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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 2003
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
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(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification Number)
Organization) Code Number)
580 Marshall Street
Phillipsburg, New Jersey 08865
(908) 387-1673
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(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. [X]
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 30, 2003) was approximately $35,633,676.
As of March 22, 2004, 7,457,224 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
Documents Incorporated By Reference: None
PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
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 or on behalf of us. These
risks and uncertainties include, but are not limited to, risks associated with
our history of consolidated net losses; our dependence on a limited number of
customers; our dependence on research and development expenditures by the
pharmaceutical and biotechnology industries; our need for additional capital to
finance our expanding research and development programs; changes in customer
preferences; the ability to hire and retain key personnel; compliance with
federal or state environmental laws and other laws, changes in such laws and the
administration of such laws; protection of patents, 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.
COMPANY OVERVIEW
We are a holding company conducting business through two wholly-owned
operating subsidiaries, Cell & Molecular Technologies, Inc. ("CMT"), and
Sentigen Biosciences, Inc. ("Sentigen Biosciences," formerly Sentigen Corp.).
CMT provides contract research and development services and manufactures
specialty cell culture media, reagents and other research products for companies
engaged in the drug discovery process. Sentigen Biosciences is primarily engaged
in the development and commercialization of novel bioassay systems that
elucidate the underlying biology of protein-protein interactions. Sentigen
Biosciences is initially targeting its Tango(TM) Assay System to address the
functionalization of G protein-coupled receptors (GPCRs) for pharmaceutical drug
discovery and development. Sentigen Biosciences has filed patent applications on
its Assay System and expects to file additional patent applications on this
technology in the future.
We were incorporated under the laws of the State of Delaware in May
1990. After having engaged in the acquisition and operation of different
businesses 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 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, and changed
its name to Sentigen Biosciences, Inc. on February 24, 2004. 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 operate 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.
Our internet address is www.sentigencorp.com. We make available, free
of charge, on or through the investor relations portion of our website, our
annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports
on Form 8-K and amendments to such reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as
soon as reasonably practicable after we file such material with,
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or furnish it to, the Securities and Exchange Commission ("SEC"). These filings
are also available on the SEC's website at www.sec.gov. Also available on our
website is our Code of Ethics and Business Conduct (applicable to all directors,
officers and employees) and the charter for our Audit Committee. Within the time
period required by the SEC and NASDAQ, we will post any amendment to our Code of
Ethics and Business Conduct and any waiver of our Code of Ethics and Business
Conduct applicable to our senior financial professionals, executive officers and
directors.
CELL & MOLECULAR TECHNOLOGIES, INC.
CMT is a Contract Research Organization that specializes in supporting
the drug discovery process. Products and services offered by CMT include:
- High Throughput Screening ("HTS") support services;
- Custom contract research services; and
- The development, production and marketing of specialty cell culture
media.
Through its scientific staff, technology focus and research products,
CMT aims to increase the efficiency of the drug discovery process of
pharmaceutical, biotechnology, and biomedical research organizations and
optimize their investments in new technologies.
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
disease targets, and (3) screening those targets against chemical entities for
scientifically significant interactions. CMT believes that the proliferation of
new targets and technologies to this process has shifted the resource priorities
and research strategies of the entire drug discovery industry. The industry is
also facing patent expirations, more stringent drug approval standards, and
thinning product pipelines. As a result of these factors, CMT believes that the
race for new targets, compounds and drug candidates has become more competitive
and has increased the demand for additional research talent, laboratory
capacity, creative experimental design and tailored products. CMT believes that
it provides its customers access to the additional talent, capacity, creativity,
products and services which can accelerate their drug discovery programs,
optimize their technology investments and gain a competitive advantage. CMT
operates through two divisions -- Molecular Cell Science and Specialty Media.
CMT maintains internet addresses at www.cmt-inc.net and
www.specialtymedia.com.
Molecular Cell Science
CMT provides contract research and development services to the drug
discovery community through its Molecular Cell Science ("MCS") division, which
provides services in the following areas:
- Molecular and cell biology,
- Gene expression and protein biochemistry,
- Bio-processing,
- HTS support services, and
- Mouse genetics.
Services are performed on a fee-for-service, fixed contract basis that
provide 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 its customers.
Proposals for service are based on collaborative discussions between
the customer's research staff and CMT scientific staff and are highly customized
for each individual customer. These discussions lead to detailed,
milestone-based research proposals that can be periodically modified based on
the data collected during the project.
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CMT believes that its customized, dynamic and data-driven approach generally
augments and complements the customer's own research and development efforts in
a cost and time effective manner while maintaining the highest quality of
services.
Molecular and cell biology. CMT offers an array of services to clone,
isolate and characterize genes from viral, prokaryotic or eukaryotic organisms.
Services in molecular biology include the construction of:
- cDNA libraries and genomic libraries,
- Size selected, normalized and subtracted libraries,
- Custom gene libraries,
- Gene cloning and vector construction, and
- Gene expression analysis ("Taqman").
In addition, CMT provides expertise in the cloning and expression
analysis of target-selected genes. Services in this area allow its customers to
specify the vector and cell or tissue source. CMT also offers 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.
Gene expression and protein biochemistry. The drug discovery community
demands an ever increasing amount of recombinant proteins for their HTS
programs, as well as, biochemical and biophysical studies. CMT helps to meet
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.
Bio-processing. CMT possesses 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 aims
to deliver a well-characterized process by incorporating cell banking through
upstream and downstream process development. Using its flexible cell culture
facilities, CMT prepares reagents derived from a broad range of host cell types
(including whole cells, cellular fractions, or purified bio-molecule 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 support services. Pharmaceutical and biotechnology companies
utilize sophisticated automation and robotics to screen large quantities of
cells or proteins very rapidly. Through HTS programs the drug discovery
community is able to rapidly screen, identify and develop potential drug
candidates for a large number of disease 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 to
customers 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 (384, 1536 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.
CMT believes its 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 facilities. CMT's services also include
the design, establishment, and execution of quality control standards for the
new assay system.
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During 2002, CMT developed a process for the use of "division-arrested"
cells within cell-based assays for drug discovery. This development is intended
to enable drug discovery professionals to maintain consistent cell-counts and
cell quality within assays despite the increasing density of screening formats
and varying screening cycle times. CMT filed a patent application on this
process in 2002 and began the process of introducing this service to its
customers in late 2003.
Mouse genetics. Transgenic mouse technology allows 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 constructs
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
Specialty Media ("SM") develops, manufactures, and markets high quality
cell culture media, reagents and other research products including:
- Media and reagents for the culture of mouse embryos;
- Murine Embryonic Stem ("ES") cells, feeder cells and reagents;
- Reagents for gene transfer and expression; and
- Standard and custom formulated cell culture media.
SM also identifies and develops custom research products and reagents
in response to customer feedback and as a result of services performed by the
MCS division. SM 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 feeder cells, media and reagents qualified for
the manipulation of ES Cells.
Unique Products for General Cell Culture. A significant portion of the
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 those customers' private
labels.
Custom Media Manufacturing. Researchers demand custom formulated cell
culture media in which the components and/or amounts of a standard medium are
altered to address a specific application. 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.
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SENTIGEN BIOSCIENCES
Sentigen Biosciences is primarily engaged in the development and
commercialization of novel bioassay systems that elucidate the underlying
biology of protein-protein interactions. Sentigen Biosciences is initially
targeting its Tango Assay System to address the functionalization of G
protein-coupled receptors (GPCRs) for pharmaceutical drug discovery and
development. Sentigen Biosciences has filed patent applications on its Assay
System and expects to file additional patent applications on this technology in
the future. Sentigen Biosciences has not generated any revenues from these
activities and while initial introductory meetings have begun it has not yet
entered into any drug discovery or development agreements with pharmaceutical
companies, nor can any assurance be given that it will do so.
GPCRs are the largest family of receptors in humans, and they are
involved in a multitude of cellular signaling mechanisms. GPCRs function as
important mediators of cellular responses to hormones, neurotransmitters,
chemokines and other molecules. In addition, GPCRs are responsible for mediating
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 Biosciences believes that GPCRs represent the most profitable
class of targets for pharmaceutical drug discovery because of their role in many
cellular signaling mechanisms. It is generally accepted that a majority 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-hundred and fifty
non-olfactory GPCRs for which a ligand and/or function is neither known nor
understood (orphan GPCRs). Sentigen Biosciences believes that bioassays
developed on its Tango Assay System platform offer the potential to monitor
receptor activation with better selectivity, sensitivity, and flexibility than
other currently-available technologies. Sentigen Biosciences believes that the
use of Tango assays to interrogate the two hundred known GPCRs has the potential
to identify ligands that may yield drugs that are more effective and specific
than drugs currently on the market. Sentigen Biosciences believes that using
Tango assays to functionalize orphan GPCRs has the potential to yield a new
population of effective drug targets. Finally, Sentigen Biosciences believes
that the ability to profile the activity of lead drug compounds against a wide
range of GPCRs in the Tango System could enable the generation of selectivity
profiles for drug candidates, thereby enabling the identification of more
specific drugs with fewer side effects. While Sentigen Biosciences believes that
these objectives are attainable based upon laboratory results, there is no
assurance that its Assay System will be accepted by commercial customers or will
work effectively against all possible drug targets.
Sentigen Biosciences believes that it could potentially address other
complex problems in the drug discovery and development process by developing its
Assay System to address other drug target classes such as:
- Receptor tyrosine kinases;
- Nuclear hormone receptors;
- Intracellular signaling proteins;
- Cytokine receptors;
- Enzymes and proteases; and
- Other protein-protein interactions.
It is generally accepted that the aforementioned drug targets have
significance across a range of therapeutic areas including: cancer, Alzheimer's
disease and other neurodegenerative disorders; immunological or inflammatory
diseases; cardiovascular disease; endocrine disorders; virology; and metabolic
disorders. However, Sentigen Biosciences has not yet commenced development of
its Assay System to address these target classes and therapeutic areas, and no
assurance can be given that it will commence such development or that such
development, once commenced, will be successful.
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Sentigen Biosciences believes that potential applications of such
assays outside the pharmaceutical drug discovery and development area include
microarray-based detection technologies and insect olfaction and taste based
pest management solutions. 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
Biosciences believes that it could potentially 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, in medical diagnostics and possible insect and pest
control areas.
License Agreement
Sentigen Biosciences has an exclusive licensing agreement with The
Trustees of Columbia University in the City of New York giving it the right to
patent intellectual property and applications in the areas of chemosensation and
olfaction. 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.
Consulting Agreements
Sentigen Biosciences entered into a consulting agreement with Dr.
Richard Axel, a professor at Columbia University, in connection with the
formation of Sentigen Biosciences. Our consulting agreement with Dr. Richard
Axel expires in March 2005.
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, LVMH,
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-Myers 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.
Other consultants retained at various times by Sentigen Biosciences
have included: 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. The aforementioned scientists have entered into consulting
agreements with us which expire in March 2005.
Federal Phase I Grant - National Institute of Health
On August 19, 2002, Sentigen Biosciences 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,
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2003. Sentigen Biosciences completed the research project covered under the
grant and all funds were received from the National Institute of Health as of
December 31, 2002.
CUSTOMERS
Cell and Molecular Technologies, Inc.
CMT provides its products and services to pharmaceutical and
biotechnology companies, hospitals; universities and other research institutions
engaged in the drug discovery process.
Molecular Cell Science. For the years ended December 31, 2003, 2002 and
2001, Merck & Co., Inc. accounted for approximately 61%, 58% and 51% of the
division's annual revenues, respectively. Merck & Co. accounted for 41%, 36% and
33% of our consolidated revenues for the same periods. For the year ended
December 31, 2003, Rockefeller University accounted for 11% of the division's
annual revenues. We believe that these customers will continue to account for a
significant percentage of revenues in the 2004 and 2005 fiscal years. We cannot
assure you, however, that these customers will continue to generate significant
revenues and the loss of any of these customers, or any other customers, could
have a material adverse effect on our business.
The majority of the revenues from Merck & Co. are generated under one
contract with CMT for HTS support services. The contract provided for payments
of $200,000 per month, regardless of the volume of services performed during the
month. The term of the contract was for one year and ended on December 31, 2003.
On January 19, 2004, Merck & Co. renewed its contract with CMT for a term of one
year, ending on December 31, 2004. The new contract provides for payments to CMT
of $200,000 per month in exchange for a fixed number of cell and reagent
deliveries to support Merck & Co.'s HTS program. Should actual deliveries during
2004 exceed the fixed number of deliveries provided for in the contract,
additional deliveries will be billed at the rate of $909 per delivery. The
contract also provides for a credit against other services (in addition to the
base contract value) performed for the customer in 2005 should actual deliveries
during 2004 fall below the fixed number of deliveries provided for in the
contract. The contract states that the credit against the value of future
additional services performed in 2005 cannot exceed 30% of the value of the
additional services performed in addition to the base contract value for 2004.
Specialty Media. For the years ended December 31, 2003, 2002 and 2001,
Invitrogen accounted for approximately 22%,18% and 20% of the division's annual
revenues, respectively. For the year ended December 31, 2003, GenX International
accounted for 10% of the division's annual revenues. For the year ended December
31, 2002, Dainippon Pharmaceuticals accounted for 11% of the division's annual
revenues. We believe that these customers will continue to account for a
significant percentage of revenues in the 2004 and 2005 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 customers, could have a
material adverse effect on our business.
Sentigen Biosciences
Sentigen Biosciences does not have any customers and while initial
introductory meetings have begun, it has not yet entered into any drug discovery
or development agreements with pharmaceutical companies, nor can any assurance
be given that it will do so. The only revenues generated to date have been under
a grant from the National Institute of Health during the year ended December 31,
2002
SALES AND MARKETING
Cell and Molecular Technologies, Inc.
Molecular Cell Science. 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
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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 and speaking engagements at industry trade-shows and
conventions.
