-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SYrYUnoikcJ5PyYtdzEdQvw1vifS2IZfURq9oJ2EUacuTCIPdRkLcB+s0wI8n4gF +5JceFiAV45InjjGjMyGvg== 0001047469-99-025813.txt : 19990630 0001047469-99-025813.hdr.sgml : 19990630 ACCESSION NUMBER: 0001047469-99-025813 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IGEN INTERNATIONAL INC /DE CENTRAL INDEX KEY: 0000916304 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 942852543 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23252 FILM NUMBER: 99655244 BUSINESS ADDRESS: STREET 1: 16020 INDUSTRIAL DR CITY: GAITHERSBURG STATE: MD ZIP: 20877 BUSINESS PHONE: 3019848000 MAIL ADDRESS: STREET 1: 16020 INDUSTRIAL DRIVE CITY: GAITHERSBURG STATE: MD ZIP: 20877 FORMER COMPANY: FORMER CONFORMED NAME: IGEN INC /CA/ DATE OF NAME CHANGE: 19931216 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934 For Fiscal Year Ended March 31, 1999 -------------- Commission File Number 0-23252 ----------------- IGEN INTERNATIONAL, INC. ------------------------ (Exact name of registrant as specified in its charter) DELAWARE 94-2852543 - ------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 16020 INDUSTRIAL DRIVE, GAITHERSBURG, MD 20877 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 301/984-8000 ---------------------------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK $0.001 PAR VALUE ----------------------------- (Title of Class) 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. _ The aggregate market value of the voting and non-voting equity held by non-affiliates of the Registrant as of June 11, 1999, computed by reference to the closing sale price of such stock quoted on the Nasdaq National Market, was approximately $271,638,100. For the purposes of this calculation, shares owned by officers, directors and 5% shareholders known to the Registrant have been deemed to be owned by affiliates. The number of shares outstanding of the Registrant's Common Stock as of June 11, 1999 was 15,372,600. DOCUMENTS INCORPORATED BY REFERENCE The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K. Certain information required in Part III of this Annual Report on Form 10-K is incorporated from the Company's definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held on September 15, 1999. PART I IN ADDITION TO HISTORICAL INFORMATION THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE "SAFE HARBOR" PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. REFERENCE IS MADE IN PARTICULAR TO STATEMENTS REGARDING THE POTENTIAL MARKET FOR DIAGNOSTIC PRODUCTS, POTENTIAL IMPACT OF COMPETITIVE PRODUCTS, THE COMPANY'S EXPECTATIONS REGARDING THE LEVEL OF ANTICIPATED ROYALTY AND REVENUE GROWTH IN THE FUTURE, THE POTENTIAL MARKET FOR PRODUCTS IN DEVELOPMENT, THE OUTCOME OF LITIGATION, THE DESCRIPTION OF THE COMPANY'S PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, ASSUMPTIONS UNDERLYING SUCH PLANS AND OBJECTIVES AND OTHER FORWARD-LOOKING STATEMENTS INCLUDED IN ITEM 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" ("MD&A"). SUCH STATEMENTS ARE BASED ON MANAGEMENT'S CURRENT EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF FACTORS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. IN PARTICULAR, CAREFUL CONSIDERATION SHOULD BE GIVEN TO CAUTIONARY STATEMENTS MADE IN ITEM 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND IN ITEM 1 - "BUSINESS" UNDER THE HEADING "RISK FACTORS." IGEN DISCLAIMS ANY INTENT OR OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS. ITEM 1. BUSINESS IGEN International, Inc. ("IGEN" or the "Company"), together with collaborators, develops, manufactures and markets diagnostic systems utilizing IGEN's patented ORIGEN technology, which is based on electrochemiluminescence ("ECL"), a universal diagnostic platform which addresses many segments of the diagnostics industry. The Company believes that ORIGEN-based diagnostic products offer significant advantages over existing systems by providing a combination of enhanced speed, sensitivity, flexibility, throughput and cost effectiveness. The Company and its collaborators design ORIGEN-based diagnostic systems for multiple segments of the $20 billion worldwide diagnostic market, from hospital and clinical reference laboratories to patient point-of-care, life science research, industrial and in-home testing. The Company has commercialized certain first generation ORIGEN-based products for large, established markets, such as clinical reference and central hospital laboratories, in collaboration with leading healthcare companies. All of these products feature the ORIGEN technology as the central diagnostic operating system. There are six ORIGEN-based product lines on the market generating revenues from equipment and recurring reagent sales which are being sold either by IGEN or its licensees. The Company estimates that approximately 5,000 of these systems have been sold or placed with customers, with more than 75% of these systems having been placed or sold in the last 24 months. The Company directly markets two product lines, the M-SERIES High Throughput Screening system and the ORIGEN Detection System, along with related reagents and services, for life science research applications. Leveraging on its success in developing and commercializing the first generation of ORIGEN-based products, the Company's strategy is to expand its role in the manufacturing and marketing of a new generation of ORIGEN-based products to create a universal diagnostic platform for potential high-growth market segments, including patient point-of-care, high throughput drug screening ("HTS") (life science research), and food, water and animal health testing (industrial). To facilitate marketing and distribution in certain of these new market segments, the Company may enter into corporate collaborations. The Company has recently completed the development of a second generation of the ORIGEN-based system, the ECL Module ("ECLM"). The Company developed the ECLM to be a self-contained, fully-functional 1 diagnostic operating system that approximates 1/20th the size of, and is fully compatible with, the first generation ORIGEN operating system. The ECLM reduces the time and cost required to incorporate ORIGEN technology into many diagnostic or analytical instruments. Because the ECLM combines small size and relatively low cost, with speed, accuracy and sensitivity equal to the first generation of ORIGEN-based products, the Company believes that the ECLM will accelerate the development of products for potential high-growth market segments. In the life science research market, IGEN has developed and is marketing the first ECLM-based product, the M-SERIES High Throughput Screening System, for use by biopharmaceutical companies in the drug discovery process. IGEN believes that screening specific drug targets against libraries containing hundreds of thousands of potential drug candidates is one of the most difficult challenges in the biopharmaceutical industry. The M-SERIES was developed to enable the rapid development of HTS assays and should allow biopharmaceutical companies to perform thousands of screens per day at less cost and with greater reliability. Leveraging on IGEN's extensive pharmaceutical contacts and its reputation in the life science research market, the Company established its first contracts with customers in the HTS market. Commitments to acquire the M-SERIES have been made by Pfizer, Amgen, Bristol-Myers Squibb, Schering Plough, Merck, Abbott Laboratories, Novo Nordisk, Agouron, Peptide Therapeutics, Zymogenetics, Battelle and the John Wayne Cancer Institute. Shipments of the first two M-SERIES pre-production units occurred in March, 1999. In the point-of-care market, the Company believes that ECLM-based devices should allow for a broad diagnostic menu, faster turnaround of tests, more accurate diagnosis and, therefore, better and more cost-effective patient care. The broad menu of immunoassays that has been developed by IGEN and its collaborators for the first generation of ORIGEN-based products can be performed on, and is available for use with, ECLM-based devices for the point-of-care market. IGEN is currently exploring collaborative business arrangements to accelerate the commercialization of ECLM-based products for multiple point-of-care applications. In the industrial market, IGEN has performed field evaluations of its ORIGEN test for E. coli bacteria in meat and other foods with the U.S. Department of Agriculture ("USDA") and two major food producers. This test, developed in conjunction with the USDA Agricultural Research Service, is used in testing food and beverage products, such as meat used in hamburger, for the bacteria which have caused numerous outbreaks of gastrointestinal and renal disease worldwide. According to published studies by the USDA, the ORIGEN-based test, which is automated and creates a permanent record of test results, is 1,000 times more sensitive and significantly faster than existing E.coli tests. The Company has entered into collaborations with established diagnostic and pharmaceutical companies which have provided IGEN with $80 million in license fees and product development and marketing resources, in addition to royalties on product sales. In 1997, revenues from these collaborations substantially shifted from up-front license fees to royalties based on sales of equipment and reagents. - The Company has a collaboration with Roche Diagnostics ("Roche"), the largest worldwide manufacturer of diagnostic equipment and supplies, to commercialize ORIGEN-based clinical immunodiagnostic and nucleic acid probe systems that are marketed worldwide to central hospital and clinical reference laboratories. IGEN has received $50 million in license fees from Roche and receives royalties on product sales. Roche presently markets two ORIGEN-based systems under the Elecsys product line together with a test menu of more than 35 different 2 assays (including tests for infectious diseases, anemia, cancer, heart attacks, thyroid disease and fertility/pregnancy, as well as other tests). IGEN has filed a lawsuit in Maryland against Roche, which claims multiple breaches of the license agreement between the parties and failure by Roche to perform its material obligations under the agreement. The timing or likelihood of resolving this matter cannot be determined at this time. See Item 3 - "Legal Proceedings." - The Company has an agreement with Organon Teknika B.V. ("Organon Teknika"), a company specializing in hospital and blood bank products, which is a business unit of Akzo Nobel N.V., a multinational corporation with annual revenues of approximately $12 billion, to develop and commercialize ORIGEN-based nucleic acid probe systems that will be marketed worldwide to clinical diagnostic and life science research markets. Organon Teknika has combined its proprietary nucleic acid sequence based amplification ("NASBA") technology with ORIGEN technology and markets the NucliSens line of diagnostic virology products together with test kits for the detection of HIV-1 RNA and CMV (cytomegalo virus). IGEN has received $20 million under its agreements with Organon Teknika and currently receives royalties on product sales. - IGEN has a collaboration with Eisai Co., Ltd. ("Eisai"), a leading Japanese pharmaceutical company, to market in Japan an ORIGEN-based diagnostic system for agreed-upon diagnostic tests currently focused primarily in the cancer area. Eisai introduced its first ORIGEN-based product under the trade name Picolumi during 1997 and IGEN receives royalties on product sales. IGEN's executive offices, laboratories and manufacturing operations are located at 16020 Industrial Drive, Gaithersburg, Maryland 20877. INDUSTRY BACKGROUND IN VITRO diagnostic testing is the process of analyzing blood, urine and other specimens to screen for, monitor and diagnose diseases and other medical conditions or to determine the chemical and microbiological constituents of the specimens. The major IN VITRO procedures include immunodiagnostic, nucleic acid probe and chemistry tests. The worldwide IN VITRO diagnostic market opportunity for IGEN is estimated to be approximately $20.0 billion and includes diagnostic procedures performed in three primary markets: (i) the clinical diagnostic market, including central hospital laboratories, clinical reference laboratories and blood banks, which are collectively estimated at $14.0 billion, and patient point-of-care testing and home testing, which are collectively estimated at $2.0 billion; (ii) the life science research market, which is estimated at $2.0 billion, including laboratories in pharmaceutical and biotechnology companies, universities, private institutes and the government; and (iii) the industrial market, which is estimated at $2.0 billion, including food and water quality assurance programs, agricultural diagnostics and animal health testing. Immunodiagnostic tests utilize antibodies to detect specific analytes such as viruses, hormones, therapeutic drugs and other substances present in the blood or other specimens in extremely low concentrations. To develop an immunodiagnostic test, an antibody is created that binds specifically to 3 the analyte to be detected. The antibody is then coupled to a label that signals to an instrument the presence of the analyte in a way that can be measured. Immunodiagnostic tests are characterized by a relatively high rate of technological change and the frequent introduction of new clinical tests. Currently, most immunodiagnostic tests are performed in large centralized hospital laboratories and clinical reference laboratories by skilled technicians who must process the specimen, measure its volume, add reagents and use sophisticated machines to read and calculate the results. Nucleic acid probe tests allow the detection of disease at the fundamental genetic level. The absence or presence of certain genes or gene mutations have been found to be reliable indicators of specific cancers, genetic disorders and infectious diseases. Nucleic acid probes provide a direct means of detecting nucleic acid sequences associated with either infectious agents or certain genes in a biological sample. One difficulty in the development of nucleic acid-based diagnostic technology is the low concentration of nucleic acid in the sample, which generally renders direct detection impractical. Recent solutions to this problem, including the DNA Polymerase Chain Reaction ("PCR") and NASBA, are capable of amplifying trace amounts of target nucleic acid hundreds of millions of times and allow for the detection of disease-causing genes before symptoms appear. Chemistry tests utilize established analytical methods for measuring simple compounds such as glucose and cholesterol, elements such as sodium and potassium, gases and enzymes. The types of samples that can be analyzed include biological specimens such as blood and urine as well as environmental materials, foods and beverages. The results of the analysis can be qualitative, identifying only the presence or absence of an analyte, or quantitative, identifying also the precise level of the analyte in the specimen. ORIGEN TECHNOLOGY The ORIGEN technology is a proprietary technology based on ECL, which utilizes labels that, when attached to a biological substance and electrochemically stimulated, emit light at a particular wavelength to signal the presence of an analyte. The light emission can then be measured with a high degree of accuracy to detect and quantify the analyte. The Company's ORIGEN technology thus provides a uniform assay format to conduct a multitude of diagnostic tests including immunoassay, nucleic acid probe and clinical chemistry tests. The ORIGEN technology is protected by numerous patents in the United States and internationally. IGEN and its collaborators are using the ORIGEN technology to develop and commercialize diagnostic systems that offer many advantages over current technologies. The Company believes that its ORIGEN technology offers improved speed, sensitivity, flexibility and throughput relative to existing diagnostic technologies and lowers the cost of diagnostic procedures. The ORIGEN system directly measures ECL, and does not involve the use of enzymes common in competing systems, thus permitting a simplified assay format. The ORIGEN diagnostic systems can be automated to provide in a uniform format a large number of immunoassay, nucleic acid probe and clinical chemistry tests. The essential component of the ORIGEN system is the measurement module, which consists of a flow cell containing an electrode and a light detection means such as a photodiode. The ORIGEN measurement module has been designed so that it can be easily incorporated into a variety of instruments from large central laboratory random-access systems to small batch systems. The major features and benefits of proprietary ORIGEN-based diagnostic systems are: 4
FEATURE BENEFIT Simple Assay Format Reduces time and labor in performing an assay. Flexibility Enables a single instrument to perform immunoassays on large and small molecules and to perform DNA and RNA probe assays. Cost Reduces assay cost per test. Speed Produces quick results. Enables high throughput (random access). Sensitivity Allows detection of analytes at very low concentrations. Precision Provides highly-reproducible measurements. Label Stability Extends reagent shelf life. Improves measurement accuracy.
The Company has recently completed the development of a new generation of ORIGEN technology, the ECLM. The Company developed ECLM to be a self-contained, fully-functional diagnostic operating system that is 1/20th the size of, and fully compatible with, the first generation ORIGEN operating system. The ECLM reduces the time and cost required to incorporate ORIGEN technology into many diagnostic or analytical instruments. Because the ECLM combines small size and relatively low cost, with speed, accuracy and sensitivity equal to the first generation of ORIGEN products, the Company believes that the ECLM will accelerate the development of products for potential high-growth market segments. ORIGEN-BASED PRODUCTS The Company is designing its diagnostic systems to create a universal diagnostic platform for all segments of the diagnostic market, from large central laboratories to patient point-of-care and in-home testing. The Company believes that its ORIGEN-based technology is well suited for the development of a family of instruments to be used in all segments of the market. The technology permits virtually all clinical chemistry, immunodiagnostic, nucleic acid tests and tests to be performed on the same instrument using the same detection method. 5 The following table summarizes the Company's products and development programs.
COMMERCIAL MARKET PRODUCT APPLICATION RIGHTS STATUS CLINICAL DIAGNOSTIC MARKET HOSPITAL/REFERENCE LABORATORY SYSTEMS Elecsys 2010 Immunoassays Roche Product Sales Elecsys 1010 Immunoassays Roche Product Sales NucliSens/NASBA QR Nucleic Acid Probe Organon Teknika Product Sales Detection Picolumi Immunoassays (Japan) Eisai (Japan) Product Sales High Throughput Elecsys Immunoassays Roche Development System (Modular) PATIENT POINT-OF-CARE SYSTEMS Physician Office-Elecsys Immunoassays IGEN (1) Product Sales Physician's Office/Portable Immunoassays/Clinical IGEN Development Hospital Analyzer Chemistry LIFE SCIENCE RESEARCH MARKET Home Self-Testing Health Screening and IGEN Research Monitoring M-SERIES High Throughput Immunoassay/Nucleic Acid IGEN Product Sales System Probe ORIGEN Detection System and Immunoassays/Nucleic Acid IGEN Product Sales Reagents Probe Cell Culture Reagents Research Biologicals IGEN Product Sales NucliSens/NASBA QR Nucleic Acid Probes Organon Teknika Product Sales INDUSTRIAL MARKETS Environmental/Water Immunoassays and Nucleic IGEN; Development/ Testing/Food Processing Acid Probe Detection Organon Teknika Field Studies System Animal Health Systems Immunoassays and Nucleic IGEN Development Acid Probe Detection
- ------------ 1 IGEN currently servicing customers pursuant to preliminary injunction issued by the Court in October, 1998. 6 CLINICAL DIAGNOSTIC PRODUCTS HOSPITAL/REFERENCE LABORATORY SYSTEMS. One of the significant applications of the Company's ORIGEN technology is in large, highly-automated clinical immunoassay systems of the type used in central hospital laboratories, clinical reference laboratories and blood banks. Reference laboratories constitute the vast majority of the clinical diagnostic market today. Reference laboratory systems must be able to perform a wide variety of immunoassay tests on a large number of samples both reliably and cost-effectively. The Company and its corporate collaborators believe that systems based on the ORIGEN technology are well suited to serve this market, and may surpass those immunoassay and nucleic acid probe systems currently available in terms of speed, cost effectiveness and ease of use. One of the Company's licensees, Roche, introduced its first ORIGEN-based random-access immunoassay system, the Elecsys 2010, for the central hospital and reference laboratory markets in 1996. The Elecsys 2010 is designed to perform multiple assays in a random-access mode while handling STAT tests (i.e., tests performed on clinical samples where the results are needed immediately) without interfering with the system workflow. Roche and Hitachi have cooperated in the development of the Elecsys 2010, building on their successful cooperation in clinical chemistry instrumentation. The Elecsys 2010 is designed so that it can be integrated with Roche's clinical chemistry systems. Roche also introduced the Elecsys 1010 system, which is a system designed for central hospital and reference lab customers who have a lower throughput requirement. Roche offers a competitive panel of more than 35 assays with the Elecsys systems, including tests for infectious diseases, anemia, cancer, heart attacks, thyroid disease, fertility/pregnancy, as well as other tests, and continues to develop additional assays for market introduction in subsequent months and years. IGEN is collaborating with Roche to develop additional assays for which IGEN is reimbursed by Roche for certain of its assay development costs. Roche is also developing the Modular, a high throughput Elecsys system. See Item 3 - "Legal Proceedings" for a description of litigation between the Company and Roche. IGEN and its licensee, Organon Teknika, believe that the ORIGEN technology applied to nucleic acid probe assays will offer the advantages of greater accuracy and efficiency that the market demands. Organon Teknika is developing nucleic acid probe diagnostic tests that are used to analyze human gene sequences or to detect the presence of gene sequences of infectious organisms. Organon Teknika markets the NucliSens line of diagnostic virology products, which combines the first nucleic acid probe system based on the ORIGEN technology with NASBA. The NucliSens has four stages: sample preparation and nucleic acid isolation, amplification and detection. The NASBA QR System utilizes ORIGEN technology which provides automated, rapid, specific, sensitive and homogenous detection. Tests on the market include a product for the direct detection of HIV-1 RNA, both quantitatively and qualitatively, and for the detection of CMV (cytomegalo virus). Products under development by Organon Teknika include tests for hepatitis, chlamydia and mycobacteria. In addition to the diagnosis of infectious disease, the NucliSens has potential applications in the fields of genetic diseases, oncologic diseases and HLA typing for organ transplants. The Company's licensee in Japan, Eisai, launched its ORIGEN-based product, the Picolumi, in 1997. The Picolumi consists of an immunodiagnostic instrument and certain assays. Currently, there are four cancer tests on the market and additional tests are in development. PATIENT POINT-OF-CARE SYSTEMS. IGEN is independently developing ORIGEN-based products that can be used to perform immunoassays and clinical chemistry tests outside of large central laboratory settings. This market includes patient point-of-care settings such as the physician's office, ambulatory clinics, 7 hospital emergency rooms, surgical and intensive care units, hospital satellite laboratories, nurse's stations or the hospital patient's bedside. Physicians, patients and third-party payors have created a demand for bringing laboratory testing closer to the patient in order to provide the medical practitioner with faster results and, therefore, prompt feed-back to the patient. Immunodiagnostic systems for individual physicians and group practices have had limited market penetration because of the lengthy turnaround time for test results (1-2 days), the need for skilled labor in performing tests and high cost. The Company believes that the emergence of simple, accurate and cost effective diagnostic products is shifting the site of IN VITRO diagnostic testing from the central clinical laboratory to alternate sites. IGEN believes that significant demand exists for immunodiagnostic and clinical diagnostic products that reduce turnaround time and cost. IGEN's point-of-care system is being designed to conduct tests that can provide accurate results to the physician within 15 minutes, thereby permitting the physician to make a timely decision regarding the patient's course of treatment. The ORIGEN technology permits development of a system that is simple to operate at a very low cost per test. The Company is designing its point-of-care system to consist of a simple, low cost instrument and a line of reagents packaged in a disposable single test or panel format. As most assays can be conducted on the ORIGEN system in a uniform format, the Company believes that a broad menu of tests could be marketed on its point-of-care system. Longer-term applications of the ORIGEN technology also exist in the field of in-home testing (patient self-testing), in which IGEN's technology may enable the creation of compact, inexpensive diagnostic products. The Company is exploring the feasibility of using its ORIGEN technology for such products. LIFE SCIENCE RESEARCH PRODUCTS M-SERIES HIGH THROUGHPUT SCREENING SYSTEM. IGEN believes that the need of biopharmaceutical companies to find new drugs and advances in drug discovery technologies has created an opportunity for the ORIGEN technology platform in the biopharmaceutical industry. Advances in fields of combinatorial chemistry and biotechnology have revolutionized drug discovery. With the advent of combinatorial chemistry, biopharmaceutical companies have dramatically expanded their drug candidate libraries. Developments in biotechnology and research programs such as the Human Genome Project have greatly increased the understanding of disease mechanisms and pathogens, providing novel therapeutic targets. In order to exploit these advances, biopharmaceutical companies are re-engineering their drug development processes. High Throughput Screening (HTS) uses automation and the latest advances in technology to accelerate the screening of compound libraries against the disease targets of interest. In HTS, researchers are challenged to develop new target assays while reducing costs and always processing larger numbers of samples. IGEN's ORIGEN technology is ideally suited to provide products to the biopharmaceutical HTS market. IGEN's M-SERIES High Throughput Screening System, based on the ECLM builds on the applications of its first generation product, the ORIGEN Detection System. The M-SERIES is compatible with 96 and 384 multi-well plates that are commonly used in HTS laboratories, and can be fully integrated with existing automation and robotic systems. It should allow researchers to perform thousands of tests per day, with less cost and with greater sensitivity and reliability. The sensitivity and accuracy of the M-SERIES has advantages over competitive screening technologies. It allows the user to quickly adapt the ORIGEN technology to target assays in weeks compared to the 8 months taken today, to reduce the use of their rare reagent, and to be more confident in their positive and negative results. IGEN's assay expertise assists customers with assay feasibility, development and in the performance of assay services under full GMP compliance. During 1998, IGEN established its first contracts with customers in the HTS market. Commitments to acquire the M-SERIES have been made by Pfizer, Amgen, Bristol-Myers, Squibb, Schering Plough, Merck, Abbot Laboratories, Novo Nordisk, Agouron, Peptide Therapeutics, Zymogenetics, Battelle, and the John Wayne Cancer Institute. Shipments of the first two M-SERIES pre-production units occurred in March 1999. ORIGEN DETECTION SYSTEM. IGEN currently sells the ORIGEN Detection System and a line of related reagents and services. The ORIGEN Detection System is used by researchers who wish to perform immunoassays for life science applications. The ORIGEN Detection System is an open architecture assay platform that quantitates the binding affinity of any two molecules that come together with specificity. The "open architecture" component of ORIGEN refers to the researcher's ability to customize their assays for their particular performance parameters. The System is optimized for immunoassays, but offers researchers the flexibility to build other assays for direct detection of nucleic acids and receptor ligand studies. ORIGEN is being implemented throughout the life science market as a replacement technology for Radioimmunoassays (RIA) and Enzyme Linked Immunosorbent Assays (ELISA), the most commonly used systems, as well as a replacement for newer chemiluminescent and fluorescent procedures. IGEN's market focus on biopharmaceuticals has resulted in successful application of ORIGEN technology by customers in drug discovery and development, compound screening, basic research, clinical trials, quality control and manufacturing. Biopharmaceutical researchers are benefiting from the ORIGEN Detection System's sensitivity as well as the reduction of time and labor, and significantly, the reduction in use of rare assay components such as proprietary compounds, antibodies, or clinical trial samples. While IGEN's market focus has been on immunodiagnostic applications for biopharmaceutical customers, the Company also has customers at government and university research centers. Certain of these customers are performing research in strategic IGEN growth areas such as food and water quality testing. The Company has also broadened its assay versatility by expanding into nucleic acid probe applications. The Company believes that ORIGEN-based technology also sensitively detects DNA without costly amplification steps. RESEARCH BIOLOGICALS. The Company produces and sells a line of research reagents under its ORIGEN brand name. The products are purified biological extracts that promote the growth of certain types of cells used in laboratory investigations. The Company markets the products directly as well as through distributors. INDUSTRIAL PRODUCTS The Company is seeking to develop further, either independently or with joint venture partners, ORIGEN-based products for use in food and water quality assurance programs and animal health testing. The emergence of simple, accurate and cost effective products is shifting testing from traditional labor intensive methods such as gas chromatography, to immunodiagnostics. The Company believes that its ORIGEN Detection System and reagents together with simpler, low-cost, ECLM-based instruments under development will be well-suited for these market applications. 