology in 1972. He then began research into the mechanisms
involved in the regulation of primary cellular processes, particularly the
control of cell growth and the development of multicellular organisms. He has
focused on cell-cell interactions in early embryonic development and in the
formation and function of the nervous system. These studies led to the discovery
of cell adhesion molecules, or CAMs, which have been found to guide the
fundamental processes by which an animal achieves its shape and form, and by
which nervous systems are built. One of the most significant insights provided
by this work is that the precursor gene for the neural cell adhesion molecule
gave rise in evolution to the entire molecular system of adaptive immunity.
Dr. Edelman has formulated a detailed theory to explain the development
and organization of higher brain functions in terms of a process known as
neuronal group selection. This theory was presented in his 1987 volume Neural
Darwinism, a widely known work. Dr. Edelman's continuing work in theoretical
neuroscience includes designing new kinds of machines, called recognition
automata, that are capable of carrying out tests of the self-consistency of the
theory of neuronal group selection and promise to shed new light on the
fundamental workings of the human brain. A new, biologically based theory of
consciousness extending the theory of neuronal group selection is presented in
his 1989 volume The Remembered Present. His most recent book, Bright Air,
Brilliant Fire, published in 1992, continues to explore the implications of
neuronal group selection and neural evolution for a modern understanding of the
mind and the brain.
Dr. Edelman was born in New York City in 1929. He earned his B.S. degree
at Ursinus College and an M.D. at the University of Pennsylvania. He spent a
year at the Johnson Foundation of Medical Physics, and after a medical house
officership at the Massachusetts General Hospital, he served as a Captain in the
Army Medical Corps. In 1960 he earned his PhD at The Rockefeller Institute (now
University). In addition to the Nobel Prize, Dr. Edelman has been the recipient
of numerous awards and honors, including many honorary degrees. He is a member
of the National Academy of Sciences, the American Philosophical Society, and
several foreign societies, including the Academy of Sciences, Institute of
France. He is author of over 450 research publications.
WENDELL L. ROELOFS, PHD obtained a B.S. in Chemistry in 1960 from Central
College in Pella, Iowa, and a PhD in Organic Chemistry in 1964 from Indiana
University. He served at the Massachusetts Institute of Technology as a
postdoctoral fellow in Chemistry and then as an Assistant Professor at Cornell
University Entomology Department's Agricultural Experiment Station, where he
currently serves as The Liberty Hyde Bailey Professor of Insect Biochemistry.
For three decades Dr. Roelofs' research efforts have led to promising
non-pesticidal, sustainable pest management technologies based on behavioral,
physiological and biochemical insect traits. Dr. Roelofs research has identified
pheromone blends of more than 50 major agricultural pests. Dr. Roelofs received
the Kenneth A. Spencer Award in Food and Agricultural Chemistry from the
American Chemical Society in February 2001. Dr. Roelofs has received numerous
other awards for his research efforts including: Alexander Humbolt Award, The
Wolf Foundation Prize in Agriculture and The National Medal of Science. He is
author or co-author of over 320 research publications.
LESLIE VOSSHALL, PHD is Assistant Professor and Head of Laboratory of
Neurogenetics and Behavior at the Rockefeller University. Her lab studies the
molecular genetics of insect olfaction. Dr. Vosshall was a postdoctoral fellow
and Associate Research Scientist at the Center for Neurobiology and Behavior at
Columbia University, where she worked with Dr. Richard Axel to identify the
Drosophila odorant receptors. She graduated with an A.B. in Biochemistry from
Columbia University, where she was a John Jay Scholar. Her Ph.D. work was
conducted at the Rockefeller University, and involved the behavior genetics of
biological rhythms. Dr. Vosshall has been named a Beckman Young Investigator, a
McKnight Fellow, and was the recipient of a National Science Foundation CAREER
award in 2000 and a Presidential Early Career Award for Scientists and Engineers
in 2001.
29
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who beneficially own more than 10 percent of a
registered class of our equity securities, file certain reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
directors, and greater than 10 percent beneficial stockholders are required by
SEC regulation to furnish us with copies of all Section 16(a) forms they file.
Based solely on our review of the copies of such forms received by us, or
representations obtained from certain reporting persons, we believe that during
the year ended December 31, 2002 all filing requirements applicable to its
officers, directors, and greater than 10 percent beneficial stockholders were
complied with.
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses the compensation awarded by us to our
Chairman of the Board and Chief Executive Officer and our most highly
compensated executive officers (including of one of our subsidiaries as
appropriate) other than our CEO who were serving as executive officers at
December 31, 2002.
LONG TERM
COMPENSATION
SECURITIES ALL
UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS (#) COMPENSATION ($)
- --------------------------- ---- ------ ----- --------------- ----------------
Joseph K. Pagano 2002 $175,000 -- -- $17,875(2)
Chairman of The Board, 2001 161,500 -- -- 1,000(2)
Chief Executive Officer and 2000 85,000 -- 200,000(1) --
President
Fredrick B. Rolff 2002 $115,000 5,750(3) -- $ 6,000(6)
Chief Financial Officer 2001 99,100 5,750(3) -- 3,000(6)
2000 10,240 324(4) 50,000(5) --
Thomas Livelli 2002 $156,658 $20,000(7) -- $ 6,000(6)
Chief Executive Officer and 2001 150,000 20,000(7) 25,000(8) 6,000(6)
President of CMT 2000 135,000 2,591(4) -- 6,000(6)
(1) On September 15, 2000, we granted Mr. Pagano an option to purchase an
aggregate of 200,000 shares of our common stock at $9.00 per share, which
expires as to 66,000 shares on September 15, 2005 and 134,000 shares on
September 15, 2010. This option vests in four equal annual installments
commencing on September 15, 2001.
(2) On November 1, 2001, Mr. Pagano was granted a $500 per month car allowance
which continued for the twelve months ended December 31, 2002. In December
2002 we purchased two term insurance policies on the life of Joseph K.
Pagano. Sentigen Holding Corp. is the beneficiary under one of the
policies in the amount of $5 million. Mr. Pagano's son is the beneficiary
under the other policy in the amount of $5 million. The first-year premium
on the policy for the benefit of Mr. Pagano's son was $11,875. See below
under "Life Insurance Policies on Chairman of the Board and Scientific
Consultant" for a description of the life insurance policies.
(3) The employees of CMT and our Chief Financial Officer were paid a bonus
based on 5% of the respective individual's annual salary. Each
individual's bonus was prorated for months of service for the years ended
December 31, 2002 and December 31, 2001.
(4) Management of CMT and our Chief Financial Officer were paid a bonus based
on CMT's pre-tax income for the year ended December 31, 2000. Each
individual's bonus was prorated for months of service for the year ended
December 31, 2000.
30
(5) On December 20, 2000, Mr. Rolff was granted an option to purchase 50,000
shares of our common stock at $6.25 per share. The option vests in five
equal annual installments commencing on December 20, 2001 and expires on
December 20, 2010.
(6) Reflects a $500 per month car allowance.
(7) Reflects Mr. Livelli's annual bonus per his employment agreement.
(8) On May 23, 2001, we granted Mr. Livelli an option to purchase 25,000
shares of our common stock at $9.00 per share, which expires on May 22,
2011. This option vests in five equal annual installments commencing on
January 1, 2002.
EMPLOYMENT AGREEMENTS
Joseph K. Pagano. On May 24, 1999, we entered into an employment agreement
with Joseph K. Pagano to serve as our Chairman of the Board, President and Chief
Executive Officer, replacing the consulting agreement that we had with Mr.
Pagano. The agreement was for an initial term of one year and automatically
renews thereafter unless notice is given by one of the parties. The employment
agreement provides for annual base compensation of $85,000. In connection with
the employment agreement, the termination date of an option to purchase 217,000
shares of our common stock previously granted to Mr. Pagano was extended an
additional three years to April 30, 2004. On September 15, 2000, we granted Mr.
Pagano an option to purchase an aggregate of 200,000 shares of our common stock
at $9.00 per share, which expires as to 66,000 shares on September 15, 2005 and
134,000 shares on September 15, 2010. This option vests in four equal annual
installments commencing on September 15, 2001. In March 2001, we increased Mr.
Pagano's annual base compensation to $175,000.
Thomas Livelli. In connection with our acquisition of CMT, we assumed an
employment agreement with Thomas Livelli pursuant to which Mr. Livelli served as
President and Chief Executive Officer of CMT through May 22, 2001. As of May 23,
2001, we entered into a new employment agreement with Mr. Livelli to serve in
the same capacity until the earlier of May 22, 2006 or the two-year anniversary
of a "change in control" (as such term is defined in the employment agreement).
The employment agreement provides for annual base compensation of $150,000, with
automatic cost of living adjustments on each one-year anniversary of the
agreement. Mr. Livelli is also entitled to participate in CMT's bonus plan,
which is based on CMT's net profits and allocated each year by the Board of
Directors. Mr. Livelli's agreement provides that his bonus shall be at least
$20,000 for each full fiscal year of employment. If such minimum bonus payment
exceeds Mr. Livelli's allocated bonus under the plan, the excess shall be
credited against any future allocated bonuses in excess of $20,000. The
employment agreement provides for Mr. Livelli's employment on a full-time basis
and contains a provision that the employee will not compete with us during the
term of the employment agreement and for a period of two years thereafter.
Pursuant to the employment agreement, we granted Mr. Livelli an option to
purchase 25,000 shares of our common stock at $9.00 per share. This option
expires on May 22, 2011 and vests in five equal annual installments commencing
on January 1, 2002. On August 1, 2002 we amended Mr. Livelli's employment
agreement to provide for an annual base salary of $165,000.
LIFE INSURANCE POLICIES ON CHAIRMAN OF THE BOARD AND SCIENTIFIC CONSULTANT
In December 2002, we purchased insurance on the lives of Joseph K. Pagano
and Richard Axel.
We purchased two term insurance policies on the life of Joseph K. Pagano,
the Chairman of the Board, Chief Executive Officer and President of our company.
Sentigen Holding Corp. is the beneficiary under one of the policies in the
amount of $5 million. Mr. Pagano's son is the beneficiary under the other policy
in the amount of $5 million. We are required to make annual premium payments of
$23,750 until December 24, 2012, at which time scheduled annual premium
increases begin. The policy is cancelable, non-participating and does not pay
dividends.
We purchased a term insurance policy on the life of Richard Axel, a
scientific consultant to us. Sentigen Holding Corp. is the beneficiary under the
policy in the amount of $10 million. We are required to make annual premium
payments of $30,785 until December 9, 2012, at which time scheduled annual
premium increases begin. The policy is cancelable, non-participating and does
not pay dividends.