Specialty Media. This division markets its products to specialized
aspects of the cell culture market. In serving these areas, CMT has built up
customer loyalty and name recognition, despite relatively minimal marketing
activities. CMT's Chief Operating Officer manages the division's sales and
marketing activities. CMT also utilizes the distributor services of Dainippon
Pharmaceuticals (Japan), which are responsible primarily for sales to customers
not serviced directly by CMT.
Sentigen Biosciences
For the years ended December 31, 2003, 2002 and 2001, Sentigen
Biosciences did not engage in any significant sales and marketing activities.
Sentigen Biosciences has been primarily focused on research and development, and
has participated in various scientific and industry conferences and met with
leading pharmaceutical, biotechnology and agricultural companies in an effort to
raise awareness of its technologies among constituents in those communities.
Sentigen Biosciences intends to seek strategic discovery and development
partnerships around key molecular targets with biotechnology, pharmaceutical and
other life sciences research institutions. Although introductory meetings have
begun, no assurance can be given that any such partnerships will be successfully
entered into.
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 sales needs.
Molecular Cell Science. 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. The raw materials used in the manufacturing process
are obtained from a variety of third-party suppliers and are generally not
dependent on any one supplier or group of suppliers. However, raw fetal bovine
serum is a significant raw material in Specialty Media'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 the
discovery of bovine spongiform encephalopathy, or BSE (popularly referred to as
mad cow disease) in the U.S. While the division has changed its purchasing
habits to accommodate these difficulties we cannot assure you that the
division's business will not be adversely affected by any shortage in the
future.
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Sentigen Biosciences
The research and development operations of Sentigen Biosciences
including purchasing are accomplished at the 3960 Broadway, New York, New York
location. Sentigen Biosciences 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 and
development or reagent/media production 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.
CMT believes that entry barriers to these markets are significant,
involving the high costs of specialized 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.
Although no assurances can be given, CMT believes that it can continue
to 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. There
are a number of large competitors that have substantially greater resources than
CMT. Such competitors, however, 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. 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
biological targets for HTS programs 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
10
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. CMT believes that the specialty media market is
dominated by a few very large companies with a number of minor participants.
Historically, the revenue producers in the specialty media 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 Biosciences
Sentigen Biosciences is primarily engaged in the development and
commercialization of novel bioassay systems that elucidate the underlying
biology of protein-protein interactions. Sentigen Biosciences is initially
targeting its Tango Assay System to address the functionalization of G
protein-coupled receptors (GPCRs) for pharmaceutical drug discovery and
development. Sentigen Biosciences' future competitive position depends on its
ability to develop a platform that will be more cost-effective and technically
advantageous than other currently available technologies. While Sentigen
Biosciences believes that its approach is unique and will provide a superior
technological solution, there are several other platforms that have been
developed and are being used in the pharmaceutical and biotechnology industries.
These other platforms are in direct competition with or could replace our
technologies and there could possibly be additional such platforms under
development elsewhere. Sentigen Biosciences has not yet determined the size of
the market for its platform or the prices at which it could be marketed. In
addition, as Sentigen Biosciences has not yet entered into any discovery or
development agreements with biotechnology, pharmaceutical or other life science
institutions, it is unable to accurately assess the market for its Assay System.
GOVERNMENT REGULATION
We are subject to many laws and governmental regulations and changes in
these laws and regulations and changes in interpretation by government agencies
and 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. These 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 us to substantial civil and criminal penalties.
CMT operates a manufacturing facility and both CMT and Sentigen
Biosciences 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 these items, our business operations and financial position could be
materially adversely affected. In addition, liability to third parties could
have a material adverse effect on our business. For the years ended December 31,
2003, 2002 and 2001, we did not make any material expenditure with respect to
such matters.
11
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 substances 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 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, 2003, 2002 and 2001, we did not make any material expenditure with respect
to such matters.
Permits. In connection 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 CMT's compliance
with these regulations, however, is on a voluntary basis since its operations
produce insufficient levels of chemical waste. We further believe that none of
CMT's medical waste is deemed infectious. In addition, both CMT and Sentigen
Biosciences 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 by us 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, 2003, 2002 and 2001, we did not
make any material expenditure with respect to such matters.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
Our success depends in part on our ability to protect our proprietary
technologies and information, and to operate without infringing on the
proprietary rights of third parties. We rely on a combination of patent
applications, trade secrets, and trademarks, as well as confidentiality,
licensing and other agreements to establish and protect our proprietary rights.
We utilize certain proprietary information in connection with our
research and development operations, the provision of our services, and the
manufacture and sale of our products, including processes and formulas with
respect to cell and embryo culture media and reagents, gene expression systems
and screening assays. We rely on customary principles of "work-for-hire" as well
as technical measures to establish and protect the ideas, concepts, and
documentation of proprietary technology and know-how and, in certain instances,
have entered into non-disclosure agreements with certain customers, prospects,
consultants and employees. Such methods, however, may not afford us complete
protection, and we cannot assure you that third parties will not independently
develop such know-how or obtain access to such know-how, ideas, concepts, and
documentation.
It is expected that in the future we will need and attempt to obtain
licenses for patents and/or proprietary information from others to be utilized
in our operations. In connection with obtaining these licenses appropriate
contractual arrangements, involving some form of payment from us, may well have
to be entered into. Although we believe that our technology has been developed
independently, we cannot assure you that the technology does not and will not
infringe on the rights of others or that third parties will not assert
infringement claims against us in the future. In the case of infringement, we
would, under certain circumstances, be required to modify our operations 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 operations 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,
services 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.
12
Cell & Molecular Technologies, Inc.
During 1999, CMT applied to the United States Patent and Trademark
Office for a trademark, EmbryoMax(TM). In 2002 CMT was awarded the trademark.
The EmbryoMax trademark pertains to Specialty Media's mouse embryo culture media
and reagents offered by Specialty Media to support the generation of transgenic
mice. CMT has also applied for a U.S. patent application, in 2002, and has filed
an international, or PCT application, in 2003.
Sentigen Biosciences
On April 10, 2000, Sentigen Biosciences 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
common stock and will receive royalties of 1% of the net sales of any licensed
products or services developed under the patents. The value of this license
agreement is recorded as license costs, net of accumulated amortization on our
consolidated balance sheet. As of December 31, 2003 license costs were $343,434.
The value of the license reflects the closing share price of our common stock on
April 10, 2000, less accumulated amortization.
During 2004, we applied to the United States Patent and Trademark
Office for a trademark on the Tango Assay System. Sentigen Biosciences also
filed several U.S. provisional applications on its proprietary technology, and
plans to file additional provisional and utility applications in the United
States. Sentigen Biosciences also plans to file additional patent applications
in other countries, as seen as relevant markets for the development of its
technology.
We believe that our technology has been independently developed and
does not infringe the rights of others. However, we are aware of pending patent
applications which may issue as patents that are drawn to the same field as our
technology. We cannot assure you that our technology does not and will not, in
the future, infringe upon the rights of third parties.
PRODUCT LIABILITY
As a manufacturer of certain products, we may be exposed to product
liability claims by consumers. We 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 these policies will provide coverage for any claim
against us or that these policies 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 and financial position. 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.
13
EMPLOYEES
As of December 31, 2003, we had 45 full-time and six part-time
employees. These employees were engaged as follows:
- 17 in contract research and development services;
- nine in research and development;
- seven in media production;
- seven in administration, information technology and accounting
- four in executive positions;
- two in customer support;
- three in warehousing, shipping and receiving; and
- two in sales and marketing.
None of our employees are covered by collective bargaining agreements.
We believe that we have good relationships with our employees.
ITEM 2. PROPERTIES
Our executive offices are located at 580 Marshall Street, Phillipsburg,
New Jersey. The Phillipsburg facility consists of approximately 6,651 square
feet of laboratory, manufacturing and office/warehouse space. The property is
owned by CMT, subject to a note, dated February 10, 1997, bearing interest at
5.00% and having a balance as of December 31, 2003, of $249,670. 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. Rental expense
totaled $158,123 for the year ended December 31, 2003.
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 accommodates the HTS
support services group. Rental expense totaled $18,000 for the
year ended December 31, 2003. CMT renewed this lease through
November 2004 at its current terms. In February 2003, CMT
signed a 3-year lease to expand this location by an additional
3,000 square feet. Rental expense for this area totaled
$16,500 for the year ended December 31, 2003.
Sentigen In May 2000, Sentigen Biosciences leased approximately 2,000
Biosciences square feet of laboratory space at 3960 Broadway, New York,
New York. The lease expired in April 2002, and we are on a
month-to-month basis. Rental expense for this facility totaled
$68,778 for the year ended December 31, 2003.
Sentigen We lease approximately 980 square feet of administrative
Holding office space for use by our Board of Directors and Executive
Corp. Officers at 434 East Cooper Street, Aspen, Colorado. This
lease expires on April 30, 2004. We intend to renew this lease
through April 30, 2005 should the terms be acceptable. Rental
expense totaled $40,993 for the year ended December 31, 2003.
Sentigen On October 1, 2003, in connection with our employment
Holding agreement with Erik R. Lundh, we leased an apartment in New
Corp. York, New York. Rental expense totaled $7,350 for the year
ended December 31, 2003. The lease expires on September 30,
2004.
We routinely evaluate our facilities for adequacy in light of our
business plans. Our business plans may require us to lease additional facilities
in the future.
14
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on November 19, 2003. The
following proposals were adopted by the margins indicated:
1. To elect seven directors, each of whom is to serve until the next
Annual Meeting of Stockholders and until his successor is elected and
qualified.
NUMBER OF SHARES
WITHHELD
FOR AUTHORITY AGAINST
--- --------- -------
Joseph K. Pagano 5,916,146 1,538,598 -
Thomas Livelli 5,916,146 1,538,598 -
Frederick R. Adler 5,916,146 1,538,598 -
Samuel A. Rozzi 5,916,146 1,538,598 -
Joel M. Pearlberg 5,916,146 1,538,598 -
Gerald Greenwald 5,916,146 1,538,598 -
Bruce Slovin 5,916,146 1,538,598 -
2. To ratify the appointment of Deloitte & Touche LLP as independent
auditors for the fiscal year ending December 31, 2003.
For 5,916,146
Withheld Authority 1,538,598
Against -
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On January 9, 2002 our common stock began trading on The NASDAQ
SmallCap Market under the symbol SGHL. Prior to that date our common stock was
traded on the OTC Bulletin Board. The following table sets forth the high and
low bid prices for our common stock as reported on the OTC Bulletin Board or The
NASDAQ SmallCap Market, as applicable, and the high and low bid prices from
January 1, 2002 until March 22, 2004. The prices represent inter-dealer
quotations, which do not include retail markups, markdowns or commissions and
may not necessarily represent actual transactions.
PERIOD HIGH ($) LOW ($)
------ -------- ---------
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
Fourth quarter $ 5.9600 $ 4.4600
Third quarter 4.8300 4.6000
Second quarter 5.0700 3.8500
First quarter 5.7500 4.7300
2004
First quarter $11.6500 $ 5.6500
(through March 22, 2004)
On March 22, 2004, the last sale price for our common stock was $9.84,
as reported by The NASDAQ SmallCap Market. As of March 22, 2004, we had
7,457,224 shares of our common stock outstanding and approximately 340 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, capital
requirements and financial condition and other relevant factors. We currently
intend to retain all earnings, if any, to finance the continued 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.
16
ITEM 6. SELECTED FINANCIAL DATA
The following selected statement of operations data for the years ended
December 31, 2003, 2002 and 2001 and the selected balance sheet data as of
December 31, 2003 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, 2000 and 1999 and the selected balance sheet data as of December
31, 2001, 2000 and 1999 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 consolidated financial statements and the notes thereto appearing elsewhere
in this report.
FISCAL YEAR ENDED DECEMBER 31,
------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Total revenues $ 9,014,781 $ 7,217,446 $ 6,080,198 $ 4,729,503 $ 3,916,581
------------ ------------ ------------ ------------ ------------
Income after
direct costs $ 5,917,242 $ 4,654,350 $ 3,804,142 $ 2,838,854 $ 2,290,378
Operating expenses 6,684,775 5,276,486 4,826,954 3,083,238 1,809,614
------------ ------------ ------------ ------------ ------------
(Loss) income from
operations (767,533) (622,136) (1,022,812) (244,384) 480,764
Interest income, net of
interest expense 20,489 235,956 508,345 191,991 160,350
Income tax expense 126,144 135,851 133,122 74,322 -
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (873,188) $ (522,031) $ (647,589) $ (126,715) $ 641,114
============ ============ ============ ============ ============
(Loss) income per
share of common stock
Basic $ (0.12) $ (0.07) $ (0.09) $ (0.02) $ 0.11
============ ============ ============ ============ ============
Diluted $ (0.12) $ (0.07) $ (0.09) $ (0.02) $ 0.10
============ ============ ============ ============ ============
BALANCE SHEET DATA:
Working capital $ 9,956,254 $ 9,811,764 $ 9,929,995 $ 5,462,235 $ 5,386,910
------------ ------------ ------------ ------------ ------------
Total assets $ 13,123,379 $ 13,148,435 $ 12,862,944 $ 13,419,909 $ 7,428,682
------------ ------------ ------------ ------------ ------------
Long - Term Debt $ 800,581 $ 1,031,161 $ 914,110 $ 635,001 $ 1,092,095
------------ ------------ ------------ ------------ ------------
Stockholders' Equity $ 10,931,194 $ 10,870,489 $ 10,950,382 $ 11,351,799 $ 5,734,091
------------ ------------ ------------ ------------ ------------
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT OVERVIEW
We are a holding company conducting business through two wholly-owned
operating subsidiaries, Cell & Molecular Technologies, Inc. ("CMT"), and
Sentigen Biosciences. CMT provides contract research and development services
and manufactures specialty cell culture media, reagents and other research
products for companies engaged in the drug discovery process. Sentigen
Biosciences is primarily engaged in the development and commercialization of
novel bioassay systems that elucidate the underlying biology of protein-protein
interactions. Sentigen Biosciences is initially targeting its Tango Assay System
to address the functionalization of G protein-coupled receptors (GPCRs) for
pharmaceutical drug discovery and development. Sentigen Biosciences has filed
patent applications on its Assay System and expects to file additional patent
applications on this technology in the future.