9 The Company has performed field evaluations of its ORIGEN test for E.coli bacteria in meat and other foods with the USDA and two major food producers. This test, developed in conjunction with the USDA Agricultural Research Service, is used in testing food and beverage products such as meat used in hamburger, for the bacteria which have caused numerous outbreaks of gastrointestinal and renal disease worldwide. According to published studies by the USDA, the ORIGEN-based test, which is automated and creates a permanent record of test results, is 1,000 times more sensitive and significantly faster than existing E.coli tests. Major food and beverage producers could become primary users of the E.coli test to ensure continued safety of food and beverage products. The major advantages of the ORIGEN test are its ability to perform in complex sample types like hamburger meat, in less time, with a 1,000 fold increase in sensitivity over available methods. The IGEN test will offer food producers the ability to efficiently test many more food samples than available methods. In addition to E.coli, IGEN will begin field evaluations soon of other ORIGEN-based food and beverage safety tests, such as a test for cryptosporidium parasite developed in conjunction with the Centers for Disease Control. COLLABORATION AND LICENSE AGREEMENTS IGEN's business strategy is to develop and market products both independently and in collaboration with established healthcare companies. The Company's ORIGEN technology has already provided near-term revenues, which have enabled the Company to pursue its strategic objectives in the diagnostic business. IGEN may seek additional corporate collaborations to accelerate commercialization of ECLM-based products for point-of-care applications and to facilitate marketing and distribution of its products in certain other markets. ROCHE -- Roche Diagnostics GmbH ("Roche") is a subsidiary of F. Hoffmann La-Roche Ltd. of Switzerland, a multinational corporation with annual revenues exceeding $15 billion and the largest worldwide manufacturer of diagnostic equipment and supplies. Roche's principal strength is in the areas of clinical chemistry and nucleic acid probe systems, in which it is the market leader. The Company entered into an agreement under which Roche was granted rights to develop and market clinical diagnostic systems in certain markets worldwide based on the Company's technology. Under the agreement, IGEN received $50 million in license fees over a five-year period ending in 1996. Roche pays additional amounts for certain assay product development being performed by IGEN, and is obligated to pay the Company a royalty on all product sales. The ORIGEN products being marketed by Roche under the name Elecsys, are a series of highly-automated diagnostic systems designed for central hospital laboratories and clinical reference laboratories. IGEN believes that Elecsys systems will enable Roche to increase its market presence in immunodiagnostics and to market systems capable of performing both clinical chemistry and immunodiagnostic tests. The Company estimates that Roche has placed or sold approximately 5,000 Elecsys systems with customers since market introduction in mid-1996. The Company has granted Roche an exclusive right to market these products to central hospital laboratories and clinical reference laboratories worldwide, except for rights previously licensed to Eisai to market contained products in Japan. The Company has also granted Roche a co-exclusive license to use the ORIGEN technology for nucleic acid probe tests for use in centralized hospital laboratories and clinical reference laboratories. In addition, Roche has granted to the Company a non-exclusive license to certain improvements for products based on the ECL technology resulting from Roche's work under its agreement with the 10 Company. This "grant back" may be used only in fields other than central hospital and clinical reference laboratories. The Company is involved in litigation with Roche. See Item 3 -" Legal Proceedings." The Company recorded royalty income and license fees from the Roche agreement of $7.1 million, $4.4 million and $8.6 million for the three fiscal years ended March 31, 1997, 1998 and 1999. ORGANON TEKNIKA B.V. Organon Teknika, a company specializing in hospital and blood bank products, is a business unit of Akzo Nobel N.V., a multinational corporation with annual revenues of approximately $12 billion. In 1993, the Company entered into a $20 million license agreement and a stock purchase agreement with Organon Teknika. The license agreement provides Organon Teknika with co-exclusive rights to commercialize certain products utilizing the Company's ORIGEN technology for detecting nucleic acids in centralized clinical markets, research markets and for certain pathogens for food testing. Organon Teknika has combined the Company's ORIGEN technology with NASBA, a proprietary nucleic acid amplification technique. The agreement provides for royalty payments to IGEN and for product supply arrangements. The Company also issued shares of Common Stock to Organon Teknika and agreed to devote specified resources to research and development activities in the field of clinical diagnostics. Robert Salsmans, a director of the Company, is President and Chief Executive Officer of the Organon Teknika group of companies. EISAI CO., LTD. Eisai is a major Japanese pharmaceutical company. The Company granted a license to Eisai to market in Japan a clinical diagnostic system based on the Company's ORIGEN technology. Under this agreement, Eisai has paid $8 million to IGEN as license fees and an additional $2.75 million as an advance royalty payment. During 1997, Eisai launched an ORIGEN-based product under the trade name Picolumi, which consists of an immunodiagnostic instrument and certain assays for use in Japan in the market regulated by the Japanese Ministry of Health and Welfare. Eisai currently markets three cancer tests and one test for HTLV and is developing additional tests. The Company receives royalties from Eisai's sales. For the three fiscal years ended March 31, 1997, 1998 and 1999, revenue from corporate collaborators, which is represented as product-based royalty income, license fees and contract revenue, totaled $9.6 million (60%), $7.8 million (58%), and $9.9 million (67%), respectively. RESEARCH AGREEMENTS In 1993, the Company established HyperGen, a joint venture partnership, with Hyperion Catalysis International ("Hyperion") to develop and commercialize biomedical products utilizing advanced materials such as Hyperion's proprietary Graphite Fibrils nanotubes. Hyperion, a privately-held company based in Cambridge, Massachusetts, is engaged in the development and manufacture of Graphite Fibrils, an innovative carbon-based nanofiber. IGEN licensed the exclusive right to use products developed by HyperGen for diagnostic applications. The Company contributed cash of $3 million for its initial 50% interest in HyperGen and made additional cumulative payments of $2 million based on the attainment of certain research milestones. In December 1994, the Company acquired the remaining 50% interest in HyperGen for $3 million. IGEN assumed operating control of HyperGen and consolidated HyperGen's research and development programs into the Company's internal programs. Acquisition of the HyperGen rights to Graphite Fibrils enabled IGEN to commence the development of proprietary products to complement its business in the medical and life science marketplace. One product under investigation by IGEN is a filter comprised of Graphite Fibrils that could be used as a disposable 11 electrode for ECL measurements for ORIGEN-based products. The Company's Chief Executive Officer, Samuel Wohlstadter, is Chief Executive Officer and a shareholder of Hyperion. During November 1995, the Company formed a joint venture for the development and commercialization of advanced diagnostics products utilizing a proprietary combination of multi-array technology together with the Company's ORIGEN technology. Products based on these technologies would be used for high throughput, multiparameter analysis for DNA sequencing, clinical chemistry and immunodiagnostics. The joint venture is named Meso Scale Diagnostics, LLC ("MSD"), and was formed together with Meso Scale Technologies, LLC ("MST"), a company based in Maryland. MST is a technology-based company established and operated by Jacob Wohlstadter, the son of Samuel J. Wohlstadter, the Chief Executive Officer of the Company. Nadine Wohlstadter, a member of MST, is the spouse of Samuel J. Wohlstadter. The Company has agreed to provide initial capital contributions to MSD of $5 million over time in exchange for its ownership interest and in addition, it has agreed to fund the organizational and certain ongoing (non-research) expenses of MSD. Furthermore, at the request of MSD, IGEN will make available to MSD such personnel as are reasonably necessary to permit MSD to conduct its research (such time spent by IGEN personnel would be credited to IGEN's capital contributions). The Company will also participate in a collaborative research program under which no funds have been expended. MSD's research programs to develop products will be based on multi-array diagnostic techniques and the ability to control and adapt surface chemistry reactions on a microscopic level. The process may generate thousands of reactions on a single chip with diagnostic results presented on an array and read using electrochemiluminescence. The multiple results would represent an advance in diagnostic testing enabling researchers and clinicians to explore complex information rapidly and cost-effectively. PATENTS AND OTHER PROPRIETARY RIGHTS IGEN pursues a policy of seeking patent protection to preserve its proprietary technology and its right to capitalize on the results of its research and development activities and, to the extent it may be necessary or advisable, to exclude others from appropriating its proprietary technology. IGEN also relies upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. The Company prosecutes and defends its intellectual property, including its patents, trade secrets and know-how. The Company regularly searches for third-party patents in its fields of endeavor, both to shape its own patent strategy as effectively as possible and to identify licensing opportunities. IGEN owns 40 issued U.S. patents and has 45 pending U.S. applications in the diagnostics field. Worldwide, the Company owns 85 additional issued patents and has more than 147 pending patent applications covering the same technology. These patents and patent applications cover various aspects of IGEN's ORIGEN technology and products, and the methods for their production and use. IGEN patents will not begin to expire until 2005; core ORIGEN patents will extend through 2015. The Company continues to protect its technology with new patent filings which could further extend its patent coverage. The patent positions of diagnostic firms, including the Company, are highly uncertain and involve complex legal and factual questions. The Company may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention, which could result in substantial cost to the Company even if the eventual outcome is favorable to the Company. 12 Consequently, the Company does not know whether its applications will result in issued patents or whether its patents will provide significant proprietary protection or will be circumvented or invalidated. A number of healthcare and information technology companies and research and academic institutions have filed patent applications or received patents in the diagnostic field. Some of these applications or patents may be competitive with the Company's issued patents or pending patent applications or conflict in certain respects with claims made in the Company's patents or patent applications or the Company's ability to practice the technology covered thereby. Such conflicts could result in a significant reduction of the Company's ability to practice the inventions covered by its patents and pending patent applications. In addition, if patents containing competitive or conflicting claims are issued to others and such claims are ultimately determined to be valid, there can be no assurance that the Company will be able to obtain licenses to these patents at a reasonable cost or be able to develop or obtain alternative technology. In June 1998, a subsidiary of Ares - Serono filed a patent infringement claim against IGEN, Roche and Organon Teknika in U.S. District Court in Delaware. This action claims that a patent for "A Method Assay Employing a Magnetic Electrode" is being infringed by IGEN. The Company does not believe it infringed on the Serono patent and intends to vigorously defend against this claim. The Company filed an opposition in the European Patent Office in 1995 to a patent (EP 0 285 05781) owned by Enzo Biochem, Inc. This patent covers labeled oligonucleotides useful in DNA probe assays. Separate oppositions have been lodged by Roche and Organon Teknika. The Company is vigorously opposing this patent. Since the opposition is still in an early stage, it is not possible to predict the outcome or the effect, if any, on the Company's intellectual property or products. GOVERNMENT REGULATION The Company's research and development activities and the future manufacturing and marketing of products by the Company are subject to regulation by numerous governmental authorities in the United States and other countries. In the United States, clinical diagnostic devices are subject to rigorous U.S. Food and Drug Administration ("FDA") regulation. The Federal Food, Drug and Cosmetic Act and the Public Health Service Act govern the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of the Company's clinical products. In addition to FDA regulations, the Company is subject to other federal and state regulations such as the Occupational Safety and Health Act and the Environmental Protection Act. Product development and approval within this regulatory framework may take a number of years and involves the expenditure of substantial resources. In addition, there can be no assurance that this regulatory framework will not change or that additional regulation will not arise at any stage of the Company's product development, which may affect approval of or delay an application or require additional expenditures by the Company. The Company's regulatory strategy is to pursue development and marketing approval of its products worldwide, either independently or through corporate collaborators. The Company intends to seek input from the regulatory authorities at each stage of the clinical process to facilitate appropriate and timely clinical development. The clinical development of certain products may be the responsibility of the Company's collaborators. 13 CLINICAL DIAGNOSTIC SYSTEMS The manufacture, distribution and sale in the United States of the Company's products for clinical diagnostic purposes will require prior authorization by the FDA. The FDA and similar agencies in foreign countries have promulgated substantial regulations that apply to the testing, marketing, export and manufacturing of diagnostic products. To obtain FDA approval of a new product for diagnostic purposes, the Company or its collaborators will in most cases be required to submit proof of the safety and efficacy of the product, or its "substantial equivalence" to previously marketed products. Such proof typically entails clinical and laboratory tests. The testing, preparation of necessary applications and processing of those applications by the FDA is expensive and time consuming. Significant difficulties or costs may be encountered by the Company in its efforts to obtain FDA approvals that could delay or preclude the Company from marketing its products for diagnostic purposes. Furthermore, there can be no assurance that the FDA will not request the development of additional data following the original submission. With respect to patented products or technologies, delays imposed by the governmental approval process may materially reduce the period during which the Company or its collaborators will have the exclusive right to exploit those products or technologies. The Company's and its collaborative partners' diagnostic products are regulated as medical devices. The Roche Elecsys clinical diagnostic product has received FDA approval. Prior to entering commercial distribution, all medical devices must undergo FDA review under one of two basic review procedures depending on the type of assay: a Section 510(k) pre-market notification ("510(k)") or a pre-market approval application ("PMA"). 510(k) notification is generally a relatively simple filing submitted to demonstrate that the device in question is "substantially equivalent" to another legally marketed device and includes tests for therapeutic drugs and hormones. Approval under this procedure may be granted within 90 days if the product qualifies, but generally takes longer, and may require clinical testing. When the product does not qualify for approval under the 510(k) procedure, the manufacturer must file a PMA to show that the product is safe and efficacious, based on extensive clinical testing among several diverse testing sites and population groups, and shows acceptable sensitivity and specificity. This procedure requires much more extensive pre-filing testing than does the 510(k) procedure and involves a significantly longer FDA review after the date of filing. In responding to a PMA, the FDA may grant marketing approval, may request additional information, may set restrictive limits on claims for use or may deny the application altogether. After product approvals have been received, they may still be withdrawn if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. The FDA may require surveillance programs to monitor the effect of products which have been commercialized, and has the power to prevent or limit further marketing of the products based on the results of these post-marketing programs. In addition to obtaining FDA approval for each product, under the PMA guidelines, the Company must seek FDA approval of the manufacturing facilities and procedures. The FDA will also inspect diagnostic companies on a routine basis for regulatory compliance with its Good Manufacturing Practices ("GMP"). The Company's products for the physician's office market will be affected by the Clinical Laboratory Improvement Amendments of 1988 ("CLIA"), which is intended to insure the quality and reliability of medical testing and may have the effect of discouraging, or increasing the cost of, testing in physicians' offices. The regulations establish requirements for laboratories in the area of administration, participation in proficiency testing, patient test management, quality control, personnel, quality assurance and inspection. Under these regulations, the specific requirements that a laboratory must meet depend 14 upon the complexity of the tests performed by the laboratory. Laboratory tests are categorized as either waived tests, tests of moderate complexity or tests of high complexity. Laboratories that perform either moderate or high complexity tests must meet standards in all areas, with the major difference in requirements between moderate and high complexity testing concerning quality control and personnel standards. Quality control standards for moderate complexity testing are being implemented in stages. Personnel standards for high complexity testing are more rigorous then those for moderate complexity testing. In general, personnel conducting high complexity testing will need more education and experience than those doing moderate complexity testing. Under the CLIA regulations, all laboratories performing moderately complex or highly complex tests will be required to obtain either a registration certificate or certificate of accreditation from the Healthcare Financing Administration ("HCFA"). Because the regulations' interpretation is uncertain, it is possible that certain of the Company's products may be categorized as tests of high complexity, in which case the Company's penetration of the point-of-care market would be reduced since not all laboratories would meet the standards required to conduct such tests. The Company understands that laboratories, including physician office laboratories, will be evaluating the requirements of CLIA in determining whether to perform certain types of moderate and high complexity diagnostic tests. The Company believes that the sale of its products will not be adversely affect by CLIA. However, no assurance can be given that the statute and its implementing regulations will not have a material adverse impact on the Company and its ability to market and sell any products that it develops. Although the Company believes that it will be able to comply with all applicable regulations regarding the manufacture and sale of diagnostic devices, such regulations are always subject to change and depend heavily on administrative interpretations. There can be no assurance that future changes in regulations or interpretations made by the HHS, FDA, HCFA or other regulatory bodies, with possible retroactive effect, will not adversely affect the Company. In addition to the foregoing, the Company is subject to numerous federal, state and local laws and regulations relating to such matters as safe working conditions, laboratory and manufacturing practices, environmental, fire hazard control, and disposal of hazardous or potentially hazardous substances. To date, compliance with these laws and regulations has not had a material effect on the Company's financial results, capital requirements or competitive position, and the Company has no plans for material capital expenditures relating to such matters. However, there can be no assurance that it will not be required to incur significant costs to comply with such laws and regulations in the future, or that such laws or regulations will not have a material adverse effect upon the Company's ability to do business. Sales of the Company's products outside the United States are also subject to extensive regulatory requirements, which vary widely from country to country. The time required to obtain such approval may be longer or shorter than that required for FDA approval. RESEARCH PRODUCTS The Company's products that are being sold for research use only, including the M-SERIES High Throughput Screening System, must be properly labeled as such, as required by the FDA, but do not generally require FDA approval prior to marketing. The FDA has begun to impose new distribution requirements and procedures on companies selling research-only products, such as the requirement that the seller receive specified certifications from its customers as to the customers' intended use of the product. The Company expects that the FDA will develop additional restrictions of this nature. The 15 Company is unable at this time to predict the form these restrictions may take, their likely magnitude or their ultimate impact on the Company or its sales. ENVIRONMENTAL REGULATION Due to the nature of its current and proposed research, development and manufacturing processes, the Company is subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes. Although the Company believes that it has complied with these laws and regulations in all material respects and has not been required to take any action to correct any noncompliance, there can be no assurance that the Company will not be required to incur significant costs to comply with environmental and health and safety regulations as it expands its production operations. REIMBURSEMENT Third party payors, such as governmental programs and private insurance plans, can indirectly affect the pricing or the relative attractiveness of the Company's products by regulating the maximum amount of reimbursement they will provide for diagnostic testing services. In recent years, healthcare costs have risen substantially, and third-party payors have come under increasing pressure to reduce such costs. In this regard, the Federal government, in an effort to reduce healthcare costs, may take actions which may involve reductions in reimbursement rates. If the reimbursement amounts for diagnostic testing services are decreased in the future, it may decrease the amount which physicians, clinical laboratories and hospitals are able to charge patients for such services and consequently the price the Company can charge for its products. COMPETITION Competition in the diagnostic industry is intense, and a small number of large and well established companies are major participants. In view of the nature of the industry, the Company has elected to rely on alliances with established companies to exploit fully the advantages of its diagnostic systems. There can be no assurance, however, that IGEN's corporate collaborators will be successful in commercializing the ORIGEN technology. Furthermore, academic institutions, government agencies and other public and private organizations conducting research may develop potentially competing products or technologies and may establish collaborative arrangements with competitors of the Company. The Company's competition will be determined in part by the potential applications for which the Company's products are developed and ultimately approved by regulatory authorities. For certain of the Company's future products, an important factor in competition may be the timing of market introduction of its own or competing products. Accordingly, the relative speed with which IGEN or its corporate collaborators can develop products, complete the clinical trials and approval processes and supply commercial quantities of the products to the market are expected to be important competitive factors. The Company expects that competition with products approved for sale will be based, among other things, on product efficacy, safety, reliability, availability, price and patent position. Many of the Company's existing or potential competitors have substantially greater financial, technical and human resources than the Company and may be better equipped to develop, manufacture and market 16 products. These companies may develop and introduce products and processes competitive with or superior to those of the Company. The Company's competitive position also depends upon its ability to attract and retain qualified personnel, obtain patent protection or otherwise develop proprietary products or processes and secure sufficient capital resources for the often substantial period between technological conception and commercial sales. MANUFACTURING The Company's current commercial manufacturing operations consist of the manufacture of the M-SERIES High Throughput Screening System and the ORIGEN Detection System and related reagents and cell culture research biologicals as well as quality assurance processes. IGEN operates a qualified GMP facility. The Company uses a variety of suppliers and believes that it does not depend on any single-source supplier that it cannot replace in the ordinary course of business. The Company has not yet introduced clinical diagnostic products. Initial clinical diagnostic products, based on the Company's ORIGEN technology, are being manufactured by the Company's corporate collaborators. Although additional future products may be manufactured by the Company, it has not yet developed plans for establishing manufacturing operations for these products. SALES AND MARKETING IGEN markets the M-SERIES High Throughput Screening System and the ORIGEN Detection System, together with related reagents and services, directly to the life science research market. In conjunction with the U.S. and European launch of the M-SERIES system, the Company has expanded its direct sales force, including the addition of application specialists and in-house technical services personnel. The Company continues to develop marketing plans for Japan. Substantial sales and marketing of products based on the Company's ORIGEN technology is conducted by corporate collaborators. See "-- Collaboration and License Agreements." The ORIGEN cell culture products are sold directly and through distributors. HUMAN RESOURCES As of May 31, 1999, IGEN employed 158 individuals full-time, of whom 105 were engaged in research, product development, manufacturing and operations support, 36 in marketing, sales and applications support and 17 in general administration. Of the Company's employees, 53 have Ph.D. degrees. A significant number of the Company's management and professional employees have had prior experience with pharmaceutical, biotechnology, diagnostic or medical products, computer software or electronics companies. None of the Company's employees is covered by collective bargaining agreements, and management considers relations with its employees to be good. The Company's ability to maintain its competitive position will depend, in part, upon its continued ability to attract and retain qualified scientific and managerial personnel. Competition for such personnel is intense. 17 RISK FACTORS DEPENDENCE ON THE EFFORTS OF LICENSEES AND COLLABORATORS IGEN's business depends, in part, on the efforts of companies to which it has licensed its technology. IGEN has licensed its technology to Organon Teknika B.V., Eisai Co., Ltd., and Roche Diagnostics for selected markets and uses. If these companies do not effectively develop and market products based on this technology, IGEN's business would be adversely affected. IGEN's license agreements allow these companies to develop products using IGEN's technology. The licenses also authorize them to manufacture and sell those products in selected markets. In return for the right to use IGEN's technology, each of these companies must pay royalties to IGEN based on revenues from products using the technology. Each company is currently selling products based on IGEN's technology and making royalty payments. These royalties are a significant part of IGEN's overall revenue, accounting for 63% of revenue in fiscal year 1999. IGEN believes that licensees have economic incentives to continue marketing products using this technology, but IGEN cannot predict future royalty income. Future royalties will depend on a variety of factors that are outside IGEN's control. For example, the amount of royalties IGEN receives will depend on how diligently licensees market products incorporating the technology. IGEN has a lawsuit against Roche, in part because it believes Roche has not calculated and paid royalties properly and has not marketed the technology as diligently as the license agreement requires. In the future, IGEN expects to enter into additional license agreements or other collaborative arrangements to develop and market products using IGEN technology. Future royalty income will depend, in part, on whether IGEN can negotiate suitable arrangements with other companies and whether the products using IGEN's technology succeed commercially. LITIGATION AGAINST ROCHE AND HITACHI IGEN is currently involved, directly and indirectly, in two separate lawsuits with its licensee Roche. Roche is the largest licensee of IGEN's technology in terms of royalty income. IGEN cannot predict whether it will succeed in this litigation. IGEN is currently suing Roche in Maryland federal court about disputes over a license agreement between the two companies. This license agreement gives Roche the exclusive right to manufacture, market and sell diagnostic equipment, and related assays, using IGEN's patented ORIGEN technology, to central hospital laboratories and clinical reference laboratories. The license restricts Roche's rights in the Japanese clinical diagnostic market. In the lawsuit, IGEN claims that Roche has not performed a variety of its obligations under the license agreement. Allegations include the following: - Roche has not developed and commercialized ORIGEN technology according to an agreed-upon timetable. - Roche has not diligently marketed the licensed technology. 