31
DIRECTOR COMPENSATION
Directors receive no cash compensation for serving on the Board of
Directors or for attending Board or Committee meetings. We reimburse directors
for out-of-pocket expenses incurred in connection with attending board meetings.
Non-employee directors are eligible to be granted non-qualified stock options
under our 2000 Performance Equity Plan. Nonqualified stock options may be
exercised for up to 10 years from the date of grant at such exercise prices as
the Board of Directors may determine.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee is comprised of Frederick R. Adler and Joel
Pearlberg. Neither of these individuals served as officers of ours or of our
subsidiaries.
OPTION GRANTS
We did not grant any stock options in the fiscal year ended December 31,
2002 to our executive officers identified in the Summary Compensation table
above. The following table sets forth the fiscal year end option values of
outstanding options at December 31, 2002 and the dollar value of unexercised,
in-the-money options for our executive officers identified in the Summary
Compensation table above.
AGGREGATE FISCAL YEAR END OPTION VALUES
Number of Securities Underlying Dollar Value of Unexercised in-the-
Unexercised Options at December 31, 2002: Money Options at December 31, 2002(1):
Name Exercisable(#) Unexercisable(#) Exercisable(#) Unexercisable(#)
---- -------------- ---------------- -------------- ---------------
Joseph K. Pagano 317,000 100,000 $678,125 $ --
Fredrick B. Rolff 20,000 30,000 $ -- $ --
Thomas Livelli 5,000 20,000 $ -- $ --
(1) These values are based on the difference between the closing sale price of
our common stock on December 31, 2002 of $4.75 and the exercise prices of
the options, multiplied by the number of shares of common stock subject to
the options.
STOCK PLANS
We have two stock option plans: our 1990 Stock Option Plan and our 2000
Performance Equity Plan. We are no longer able to grant options under the 1990
plan. The 2000 plan provides for grants of options to purchase up to 2,000,000
shares of our common stock. Under the 2000 plan, we may grant options to
employees, directors, consultants, agents and other persons that we deem to be
valuable to our company or any of our subsidiaries. The 2000 plan permits our
board of directors or a stock option committee to issue incentive stock options,
as defined in Section 422 of the Internal Revenue Code, and stock options that
do not conform to the requirements of that Code section. The exercise price of
each incentive stock option may not be less than 100% of the fair market value
of our common stock at the time of grant, except that in the case of a grant to
an employee who owns 10% or more of our outstanding stock , the exercise price
may not be less than 110% of such fair market value. The exercise price of each
non-incentive stock option also may not be less than 100% of the fair market
value of our common stock at the time of grant.
Options that we have granted under our 1990 plan may not be exercised
prior to the first anniversary, or on or after the tenth anniversary of their
grant. These options may not be transferred during the lifetime of the option
holder.
32
Under our 2000 plan, our Board of Directors may award stock appreciation
rights, restricted stock, deferred stock, stock reload options and other
stock-based awards in addition to stock options. Our 2000 plan currently is
administered by our full Board of Directors. Subject to the provisions of our
option plans, the Board of Directors (or a committee of the board) has the
authority to determine the individuals to whom the stock options are to be
granted, the number of shares to be covered by each option, the option price,
the type of option, the option period, the restrictions, if any, on the exercise
of the option, the terms for the payment of the option price and other terms and
conditions. Under our 2000 plan, options covering a maximum of 200,000 shares
our common stock in the aggregate may be granted to any one holder during any
one calendar year.
At December 31, 2002, options to purchase an aggregate of 251,250 and
1,062,594 shares of our common stock were outstanding under the 1990 plan and
2000 plan, respectively.
We have also granted from time to time non-plan options and warrants to
certain officers, employees and consultants. Non-plan warrants to purchase an
aggregate of 44,810 shares of our common stock were outstanding at December 31,
2002. These warrants were issued in connection with our private placement
consummated in November 2000.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information at December 31, 2002
with respect to our equity compensation plans that provide for the issuance of
options, warrants or rights to purchase our securities.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
BE ISSUED UPON EXERCISE EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN THE FIRST COLUMN)
- ------------- ------------------- ------------------- -----------------------------
Equity Compensation Plans Approved by 1,313,844 $ 5.26 937,406
Security Holders
Equity Compensation Plans Not Approved 44,810(1) $ 6.00 0
by Security Holders
(1) In connection with a private placement which we consummated in November
2000, we issued a warrant to Mr. Theodore M. Serure to purchase 44,810
shares of our common stock as compensation for introducing to us investors
who purchased shares of our common stock in the private placement. This
warrant has an exercise price of $6.00 per share and expires November 21,
2005. The exercise price and the number of shares of common stock issuable
upon exercise of the warrant are subject to adjustment in some
circumstances including a stock dividend, recapitalization,
reorganization, merger or consolidation. However, the warrant is not
subject to adjustment for issuance of common stock at a price below the
exercise price of the warrant.
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 28, 2003 (except
as otherwise noted in the footnotes), regarding the beneficial ownership of our
common stock by: (1) each person or group known by us to own beneficially more
than five percent of the outstanding shares of our common stock; (2) each of our
directors; (iii) each of our executive officers named in the Summary
Compensation Table above; and (4) all of our directors and executive officers as
a group.
Amount and Nature Percent of Class
Name and Address of Beneficial Owner(1) of Beneficial Ownership(2) of Voting Securities(2)
------------------------------------ ----------------------- --------------------
Joseph K. Pagano 1,492,450(3) 19.1%
Frederick A. Adler 743,573(4) 9.5%
Samuel A. Rozzi 507,525 6.5%
Thomas Livelli 159,380(5) 2.0%
Joel M. Pearlberg 35,000 *
Gerald Greenwald 20,000(6) *
Frederick B. Rolff 21,000(7) *
D.H. Blair Investment 1,134,859(8) 14.5%
Banking Corp.
All directors and executive officers 2,978,928(9) 38.1%
as a groupseven persons)
* Less than 1%
(1) The address of each beneficial owner is c/o Sentigen Holding Corp. is 580
Marshall Street, Phillipsburg, NJ 08865.
(2) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934 and includes all outstanding shares of
common stock owned by the holder plus, for each person or group, any
shares of common stock that the person or the group has the right to
acquire within 60 days pursuant to options, warrants, conversion
privileges or other rights. Except as otherwise indicated, all of the
shares of common stock are owned of record and beneficially and the
persons identified have sole voting and investment power with respect
thereto. All option shares which are specifically excluded in the
footnotes below have been excluded because the portion of the options
covering such shares vests at a time that is more than 60 days from March
28, 2003.
(3) Includes (i) 25,000 shares of common stock held of record by the Joseph K.
Pagano, Jr. Trust established for Mr. Pagano's son, and (ii) 317,000
shares of common stock issuable upon exercise of options. Excludes options
to purchase up to 100,000 shares of common stock.
(4) Includes (i) 703,573 shares of common stock held by the Frederick R. Adler
Intangible Asset Management Trust of which Mr. Adler is the settlor and
beneficiary and (ii) 40,000 shares of common stock held by Mr. Adler
directly. Does not include 1,124,859 shares of common stock over which Mr.
Adler is trustee pursuant to a voting trust among us, D.H. Blair
Investment Banking Corp. and Mr. Adler. The voting trust agreement
provides that Mr. Adler will vote those shares in the same manner as the
public, on a proportionate basis, excluding the votes of our officers,
directors and greater than ten-percent stockholders. However, with respect
to a vote or consent in connection with either a "Rule 13e-3 Transaction"
(as defined in Rule 13e-3 promulgated under Securities Exchange Act of
1934) or a transaction in which stockholders are afforded appraisal rights
under Section 262 of the Delaware General Corporation Law, Mr. Adler will
vote these shares as directed D. H. Blair, or by the actual holders of the
shares.
(5) Includes 5,000 shares of common stock issuable upon exercise of options.
Excludes options to purchase 20,000 shares of common stock.
34
(6) Represents 20,000 shares of common stock issuable upon the exercise of
options.
(7) Includes 20,000 shares of common stock issuable upon exercise of options.
Excludes options to purchase 30,000 shares of common stock.
(8) J. Morton Davis is the sole stockholder of D.H. Blair Investment Banking
Corp. The amount reported includes 10,000 shares owned by Mr. Davis' wife
of which Mr. Davis disclaims beneficial ownership. The information with
respect to D.H. Blair Investment Banking Corp. and J. Morton Davis is
based upon the Schedule 13G/A, dated May 23, 2001, filed by such persons
with the Securities and Exchange Commission. All the shares beneficially
owned by D.H. Blair Investment Banking Corp. have been placed in trust,
pursuant to the trust agreement described in footnote 4. The voting trust
agreement does not limit D. H. Blair's ability to make public sales of the
shares in the open market pursuant to an effective registration statement
under the Securities Act of 1933 or pursuant to Rule 144 thereunder or to
make private sales of the shares pursuant to Section 4(1) of the
Securities Act of 1933, provided, however, that shares sold in private
sales will continue to be subject to the voting trust agreement until
certain conditions are met. In addition, D.H. Blair agreed that, during
the term of the voting trust agreement, it will not acquire additional
shares of our common stock or other securities convertible into our common
stock.
(9) Includes 362,000 shares of common stock issuable upon the exercise of
options. Excludes options to purchase 150,000 shares of common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Notes payable to Stockholders in connection with the Cell & Molecular
Technologies, Inc. Merger
At the time of our acquisition of CMT, there were loans outstanding from
CMT to five of its shareholders and a related party, in the aggregate principal
amount of $500,000, evidenced by promissory notes to each of the shareholders.
Messrs. Pagano and Adler were among these shareholders and, at the time of the
acquisition, held promissory notes in the principal amounts of $218,333 and
$112,500, respectively. These notes had a stated interest rate of 5% and an
original due date of July 14, 2002. As a result of the CMT acquisition, the
above loans' maturity dates were accelerated to May 1, 2000. During 1999, the
stockholders agreed to extend the above loans' maturity date to May 1, 2001. In
July 2001, the stockholders agreed to further extend the maturity date of the
loans until September 1, 2001, at which time we repaid principal and interest of
$603,125 to retire these obligations, in the aggregate.
Reimbursements to Mr. Pagano
The Board of Directors authorized reimbursement to Mr. Pagano for the cost
of using a private aircraft when used in company business and utilized for time
saving or privacy reasons. Reimbursement for the use of the aircraft is limited
to actual costs incurred by Mr. Pagano. The Board of Directors also determined
that reimbursement for use of the aircraft is not to exceed $120,000 for the
calendar year ending December 31, 2002. The cost limitation does not include
travel on commercial airlines. For the fiscal year ended December 31, 2002
reimbursements to Mr. Pagano for the use of private aircraft totaled $109,545.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chairman of the Board and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Company's Chairman of the Board and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) that is required to be
included in the Company's periodic filings with the Securities and Exchange
Commission. There have been no significant changes in the Company's internal
controls or, to the Company's knowledge, in other factors that could
significantly affect those internal controls subsequent to the date the Company
carried out its evaluation.