CMT operates through two divisions -- Molecular Cell Science ("MCS")
and Specialty Media ("SM"). MCS provides contract research and development
services and High Throughput Screening support services to companies engaged in
the drug discovery process. SM develops, manufactures and markets specialty cell
culture media, reagents and other research products.
CMT and Sentigen Biosciences continue to execute their respective
business plans and are focused on building their respective businesses to secure
growth in the future. At CMT, we are expending time and resources to broaden our
customer base and our service offerings to the drug discovery community. At
Sentigen Biosciences, we are spending our time and resources to execute the
development and commercialization of the Tango Assay System.
The earnings generated from our base business at CMT have, to date,
provided us with the financial resources to execute our research program at
Sentigen Biosciences. Our continued success in these efforts depends on CMT's
ability to broaden its customer base and expand its portfolio of services to the
drug discovery community. To this end, the management team at CMT has spent its
time developing its business through trade conferences, exhibition and project
collaborations that demonstrate CMT's sophisticated service platform and
research products to companies engaged in the drug discovery process.
Sentigen Biosciences has been primarily focused on research and
development, and has participated in various scientific and industry conferences
and met with leading pharmaceutical, biotechnology and agricultural companies in
an effort to raise awareness of its technologies among constituents in those
communities. Sentigen Biosciences intends to seek strategic discovery and
development partnerships around key molecular targets with biotechnology,
pharmaceutical and other life sciences research institutions and although
introductory meetings have begun, no assurance can be given that any such
partnerships will be successfully entered into. Sentigen Biosciences also
intends to expand its research and development programs and we may, in the
future, seek to obtain additional debt or equity financing to fund these
expanded research and development programs.
CRITICAL ACCOUNTING POLICIES
Cell & Molecular Technologies, Inc.
Management evaluates the performance of CMT through its two divisions
(both are treated as separate business segments). Revenue, income after direct
costs (also referred to as "gross margin on revenues" or "gross margin") 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 provide 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" on our consolidated balance sheets. Unearned
revenue represents amounts billed in excess of costs incurred and are recorded
as liabilities on our consolidated
18
balance sheets. Revenues from the product sales of the SM division are
recognized upon transfer of title and transfer of risk of loss to the product,
which generally occurs upon shipment to the customer.
Direct Costs. The major classes of direct costs for the MCS division
are as follows: (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 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 major classes of
selling, general and administrative expenses incurred by CMT are as follows: (1)
compensation and employee benefit costs of CMT's management, sales, and
administrative staff, (2) 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 Biosciences
The operations of Sentigen Biosciences are reflected as research and
development expenses in our consolidated statements of operations. Sentigen
Biosciences operations, since its inception in February 2000, consist entirely
of research and development. Research and development costs are expensed as such
costs are incurred.
On August 19, 2002, Sentigen Biosciences 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 Biosciences
overall research program (budgeted in the grant for $75,000) as well as an
allocation for the facilities and administrative costs of Sentigen Biosciences
related to the project (budgeted in the grant at $25,003). Sentigen Biosciences
completed the research project covered under the grant and all funds were
received from the National Institute of Health as of December 31, 2002. The
receipt of funds under the grant were 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 the parent company, 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 the chairman of the board, chief financial officer,
executive vice president of commercial operations and administrative assistant,
(2) professional fees for legal and accounting services, (3) office rental,
utilities and communication costs, (4) stock market listing fees and other
related public company expenses 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. Management bases 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:
19
Allowance for doubtful accounts. Our consolidated balance sheet
includes a reserve against receivables for estimated losses that may result from
customers' inability to pay. Management determines the amount of the reserve by
analyzing uncollectible accounts, aged receivables, and customers'
creditworthiness. Amounts later determined and specifically identified to be
uncollectible are charged against this reserve. To minimize the likelihood of
uncollectible accounts, customers' creditworthiness is reviewed periodically
based on our experience with the customer and external credit services (if
necessary) and adjusted accordingly. Should a customer's account become past
due, a hold is generally placed on the account and further shipments or services
are discontinued to that customer, minimizing further risk of loss.
Additionally, all accounts with aged balances greater than one year are fully
reserved.
Inventory adjustments. Inventories are stated at the lower of cost or
market. Management reviews the components of inventory on a regular basis for
excess, obsolete and impaired inventory based on estimated future usage and
sales. Stock levels generally do not exceed one quarter's expectation of usage
or sales. Inventories were stated at $241,134 and no reserve for impairment or
obsolescence was necessary as of December 31, 2003.
Impairment of intangibles. Our intangible assets consist primarily of
license costs of $343,434 as of December 31, 2003, and are the result of the
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 the agreement with the Trustees of Columbia
University) less accumulated amortization. The value of the license is subject
to an amortization period of 17 years. Management reviews 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, 2003.
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. Management uses estimates of
remaining costs to complete each contract to determine the revenue and
profitability on each contract. Management reevaluates 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 that the exercise
price is equal to the market price at the date of the grants. Options granted to
non-employees are valued at either 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.
The Black-Scholes model requires management to estimate common stock price
volatility, risk-free interest rates and other parameters in order to determine
the fair value of an option grant. We also adopted the provisions of SFAS No.
148, "Accounting for Stock-Based Compensation --Transition and Disclosure, an
amendment of SFAS No. 123."
OFF-BALANCE-SHEET ARRANGEMENTS
As of December 31, 2003, we did not have any off-balance-sheet
arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
20
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 2003 TO YEAR ENDED DECEMBER 31, 2002
Revenues. Revenues for the year ended December 31, 2003 were $9,014,781
compared to revenue of $7,217,446 for the year ended December 31, 2002. This
increase of $1,797,335 or 25%, was the result of an increase of $1,621,263, or
36%, in contract revenue from CMT's MCS division and an increase of $276,075 or
10%, in revenue from CMT's SM division, offset, in part, by a decrease of
$100,003, or 100% in grant revenues from Sentigen Biosciences. Our consolidated
revenues in 2003 were entirely attributable to the operations of CMT and its two
divisions, MCS and SM.
An analysis of the revenues from the MCS division is as follows:
FOR THE YEAR ENDED
DECEMBER 31,
------------ PERCENT
2003 2002 CHANGE
------------ ------------ -------
HTS contract $ 2,400,000 $ 2,004,000 20%
All other contracts 3,676,502 2,451,239 50%
------------ ------------
Total $ 6,076,502 $ 4,455,239 36%
============ ============
The contract revenue for high-throughput screening, or HTS, services is
derived from a retainer contract. The contract provided for payments of $200,000
per month, regardless of the volume of services performed during the month. The
term of the contract was for one year and ended on December 31, 2003. The 20%
increase in the revenues received under the contract resulted from the increase
in HTS services required by the customer to support its HTS programs during the
year ended December 31, 2003 compared to the year ended December 31, 2002. On
January 19, 2004, this customer renewed its contract with CMT for a term of one
year, ending on December 31, 2004. The new contract provides for payments to CMT
of $200,000 per month in exchange for a fixed number of cell and reagent
deliveries to support the customer's HTS program. Should actual deliveries
during 2004 exceed the fixed number of deliveries provided for in the contract
additional deliveries will be billed at the rate of $909 per delivery. The
contract also provides for a credit against other services (in addition to the
base contract value) performed for the customer in 2005 should actual deliveries
during 2004 fall below the fixed number of deliveries provided for in the
contract. The contract states that the credit against the value of future
additional services performed in 2005 cannot exceed 30% of the value of the
additional services performed in addition to the base contract value for 2004.
The 50% growth from other contracts was driven by mouse genetics
services and protein expression services.
Revenues from the SM division grew 10% for the year ended December 31,
2003 as compared to the year ended December 31, 2002. This growth was driven by
three 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; and
- price increases implemented as of January 1, 2003.
Income after Direct Costs and Gross Margin. Income after direct costs
for the year ended December 31, 2003 was $5,917,242 (a gross margin on revenue
of 66%) compared to income after direct costs of $4,654,350 (a gross margin on
revenue of 64%) for the year ended December 31, 2002. Gross margin for the MCS
division was 69% for both the year ended December 31, 2003, and 2002. Gross
margin for the SM division was 58% for the year ended December 31, 2003 and 59%
for the year ended December 31, 2002. The decrease was due to higher direct
labor costs in the SM division.
21
Operating Expenses. Operating expenses for the year ended December 31,
2003 were $6,684,775 compared to $5,276,486 for the year ended December 31,
2002. This increase of $1,408,289 or 27% was primarily the result of the
following:
- Selling, general and administrative expenses of CMT increased
$315,244 or 13% due to higher commercial insurance expenses,
higher compensation expenses and higher marketing and sales
expenses.
- Research and development expenses increased $216,476 due to
higher professional fees and research expenses at Sentigen
Biosciences. - Corporate overhead expenses increased $206,815
or 19%. The increase was primarily due to the increased costs
associated with the hiring of our Executive Vice President of
Commercial Operations and increased professional fees for
legal services.
- An increase in stock based compensation costs of $720,763. The
increase in stock based compensation results from the
September 4, 2003 amendment to a stock option agreement with
our Chairman of the Board, Chief Executive Officer and
President. The stock option is for the purchase of 217,000
shares of our common stock at $1.625 per share and was
originally granted on May 1, 1996. The stock option is fully
vested and would have expired on April 30, 2004. The amendment
extended the life of the option to April 30, 2006. All other
terms of the stock option agreement remain unchanged. As a
result of this amendment and according to FASB Interpretation
No. 44 to APB Opinion No. 25 we recognized stock based
compensation in the amount of $820,407.
- These increases were partially offset by a decrease of $26,006
in depreciation and amortization expenses.
Income / Loss from Operations. Loss from operations for the year ended
December 31, 2003 was $767,533 compared to a loss from operations of $622,136
for the year ended December 31, 2002. The components of this 23% increase are as
follows:
FOR THE YEAR ENDED
DECEMBER 31,
------------ PERCENT
2003 2002 CHANGE
------------ ------------ -------
CMT $ 2,614,738 $ 1,600,950 63%
Sentigen Biosciences (1,259,673) (1,124,787) 12%
Holding Company
Expenses (2,122,598) (1,098,299) 93%
------------ ------------
Total $ (767,533) $ (622,136) 23%
============ ============
The increased income from operations of CMT was driven by its 27%
increase in revenues. The revenue increase was augmented by reduced selling,
general and administrative costs as a percentage of revenue. The loss from
operations attributable to Sentigen Biosciences increased due to higher research
costs and professional fees. The loss from holding company expenses increased by
93% due to the additional stock based compensation of $820,407 recognized for
the extension of the life of a stock option previously granted to our Chairman
of the Board, Chief Executive Officer and President and the additional costs
associated with the hiring of our Executive Vice President of Commercial
Operations.
Interest income. Interest income, net of interest expenses declined by
$215,467 due to the decline in yields on U.S. Treasury and money market
securities, in which we invest our available cash.
22
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 Biosciences for $100,003. Other
than the Federal Phase I grant award received by Sentigen Biosciences, our
revenues for 2002 were entirely attributable to the operations of CMT and its
two divisions, MCS and SM.
An analysis of the 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. CMT 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.
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 Biosciences) 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
23
development costs of Sentigen Biosciences 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 Biosciences (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
Biosciences improved by 2% which was due to the grant award from the NIH, offset
by higher stock-based compensation costs. Sentigen Biosciences' 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003 we had $10,086,952 in cash and cash equivalents
and working capital of $9,956,254. During the year ended December 31, 2003 we
financed our operations and capital expenditures primarily through working
capital and certain equipment leases were capitalized for accounting purposes.
On January 22, 2003 we sold $5,250,000 face value, 2.125% U.S. Treasury
Notes maturing on October 31, 2004. The proceeds from the sale were reinvested
in 90-day U.S. Treasury Bills. Capital gains recognized from the transaction
were minimal. This sale accounts for the majority of the $5,266,985 increase in
cash and cash equivalents reported in our consolidated statement of cash flows.
We believe that our financial resources will be sufficient to fund
operations and capital requirements for at least the next 12 months. However, we
may, in the future, seek to obtain additional debt or equity financing to fund
expanded research and development programs. It is possible that any such
financing may be dilutive to current 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 future business prospects, as well as conditions
prevailing in the capital markets.
Cell & Molecular Technologies, Inc.
In July 2003, 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, equipment
and an offsetting capital lease liability was recorded on our consolidated
balance sheet in the amount of $35,000. We used a fixed interest rate of 5.00%
to approximate the borrowing rate for the lease. The equipment is being
depreciated on a straight-line basis through the term of the lease which expires
in June 2006. Rental payments through December 31, 2003 totaled $6,372. Of those
payments, $5,555 was applied to the capital lease liability and $817 was applied
to interest expense. As of December 31, 2003 the total remaining lease
obligation amounted to $29,445.
24
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, equipment
and an offsetting capital lease liability was recorded on our consolidated
balance sheet in the amount of $95,945. We used a fixed interest rate of 7.40%
to approximate the borrowing rate for the lease. The equipment is being
depreciated on a straight-line basis through the term of the lease which expires
in September 2005. Rental payments for the year ended December 31, 2003 totaled
$36,067. Of those payments, $30,574 was applied to the capital lease liability
and $5,493 was applied to interest expense. As of December 31, 2003 the total
remaining lease obligation amounted to $57,486.
During the first quarter of 2001, CMT leased approximately 3,000 square
feet of laboratory space to accommodate its High Throughput Screening support
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 its leased
facility in Phillipsburg, New Jersey. CMT is required to repay this loan 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 during the twelve months ended December 31, 2003.