18 - Roche continues to market products on which it does not have to pay royalties, even though the license agreement required it to phase out these products. - Roche has marketed and sold products to customers that are not permitted under the license. - Roche has disregarded certain confidentiality obligations that apply to the ORIGEN technology. - Roche has not maintained its corporate records in a way that would allow it to accurately calculate the royalties it owes to IGEN. - Roche has not properly computed royalties and has underpaid royalties to IGEN. Based on the violations by Roche of the license agreement, IGEN asked the court to do three principal things: - Award monetary damages to compensate IGEN for Roche's failure to perform its contractual obligations. - Prohibit Roche from violating the license agreement in the future. - Determine that IGEN is entitled to terminate the agreement with Roche because of Roche's material breaches. During 1998, IGEN asked the court to issue a preliminary injunction because it believed Roche was selling outside of its authorized markets. IGEN asked the court to: - Prohibit Roche from selling products using ORIGEN technology to physicians' offices and physicians' office laboratories which are not within Roche's licensed field. - Direct Roche to transfer its current unauthorized customers to IGEN for future orders of reagents. - Direct Roche to place all income from its unauthorized sales in an escrow account until completion of the litigation. The court granted IGEN's motion in July 1998 and issued a preliminary injunction in October 1998. Roche has appealed the decision to the Fourth Circuit Court of Appeals. This appeal is currently pending. In December 1998, Roche filed a counterclaim with the court against IGEN. In that counterclaim, Roche asserted complaints for fraud, breach of contract, tortuous interference with business relations, unjust enrichment/equitable recoupment and contract reformation. IGEN believes that Roche's claims are unfounded. In March 1999, IGEN asked the court to dismiss Roche's claims for fraud, tortious interference with business relations, unjust enrichment/equitable recoupment and contract reformation. IGEN also asked the court to dismiss a small portion of Roche's breach of contract claim and to dismiss Roche's request for damages and injunctive relief. After receiving IGEN's motion to dismiss, Roche dropped its complaint for contract reformation and part of its tortious interference complaint. In June 1999, the court dismissed Roche's claims for fraud, tortious interference, and unjust enrichment/equitable recoupment and refused Roche's request for punitive damages and injunctive relief. Roche's breach of contract counterclaim remains oustanding. 19 In addition to the Maryland lawsuit, IGEN is suing Roche's Japanese manufacturer, Hitachi Ltd. in Japan. Hitachi manufactures diagnostic equipment based on ORIGEN technology for Roche. IGEN believes Hitachi's actions in Japan violate certain rights IGEN originally granted to Eisai to develop, manufacture and sell products using ORIGEN technology to the Japanese clinical diagnostic market. IGEN asked the Japanese court for the following actions to remedy Hitachi's violations: - Prohibit Hitachi from manufacturing, using or selling, in Japan, the Elecsys 2010 Instrument (Roche's immunoassay instrument that is based on ORIGEN technology in Japan). - Order Hitachi to destroy all of the Elecsys instruments in Hitachi's possession. IGEN is vigorously pursuing these lawsuits against Roche and Hitachi and it believes that the lawsuits are well-founded. It cannot be certain, though, that IGEN will win in either lawsuit. The lawsuits may present certain risks to IGEN's current and future business. With respect to IGEN's current business, IGEN does not believe that the lawsuit against Roche is affecting Roche's sales of products incorporating ORIGEN technology or the royalties IGEN receives as a result of those sales. IGEN has voluntarily agreed not to terminate the license agreement with Roche until the court determines that it has that right. Therefore, during the course of this litigation, Roche has the right to continue selling products based on ORIGEN technology to central hospital laboratories and to clinical reference laboratories, and IGEN expects to continue receiving royalties, as calculated by Roche, for those sales. With respect to IGEN's future prospects, the lawsuit against Roche could affect IGEN's business in a variety of ways. First, if the court determines that Roche has not miscalculated or underpaid royalties, the future royalty revenue from Roche's Elecsys products could be materially less than expected amounts. Although IGEN does not believe its own product development efforts would suffer directly, there would be less money available, all other things being equal, to devote to product development. Second, although IGEN does not believe that Roche's sales of licensed products, or the resulting royalty revenue, would suffer if IGEN lost the lawsuit, this is not certain. And, finally, if the court decides that IGEN may terminate the license agreement with Roche and IGEN chooses to do so, there would be risks in connection with the termination. If IGEN were to terminate the agreement, royalty revenues could suffer temporarily until IGEN found a suitable replacement for Roche. IGEN's overall income may significantly decrease. Furthermore, at this time, IGEN cannot be sure that it would be able to find a suitable replacement. Like the Roche litigation, the lawsuit against Hitachi also presents business risks. If IGEN wins the lawsuit against Hitachi, Roche would need to find a new manufacturer for equipment based on ORIGEN technology or make arrangements for Hitachi to manufacture the equipment outside of Japan. As a result, IGEN royalty income could suffer if Roche experiences supply problems. On the other hand, if IGEN loses the lawsuit, it does not foresee any direct adverse effects. IGEN does not believe that royalty income would suffer if it lost the Hitachi lawsuit. Hitachi would be able to continue manufacturing equipment using IGEN technology for Roche in Japan and IGEN would still be entitled to royalties based on the sales of the equipment. 20 COMPETING AGAINST MORE ESTABLISHED COMPANIES AND INSTITUTIONS IGEN is a relatively young company in a highly competitive industry. It competes against established diagnostic companies and with research and academic institutions, and IGEN expects this competition to intensify. Many of these companies and institutions have one or more competitive advantages: more money to invest; greater technical expertise in developing and marketing products; a larger, more experienced workforce; and more experience in obtaining regulatory approval for diagnostic products. NEED FOR ADDITIONAL CAPITAL IGEN may need to raise substantial amounts of money to fund a variety of future activities, including the following: - Development efforts: IGEN will have to spend a substantial amount of time and effort for research and development to successfully develop its technology. - Regulatory approval: IGEN will need to obtain regulatory approval for certain of its products. It plans to get approval by showing that these products are "substantially equivalent" to products that have already been approved. If IGEN does not succeed, it will have to conduct extensive clinical trials at substantial expense to gain regulatory approval. Costs for obtaining regulatory approval will depend on the method used to gain regulatory approval and the amount of time and effort that must be invested. - Patent protection: IGEN needs to protect its technology by filing and prosecuting patent applications. It will need to enforce patent rights against infringement by competitors. IGEN's patent related expenses will depend on how many applications IGEN files, the amount and strength of opposition to filings, and the cost of enforcing intellectual property rights against competitors who infringe IGEN's patents. - Technological innovation: IGEN will need to respond to innovations by our competitors. For example, it may have to invest more money in research and development to respond to improvements in competing technologies. - Market changes: IGEN will need to respond appropriately to changes in the market. For example, it may have to spend more to keep qualified employees if competition increases for scientists. - Licensing situation: IGEN may need to make new arrangements for marketing its technology. In particular, if IGEN succeeds in its lawsuit against Roche, it may have to look for a company to replace Roche in marketing products to central hospital laboratories and to clinical research laboratories. If IGEN is not able to find a suitable replacement, it may have to market the products directly, which would require additional investments to expand manufacturing and marketing capabilities. - Manufacturing: Currently, IGEN does not have the ability to manufacture certain products commercially. It may look for a company to manufacture its products. If not, or if it does not find an appropriate manufacturer, IGEN may need to invest substantial amounts to build or buy its own facilities. - Sales and marketing: Currently, IGEN does not have multiple sales teams to market different products to different markets. As with manufacturing, it 21 may look for a company to provide sales, marketing and distribution services for certain products. Alternatively, IGEN may need to build its own sales and distribution force. IGEN has a variety of funding options, but it cannot be certain that it will have access to enough funds to successfully develop the business. IGEN expects to need additional capital in the future, which it could raise by issuing additional debt securities or selling additional common or preferred stock, which could dilute the holdings of existing stockholders. If IGEN is unable to raise additional capital, it may have to scale back, or even eliminate, some programs. Alternatively, IGEN may have to consider arrangements with other companies, such as granting licenses or entering into joint ventures. These arrangements could require that IGEN give up some rights to technology or products. NEED FOR QUALIFIED STAFF IGEN needs to hire additional staff and retain existing staff, which is difficult in today's competitive marketplace. Because IGEN is a technology company, it depends heavily on scientists to develop products and to build a successful business. Research and development efforts could suffer if IGEN were not able to hire and retain enough qualified scientists. IGEN cannot be sure that it will succeed in its hiring and retention efforts. There is competition against other technology companies and research and academic institutions for experienced scientists. Many of these companies and institutions have greater resources than IGEN. In addition to scientists, IGEN will also need to hire managers as the business grows. IGEN will need managers who are able to address the need for regulatory, manufacturing and marketing capabilities. If IGEN is not able to hire managers with these skills, or develop expertise in these areas, its business prospects could suffer. IGEN also relies on outside consultants and advisors to create research and development strategies. Most consultants and advisors work for other companies. Their other commitments could make them unavailable to work for IGEN when needed in the future. This could hurt IGEN's ability to formulate effective research and development strategies. FDA APPROVAL REQUIRED FOR CLINICAL PRODUCTS The Company's products that are being sold for research use only, including the M-SERIES High Throughput Screening System, must be properly labeled as such, as required by the FDA, but do not generally require FDA approval prior to marketing. IGEN must obtain FDA approval before it can market clinical diagnostic products. The FDA regulates many areas in which IGEN conducts research and in which it develops, produces and markets products. In the United States, IGEN (or the companies with whom it works) will need to submit data from clinical trials demonstrating that its clinical diagnostic systems are substantially equivalent to diagnostic systems that have already been approved. Until the FDA determines that an ORIGEN-based system is substantially equivalent, IGEN cannot sell that system for clinical use in the United States. Typically, the FDA review process is a 90-day process, but the FDA's review could take longer. In addition, IGEN cannot be sure that it will be able to demonstrate substantial equivalence for present or future diagnostic systems. If IGEN does not successfully demonstrate substantial equivalence, it will have to conduct extensive clinical testing of these products. Extensive testing could involve substantial additional costs and might delay bringing clinical diagnostic products to market. 22 REGULATION OF PRODUCTS AND MANUFACTURING It may cost a substantial amount to comply with the regulations of the FDA and other governmental agencies. Government agencies, such as the FDA and the EPA, regulate manufacturers of diagnostic products and the manufacturing process. The costs of complying with governmental regulations and with any restrictions that might be imposed could have a significant impact on IGEN's business. Whether IGEN manufactures products or uses another company, the FDA will continually review and periodically inspect the manufacturing process. If the FDA discovered a problem with IGEN's products, the manufacturing process or the manufacturing facility, it could place restrictions on these products and on the manufacturer. For example, the FDA could require IGEN to recall, or even to totally withdraw, a product from the market. In addition to FDA regulations, the process of manufacturing products will be subject to a variety of environmental and safety laws and regulations, including laws and regulations governing the use and disposal of hazardous materials. LACK OF MANUFACTURING AND MARKETING EXPERIENCE IGEN lacks experience in large-scale manufacturing of diagnostic equipment and it is not currently equipped to manufacture all products. There are two options to address this problem. IGEN could expand the internal ability to manufacture products in compliance with FDA regulations or IGEN could contract with a third party to manufacture products for it. If IGEN cannot develop its own manufacturing capacity or find a suitable manufacturer in a timely manner, it will be delayed in introducing products to the market. A delay could put IGEN at a competitive disadvantage and could harm the financial condition of IGEN. IGEN will also need to develop greater selling, marketing and distribution capabilities. To market clinical diagnostic products directly, IGEN would need to develop a substantial sales force with technical expertise. It would also need to establish a distribution system to support the sales force. Alternatively, IGEN could license or contract with another company to provide sales and distribution services for products, in much the same way as was done with Roche, Eisai and Organon Teknika. IGEN cannot be sure, however, that it will be able to develop its own sales and distribution force or that it will be able to find a suitable company to fill that role for it. DEPENDENCE ON PATENTS IGEN's business depends heavily on patents, which will expire in time and may be challenged or circumvented by competitors. IGEN's strategy is to file patent applications covering its technology and products. Patents allow IGEN to prevent others, for a time, from using IGEN's inventions to compete against it. IGEN's success or failure will depend, in part, on its ability to obtain and maintain adequate patent protection for the ORIGEN technology. IGEN has over 147 patent applications pending in the United States and abroad. It cannot be sure, though, that any patents will actually be issued as a result of these applications. In the United States, IGEN owns or co-owns 40 patents providing exclusive rights in the diagnostic market; in other parts of the world IGEN owns or co-owns 45 patents in its field. . IGEN patents will not begin to expire until 2005; core ORIGEN patents will extend through 2015. IGEN will continue to file new patent applications which could extend patent coverage of ORIGEN technology beyond that time. 23 IGEN also cannot be certain that current patents or future patents will adequately protect its technology from use by competition. The breadth of claims in medical patents depends on complex factual issues and legal standards. Because there is no consistent policy governing the scope of these claims, patent protection is uncertain. Companies may, for example, challenge and invalidate patents or circumvent valid claims in patents, all of which could make it necessary for IGEN to defend its patents in litigation. Litigation over patents could harm IGEN's business in at least three ways. First, litigation costs can be high, which could drain IGEN's financial resources. Second, litigation over IGEN's patents could discourage other companies from working with IGEN to develop and market new products. Third, if IGEN loses some patent protection as a result of litigation, its competitive advantage could be eroded. IGEN's success or failure will also depend, in part, on the patent rights of others. IGEN licenses technology from other companies and academic institutions. Because these patents are necessary to its business, IGEN must be certain that it complies with these license agreements. IGEN's business could be harmed if it breached these agreements and lost the rights to use this patented technology. IGEN must also be sure that it does not infringe the patent rights of competitors. If IGEN did infringe, there are several possibilities--IGEN may have to alter its products or processes; it may have to obtain a license from the patent holder; or it may be forced to abandon development work that relates to these products. IGEN cannot be sure that it would be able to alter products or processes or that it could obtain a license at a reasonable cost. The business could be damaged if IGEN is unable to make necessary alterations or obtain a necessary license. In addition, IGEN may need to litigate the scope and validity of patents held by others. Litigation could be a substantial cost for IGEN. Laboratories Serono, S.A., a subsidiary of Ares-Serono, filed a patent infringement claim against IGEN and against the licensees, Roche and Organon Teknika, in June 1998. It claims that IGEN is violating its patent for "A Method Assay Employing a Magnetic Electrode." IGEN is in the early stages of responding to this claim, but does not believe that it or its licenses have been or are now infringing the patent. IGEN will continue to vigorously defend this claim. In an effort to defend its technology against infringement by others, IGEN is opposing a European patent owned by Enzo Biochem, Inc. Licensees Roche and Organon Teknika have also filed oppositions to the Enzo Biochem patent. The disputed patent gives Enzo Biochem exclusive rights to labeled oligonucleotides which are useful in DNA probe assays. IGEN is vigorously opposing Enzo Biochem's patent. Because it is at an early stage in the process, IGEN cannot determine yet what impact, if any, the Enzo Biochem patent will have on its business. While IGEN relies heavily on patents to protect its technology, it also enters into confidentiality agreements with licensees, employees and consultants. These agreements prohibit them from disclosing IGEN trade secrets and other confidential information. Despite these agreements, IGEN cannot be sure that the information shared with others will remain confidential. It also cannot be certain that it would have sufficient legal remedies to correct or compensate for unauthorized disclosures. Furthermore, IGEN's confidentiality agreements do not protect it against the possibility that competitors may make similar, independent discoveries. RESTRICTIONS ON PAYMENTS FOR PRODUCTS Third-party payors, such as governments, health maintenance organizations and private insurers, are restricting payments for health care. These restrictions may decrease demand for IGEN's clinical diagnostic products and the price it can charge. In many foreign markets, the government directly sets 24 the prices that diagnostic companies may charge. In the United States, IGEN believes that federal and state lawmakers will continue to propose similar governmental controls. Increasingly, Medicaid and other third-party payors are challenging the prices charged for medical services, including clinical diagnostic tests. They are also attempting to contain costs by limiting coverage and the reimbursement level of clinical diagnostic tests and other health care products. IGEN cannot be certain that insurers will cover clinical diagnostic tests in the future. Without adequate coverage and reimbursement, consumer demand for diagnostic tests will decrease. Decreased demand would likely cause IGEN sales of clinical diagnostic products, and sales by its licensees, to fall because fewer tests would be done or prices would be lowered, or both. Reduced sales by IGEN or its licensees would hurt IGEN's business and its business prospects. YEAR 2000 POTENTIAL ISSUES Many of the world's computer systems currently record years in a two-digit format. Such computer systems will be unable to interpret properly dates beyond the year 1999 which could lead to business disruptions in the U.S. and internationally ("Year 2000" issues). IGEN has reviewed its business, financial and accounting systems for Year 2000 issues. IGEN believes that installation of new or upgraded software to address any Year 2000 issues can be done on time. Upgrading software is not expected to create disruptions, malfunctions or prevent IGEN from operating its business. The Company is assessing whether its suppliers and collaborators with Year 2000 issues can comply on time. IGEN cannot be sure that suppliers and collaborators with Year 2000 issues can comply on time. IGEN does not expect there to be significant future costs. The failure of suppliers and collaborators for Year 2000 could disrupt IGEN's operations. Year 2000 compliance has not been, and is not anticipated to be, significant based on management's best estimates. These costs are based on management's best estimates of future events including continued availability of resources, suppliers and collaborators. These estimates may be impacted by future events. POTENTIAL PRODUCT LIABILITY IGEN may not be able to adequately insure against risk of product liability. As IGEN begins marketing products, it may face product liability for claims and lawsuits by customers. Damages in product liability cases can be very large. While IGEN has product liability insurance, this coverage is limited. SIGNIFICANT OWNERSHIP BY MANAGEMENT IGEN management has significant control over the company through stock ownership. IGEN's officers and directors, own (or have the right to purchase) about 36% of IGEN's common stock. IGEN's Chief Executive Officer has ownership of about 27%. If they act together, the officers and directors have significant influence over the election of directors and other shareholder actions. LIMITATION OF STOCKHOLDER RIGHTS IGEN's governing documents have provisions designed to prevent hostile takeovers, which may limit the ability of shareholders to approve certain transactions. According to IGEN's governing documents, stockholders can only act at annual meetings or at special meetings of stockholders. Stockholders are not allowed to act by written consent. In addition, stockholders are not allowed to call for a special meeting. 25 Only IGEN's Board of Directors, the Chairman of the Board, or the President may convene a special meeting. These provisions may make it difficult for shareholders to force IGEN to hold special meetings. These provisions may also limit the ability of stockholders to consider transactions that they may want to approve such as a hostile takeover of the company. IGEN also has other provisions which could make it more difficult for there to be a change in control of the company. IGEN's Board of Directors can issue preferred stock and can determine the rights of those preferred stockholders. For example, IGEN's Board could give preferred stockholders one or more votes on issues on which common stockholders vote. This could have the effect of diluting the voting rights of common stockholders. STOCK PRICE MAY FALL IGEN's common stock currently trades on the Nasdaq National Market. The prices of publicly traded stock often fluctuates. The price of IGEN stock may rise or fall dramatically, even though its business performance has not changed. In the past, the stock price of technology companies has been especially volatile. It is expected that this will continue to be the case. In addition to these fluctuations, an investment in IGEN could be affected by a wide variety of factors that relate to its business. For example, the value IGEN shares could be affected by new inventions IGEN discovers, innovations by competitors, disputes over patents or other proprietary rights, publicity, regulations, market conditions, and fluctuations in performance. NO CASH DIVIDENDS Since IGEN was formed, it has never paid cash dividends on its common stock. There are no plans to pay cash dividends in the foreseeable future. DILUTION OF AN INVESTMENT IGEN officers, directors, employees and consultants have options to purchase common stock. If they exercise their options and purchase common stock, an investment in the company will be diluted. IGEN currently has preferred stockholders who have the right to convert their preferred shares to common stock. An investment would be diluted if these preferred stockholders decide to convert their shares. An investment could be further diluted if IGEN issues additional common stock. IGEN may need to issue more common stock in the future to raise funds for the business. ITEM 2. PROPERTIES The Company's principal administrative, marketing, manufacturing and research and development facility consists of an 84,000 square foot building located in Gaithersburg, Maryland. The Company took occupancy of this leased facility during 1995. The lease expires in 2005. The Company believes that its current facility will be adequate for anticipated expansion needs. ITEM 3. LEGAL PROCEEDINGS On September 15, 1997, the Company filed a lawsuit in Maryland against Roche Diagnostics GmbH (then known as Boehringer Mannheim GmbH or BMG), a German company, to which the Company has licensed certain rights to develop and commercialize diagnostic products based on the Company's ORIGEN technology. BMG was acquired by F. Hoffman LaRoche during 1998, and is referred to herein 26 as Roche. That lawsuit is pending in the Southern Division of the United States District Court for the District of Maryland. The Company's dispute with Roche arises out of a 1992 License and Technology Development Agreement (the "Agreement"), pursuant to which Roche developed and launched its "Elecsys" line of diagnostic products, which is based on ORIGEN technology. The Company alleges that Roche has failed to perform certain material obligations under the Agreement, including development and commercialization of ORIGEN technology according to the contractual timetable; exploitation of the license to the extent contemplated by the parties; phase out of certain non-royalty-bearing product lines; exploitation of ORIGEN technology only within Roche's licensed fields; proper treatment of intellectual property rights regarding ORIGEN technology; maintenance of records essential to the computation of royalties; and proper computation and payment of royalties. In its lawsuit, the Company seeks damages as well as injunctive and declaratory relief, including a judicial determination of its entitlement to terminate the Agreement. The Company voluntarily has agreed not to terminate the Agreement unless and until the Court determines its entitlement to do so. During 1998, the Company filed a motion for preliminary injunction in its Maryland lawsuit against Roche. In that motion, the Company requested that the court enjoin Roche from marketing, selling, or distributing its Elecsys products outside of Roche's licensed field of use. The 1992 Agreement granted Roche rights to develop and commercialize diagnostic systems based on the Company's ORIGEN technology for use in centralized hospital laboratories and clinical reference laboratories only. The Company retains the rights to exploit its ORIGEN technology in all other clinical diagnostic markets. The Company learned that Roche was marketing Elecsys products outside of its licensed field of use and therefore asked the court to enjoin Roche from selling outside of its licensed field and, in particular, to physicians' offices and physicians' office laboratories. The Company also sought additional relief, including an order requiring Roche to refer all customers outside of Roche's licensed field to the Company for future reagent supply needs and to place all revenues derived from unauthorized sales in escrow pending the outcome of the litigation. The court granted IGEN's motion in July 1998 and issued a preliminary injunction in October 1998. Roche has appealed the preliminary injunction. In December 1998, Roche filed a counterclaim against the Company asserting five causes of action: fraud, breach of contract, tortious interference with business relations, unjust enrichment/equitable recoupment, and reformation. The Company believes that Roche's claims are unfounded. In March 1999, the Company moved to dismiss Roche's claims for fraud, tortious interference with business relations, unjust enrichment/equitable recoupment and reformation. The Company also moved the court to dismiss a portion of Roche's breach of contract claim and to strike Roche's request for punitive damages and injunctive relief. After being served with the Company's motion to dismiss, Roche dropped its complaint for contract reformation and part of its tortious interference claim. In June 1999, the court dismissed Roche's claims for fraud, tortious interference, and unjust enrichment/equitable recoupment and struck down Roche's request for punitive damages and injunctive relief. Roche's breach of contract counterclaim remains outstanding. In December 1997, IGEN International K.K.(IGEN K.K."), a Japanese subsidiary of the Company, filed a lawsuit in Tokyo District Court against Hitachi Ltd. ("Hitachi"). The lawsuit seeks to enjoin Hitachi from infringing IGEN K.K.'s license registration, (known in Japan as a "senyo-jisshi-ken") to prevent Hitachi from manufacturing, using or selling the Elecsys 2010 Instrument, which incorporates IGEN's patented ORIGEN technology, in Japan. Hitachi is the sole manufacturer for Roche of the Elecsys 2010 immunoassay instrument. Roche is licensed to market the Elecsys 2010 worldwide, except for Japan, to central hospital laboratories and clinical reference laboratories. The Company's ORIGEN technology is 27 licensed in Japan to IGEN K.K. and to Eisai Company, Ltd. The lawsuit requests injunctive relief against Hitachi. In June 1998, a subsidiary of Ares - Serono filed a patent infringement claim against IGEN, Roche and Organon Teknika in U.S. District Court in Delaware. This action claims that a patent for "A Method Assay Employing a Magnetic Electrode" is being infringed by IGEN. The Company does not believe it infringed on the Serono patent and intends to vigorously defend against this claim. The Company filed an opposition in the European Patent Office in 1995 to a patent (EP 0 285 05781) owned by Enzo Biochem, Inc. This patent covers labeled oligonucleotides useful in DNA probe assays. Separate oppositions have been lodged by Roche and Organon Teknika. The Company is vigorously opposing this patent. Since the opposition is still in an early stage, it is not possible to predict the outcome or the effect, if any, on the Company's intellectual property or products. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE COMPANY The names and ages of all executive officers of the Company at June 11, 1999 and their respective positions and offices with the Company are set forth below. Each officer serves without a set term.