35
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits.
See Exhibit Index appearing later in this Report.
(b) Report on Form 8-K.
None.
36
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2002, 2001 and 2000
TABLE OF CONTENTS
- ----------------------------------------------------------------------------------------------------------------------
PAGE
Independent Auditors' Report for the years ended December 31, 2002 and 2001 F-2
Independent Auditors' Report for the year ended December 31, 2000 F-3
Consolidated Financial Statements
Balance Sheets
December 31, 2002 and 2001 F-4
Statements of Operations
For the Years ended December 31, 2002, 2001, 2000 F-5
Statements of Stockholders' Equity
For the Years ended December 31, 2002, 2001, 2000 F-6
Statements of Cash Flows
For the Years ended December 31, 2002, 2001, 2000 F-7
Notes to Consolidated Financial Statements F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Sentigen Holding Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Sentigen Holding
Corp. and Subsidiaries (the "Company") as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2002
and 2001, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte & Touche LLP
New York, New York
February 24, 2003
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Sentigen Holding Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Sentigen Holding
Corp. and Subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 2000, 1999 and 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sentigen Holding
Corp. and Subsidiaries as of December 31, 2000 and 1999 and the results of its
operations and its cash flows for the years ended December 31, 2000, 1999 and
1998, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Raich Ende Malter & Co. LLP
RAICH ENDE MALTER & CO. LLP
East Meadow, New York
February 16, 2001
F-3
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
------------
2002 2001
----- ----
Assets
Current Assets
Cash and cash equivalents $ 4,819,967 $ 4,889,272
Investment securities, held to maturity, at amortized cost -- 4,898,490
Investment securities, available for sale, at fair value 5,307,419
Accounts receivable - net of allowance for doubtful accounts
of $45,000 for 2002 and 2001 509,298 771,867
Unbilled services 15,400 49,245
Inventory 212,104 197,184
Accrued interest receivable 18,645 47,135
Prepaid expenses 175,716 75,254
------------ ------------
11,058,549 10,928,447
------------ ------------
Property, plant and equipment 3,535,355 2,903,450
Equipment under capital lease 95,945 --
Less: Accumulated depreciation 1,938,272 1,387,154
------------ ------------
1,693,028 1,516,296
------------ ------------
Other Assets
Security deposits 17,961 11,917
Deferred financing costs - net of accumulated amortization
of $4,116 for 2002 and $2,648 for 2001 9,544 11,012
License costs - net of accumulated amortization
of $71,272 for 2002 and $45,353 for 2001 369,353 395,272
------------ ------------
396,858 418,201
------------ ------------
Total Assets $ 13,148,435 $ 12,862,944
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt 235,234 175,702
Liability under capital lease - current portion 30,574 --
Accounts payable and accrued expenses 511,620 620,387
Customer deposits 410,507 196,613
Unearned revenue 58,850 5,750
------------ ------------
1,246,785 998,452
Liability under capital lease - long-term 57,486 --
Long-term debt - net of current maturities 973,675 914,110
------------ ------------
Total liabilities 2,277,946 1,912,562
------------ ------------
Stockholders' Equity
Preferred Stock - $.01 par value, 5,000,000 shares
authorized - none issued or outstanding -- --
Common Stock - $.01 par value, 20,000,000 shares
authorized, 7,451,044 and 7,147,324 shares
issued and outstanding in 2002 and 2001, respectively 74,511 71,474
Additional paid-in capital 12,237,896 11,812,612
Accumulated other comprehensive income 13,817 --
Accumulated deficit (1,455,735) (933,704)
------------ ------------
Total stockholders' equity 10,870,489 10,950,382
------------ ------------
Total Liabilities and Stockholders' Equity $ 13,148,435 $ 12,862,944
============ ============
See notes to consolidated financial statements.
F-4
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31,
--------------------------------
2002 2001 2000
----------- ----------- -----------
Revenues
Molecular cell science $ 4,455,239 $ 3,905,549 $ 3,025,071
Specialty media 2,662,204 2,174,649 1,704,432
Grant, National Institute of Health 100,003 -- --
----------- ----------- -----------
7,217,446 6,080,198 4,729,503
----------- ----------- -----------
Direct Costs
Molecular cell science 1,385,630 1,443,147 1,149,226
Specialty media 1,102,466 832,909 741,423
Grant, National Institute of Health 75,000 -- --
----------- ----------- -----------
2,563,096 2,276,056 1,890,649
----------- ----------- -----------
Income After Direct Costs
Molecular cell science 3,069,609 2,462,402 1,875,845
Specialty media 1,559,738 1,341,740 963,009
Grant, National Institute of Health 25,003 -- --
----------- ----------- -----------
4,654,350 3,804,142 2,838,854
----------- ----------- -----------
Operating Expenses
Selling, general and administrative 2,462,541 2,027,716 1,420,588
Research and development 902,696 1,022,490 467,567
Grant, National Institute of Health 25,003 -- --
Corporate overhead 1,085,304 1,219,476 698,601
Stock based compensation 222,437 73,146 213,729
Depreciation and amortization 578,505 484,126 282,753
----------- ----------- -----------
5,276,486 4,826,954 3,083,238
----------- ----------- -----------
Loss From Operations (622,136) (1,022,812) (244,384)
Interest income 340,721 611,737 310,138
Interest expense 104,765 103,392 118,147
----------- ----------- -----------
Interest income, net of interest expense 235,956 508,345 191,991
----------- ----------- -----------
Loss before Provision for Income Taxes (386,180) (514,467) (52,393)
Provision for Income Taxes 135,851 133,122 74,322
----------- ----------- -----------
Net Loss (522,031) (647,589) (126,715)
----------- ----------- -----------
Other comprehensive income (loss)
Unrealized gain on investments 13,817 -- --
----------- ----------- -----------
Comprehensive loss $ (508,214) $ (647,589) $ (126,715)
=========== =========== ===========
Net Loss per share
Basic and diluted $ (0.07) $ (0.09) $ (0.02)
=========== =========== ===========
Weighted average shares outstanding
Basic and diluted 7,390,300 7,101,832 6,297,463
=========== =========== ===========
See notes to consolidated financial statements.
F-5
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Accumulated
Common Stock Additional other
------------ Paid-in comprehensive Accumulated
Shares Amount Capital income Deficit Total
------ ------ ------- ------ ------- -----
Balance - January 1, 2000 6,078,700 $ 60,787 $ 5,832,704 $ -- $ (159,400) $ 5,734,091
Stock options exercised 2,980 30 2,950 -- -- 2,980
Shares issued in connection
with license agreement 75,000 750 374,250 -- -- 375,000
Shares issued in the private
placement 863,834 8,638 5,144,076 -- -- 5,152,714
Compensation for stock options
issued to the Scientific
Advisory Board -- -- 213,729 -- -- 213,729
Net loss -- -- -- -- (126,715) (126,715)
--------- --------- ------------ ------- ----------- -----------
Balance - December 31, 2000 7,020,514 $ 70,205 $ 11,567,709 $ -- $ (286,115) $11,351,799
Stock options exercised 126,810 1,269 106,132 -- -- 107,401
Compensation for stock options
issued to the Scientific
Advisory Board -- -- 73,146 -- -- 73,146
Adjustment to value of license
agreement -- -- 65,625 -- -- 65,625
Net loss -- -- -- -- (647,589) (647,589)
--------- --------- ------------ ------- ----------- -----------
Balance - December 31, 2001 7,147,324 $ 71,474 $ 11,812,612 $ -- $ (933,704) $10,950,382
Stock options exercised 303,720 3,037 202,847 -- -- 205,884
Compensation for stock options
issued to the Scientific
Advisory Board -- -- 222,437 -- -- 222,437
Unrealized gain on investments -- -- -- 13,817 -- 13,817
Net loss -- -- -- -- (522,031) (522,031)
--------- --------- ------------ ------- ----------- -----------
Balance - December 31, 2002 7,451,044 $ 74,511 $ 12,237,896 $13,817 $(1,455,735) $10,870,489
========= ========= ============ ======= =========== ===========
See notes to consolidated financial statements.
F-6
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
------------
2002 2001 2000
---- ---- ----
Cash Flows from Operating Activities
Net Loss $ (522,031) $ (647,589) $ (126,715)
Adjustments to reconcile net loss
to cash provided by (used in) operating
activities:
Depreciation and amortization 578,505 484,126 282,753
Accrued interest on stockholder loans -- 22,676 48,461
Stock based compensation 222,437 73,146 213,729
(Increase) decrease in:
Accrued interest receivable 28,490 37,324 (44,875)
Accounts receivable, net of allowance 262,569 (137,029) (62,763)
Unbilled services 33,845 110,368 (49,804)
Inventory (14,920) (23,930) (21,438)
Prepaid expenses (100,462) (40,319) (19,967)
Security deposits (6,044) (10,917) --
Increase (decrease) in:
Accounts payable and accrued expenses (108,767) 227,815 77,139
Customer deposits 213,894 (42,729) 95,500
Unearned revenue 53,100 (78,009) 29,299
------------ ------------ ------------
Cash provided by (used in) operating activities 640,616 (25,067) 421,319
------------ ------------ ------------
Cash Flows from Investing Activities
Acquisitions of property, plant and equipment (631,905) (705,108) (439,052)
Purchase of investment securities (5,300,112) (21,121) (10,102,488)
Maturities of investment securities 4,905,000 5,540,000 5,000,000
------------ ------------ ------------
Cash (used in) provided by investing activities (1,027,017) 4,813,771 (5,541,540)
------------ ------------ ------------
Cash Flows from Financing Activities
Retirement of stockholder loans -- (603,125) --
Payment of deferred financing costs -- (3,079) (3,000)
Proceeds from issuance of long term debt 315,663 464,337 240,000
Principal payments on long term debt (196,566) (146,513) (116,880)
Payments on capital lease obligation (7,885) -- --
Cash received from stock options exercised 205,884 107,401 2,980
Net proceeds received from private placement -- -- 5,152,714
------------ ------------ ------------
Cash provided by (used in) financing activities 317,096 (180,979) 5,275,814
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents (69,305) 4,607,725 155,593
Cash and cash equivalents - beginning of period 4,889,272 281,547 125,954
------------ ------------ ------------
Cash and cash equivalents - end of period $ 4,819,967 $ 4,889,272 $ 281,547
============ ============ ============
See notes to consolidated financial statements.