Sentigen Holding Corp. guarantees this obligation of CMT. The unpaid principal
balance on this loan at December 31, 2003 was $584,662. On April 15, 2003, CMT
renegotiated the interest rate on this loan from a fixed rate of 7.40% to a
fixed rate of 5.25%. The amortization period of the loan remained unchanged.
Sentigen Biosciences
In June 2001, Sentigen Biosciences borrowed an additional $60,000 under
a $500,000 loan facility. We are no longer able to borrow under this facility.
Sentigen Holding Corp. guarantees this obligation of Sentigen Biosciences. The
loan also requires that Sentigen Holding Corp. keep unencumbered liquid assets
equaling two-times the combined outstanding loan balances for Sentigen and CMT.
We complied with these terms as of December 31, 2003. The loan is being
amortized over a five year period and at December 31, 2003, Sentigen Biosciences
had borrowed a total of $300,000 under this facility, and the unpaid principal
balance on this loan was $92,121. On February 5, 2003 Sentigen Biosciences
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 rate plus
1.00% with a minimum interest rate of 5.50%.
Sentigen Biosciences 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 Biosciences within one year of the date of the
agreement (by April 2001) or we must be involved in active negotiations to raise
$1,000,000 in additional funding. We satisfied this provision through the
consummation of a 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 requires that a minimum of $50,000
per six month period or $100,000 per annual period 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
sufficient capital resources to meet the financial requirements of this
provision for the agreement years 2004 and beyond.
There is no assurance that the technology related to the licensing
agreement with The Trustees of Columbia University or other technologies
involved in the research and development activities of Sentigen Biosciences 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 its facility at 3960 Broadway, New York, New York. No
provisions have been made for such possible further expense.
25
COMMITMENTS UNDER DEBT OBLIGATIONS AND LEASES
We were in compliance with all debt covenants as of and for the year
ended December 31, 2003. As of December 31, 2003, the scheduled maturities of
our indebtedness were:
TOTAL <1 YEAR 1-3 YEARS 3-5 YEARS >5 YEARS
----------- ------- --------- --------- --------
Long-Term Debt Obligations $ 970,025 211,927 231,098 233,409 293,591
Capital Lease Obligations 86,931 44,448 42,483 - -
Operating Lease Obligations 408,352 237,993 170,359 - -
----------- ------- ------- -------- --------
Total $ 1,465,308 494,368 443,940 233,409 293,591
=========== ======= ======= ======== ========
INFLATION
Inflation has historically not had a material effect on our operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("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. The adoption of SFAS No. 143 did not have an 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. The
adoption of SFAS No. 145 did not have an effect on our 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 was
effective for all exit or disposal activities initiated after December 31, 2002.
We did not undertake any exit or disposal activities for the year ended December
31, 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
26
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 was effective for
the year ended December 31, 2002.
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 fair value of employee stock options as permitted by SFAS No. 123, as
amended by SFAS No. 148, since it permits alternative methods of adoption.
2003 2002 2001
------------ ------------ ------------
Net Loss:
As reported $ (873,188) $ (522,031) $ (647,589)
Pro-forma expense as if employee
stock options were charged
against net loss (244,551) (192,051) (236,780)
------------ ------------ ------------
Pro-forma net loss using the fair
value method $ (1,117,739) $ (714,082) $ (884,369)
============ ============ ============
Basic and Diluted EPS:
As reported $ (0.12) $ (0.07) $ (0.09)
Pro-forma using the fair
value method $ (0.15) $ (0.10) $ (0.12)
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, as restated by FIN No.
46R, "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 December 15, 2003, to entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
We do not have variable interest entities as of December 31, 2003.
In April 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No.
133 for certain decisions made by the Board as part of the Derivatives
Implementation Group (DIG) process and is effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. In addition, SFAS No. 149 should be applied prospectively. The
provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. We are not involved in any hedging activities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 addresses how certain financial instruments with characteristics of both
liabilities and equity should be classified and measured. The adoption of SFAS
No. 150 did not have an effect on the Company's financial position.
27
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 and cash equivalents, investment securities and 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.
At December 31, 2003, we have total debt of $1,056,956. This debt
consists of two capital leases, three bank notes used for equipment financing
and a mortgage on our executive office at 580 Marshall Street, Phillipsburg, New
Jersey 08865. The 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 Biosciences renegotiated the interest
rate on its equipment loan maturing April 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%.
On April 15, 2003, CMT renegotiated the interest rate on its equipment
loan, maturing May 2009 from a fixed rate of 7.40% to a fixed rate of 5.25%. The
amortization period of the loan remained unchanged.
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 DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was
performed on the effectiveness of the design and operation of our disclosure
controls and procedures under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that the design and operation of our disclosure controls and
procedures were effective as of the end of the period covered by this report. In
addition, no change in our internal control over financial reporting (as defined
in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the
fourth quarter of our fiscal year ended December 31, 2003 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
28
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Our current executive officers, directors and key employees are as
follows:
NAME AGE POSITION
- --------------------------------- --- ------------------------------------------------------------
EXECUTIVE OFFICERS AND DIRECTORS:
Joseph K. Pagano 59 Chairman of the Board, Chief Executive Officer and President
Fredrick B. Rolff 32 Chief Financial Officer
Erik R. Lundh 34 Executive Vice President - Commercial Operations
Thomas Livelli 51 Director, Chief Executive Officer and President of CMT
Frederick R. Adler 78 Director
Gerald Greenwald 68 Director
Joel M. Pearlberg 66 Director
Samuel A. Rozzi 58 Director
Bruce Slovin 68 Director
KEY EMPLOYEES:
Kevin J. Lee, PhD 41 Vice President - Research, Sentigen Biosciences
Richard Malavarca 51 Chief Operating Officer and Vice President of CMT
JOSEPH K. PAGANO has served as 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. 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 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.
ERIK R. LUNDH has served as Executive Vice President, Commercial
Operations since September 2003. From 2002 to September 2003, Mr. Lundh led the
worldwide sales, business development, and services functions at ACLARA
BioSciences, Inc. (NASDAQ: ACLA), a leading provider of tools for
biopharmaceutical drug discovery
29
and development. From 1999 to 2001, Mr. Lundh was a vice president of sales at
SciQuest, Inc. (NASDAQ: SQST), a provider of supply chain technology, services,
and domain expertise to the life sciences and industrial research markets. From
1995 to 1999, Mr. Lundh managed sales in the Western U.S. region for QIAGEN Inc.
(NASDAQ: QGENF), a leading provider of integrated bio-separation solutions to
the life sciences industry. From 1991 to 1994, Mr. Lundh worked as a
cardiovascular research scientist at Berlex Biosciences, Inc., the North
American subsidiary of Schering AG (NYSE: SHR). Mr. Lundh holds a B.S. in
Biological Sciences from Santa Clara University.
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.
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. He is
also a director of SIT Investments, Inc., an investment management firm located
in Minneapolis, MN and from 1977 to 1995 was a Trustee and member of the Finance
Committee of Teachers Insurance and Annuity Association. Mr. Adler is a retired
partner of the law firm of Fulbright & Jaworski L.L.P. and was previously a
senior partner in the firm and of counsel to the firm. From 1982 to 1996 he was
a director of Life Technologies, Inc., a significant supplier in the
biotechnology area, serving at various times until January 1, 1988 as either its
Chairman or its Chief Executive Officer and after 1988 as Chairman of its
Executive Committee. He has been a founding investor and a director of a number
of biotechnology firms including Biotechnology General (now Savient) and
Synaptic. Mr. Adler is a graduate of Brooklyn College and graduated Magna Cum
Laude from The Harvard Law School.
GERALD GREENWALD has been a Director since June 2001. Mr. Greenwald
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 United Airlines. From 1994 until his retirement
in July 1999, Mr. Greenwald was Chairman and Chief Executive Officer of United
Airlines. In his five years with United, he led the airline through its
beginnings as the world's largest majority employee-owned company, helped return
it to profitability and built its leadership position throughout the world. 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. He is the author of the business book, Lessons from the Heart of
American Business, Publisher, Warner Books. 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 2004.
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 that he founded, since September 1988. Mr. Rozzi is the uncle of
Fredrick B. Rolff.
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BRUCE SLOVIN has been a Director since September 2003. Mr. Slovin has
served as President of 1 Eleven Associates, LLC, a private investment firm since
January 2000. From 1985 until December 2000, Mr. Slovin was the President and a
director of MacAndrews & Forbes Holdings Inc. and Revlon Group, Inc., privately
held industrial holding companies. Mr. Slovin is a director of M&F Worldwide
Corp. (NYSE: MFW), a manufacturer of licorice extract and flavorings, Daxor
Corporation (AMEX: DXR), the developer and manufacturer of the Blood Volume
Analyzer, and Cantel Medical Corp. (NYSE: CMN), a medical device company.
KEVIN J. LEE, PHD has served as Vice President - Research for Sentigen
Biosciences 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that 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 a 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, 2003 all filing requirements applicable to our
officers, directors, and greater than 10 percent beneficial stockholders were
complied with.
AUDIT COMMITTEE
The members of our audit committee are Frederick R. Adler, Joel M.
Pearlberg and Bruce Slovin. The Board has determined that Mr. Pearlberg
satisfies the definition of "audit committee financial expert" as set forth in
Item 401(h) of Regulation S-K. All members of the audit committee are
"independent" as that term is defined in applicable SEC rules and NASDAQ listing
standards.
CODE OF ETHICS AND BUSINESS CONDUCT
Our Code of Ethics and Business Conduct is available free of charge on
our website at www.sentigencorp.com. Our Code of Ethics and Business Conduct
applies to all directors, officers (including senior financial officers) and
employees. Amendments to or waivers of the Code of Ethics and Business Conduct
granted to a director or executive officer will be posted on our website.
31
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 the chief executive officer of one of
our subsidiaries) other than our Chief Executive Officer who were serving as
executive officers at December 31, 2003.
LONG TERM
COMPENSATION
------------
SECURITIES ALL
UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS (#) COMPENSATION ($)
--------------------------- ---- -------- ---------- --------------- ---------------
Joseph K. Pagano 2003 $175,000 - - $ 17,875(1)
Chairman of The Board, 2002 175,000 - - 17,875(1)
Chief Executive Officer and 2001 161,500 - - 1,000(1)
President
Fredrick B. Rolff 2003 $123,164 7,845(2) - $ 6,000(7)
Chief Financial Officer 2002 115,000 5,750(2) - 6,000(7)
2001 99,100 5,750(2) - 3,000(7)
Erik R. Lundh 2003 $ 66,667 8,219(3) - $ 7,350(8)
Executive Vice President of
Commercial Operations
Thomas Livelli 2003 $168,771 $ 40,000(4) - $ 6,000(7)
Chief Executive Officer and 2002 156,658 20,000(5) - 6,000(7)
President of CMT 2001 150,000 20,000(5) 25,000(6) 6,000(7)
(1) On November 1, 2001, Mr. Pagano was granted a $500 per month car
allowance which continued for the years ended December 31, 2002 and
2003. In December 2002, we purchased two term insurance policies on the
life of Joseph K. Pagano. We are 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
annual premium on the policy for the benefit of Mr. Pagano's son was
$11,875 for the years ended December 31, 2003 and 2002. See below under
"Life Insurance Policies on Chairman of the Board and Scientific
Consultant" for a description of the life insurance policies.
(2) The employees of CMT and our Chief Financial Officer were paid a bonus
based on 5% of the respective individual's annual salary for the year
ended December 31, 2001 and 2002. During the year ended December 31,
2003 such bonus was paid at the rate of 6% of the respective
individual's annual salary.
(3) Mr. Lundh received a bonus of $8,219 for the year ended December 31,
2003 pursuant to his employment agreement with us. See below under
"Employment Agreements" for a description of the employment contract.
(4) For the year ended December 31, 2003, Mr. Livelli received a bonus of
$30,000 pursuant to his employment agreement with CMT. In addition, on
July 29, 2003, Mr. Livelli's employment agreement was amended to
provide for a one-time bonus of $10,000 in addition to any bonus earned
by Mr. Livelli in 2003. The amendment also extended the term of Mr.
Livelli's employment agreement to the earlier of May 22, 2008 or the
two year anniversary of a "change in control" (as such term is defined
in the employment agreement).
(5) Reflects Mr. Livelli's minimum guaranteed annual bonus per his
employment agreement.
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(6) On May 23, 2001, Mr. Livelli was granted 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.
(7) Reflects a $500 per month car allowance.
(8) We leased an apartment in New York, New York for Mr. Lundh pursuant to
his employment agreement. The monthly rent for the apartment is $2,450.
The lease term is for one year beginning October 1, 2003 and ending on
September 30, 2004. See below under "Employment Agreements" for a
description of the employment contract.
EMPLOYMENT AGREEMENTS
Joseph K. Pagano. On May 24, 1999, we entered into an employment
agreement with Mr. Pagano to serve as Chairman of the Board, President and Chief
Executive Officer. The employment 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 provided for annual base compensation of
$85,000 and in March 2001 was amended to provide for annual base compensation of
$175,000. On February 17, 2004, Mr. Pagano's annual base compensation was raised
to $225,000. In connection with the employment agreement, the termination date
of an option previously granted to Mr. Pagano to purchase 217,000 shares of our
common stock was extended an additional three years to April 30, 2004. The
termination date of this option was extended again on September 4, 2003 to April
30, 2006. 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.
Erik R. Lundh. On September 2, 2003 we entered into an employment
agreement with Mr. Lundh to serve as Executive Vice President of Commercial
Operations. The agreement is 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 $200,000. Mr. Lundh is also
entitled to participate in a bonus plan, which will be based on certain
operational and financial milestones. The bonus under the plan shall not be less
than $8,219 in 2003 and shall not be less than $25,000 in 2004. Pursuant to the
employment agreement, we granted Mr. Lundh an option to purchase 50,000 shares
of our common stock at $4.75 per share. This option expires on September 2, 2013
and vests in five equal annual installments commencing on September 2, 2004.