NAME AGE POSITION ---- --- -------- Samuel J. Wohlstadter 57 Chairman, Chief Executive Officer and Director Richard J. Massey, Ph.D. 52 President, Chief Operating Officer and Director Robert Connelly 39 Vice President, Marketing and Sales George V. Migausky 44 Vice President, Chief Financial Officer and Secretary
SAMUEL J. WOHLSTADTER is a founder of the Company and has been Chairman of the Board and Chief Executive Officer since its formation in 1982. Mr. Wohlstadter has been a venture capitalist for more than 25 years and has experience in founding, supporting and managing high technology companies, including Amgen Inc., a biopharmaceutical company, and Applied Biosystems, Inc., a medical and biological research products company. Mr. Wohlstadter is also Chief Executive Officer of Hyperion Catalysis International, an advanced materials company, which he founded in 1981, of Pro-Neuron, Inc., a drug discovery company, which he founded in 1985, of Proteinix Corporation, a development stage company organized to conduct research in intracellular metabolic processes, which he founded in 1988 and of Pro-Virus, Inc., a drug discovery company, which commenced operations in 1994. RICHARD J. MASSEY, PH.D. is a founder of the Company, has been President and Chief Operating Officer of the Company since 1992, a Director of the Company since 1990 and served as Senior Vice President since 1985. From 1981 until he joined IGEN in 1983, Dr. Massey was a faculty member in the Microbiology and Immunology Department at Rush Medical Center in Chicago. Prior to that, he was Senior Research Scientist at the National Cancer Institute, Frederick Cancer Research Center. ROBERT CONNELLY, has been Vice President of Marketing and Sales since 1994, when he joined the Company. Previously, Mr. Connelly was the U.S. Marketing Manager for the Instrument Group at Abbott Laboratories, which he joined in 1983, where he was responsible for the marketing of chemistry and hematology systems and point-of-care and near-patient testing instruments. GEORGE V. MIGAUSKY has been associated with IGEN as Chief Financial Officer since 1985, assuming that position on a full-time basis in 1992. Between 1985 and 1992, in addition to serving as Chief Financial Officer of IGEN on a part-time basis, Mr. Migausky also served as financial advisor to several other privately held companies. Prior to joining IGEN in 1985, he spent nine years in financial management and public accounting positions, most recently as a Manager with the High Technology Group of Deloitte Haskins & Sells. 28 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is quoted on the NASDAQ National Market System under the symbol IGEN. As of June 11, 1999, there were approximately 3,500 holders of record of the Company's Common Stock. No cash dividends have been paid on the Common Stock to date, and the Company currently intends to retain any earnings for development of the Company's business. The following table sets forth, for periods indicated, the range of high and low closing sales prices of the Common Stock as quoted on the NASDAQ National Market System.
FISCAL 1998 HIGH LOW ----------- ---- --- First Quarter $ 8 $ 4 3/4 Second Quarter $ 13 7/8 $ 7 1/16 Third Quarter $ 15 1/8 $ 10 5/8 Fourth Quarter $ 43 $ 12 1/4 FISCAL 1999 First Quarter $ 45 3/4 $ 30 5/8 Second Quarter $ 40 $ 20 9/16 Third Quarter $ 31 1/8 $ 21 1/2 Fourth Quarter $ 35 $ 24
29 ITEM 6. SELECTED FINANCIAL DATA. The selected financial data set forth below with respect to the Company's consolidated statements of operations for each of the years in the three year period ended March 31, 1999 and with respect to the balance sheets at March 31, 1999 and 1998 are derived from, and are qualified by reference to, the consolidated financial statements that have been audited by Deloitte & Touche LLP, independent auditors, and are included elsewhere in this Form 10-K. The statement of operations data for each of the years in the two-year period ended March 31, 1996, and the balance sheet data at March 31, 1997, 1996 and 1995 are derived from audited financial statements not included in this Form 10-K. The following selected financial data should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.
FISCAL YEAR ENDED MARCH 31, - --------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) Statement of Operations Data: Revenues: Product Sales $ 4,949 $ 5,614 $ 6,360 $ 4,583 $ 2,555 Royalty income 9,439 5,024 843 75 20 License fees and contract revenue 510 2,795 8,802 11,266 12,259 -------- -------- -------- -------- -------- Total 14,898 13,433 16,005 15,924 14,834 -------- -------- -------- -------- -------- Operating Costs and Expenses: Products Costs 1,340 1,716 2,448 1,848 1,278 Research and development 14,271 11,615 13,114 14,078 12,267 Marketing, general and administrative 13,247 11,761 10,910 8,725 8,707 -------- -------- -------- -------- -------- Total operating expenses 28,858 25,092 26,472 24,651 22,252 -------- -------- -------- -------- -------- Loss from operations (13,960) (11,659) (10,467) (8,727) (7,418) Interest Income - net 687 54 586 1,079 1,489 Other expense (36) (225) -- -- -- -------- -------- -------- -------- -------- Net loss $(13,309) $(11,830) $ (9,881) $ (7,648) $ (5,929) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net loss per share $ (1.00) $ (.82) $ (.66) $ (.52) $ (.40) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Shares used in computing net loss per share 15,318 15,116 14,959 14,779 14,769 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
MARCH 31, - ------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (IN THOUSANDS) Balance Sheet Data: Cash, cash equivalents and short-term investments $ 34,374 $ 23,122 $ 9,044 $ 20,217 $ 30,226 Working capital 32,327 17,590 4,431 13,700 21,484 Total assets 45,823 30,391 17,794 29,276 37,806 Long term obligations 32,704 146 158 329 418 Accumulated deficit (81,839) (68,530) (56,700) (46,819) (39,171) Shareholders' equity 5,590 20,862 7,882 17,435 24,998
30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The Company has devoted substantially all of its resources to the research and development of its proprietary technologies, primarily the ORIGEN technology for clinical diagnostic and life science research products. Historically, the Company's sources of revenue consisted primarily of license or research payments pursuant to licensing or collaborative research agreements. The Company has entered into arrangements with corporate collaborators that provide for the development and marketing of certain ORIGEN-based systems. These agreements provide fees and royalties payable to the Company in exchange for licenses to produce and sell products. Beginning in the fourth quarter of fiscal 1997, the Company's revenues from license fees and contract research were substantially replaced by royalties based on its licensees' product sales. In the fiscal year ended March 31, 1999, 97% of the Company's revenues resulted from product sales, either by IGEN or its corporate licensees. Going forward, the Company expects an increasing amount of its revenues to be derived from sales of its products and royalties from corporate collaborations; however, the Company may selectively pursue additional strategic alliances, which could result in additional contract revenues. RESULTS OF OPERATIONS YEARS ENDED MARCH 31, 1999 AND 1998. The Company had a net loss of $13.3 million ($1.00 per share) on revenues of $14.9 million for the year ended March 31, 1999. This compares with a net loss of $11.8 million ($0.82 per share) on revenues of $13.4 million for the corresponding prior year ended March 31, 1998. During fiscal 1999, $14.4 million (97%) of the Company's revenue was generated from the sale of products, either directly by IGEN or from royalties on licensees sales. This represents a 35% increase from the $10.6 million of revenue recorded last year from comparable sources. Pursuant to the Company's agreement with Roche, (the "Agreement"), Roche launched its Elecsys product line in 1996, which is based on IGEN's ORIGEN technology. The Company is involved in litigation with Roche arising out of this agreement. See Item 3, "Legal Proceedings". One of the disputes in the litigation relates to the computation of royalties to which the Company is entitled under the Agreement. The Company recorded royalty income from this Agreement of $8.6 million and $4.4 million for the years ended March 31, 1999 and 1998, respectively. Product costs were $1.3 million (27% of product sales) for the year ended March 31, 1999 compared to $1.7 million (31% of product sales) for the corresponding prior year. Lower product costs and improved gross margins are attributable to a change in product mix between instruments, services and reagents and the elimination of sales to Organon Teknika for which the Company received no gross margin. Operating costs, excluding product costs, increased to $27.5 million in the fiscal 1999 compared to $23.4 million during fiscal 1998. During fiscal 1999, research and development costs increased $2.7 million (23%) to $14.3 million from $11.6 million in fiscal 1998 due to higher personnel and development expenses associated with development of the M-SERIES High Throughput Screening System. There was an increase in marketing, general and administrative expenses in fiscal 1999 over the prior year of $1.5 million (13%) due primarily to professional and legal fees associated with the Company's litigation with Roche. 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Financial Accounting Standards Board ("FASB") issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INVESTMENTS AND HEDGING ACTIVITIES. SFAS 133 is effective for years beginning after June 15, 1999. The Company does not believe that adoption of SFAS 133 will have a material impact on its financial position or results of operations. Interest income, net of other expense, increased $600,000 from higher cash balances and the reduction of interest expense associated with the advance royalty agreement with Roche, which was repaid during the first quarter of fiscal 1999. As a result of the Company's issuance of $30 million of notes in March 1999, the Company's interest expense will increase in Fiscal 2000 compared to 1999. Income (loss) from continuing operations over the next several years is likely to fluctuate substantially from quarter to quarter as a result of differences in the timing of revenues earned under license and product development agreements, and associated product development expenses. As of March 31, 1999, the Company had net operating loss and general business credit tax carryforwards of approximately $70 million and $3 million, respectively. The Company's ability to utilize its net operating loss and general business credit tax carryforwards may be subject to an annual limitation in future periods pursuant to the "change in ownership rules" under Section 382 of the Internal Revenue Service Code of 1986, as amended. YEARS ENDED MARCH 31, 1998 AND 1997. The Company had a net loss of $11.8 million ($.82 per share) on revenues of $13.4 million for the year ended March 31, 1998. This compares with a net loss of $9.9 million ($.66 per share) on revenues of $16 million for the corresponding prior year ended March 31, 1997. During fiscal 1998, $10.6 million (79%) of the Company's revenue was generated from the sale of products, either directly by IGEN or from royalties on licensees sales. This represents a 47% increase from the $7.2 million of revenue recorded in fiscal 1997 from comparable sources. During the fourth quarter of fiscal 1997, the Company's license and contract revenue converted to royalty income based on product sales of corporate licensees. Revenue from license fees and contract research were substantially replaced by royalties based on sales. Therefore, while royalty revenue increased during fiscal 1998, revenue from license fees and contract research decreased to $2.8 million from $8.8 million in fiscal 1997. The Company recorded royalty income from the Agreement of $4.4 million and $706,000 for the years ended March 31, 1998 and 1997, respectively. These amounts were offset by a $6 million advance, secured by future royalties, received from Roche in January 1997. Product costs were $1.7 million (31% of product sales) for the year ended March 31, 1998 compared to $2.4 million (38% of product sales) for the corresponding prior year. Lower product costs and improved gross margins are attributable to a change in product mix between instruments, services and reagents and the reduction of sales to Organon Teknika for which the Company received no gross margin. Operating costs, excluding product costs, decreased to $23.4 million in the fiscal 1998 compared to $24 million during fiscal 1997. During fiscal 1998, research and development costs decreased $1.5 million (11%) to $11.6 million from $13.1 million in fiscal 1997 due to expiring external collaborations. Partially offsetting this decrease was an $851,000 (8%) increase in marketing, general and administrative expenses in fiscal 1998 over the prior year due primarily to professional and legal fees associated with the Company's litigation with Roche. 32 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Interest income, net of other expense, decreased $532,000 because of lower cash balances through the first nine months of fiscal 1998 coupled with accrued interest expense associated with the advanced royalty agreement with Roche initiated during the fourth quarter of fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations through the sale of Preferred and Common Stock, aggregating approximately $85 million through March 31, 1999. Also, in March 1999, the Company completed a $30 million debt financing with John Hancock Life Insurance Company. The seven year, 8.5% Senior Secured Notes mature in 2006 with quarterly interest only payments of $637,5000 through September 2000. In December 2000, principal and interest installments of $1.7 million will be due quarterly through March 2006. Collateral for the debt is represented by royalty payments and rights of the Company to receive monies due pursuant to the Company's license agreement with Roche. Plans for the net proceeds from this financing include continuing research and development, as well as working capital needs related to general corporate expenditures, including the sales and marketing efforts related to the launch of the M-SERIES High Throughput Screening System. In addition, the Company has received funds from collaborative research and licensing agreements, and sales of its ORIGEN line of products. As of March 31, 1999, the Company had $34 million in cash, cash equivalents and short term investments. Working capital was $32.3 million at March 31, 1999. Net cash used for operating activities was $15.5 million, $10 million, and $10.4 million during the years ended March 31, 1999, 1998 and 1997, respectively. License and collaboration agreements between the Company and its strategic corporate collaborators provided cumulative payments to the Company of approximately $80 million through March 31, 1999. Additionally, the Company received $2.75 million in August 1997 under an advance royalty agreement with Eisai. The Company used approximately $1.7 million, $751,000, and $778,000 of net cash for investing activities substantially related to the acquisition of laboratory equipment, furniture and leasehold improvements during the years ended March 31, 1999, 1998, and 1997, respectively. Additionally, during fiscal years 1999, 1998 and 1997, the Company incurred capital lease obligations of approximately $180,000, $80,000, and $113,000, respectively, related to acquisition of laboratory equipment, furniture and leasehold improvements. The Company believes material commitments for capital expenditures may be required in a variety of areas, such as product development programs. The Company has not, at this time, made commitments for any such capital expenditures or secured additional sources to fund such commitments. The Company has no reason to believe that the existence of the Roche litigation is having a material adverse affect on Roche's sales pursuant to its agreement with IGEN or that a negative result for the Company in the Roche litigation would have a material adverse affect on Roche's sales, although there can be no assurance that the litigation or its outcome would not have such an effect. As it now stands, Roche will have the right to continue to market its Elecsys products to central hospital laboratories and clinical reference laboratories during the term of the agreement unless and until the Company is determined to have the right to terminate the agreement and then determines to terminate the agreement. If the Company elects to terminate the agreement, it would have a material adverse effect on the 33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Company's royalty revenue from license sales unless and until the Company entered into a strategic partnership with another company that is able to commercialize diagnostic instruments to hospitals and clinical reference laboratories. There can be no assurance, if the Company decided to terminate the Agreement, that the Company would be able to enter into such a strategic partnership on terms favorable to the Company. The Company does not expect that failure to prevail in the Hitachi litigation by itself would have a material adverse effect on the Company's revenue or sales, since Hitachi would continue to manufacture Roche instruments and the Company would continue to earn royalties in connection therewith. There can be no assurance that the Company's failure in the Hitachi litigation would not have a material adverse effect or the success by the Company in the Hitachi litigation could have a material adverse effect on the Company's intellectual property. Success by the Company in the Hitachi litigation could have a material adverse effect on the Company's royalty revenues from sales of Elecsys products to the extent that Roche's sales of Elecsys instruments are hindered because it needs to find a new manufacturer for its instruments or make arrangements to have Hitachi manufacture the instruments outside of Japan. The Company has incurred and expects to incur substantial additional research and development expenses, manufacturing costs and marketing and distribution expenses and costs related to the Roche litigation in the future. It is the Company's intention to selectively seek additional collaborative or license agreements with suitable corporate collaborators, although there can be no assurance the Company will be able to enter into such agreements or that amounts received under such agreements will reduce substantially the Company's funding requirements. Additional equity or debt financing may be required, and there can be no assurance that these funds may be available on favorable terms, if at all. The Company's future capital requirements depend on many factors, including continued scientific progress in its diagnostics programs, the magnitude of these programs, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patent claims, competing technological and market developments, changes in its existing license and other agreements, the ability of the Company to establish development arrangements, the cost of manufacturing scale-up and effective commercialization activities and arrangements. YEAR 2000 ISSUE The Year 2000 ("Y2K") issue results from computer programs and hardware that are unable to distinguish between the Year 1900 and the Year 2000; accordingly, computer systems that have time-sensitive calculations may not properly recognize the Year 2000. This could result in system failures or miscalculations, causing disruptions of the Company's operations, including, without limitation, research, manufacturing, distribution, and other business activities. The Y2K problem may affect the Company's computer hardware, software, systems, devices and applications, and may also affect products manufactured by collaborators using the Company's technology. 34 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company has conducted a review of its systems to identify those areas that could be affected by the Y2K problem and has established a program to address Y2K issues. The Company is installing a Y2K compliant Enterprise Resource Planning ("ERP") computer system, which will perform substantially all of the central data processing tasks of the Company. The Company is installing this system in order to fully integrate its financial systems with its manufacturing and distribution systems and provide for the growth of its business and not as a concern about the Y2K problem. The Company has completed installation of the financial systems. While existing manufacturing and distribution systems are Y2K compliant, the new manufacturing and distribution installations are planned for completion during the fourth calendar quarter of 1999. Most of the Company's other information technology systems, including desktop computers, server computer equipment and installed commercial application software, are relatively new and have been designed with the Y2K issue in mind. The Company has completed testing of these information technology systems that are material to the Company's business. To the extent that these systems are found not to be Y2K compliant, the Company believes that any material issues can be resolved by installing commercially available upgrades. In addition to reviewing its systems, the Company has also considered the impact of the Y2K issue on products that it manufactures and on products manufactured by collaborators using the Company's technology. In all material respects, products manufactured by the Company are Y2K compliant. The Company is aware that certain products manufactured by collaborators using the Company's technology may utilize calendar dates. Where known, the Company has contacted collaborators to ascertain their awareness of the problem and their plans to address the Y2K issue. Roche has indicated to IGEN that its Elecsys products are currently Y2K compliant or can be made Y2K compliant with a currently available software upgrade. The Company has identified critical providers of information, goods and services ("Suppliers") in order to assess their Y2K compliance and has sent questionnaires to such critical Suppliers. Although the Company cannot control the response time of Suppliers to its surveys, the Company has assessed survey responses received through May 31, 1999 and confirmed year 2000 readiness of selected Suppliers. Additional open responses continue to be monitored and the Company anticipates to have confirmed Year 2000 readiness by September 30, 1999. The Company does not intend to contact entities that are not critical and cannot guarantee that such entities will be Y2K compliant. There can be no assurance that the Company's suppliers are, or will be, Y2K compliant or that a failure of timely Y2K compliance on the part of the Suppliers would not have a material adverse effect on the Company. The Company's business operations are also dependent upon the Y2K readiness of infrastructure suppliers in areas such as utilities, communications, transportation and other services. The Company has been unable to assess the likelihood, length or effects of failures by any of these suppliers and there can be no assurance that such failures will not have a material adverse effect on the Company. The Company has not incurred, and does not expect to incur, material costs in conjunction with its Y2K remediation plan. The majority of the costs incurred to date are related to the installation of the ERP system. As described above, the Company did not undertake this project to specifically address the Y2K issue and the installation has not been accelerated or otherwise modified as a result of the Y2K issue. 35 At the current time, the Company anticipates that its critical information and non-information technology systems will be Y2K compliant in all material respects before January 1, 2000. Although the Company does not expect, in view of its Y2K readiness efforts and diversity of its suppliers and customers, the occurrence of Y2K failures to have a material adverse effect on the financial position or results of operations of the Company, there can be no assurance of complete Y2K compliance. Contingency plans for information technology systems generally anticipate use of standard non-customized replacement modules in the event of contingencies. Work with major collaborators and vendors to date has indicated a high awareness of the issues and plans to address them. Alternative vendors are available for most major supplies and raw materials. Nonetheless, it is not possible for the Company to fully assess the likelihood or magnitude of consequences from vendor or collaborator Y2K compliance issues. While there are no indications of major revenue disruptions from actions of such third parties, there can be no assurance at this time as to the future impacts of Y2K actions or inactions by collaborators or vendors. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Changes in interest rates do not affect interest expense incurred on the Company's long-term borrowings because it bears interest at a fixed rate. Terms of this debt are as follows: $30 million principal, Seven year 8.5% Senior Secured Notes secured by future royalty revenue from Roche, maturing in 2006 with quarterly interest only payments through September 2000 and quarterly principal and interest payments through March 2006. However, the Company runs a risk that market rates will decline and that the interest rate will exceed those based on the then current market rate. The Company is currently not using interest rate derivative instruments to manage its exposure to interest rate changes. Interest income earned on the Company's investment portfolio is affected by changes in the general level of interest rates. The Company has invested its excess cash generally in securities of the U.S. Treasury, money market funds, certificates of deposit and corporate bonds. The Company invests its excess cash in accordance with a policy objective that seeks to ensure both liquidity and safety of principal. The policy limits investments to certain types of instruments issued by institutions with strong investment grade credit ratings and places restrictions on their terms and concentrations by type and issuer. 36 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS PAGE Independent Auditors' Report 38 Consolidated Statements of Operations for the Three Years 39 Ended March 31, 1999, 1998 and 1997 Consolidated Balance Sheets at March 31, 1999 and 1998 40 Consolidated Statements of Cash Flows for the Three Years 41 Ended March 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity for the Three Years 42 Ended March 31, 1999, 1998, and 1997 Notes to Consolidated Financial Statements 43
37 INDEPENDENT AUDITORS' REPORT TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF IGEN INTERNATIONAL, INC.: We have audited the accompanying consolidated balance sheets of IGEN International, Inc. (the Company) as of March 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1999. 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 generally accepted auditing standards. 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 March 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1999, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Washington, D.C. May 10, 1999 38 IGEN INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1999 1998 1997 ---- ---- ---- REVENUES (Notes 1 and 2): Product sales $ 4,949 $ 5,614 $ 6,360 Royalty income 9,439 5,024 843 License fees and contract revenue 510 2,795 8,802 -------- -------- -------- Total 14,898 13,433 16,005 -------- -------- -------- OPERATING COSTS AND EXPENSES: Product costs 1,340 1,716 2,448 Research and development (Note 2) 14,271 11,615 13,114 Marketing, general, and administrative 13,247 11,761 10,910 -------- -------- -------- Total 28,858 25,092 26,472 -------- -------- -------- LOSS FROM OPERATIONS (13,960) (11,659) (10,467) INTEREST INCOME - NET 687 54 586 OTHER EXPENSE (Note 5) (36) (225) -- -------- -------- -------- NET LOSS $(13,309) $(11,830) $ (9,881) -------- -------- -------- -------- -------- -------- LOSS PER SHARE (Note 1): Basic and Diluted loss per common share $ (1.00) $ (0.82) $ (0.66) -------- -------- -------- -------- -------- -------- SHARES USED IN COMPUTING NET LOSS PER SHARE (Note 1) 15,318 15,116 14,959 -------- -------- -------- -------- -------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 39 IGEN INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA)
March 31, ASSETS 1999 1998 ------ ---- ---- CURRENT ASSETS: Cash and cash equivalents (Note 1) $ 720 $ 1,502 Short term investments (Note 1) 33,654 21,620 Accounts receivable, net 3,252 1,552 Inventory (Note 1) 1,455 1,435 Other current assets 775 864 -------- -------- Total current assets 39,856 26,973 -------- -------- EQUIPMENT, FURNITURE, AND IMPROVEMENTS (Note 1) 9,025 7,124 Accumulated depreciation and amortization (5,397) (4,111) -------- -------- Equipment, furniture, and improvements, net 3,628 3,013 -------- -------- NONCURRENT ASSETS: Deferred debt issuance costs (Note 4) 1,361 -- Restricted cash (Notes 1, 4) 600 -- Other 378 405 -------- -------- Total noncurrent assets 2,339 405 -------- -------- TOTAL $ 45,823 $ 30,391 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 4,924 $ 5,152 Deferred revenue (Notes 1, 2) 2,488 4,139 Obligations under capital leases (Note 8) 117 92 -------- -------- Total current liabilities 7,529 9,383 -------- -------- NONCURRENT LIABLITIES: Note payable (Note 4) 30,000 -- Convertible preferred stock dividend payable (Note 3) 2,521 -- Obligations under capital leases (Note 8) 183 146 -------- -------- Total noncurrent liabilities 32,704 146 -------- -------- COMMITMENTS AND CONTINGENCIES (See Note 8) -- -- -------- -------- STOCKHOLDERS' EQUITY: (Notes 1, 3) Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized, issuable in Series: Series A, 600,000 shares designated, none issued; Series B, 25,000 shares issued and outstanding - liquidation value of $25,000,000 plus accrued and unpaid dividends 1 1 Common stock: $.001 par value, 50,000,000 shares authorized: 15,361,465 and 15,261,240 shares issued and outstanding 15 15 Additional paid-in capital 87,413 89,376 Accumulated deficit (81,839) (68,530) -------- -------- Total stockholders' equity 5,590 20,862 -------- -------- TOTAL $ 45,823 $ 30,391 -------- -------- -------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 40 IGEN INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATIONS: Net loss $(13,309) $(11,830) $ (9,881) Adjustments to reconcile net loss to net cash used in operating activities: Loss on disposal of equipment, furniture and improvements -- 53 -- Depreciation and amortization 1,313 889 1,320 Deferred revenue (1,651) (1,254) (2,140) Add (deduct) items not affecting cash: (Increase) decrease in accounts receivable (1,700) 648 (308) (Increase) decrease in inventory (20) 640 (426) Decrease in other current assets 89 2 590 (Decrease) increase accounts payable and accrued expenses (228) 886 473 -------- -------- -------- Net cash used in operating activities (15,506) (9,966) (10,372) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for equipment, furniture, and improvements (1,721) (751) (778) Sale of short-term investments 32,706 8,781 30,726 Purchase of short-term investments (44,740) (22,147) (22,764) -------- -------- -------- Net cash (used in) provided by investing activities (13,755) (14,117) 7,184 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes receivable from sale of subscribed stock, net -- 310 40 Proceeds from note payable 30,000 -- -- Disbursements for debt issuance costs (1,361) -- -- Restricted cash (600) -- -- Issuance of convertible preferred stock, net -- 23,428 -- Issuance of common stock - net 558 1,073 200 Payments under capital lease obligations (118) (16) (263) -------- -------- -------- Net cash provided by (used in) financing activities 28,479 24,795 (23) -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (782) 712 (3,211) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,502 790 4,001 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 720 $ 1,502 $ 790 -------- -------- -------- -------- -------- -------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest Paid $ 61 $ 12 $ 65 SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Capital Lease Obligations incurred for equipment, furniture and improvements $ 180 $ 80 $ 113
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 41 IGEN INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