F-7
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the Years Ended
December 31,
------------
2002 2001 2000
---- ---- ----
Supplemental Disclosures of Cash Flow Information
Cash paid during the year:
Interest $ 101,307 $ 80,716 $ 69,686
Income taxes $ 174,987 $ 96,125 $ 67,185
Non-cash investing and financing activities:
Investing activities:
Equipment acquired under capital lease $ (95,945) $ -- $ --
Financing activities:
Debt incurred under capital lease $ 95,945 $ -- $ --
See notes to consolidated financial statements.
F-8
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000
1. ORGANIZATION OF THE COMPANY AND NATURE OF ITS OPERATIONS
We are a holding company conducting business through two wholly owned
operating subsidiaries, Cell & Molecular Technologies, Inc. (CMT) and Sentigen
Corp. CMT is comprised of a service organization that provides contract research
and development (R&D) services, and a products organization that provides cell
culture media, reagents and other research products to companies engaged in the
drug discovery process. Sentigen Corp. is engaged in scientific research to
develop assays for the screening of G Protein-Coupled Receptors, or GPCRs. The
assays have applications in drug discovery, micro-array based detection
technologies and environmentally sound pest management solutions for
agricultural and human health vectors.
CMT operates through two divisions -- Molecular Cell Science (MCS) and
Specialty Media (SM). MCS provides contract R&D services and High Throughput
Screening applications and services to companies engaged in the drug discovery
process. SM develops, manufactures, markets and sells specialty cell culture
media, reagents and other research products.
The operations of Sentigen Corp. are reflected as research and development
expenses in our consolidated statements of operations. Sentigen Corp's
operations, since its inception in February 2000, consist entirely of research
and development.
The expenses of Sentigen Holding Corp. are reflected as "Corporate
overhead" expenses in our consolidated statements of operations and include the
following major classes: (1) compensation and employee benefits cost for our
chairman of the board, chief financial officer, and administrative assistant,
(2) professional fees for legal and accounting services, (3) office rental,
utilities and communication costs, (4) stock market listing fees and (5)
business travel expenses.
We were incorporated under the laws of the State of Delaware in May 1990
and, after having engaged in the acquisition and operation of different business
entities subsequent to our initial public offering in August 1990, we commenced
our current business operations when we acquired CMT in May 1998. CMT was
incorporated in May 1997 to acquire all of the outstanding stock of Specialty
Media, Inc. and Molecular Cell Science, Inc., two entities operating in the
biotechnology and pharmaceutical industries since 1987 and 1991, respectively.
Sentigen Corp. was formed on February 16, 2000. We changed our name to Sentigen
Holding Corp. on June 23, 2000. On January 9, 2002, our common stock began
trading on The Nasdaq SmallCap Market under the symbol SGHL.
2. Summary of Significant Accounting Policies
a. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Sentigen Holding Corp. and its wholly owned
subsidiaries, after elimination of all intercompany accounts and
transactions.
b. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include liquid
investments with maturities of three months or less at the time of
purchase.
c. INVESTMENT SECURITIES - Investment securities consist of U.S. Treasury
Notes. All investment securities purchased in 2002 are defined as
available for sale under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" and, as such, have been
reported at fair value. Quoted market prices are used to determine
fair value. Investment securities purchased before 2002 are defined as
held-to-maturity under the provisions of SFAS No. 115 and, as such,
have been reported at amortized cost.
d. INVENTORY - Inventory, consisting of cell culture media, reagents and
related packaging and raw materials for the SM division, is stated at
the lower of cost or market. We use the FIFO (first-in, first-out)
method for inventory accounting.
e. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
stated at cost. Depreciation is provided on both straight-line and
accelerated methods over the estimated useful lives of the assets,
which range from three to forty years. Amortization of leasehold
improvements is provided on the straight-line basis over the lesser of
the estimated useful life of the asset or the remaining lease term.
F-9
Repairs and maintenance, which do not extend the useful lives of the
related assets, are expensed as incurred.
f. LICENSE AND DEFERRED COSTS - License costs are amortized over 17 years
on a straight line basis and result from our exclusive licensing
agreement with the Trustees of Columbia University (See Note 6).
Deferred financing costs were incurred in connection with our various
loan facilities (See Note 9). Deferred financing costs are amortized
on a straight-line basis over the duration of the related loan.
g. IMPAIRMENT - We review intangible and long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be fully recoverable. A review for
impairment includes comparing the carrying value of an asset to an
estimate of the undiscounted net future cash inflows over the life of
the asset. An asset is considered to be impaired when the carrying
value exceeds the calculation of the undiscounted net future cash
inflows or fair market value. An impairment loss is defined as the
amount of the excess of the carrying value over the fair market value
of the asset. We believe none of our intangible and long-lived assets
are impaired as of December 31, 2002.
h. REVENUE RECOGNITION - We record revenue from fixed-price contracts
extending over more than one accounting period on a
percentage-of-completion basis. Percentage-of-completion is determined
based on the proportion of completed costs to total anticipated costs
on each contract. If we determine that a loss will result from the
performance of a contract, the entire amount of estimated loss is
charged against income in the period in which the determination is
made. In general, prerequisites for billings are established by
contractual provisions including predetermined payment schedules, the
achievement of contract milestones or submission of appropriate
billing detail. Unbilled services arise when services have been
rendered but clients have not been billed. Similarly, unearned revenue
represents amounts billed in excess of revenue recognized. Revenues
from product sales are recognized upon transfer of title to the
product, which generally occurs upon shipment to the customer.
i. RESEARCH AND DEVELOPMENT COSTS - We expense research and development
costs as such costs are incurred. The operations of Sentigen Corp. are
reflected as research and development expenses in our consolidated
statements of operations. Sentigen Corp's operations, since its
inception in February 2000, consist entirely of research and
development. Total expenditures on research and development for 2002,
2001 and 2000, including research costs reimbursed under grants
received from the National Institute of Health (See Note 7), were
$1,020,036, $1,247,072 and $690,026, respectively.
j. CORPORATE OVERHEAD COSTS - We expense corporate overhead costs as such
costs are incurred. The operations of the holding company are
reflected as corporate overhead expenses in our consolidated
statements of operations and include the following major classes: (1)
compensation and employee benefits cost for our chairman of the board,
chief financial officer, and administrative assistant, (2)
professional fees for legal and accounting services, (3) office
rental, utilities and communication costs, (4) stock market listing
fees and (5) business travel expenses.
k. RESEARCH GRANTS - CMT was engaged in research and development
activities under grant from the National Institute of Health (NIH).
The research expenses incurred under the grants were exactly offset by
the cash received under the grants. This activity is not recorded in
the consolidated statements of operations as it was a reimbursement of
amounts passed through to sub-recipients (See Note 7). In 2002,
Sentigen Corp. was awarded a NIH Federal Phase I Grant. The grant
covers the direct costs of a specific project within Sentigen Corp.'s
overall research program as well as an allocation for the facilities
and administrative costs of Sentigen Corp. related to the project. The
project funded under this grant was completed by Sentigen Corp. and
not a sub-recipient (See Note 7); therefore; the receipt of funds and
the project costs were recorded in our consolidated statements of
operations.
l. INCOME TAXES - We account for certain income and expense items
differently for financial reporting and income tax purposes. Deferred
tax assets and liabilities are determined based on the difference
between the financial statement and income tax basis of assets and
liabilities and the tax effect of net operating loss and tax credit
carryforwards applying the enacted statutory tax rates in effect for
the year in which the differences are expected to reverse.
m. ADVERTISING, MARKETING AND SALES COSTS - We expense all costs relating
to advertising, marketing and sales as such costs are incurred.
Advertising, marketing and sales costs during 2002, 2001 and 2000 were
$336,283, $213,942 and $111,001, respectively.
n. ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires our management to
make estimates and assumptions that affect the reported
F-10
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
o. EARNINGS PER SHARE - The accompanying financial statements include
earnings per share calculated as required by SFAS No. 128 "Earnings
Per Share" which replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Basic
earnings per share is calculated by dividing net loss by the weighted
average number of shares of common stock outstanding. Diluted earnings
per share include the effects of securities convertible into common
stock, consisting of stock options, to the extent such conversion
would be dilutive. Potential common stock was excluded from the
computation for the years ended December 31, 2002, 2001 and 2000
because of SFAS No. 128 which prohibits adjusting the denominator of
diluted EPS for additional potential common shares when a net loss
from continuing operations is reported.
p. STOCK-BASED COMPENSATION - SFAS No. 123 "Accounting for Stock-Based
Compensation", encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair
value. We continue to account for stock-based compensation to
employees using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". APB No. 25 requires no recognition of compensation expense
for the stock-based compensation arrangements provided by us where the
exercise price is equal to the market price at the date of the grants.
Options issued to non-employees are valued at the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. The expense for options
issued to non-employees is recorded as stock based compensation in our
consolidated statements of operations.
q. SEGMENTS - The accompanying financial statements include segment
disclosure as required by SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information," which expands and modifies
disclosures but has no impact on our consolidated financial position
or results of operations or cash flows. Our reportable operating
segments are: MCS, SM and Sentigen Corp.
r. RECLASSIFICATION - Certain amounts from the prior years have been
reclassified to conform to the current year's presentation. These
reclassifications have no effect on our previously reported net
losses.
s. NEW ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 141, "Business Combinations."
This standard eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001 and addresses the
accounting for intangible assets and goodwill acquired in a business
combination. The adoption of SFAS No. 141 did not have a material
effect on our financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible
Assets," which revises the accounting for purchased goodwill and
intangible assets. Under SFAS No. 142, goodwill and intangible assets
with indefinite lives are no longer amortized, but are tested for
impairment annually or in the event of an impairment indicator. SFAS
No. 142 was effective January 1, 2002. The adoption of SFAS No. 142
did not have a material effect on our financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The standard requires entities to record the
fair value of a liability for an asset retirement obligation in the
period in which it is incurred. SFAS No. 143 is effective for all
fiscal years beginning after June 15, 2002. We do not expect SFAS No.
143 to 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 or Disposal of Long-Lived Assets." SFAS No. 144 replaces
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or
discontinued operations. Therefore, discontinued operations will no
longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS No. 144 also
broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from
the rest of the entity and that
F-11
will be eliminated from the ongoing operations of their entity in a
disposal transaction. SFAS No. 144 was effective January 1, 2002. The
adoption of SFAS No. 144 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 4, 44 and 64, Amendment of FASB Statement 13, and Technical
Corrections." SFAS No. 145 is effective January 1, 2003. Among other
things, SFAS No. 145 requires that gains or losses on the
extinguishment of debt will generally be required to be reported as a
component of income from continuing operations and will no longer be
classified as an extraordinary item. The Company does not expect the
provisions of SFAS No. 145 to have a material impact on its financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF)
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
that a liability be recorded for such activities when the liability is
actually incurred, and unlike EITF 94-3, the existence of a plan does
not necessarily support the basis for the recording of a liability.