Pursuant to this agreement we leased an apartment in New York, New York for Mr.
Lundh for a term of one year, beginning October 1, 2003. The monthly rent for
the apartment is $2,450.
Thomas Livelli. In connection with the acquisition of CMT, we assumed
an employment agreement with Mr. Livelli pursuant to which Mr. Livelli served as
President and Chief Executive Officer of CMT through May 22, 2001. As of May 23,
2001, CMT 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 (subject to certain adjustments) 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,
Mr. Livelli was granted 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, Mr.
Livelli's employment agreement was amended to provide for an annual base salary
of $165,000. Pursuant to the automatic cost of living adjustment provided for in
the agreement we increased Mr. Livelli's annual base salary to $169,571
effective May 23, 2003. On July 29, 2003 Mr. Livelli's employment agreement was
amended to provide for a one-time bonus of $10,000 in addition to any bonus
earned by Mr. Livelli in 2003. The amendment also extended the terms of Mr.
Livelli's
33
employment agreement to the earlier of May 22, 2008 or the two year anniversary
of a "change in control" (as such term is defined in the employment agreement).
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, our Chairman of the Board, Chief Executive Officer and President. We are
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 Dr. Richard Axel, a
scientific consultant to us. We are the beneficiary under the policy in the
amount of $10 million. We are required to make annual premium payments of
$30,785 until December 9, 2012, at which time scheduled annual premium increases
begin. The policy is cancelable, non-participating and does not pay dividends.
DIRECTOR COMPENSATION
Directors receive no cash compensation for serving on the Board of
Directors or for attending Board or Committee meetings. We will reimburse
directors for out-of-pocket expenses incurred in connection with attending board
meetings. Non-employee directors are eligible to be granted non-qualified stock
options under the 2000 Performance Equity Plan. Nonqualified stock options may
be exercised for up to 10 years from the date of grant at such exercise prices
as the Board of Directors may determine. During the year ended December 31, 2003
we granted stock options to non-employee directors as follows:
NUMBER OF
SECURITIES
UNDERLYING
OPTIONS EXERCISE PRICE GRANT EXPIRATION
NAME GRANTED(#) VESTING PER SHARE($) DATE DATE
---- ---------- ------- ------------ ---- ----
Gerald Greenwald 10,000 100% on 9/2/2004 $4.75 9/2/2003 9/2/2013
Joel M. Pearlberg 20,000 100% on 9/2/2004 $4.75 9/2/2003 9/2/2013
Bruce Slovin 20,000 100% on 9/25/2004 $4.65 9/25/2003 9/25/2013
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee is comprised of Frederick R. Adler and Joel
M. Pearlberg. No member of our Compensation Committee has been an employee of
ours. None of our executive officers serves as a member of the board of
directors or the compensation committee of any other entity that has one or more
executive officers serving as a member of our Board of Directors or Compensation
Committee.
34
OPTION GRANTS
The following table represents the stock options granted during the
fiscal year ended December 31, 2003 to the executive officers identified in the
Summary Compensation table above.
OPTIONS GRANTED IN LAST FISCAL YEAR
PERCENT OF POTENTIAL REALIZABLE
NUMBER OF TOTAL OPTIONS VALUE AT ASSUMED
SECURITIES GRANTED TO ANNUAL RATES OF
UNDERLYING EMPLOYEES STOCK PRICE
OPTIONS DURING THE EXERCISE PRICE EXPIRATION APPRECIATION FOR
NAME GRANTED(#) FISCAL YEAR(%) PER SHARE($) DATE OPTION TERM($)
- -------------- ---------- ------------- -------------- ---------- ---------------------
5%(1) 10%(1)
-------- --------
Erik R. Lundh 50,000 95% $4.75 9/4/2013 $222,663 $495,232
(1) The above information concerning five percent and ten percent assumed
annual rates of compounded stock price appreciation is mandated by the
Securities and Exchange Commission. There is no assurance provided to
any executive officer or to any other optionee that there will be
appreciation of the stock price over the option term or that the
optionee will realize any gains with respect to the options. The
closing price of our common stock on December 31, 2003 was $5.65 per
share.
The following table sets forth the fiscal year end option values of
outstanding options at December 31, 2003 and the dollar value of unexercised,
in-the-money options for the executive officers identified in the Summary
Compensation table above. None of our executive officers exercised any stock
options during the year ended December 31, 2003.
AGGREGATE FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED DOLLAR VALUE OF UNEXERCISED IN-THE-
OPTIONS AT DECEMBER 31, 2003: MONEY OPTIONS AT DECEMBER 31, 2003(1):
NAME EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE(#) UNEXERCISABLE(#)
---- ------------- -------------------- ------------- ----------------
Joseph K. Pagano 367,000 50,000 $ 873,425 $ -
Fredrick B. Rolff 30,000 20,000 $ - $ -
Erik R. Lundh - 50,000 $ - $ 45,000
Thomas Livelli 10,000 15,000 $ - $ -
(1) These values are based on the difference between the closing sale price
of our common stock on December 31, 2003 of $5.65 and the exercise
prices of the options, multiplied by the number of shares of common
stock subject to the options.
35
EQUITY COMPENSATION PLANS
We have two stock option plans: the 1990 Stock Option Plan and the 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, options may be granted to
employees, directors, consultants, agents and other persons that are deemed to
be valuable to us or our subsidiaries. The 2000 plan permits the 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 were granted under
the 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.
Under the 2000 plan, the 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. The 2000 plan currently
is administered by the full Board of Directors. Subject to the provisions of the
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 the 2000 plan, options covering a maximum of 200,000 shares of
our common stock in the aggregate may be granted to any one holder during any
one calendar year.
At December 31, 2003, options to purchase an aggregate of 247,550 and
1,121,709 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, 2003. These warrants were issued in connection with our private
placement consummated in November 2000.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 22, 2004
with respect to the common stock ownership of (i) each person known by us to
beneficially own more than 5% of our voting securities; (ii) each of our
directors and director nominees; (iii) each executive officer named in the
Summary Compensation Table above; and (iv) 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 1,541,450(3) 19.6%
Frederick A. Adler 743,573(4) 9.9%
Samuel A. Rozzi 507,525 6.8%
Thomas Livelli 169,380(5) 2.3%
Joel M. Pearlberg 35,000(6) *
Fredrick B. Rolff 31,000(7) *
Gerald Greenwald 20,000(8) *
Bruce Slovin -(9) *
Erik R. Lundh -(10) *
D.H. Blair Investment 1,134,859(11) 15.2%
Banking Corp.
All directors and executive 3,047,928(12) 37.8%
officers as a group (nine persons)
- --------------------
* Less than 1% of the outstanding common stock
(1) The address is c/o Sentigen Holding Corp., 580 Marshall Street,
Phillipsburg, NJ 08865.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, which generally attributes
beneficial ownership of securities to persons who possess sole or
shared voting power and/or investment power with respect to those
securities. Shares of common stock issuable pursuant to options, to the
extent such options are exercisable or convertible within 60 days after
March 22, 2004, are treated as outstanding for purposes of computing
the percentage of the person holding such securities but are not
treated as outstanding for purposes of computing the percentage of any
other person.
(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) options
to purchase 367,000 shares of common stock which are currently
exercisable. Excludes options to purchase 50,000 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 by D. H.
Blair, or by the actual holders of the shares. Mr. Adler disclaims
beneficial ownership of all shares other than those held in his name.
37
(5) Includes options to purchase 15,000 shares of common stock which are
currently exercisable. Excludes options to purchase 10,000 shares of
common stock.
(6) Excludes options to purchase 20,000 shares of common stock.
(7) Includes options to purchase 30,000 shares of common stock which are
currently exercisable. Excludes options to purchase 20,000 shares of
common stock.
(8) Represents options to purchase 20,000 shares of common stock which are
currently exercisable. Excludes options to purchase 10,000 shares of
common stock.
(9) Excludes options to purchase 20,000 shares of common stock.
(10) Excludes options to purchase 50,000 shares of common stock.
(11) 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. Mr. Adler
disclaims beneficial ownership of all shares other than those held in
his name.
(12) Includes options to purchase 432,000 shares of common stock which are
currently exercisable. Excludes options to purchase 180,000 shares of
common stock.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information at December 31, 2003
with respect to the 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)
------------- ------------------- ------------------- -----------------------------
Approved by Stockholders 1,369,259 $5.24 878,291
Not Approved by Stockholders 44,810(1) $6.00 -
(1) In connection with a private placement consummated in November 2000, a
warrant was issued to Mr. Theodore M. Serure to purchase 44,810 shares
of our common stock as compensation for introducing investors to us who
purchased 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.
38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Notes payable to Stockholders in connection with the Cell & Molecular
Technologies, Inc. Merger
At the time of the 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 principal and
interest of $603,125 was repaid 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 connection with company business.
Reimbursement for the use of the aircraft is limited to actual costs incurred.
The Board of Directors also determined that reimbursement for use of the
aircraft was not to exceed $120,000 for the calendar year ending December 31,
2003. The cost limitation does not include travel on commercial airlines. For
the fiscal year ended December 31, 2003 reimbursements to Mr. Pagano for use of
a private jet totaled $82,253.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The aggregate fees billed by Deloitte & Touche LLP for professional
services rendered for the audit of our annual financial statements for the
fiscal years ended December 31, 2003 and 2002 and for the reviews of the
financial statements included in our Quarterly Reports on Form 10-Q for those
fiscal years totaled approximately $70,000 and $60,000, respectively.
Tax Fees
Deloitte & Touche LLP prepares our federal and state income tax
returns. Fees billed for these services totaled $28,500 per year for the fiscal
years ended December 31, 2003 and 2002.
Audit-Related and All Other Fees
There were no other audit-related fees or other services rendered by
our principal accountant during the fiscal years ended December 31, 2003 and
2002.
The Audit Committee pre-approves all audit and non-audit services
provided by our independent auditors prior to the engagement of the independent
auditors with respect to such services. The Audit Committee shall pre-approve
any additional audit services and permissible non-audit services. All "Audit
Fees" and "Tax Fees" set forth above were pre-approved by the Audit Committee in
accordance with its pre-approval policy.
39
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.
40
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Financial Statements December 31, 2003, 2002 and 2001
TABLE OF CONTENTS
PAGE
Independent Auditors' Report for the years ended December 31, 2003, 2002 and 2001 F-2
Consolidated Financial Statements
Balance Sheets
December 31, 2003 and 2002 F-3
Statements of Operations
For the Years ended December 31, 2003, 2002, 2001 F-4
Statements of Stockholders' Equity
For the Years ended December 31, 2003, 2002, 2001 F-5
Statements of Cash Flows
For the Years ended December 31, 2003, 2002, 2001 F-6
Notes to Consolidated Financial Statements F-8
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, 2003 and 2002, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years ended December 31, 2003, 2002 and 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2003 and 2002 and the results of its operations and its cash flows
for the years ended December 31, 2003, 2002 and 2001, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
- ----------------------------
New York, New York
March 9, 2004
F-2
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
--------------
2003 2002
------------ -----------
Assets
Current Assets
Cash and cash equivalents $ 10,086,952 $ 4,819,967
Investment securities, available for sale, at fair value - 5,307,419
Accounts receivable - net of allowance for doubtful
accounts of $45,000 for 2003 and 2002 940,570 509,298
Unbilled services 4,650 15,400
Inventory 241,134 212,104
Accrued interest receivable 4,156 18,645
Prepaid expenses 70,396 175,716
------------ -----------
11,347,858 11,058,549
------------ -----------
Property, plant and equipment 3,736,039 3,535,355
Equipment under capital lease 130,945 95,945
Less: Accumulated depreciation 2,463,384 1,938,272
------------ -----------
1,403,600 1,693,028
------------ -----------
Other Assets
Security deposits 20,411 17,961
Deferred financing costs - net of accumulated amortization
of $5,584 for 2003 and $4,116 for 2002 8,076 9,544
License costs - net of accumulated amortization
of $97,191 for 2003 and $71,272 for 2002 343,434 369,353
------------ -----------
371,921 396,858
------------ -----------
Total Assets $ 13,123,379 $13,148,435
============ ===========
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt 211,927 235,234
Liability under capital lease - current portion 44,448 30,574
Accounts payable and accrued expenses 892,059 511,620
Customer deposits 234,570 410,507
Unearned revenue 8,600 58,850
------------ -----------
1,391,604 1,246,785
Liability under capital lease - long-term 42,483 57,486
Long-term debt - net of current maturities 758,098 973,675
------------ -----------
Total liabilities 2,192,185 2,277,946
------------ -----------
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, 7,454,744 and 7,451,044 shares issued
and outstanding in 2003 and 2002, respectively 74,547 74,511
Additional paid-in capital 13,185,570 12,237,896
Accumulated other comprehensive income - 13,817
Accumulated deficit (2,328,923) (1,455,735)
------------ -----------
Total stockholders' equity
10,931,194 10,870,489
------------ -----------
Total Liabilities and Stockholders' Equity $ 13,123,379 $13,148,435
============ ===========
See notes to consolidated financial statements.