Notes Receivable From Convertible Additional Sale of Preferred Stock Common Stock Paid in Accumulated Deferred Subscribed Shares Amount Shares Amount Capital Deficit Comp. Stock Total ------ ------ ------ ------ ------- ------- ----- ----- ----- BALANCE APRIL 1, 1996 -- -- 14,908 $ 15 $64,676 $(46,819) $(91) $ (346) $ 17,435 Issuance of shares of common stock -- -- 79 -- 200 -- -- -- 200 Amortization of deferred compensation -- -- -- -- -- -- 91 -- 91 Changes in notes receivable -- -- -- -- -- -- -- 36 36 Net loss -- -- -- -- -- (9,881) -- -- (9,881) ----- ------ ------- ----- ------- -------- ------ ----- -------- BALANCE MARCH 31, 1997 -- -- 14,987 15 64,876 (56,700) -- (310) 7,881 Issuance of shares of common stock -- -- 274 -- 1,073 -- -- -- 1,073 Issuance of shares of covertible preferred stock, net 25 $ 1 -- -- 23,427 -- -- -- 23,428 Changes in notes receivable -- -- -- -- -- -- -- 310 310 Net loss -- -- -- -- -- (11,830) -- -- (11,830) ----- ------ ------- ----- ------- -------- ------ ----- -------- BALANCE MARCH 31, 1998 25 1 15,261 15 89,376 (68,530) -- -- 20,862 Issuance of shares of common stock -- -- 100 -- 558 -- -- -- 558 Preferred stock, dividends payable -- -- -- -- (2,521) -- -- -- (2,521) Net loss -- -- -- -- -- (13,309) -- -- (13,309) ----- ------ ------- ----- ------- -------- ------ ----- -------- BALANCE MARCH 31, 1999 25 $ 1 15,361 $ 15 $87,413 $(81,839) $ -- $ -- $ 5,590 ----- ------ ------- ----- ------- -------- ------ ----- -------- ----- ------ ------- ----- ------- -------- ------ ----- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain amounts from the prior years have been reclassified to conform to the current year presentation. ORGANIZATION AND BUSINESS ACTIVITY - IGEN International, Inc. (the Company) develops, manufactures, and markets diagnostic systems utilizing its patented ORIGEN(R) technology, which is based on electrochemiluminescence. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, IGEN Europe, Inc. and IGEN International, K.K. All significant intercompany transactions and balances have been eliminated. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - Cash equivalents include cash in banks, money market funds, securities of the U.S. Treasury, and certificates of deposit with original maturities of three months or less. The company has classified its short term investments which consist of U.S. Government Obligations and Corporate Debt-Securities as "available for sale" which are recorded at market value. The recorded market value approximates cost. RESTRICTED CASH - The Company has a debt service reserve of $600,000 as of March 31, 1999 that is restricted in use (See Note 4). These funds are held in trust as collateral with increasing increments scheduled for each of the first six quarterly note payable due dates. CONCENTRATION OF CREDIT RISK - The Company has invested its excess cash generally in securities of the U.S. Treasury, money market funds, certificates of deposit and corporate bonds. The Company invests its excess cash in accordance with a policy objective that seeks to ensure both liquidity and safety of principal. The policy limits investments to certain types of instruments issued by institutions with strong investment grade credit ratings and places restrictions on their terms and concentrations by type and issuer. The Company has not experienced any losses on its investments, due to credit risk. INVENTORY is recorded at the lower of cost or market using the first-in, first-out method and consists of the following:
(in thousands) 1999 1998 ----------------------------------- Finished Goods $ 461 $ 824 Work in process 137 117 Raw materials 857 494 ------ ------ Total $1,455 $1,435 ------ ------ ------ ------
43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) EQUIPMENT, FURNITURE, AND IMPROVEMENTS are carried at cost. Depreciation is computed over the estimated useful lives of the assets, generally five years, using accelerated methods. Such property consists of the following:
(in thousands) 1999 1998 -------------------------------------------------- Laboratory equipment $3,805 $2,967 Furniture and office equipment 3,606 2,653 Leasehold improvements 1,614 1,504 ------ ------ Total $9,025 $7,124 ------ ------ ------ ------
OTHER ASSETS - The Company amortizes the cost of purchased patent rights on a straight-line basis over the estimated economic lives of such assets, ranging from five to twenty-one years. Accumulated amortization on purchased product technology rights was $249,660, $223,400 and $187,300 at March 31, 1999, 1998 and 1997, respectively. The Company amortizes debt issuance costs using the effective interest method over the terms of the debt agreement. REVENUE RECOGNITION - Product sales revenue is recorded as products are shipped. Nonrefundable license fees and milestone payments and service fees in connection with research and development contracts or commercialization agreements with corporate partners are recognized when they are earned in accordance with the applicable performance requirements and contractual terms. Amounts received in advance of performance under contracts or commercialization agreements are recorded as deferred revenue until earned. DEFERRED INCOME TAXES - Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. LOSS PER SHARE - Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standard No. 128 "Earnings per Share" ("SFAS 128"). The Company's loss has been adjusted by dividends accumulated at March 31, 1999 and 1998, on the Company's Convertible Preferred Series B Stock. There was no change in loss per share reported in prior periods related to the adoption of SFAS 128. See Note 3. NEW ACCOUNTING STANDARDS In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which was effective for years beginning after December 15, 1997. SFAS No. 131 redefines how operating segments are determined and requires disclosures about products, services, major customers and geographic areas. The Company operates as one business segment with a group of similar products. With the exception of revenue from 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Roche and Eisai, no single customer accounted for more than 10% of total revenue. Revenue from Roche totalled 61%, 39% and 56% of total revenues for the years ended March 31, 1999, 1998 and 1997, respectively, while revenue from Eisai totaled 17% for the year ended March 31, 1998. In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 is effective for years beginning after June 15, 1999 and requires recognition of all derivatives at fair value as either assets or liabilities in the statement of financial position. The Company does not believe that adoption of SFAS No. 133 will have a material impact on its financial position or results of operation. 2. LICENSE AND RESEARCH AGREEMENTS In 1992, the Company entered into an agreement with Roche Diagnostics ("Roche"), (formerly operating as Boehringer Mannheim GmbH), under which that company was granted rights to develop and market certain clinical diagnostic systems worldwide based on the Company's ORIGEN technology. Under the terms of the agreement, the Company received five $10 million license payments annually through January 1996 which were recognized as revenue on a ratable basis through December 1996. This agreement also provides the Company with additional payments for certain product development work, as well as royalties on product sales. The Company is currently in litigation with Roche (See Note 9). During 1993, the Company entered into a $20 million license and stock purchase agreement with Organon Teknika, B.V. Under this agreement, the Company sold 346,135 shares of common stock, granted a license to develop and market certain diagnostic systems worldwide utilizing the Company's ORIGEN technology and agreed to invest $5 million in research and development under a joint development program. Among other things, the agreement provides for royalty payments to the Company on product sales and for product supply arrangements between the parties. Under the product supply agreement, there were no sales to Organon Teknika during the year ended March 31, 1999 and sales were $1.3 million and $1.4 million, respectively, for the years ended March 31, 1998 and 1997.. During 1990, the Company granted a license to Eisai Co., Ltd., to market in Japan a certain clinical diagnostic system based on the Company's ORIGEN technology. The agreement provided license fees of $8 million tied to the achievement of product development milestones. This agreement also provides for royalty payments to the Company on product sales. In August 1997, the Company received $2.75 million as an advance royalty payment of which $ 358,000 and $290,000 was recognized as revenue in fiscal 1999 and 1998, respectively. During 1995, the Company formed a joint venture for the development and commercialization of advanced diagnostic products utilizing a proprietary combination of multi-array technology together with the Company's ORIGEN technology. Products based on these technologies would be used for high throughput, multiparameter analysis for DNA sequencing, clinical chemistry and immunodiagnostics. The joint venture is named Meso Scale Diagnostics, LLC ("MSD"), and was formed together with Meso Scale Technologies, LLC ("MST"), which is a non-controlled non-owned affiliated company. The Company has agreed to provide initial capital contributions to MSD of $5 million over time, plus certain start up costs, in exchange for a 50% interest and to fund the organizational and certain ongoing (non-research) operating expenses of MSD. The Company will also participate in a collaborative research program. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the year ended March 31, 1999 and 1998, the Company has made contributions of $3.6 and $2.6 million, respectively. The Company has accounted for its investments in MSD as research and development funding arrangements and, accordingly, has recorded its payments as research and development expense. 3. STOCKHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK - In December 1997, the Company received net proceeds of $23.4 million from the issuance of 25,000 shares of Series B Convertible Preferred Stock, stated value $1,000 per share. The Series B Convertible Preferred Stock is convertible into 1,790,831 shares of Common Stock of the Company at a rate of $13.96 per share in accordance with the terms of the Certificate of Designation, Powers, Preferences and Rights. The Series B Convertible Preferred Stock entitles its holders to a dividend payment of 7.75% compounded annually on the stated value of the stock and the Company may elect to make the dividends payable in common shares at a rate of $13.96 per share, rather than making the dividend payment in cash. If the Company elects to pay such dividends in shares of common stock, the Company may issue up to 810,174 shares to the holders of Series B Convertible Preferred Stock. Earnings per share for the years ended March 31, 1999 and 1998, have been adjusted by accumulated dividends on Series B Convertible Preferred Stock of approximately $2 million ($0.13 per share) and $541,000 ($.04 per share), respectively. The resulting calculation results in Net Loss Attributable to Common Shareholders for the years ended March 31, 1999 and 1998 of approximately $15 million ($1.00 per share) and $12.4 million ($0.82 per share), respectively. SHAREHOLDER RIGHTS PLAN - In 1996, the Board of Directors adopted a shareholder rights plan and declared a dividend of one preferred share purchase right for each outstanding share of common stock par value $.001 per share, of the Company. The dividend is effective as of November 6, 1996 with respect to the shareholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $.001 per share, of the Company at a price of $65.00 per one one-hundredth of a Preferred Share, subject to adjustment. The description and terms of the Rights are set forth in a Rights Plan between the Company and The First National Bank of Boston. STOCK OPTION PLAN - The Company adopted the 1994 Stock Option Plan under which 1,750,000 shares of Common Stock have been reserved for issuance upon exercise of options granted to employees or consultants and the 1994 Non-Employee Directors Stock Option Plan under which 150,000 shares of Common Stock have been reserved for issuance upon exercise of options granted to Non-Employee Directors. The 1994 Stock Option Plan replaced the 1985 Stock Option Plan which expired in February 1995 and continues to have unexercised options. The Option Plans provide for the granting of both incentive stock options intended to qualify as such under Section 422 of the Internal Revenue Code of 1986, as amended, and supplemental stock options that do not so qualify. Generally, the options vest 20% after year one and ratably over the following 16 quarters, expiring ten years from date of grant. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) A summary of the option activity is as follows:
(in thousands) Weighted Average Range of Exercise Number of Shares Exercise Price Price ---------------- -------------- ----- Outstanding on April 1, 1996 1,493 $2.60 $0.29 - $9.63 Granted 310 $5.00 $5.00 Exercised (79) $2.80 $0.29 - $5.50 Forfeited (83) $3.90 $0.29 - $5.50 ----- Outstanding on March 31, 1997 1,641 $2.69 $0.29 - $9.63 Granted 601 $6.67 $6.00 -$20.625 Exercised (274) $3.91 $0.29 - $8.75 Forfeited (33) $5.29 $4.57 - $5.50 ----- Outstanding on March 31, 1998 1,935 $5.52 $0.29 - $20.00 Granted -- -- -- Exercised (100) $5.58 $0.29 - $14.00 Forfeited (30) $14.38 $4.87 - $20.625 ----- Outstanding on March 31, 1999 1,805 $7.77 $0.29 - $20.625 ----- ----- (Weighted Average Remaining Contractual Life is 5.45 years)
At March 31, 1999, there were approximately 1.3 million stock options exercisable, under the Plan with a Weighted Average Exercise Price of $5.86. STOCK-BASED COMPENSATION - In 1997, the Company adopted Statement of Financial Accounting Standard No. 123 ("SFAS 123"), ACCOUNTING FOR STOCK-BASED COMPENSATION. Upon adoption of SFAS 123, the Company continues to measure compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by APB No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and has provided below pro forma disclosures of the effect on net loss and loss per share as if the fair value-based method using the Black-Scholes model prescribed by SFAS 123 had been applied in measuring compensation expense. If compensation cost for the Company's fiscal 1999, 1998 and 1997 grants for stock-based compensation had been determined consistent with the fair value-based method of accounting per SFAS 123, the Company's pro forma net loss and pro forma loss per share for the years ended March 31, 1999, 1998 and 1997 would be as follows:
1999 1998 1997 ---- ---- ---- Net loss (in thousands) As reported $(13,309) $(11,830) $(9,881) Pro forma $(15,359) $(12,130) $(9,996) Basic loss per share As reported $ (1.00) $ (0.82) $ (0.66) Pro forma $ (1.13) $ (0.84) $ (0.67)
47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The fair value of the option grant is estimated on the date of grant using the Black-Scholes option pricing models with the following assumptions:
1999 1998 1997 ---- ---- ---- Expected dividend yield 0% 0% 0% Expected stock price volatility 82.51% 53.24% 3.5% Risk-free interest rate 5.58% 6.74% 6% Expected option term 5 years 5 years 5 years
4. NOTE PAYABLE In March 1999, the Company entered into a debt financing with John Hancock Mutual Life Insurance Company under a Note Purchase Agreement from which the Company received $30 million. The seven year, 8.5% Senior Secured Notes mature in 2006 with quarterly interest only payments of $637,500 through September 2000. Beginning December 2000, principal and interest installments of $1.7 million will be due quarterly through March 2006. Collateral for the debt is represented by royalty payments and rights of the Company to receive monies due pursuant to the Company's license agreement with Roche. Additional collateral is represented by a Restricted Cash balance of $600,000 initiated at closing. The Restricted Cash will have increasing increments for each of the first six quarterly periods to a maximum of $1.7 million. Covenants within the Note Purchase Agreement include compliance with annual and quarterly Royalty Payment Coverage Ratios which are tied to royalty payments and debt service. Costs associated with obtaining the debt financing totaling $1.4 million were deferred and are represented as a noncurrent asset on the balance sheet. These costs will be amortized over the seven year life of the Note. The Company has committed to note principal and interest payments of $2.6 million and $4.7 million for the years ending March 31, 2000 and 2001, respectively, and $6.9 million in each of the years ending March 31, 2002, 2003 and 2004, with payments totaling $13.8 million thereafter. 5. INCOME TAXES For the years ended March 31, 1999, 1998 and 1997, the Company recorded no federal or state income tax expense and did not pay federal or state tax, as calculated by applying statutory rates to pretax income. During fiscal 1998, the Company received a $4.75 million payment from its Japanese corporate partner, Eisai, Ltd net of the Japanese tax withholding of $475,000. The Company recognized revenues of $358,400 and $2.3 million under this arrangement in fiscal 1999 and 1998, and recorded the associated foreign tax of $35,800 and $225,000 which is reflected in Other Expense in the financial statements. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) As of March 31, 1999, the Company has available for income tax reporting purposes net operating loss and general business credit carryforwards approximating $70 million and $3 million, respectively. These carryforwards expire in varying amounts through March 31, 2014. The use of the Company's net operating loss carryforward may be significantly reduced, if substantial changes in stock ownership take place. The potential tax benefits of the unused carryforwards have not been recorded for financial statement purposes because of the uncertainty of realizing those benefits in the future. The approximate tax effects of temporary differences that gave rise to the Company's deferred tax assets and liabilities are as follows:
Year Ended March 31, (in thousands) 1999 1998 -------------- ---- ---- Deferred tax assets: Deferred revenue $ 945 $ 1,571 Net operating loss and tax credit carryforwards 29,603 23,727 Other 94 61 Less valuation allowance (30,642) (25,359) -------- -------- Net deferred tax assets $ -- $ -- -------- -------- -------- --------
6. EMPLOYEE SAVINGS PLAN The Company has an Employee Savings Plan (the Plan) qualifying under Section 401(k) of the Internal Revenue Code and subject to the Employee Retirement Income Security Act of 1974, as amended. Effective April 1, 1997, the Company began contributing a 25% match on the first 6% of contributions from qualified individuals participating in the Plan. This Company contribution totaled $180,600 and $129,000 for the years ended March 31, 1999 and 1998, respectively. The Company is not obligated under any other postretirement benefit plan. 7. RELATED PARTIES Certain shareholders of the Company are also shareholders of several other companies which are considered affiliates of IGEN for the purpose of this disclosure. As discussed in Note 2, the Company has entered into transactions with companies that were affiliated through common shareholders. Amounts due from affiliated companies for services rendered and certain shared costs were approximately $44,500, and $43,500 at March 31, 1999 and 1998, respectively. During 1997, the Company incurred approximately $212,500 in expenses under a research contract with an affiliate. There were no such expenditures made in fiscal years 1999 or 1998. The Company has licensed certain diagnostic technologies from affiliated companies and has licensed certain pharmaceutical technologies to affiliated companies. No royalties have ever been earned or accrued under these license agreements. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. COMMITMENTS AND CONTINGENCIES CAPITAL LEASES - The Company is obligated under capital lease agreements, for certain equipment, furniture and building improvements. The aggregate discounted lease payments are recorded as a liability, and the fair market value of the related leased assets are capitalized and amortized over the assets estimated useful lives. Total assets capitalized pursuant to such agreements were approximately $500,000 at March 31, 1999 with accumulated depreciation totaling approximately $200,000. The future minimum payments (in thousands) under these lease agreements at March 31, 1999 are as follows: 2000 $ 156 2001 99 2002 66 2003 60 ----- Total minimum payments 381 Amount representing interest (81) ----- Obligations under capital leases 300 Current portion (117) ----- Obligations under capital leases - noncurrent $ 183 ----- -----
OPERATING LEASES - During 1995, the Company entered into a lease for an office, laboratory and manufacturing facility with a term of ten years, and an option to terminate the lease after five years. Rent expense for facility and equipment operating leases totaled approximately $1.5 million for the years ended March 31, 1999, 1998, and 1997, respectively. RESEARCH AGREEMENTS - The Company has entered into agreements with entities to fund research and development programs. At March 31, 1999, the future minimum lease and research payments under these agreements are as follows:
Research (in thousands) Operating Leases Agreements ---------------- ---------- 2000 $1,479 $1,000 2001 1,523 200 2002 1,569 -- 2003 1,615 -- 2004 1,664 -- Thereafter 1,424 -- ------ ------ Total $9,274 $1,200 ------ ------ ------ ------
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. LITIGATION ROCHE On September 15, 1997, the Company filed a lawsuit in Maryland against Roche Diagnostics GmbH (then known as Boehringer Mannheim GmbH or BMG), a German company, to which the Company has licensed certain rights to develop and commercialize diagnostic products based on the Company's ORIGEN technology. BMG was acquired by F. Hoffman LaRoche during 1998, and is referred to herein as Roche. That lawsuit is pending in the Southern Division of the United States District Court for the District of Maryland. The Company's dispute with Roche arises out of a 1992 License and Technology Development Agreement (the "Agreement"), pursuant to which Roche developed and launched its "Elecsys" line of diagnostic products, which is based on ORIGEN technology. The Company alleges that Roche has failed to perform certain material obligations under the Agreement, including development and commercialization of ORIGEN technology according to the contractual timetable; exploitation of the license to the extent contemplated by the parties; phase out of certain non-royalty-bearing product lines; exploitation of ORIGEN technology only within Roche's licensed fields; proper treatment of intellectual property rights regarding ORIGEN technology; maintenance of records essential to the computation of royalties; and proper computation and payment of royalties. In its lawsuit, the Company seeks damages as well as injunctive and declaratory relief, including a judicial determination of its entitlement to terminate the Agreement. The Company voluntarily has agreed not to terminate the Agreement unless and until the Court determines its entitlement to do so. During 1998, the Company filed a motion for preliminary injunction in its Maryland lawsuit against Roche. In that motion, the Company requested that the court enjoin Roche from marketing, selling, or distributing its Elecsys products outside of Roche's licensed field of use. The 1992 Agreement granted Roche rights to develop and commercialize diagnostic systems based on the Company's ORIGEN technology for use in centralized hospital laboratories and clinical reference laboratories only. The Company retains the rights to exploit its ORIGEN technology in all other clinical diagnostic markets. The Company learned that Roche was marketing Elecsys products outside of its licensed field of use and therefore asked the court to enjoin Roche from selling outside of its licensed field and, in particular, to physicians' offices and physicians' office laboratories. The Company also sought additional relief, including an order requiring Roche to refer all customers outside of Roche's licensed field to the Company for future reagent supply needs and to place all revenues derived from unauthorized sales in escrow pending the outcome of the litigation. The court granted IGEN's motion in July 1998 and issued a preliminary injunction in October 1998. Roche has appealed the preliminary injunction. In December 1998, Roche filed a counterclaim against the Company asserting five causes of action: fraud, breach of contract, tortious interference with business relations, unjust enrichment/equitable recoupment, and reformation. The Company believes that Roche's claims are unfounded. In March 1999, the Company moved to dismiss Roche's claims for fraud, tortious interference with business relations, unjust enrichment/equitable recoupment and reformation. The Company also moved the court to dismiss a portion of Roche's breach of contract claim and to strike Roche's request for punitive damages and injunctive relief. After being served with the Company's motion to dismiss, Roche dropped its complaint for contract reformation and part of its tortious interference claim. In June 1999, the court dismissed Roche's claims for fraud, tortious interference, and unjust enrichment/equitable 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) recoupment and struck down Roche's request for punitive damages and injunctive relief. Roche's breach of contract counterclaim remains outstanding. This litigation against Roche may have a material adverse effect upon the Company regardless of whether the outcome is favorable or not. The Company recorded royalty income from this Agreement of $8.6 million, $4.4 million and $706,000 for the years ended March 31, 1999, 1998 and 1997, respectively. HITACHI In December 1997, IGEN International K.K.(IGEN K.K."), a Japanese subsidiary of the Company, filed a lawsuit in Tokyo District Court against Hitachi Ltd. ("Hitachi"). The lawsuit seeks to enjoin Hitachi from infringing IGEN K.K.'s license registration, (known in Japan as a "senyo-jisshi-ken") to prevent Hitachi from manufacturing, using or selling the Elecsys 2010 Instrument, which incorporates IGEN's patented ORIGEN technology, in Japan. Hitachi is the sole manufacturer for Roche of the Elecsys 2010 immunoassay instrument. Roche is licensed to market the Elecsys 2010 worldwide, except for Japan, to central hospital laboratories and clinical reference laboratories. The Company's ORIGEN technology is licensed in Japan to IGEN K.K. and to Eisai Company, Ltd. The lawsuit requests injunctive relief against Hitachi. OTHER MATTERS From time to time, claims and pending legal proceedings arise that generally involve the Company's technology and possible patent infringement. These cases are routine matters in which disposition of such proceedings are not expected to have a material adverse effect on the Company's financial position, results of operations or cash flows. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. PART III Certain information required by Part III is omitted from this Report in that the Registrant will file a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement which specifically address the items set forth herein are incorporated by reference. 52 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (a) DIRECTORS. The information with respect to directors required under this item is incorporated herein by reference to the section captioned "Election of Directors" in the Company's Proxy Statement with respect to the Annual Meeting of Shareholders to be held on September 15, 1999. (b) EXECUTIVE OFFICERS. The information with respect to executive officers required under this item is incorporated herein by reference to Part I of this Report. ITEM 11. EXECUTIVE COMPENSATION. The information required under this item is incorporated herein by reference to the sections entitled "Election of Directors -- Compensation for Directors", "--Compensation of Executive Officers", "--Compensation Arrangements and Employment Agreements", "-- Report of the Compensation Committee", in the Company's Proxy Statement with respect to the Annual Meeting of Shareholders to be held on September 15, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required under this item is incorporated herein by reference to the section entitled "Principal Shareholders" in the Company's Proxy Statement with respect to the Annual Meeting of Shareholders to be held on September 15, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required under this item is incorporated herein by reference to the sections entitled "Election of Directors -- Compensation Arrangements and Employment Agreements" and "-- Certain Transactions" in the Company's Proxy Statement with respect to the Annual Meeting of Shareholders to be held on September 15, 1999. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) (1) INDEX TO FINANCIAL STATEMENTS. The financial statements listed in the Index to Financial Statements are filed as part of this Annual Report on Form 10-K. (a) (2) INDEX TO FINANCIAL STATEMENT SCHEDULES. All schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto. (a) (3) INDEX TO EXHIBITS. 53 The Exhibits filed as part of this Form 10-K are listed on the Exhibit Index immediately preceding such Exhibits. (b) REPORTS ON FORM 8-K: On March 29, 1999, the Company filed a Form 8-K announcing the Company's completion of a $30 million debt financing with John Hancock Mutual Life Insurance Company. (c) EXHIBITS The response to this portion of Item 14 is submitted as a separate section of this Form 10-K. MANAGEMENT CONTRACTS AND OTHER COMPENSATORY ARRANGEMENTS. None (d) FINANCIAL STATEMENT SCHEDULES. All schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto. 54 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. IGEN International, Inc. June 25, 1999 By: /s/ Samuel J. Wohlstadter -------------------------- Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Samuel J. Wohlstadter, Richard J. Massey and George V. Migausky as his attorney-in-fact for him in any and all capacities, to sign any amendments to this report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that the said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue thereof. 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 and in the capacities and on the dates indicated. Signature Title Date /s/ Samuel J. Wohlstadter Chief Executive Officer June 25, 1999 - ------------------------- (Principal Executive Officer); Samuel J. Wohlstadter Director /s/ George V. Migausky Vice President June 25, 1999 - ------------------------- and Chief Financial Officer George V. Migausky (Principal Financial and Accounting Officer) /s/ Richard J. Massey President, Chief Operating June 25, 1999 - ------------------------- Officer; Director Richard J. Massey /s/ Edward Lurier Director June 25, 1999 - ------------------------ Edward Lurier /s/ William O'Neill Director June 25, 1999 - ------------------------ William O'Neill /s/ Robert Salsmans Director June 25, 1999 - ------------------------ Robert Salsmans 55 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------ ----------------------- 2.1(4) Agreement and Plan of Merger effective November 19, 1996 (by virtue of a reincorporation), by and between IGEN, Inc., a California corporation (the "Company"), and IGEN International, Inc. a Delaware corporation (the "Registrant"). 3.1(4) The Registrant's Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on August 30, 1996. 3.2(4) The Registrant's Certificate of Designation of Series A Junior Participating Preferred Stock, as filed with the Secretary of State of the State of Delaware on November 18, 1996. 3.3(8) The Registrant's Certificate of Designation of Series B Convertible Preferred Stock, as field with the Secretary of State of the State of Delaware on December 18, 1997. 3.4(4) The Registrant's Bylaws, as currently in effect. 4.1(7) Form of Specimen Right Certificate. 4.2(7) Rights Agreement, dated November 6, 1996, between the Registrant and The First National Bank of Boston. 4.3 Note Purchase Agreement between the Registrant and the purchasers named therein dated as of March 22, 1999. Filed herewith. 10.1(1) Registration Agreement between the Registrant and the parties named therein dated March 17, 1988, as amended through March 30, 1993. 10.2(3) Form of Waiver and Amendment of Registration Agreement executed in December 1993, amending in certain respects the Registration Agreement dated as of March 17, 1988. 10.3(3) Agreement between the Registrant and The Perkin-Elmer Corporation dated March 30, 1990, with Addendum to Agreement dated February 21, 1991 (with certain confidential information deleted). 10.4(3) Agreement between the Registrant and Eisai Co., Ltd. dated May 25, 1990 (with certain confidential information deleted). 10.4.1(1) Supplemental Agreement between Eisai Co., Ltd. and the Registrant 10.5(3) License and Development Technology Agreement between the Registrant and Boehringer Mannheim GmbH dated September 23, 1992 (with certain confidential information deleted). 10.5.1(2) Advanced Royalty Agreement between the Registrant and Boehringer Mannheim GmbH dated January 9, 1997. 10.6(3) License Agreement between the Registrant and Hyperion Catalysis International ("Hyperion") dated October 10, 1993 as amended March 15, 1990. 10.7(3) Common Stock Purchase Agreement between the Registrant and Organon Teknika B.V. ("Organon") dated May 19, 1993.