SFAS No. 146 is effective for all exit or disposal activities
initiated after December 31, 2002. The Company will be required to
adopt this SFAS on such activities beginning January 1, 2003.
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 amends SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for the year ended December 31,
2002 and the appropriate disclosures have been included herein.
The following table reconciles net loss and diluted earnings per share
(EPS), as reported, to pro-forma net loss and diluted EPS, as if the
Company had expensed the grant date fair value of stock options as
permitted by SFAS No. 123, as amended by SFAS No. 148, since it
permits alternative methods of adoption.
2002 2001 2000
---- ---- ----
Net Income (Loss):
As reported $(522,031) $(647,589) $(126,715)
Pro-forma expense as if
stock options were charged
against net loss (192,051) (236,780) (206,326)
--------- --------- ---------
Pro-forma net loss using the fair
value method $(714,082) $(884,369) $(333,041)
========= ========= =========
Diluted EPS:
As reported $ (0.07) $ (0.09) $ (0.02)
Pro-forma using the fair
value method $ (0.10) $ (0.12) $ (0.05)
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting And Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN No. 45
clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of this interpretation are applicable
on a prospective basis to guarantees
F-12
issued or modified after December 31, 2002. The interpretation also
requires enhanced and additional disclosures of guarantees in
financial statements ending after December 15, 2002. In the normal
course of business, the Company does not issue guarantees to
third-parties; accordingly, this interpretation does not effect the
disclosures included herein.
In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB 51." FIN No. 46
defines when a business enterprise must consolidate a variable
interest entity. This interpretation applies immediately to variable
interest entities created after January 31, 2003. It applies in the
first fiscal year or interim period beginning after June 15, 2003, to
entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company has determined that it
is not reasonably possible that it will be required to consolidate or
disclose information about a variable interest entity upon the
effective date of this interpretation.
3. INVENTORY
Inventory of the SM segment consists of the following:
December 31,
------------
2002 2001
---- ----
Finished Goods $ 123,464 $ 108,373
Packaging Materials 30,093 28,510
Raw Materials 58,547 60,301
---------- ----------
Total Inventory $ 212,104 $ 197,184
========== ==========
4. INVESTMENT SECURITIES
At December 31, 2002 and 2001, our investment securities consisted entirely
of U.S. Treasury Notes. U.S. Treasury Notes purchased prior to 2002 were
classified as held-to-maturity, and were reflected in our balance sheet at
amortized cost. The U.S. Treasury Note purchased in 2002 was classified as
available for sale, and is reflected on our balance sheet at fair value. Fair
values are determined by quoted market prices.
Amortized Cost Fair Value Unrealized Gain
-------------- ---------- ---------------
December 31, 2002
Investment Securities - current
U.S. Treasury Note - face value of
$5,250,000 - interest at 2.125% - due
October 31, 2004 $ 5,293,602 $ 5,307,419 $ 13,817
------------ ------------ ------------
Total Investment Securities $ 5,293,602 $ 5,307,419 $ 13,817
============ ============ ============
December 31, 2001
Investment Securities - current
U.S. Treasury Note - face value of
$4,905,000 - interest at 5.750% - due
October 31, 2002 $ 4,898,490 $ 5,058,281 $ 159,791
------------ ------------ ------------
Total Investment Securities $ 4,898,490 $ 5,058,281 $ 159,791
============ ============ ============
F-13
On January 22, 2003 we sold the 2.125%, $5,250,000 face value U.S. Treasury
Note due October 31, 2004. We received gross proceeds of $5,319,871 of which
$25,574 represented accrued interest. We recognized a gain of approximately
$2,700 on the sale. The proceeds are currently invested in 90-day U.S. Treasury
Bills.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31,
------------
2002 2001
---- ----
Land $ 90,000 $ 90,000
Building and Improvements 702,839 499,250
Machinery and Equipment 2,500,040 2,187,050
Equipment under capital lease 95,945 --
Furniture and Fixtures 242,476 127,150
---------- ----------
Total Property, Plant and Equipment 3,631,300 2,903,450
Less: Accumulated Depreciation 1,938,272 1,387,154
---------- ----------
Property, Plant and Equipment - net $1,693,028 $1,516,296
========== ==========
Depreciation expense charged to operations was $551,118, $448,448 and
$271,047 for the years ended December 31, 2002, 2001 and 2000 respectively.
6. EXCLUSIVE LICENSE AGREEMENT
On April 10, 2000, Sentigen Corp. entered into a license agreement with The
Trustees of the Columbia University in New York for an exclusive worldwide right
to Columbia's patent applications and other proprietary rights in the areas of
insect chemosensation and olfaction. Our licensing agreement with The Trustees
of the Columbia University in New York required us to contribute a minimum of
$1,000,000 into Sentigen Corp. within one year of the date of the agreement (by
April 2001) or we must have been involved in active negotiations to raise
$1,000,000 in additional funding. We satisfied this provision through the
consummation of our private placement in November 2000 in which we sold 863,834
shares of our common stock at $6.00 per share for aggregate gross proceeds of
$5,183,004.
Another provision of the agreement calls for a minimum of $50,000 per six
month period or $100,000 per annual period to be spent on bona fide research and
development of the patents and licenses subject to the agreement from the second
through the fourth years of the agreement (April 2002 through April 2004) or we
must be involved in active negotiation to raise $1,000,000 in additional
funding. We satisfied this provision through April 2002 and 2003 (the second and
third fiscal years of the license agreement). We believe that we have enough
capital resources to meet the financial requirements of this provision for the
agreement years 2004 and beyond.
In consideration of the license agreement, Columbia was issued 75,000
shares of our stock and will receive royalties of 1% of the net sales of any
licensed products or services. The value of this license agreement is recorded
as license costs, net of accumulated amortization on our consolidated balance
sheet. The value of the license reflects the closing share price of our common
stock on April 10, 2000.
There can be no assurance that the technology involved in the research and
development activities related to the licensing agreement with The Trustees of
Columbia University will prove to be productive. In the event we decide to
terminate such activities, there will be associated costs to us, such as payment
to employees and expenses
F-14
related to the closing of our facility at 3960 Broadway, New York, New York. No
provisions have been made for such possible further expense.
7. RESEARCH GRANTS
Cell & Molecular Technologies, Inc. The SM division, in collaboration with
Harvard University, is the recipient of an NIH Federal Phase II Grant in the
amount of $757,532. The research performed under this grant originally covered
the period from July 1998 through August 2001, but was extended through March
2002. The MCS division, in collaboration with The University of Alabama, is the
recipient of an NIH Federal Phase I Grant in the amount of $100,270. The work
performed under this grant covered the period from June 1999 to May 2000.
For the years ended December 31, 2002, 2001 and 2000 research expenses
incurred were exactly offset by the cash received under the grants. This
activity is not recorded in the consolidated statements of operations as it is a
reimbursement of amounts passed through to sub recipients. The amounts received
and expended are as follows:
December 31,
------------
2002 2001 2000
---- ---- ----
SM NIH funding received $ 17,337 $ 224,582 $ 177,846
MCS NIH funding received -- -- 44,613
--------- --------- ---------
Total NIH funding received 17,337 224,582 222,459
NIH research expenses incurred by sub recipients (17,337) (224,582) (222,459)
--------- --------- ---------
Net effect on the Company's
Statements of Operations for the
years then ended $ -- $ -- $ --
========= ========= =========
Sentigen Corp. Sentigen Corp. is the recipient of an NIH Federal Phase I
Grant in the amount of $100,003. The term of the grant is from September 1, 2002
through February 28, 2003. The grant covers the direct costs of a specific
project within Sentigen Corp.'s overall research program as well as an
allocation for facilities and administrative costs of Sentigen Corp. related to
the project. As of December 31, 2002, Sentigen Corp., completed the research
project covered under the grant and all funds had been received from the NIH.
The activity on this grant is reflected in our consolidated statements of
operations as "Grant, National Institute of Health." The direct costs of the
project as stipulated in the grant award were $75,000 while the facilities and
administrative costs as stipulated in the grant award were $25,003. Had the
grant not been awarded these costs would have been reflected as research and
development costs in the consolidated statements of operations.
8. RETIREMENT PLAN
During 1999, we adopted a 401(k) retirement plan for all eligible employees
who meet certain eligibility criteria such as age, term of employment, etc.
Eligible employees may elect to contribute to the plan a portion of their gross
salary (subject to federal tax law). We do not make matching contributions to
the plan.
F-15
9. LONG-TERM DEBT
Long-term debt consists of the following:
Unpaid Principal at
December 31,
Face Interest
Company Maturity Value Rate Description and Covenants 2002 2001
- ------- -------- ----- ---- ------------------------- ---- ----
Mortgage Note. Secured by our
February 9.50% building at 580 Marshall St. $ 251,732 $ 259,629
CMT 2017 $287,600 (variable) Phillipsburg, New Jersey. The
interest rate resets every 3 years
and reset in February 2003 to a
rate of 5.00%.
Equipment Loan. Guaranteed by two
June 10.00% stockholders and a stockholders'
CMT 2002 $100,000 (fixed) personal residence. -- 12,539
Equipment Loan. Guaranteed by
August 8.75% Sentigen Holding Corp. Guarantor
CMT 2004 $350,000 (fixed) required to maintain unencumbered 124,931 197,020
liquid assets of two-times the
outstanding loan balance.
Equipment Loan. Guaranteed by
May 7.40% Sentigen Holding Corp. CMT is
CMT 2009 $720,000 (fixed) required to maintain cash-flow 673,548 404,337
equal to 1.25 to 1.00 times annual
debt service as well as maintain a
debt to equity ratio of 3 to 1.
Equipment Loan. Guaranteed by
Sentigen May 8.75% Sentigen Holding Corp. Guarantor
Corp. 2005 $300,000 (fixed) required to maintain unencumbered 158,698 216,287
liquid assets of two-times the ---------- ----------
outstanding loan balance.
$1,208,909 $1,089,812
Less: Current Maturities (235,234) (175,702)
---------- ----------
Long-Term Debt - Net $ 973,675 $ 914,110
========== ==========
Principal maturities of long-term debt over the next five years are as
follows:
December 31, 2003 $ 235,234
2004 217,267
2005 136,349
2006 118,209
2007 127,538
Thereafter 374,312
-----------
$ 1,208,909
F-16
On February 5, 2003, CMT renegotiated the interest rate on its equipment
loan, maturing August 2004 from a fixed rate of 8.75% to a variable interest
rate. The variable interest rate is the prime rate of interest plus 1.00% with a
minimum interest rate of 5.50%.
On February 5, 2003, Sentigen Corp. renegotiated the interest rate on its
equipment loan, maturing May 2005 from a fixed rate of 8.75% to a variable
interest rate. The variable interest rate is the prime rate of interest plus
1.00% with a minimum interest rate of 5.50%.