F-3
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31,
--------------------------------------
2003 2002 2001
------------ ------------ ------------
Revenue
Molecular cell science $ 6,076,502 $ 4,455,239 $ 3,905,549
Specialty media 2,938,279 2,662,204 2,174,649
Grant, National Institute of Health - 100,003 -
------------ ------------ ------------
9,014,781 7,217,446 6,080,198
------------ ------------ ------------
Direct Costs
Molecular cell science 1,869,769 1,385,630 1,443,147
Specialty media 1,227,770 1,102,466 832,909
Grant, National Institute of Health - 75,000 -
------------ ------------ ------------
3,097,539 2,563,096 2,276,056
------------ ------------ ------------
Income After Direct Costs
Molecular cell science 4,206,733 3,069,609 2,462,402
Specialty media 1,710,509 1,559,738 1,341,740
Grant, National Institute of Health - 25,003 -
------------ ------------ ------------
5,917,242 4,654,350 3,804,142
------------ ------------ ------------
Operating Expenses
Selling, general and administrative costs 2,777,785 2,462,541 2,027,716
Research and development 1,119,172 902,696 1,022,490
Grant, National Institute of Health - 25,003 -
Corporate overhead 1,292,119 1,085,304 1,219,476
Stock based compensation 943,200 222,437 73,146
Depreciation and amortization 552,499 578,505 484,126
------------ ------------ ------------
6,684,775 5,276,486 4,826,954
------------ ------------ ------------
Loss from Operations (767,533) (622,136) (1,022,812)
Interest income 88,387 340,721 611,737
Interest expense 67,898 104,765 103,392
------------ ------------ ------------
20,489 235,956 508,345
------------ ------------ ------------
Loss before Provision for Income Taxes (747,044) (386,180) (514,467)
Provision for Income Taxes 126,144 135,851 133,122
------------ ------------ ------------
Net loss (873,188) (522,031) (647,589)
Other comprehensive net income:
Unrealized gain on investments (13,817) 13,817 -
------------ ------------ ------------
Comprehensive Loss $ (887,005) $ (508,214) $ (647,589)
============ ============ ============
Net loss per share:
Basic and Diluted $ (0.12) $ (0.07) $ (0.09)
============ ============ ============
Weighted average shares outstanding:
Basic and Diluted 7,453,664 7,390,300 7,101,832
============ ============ ============
See notes to consolidated financial statements.
F-4
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 - 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
Stock based compensation - - 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
Sock based compensation - - 222,437 - - 222,437
Unrealized gain on - - - 13,817 - 13,817
investments
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
Stock options exercised 3,700 36 4,474 - - 4,510
Stock based compensation - - 943,200 - - 943,200
Change in unrealized gain on
investments - - - (13,817) - (13,817)
Net loss - - - - (873,188) 873,188)
---------- -------- ----------- ------------ ----------- -----------
Balance - December 31, 2003 7,454,744 $ 74,547 $13,185,570 $ - $ (2,328,923) $10,931,194
========== ======== =========== ============ ============ ===========
See notes to consolidated financial statements.
F-5
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
----------------
2003 2002 2001
------------ ----------- ----------
Cash Flows from Operating Activities
Net Loss $ (873,188) $ (522,031) $ (647,589)
Adjustments to reconcile net loss
to cash provided by (used in) operating
activities:
Depreciation and amortization 552,499 578,505 484,126
Accrued interest on stockholder loans - - 22,676
Stock based compensation 943,200 222,437 73,146
Decrease (increase) in:
Accrued interest receivable 14,489 28,490 37,324
Accounts receivable, net of allowance (431,272) 262,569 (137,029)
Unbilled services 10,750 33,845 110,368
Inventory (29,030) (14,920) (23,930)
Prepaid expenses 105,320 (100,462) (40,319)
Security deposits (2,450) (6,044) (10,917)
Increase (decrease) in:
Accounts payable and accrued expenses 380,439 (108,767) 227,815
Customer deposits (175,937) 213,894 (42,729)
Unearned revenue (50,250) 53,100 (78,009)
------------ ----------- ----------
Cash provided by (used in) operating activities 444,570 640,616 (25,067)
------------ ----------- ----------
Cash Flows from Investing Activities
Acquisitions of property, plant and equipment (200,684) (631,905) (705,108)
Purchase of investment securities - (5,300,112) (21,121)
Sales of investment securities 5,293,602
Maturities of investment securities - 4,905,000 5,540,000
------------ ----------- ----------
Cash provided by (used in) investing activities 5,092,918 (1,027,017) 4,813,771
------------ ----------- ----------
Cash Flows from Financing Activities
Retirement of stockholder loans - - (603,125)
Payment of deferred financing costs - - (3,079)
Proceeds from issuance of long term debt - 315,663 464,337
Principal payments on long term debt (238,884) (196,566) (146,513)
Payments on capital lease obligation (36,129) (7,885) -
Cash received from stock options exercised 4,510 205,884 107,401
------------ ----------- ----------
Cash (used in) provided by financing activities (270,503) 317,096 (180,979)
------------ ----------- ----------
Increase (decrease) in cash and cash equivalents 5,266,985 (69,305) 4,607,725
Cash and cash equivalents - beginning of period 4,819,967 4,889,272 281,547
------------ ----------- ----------
Cash and cash equivalents - end of period $ 10,086,952 $ 4,819,967 $4,889,272
============ =========== ==========
See notes to consolidated financial statements.
F-6
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the Years Ended
December 31,
------------
2003 2002 2001
---------- ---------- ---------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year:
$ 71,774 $ 101,307 $ 80,716
Interest
Income taxes $ 157,000 $ 174,987 $ 96,125
Non-cash investing and financing activities:
Investing activities:
Equipment acquired under capital lease $ (35,000) $ (95,945) $ -
Financing activities:
Debt incurred under capital lease $ 35,000 $ 95,945 $ -
See notes to consolidated financial statements.
F-7
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001
1. ORGANIZATION AND NATURE OF OPERATIONS
We are a holding company conducting business through two wholly-owned
operating subsidiaries, Cell & Molecular Technologies, Inc. ("CMT"), and
Sentigen Biosciences, Inc. ("Sentigen Biosciences," formerly Sentigen Corp.).
CMT provides contract research and development services and manufactures
specialty cell culture media, reagents and other research products for companies
engaged in the drug discovery process. Sentigen Biosciences is primarily engaged
in the development and commercialization of novel bioassay systems that
elucidate the underlying biology of protein-protein interactions. Sentigen
Biosciences is initially targeting its Tango(TM) Assay System to address the
functionalization of G protein-coupled receptors (GPCRs) for pharmaceutical drug
discovery and development. Sentigen Biosciences has filed patent applications on
its Assay System and expects to file additional patent applications on this
technology in the future.
CMT operates through two divisions -- Molecular Cell Science ("MCS")
and Specialty Media ("SM"). MCS provides contract research and development
services and High Throughput Screening support services to companies engaged in
the drug discovery process. SM develops, manufactures, and markets high quality
cell culture media, reagents and other research products.
The operations of Sentigen Biosciences are reflected as research and
development expenses in our consolidated statements of operations. Sentigen
Biosciences' operations, since its inception in February 2000, consist entirely
of research and development.
The expenses of the parent company, 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 the chairman of the board, chief financial officer,
executive vice president of commercial operations and administrative assistant,
(2) professional fees for legal and accounting services, (3) office rental,
utilities and communication costs, (4) stock market listing fees and other
related public company expenses and (5) business travel expenses.
We were incorporated under the laws of the State of Delaware in May
1990. After having engaged in the acquisition and operation of different
businesses 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 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, and changed
its name to Sentigen Biosciences, Inc. on February 24, 2004. 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.
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
inter-company 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.
F-8
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. 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 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 - Intangible and long-lived assets are reviewed 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 that none of
our intangible and long-lived assets are impaired as of
December 31, 2003.
h. REVENUE RECOGNITION - Revenue from fixed-price contracts
extending over more than one accounting period is recognized
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 it is determined
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 and transfer of risk of loss
to the product, which generally occurs upon shipment to the
customer.
i. DIRECT COSTS - Direct costs incurred in the delivery of
services and manufacturing of media at CMT are expensed as
such costs are incurred. Direct costs in 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 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.
j. SELLING, GENERAL AND ADMINISTRATIVE COSTS - Selling, general
and administrative costs incurred in the operation of CMT are
expensed as incurred. The major classes of selling, general
and administrative expenses incurred by CMT are as follows:
(1) compensation and employee benefit costs of CMT's
management, sales, and administrative staff, (2) 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.
F-9
k. RESEARCH AND DEVELOPMENT COSTS - Research and development
costs are expensed as such costs are incurred. The operations
of Sentigen Biosciences are reflected as research and
development expenses in our consolidated statements of
operations. Sentigen Biosciences' operations, since its
inception in February 2000, consist entirely of research and
development. Total expenditures on research and development
for 2003, 2002 and 2001, including research costs reimbursed
under grants received from the National Institute of Health
(See Note 7), were $1,119,172, $1,020,036 and $1,247,072,
respectively.
l. CORPORATE OVERHEAD COSTS - Corporate overhead costs are
expensed as such costs are incurred. The expenses 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 the chairman of the board, chief financial
officer, executive vice president of commercial operations and
administrative assistant, (2) professional fees for legal and
accounting services, (3) office rental, utilities and
communication costs, (4) stock market listing fees and other
related public company expenses and (5) business travel
expenses.
m. 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 for the years ended December 31, 2002 and 2001 as
it was a reimbursement of amounts passed through to
sub-recipients (See Note 7). In 2002, Sentigen Biosciences was
awarded a NIH Federal Phase I Grant. The grant covers the
direct costs of a specific project within Sentigen Biosciences
overall research program as well as an allocation for the
facilities and administrative costs of Sentigen Biosciences
related to the project. The project funded under this grant
was completed by Sentigen Biosciences 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.
n. INCOME TAXES - Certain income and expense items are accounted
for 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 carry-forwards applying
the enacted statutory tax rates in effect for the year in
which the differences are expected to reverse.
o. ADVERTISING, MARKETING AND SALES COSTS - Advertising,
marketing and sales costs are expensed as such costs are
incurred. Advertising, marketing and sales costs during 2003,
2002 and 2001 were $355,120, $336,283 and $213,942,
respectively. These costs are included in selling, general and
administrative expenses in our consolidated statements of
operations.
p. ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported 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.
q. 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,
2003, 2002 and 2001 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.
F-10
r. 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 to employees
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. On September 4, 2003
the life of a stock option previously granted to the Chairman
of the Board, Chief Executive Officer and President was
extended. The option is for the purchase of 217,000 shares of
common stock at $1.625 per share and was originally granted on
May 1, 1996. The stock option is fully vested and would have
expired on April 30, 2004. The amendment extended the life of
the option to April 30, 2006. As a result of this amendment
and according to FASB Interpretation No. 44 to APB Opinion No.
25 we recognized stock based compensation in the amount of
$820,407 (See Note 15).
s. 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
the consolidated financial position or results of operations
or cash flows. Our reportable operating segments are: MCS, SM
and Sentigen Biosciences.
t. RECLASSIFICATION - Certain amounts from the prior years have
been reclassified to conform to the current year's
presentation. These reclassifications have no effect on
previously reported net losses.
RECENT ACCOUNTING PRONOUNCEMENTS - In August 2001, the
Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("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. The adoption of SFAS No. 143 did not have an
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. The adoption of SFAS No. 145 did not have
an effect on our 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
F-11
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 did not
undertake any exit or disposal activities for the year ended
December 31, 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 was effective for the year
ended December 31, 2002.
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 fair value of employee
stock options as permitted by SFAS No. 123, as amended by SFAS
No. 148, since it permits alternative methods of adoption.
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
2003 2002 2001
----------- ----------- -----------
Net Loss:
As reported $ (873,188) $ (522,031) $ (647,589)
Pro-forma expense as if employee
stock options were charged
against net loss (244,551) (192,051) (236,780)
----------- ----------- -----------
Pro-forma net loss using the fair
value method $(1,117,739) $ (714,082) $ (884,369)
=========== =========== ===========
Basic and Diluted EPS:
As reported $ (0.12) $ (0.07) $ (0.09)
Pro-forma using the fair
value method $ (0.15) $ (0.10) $ (0.12)
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, as restated by
FIN No. 46R, "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 December
15, 2003, to entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. We do not
have variable interest entities as of December 31, 2003.
In April 2003 the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends SFAS No. 133 for certain
decisions made by the FASB as part of the Derivatives
Implementation Group (DIG) process and is effective for
contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. In
addition, SFAS No. 149 should be applied prospectively. The
provisions of SFAS No. 149 that relate to SFAS No. 133
Implementation Issues that have been effective for fiscal
quarters
F-12
that began prior to June 15, 2003, should continue to be
applied in accordance with their respective effective dates.
We are not involved in any hedging activities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 addresses how certain
financial instruments with characteristics of both liabilities
and equity should be classified and measured. The adoption of
SFAS No. 150 did not have an effect on the Company's financial
position.
3. INVENTORY
Inventory of the SM segment consists of the following:
DECEMBER 31,
---------------------------------
2003 2002
----------- -----------
Finished Goods $ 139,020 $ 123,464
Packaging Materials 30,019 30,093
Raw Materials 72,095 58,547
----------- -----------
Total Inventory $ 241,134 $ 212,104
=========== ===========
4. INVESTMENT SECURITIES
At December 31, 2003 our available cash and cash equivalents of
$10,086,952 was invested in short-term U.S. Treasury Bills.
At December 31, 2002 we held cash equivalents, consisting of short-term
U.S. Treasury Bills in the amount of $4,819,967 and investment securities
consisting entirely of U.S. Treasury Notes in the amount of $5,307,419. The U.S.
Treasury Note purchased in 2002 was classified as available for sale, and is
reflected on the 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
============== ============= ===========
On January 22, 2003 the 2.125%, $5,250,000 face value U.S. Treasury
Note due October 31, 2004 was sold. We received gross proceeds of $5,319,871 of
which $26,574 represented accrued interest. Capital gains recognized on the sale
were minimal. The proceeds are currently invested in 90-day U.S. Treasury Bills.
This sale accounts for the majority of the $5,266,985 increase in cash and cash
equivalents reported in our consolidated statement of cash flows.
F-13
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
---------------------------------
2003 2002
------------ ---------------
Land $ 90,000 $ 90,000
Building and Improvements 743,403 702,839
Machinery and Equipment 2,647,718 2,500,040
Equipment under capital lease 130,945 95,945
Furniture and Fixtures 254,918 242,476
------------ ---------------
Total Property, Plant and Equipment 3,866,984 3,631,300
Less: Accumulated Depreciation 2,463,384 1,938,272
------------ ---------------
Property, Plant and Equipment - net $ 1,403,600 $ 1,693,028
============ ===============
Depreciation expense charged to operations was $525,112, $551,118 and
$448,448 for the years ended December 31, 2003, 2002 and 2001 respectively.