56
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------ ----------------------- 10.8(3) License and Technology Development agreement between the Registrant and Organon dated May 19, 1993 (with certain confidential information deleted). 10.9(3) Agreement and Plan of Reorganization and Agreement and Plan of Merger between the Registrant and Molecular Displays, Inc. dated March 9, 1993. 10.103 Term Sheet for Consolidation of Research Projects between the Registrant and Proteinix Corporation dated December 14, 1993 (with certain confidential information deleted). 10.11(3) Term Sheet for consolidation of Cancer Research Projects between the Registrant and Pro-Neuron, Inc. dated December 14, 1993 (with certain confidential information deleted). 10.12(3) Join Venture Agreement between the Registrant and Hyperion dated May 28, 1993. 10.13(3) Product Development and Marketing Agreement between the Registrant, Hyperion and HyperGen dated May 29, 1993. 10.14(3) Form of Indemnity Agreement entered into between the Registrant and its directors and officers. 10.15(3) Registrant's 1985 Stock Option Plan, as amended, and related Form of Incentive Stock Option Grant and Form of Nonqualified Stock Option Grant. 10.16(5) Registrant's 1994 Stock Option Plan, and related Form of Incentive Stock Option Grant. 10.17(5) Registrant's 1994 Non-Employee Directors Stock Option Plan, and related Form of Incentive Stock Option Grant. 10.18(5) Lease Agreement between the Registrant and W-M 16020 Limited Partnership dated October 5, 1994. 10.19(5) Agreement for Purchase and Sale of Joint Venture Interest between the Registrant and Hyperion, dated December 28, 1994 10.20(6) Joint Venture Agreement, dated as of November 30, 1995, between Meso Scale Diagnostics, LLC ("MSD"), Meso Scale Technologies, LLC ("MST") and the Company. 10.21(6) Limited Liability Company Agreement, dated as of November 30, 1995, between MSD, MST and the Company. 10.22(6) IGEN/MSD License Agreement, dated as of November 30, 1995, between MSD and the Company. 10.23(6) Indemnification Agreement, dated as of November 30, 1995, between the Company and Jacob Wohlstadter. 10.24(8) Purchase Agreement for the Series B Convertible Preferred Stock between the Registrant and the purchasers named therein dated as of December 16, 1997. 10.25(8) Registration Rights Agreement between the Registrant and the purchasers named therein dated as of December 16, 1997. 11.1 Calculation of net loss per share. Filed herewith. 23.1 Consent of Deloitte & Touche LLP. Filed herewith.
57
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------ ----------------------- 27.1 Financial Data Schedule. Filed herewith.
- ------------ (1) Previously filed as an exhibit to the Registrant's Form 10-Q for the quarter ended September 30, 1997. (2) Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K, as amended, for the fiscal year ended March 31, 1997. (3) Previously filed as an exhibit to the Registration Statement on Form S-1, as amended (Registration No. 33-72992) and incorporated by reference herein. (4) Previously filed as an exhibit to the Registrant's Form 10-Q for the quarter ended December 31, 1996. (5) Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1995. (6) Previously filed as an exhibit to the Registrant's Form 10-Q for the quarter ended December 31, 1995. (7) Incorporated by reference to Exhibit 1.1 of the Registrant's Form 8-A filed December 10, 1996. (8) Previously filed as an exhibit to the Registrant's Registration Statement on Form S-3, as amended (Registration No. 333-45355). 58 EX-4.3 2 EXHIBIT 4.3 EXHIBIT 4.3 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- IGEN INTERNATIONAL, INC. $30,000,000 8.50% Senior Secured Notes due 2006 NOTE PURCHASE AGREEMENT Dated as of March 22, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
SECTION PAGE - ------- ---- 1. AUTHORIZATION OF NOTES....................................................1 2. SALE AND PURCHASE OF NOTES................................................1 3. CLOSING...................................................................2 4. CONDITIONS TO CLOSING.....................................................2 4.1. Representations and Warranties......................................2 4.2. Performance; No Default.............................................2 4.3. Compliance Certificates.............................................2 4.4. Opinions of Counsel.................................................3 4.5. Purchase Permitted By Applicable Law, etc...........................3 4.6. Sale of Other Notes.................................................3 4.7. Payment of Special Counsel Fees and Other Fees......................3 4.8. Private Placement Number............................................4 4.9. Changes in Corporate Structure......................................4 4.10. Financing Documents; Security Interests.............................4 4.11. Lien Searches.......................................................4 4.12. License Agreement...................................................4 4.13. BMG Payment Letter..................................................4 4.14. Proceedings and Documents...........................................4 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................5 5.1. Organization; Power and Authority...................................5 5.2. Authorization, etc..................................................5 5.3. Disclosure..........................................................5 5.4. Organization and Ownership of Shares of Subsidiaries; Affiliates....6 5.5. Financial Statements................................................6 5.6. Compliance with Laws, Other Instruments, etc........................7 5.7. Governmental Authorizations, etc....................................7 5.8. Litigation; Observance of Agreements, Statutes and Orders...........7 5.9. Taxes...............................................................7 5.10. Title to Property; Leases...........................................8 5.11. Licenses, Permits, etc..............................................8 5.12. Compliance with ERISA...............................................8 5.13. Private Offering by the Company.....................................9 5.14. Use of Proceeds; Margin Regulations................................10 5.15. Existing Indebtedness; Future Liens................................10 5.16. Foreign Assets Control Regulations, etc............................10 5.17. Status under Certain Statutes......................................10 5.18. Environmental Matters..............................................11 5.19. Ownership; Security Documents......................................11 5.20. License Agreement..................................................12 5.21. Chief Executive Office.............................................12
i 5.22. Year 2000..........................................................12 6. REPRESENTATIONS OF THE PURCHASER.........................................12 6.1. Purchase for Investment............................................12 6.2. Source of Funds....................................................12 7. INFORMATION AS TO COMPANY................................................14 7.1. Financial and Business Information.................................14 7.2. Officer's Certificate..............................................16 7.3. Inspection.........................................................17 8. PAYMENT OF THE NOTES.....................................................17 8.1. Required Payments..................................................17 8.2. Optional Prepayments with Make-Whole Amount........................18 8.3. Allocation of Partial Prepayments..................................18 8.4. Maturity; Surrender, etc...........................................18 8.5. Purchase of Notes..................................................19 8.6. Make-Whole Amount..................................................19 9. AFFIRMATIVE COVENANTS....................................................20 9.1. Compliance with Law................................................20 9.2. Insurance..........................................................21 9.3. Maintenance of Properties..........................................21 9.4. Payment of Taxes and Claims........................................21 9.5. Corporate Existence, etc...........................................21 9.6. Further Assurances.................................................22 9.7. License Agreement..................................................22 10. NEGATIVE COVENANTS.......................................................22 10.1. Transactions with Affiliates.......................................22 10.2. Merger, Consolidation, etc.........................................22 10.3. Liens..............................................................23 10.4. Amendments to License Agreement....................................23 10.5. Royalty Payment Coverage Ratio.....................................23 10.6. Incurrence of Secured Indebtedness.................................24 11. EVENTS OF DEFAULT........................................................24 12. REMEDIES ON DEFAULT, ETC.................................................26 12.1. Acceleration.......................................................26 12.2. Other Remedies.....................................................27 12.3. Rescission.........................................................27 12.4. No Waivers or Election of Remedies, Expenses, etc..................28 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES............................28 13.1. Registration of Notes..............................................28 13.2. Transfer and Exchange of Notes.....................................28 13.3. Replacement of Notes...............................................29 14. PAYMENTS ON NOTES........................................................29 14.1. Place of Payment...................................................29 14.2. Home Office Payment................................................29 15. EXPENSES, ETC............................................................30 15.1. Transaction Expenses...............................................30 15.2. Survival...........................................................30
ii 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.............30 17. AMENDMENT AND WAIVER.....................................................31 17.1. Requirements.......................................................31 17.2. Solicitation of Holders of Notes...................................31 17.3. Binding Effect, etc................................................32 17.4. Notes held by Company, etc.........................................32 18. NOTICES..................................................................32 19. REPRODUCTION OF DOCUMENTS................................................33 20. CONFIDENTIAL INFORMATION.................................................33 21. SUBSTITUTION OF PURCHASER................................................34 22. MISCELLANEOUS............................................................34 22.1. Successors and Assigns.............................................34 22.2. Payments Due on Non-Business Days..................................34 22.3. Severability.......................................................35 22.4. Construction.......................................................35 22.5. Counterparts.......................................................35 22.6. Governing Law......................................................35
SCHEDULE A -- INFORMATION RELATING TO PURCHASERS SCHEDULE B -- DEFINED TERMS SCHEDULE 4.9 -- Changes in Corporate Structure SCHEDULE 4.10 -- Filings and Recordings SCHEDULE 5.4 -- Subsidiaries of the Company and Ownership of Subsidiary Stock SCHEDULE 5.5 -- Financial Statements SCHEDULE 5.11 -- Patents, etc. SCHEDULE 5.14 -- Use of Proceeds SCHEDULE 5.15 -- Existing Indebtedness SCHEDULE 8.1 -- Amortization of the Notes EXHIBIT 1 -- Form of 8.50% Senior Secured Note due 2006 EXHIBIT 2 -- Form of Security Agreement
iii EXHIBIT 4.4(a) -- Form of Opinion of Special Counsel for the Company EXHIBIT 4.4(b) -- Form of Opinion of Special Counsel for the Purchasers
iv IGEN INTERNATIONAL, INC. 16020 Industrial Drive Gaithersburg, MD 20877 8.50% Senior Secured Notes due 2006 as of March 22, 1999 TO EACH OF THE PURCHASERS LISTED IN THE ATTACHED SCHEDULE A: Ladies and Gentlemen: IGEN INTERNATIONAL, INC., a Delaware corporation (the "COMPANY"), agrees with you as follows: AUTHORIZATION OF NOTES. The Company will authorize the issue and sale of $30,000,000 aggregate principal amount of its 8.50% Senior Secured Notes due 2006 (the "NOTES", such term to include any such notes issued in substitution therefor pursuant to Section 13 of this Agreement or the Other Agreements (as hereinafter defined)). The Notes shall be substantially in the form set out in Exhibit 1, with such changes therefrom, if any, as may be approved by you and the Company. Certain capitalized terms used in this Agreement are defined in Schedule B; references to a "Schedule" or an "Exhibit" are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement. The Notes will be secured by the Collateral, all as provided in the Security Agreement. SALE AND PURCHASE OF NOTES. Subject to the terms and conditions of this Agreement, the Company will issue and sell to you and you will purchase from the Company, at the Closing provided for in Section 3, Notes in the principal amount specified opposite your name in Schedule A at the purchase price of 100% of the principal amount thereof. Contemporaneously with entering into this Agreement, the Company is entering into separate Note Purchase Agreements (the "OTHER AGREEMENTS") identical with this Agreement with each of the other purchasers named in Schedule A (the "OTHER PURCHASERS"), providing for the sale at such Closing to each of the Other Purchasers of Notes in the principal amount specified opposite its name in Schedule A. Your obligation hereunder and the obligations of the Other Purchasers under the Other Agreements are several and not joint obligations and you shall have no obligation under any Other Agreement and no liability to any Person for the performance or non-performance by any Other Purchaser thereunder. 1 CLOSING. The sale and purchase of the Notes to be purchased by you and the Other Purchasers shall occur at the offices of Milbank, Tweed, Hadley & McCloy LLP, One Chase Manhattan Plaza, New York, New York 10005, at 10:00 a.m., New York City time, at a closing (the "CLOSING") on March 22, 1999 or on such other Business Day thereafter on or prior to March 31, 1999 as may be agreed upon by the Company and you and the Other Purchasers. At the Closing the Company will deliver to you the Notes to be purchased by you in the form of a single Note (or such greater number of Notes in denominations of at least $1,000,000 as you may request) dated the date of the Closing and registered in your name (or in the name of your nominee), against delivery by you to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 2000007114036 at First Union National Bank of Maryland, Rockville, Maryland 20852, ABA number 055-003-201, Reference: for further credit to IGEN International Inc. If at the Closing the Company shall fail to tender such Notes to you as provided above in this Section 3, or any of the conditions specified in Section 4 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any rights you may have by reason of such failure or such nonfulfillment. CONDITIONS TO CLOSING. Your obligation to purchase and pay for the Notes to be sold to you at the Closing is subject to the fulfillment to your satisfaction, prior to or at the Closing, of the following conditions: REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company in each Financing Document shall be correct when made and at the time of the Closing. PERFORMANCE; NO DEFAULT. The Company shall have performed and complied with all agreements and conditions contained in each Financing Document required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Schedule 5.14) no Default or Event of Default shall have occurred and be continuing. Neither the Company nor any Subsidiary shall have entered into any transaction since December 31, 1998, that would have been prohibited by Section 10.1 or 10.6 hereof had such Sections applied since such date. COMPLIANCE CERTIFICATES. (a) OFFICER'S CERTIFICATE. The Company shall have delivered to you an Officer's Certificate, dated the date of the Closing, certifying that the conditions specified in Sections 4.1, 4.2, 4.9 and 4.12 have been fulfilled. 2 (b) SECRETARY'S CERTIFICATE. The Company shall have delivered to you a certificate certifying as to the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of the Notes, this Agreement, the Other Agreements and the other Financing Documents. OPINIONS OF COUNSEL. You shall have received opinions in form and substance satisfactory to you, dated the date of the Closing (A) from Cooley Godward LLP, counsel for the Company, covering the matters set forth in Exhibit 4.4(a) and covering such other matters incident to the transactions contemplated hereby as you or your counsel may reasonably request (and the Company hereby instructs its counsel to deliver such opinion to you) and (B) from Milbank, Tweed, Hadley & McCloy LLP, your special counsel in connection with such transactions, substantially in the form set forth in Exhibit 4.4(b) and covering such other matters incident to such transactions as you may reasonably request. PURCHASE PERMITTED BY APPLICABLE LAW, ETC. On the date of the Closing your purchase of Notes shall (I) be permitted by the laws and regulations of each jurisdiction to which you are subject, without recourse to provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (II) not violate any applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (III) not subject you to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by you, you shall have received an Officer's Certificate certifying as to such matters of fact as you may reasonably specify to enable you to determine whether such purchase is so permitted. SALE OF OTHER NOTES. Contemporaneously with the Closing the Company shall sell to the Other Purchasers and the Other Purchasers shall purchase the Notes to be purchased by them at the Closing as specified in Schedule A. PAYMENT OF SPECIAL COUNSEL FEES AND OTHER FEES. Without limiting the provisions of Section 15.1, the Company shall have paid on or before the Closing any fees due and owing to the Collateral Agent and shall have paid the fees, charges and disbursements of your special counsel referred to in Section 4.4 to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing. In addition, all taxes due in connection with the preparation, execution, delivery, filing, recordation, registration and notarization of any Financing Document or any document furnished under or in connection with any Financing Document shall have been paid in full by the Company and you shall have received evidence thereof reasonably satisfactory to you. 3 PRIVATE PLACEMENT NUMBER. A Private Placement number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Notes. CHANGES IN CORPORATE STRUCTURE. Except as specified in Schedule 4.9, the Company shall not have changed its jurisdiction of incorporation or been a party to any merger or consolidation and shall not have succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5. FINANCING DOCUMENTS; SECURITY INTERESTS. This Agreement and each other Financing Document shall have been duly executed and delivered by each of the parties hereto and thereto and shall be in full force and effect. In addition, you shall have received evidence reasonably satisfactory to you that the Company shall have taken all actions (including, without limitation, the making of all recordings and filings set forth in Schedule 4.10) as may be necessary or appropriate in order to create and perfect the security interests intended to be created pursuant to the Security Agreement as first priority Liens. LIEN SEARCHES. The Company shall have delivered to you the results of a recent search, by a Person reasonably satisfactory to you, of the Uniform Commercial Code filings and tax and judgment Liens which may have been filed with respect to the personal property of the Company in such filing offices as you may reasonably request. LICENSE AGREEMENT. True and complete copies (including any amendments thereto) of the License Agreement shall have been delivered to you and the Other Purchasers and the License Agreement shall be in full force and effect. BMG PAYMENT LETTER. The Company shall have delivered to you, in form and substance satisfactory to you, a letter from the Company to BMG directing BMG to make all Royalty Payments directly to the Collection Account. PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated by the Financing Documents and all documents and instruments incident to such transactions shall be satisfactory to you and your special counsel, and you and your special counsel shall have received 4 all such counterpart originals or certified or other copies of such documents as you or they may reasonably request. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to you that: ORGANIZATION; POWER AND AUTHORITY. The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement, the Notes and each other Financing Document and to perform the provisions hereof and thereof. AUTHORIZATION, ETC. This Agreement, the Notes and each Other Financing Document have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement constitutes, and upon execution and delivery thereof each Note and each other Financing Document will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (I) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (II) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). DISCLOSURE. The Company, through its agent, ING Baring Furman Selz LLC, has delivered to you and each Other Purchaser a copy of (i) an Information Memorandum, dated December, 1998 (the "MEMORANDUM"), relating to the transactions contemplated hereby and (ii) its Annual Report on Form 10-K for its fiscal year ended March 31, 1998 and its Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30, 1998, September 30, 1998 and December 31, 1998 (collectively, the "SEC REPORTS"). The Memorandum and the SEC Reports, taken as a whole, fairly describe, in all material respects, the general nature of the business and principal properties of the Company and its Subsidiaries. This Agreement, the other Financing Documents, the Memorandum, the SEC Reports, the documents, certificates or other writings delivered to you by or on behalf of the Company in connection with the transactions contemplated hereby and the financial statements listed in Schedule 5.5, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. Except as disclosed in the Memorandum or as 5 expressly described in the SEC Reports, or in one of the documents, certificates or other writings identified therein, or in the financial statements listed in Schedule 5.5, since December 31, 1998, there has been no change in the financial condition, operations, business, properties or prospects of the Company or any Subsidiary except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Memorandum or in the other documents, certificates and other writings delivered to you by or on behalf of the Company specifically for use in connection with the transactions contemplated hereby. ORGANIZATION AND OWNERSHIP OF SHARES OF SUBSIDIARIES; AFFILIATES. (a) Schedule 5.4 contains (except as noted therein) complete and correct lists (I) of the Company's Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary, (II) of the Company's Affiliates, other than Subsidiaries, and (III) of the Company's directors and senior officers. (b) All of the outstanding shares of capital stock or similar equity interests of each Subsidiary shown in Schedule 5.4 as being owned by the Company and its Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Company or another Subsidiary free and clear of any Lien (except as otherwise disclosed in Schedule 5.4). (c) Each Subsidiary identified in Schedule 5.4 is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each such Subsidiary has the corporate or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact. (d) No Subsidiary is a party to, or otherwise subject to any legal restriction or any agreement (other than this Agreement, the agreements listed on Schedule 5.4 and customary limitations imposed by corporate law statutes) restricting the ability of such Subsidiary to pay dividends out of profits or make any other similar distributions of profits to the Company or any of its Subsidiaries that owns outstanding shares of capital stock or similar equity interests of such Subsidiary. FINANCIAL STATEMENTS. The Company has delivered to each Purchaser copies of the financial statements of the Company and its Subsidiaries listed on Schedule 5.5. All of said financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of the respective dates specified in such Schedule 6 and the consolidated results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC. The execution, delivery and performance by the Company of this Agreement, the Notes and the other Financing Documents will not (I) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien (other than the Lien of the Security Agreement) in respect of any property of the Company or any Subsidiary under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws, or any other agreement or instrument to which the Company or any Subsidiary is bound or by which the Company or any Subsidiary or any of their respective properties may be bound or affected, (II) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Subsidiary or (III) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or any Subsidiary. GOVERNMENTAL AUTHORIZATIONS, ETC. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company of this Agreement, the Notes or any other Financing Document. LITIGATION; OBSERVANCE OF AGREEMENTS, STATUTES AND ORDERS. (a) There are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or any property of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (b) Neither the Company nor any Subsidiary is in default under any term of any agreement or instrument to which it is a party or by which it is bound, or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. TAXES. The Company and its Subsidiaries have filed all tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the 7 extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (I) the amount of which is not individually or in the aggregate Material or (II) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of Federal, state or other taxes for all fiscal periods are adequate. The Federal income tax liabilities of the Company and its Subsidiaries have been determined by the Internal Revenue Service and paid for all fiscal years up to and including the fiscal year ended March 31, 1998. TITLE TO PROPERTY; LEASES. The Company and its Subsidiaries have good and sufficient title to their respective properties that individually or in the aggregate are Material, including all such properties reflected in the most recent audited balance sheet referred to in Section 5.5 or purported to have been acquired by the Company or any Subsidiary after said date (except as sold or otherwise disposed of in the ordinary course of business), in each case free and clear of Liens prohibited by this Agreement or any other Financing Document. All leases that individually or in the aggregate are Material are valid and subsisting and are in full force and effect in all material respects. LICENSES, PERMITS, ETC. Except as disclosed in Schedule 5.11, (a) The Company and its Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that individually or in the aggregate are Material, without known conflict with the rights of others; (b) To the best knowledge of the Company, no product of the Company infringes in any material respect any license, permit, franchise, authorization, patent, copyright, service mark, trademark, trade name or other right owned by any other Person; and (c) To the best knowledge of the Company, there is no Material violation by any Person of any right of the Company or any of its Subsidiaries with respect to any patent, copyright, service mark, trademark, trade name or other right owned or used by the Company or any of its Subsidiaries. COMPLIANCE WITH ERISA. (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the 8 Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to section 401(a)(29) or 412 of the Code, other than such liabilities or Liens as would not be individually or in the aggregate Material. (b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan's most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan's most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities. The term "BENEFIT LIABILITIES" has the meaning specified in section 4001 of ERISA and the terms "CURRENT VALUE" and "PRESENT VALUE" have the meaning specified in section 3 of ERISA. (c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material. (d) The expected postretirement benefit obligation (determined as of the last day of the Company's most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company and its Subsidiaries is not Material. (e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any transaction that is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company in the first sentence of this Section 5.12(e) is made in reliance upon and subject to (I) the accuracy of your representation in Section 6.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by you and (II) the assumption, made solely for the purpose of making such representation, that Department of Labor Interpretive Bulletin 75-2 with respect to prohibited transactions remains valid in the circumstances of the transactions contemplated herein. PRIVATE OFFERING BY THE COMPANY. Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than you, the Other Purchasers and not more than 12 other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act. 9 USE OF PROCEEDS; MARGIN REGULATIONS. The Company will apply the proceeds of the sale of the Notes as set forth in Schedule 5.14. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). Margin stock does not constitute more than 5% of the value of the consolidated assets of the Company and its Subsidiaries and the Company does not have any present intention that margin stock will constitute more than 5% of the value of such assets. As used in this Section, the terms "MARGIN STOCK" and "PURPOSE OF BUYING OR CARRYING" shall have the meanings assigned to them in said Regulation U. EXISTING INDEBTEDNESS; FUTURE LIENS. (a) Except as described therein, Schedule 5.15 sets forth a complete and correct list of all outstanding Indebtedness of the Company and its Subsidiaries as of December 31, 1998, since which date there has been no Material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company or its Subsidiaries. Neither the Company nor any Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Indebtedness of the Company or such Subsidiary and no event or condition exists with respect to any Indebtedness of the Company or any Subsidiary that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment. (b) Neither the Company nor any Subsidiary has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien. FOREIGN ASSETS CONTROL REGULATIONS, ETC. Neither the sale of the Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto. STATUS UNDER CERTAIN STATUTES. Neither the Company nor any Subsidiary is subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, the Interstate Commerce Act, as amended, or the Federal Power Act, as amended. 10 ENVIRONMENTAL MATTERS. Neither the Company nor any Subsidiary has knowledge of any claim or has received any notice of any claim, and no proceeding has been instituted raising any claim against the Company or any of its Subsidiaries or any of their respective real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect. Except as otherwise disclosed to you in writing, (a) neither the Company nor any Subsidiary has knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by any of them or to other assets or their use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect; (b) neither the Company nor any of its Subsidiaries has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them and has not disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and (c) all buildings on all real properties now owned, leased or operated by the Company or any of its Subsidiaries are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect. OWNERSHIP; SECURITY DOCUMENTS. The Company is the sole and beneficial owner of the Collateral and no Lien exists or will exist upon such Collateral at any time, except for the security interest in favor of the Collateral Agent for the benefit of the Secured Parties created or provided for in the Security Agreement. The provisions of the Security Agreement are effective to create, in favor of the Collateral Agent on behalf of the Secured Parties, legal, valid and enforceable Liens on or in all of the Collateral intended to be covered thereby, and as of the date of the Closing all necessary recordings and filings will have been made in all necessary public offices (such recordings and filings being identified on Schedule 4.10) and all other necessary and appropriate action will have been taken so that the Liens created by the Security Agreement will constitute perfected Liens on or in the Collateral intended to be covered thereby, prior and superior to all other Liens, and all necessary consents, if any, to the creation, effectiveness, priority and perfection of each such Lien have been obtained. No mortgage or financing statement or other instrument or recordation covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of the Collateral Agent for the benefit of the Secured Parties. 