The company was in compliance with all debt covenants as of December 31,
2002 and 2001.
10. STOCKHOLDER LOANS
Five stockholders and one of their related parties advanced $500,000, in
aggregate, to CMT during 1997. The promissory notes provided for 5% simple
interest, payable at maturity, and had an original due date of July 14, 2002. As
the promissory notes provided for a below market rate of interest, additional
interest was imputed on the notes to approximate our current available financing
rate of 10%.
During 1999, the stockholders agreed to accelerate the above loans'
maturity date to May 1, 2001. The imputed interest was adjusted as a result of
the maturity date acceleration thereby increasing the discount by $18,694. This
amount was added to additional paid-in capital as an adjustment to the original
$120,199 (as adjusted by $58,909 in 1998) credited to additional paid-in capital
in 1997, which related to the purchase of stock.
In July 2001, the stockholders agreed to extend the maturity date of the
loans until September 1, 2001 under the existing terms of the loans. On
September 1, 2001 CMT repaid principal and interest of $603,125 to retire these
obligations.
11. COMMITMENTS
Employment Agreement with Thomas J. Livelli. In connection with our
acquisition of CMT, we assumed an employment agreement with Thomas Livelli
pursuant to which Mr. Livelli served as President and Chief Executive Officer of
CMT through May 22, 2001. As of May 23, 2001, we entered into a new employment
agreement with Mr. Livelli to serve in the same capacity until the earlier of
May 22, 2006 or the two-year anniversary of a "change in control" (as such term
is defined in the employment agreement). The employment agreement provides for
an annual base compensation of $150,000, with automatic cost of living
adjustments on each one-year anniversary of the agreement. Mr. Livelli is also
entitled to participate in CMT's bonus plan, which is based on CMT's net profits
and allocated each year by the Board of Directors. Mr. Livelli's agreement
provides that his bonus shall be at least $20,000 for each full fiscal year of
employment. If such minimum bonus payment exceeds Mr. Livelli's allocated bonus
under the plan, the excess shall be credited against any future allocated
bonuses in excess of $20,000. The employment agreement provides for Mr.
Livelli's employment on a full-time basis and contains a provision that the
employee will not compete with us during the term of the employment agreement
and for a period of two years thereafter. Pursuant to the employment agreement,
we granted Mr. Livelli an option to purchase 25,000 shares of our common stock
at $9.00 per share. This option expires on May 22, 2011 and vests in five equal
annual installments commencing on January 1, 2002. On August 1, 2002 we amended
Mr. Livelli's employment agreement, the amended agreement to provide for an
annual base salary of $165,000.
Employment Agreement with Joseph K. Pagano. On May 24, 1999, we entered
into an employment agreement with Joseph K. Pagano to serve as our Chairman of
the Board, Chief Executive Officer and President, replacing the consulting
agreement that we had with Mr. Pagano. The agreement was for an initial term of
one year and automatically renews thereafter unless notice is given by one of
the parties. The employment agreement provides for annual base compensation of
$85,000. In connection with the employment agreement, the termination date of an
option to purchase 217,000 shares of our common stock previously granted to Mr.
Pagano was extended an additional three years to April 30, 2004. In March 2001
we increased Mr. Pagano's annual base compensation to $175,000.
F-17
In connection with the 1999 employment agreement, the termination date of a
stock option previously granted to Mr. Pagano under our 1990 Stock Option Plan
for the purchase of 217,000 shares of our common stock was extended an
additional three years to May 24, 2004. In accordance with FIN No. 44, the
additional compensation recognized as of the modification date, if we had
accounted for its stock option plans under the fair value method, would have
been $45,570, which was estimated using the Black-Scholes pricing model, with
the following weighted average assumptions:
Before After
Modification Modification
------------ ------------
Expected life of options 2 years 5 years
Risk-free interest rate 5% 5%
Volatility of stock 158% 158%
Expected dividend yield -- --
On September 15, 2000, we granted Mr. Pagano an option to purchase an
aggregate of 200,000 shares of our common stock at $9.00 per sharewhich expires
as to 66,000 shares on September 15, 2005 and 134,000 shares on September 15,
2010. The option vests in four equal annual installments commencing on September
15, 2001.
Life Insurance for Joseph K. Pagano. In December 2002, we purchased two
term insurance policies on the life of Joseph K. Pagano, the Chairman of the
Board, Chief Executive Officer and President of our company. Sentigen Holding
Corp. is the beneficiary under one of the policies in the amount of $5 million.
Mr. Pagano's son is the beneficiary under the other policy in the amount of $5
million. We are required to make annual premium payments of $23,750 until
December 24, 2012, at which time scheduled annual premium increases begin. The
policy is cancelable, non-participating and does not pay dividends.
Life Insurance for Richard Axel. In December 2002, we purchased a term
insurance policy on the life of Richard Axel, a scientific consultant to us.
Sentigen Holding Corp. is the beneficiary under the policy in the amount of $10
million. We are required to make annual premium payments of $30,785 until
December 9, 2012, at which time scheduled annual premium increases begin. The
policy is cancelable, non-participating and does not pay dividends.
F-18
12. LEASE COMMITMENTS
Operating Leases. Lease commitments classified as operating-type leases
consist primarily of facilities, office equipment and certain laboratory
equipment. Rental expenses are as follows:
Rental Expense
Company Purpose and Terms for the years ended
- ------- ----------------- -------------------
Properties: 2002 2001 2000
----------- ---- ---- ----
CMT In November 2001, CMT signed a 44-month
lease for approximately 11,000 square
feet of laboratory and office/warehouse
space at 445 Marshall Street,
Phillipsburg, New Jersey. The MCS
division occupies this facility. $144,793 -- --
Sentigen In May 2000, Sentigen Corp. leased
Corp. laboratory space at 3960 Broadway, New
York, New York, 10032. The lease expired
in April 2002, and we are currently
operating on a month-to-month basis. In
June 2001, we leased additional
administrative space at this same
location, this lease terminated on June
30, 2002. 82,440 84,173 44,074
Sentigen We lease approximately 980 square feet
Holding of administrative office space for use
Corp. by the Board of Directors and Executive
Officers of our Company at 434 East
Cooper Street, Aspen, Colorado. The
lease expires April 30, 2003; however,
we intend to renew this lease, should
the lease terms be acceptable to us. 38,654 36,492 32,929
CMT In March 2001, CMT signed a 3-year lease
for approximately 3,000 square feet of
laboratory space at 418 Industrial
Drive, North Wales, Pennsylvania. This
space is accommodates the high
throughput screening applications and
assay development services group. 18,000 13,500 --
CMT CMT leased approximately 750 square feet
of administrative office space at 445
Marshall Street, Phillipsburg, New
Jersey. We leased this property on a
month-to-month basis, and the lease
terminated on December 31, 2001. -- 12,000 12,000
Equipment:
CMT CMT leases certain laboratory and office
equipment under operating leases. 17,294 2,252 8,039
Sentigen Sentigen Corp. leases office equipment
Corp. under operating leases. 4,195 1,162 --
-------- -------- --------
Total Rental Expense $305,376 $149,579 $ 97,042
======== ======== ========
F-19
Capital Leases. In October 2002 CMT leased equipment for use in the
performance of certain contracts in the MCS division. The lease qualified for
treatment as a capital lease for accounting purposes. At the inception of the
lease CMT recorded the equipment on its balance sheet and an offsetting capital
lease liability in the amount of $95,945, the fair value of the equipment (the
dealer-quoted invoice price of the equipment was used to determine fair value).
The equipment will be depreciated straight-line through the conclusion of the
lease in September 2005. Through December 31, 2002 rental payments of $9,017
were made under this lease agreement. Of those payments, $7,885 was applied to
the capital lease liability while $1,132 was charged to interest expense. As of
December 31, 2002 the total lease obligation amounted to $88,060 and the net
book value of the equipment is $87,950 (net of accumulated depreciation of
$7,995).
The estimated future minimum rental payments under capital and
operating-type leases over the next three years are as follows:
Capital Operating
------- ---------
For the year ending December 31, 2003 $ 36,067 $228,315
2004 36,067 204,347
2005 27,050 147,764
-------- --------
Minimum rental payments $ 99,184 $580,426
========
Less interest-portion of rental payments (11,124)
--------
Capital lease obligation $ 88,060
========
13. INCOME TAXES
Deferred taxes reflect the tax effects of temporary differences between the
amounts of assets and liabilities for financial reporting and the amounts
recognized for income tax purposes as well as the tax effects of net operating
loss and tax credit carryforwards. The significant components of net deferred
tax assets are as follows:
December 31,
------------
2002 2001
---- ----
Net operating loss carryforwards $1,295,000 $ 694,000
Research and Development credit carryforward 102,000 67,000
AMT Credit carryforward 6,000 6,000
Depreciation and other temporary differences 11,000 (8,000)
---------- ----------
Total deferred tax assets 1,414,000 759,000
Less: Valuation allowance 1,414,000 759,000
---------- ----------
Net deferred tax assets $ -- $ --
========== ==========
We believe that it is more likely than not that the deferred tax assets
will not be realized by us and have therefore provided a valuation allowance in
our balance sheet equal to the entire amount of our deferred tax assets for the
entire balance.
F-20
The provision for income taxes differs from the amount using the statutory
federal income tax rate (34%) as follows:
December 31,
------------
2002 2001 2000
---- ---- ----
At Statutory Rates $(132,000) $(308,000) $ (45,000)
Loss for which no benefit was recorded 132,000 308,000 45,000
State income taxes 135,851 133,122 74,322
--------- --------- ---------
Provision for income taxes $ 135,851 $ 133,122 $ 74,322
========= ========= =========
At December 31, 2002 we have federal and state net operating loss
carryforwards of $2,392,644 and $5,346,359, respectively, available to offset
future federal and state taxable income. These carryforwards will expire between
December 31, 2009 and December 31, 2022. Additionally, we have research and
development credit and Alternative Minimum Tax credit carryforwards of $102,000
and $6,000 respectively. The research and development credit carryforwards will
expire between December 31, 2012 and December 31, 2022 and the Alternative
Minimum Tax credit carryforwards may be carried forward indefinitely. These
credit carryforwards will be available to offset future federal income tax
liabilities.