6. EXCLUSIVE LICENSE AGREEMENT
On April 10, 2000, Sentigen Biosciences 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. The
licensing agreement with The Trustees of the Columbia University in New York
required us to contribute a minimum of $1,000,000 into Sentigen Biosciences
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 a private placement in
November 2000 in which 863,834 shares of our common stock was sold for $6.00 per
share for aggregate gross proceeds of $5,183,004.
Another provision of the agreement requires that a minimum of $50,000
per six month period or $100,000 per annual period 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 common 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 the consolidated
balance sheet. The value of the license reflects the closing share price of our
common stock on April 10, 2000.
There is no assurance that the technology related to the licensing
agreement with The Trustees of Columbia University or other technologies
involved in the research and development activities of Sentigen Biosciences 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.
F-14
7. RESEARCH GRANTS
Cell & Molecular Technologies, Inc. The SM division, in collaboration
with Harvard University, was 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.
For the year ended December 31, 2003 there was no activity under NIH
funded grants. For the years ended December 31, 2002 and 2001 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:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
2003 2002 2001
-------- --------- --------
SM NIH funding received $ - $ 17,337 $224,582
MCS NIH funding received - - -
-------- --------- --------
Total NIH funding received - 17,337 224,582
NIH research expenses incurred by sub recipients - (17,337) (224,582)
-------- --------- --------
Net effect on the consolidated
Statements of Operations for the
years then ended $ - $ - $ -
======== ========= ========
Sentigen Biosciences. On August 19, 2002, Sentigen Biosciences was
awarded a NIH Federal Phase I Grant in the amount of $100,003. The term of the
grant was from September 1, 2002 through February 28, 2003. The grant covers the
direct costs of a specific project within Sentigen Biosciences overall research
program as well as an allocation for facilities and administrative costs of
Sentigen Biosciences related to the project. As of December 31, 2002, Sentigen
Biosciences had 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
the 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
We administer 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 a portion of their gross salary (subject to
federal tax law) to the plan. 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 2003 2002
- ------- -------- ----- ---- ------------------------- --------- -----------
Mortgage Note. Secured by 580
February 5.00% Marshall St. Phillipsburg, New $ 249,670 $ 251,732
CMT 2017 $287,600 (variable) Jersey. The interest rate resets every
3 years and reset in February 2003 to
a rate of 5.00%.
Equipment Loan. Guaranteed by
August 5.50% Sentigen Holding Corp. Guarantor
CMT 2004 $350,000 (variable) required to maintain unencumbered 43,572 124,931
liquid assets of two-times the
outstanding loan balance.
Equipment Loan. Guaranteed by
May 5.25% Sentigen Holding Corp. CMT is
CMT 2009 $720,000 (fixed) required to maintain cash-flow equal 584,662 673,548
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 April 5.50% Sentigen Holding Corp. Guarantor
Biosciences 2005 $300,000 (variable) required to maintain unencumbered 92,121 158,698
liquid assets of two-times the --------- -----------
outstanding loan balance.
$ 970,025 $ 1,208,909
Less: Current Maturities (211,927) (235,234)
--------- -----------
Long-Term Debt - Net $ 758,098 $ 973,675
========= ===========
We were in compliance with all debt covenants as of December 31, 2003
and 2002.
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 Biosciences renegotiated the interest
rate on its equipment loan maturing April 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%.
On April 15, 2003, CMT renegotiated the interest rate on its equipment
loan, maturing May 2009 from a fixed rate of 7.40% to a fixed rate of 5.25%. The
amortization period of the loan remained unchanged.
F-16
Principal maturities of long-term debt over the next five years are as
follows:
For the year ending December 31, 2004 $ 211,927
2005 123,246
2006 107,852
2007 113,650
2008 119,759
Thereafter 293,591
----------
Total principal maturities of long-term debt $ 970,025
==========
10. LOANS PAYABLE TO STOCKHOLDERS
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 the current available financing
rate of 10%.
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
Joseph K. Pagano. On May 24, 1999, we entered into an employment
agreement with Mr. Pagano to serve as Chairman of the Board, President and Chief
Executive Officer. The employment 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 provided for annual base compensation of
$85,000 and in March 2001 was amended to provide for annual base compensation of
$175,000. On February 17, 2004, Mr. Pagano's annual base compensation was raised
to $225,000. In connection with the employment agreement, the termination date
of an option previously granted to Mr. Pagano to purchase 217,000 shares of our
common stock was extended an additional three years to April 30, 2004. The
termination date of this option was extended again on September 4, 2003 to April
30, 2006. 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.
Erik R. Lundh. On September 2, 2003 we entered into an employment
agreement with Mr. Lundh to serve as Executive Vice President of Commercial
Operations. The agreement is 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 $200,000. Mr. Lundh is also
entitled to participate in a bonus plan, which will be based on certain
operational and financial milestones. The bonus under the plan shall not be less
than $8,219 in 2003 and shall not be less than $25,000 in 2004. Pursuant to the
employment agreement, we granted Mr. Lundh an option to purchase 50,000 shares
of our common stock at $4.75 per share. This option expires on September 2, 2013
and vests in five equal annual installments commencing on September 2, 2004.
Pursuant to this agreement we leased an apartment in New York, New York for Mr.
Lundh for a term of one year, beginning October 1, 2003. The monthly rent for
the apartment is $2,450.
Thomas Livelli. In connection with the acquisition of CMT, we assumed
an employment agreement with Mr. Livelli pursuant to which Mr. Livelli served as
President and Chief Executive Officer of CMT through May 22, 2001. As of May 23,
2001, CMT 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 (subject to certain
F-17
adjustments) 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,
Mr. Livelli was granted 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, Mr.
Livelli's employment agreement was amended to provide for an annual base salary
of $165,000. Pursuant to the automatic cost of living adjustment provided for in
the agreement we increased Mr. Livelli's annual base salary to $169,571
effective May 23, 2003. On July 29, 2003 Mr. Livelli's employment agreement was
amended to provide for a one-time bonus of $10,000 in addition to any bonus
earned by Mr. Livelli in 2003. The amendment also extends the terms of Mr.
Livelli's employment agreement to the earlier of May 22, 2008 or the two year
anniversary of a "change in control" (as such term is defined in the employment
agreement).
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, our Chairman of the Board, Chief Executive Officer and President. We are
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. We are 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. LEASES
Operating Leases. Lease commitments classified as operating-type leases
consist primarily of facilities, office equipment and certain laboratory
equipment. Rental expenses for these operating-type leases are as follows:
RENTAL EXPENSE
FOR THE YEARS ENDED
--------------------
COMPANY PURPOSE AND TERMS 2003 2002 2001
- ------- ----------------- -------- -------- -------
PROPERTIES:
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. $158,123 $144,793 $ -
Sentigen Sentigen Biosciences leases laboratory space at 3960 Broadway,
Biosciences New York, New York, 10032. The lease expired in April 2002,
and is currently a month-to-month lease. In June 2001,
additional office space was leased at this same
location, which lease terminated on June 30, 2002. 68,778 82,440 84,173
Sentigen We lease approximately 980 square feet of office space for use
Holding by our Board of Directors and Executive Officers at 434 East
Corp. Cooper Street, Aspen, Colorado. The lease expires April 30,
2004; we intend to renew this lease, should the lease
terms be acceptable. 40,993 38,654 36,492
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 accommodates the
high throughput screening support services group. CMT renewed
this lease through November 2004. 18,000 18,000 13,500
CMT In February 2003 , CMT expanded the 418 Industrial Drive
location an additional 3,000 feet to include 422 Industrial
Drive. 16,500 - -
Sentigen On October 1, 2003, we leased an apartment in New York, New
Holding York in connection with our employment agreement with Erik R.
Corp. Lundh. The lease expires on September 30, 2004. 7,350 - -
CMT CMT leased approximately 750 square feet of administrative
office space at 445 Marshall Street, Phillipsburg, New
Jersey. The lease terminated on December 31, 2001. - - 12,000
EQUIPMENT:
CMT CMT leases certain laboratory and office equipment under
operating leases. 22,748 17,294 2,252
Sentigen Sentigen Biosciences leases certain office equipment under
Biosciences operating leases. 5,460 4,195 1,162
-------- -------- --------
Total Rental Expense $337,952 $305,376 $149,579
======== ======== ========
F-19
Capital Leases. In July 2003, 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, equipment and an offsetting capital lease liability was recorded on our
consolidated balance sheet in the amount of $35,000. We used a fixed interest
rate of 5.00% to approximate the borrowing rate for the lease. The equipment is
being depreciated on a straight-line basis through the term of the lease which
expires in June 2006. Rental payments through December 31, 2003 totaled $6,372.
Of those payments, $5,555 was applied to the capital lease liability and $817
was applied to interest expense. As of December 31, 2003 the total remaining
lease obligation amounted to $29,445.
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, equipment
and an offsetting capital lease liability was recorded on our consolidated
balance sheet in the amount of $95,945. We used a fixed interest rate of 7.40%
to approximate the borrowing rate for the lease. The equipment is being
depreciated on a straight-line basis through the term of the lease which expires
in September 2005. Rental payments for the year ended December 31, 2003 totaled
$36,067. Of those payments, $30,574 was applied to the capital lease liability
and $5,493 was applied to interest expense. As of December 31, 2003 the total
remaining lease obligation amounted to $57,486.
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,
2004 $ 48,811 $ 237,993
2005 39,794 147,763
2006 6,372 22,596
--------- ----------
Minimum rental payments $ 94,977 $ 408,352
(Less) interest-portion of rental payments (8,046)
---------
Capital lease obligation $ 86,931
=========
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,
-------------------------------
2003 2002
----------- -----------
Net operating loss carryforwards $ 1,393,000 $ 1,295,000
Research and Development credit carryforward 144,000 102,000
AMT Credit carryforward 6,000 6,000
Stock based compensation 377,000 -
Depreciation and other temporary differences 14,000 11,000
----------- -----------
Total deferred tax assets 1,934,000 1,414,000
Less: Valuation allowance 1,934,000 1,414,000
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
We believe that it is more likely than not that the deferred tax assets
will not be realized and have therefore provided a valuation allowance in the
consolidated balance sheet equal to the entire amount of the deferred tax
assets.
F-20
The provision for income taxes differs from the amount using the
statutory federal income tax rate (34%) as follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
----- ----- ----
At Statutory Rates $ (297,000) $ (132,000) $ (308,000)
Loss for which no benefit was recorded 297,000 132,000 308,000
State income taxes 126,144 135,851 133,122
---------- ---------- ----------
Provision for income taxes $ 126,144 $ 135,851 $ 133,122
========== ========== ==========
At December 31, 2003 we have federal and state net operating loss
carryforwards of $2,887,912 and $6,920,161, respectively, available to offset
future federal and state taxable income. These carryforwards will expire between
December 31, 2009 and December 31, 2023. Additionally, we have research and
development credit and Alternative Minimum Tax credit carryforwards of $144,000
and $6,000 respectively. The research and development credit carryforwards will
expire between December 31, 2012 and December 31, 2023 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 assets and liabilities related to
long-term contracts. Revenues from these contracts are recognized on the
percentage-of-completion basis:
DECEMBER 31,
------------
2003 2002
----- ----
Contract Receivables
Billed - contracts in progress $ 625,402 $ 389,997
Unbilled services (work-in-progress) 4,650 15,400
---------- ----------
630,052 405,397
Less: Allowance for doubtful collections
on contract receivables 40,000 40,000
---------- ----------
$ 590,052 $ 365,397
========== ==========
Unearned Revenue
Costs incurred on contracts in progress $ 726,168 $ 616,358
Estimated earnings 1,243,173 1,123,456
---------- ----------
1,969,341 1,739,814
Less: Billings to date 1,973,291 1,783,264
---------- ----------
$ (3,950) $ (43,450)
========== ==========
Included in the accompanying balance
sheets under the following captions:
Unbilled services $ 4,650 $ 15,400
Unearned revenue (8,600) (58,850)
---------- ----------
$ (3,950) $ (43,450)
========== ==========
F-21
Estimates of remaining costs to complete each contract are used to
determine the revenue and profitability on each contract. These estimates are
evaluated 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. EQUITY COMPENSATION PLANS
We have two stock option plans: the 1990 Stock Option Plan and the 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, options may be granted to
employees, directors, consultants, agents and other persons that are deemed to
be valuable to us or our subsidiaries. The 2000 plan permits the 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 were granted under
the 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.
Under the 2000 plan, the 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. The 2000 plan currently
is administered by the full Board of Directors. Subject to the provisions of the
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 the 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.
The pro-forma information required by SFAS No. 148 regarding net income
and earnings per share has been presented as if the stock option plans had been
accounted for 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:
2003 2002 2001
----- ---- ----
Weighted Average Assumptions:
Expected life of options 5 years 5 years 5 years
Risk free interest rate 1.8% 4.0% 5.5%
Volatility of stock 114% 240% 197%
Expected dividend yield 0% 0% 0%
The weighted average fair value per share of the options granted during
2003, 2002 and 2001 was $4.48, $4.71 and $5.39, 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 common stock. Such an increase in stock price would
benefit all stockholders commensurately.
In addition to the options granted to employees, we granted 57,000, 0
and 50,000 options to non-employees during the years ended December 31, 2003,
2002 and 2001 respectively. Non-employees consist of consultants and directors.
Consultants are retained under consulting agreements and are not considered
employees of ours or our subsidiaries. Non-cash stock-based compensation cost of
$943,200, $222,437 and $73,146 during the years ended
F-22
December 31, 2003, 2002 and 2001 respectively, was recognized based on the fair
value of the options issued, amortized over the respective anticipated service
periods. On December 3, 2001, four out of the five, consulting agreements with
the scientific consultants were amended 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 non-cash stock-based compensation
was recognized 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.
On September 4, 2003 an option agreement with the Chairman of the
Board, Chief Executive Officer and President was amended. The option is for the
purchase of 217,000 shares of our common stock at $1.625 per share and was
originally granted on May 1, 1996. The stock option is fully vested and would
have expired on April 30, 2004. The amendment extends the life of the option to
April 30, 2006. All other terms of the stock option agreement remain unchanged.
As a result of this amendment and according to FASB Interpretation No. 44 to APB
Opinion No. 25 we recognized stock based compensation in the amount of $820,407.
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, January 1, 2001 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, 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, December 31, 2002 1,313,844 $ 5.26 767,370 $ 4.64
Granted 109,500 4.80
Exercised (3,700) 1.22
Cancelled (50,385) $ 4.97
---------
Balance, December 31, 2003 1,369,259 $ 5.24 890,352 $ 4.97
=========
Presented below are options currently outstanding and exercisable at
December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE WEIGHTED
EXERCISE REMAINING EXERCISE AVERAGE
PRICES NUMBER LIFE PRICE NUMBER EXERCISE PRICE
------ ------ ---- ----- ------ --------------
$ 1.00 - $ 1.81 247,550 3 $ 1.58 240,270 $ 1.58
4.50 - 4.75 120,000 8 4.71 10,000 4.60
5.00 - 5.88 556,000 2 5.01 363,600 5.02
6.00 - 6.50 200,709 6 6.13 108,482 6.11
9.00 245,000 6 9.00 168,000 9.00
--------- -------
1,369,259 4 $ 5.24 890,352 $ 4.97
========= =======
F-23
16. SEGMENT INFORMATION
We operate through two wholly-owned subsidiaries, CMT and Sentigen
Biosciences. CMT is evaluated on the performance of its two divisions, MCS and
SM. Sentigen Biosciences is engaged in research and development. MCS, SM and
Sentigen Biosciences are separate and distinct reportable operating segments.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. These reportable segments are
strategic business units that offer different products and services. They are
managed separately because each business requires different technologies and
marketing strategies. Sales and transfers between segments, if any, are
accounted for as if the transactions were to third parties, that is at current
market prices. All inter-company transactions have been eliminated in the
presentation of segment information.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
----- ----- ----
Revenues
MCS $ 6,168,024 $ 4,549,583 $ 4,005,671
SM 2,938,279 2,662,204 2,175,375
Sentigen Biosciences - 100,003 -
------------ -------------- -------------
Total revenues for reportable segments $ 9,106,303 $ 7,311,790 $ 6,181,046
Elimination of inter-segment revenues (91,522) (94,344) (100,848)
------------ -------------- -------------
Total Reported $ 9,014,781 $ 7,217,446 $ 6,080,198
============ ============== =============
Income (Loss) from Operations
MCS $ 1,725,336 $ 709,455 $ 618,348
SM 889,402 891,495 741,677
Sentigen Biosciences (1,259,673) (1,124,787) (1,151,408)
------------ -------------- -------------
Total income for reportable segments $ 1,355,065 $ 476,163 $ 208,617
Corporate loss unallocated to segments (2,122,598) (1,098,299) (1,231,429)
------------ -------------- -------------
Total Reported $ (767,533) $ (622,136) $ (1,022,812)
============ ============== =============
Depreciation and Amortization
MCS $ 369,949 $ 382,439 $ 287,854
SM 105,225 100,283 77,256
Sentigen Biosciences 67,253 82,788 107,063
------------ -------------- -------------
Total depreciation and
amortization for reportable segments $ 542,427 $ 565,510 $ 472,173
Corporate depreciation and
amortization unallocated to segments 10,072 12,995 11,953
------------ -------------- -------------
Total Reported $ 552,499 $ 578,505 $ 484,126
============ ============== =============
F-24
DECEMBER 31,
------------
2003 2002 2001
---- ---- ----
Segment Assets
MCS $ 1,486,108 $ 1,480,390 $ 1,401,896
SM 990,133 793,646 927,768
Sentigen Biosciences 459,919 581,303 608,836
------------ ------------- -------------
Total assets for reportable segments $ 2,936,160 $ 2,855,339 $ 2,938,500
Corporate assets unallocated to segments 10,187,219 10,293,096 9,924,444
------------ ------------- -------------
Total Reported $ 13,123,379 $ 13,148,435 $ 12,862,944
============ ============= =============
Expenditures for Property, Plant and Equipment
MCS $ 115,956 $ 465,158 $ 557,996
SM 76,101 146,715 92,974
Sentigen Biosciences 4,700 14,950 48,304
------------ ------------- -------------
Total expenditures for reportable segments $ 196,757 $ 626,823 $ 699,274
Corporate, unallocated to segments 3,927 5,082 5,834
------------ ------------- -------------
Total Reported $ 200,684 $ 631,905 $ 705,108
============ ============= =============
17. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
For the years ended December 31, 2003, 2002 and 2001, we had
significant sales and receivable balances from major customers in the
pharmaceutical and biotechnology industries as follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
---- ---- ----
PERCENTAGE PERCENTAGE PERCENTAGE
SIGNIFICANT CUSTOMER SALES OF TOTAL SALES OF TOTAL SALES OF TOTAL
- -------------------- ----- ---------- ----- ---------- ----- ----------
A. MCS $ 3,688,355 61% $2,580,196 58% $1,983,482 51%
B. SM 651,555 22% 476,679 18% 441,460 20%
C. SM 303,979 10% - -% - -%
E. SM - -% 303,405 11% 110,331 5%
F. MCS 643,420 11% - -% - -%
----------- -- ---------- ----------
$ 5,287,309 59% $3,360,280 47% $2,535,273 42%
=========== == ========== == ========== ==
DECEMBER 31,
------------
2003 2002
---- ----
NET NET
ACCOUNTS PERCENTAGE ACCOUNTS PERCENTAGE
SIGNIFICANT CUSTOMER RECEIVABLE OF TOTAL RECEIVABLE OF TOTAL
- -------------------- ---------- ---------- ---------- ----------
A $ 169,965 18% $ 244,800 48%
B 79,535 8% - -%
C 79,033 8% 15,476 3%
D - -% 8,453 2%
F 94,120 10% - -%
---------- -- ----------
$ 422,653 45% $ 268,729 53%
========== == ========== ==
Net accounts receivable includes billed accounts receivable and
unbilled services less unearned revenue.
F-25
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. We routinely assess the financial strength of our
customers and, as a consequence, believe that our trade accounts receivable
credit risk exposure is limited.
18. PRIVATE PLACEMENT
In November 2000, we consummated a private offering in which 863,834
shares of our common stock was sold 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, a warrant was issued to Mr.
Theodore M. Serure to purchase 44,810 shares of our common stock as compensation
for introducing investors to us 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-26
19. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED
----------------------
December 31, September 30, June 30, March 31,
2003 2003 2003 2003
---- ---- ---- ----
Revenue
Molecular cell science $ 1,562,219 $ 1,525,064 $ 1,570,447 $ 1,418,772
Specialty media 686,027 692,207 793,800 766,245
----------- ----------- ----------- -----------
2,248,246 2,217,271 2,364,247 2,185,017
----------- ----------- ----------- -----------
Income After Direct Costs
Molecular cell science 1,083,024 1,039,857 1,076,044 1,007,808
Specialty media 375,333 380,006 466,477 488,693
----------- ----------- ----------- -----------
1,458,357 1,419,863 1,542,521 1,496,501
----------- ----------- ----------- -----------
Income (Loss) From Operations
Molecular cell science 370,647 434,000 457,907 462,782
Specialty media 133,166 167,417 262,735 326,084
Sentigen Biosciences (368,626) (301,476) (347,927) (241,644)
Corporate (526,462) (1,088,940) (230,834) (276,362)
----------- ----------- ----------- -----------
(391,275) (788,999) 141,881 270,860
----------- ----------- ----------- -----------
Net Loss $ (422,360) $ (804,062) $ 117,094 $ 236,140
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.06) $ (0.11) $ 0.02 $ 0.03
=========== =========== =========== ===========
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 Biosciences (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)
=========== =========== =========== ===========
F-27
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 22, 2004
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 Executive Officer March 22, 2004
- ----------------------------------- and President
Joseph K. Pagano
/s/ Fredrick B. Rolff Chief Financial Officer (Principal Financial March 22, 2004
- ----------------------------------- and Accounting Officer)
Fredrick B. Rolff
/s/ Thomas Livelli Director, Chief Executive Officer and March 22, 2004
- ----------------------------------- President of CMT
Thomas Livelli
/s/ Frederick R. Adler Director March 22, 2004
- -----------------------------------
Frederick R. Adler
/s/ Gerald Greenwald Director March 22, 2004
- -----------------------------------
Gerald Greenwald
/s/ Joel M. Pearlberg Director March 22, 2004
- -----------------------------------
Joel M. Pearlberg
/s/ Samuel A. Rozzi Director March 22, 2004
- -----------------------------------
Samuel A. Rozzi
/s/ Bruce Slovin Director March 22, 2004
- -----------------------------------
Bruce Slovin
41
EXHIBIT INDEX
INCORPORATED
EXHIBIT BY REFERENCE NO. IN
NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT PAGE
- ------- ----------------------------------------- ------------- --------------- --------
3.1 Certificate of Incorporation, as A Exhibit 3.1
amended
3.2 By-laws of the Company A Exhibit 3.2
4.1 Form of Subscription Agreement between B Exhibit 4
the Company and each Investor
4.2 Warrant Agreement between Theodore K Exhibit 4.2
Serure and the Company
9.1 Voting Trust Agreement, dated December -- -- Filed
__, 2001, by and between the Company, Herewith
D.H. Blair Investment Banking Corporation
and Frederick R. Adler.
10.1 1990 Stock Option Plan A Exhibit 10.1
10.2 Consulting Agreement dated July 2, C Exhibit 10.2
1991, among the Company, Prime
Cellular of Florida, Inc. and Joseph
K. Pagano (the "Consulting Agreement")
10.3 Amendment to Consulting Agreement C Exhibit 10.3
10.4 Agreement and Plan of Merger, dated as D Exhibit 2.1
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, dated D Exhibit 10.1
June 10, 1996, between Registrant and
the Bern Stockholders
10.6 Escrow Agreement, dated June 10, 1996, D Exhibit 10.2
between Registrant and the Bern
Stockholders
10.7 Indemnification Agreement, dated June D Exhibit 10.3
10, 1996 between Registrant and the
Bern Stockholders
10.8 Form of Amendment to Merger Agreement, E Exhibit 10.9
dated June 11, 1997
10.9 Form of Settlement Agreement, dated E Exhibit 10.10
August 28, 1997
10.10 Agreement and Plan of Merger, dated as F Exhibit 2
of May 29, 1998, by and among the
Company, CMT Acquisition Corp., Cell &
Molecular Technologies, Inc. and the
stockholders of Cell & Molecular
Technologies, Inc.
42
INCORPORATED
EXHIBIT BY REFERENCE NO. IN
NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT PAGE
- ------- ----------------------------------------- ------------- --------------- --------
10.11 Mortgage dated February 6, 1997, with G Exhibit 10.11
respect to premises located at 580
Marshall Street, Phillipsburg, NJ
08865, assumed by the Company in
connection with the CMT Merger
10.12 Form of Employment Agreement dated G Exhibit 10.12
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 Joseph K. I Exhibit 10.14
Pagano and the Company
10.15 Employment Agreement between Kevin Lee J Exhibit 10.15
and Sentigen Corp.
10.16 Option Agreement between the Company J Exhibit 10.16
and Kevin Lee
10.17 Employment Agreement dated May 23, L Exhibit 10.17
2001, between Cell & Molecular
Technologies, Inc. and Thomas Livelli
10.18 Employment Agreement dated September M Exhibit 10.1
2, 2003, between Erik R. Lundh and the
Company
10.19 Amendment to Stock Option Agreement, M Exhibit 10.2
dated September 4, 2003, between
Joseph K. Pagano and the Company
10.20 Stock Option Agreement, dated April M Exhibit 10.3
30, 1999, between Joseph K. Pagano and
the Company
10.21 2000 Performance Equity Plan, as -- -- Filed
amended Herewith
10.22 High Throughput Screening Support -- -- Filed
Services Agreement dated January 19, Herewith
2004 by and between Cell and Molecular
Technologies, Inc.and Merck & Co.,
Inc. *
10.23 Lease Agreement for approximately -- -- Filed
11,000 squre feet of laboratory and Herewith
office/warehouse space at 445 Marshall
Street, Phillipsburg, New Jersey
43
INCORPORATED
EXHIBIT BY REFERENCE NO. IN
NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT PAGE
- ------- ----------------------------------------- ------------- --------------- --------
10.24 Sentigen Biosciences Loan Facility, -- -- Filed
maturing April 2005. Herewith
10.25 CMT Equipment Loan, maturing May 2009 -- -- Filed
Herewith
21 List of Subsidiaries I Exhibit 21
23.1 Consent of Deloitte & Touche LLP -- -- Filed
Herewith
31.1 Certification of Joseph K. Pagano -- -- Filed
Chairman, Chief Executive Officer and Herewith
President, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Fredrick B. Rolff, -- -- Filed
Chief Financial Officer, pursuant to Herewith
Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification of Joseph K. Pagano -- -- Filed
Chairman, Chief Executive Officer and Herewith
President, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002,
regarding the information contained in
Sentigen Holding Corp.'s Annual Report on
Form 10-K for the year ended December 31,
2003.
32.2 Certification of Fredrick B. Rolff, -- -- Filed
pursuant to Section 906 of the Herewith
Sarbanes-Oxley Act of 2002, regarding
the information contained in Sentigen
Holding Corp.'s Annual Report on Form
10-K for the year ended December 31,
2003.
99.1 Risk Factors -- -- Filed
Herewith
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.
G. Company's Report on Form 10-K for the fiscal year ended December 31, 1998.
44
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.
M. Company's Report on Form 10-Q for the quarter ended September 30, 2003.
45