14. PERCENTAGE-OF-COMPLETION
The following is a summary of our assets and liabilities related to
long-term contracts which we recognize on the percentage-of-completion basis:
December 31,
------------
2002 2001
---- ----
Contract Receivables
Billed - contracts in progress $ 389,997 $ 456,714
Unbilled services (work-in-progress) 15,400 49,245
----------- -----------
405,397 505,959
Less: Allowance for doubtful collections
on contract receivables 40,000 40,000
----------- -----------
$ 365,397 $ 465,959
=========== ===========
Unearned Revenue
Costs incurred on contracts in progress $ 616,358 $ 411,924
Estimated earnings 1,123,456 627,325
----------- -----------
1,739,814 1,039,249
Less: Billings to date 1,783,264 995,754
----------- -----------
$ (43,450) $ 43,495
=========== ===========
Included in the accompanying balance
sheets under the following captions:
Unbilled services $ 15,400 $ 49,245
Unearned revenue (58,850) (5,750)
----------- -----------
$ (43,450) $ 43,495
=========== ===========
F-21
We use estimates of remaining costs to complete each contract to determine
the revenue and profitability on each contract. We reevaluate these estimates
periodically and such reevaluations may, in the future, lead to changes in the
rate of profitability on each contract. There were no contracts where the
expected costs exceeded the contract price. All contract receivables are due
within one year.
15. STOCK OPTION PLAN
The 1990 Stock Option Plan (the "Plan") provides for the granting of either
stock options intended to qualify as incentive stock options under the Internal
Revenue Code or non-statutory stock options for up to an aggregate of 1,000,000
shares of common stock. Options may be granted for terms of up to ten years and
are exercisable as determined by the Company's Board of Directors at the date of
the respective option grant. The option price under the plan must be no less
than fair market value of the shares on the date of grant, except that the term
of an incentive stock option granted under the Plan to a stockholder owning more
than 10% of the outstanding common stock and its exercise price may not be less
than 110% of the fair market value of the common stock on the date of the grant.
We are no longer able to grant options under this plan.
During the year ended December 31, 2000 we adopted the 2000 Performance
Equity Plan (the "Performance Equity Plan") which provides for grants and
options to purchase up to 2,000,000 shares of Common Stock. Under the
Performance Equity Plan, options may be granted to employees, directors,
consultants, agents and other persons deemed valuable to the Company or any of
its subsidiaries. The Performance Equity Plan permits our Board of Directors or
the Committee of the Performance Equity Plan to issue incentive stock options
(ISO's) as defined in Section 422 of the Internal Revenue Code (the "Code") and
stock options that do not conform to the requirements of that code section
("non-ISOs"). The exercise price of each ISO may not be less than 100% of the
fair market value of the Common Stock at the time of grant, except that in the
case of a grant to an employee who owns (within the meaning of Code Section 422)
10% or more of the outstanding stock of our Company or any subsidiary (a "10%
stockholder"), the exercise price may not be less than 110% of the market value
of the Common Stock at the time of grant.
Under the Performance Equity Plan, the committee may award stock
appreciation rights, restricted stock, deferred stock, stock reload options and
other stock-based awards in addition to stock options. The Performance Equity
Plan is administered by the Board of Directors and may be administered by a
committee chosen by the Board of Directors. Subject to the provisions of the
Performance Equity Plan, the Board of Directors or such Committee, as
applicable, have the authority to determine the individuals to whom the stock
options are to be granted, the number of shares to be covered by each option,
the option price, the type of option, the option period, the restrictions, if
any, on the exercise of the option, the terms for the payment of the option
price and other terms and conditions. No more than 200,000 shares in the
aggregate may be granted to any one holder in any one calendar year under the
Performance Equity Plan.
The pro forma information required by SFAS No. 148 regarding net income and
earnings per share has been presented as if we had accounted for our stock
option plans under the fair value method. The fair value of each option grant is
estimated on the date of the grant using the Black-Scholes pricing model with
the following weighted average assumptions:
2002 2001 2000
---- ---- ----
Assumptions:
Expected life of options 5 years 5 years 5 years
Risk free interest rate 4.0% 5.5% 6.0%
Volatility of stock 240% 197% 162%
Expected dividend yield 0% 0% 0%
F-22
The per share weighted average fair value of the options granted during 2002,
2001 and 2000 was $4.71 and $5.39 and $5.75, respectively.
In accordance with SFAS No. 123, the weighted average fair value of stock
options granted is required to be based on a theoretical statistical model using
the preceding assumptions. In actuality, our stock options do not trade on a
secondary exchange and, therefore, the employees and directors cannot derive any
benefit from holding the stock options under these plans without an increase in
the market price of our stock. Such an increase in stock price would benefit all
stockholders commensurately. As discussed in Note 11, we extended the
termination date of options previously granted to our President.
In addition to the options granted to employees, we granted 0, 50,000 and
345,000 options to consultants during the years ended December 31, 2002, 2001
and 2000 respectively. Consultants are retained under consulting agreements and
are not considered employees of ours or our subsidiaries. We recognized non-cash
stock-based compensation cost of $222,437 and $73,146 and $213,729 during the
years ended December 31, 2002, 2001 and 2000 respectively, based on the fair
value of the options issued, amortized over the respective consulting periods.
On December 3, 2001 we amended the consulting agreements of all but one
consultant to provide that the remaining unvested options will vest based on the
sole discretion of the Board of Directors. According to the provisions of SFAS
No. 123 we recognized non-cash stock-based compensation for the vested option
awards over the service periods of the consulting agreements. Non-cash
stock-based compensation will be recognized for the unvested options in the
period that the options actually vest.
Presented below is a summary of stock option plan activity for the years shown:
Wtd. Avg. Wtd. Avg.
Exercise Options Exercise
Options Price Exercisable Price
------- ----- ----------- -----
Balance at January 1, 2000 692,630 $ 1.05 539,866 $ 1.12
Granted 854,850 6.04
Exercised (2,980) 1.00
Cancelled (11,200) $ 1.64
---------
Balance at December 31, 2000 1,533,300 $ 3.83 732,960 $ 1.75
Granted 219,800 5.99
Exercised (126,810) 0.85
Cancelled (1,040) $ 1.81
---------
Balance at December 31, 2001 1,625,250 $ 4.36 926,670 $ 2.99
Granted 44,364 6.00
Exercised (303,720) 0.68
Cancelled (52,050) $ 4.40
---------
Balance at December 31, 2002 1,313,844 $ 5.26 767,370 $ 4.64
=========
F-23
The following summarizes information for options currently outstanding and
exercisable at December 31, 2002:
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Prices Number Life Exercise Price Number Exercise Price
--------------- --------- --------- -------------- -------- --------------
$ 1.00 24,000 6 $ 1.00 15,390 $ 1.00
1.63 217,000 1 1.63 217,000 1.63
1.81 10,250 7 1.81 2,900 1.81
4.50 10,000 8 4.50 4,000 4.50
4.75 10,000 8 4.75 2,000 4.75
5.00 595,000 3 5.00 334,500 5.00
5.88 1,500 8 5.88 300 5.88
6.00 93,994 9 6.00 42,740 6.00
6.25 107,000 5 6.25 39,500 6.25
6.50 100 9 6.50 40 6.50
9.00 245,000 7 9.00 109,000 9.00
--------- --------
1,313,844 4 $ 5.26 767,370 $ 4.64
========= ========
F-24
16. SEGMENT INFORMATION
We operate through two wholly owned subsidiaries, CMT and Sentigen Corp.
CMT is evaluated on the performance of its two divisions, MCS and SM. Sentigen
Corp. was formed in February 2000 and is engaged in research and development. We
consider MCS, SM and Sentigen Corp. as our three separate and distinct
reportable operating segments. Our reportable operating segments are strategic
business units that offer different products and services and are managed
separately because each business requires different technologies and marketing
strategies. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. We account for
inter- segment sales and transfers, if any, as if the transactions were to third
parties, that is, at current market prices.
December 31,
------------
2002 2001 2000
---- ---- ----
Revenues
MCS $ 4,549,583 $ 4,005,671 $ 3,115,178
SM 2,662,204 2,175,375 1,704,432
Sentigen Corp. 100,003 -- --
----------- ----------- -----------
Total revenues for reportable segments $ 7,311,790 $ 6,181,046 $ 4,819,610
Elimination of inter-segment revenues (94,344) (100,848) (90,107)
----------- ----------- -----------
Total Reported $ 7,217,446 $ 6,080,198 $ 4,729,503
=========== =========== ===========
Income (Loss) from Operations
MCS $ 709,455 $ 618,348 $ 675,361
SM 891,495 741,677 448,976
Sentigen Corp. (1,124,787) (1,151,408) (659,706)
----------- ----------- -----------
Total income for reportable segments $ 476,163 $ 208,617 $ 464,631
Corporate loss unallocated to segments (1,098,299) (1,231,429) (709,015)
----------- ----------- -----------
Total Reported $ (622,136) $(1,022,812) $ (244,384)
=========== =========== ===========
Depreciation and Amortization
MCS $ 382,439 $ 287,854 $ 158,189
SM 100,283 77,256 72,284
Sentigen Corp. 82,788 107,063 41,866
----------- ----------- -----------
Total depreciation and
amortization for reportable segments $ 565,510 $ 472,173 $ 272,339
Corporate depreciation and
amortization unallocated to segments 12,995 11,953 10,414
----------- ----------- -----------
Total Reported $ 578,505 $ 484,126 $ 282,753
=========== =========== ===========
F-25
December 31,
------------
2002 2001 2000
---- ---- ----
Segment Assets
MCS $ 1,480,390 $ 1,401,896 $ 1,205,316
SM 793,646 927,768 786,014
Sentigen Corp. 581,303 608,836 570,529
----------- ----------- -----------
Total assets for reportable segments $ 2,855,339 $ 2,938,500 $ 2,561,859
Corporate assets unallocated to segments 10,293,096 9,924,444 10,858,050
----------- ----------- -----------
Total Reported $13,148,435 $12,862,944 $13,419,909
=========== =========== ===========
Expenditures for Property, Plant and Equipment
MCS $ 465,158 $ 557,996 $ 126,669
SM 146,715 92,974 74,395
Sentigen Corp. 14,950 48,304 237,988
----------- ----------- -----------
Total expenditures for reportable segments $ 626,823 $ 699,274 $ 439,052
Corporate expenditures
unallocated to segments 5,082 5,834 --
----------- ----------- -----------
Total Reported $ 631,905 $ 705,108 $ 439,052
=========== =========== ===========
17. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
For the years ended December 31, 2002, 2001 and 2000, the Company had
significant sales and receivable balances from major customers in the
pharmaceutical and biotechnology industries as follows:
December 31,
------------
2002 2001 2000
---- ---- ----
Percentage Percentage Percentage
Sales of total Sales of total Sales of total
----- -------- ----- -------- ----- --------
Significant customer
A. MCS $2,580,196 58% $1,983,482 51% $1,534,610 51%
B. SM 476,679 18% 441,460 20% 414,853 24%
E. SM 303,405 11% 110,331 5% -- -%
---------- -- ---------- -- ---------- --
$3,360,280 47% $2,535,273 42% $1,949,463 41%
========== == ========== == ========== ==
December 31,
------------
2002 2001
---- ----
Net Net
Accounts Percentage Accounts Percentage
Receivable of total Receivable of total
---------- -------- ---------- --------
Significant customer
A $ 244,800 48% $ 85,536 21%
B -- --% 50,564 14%
C 15,476 3% 46,489 13%
D 8,453 2% 55,170 16%
---------- -- ---------- --
$ 268,729 53% $ 237,759 31%
========== == ========== ==
Net accounts receivable includes billed accounts receivable and unbilled
services less unearned revenue.
F-26
Financial instruments that are exposed to concentrations of credit risk
consist primarily of cash and trade accounts receivable. We hold our cash at
high credit quality institutions. At times, balances may be in excess of the
FDIC insurance limit. The Company routinely assesses the financial strength of
its customers and, as a consequence, believes that its trade accounts receivable
credit risk exposure is limited.
18. PRIVATE PLACEMENT
In November 2000, we consummated a private offering in which we sold
863,834 shares of our common stock at $6.00 per share for aggregate gross
proceeds of $5,183,044. The proceeds, net of professional fees which were
directly incurred in connection with this transaction, were $5,152,714.
In connection with the private placement, we also issued a warrant to Mr.
Theodore M. Serure to purchase 44,810 shares of our common stock as compensation
for introducing us to investors who purchased shares of common stock in the
private placement. The warrant may be exercised at $6.00 per share until
November 21, 2005.
F-27
19. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
For the Quarters Ended
----------------------
December 31, September 30, June 30, March 31,
2002 2002 2002 2002
---- ---- ---- ----
Revenue
Molecular cell science $ 1,172,438 $ 1,108,307 $ 1,128,502 $ 1,045,992
Specialty media 540,250 673,331 772,037 676,586
Grant, National Institute of Health 100,003 -- -- --
----------- ----------- ----------- -----------
1,812,691 1,781,638 1,900,539 1,722,578
----------- ----------- ----------- -----------
Income After Direct Costs
Molecular cell science 865,974 763,093 743,700 696,842
Specialty media 289,981 415,387 435,857 418,513
Grant, National Institute of Health 25,003 -- -- --
----------- ----------- ----------- -----------
1,180,958 1,178,480 1,179,557 1,115,355
----------- ----------- ----------- -----------
Income (Loss) From Operations
Molecular cell science 164,294 164,602 204,147 176,412
Specialty media 84,476 249,680 285,204 272,135
Sentigen Corp. (181,615) (266,475) (304,430) (372,267)
Corporate (309,133) (198,792) (275,755) (314,619)
----------- ----------- ----------- -----------
(241,978) (50,985) (90,834) (238,339)
----------- ----------- ----------- -----------
Net Loss $ (222,662) $ (24,716) $ (68,367) $ (206,286)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.03) $ 0.00 $ (0.01) $ (0.03)
=========== =========== =========== ===========
For the Quarters Ended
----------------------
December 31, September 30, June 30, March 31,
2001 2001 2001 2001
---- ---- ---- ----
Revenue
Molecular cell science $ 870,921 $ 892,511 $ 1,105,334 $ 1,036,783
Specialty media 554,828 627,948 520,898 470,975
----------- ----------- ----------- -----------
1,425,749 1,520,459 1,626,232 1,507,758
----------- ----------- ----------- -----------
Income After Direct Costs
Molecular cell science 540,044 575,158 731,440 615,760
Specialty media 339,165 390,628 334,006 277,941
----------- ----------- ----------- -----------
879,209 965,786 1,065,446 893,701
----------- ----------- ----------- -----------
Income (Loss) From Operations
Molecular cell science (125,241) 107,599 332,726 303,264
Specialty media 155,189 236,194 192,806 157,488
Sentigen Corp. (120,862) (356,226) (331,361) (342,959)
Corporate (363,770) (267,685) (324,953) (275,021)
----------- ----------- ----------- -----------
(454,684) (280,118) (130,782) (157,228)
----------- ----------- ----------- -----------
Net Loss $ (367,435) $ (177,192) $ (32,623) $ (70,339)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.05) $ (0.02) $ 0.00 $ (0.01)
=========== =========== =========== ===========
F-28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SENTIGEN HOLDING CORP.
Dated: March 28, 2003
By: /s/ Fredrick B. Rolff
---------------------------------
Fredrick B. Rolff
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Joseph K. Pagano Chairman of the Board, Chief March 28, 2003
- ------------------------ Executive Officer and President
Joseph K. Pagano
/s/ Fredrick B. Rolff Chief Financial Officer (Principal March 28, 2003
- ------------------------ Financial and Accounting Officer)
Fredrick B. Rolff
/s/ Thomas Livelli Director, Chief Executive Officer March 28, 2003
- ------------------------ and President of CMT
Thomas Livelli
/s/ Frederick R. Adler Director March 28, 2003
- ------------------------
Frederick R. Adler
/s/ Gerald Greenwald Director March 28, 2003
- ------------------------
Gerald Greenwald
/s/ Joel M. Pearlberg Director March 28, 2003
- ------------------------
Joel M. Pearlberg
/s/ Samuel A. Rozzi Director March 28, 2003
- ------------------------
Samuel A. Rozzi
37
CERTIFICATION PURSUANT TO
RULE 13a-14 AND 15d-14 UNDER THE
SECURITIES AND EXCHANGE ACT OF 1934, AS AMEMDED
I, Joseph K. Pagano, certify that:
1. I have reviewed this annual report on Form 10-K of Sentigen Holding
Corp;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days of the filing
date of this annual report (the "Evaluation Date"); and
c. presented in this annual 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 officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the 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 officer and I have indicated in this
annual 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.
Dated: March 28, 2003 /s/ Joseph K. Pagano
------------------------------------
Joseph K. Pagano
Chairman of the Board, Chief Executive Officer
and President
38
CERTIFICATION PURSUANT TO
RULE 13a-14 AND 15d-14 UNDER THE
SECURITIES AND EXCHANGE ACT OF 1934, AS AMEMDED
I, Fredrick B. Rolff, certify that:
1. I have reviewed this annual report on Form 10-K of Sentigen Holding
Corp;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days of the filing
date of this annual report (the "Evaluation Date"); and
c. presented in this annual 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 officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
d. 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
e. 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 officer and I have indicated in this
annual 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.
Dated: March 28, 2003 /s/ Fredrick B. Rolff
------------------------------------
Fredrick B. Rolff
Chief Financial Officer
39
EXHIBIT INDEX
- --------------------------------------------------------------------------------
INCORPORATED
EXHIBIT BY REFERENCE NO. IN
NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT PAGE
- --------------------------------------------------------------------------------
3.1 Certificate of Incorporation, A Exhibit 3.1
as amended
3.2 By-laws of the Company A Exhibit 3.2
4.1 Form of Subscription Agreement B Exhibit 4
between the Company and each
Investor
4.2 Warrant Agreement between K Exhibit 4.2
Theodore Serure and the Company
10.1 1990 Stock Option Plan A Exhibit 10.1
10.2 Consulting Agreement dated July C Exhibit 10.2
2, 1991, among the Company,
Prime Cellular of Florida, Inc.
and Joseph K. Pagano (the
"Consulting Agreement")
10.3 Amendment to Consulting C Exhibit 10.3
Agreement
10.4 Agreement and Plan of Merger, D Exhibit 2.1
dated as of May 14, 1996, by
and among the Company, Prime
Cellular Acquisition Corp.,
Bern Associates, Inc. and the
stockholders of Bern
10.5 Registration Rights Agreement, D Exhibit 10.1
dated June 10, 1996, between
Registrant and the Bern
Stockholders
10.6 Escrow Agreement, dated June D Exhibit 10.2
10, 1996, between Registrant
and the Bern Stockholders
10.7 Indemnification Agreement, D Exhibit 10.3
dated June 10, 1996 between
Registrant and the Bern
Stockholders
10.8 Form of Amendment to Merger E Exhibit 10.9
Agreement, dated June 11, 1997
10.9 Form of Settlement Agreement, E Exhibit 10.10
dated August 28, 1997
10.10 Agreement and Plan of Merger, F Exhibit 2
dated as of May 29, 1998, by
and among the Company, CMT
Acquisition Corp., Cell &
Molecular Technologies, Inc.
and the stockholders of Cell &
Molecular Technologies, Inc.
10.11 Mortgage dated February 6, G Exhibit 10.11
1997, with respect to premises
located at 580 Marshall Street,
Phillipsburg, NJ 08865, assumed
by the Company in connection
with the CMT Merger
40
- --------------------------------------------------------------------------------
INCORPORATED
EXHIBIT BY REFERENCE NO. IN
NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT PAGE
- --------------------------------------------------------------------------------
10.12 Form of Employment Agreement G Exhibit 10.12
dated May 22, 1997 between Cell
& Molecular Technologies, Inc.
and Thomas Livelli
10.13 Form of Amendment to Employment H Exhibit 10.13
Agreement dated as of May 29,
1998 between Cell & Molecular
Technologies, Inc. and Thomas
Livelli
10.14 Employment Agreement between I Exhibit 10.14
Joseph K. Pagano and the
Company
10.15 Employment Agreement between J Exhibit 10.15
Kevin Lee and Sentigen Corp.
10.16 Option Agreement between the J Exhibit 10.16
Company and Kevin Lee
10.17 Employment Agreement dated May L Exhibit 10.17
23,2001, between Cell &
Molecular Technologies, Inc.
and Thomas Livelli
21 List of Subsidiaries I Exhibit 21
23.1 Consent of Deloitte & Touche -- -- Filed
LLP Herewith
23.2 Consent of Raich Ende Malter & -- -- Filed
Co. LLP Herewith
99.1 Risk Factors -- -- Filed
Herewith
99.2 Certification pursuant to 18 -- -- Filed
U.S.C. Section 1350, as adopted Herewith
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.3 Certification pursuant to 18 -- -- Filed
U.S.C. Section 1350, as adopted Herewith
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
A. Company's Registration Statement on Form S-18 (Registration No. 3-35537-NY).
B. Company's Report on Form 8-K for event dated November 21, 2000.
C. Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1992.
D. Company's Report on Form 8-K dated June 11, 1996.
E. Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1997.
F. Company's Report on Form 8-K for the event dated May 29, 1998.
41
G. Company's Report on Form 10-K for the fiscal year ended December 31, 1998.
H. Company's Report on Form 10-K/A for the fiscal year ended December 31, 1998.
I. Company's Report on Form 10-K for the fiscal year ended December 31, 1999.
J. Company's Report on Form 10-Q for the quarter ended March 31, 2000.
K. Company's Report on Form 10-K for the fiscal year ended December 31, 2000.
L. Company's Report on Form 10-Q for the quarter ended September 30, 2001.
42