11 LICENSE AGREEMENT. The Company is not in default under the License Agreement. The License Agreement constitutes a legal, valid and binding obligation of each party thereof, enforceable against such party in accordance with its terms, except as such enforceability may be limited by (I) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (II) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and, except as disclosed in the Memorandum or the SEC Reports, no other party is in default under the License Agreement. CHIEF EXECUTIVE OFFICE. The chief place of business and chief executive office of the Company, and the office where the Company keeps its records concerning the Collateral (herein collectively called the "Records") and the original copies of the License Agreement, is 16020 Industrial Drive, Gaithersburg, MD 20877. YEAR 2000. The Company and each of its Subsidiaries has adopted a plan (the "YEAR 2000 PLAN") which adequately addresses, in the reasonable judgment of senior management of the Company, the operational and financial issues ("YEAR 2000 ISSUES") arising from data in the management information and computer systems of the Company and its Subsidiaries respecting dates prior to, on or after January 1, 2000. The Year 2000 Plan is in process of implementation and, as a result thereof, Year 2000 Issues do not present a reasonable likelihood of resulting in a Material Adverse Effect. REPRESENTATIONS OF THE PURCHASER. PURCHASE FOR INVESTMENT. You represent that you are purchasing the Notes for your own account or for one or more separate accounts maintained by you or for the account of one or more pension or trust funds and not with a view to the distribution thereof, PROVIDED that the disposition of your or their property shall at all times be within your or their control. You understand that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes. SOURCE OF FUNDS. You represent that at least one of the following statements is an accurate representation as to each source of funds (a "Source") to be used by you to pay the purchase price of the Notes to be purchased by you hereunder: 12 (a) if you are an insurance company, the Source does not include assets allocated to any separate account maintained by you in which any employee benefit plan (or its related trust) has any interest, other than a separate account that is maintained solely in connection with your fixed contractual obligations under which the amounts payable, or credited, to such plan and to any participant or beneficiary of such plan (including any annuitant) are not affected in any manner by the investment performance of the separate account; or (b) the Source is either (i) an insurance company pooled separate account, within the meaning of Prohibited Transaction Exemption ("PTE") 90-1 (issued January 29, 1990), or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 (issued July 12, 1991) and, except as you have disclosed to the Company in writing pursuant to this paragraph (b), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or (c) the Source constitutes assets of an "investment fund" (within the meaning of Part V of the QPAM Exemption) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (I) the identity of such QPAM and (II) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (c); or (d) the Source is a governmental plan; or (e) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (e); or (f) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA. As used in this Section 6.2, the terms "EMPLOYEE BENEFIT PLAN" and "SEPARATE ACCOUNT" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 13 INFORMATION AS TO COMPANY. FINANCIAL AND BUSINESS INFORMATION. The Company shall deliver to each holder of Notes that is an Institutional Investor: (a) QUARTERLY STATEMENTS -- within 60 days after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of, (i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and (ii) consolidated statements of operations and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter,setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments, PROVIDED that delivery within the time period specified above of copies of the Company's Quarterly Report on Form 10-Q prepared in compliance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section 7.1(a); (b) ANNUAL STATEMENTS -- within 105 days after the end of each fiscal year of the Company, duplicate copies of, (i) a consolidated balance sheet of the Company and its Subsidiaries, as at the end of such year, and (ii) consolidated statements of operations, stockholders' equity and cash flows of the Company and its Subsidiaries, for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied (A) by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with 14 generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and (B) a certificate of such accountants stating that they have reviewed this Agreement and the other Financing Documents and stating further whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that such accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any Default or Event of Default unless such accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit), PROVIDED that the delivery within the time period specified above of the Company's Annual Report on Form 10-K for such fiscal year (together with the Company's annual report to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act) prepared in accordance with the requirements therefor and filed with the Securities and Exchange Commission, together with the accountant's certificate described in clause (B) above, shall be deemed to satisfy the requirements of this Section 7.1(b); (c) SEC AND OTHER REPORTS -- promptly upon their becoming available, one copy of (I) each financial statement, report, notice or proxy statement sent by the Company or any Subsidiary to public securities holders generally, and (II) each regular or periodic report, each registration statement (without exhibits except as expressly requested by such holder), and each prospectus and all amendments thereto filed by the Company or any Subsidiary with the Securities and Exchange Commission and of all press releases and other statements made available generally by the Company or any Subsidiary to the public concerning developments that are Material; (d) NOTICE OF DEFAULT OR EVENT OF DEFAULT -- promptly, and in any event within five days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 11(f), a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto; (e) ERISA MATTERS -- promptly, and in any event within five days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto: (i) with respect to any Plan, any reportable event, as defined in section 4043(b) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or 15 (ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; or (iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect; (f) NOTICES FROM GOVERNMENTAL AUTHORITY -- promptly, and in any event within 30 days of receipt thereof, copies of any notice to the Company or any Subsidiary from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect; (g) NOTICES PURSUANT TO LICENSE AGREEMENT -- promptly, and in any event within 5 Business Days of receipt thereof, copies of any report provided to the Company pursuant to Section 7.1 of the License Agreement; and (h) REQUESTED INFORMATION -- with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries or relating to the ability of the Company to perform its obligations under the Financing Documents as from time to time may be reasonably requested by any such holder of Notes. OFFICER'S CERTIFICATE. Each set of financial statements delivered to a holder of Notes pursuant to Section 7.1(a) or Section 7.1(b) hereof shall be accompanied by a certificate of a Senior Financial Officer setting forth: (a) COVENANT COMPLIANCE -- the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Section 10.5 and Section 10.6 hereof, inclusive, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and 16 (b) EVENT OF DEFAULT -- a statement that such officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of the Company or any Subsidiary to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto. INSPECTION. The Company shall permit the representatives of each holder of Notes that is an Institutional Investor: (a) NO DEFAULT -- if no Event of Default then exists, at the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the Company's officers, and (with the consent of the Company, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and (b) DEFAULT -- if an Event of Default then exists, at the expense of the Company, to visit and inspect any of the offices or properties of the Company or any Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested. PAYMENT OF THE NOTES. REQUIRED PAYMENTS. On each Note Payment Date on and after December 10, 2000, the Company will make or cause to be made an installment payment in respect of the Notes, consisting of a payment of interest and a payment or prepayment of principal in an aggregate amount for all such payments sufficient to pay 100% of the original principal amount of the Notes, together with accrued interest thereon, by March 10, 2006 (each such installment payment of principal and interest to be in the aggregate amount of $1,721,313, subject to adjustment as provided below). Each such payment on the Notes, when paid, shall be applied first to the payment of accrued interest and the balance to payment on account of the principal thereof. Schedule 8.1 sets forth the amortization of the Notes. Upon any 17 prepayment of the Notes requiring a reduction in subsequent installment payments as provided in Section 8.3, the Company shall promptly revise Schedule 8.1 to incorporate any changes to such amortization as a result of such prepayment and promptly furnish such revised Schedule to the Collateral Agent and each holder of a Note. OPTIONAL PREPAYMENTS WITH MAKE-WHOLE AMOUNT. The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes, in an amount not less than 5% of the aggregate principal amount of the Notes then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid, plus the Make-Whole Amount determined for the prepayment date with respect to such principal amount. The Company will give each holder of Notes written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date, the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such holder to be prepaid (determined in accordance with Section 8.3), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Make-Whole Amount as of the specified prepayment date. ALLOCATION OF PARTIAL PREPAYMENTS. In the case of each partial prepayment of the Notes pursuant to this Section 8 (i) the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment and (ii) the installment payments thereafter payable thereon shall be reduced to an amount which will fully amortize the remaining aggregate principal balance thereof with interest at the rate provided for therein on a level payment basis (as to the aggregate amount of principal and interest paid on each Note Payment Date) through March 10, 2006. MATURITY; SURRENDER, ETC. In the case of each prepayment of Notes pursuant to this Section 8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable Make-Whole Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note. 18 PURCHASE OF NOTES. The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment, prepayment or purchase of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes. MAKE-WHOLE AMOUNT. The term "MAKE-WHOLE AMOUNT" means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, PROVIDED that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings: "CALLED PRINCIPAL" means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. "DISCOUNTED VALUE" means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal. "REINVESTMENT YIELD" means, with respect to the Called Principal of any Note, 0.75% over the yield to maturity implied by (I) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as Bloomberg Financial Markets page "PX1" (or such other display as may replace as Bloomberg Financial Markets page "PX1") for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (II) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (A) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (B) interpolating linearly between (1) the actively traded U.S. Treasury security with the duration closest to and greater than the Remaining Average Life and (2) the actively traded 19 U.S. Treasury security with the duration closest to and less than the Remaining Average Life. "REMAINING AVERAGE LIFE" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (I) such Called Principal into (II) the sum of the products obtained by multiplying (A) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (B) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "REMAINING SCHEDULED PAYMENTS" means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, PROVIDED that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or 12.1. "SETTLEMENT DATE" means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. AFFIRMATIVE COVENANTS. The Company covenants that so long as any of the Notes are outstanding: COMPLIANCE WITH LAW. The Company will and will cause each of its Subsidiaries to comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 20 INSURANCE. The Company will and will cause each of its Subsidiaries to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated. MAINTENANCE OF PROPERTIES. The Company will and will cause each of its Subsidiaries to maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, PROVIDED that this Section shall not prevent the Company or any Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. PAYMENT OF TAXES AND CLAIMS. The Company will and will cause each of its Subsidiaries to file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, PROVIDED that neither the Company nor any Subsidiary need pay any such tax or assessment or claims if (I) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (II) the nonpayment of all such taxes, assessments and claims in the aggregate could not reasonably be expected to have a Material Adverse Effect. CORPORATE EXISTENCE, ETC. The Company will at all times preserve and keep in full force and effect its corporate existence. Subject to Section 10.2, the Company will at all times preserve and keep in full force and effect the corporate existence of each of its Subsidiaries (unless merged into the Company or a Subsidiary) and all rights and franchises of the Company and its Subsidiaries unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect. 21 FURTHER ASSURANCES. The Company shall take, or cause to be taken, all action required or desirable to maintain good and valid title to the Collateral and shall maintain and preserve the Liens created by the Security Agreement and the priority thereof. LICENSE AGREEMENT. The Company shall (i) perform and observe in all material respects all of its covenants and obligations contained in the License Agreement, (ii) take all reasonable and necessary action to prevent the termination or cancellation of the License Agreement in accordance with the terms thereof or otherwise (and in connection with the BMG Litigation (as defined in the Security Agreement) shall not take any action which could reasonably be expected to result in the termination or cancellation of the License Agreement by BMG) and (iii) promptly enforce against BMG each material covenant or obligation of the License Agreement in accordance with its terms. NEGATIVE COVENANTS. The Company covenants that so long as any of the Notes are outstanding: TRANSACTIONS WITH AFFILIATES. The Company will not and will not permit any Subsidiary to enter into directly or indirectly any transaction or Material group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Subsidiary), except in the ordinary course and pursuant to the reasonable requirements of the Company's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtainable in a comparable arm's-length transaction with a Person not an Affiliate. MERGER, CONSOLIDATION, ETC. The Company shall not consolidate with or merge with any other corporation or convey, transfer or lease substantially all of its assets in a single transaction or series of transactions to any Person unless: (a) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer or lease substantially all of the assets of the Company as an entirety, as the case may be, shall be a solvent corporation organized and existing under the laws of the United States or any State thereof (including the District of Columbia), and, if the Company is not such corporation, (I) such corporation shall have executed and delivered to each holder of any Notes its assumption of the due and punctual performance and observance of each covenant and condition of this Agreement, the Notes and the other Financing Documents and (II) the Company shall have caused to be delivered to each holder of any Notes an opinion of nationally recognized independent counsel, or other independent counsel reasonably satisfactory to the Required Holders, to the effect that 22 all agreements or instruments effecting such assumption are enforceable in accordance with their terms and comply with the terms hereof; and (b) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing. No such conveyance, transfer or lease of substantially all of the assets of the Company shall have the effect of releasing the Company or any successor corporation that shall theretofore have become such in the manner prescribed in this Section 10.2 from its liability under this Agreement, the Notes or the other Financing Documents. LIENS. The Company will not, and will not permit any of its Subsidiaries to, create, assume, incur or suffer to exist any Lien upon or with respect to any patents, patent applications or patent rights relating to or supporting the Royalty Payments now owned or hereafter acquired by the Company or any such Subsidiary, unless the Notes are contemporaneously secured equally and ratably with any and all other obligations and Indebtedness secured by such Lien pursuant to documentation reasonably satisfactory to the Required Holders and provided that, if requested by the Required Holders, the holders of the Notes shall have been provided with an opinion of counsel reasonably satisfactory to the Required Holders to the effect that such documentation is enforceable in accordance with its terms and complies with the requirements of this Section 10.3. AMENDMENTS TO LICENSE AGREEMENT. (a) The Company will not enter into any amendment, modification or supplement to, or grant any waiver under the License Agreement, without the prior written consent of the Required Holders. (b) The Company will not terminate, or consent to any termination of, the License Agreement, without the prior written consent of all of the holders of the Notes. ROYALTY PAYMENT COVERAGE RATIO. (a) The Company will not permit the Royalty Payment Coverage Ratio to be less than 1.25 to 1.00 as of the end of any four consecutive fiscal quarters of the Company. (b) The Company will not permit the Royalty Payment Coverage Ratio to be less than 1.00 to 1.00 as of the end of any fiscal quarter of the Company. 23 INCURRENCE OF SECURED INDEBTEDNESS. The Company will not, and will not permit any Subsidiary to, directly or indirectly, create, incur, assume, guarantee, or otherwise become directly or indirectly liable with respect to, any Secured Indebtedness, unless on the date the Company or such Subsidiary becomes liable with respect to any such Secured Indebtedness and immediately after giving effect thereto and the concurrent retirement of any other Secured Indebtedness, (i) no Default or Event of Default exists; (ii) the Pro Forma Royalty Payment Coverage Ratio is not less than 1.50 to 1.00; (iii) the Secured Indebtedness Ratio is not greater than 2.50 to 1.00; and (iv) the Lien pursuant to which such Secured Indebtedness shall be secured shall be created pursuant to the Security Agreement (as contemplated by Section 10 thereof). For purposes of this Section 10.6, any Person extending, renewing or refunding any Secured Indebtedness shall be deemed to have incurred such Indebtedness at the time of such extension, renewal or refunding. EVENTS OF DEFAULT. An "EVENT OF DEFAULT" shall exist if any of the following conditions or events shall occur and be continuing: (a) the Company defaults in the payment of any principal or Make-Whole Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or (b) the Company defaults in the payment of any interest on any Note or any other amount due under any other Financing Document for more than five Business Days after the same becomes due and payable; or (c) the Company defaults in the performance of or compliance with any term contained in (i) Section 10.5 hereof or Section 4.1, 4.3, 8.2, 8.4(b) or 8.6 of the Security Agreement or (ii) Section 7.1(d) or Section 10.2, 10.3, 10.4 or 10.6 and any such default referred to in this clause (ii) is not remedied within five Business Days after the earlier of (X) a Responsible Officer obtaining actual knowledge of such default and (Y) the Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a "notice of default" and to refer specifically to this paragraph (c) of Section 11); or (d) the Company defaults in the performance of or compliance with any term contained herein or in any other Financing Document (other than those referred to in paragraphs (a), (b) and (c) of this Section 11) and such default is not remedied within 30 days after 24 the earlier of (I) a Responsible Officer obtaining actual knowledge of such default and (II) the Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a "notice of default" and to refer specifically to this paragraph (d) of Section 11); or (e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or in any other Financing Document or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or (f) (I) the Company or any Subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $1,000,000 beyond any period of grace provided with respect thereto, or (II) the Company or any Subsidiary is in default in the performance of or compliance with any term of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least $1,000,000 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared, due and payable before its stated maturity or before its regularly scheduled dates of payment, or (III) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), the Company or any Subsidiary has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $1,000,000; or (g) the Company or any Subsidiary (I) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (II) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (III) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (V) is adjudicated as insolvent or to be liquidated, or (VI) takes corporate action for the purpose of any of the foregoing; or (h) a court or governmental authority of competent jurisdiction enters an order appointing, without consent by the Company or any of its Subsidiaries, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any of its Subsidiaries, or any such petition shall be filed against the Company or any of its Subsidiaries and such petition shall not be dismissed within 60 days; or 25 (i) a final judgment or judgments for the payment of money aggregating in excess of $5,000,000 are rendered against one or more of the Company and its Subsidiaries and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or (j) if (I) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (II) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (III) the aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001(a)(18) of ERISA) under all Plans, determined in accordance with Title IV of ERISA, shall exceed $1,000,000, (IV) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (V) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (VI) the Company or any Subsidiary establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect; or (k) the Security Agreement shall cease to be in full force and effect or to be effective to grant a perfected Lien to the Collateral Agent, for the benefit of the Secured Parties, on the Collateral described therein with the priority purported to be created thereby. As used in Section 11(j), the terms "EMPLOYEE BENEFIT PLAN" and "EMPLOYEE WELFARE BENEFIT PLAN" shall have the respective meanings assigned to such terms in Section 3 of ERISA. REMEDIES ON DEFAULT, ETC. ACCELERATION. (a) If an Event of Default with respect to the Company described in paragraph (g) or (h) of Section 11 (other than an Event of Default described in clause (i) of paragraph (g) or described in clause (vi) of paragraph (g) by virtue of the fact that such clause encompasses clause (i) of paragraph (g)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable. (b) If any other Event of Default has occurred and is continuing, any holder or holders of more than 50% in principal amount of the Notes at the time outstanding may at any time at its or 26 their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable. (c) If any Event of Default described in paragraph (a) or (b) of Section 11 has occurred and is continuing, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable. Upon any Notes becoming due and payable under this Section 12.1, whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (X) all accrued and unpaid interest thereon and (Y) the Make-Whole Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Make-Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances. OTHER REMEDIES. If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note or in any other Financing Document, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. RESCISSION. At any time after any Notes have been declared due and payable pursuant to paragraph (b) or (c) of Section 12.1, the holders of not less than 66 2/3% in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (A) the Company has paid all overdue interest on the Notes, all principal of and Make-Whole Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Make-Whole Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (B) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17, and (C) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon. 27 NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers or remedies. No right, power or remedy conferred on any holder of a Note by this Agreement, any Note or any other Financing Document shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15, the Company will pay to the holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this Section 12, including, without limitation, reasonable attorneys' fees, expenses and disbursements. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES. REGISTRATION OF NOTES. The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Note that is an Institutional Investor promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Notes. TRANSFER AND EXCHANGE OF NOTES. Upon surrender of any Note at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or his attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or part thereof), the Company shall execute and deliver, at the Company's expense (except as provided below), one or more new Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such holder may request and shall be substantially in the form of Exhibit 1. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $1,000,000, PROVIDED that if necessary to enable the registration of transfer by a holder of its entire holding of Notes, one Note may be in a denomination of less than $1,000,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Section 6.2. 28 REPLACEMENT OF NOTES. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (PROVIDED that if the holder of such Note is, or is a nominee for, an original Purchaser or another holder of a Note with a minimum net worth of at least $10,000,000, such Person's own unsecured agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation thereof, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon. PAYMENTS ON NOTES. PLACE OF PAYMENT. Subject to Section 14.2, payments of principal, Make-Whole Amount, if any, and interest becoming due and payable on the Notes shall be made in New York, New York at the principal office of Bankers Trust Company in such jurisdiction. The Company may at any time, by notice to each holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction. HOME OFFICE PAYMENT. So long as you or your nominee shall be the holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay or cause to be paid all sums becoming due on such Note for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose below your name in Schedule A, or by such other method or at such other address as you shall have from time to time specified to the Company and the Collateral Agent in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, you shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1. Prior to any sale or other disposition of any Note held by you or your nominee you will, at your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in 29 exchange for a new Note or Notes pursuant to Section 13.2. The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by you under this Agreement and that has made the same agreement relating to such Note as you have made in this Section 14.2. EXPENSES, ETC. TRANSACTION EXPENSES. Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys' fees of a special counsel and, if reasonably required, local or other counsel) incurred by you, each Other Purchaser, the Collateral Agent or holder of a Note in connection with such transactions and in connection with the preparation, negotiation and execution of the Financing Documents and the perfection of the Liens in the Collateral contemplated by the Security Agreement and in connection with any amendments, waivers or consents under or in respect of this Agreement, the other Financing Documents or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (A) the reasonable costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement, the Notes or the other Financing Documents or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement, the Notes or the other Financing Documents, or by reason of being a holder of any Note, and all reasonable expenses incurred by each holder of a Note and the Collateral Agent incurred in connection with the preservation of any Lien or realization on or pursuit of remedies with respect to any Collateral following the occurrence and during the continuance of any Default or Event of Default, and (B) the reasonable costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes. The Company will pay, and will save you and each other holder of a Note harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those retained by you). SURVIVAL. The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement, the Notes or the other Financing Documents, and the termination of this Agreement. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All representations and warranties contained herein and in the other Financing Documents shall survive the execution and delivery of this Agreement, the Notes and the other Financing Documents, the purchase or transfer by you of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent holder of a Note, regardless of any investigation made at any time by or on behalf of you or any other holder of a Note. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant 30 to this Agreement or any other Financing Document shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement, the Notes and the other Financing Documents embody the entire agreement and understanding between you and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. AMENDMENT AND WAIVER. REQUIREMENTS. This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (A) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to you unless consented to by you in writing, and (B) no such amendment or waiver may, without the written consent of the holder of each Note at the time outstanding affected thereby, (I) subject to the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Make-Whole Amount on, the Notes, (II) change the percentage of the principal amount of the Notes the holders of which are required to consent to any such amendment or waiver, or (III) amend any of Sections 8, 9.7, 11(a), 11(b), 12, 17 or 20. SOLICITATION OF HOLDERS OF NOTES. (a) SOLICITATION. The Company will provide each holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes or any other Financing Documents. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite holders of Notes. (b) PAYMENT. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security, to any holder of Notes as consideration for or as an inducement to the entering into by any holder of Notes of any waiver or amendment of any of the terms and provisions hereof or any other Financing Document unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to each holder of Notes then outstanding even if such holder did not consent to such waiver or amendment. 31 BINDING EFFECT, ETC. Any amendment or waiver consented to as provided in this Section 17 applies equally to all holders of Notes and is binding upon them and upon each future holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the holder of any Note or the Collateral Agent nor any delay in exercising any rights hereunder or under any Note or under any other Financing Document shall operate as a waiver of any rights of any holder of such Note or the Collateral Agent. As used herein, the term "THIS AGREEMENT" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented. NOTES HELD BY COMPANY, ETC. Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes or any other Financing Document, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding. NOTICES. All notices and communications provided for hereunder shall be in writing and sent (A) by telecopy if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (B) by registered or certified mail with return receipt requested (postage prepaid), or (C) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent: (i) if to you or your nominee, to you or it at the address specified for such communications in Schedule A, or at such other address as you or it shall have specified to the Company in writing, (ii) if to any other holder of any Note, to such holder at such address as such other holder shall have specified to the Company in writing, or (iii) if to the Collateral Agent, to its address as provided in the Security Agreement, or (iv) if to the Company, to the Company at its address set forth at the beginning hereof to the attention of its Chief Financial Officer, or at such other address as the Company shall have specified to the holder of each Note in writing. Notices under this Section 18 will be deemed given only when actually received. 32 REPRODUCTION OF DOCUMENTS. This Agreement, the other Financing Documents and all documents relating thereto, including, without limitation, (A) consents, waivers and modifications that may hereafter be executed, (B) documents received by you and the Collateral Agent at the Closing (except the Notes themselves), and (C) financial statements, certificates and other information previously or hereafter furnished to you and the Collateral Agent, may be reproduced by you by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and you and the Collateral Agent may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you or the Collateral Agent in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction. CONFIDENTIAL INFORMATION. For the purposes of this Section 20, "CONFIDENTIAL INFORMATION" means information delivered to you by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by you as being confidential information of the Company or such Subsidiary, PROVIDED that such term does not include information that (A) was publicly known or otherwise known to you prior to the time of such disclosure, (B) subsequently becomes publicly known through no act or omission by you or any person acting on your behalf, (C) otherwise becomes known to you other than through disclosure by the Company or any Subsidiary or (D) constitutes financial statements delivered to you under Section 7.1 that are otherwise publicly available. You will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by you in good faith to protect confidential information of third parties delivered to you, PROVIDED that you may deliver or disclose Confidential Information to (I) your directors, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by your Notes), (II) your financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20, (iii) any other holder of any Note, (IV) any Institutional Investor to which you sell or offer to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (V) any Person from which you offer to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (VI) any federal or state regulatory authority having jurisdiction over you, (VII) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about your investment portfolio and which have been informed of the confidential nature of such information or (VIII) any 33 other Person to which such delivery or disclosure may be (W) necessary or appropriate to effect compliance with any law, rule, regulation or order applicable to you, (X) necessary or appropriate in response to any subpoena or other legal process, (Y) necessary or appropriate in connection with any litigation to which you are a party or (z) reasonably determined by you to be necessary in the enforcement or for the protection of the rights and remedies under your Notes and this Agreement, if an Event of Default has occurred and is continuing. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Company embodying the provisions of this Section 20. SUBSTITUTION OF PURCHASER. You shall have the right to substitute any one of your Affiliates as the purchaser of the Notes that you have agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both you and such Affiliate, shall contain such Affiliate's agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6. Upon receipt of such notice, wherever the word "you" is used in this Agreement (other than in this Section 21), such word shall be deemed to refer to such Affiliate in lieu of you. In the event that such Affiliate is so substituted as a purchaser hereunder and such Affiliate thereafter transfers to you all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, wherever the word "you" is used in this Agreement (other than in this Section 21), such word shall no longer be deemed to refer to such Affiliate, but shall refer to you, and you shall have all the rights of an original holder of the Notes under this Agreement. MISCELLANEOUS. SUCCESSORS AND ASSIGNS. All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of a Note) whether so expressed or not. PAYMENTS DUE ON NON-BUSINESS DAYS. Anything in this Agreement or the Notes or any other Financing Document to the contrary notwithstanding, any payment of principal of or Make-Whole Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day. 34 SEVERABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction. CONSTRUCTION. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. * * * * * 35 SCHEDULE B DEFINED TERMS As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term: "AFFILIATE" means, at any time, and with respect to any Person, (a) any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person, and (b) any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interests of the Company or any Subsidiary or any corporation of which the Company and its Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests. As used in this definition, "CONTROL" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an "Affiliate" is a reference to an Affiliate of the Company. "BMG" means Boehringer Mannheim GmbH, a German company doing business as Roche Diagnostics. "BUSINESS DAY" means (A) for the purposes of Section 8.6 only, any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed, and (B) for the purposes of any other provision of this Agreement, any day other than a Saturday, a Sunday or a day on which commercial banks in New York, New York or Baltimore, Maryland are required or authorized to be closed. "CAPITAL LEASE" means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP. "CAPITAL LEASE OBLIGATION" means, with respect to any Person and a Capital Lease, the amount of the obligation of such Person as the lessee under such Capital Lease which would, in accordance with GAAP, appear as a liability on a balance sheet of such Person. "CLOSING" is defined in Section 3. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. "COLLATERAL" is defined in the Security Agreement. "COLLATERAL AGENT" means Bankers Trust Company, a New York banking corporation. 1 "COLLECTION ACCOUNT" is defined in the Security Agreement. "COMPANY" means IGEN International, Inc., a Delaware corporation. "CONFIDENTIAL INFORMATION" is defined in Section 20. "DEBT SERVICE" means, with respect to any period, all payments of interest and principal in respect of the Notes and any other Secured Indebtedness paid or payable by the Company during such period. "DEFAULT" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. "DEFAULT RATE" means that rate of interest that is the greater of (I) 10.50% per annum above the rate of interest stated in clause (a) of the first paragraph of the Notes or (II) 2% over the rate of interest publicly announced by Bankers Trust Company in New York, New York as its "base" or "prime" rate. "ENVIRONMENTAL LAWS" means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect. "ERISA AFFILIATE" means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code. "EVENT OF DEFAULT" is defined in Section 11. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FINANCING DOCUMENTS" means this Agreement, the Other Agreements, the Security Agreement and the Notes. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. "GOVERNMENTAL AUTHORITY" means (a) the government of 2 (i) the United States of America or any State or other political subdivision thereof, or (ii) any jurisdiction in which the Company or any Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company or any Subsidiary, or (b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government. "GUARANTY" means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person: (a) to purchase such indebtedness or obligation or any property constituting security therefor; (b) to advance or supply funds (I) for the purchase or payment of such indebtedness or obligation, or (II) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such indebtedness or obligation; (c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of any other Person to make payment of the indebtedness or obligation; or (d) otherwise to assure the owner of such indebtedness or obligation against loss in respect thereof. In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor. "HAZARDOUS MATERIAL" means any and all pollutants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is or shall be restricted, prohibited or penalized by any applicable law (including, without limitation, asbestos, urea formaldehyde foam insulation and polychlorinated biphenyls). "HOLDER" means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1. "INDEBTEDNESS" with respect to any Person means, at any time, without duplication, 3 (a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (c) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases; (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); (f) Swaps of such Person; and (g) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof. Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP. "INSTITUTIONAL INVESTOR" means (A) any original purchaser of a Note, (B) any holder of a Note holding more than 5% of the aggregate principal amount of the Notes then outstanding, and (C) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form. "LICENSE AGREEMENT" means the License and Technology Development Agreement dated as of September 23, 1992 between the Company and BMG, as in effect from time to time. "LIEN" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). "MAKE-WHOLE AMOUNT" is defined in Section 8.6. 4 "MATERIAL" means material in relation to the business, operations, affairs, financial condition, assets, properties, or prospects of the Company and its Subsidiaries taken as a whole. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (A) the business, operations, affairs, financial condition, assets or properties of the Company and its Subsidiaries taken as a whole, or (B) the ability of the Company to perform its obligations under this Agreement, the Notes or any of the other Financing Documents, or (c) the validity or enforceability of this Agreement, the Notes or any of the other Financing Documents or any Lien created thereunder. "MAXIMUM PRO FORMA DEBT SERVICE" means, on any date (and after giving effect to any Senior Indebtedness proposed to be incurred on such date), the greatest amount of Debt Service which the Company would be projected to have to pay during any period of four consecutive fiscal quarters through the maturity date of the Notes. For the purpose of the foregoing calculation, if interest payable on any Secured Indebtedness is not determinable in advance because the interest rate is not a fixed rate, such interest rate shall be assumed to be the interest rate in effect on the date of calculation plus 100 basis points. "MEMORANDUM" is defined in Section 5.3. "MULTIEMPLOYER PLAN" means any Plan that is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA). "NOTE PAYMENT DATE" means the 10th day of each March, June, September and December in each year. "NOTES" is defined in Section 1. "OFFICER'S CERTIFICATE" means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate. "OTHER PURCHASERS" is defined in Section 2. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "PERSON" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. "PLAN" means an "employee benefit plan" (as defined in section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability. "PREFERRED STOCK" means any class of capital stock of a corporation that is preferred over any other class of capital stock of such corporation as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such corporation. 5 "PRO FORMA ROYALTY PAYMENT COVERAGE RATIO" means, at any time, the ratio of (a) Royalty Payments for the period of four consecutive fiscal quarters of the Company ending on, or most recently ended prior to, such time to (b) Maximum Pro Forma Debt Service. "PROPERTY" or "PROPERTIES" means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate. "QPAM EXEMPTION" means Prohibited Transaction Class Exemption 84-14 issued by the United States Department of Labor. "REQUIRED HOLDERS" means, at any time, the holders of at least 66 2/3% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates). "RESPONSIBLE OFFICER" means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this agreement. "ROYALTY PAYMENT COVERAGE RATIO" means, as at the last day of any fiscal quarter of the Company, the ratio of (a) Royalty Payments for the period of four consecutive fiscal quarters of the Company ending on such day to (b) Debt Service for such period; provided, however, that for the purpose of calculating the Royalty Payment Coverage Ratio for each fiscal quarter ending on or before December 31, 2000 Debt Service shall be deemed to be $6,885,252. "ROYALTY PAYMENTS" means the net amount of all royalty payments made to the Company pursuant to the License Agreement. "SEC REPORTS" is defined in Section 5.3. "SECURED INDEBTEDNESS" means Indebtedness secured by Royalty Payments (including the Notes and obligations relating thereto). "SECURED INDEBTEDNESS RATIO" means, at any time, the ratio of (a) the principal amount of all Secured Indebtedness outstanding at such time to (b) Royalty Payments for the period of four consecutive fiscal quarters of the Company ending on, or most recently ended prior to, such time. "SECURED PARTIES" is defined in the Security Agreement. "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time. "SECURITY AGREEMENT" means the Collateral Account and Security Agreement dated as of the date hereof, substantially in the form of Exhibit 2. "SENIOR FINANCIAL OFFICER" means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company. 6 "SUBSIDIARY" means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries (unless such partnership or joint venture can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary of the Company. "SWAPS" means, with respect to any Person, payment obligations with respect to interest rate swaps, currency swaps and similar obligations obligating such Person to make payments, whether periodically or upon the happening of a contingency. For the purposes of this Agreement, the amount of the obligation under any Swap shall be the amount determined in respect thereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such Swap had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such Swap provides for the netting of amounts payable by and to such Person thereunder or if any such agreement provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligation shall be the net amount so determined. "WHOLLY-OWNED SUBSIDIARY" means, at any time, any Subsidiary one hundred percent (100%) of all of the equity interests (except directors' qualifying shares) and voting interests of which are owned by any one or more of the Company and the Company's other Wholly-Owned Subsidiaries at such time. 7 EXHIBIT 1 [FORM OF NOTE] IGEN INTERNATIONAL, INC. 8.50% SENIOR SECURED NOTE DUE 2006 No. [ ] [Date] ------------ $[ ] PPN 449929 A* 9 -------- FOR VALUE RECEIVED, the undersigned, IGEN INTERNATIONAL, INC. (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to [ ], or registered assigns, the principal sum of [ ] DOLLARS (or so much thereof as shall not have been prepaid), on March 10, 2006, with interest (computed on the basis of a 360-day year of twelve 30-day months) (A) on the unpaid balance thereof at the rate of 8.50% per annum from the date hereof, payable on each Note Payment Date (as defined in the Note Purchase Agreements referred to below), commencing with the first such Note Payment Date next succeeding the date hereof, until the principal hereof shall have become due and payable, and (B) to the extent permitted by law, on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreements referred to below), payable on each Note Payment Date (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (I) 10.50% or (II) 2% over the rate of interest publicly announced by Bankers Trust Company from time to time in New York, New York as its "base" or "prime" rate. The principal of this Note shall be payable on the each Note Payment Date on or after December 10, 2000, in equal quarterly installments of principal and interest (as more fully provided in the Note Purchase Agreements referred to below) in such amount as shall fully pay the unpaid balance of the principal amount of this Note, together with accrued interest, on March 10, 2006. Each installment of combined principal and interest shall be applied first to the payment of accrued interest and the balance to payment on account of the principal hereof. Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the principal office of Bankers Trust Company in New York, New York or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreements referred to below. This Note is one of a series of Senior Secured Notes (herein called the "Notes") issued pursuant to separate Note Purchase Agreements, dated as of March 22, 1999 (as from time to time amended, the "Note Purchase Agreements"), between the Company and the respective Purchasers named therein 8 and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, (I) to have agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreements and (II) to have made the representation set forth in Section 6.2 of the Note Purchase Agreements. This Note is secured by, and entitled to the benefits of, the Security Agreement referred to in the Note Purchase Agreements. This Note is a registered Note and, as provided in the Note Purchase Agreements, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. The Company will make required prepayments of principal on the dates and in the amounts specified in the Note Purchase Agreements. This Note is also subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreements, but not otherwise. If an Event of Default, as defined in the Note Purchase Agreements, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreements. This Note shall be construed and enforced in accordance with the laws of the State of New York. IGEN INTERNATIONAL, INC. By ------------------------------------ Title 9 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COLLATERAL ACCOUNT AND SECURITY AGREEMENT Dated as of March 22, 1999 among IGEN INTERNATIONAL, INC. THE PURCHASERS PARTY HERETO Bankers Trust Company, as Collateral Agent and Bankers Trust Company, as Depositary Bank - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 TABLE OF CONTENTS
PAGE Section 1. Definitions...........................................................................................4 Section 1.1. CAPITALIZED TERMS..........................................................................4 Section 1.2. UNIFORM COMMERCIAL CODE; INTERPRETATION....................................................6 Section 2. COLLATERAL AGENT......................................................................................7 Section 2.1. APPOINTMENT AND DUTIES OF THE COLLATERAL AGENT.............................................7 Section 2.2. RIGHTS OF COLLATERAL AGENT.................................................................7 Section 2.3. INDEMNIFICATION AND FEES OF THE COLLATERAL AGENT...........................................9 Section 2.4. RESIGNATION OR REMOVAL OF THE COLLATERAL AGENT............................................10 Section 2.5. SUCCESSOR COLLATERAL AGENT................................................................11 Section 2.6. CONSENTS UNDER COLLATERAL DOCUMENTS.......................................................11 Section 2.7. DEPOSITARY BANK...........................................................................11 Section 3. THE ACCOUNTS.........................................................................................11 Section 3.1. DEPOSITARY BANK; MAINTENANCE OF ACCOUNTS; LIMITED COMPANY RIGHTS..........................11 Section 3.2. ESTABLISHMENT OF ACCOUNTS.................................................................12 Section 4. DEPOSITS INTO ACCOUNTS...............................................................................13 Section 4.1. DEPOSIT OF ROYALTY PAYMENTS, ETC..........................................................13 Section 4.2. NOTICE OF DEPOSITS TO COLLATERAL AGENT....................................................13 Section 4.3. INITIAL DEPOSIT INTO RESERVE ACCOUNT......................................................13 SECTION 5. DISBURSEMENTS FROM ACCOUNTS..........................................................................13 Section 5.1. DISBURSEMENTS FROM THE COLLECTION ACCOUNT.................................................13 Section 5.2. DISBURSEMENTS FROM THE RESERVE ACCOUNT....................................................14 Section 5.3. TRANSFERS WHEN AN EVENT OF DEFAULT IS CONTINUING..........................................15 Section 5.4. DISPOSITION OF ACCOUNTS UPON PAYMENT OF SECURED OBLIGATIONS...............................15 Section 6. PERMITTED INVESTMENTS................................................................................15 Section 7. COLLATERAL...........................................................................................15 Section 8. FURTHER ASSURANCES; REMEDIES.........................................................................16 Section 8.1. DELIVERY AND OTHER PERFECTION.............................................................16 Section 8.2. OTHER FINANCING STATEMENTS AND LIENS......................................................16 Section 8.3. PRESERVATION OF RIGHTS....................................................................16 Section 8.4. SPECIAL PROVISIONS RELATING TO LICENSE AGREEMENT..........................................16 Section 8.5. EVENTS OF DEFAULT, ETC....................................................................17 Section 8.6. REMOVALS, ETC.............................................................................18 Section 8.7. PRIVATE SALE..............................................................................18 Section 8.8. ATTORNEY-IN-FACT..........................................................................18 Section 8.9. PERFECTION................................................................................19 Section 8.10. TERMINATION OF SECURITY INTEREST.........................................................19 Section 8.11. EXPENSES.................................................................................19 Section 8.12. FURTHER ASSURANCES.......................................................................19 Section 9. APPLICATION OF PROCEEDS..............................................................................19 Section 10. ADDITIONAL SECURED INDEBTEDNESS.....................................................................20
2 Section 11. MISCELLANEOUS.......................................................................................21 Section 11.1. NO WAIVER................................................................................21 Section 11.2. SEVERABILITY.............................................................................22 Section 11.3. SUCCESSORS AND ASSIGNS...................................................................22 Section 11.4. COUNTERPARTS.............................................................................22 Section 11.5. AMENDMENT, WAIVER, ETC...................................................................22 Section 11.6. HEADINGS.................................................................................22 Section 11.7. NOTICES..................................................................................22 Section 11.8. REINSTATEMENT............................................................................22 Section 11.9. TERMINATION..............................................................................22 Section 11.10. NO THIRD PARTY BENEFICIARIES............................................................23 Section 11.11. GOVERNING LAW...........................................................................23
Annex A Form of Withdrawal Request 3 COLLATERAL ACCOUNT AND SECURITY AGREEMENT COLLATERAL ACCOUNT AND SECURITY AGREEMENT dated as of March 22, 1999 among IGEN INTERNATIONAL, INC., a corporation duly organized and validly existing under the laws of the State of Delaware (the "COMPANY"); the institutions named on the signature pages hereof under the caption "PURCHASERS"; Bankers Trust Company, acting in its capacity as collateral agent for the Secured Parties (in such capacity, together with its successors and permitted assigns, the "COLLATERAL AGENT"), and Bankers Trust Company, acting in its capacity as depositary bank for the Secured Parties (in such capacity, together with its successors and permitted assigns, the "DEPOSITARY BANK") in each case as herein provided. The Company has authorized the issuance of $30,000,000 aggregate principal amount of its 8.50% Senior Secured Notes due 2006 pursuant to the separate Note Purchase Agreements (collectively, as amended, restated, modified or supplemented and in effect from time to time, the "NOTE PURCHASE AGREEMENT"), each dated as of March 22, 1999, with each of the purchasers named on Schedule A thereto. The parties hereto desire to enter into this Agreement to set forth their mutual understanding with respect to the appointment of the Collateral Agent and various matters with respect to the Accounts and the Collateral (each as defined below). NOW, THEREFORE, to induce the Purchasers to enter into the Note Purchase Agreement and to purchase the Notes to be purchased by each such Purchaser, and for and in consideration of the premises and of the covenants herein contained, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto intending to be legally bound, covenant and agree as follows: SECTION 1. DEFINITIONS. SECTION 1.1. CAPITALIZED TERMS. Capitalized terms used herein and not defined herein shall have the meanings assigned thereto in the Note Purchase Agreement, whether specifically set forth therein or by reference to another document. In addition, as used herein the following terms shall have the following respective meanings (all terms defined in this Section 1.1 and in the other provisions of this Agreement in the singular to have the same meanings when used in the plural and VICE VERSA): "ACCOUNTS" has the meaning set forth in Section 3.2(a). "BMG LITIGATION" means the litigation between the Company and BMG described under the heading "BOEHRINGER MANNHEIM ('ROCHE')" in Note 3 to the Company's financial statements for the fiscal quarter ended December 31, 1998. "COLLATERAL" has the meaning set forth in Section 7. "COLLATERAL AGENT" is defined in the preamble hereto. 4 "COLLATERAL DOCUMENTS" means this Agreement and all UCC financing statements required by this Agreement to be filed with respect to the Liens on personal property of the Company created pursuant hereto. "COLLECTION ACCOUNT" means the securities account entitled "Collection Account" maintained by and in the name of the Collateral Agent with its Corporate Trust Department at the Depositary Bank in New York, New York. "COMPANY" is defined in the preamble hereto. "DEPOSITARY BANK" is defined in the preamble hereto. "FUNDS" means, collectively, all Permitted Investments and all other items of property (whether investment property, financial asset, security, instrument or cash) deposited in or credited to either Account. "NOTEHOLDER" means the holder or holders from time to time of the Notes. "NOTE PURCHASE AGREEMENT" is defined in the preamble hereto. "PERMITTED INVESTMENTS" means: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof; (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from Standard & Poor's Rating Group, a division of McGraw-Hill, Inc. ("S&P"), or from Moody's Investors Service, Inc. ("MOODY'S"); (c) investments in certificates of deposit, banker's acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof which (i) has a combined capital and surplus and undivided profits of not less than $500,000,000 and (ii) whose long-term unsecured debt obligations (or the long-term unsecured debt obligations of the bank holding company owning all of the capital stock of such bank) shall have been given one of the highest three ratings by at least one credit rating agency of recognized national standing in the United States of America; (d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria described in clause (c) above; and 5 (e) money market mutual funds (including money market funds or money market mutual funds for which the Collateral Agent in its individual capacity or any of its Affiliates is investment manager or advisor or from which the Collateral Agent in its individual capacity or any of its Affiliates charges or collects fees and expenses for services rendered) which are rated by S&P and Moody's at the time at which the investment is made in one of its three highest long-term rating categories. "REQUIRED RESERVE BALANCE" means, as of any date (a) prior to the first Note Payment Date, $600,000, (b) on or after the first Note Payment Date but prior to the second Note Payment Date, $800,000, (c) on or after the second Note Payment Date but prior to the third Note Payment Date, $1,000,000, (d) on or after the third Note Payment Date but prior to the fourth Note Payment Date, $1,200,000, (e) on or after the fourth Note Payment Date but prior to the fifth Note Payment Date, $1,400,000, (f) on or after the fifth Note Payment Date but prior to the sixth Note Payment Date, $1,700,000 and (g) on or after the sixth Note Payment Date, an amount equal to the aggregate amount of (1) all payments of principal of, interest on and Make-Whole Amount, if any, payable with respect to, the Notes and (2) all other amounts payable to the Collateral Agent or any Secured Party with respect to the Secured Obligations, in the case of both of the foregoing clauses (1) and (2), which are due and owing on the next succeeding Note Payment Date. "RESERVE ACCOUNT" means the securities account entitled "Reserve Account" maintained by and in the name of the Collateral Agent with its Corporate Trust Department at the Depositary Bank in New York, New York. "RESERVE ACCOUNT BALANCE" means on any date an amount equal to the collected credit balance of Funds held in or credited to the Reserve Account on such date. "SECURED OBLIGATIONS" means (a) the principal of, interest on and Make-Whole Amount, if any, payable with respect to, the Notes and (b) all other amounts from time to time payable to the Collateral Agent or any Noteholder under the Note Purchase Agreement or any other Financing Document. "SECURED PARTIES" means, collectively, the Noteholders and the Collateral Agent and their respective successors and assigns. "UCC" means the Uniform Commercial Code of the State of New York. "WITHDRAWAL REQUEST" means a request substantially in the form of Annex A hereto. SECTION 1.2. UNIFORM COMMERCIAL CODE; INTERPRETATION. All terms defined in the UCC shall have the respective meanings given to those terms in the UCC, except where the context otherwise requires. Unless the context otherwise requires, any reference in this Agreement to any agreement shall mean such agreement and all schedules, exhibits and attachments thereto as 6 amended, supplemented, modified or replaced. Unless otherwise stated, any reference in this Agreement to any Person shall include its permitted successors and assigns. SECTION 2. COLLATERAL AGENT. SECTION 2.1. APPOINTMENT AND DUTIES OF THE COLLATERAL AGENT. (a) Each Noteholder on the date hereof, and each other Secured Party from time to time by its acceptance of the security interests granted under the Collateral Documents, hereby designates and appoints Bankers Trust Company to act on its behalf as the Collateral Agent under the Collateral Documents, and hereby authorizes the Collateral Agent to execute, deliver and perform, on behalf of each of the Secured Parties, each Collateral Document to which the Collateral Agent is or is intended to be a party and to take such actions on behalf of the Secured Parties under the provisions of such Collateral Documents and to exercise such powers and perform such duties as are expressly delegated to the Collateral Agent by the terms of each Collateral Document, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in any Collateral Document, the Collateral Agent shall not have any duties or responsibilities, except those expressly set forth herein and in the Collateral Documents, or any fiduciary relationship with any Secured Party, and no implied covenants, functions or responsibilities shall be read into any Collateral Document or otherwise exist against the Collateral Agent. (b) The Collateral Agent will forward to each Secured Party at its last address on the records of the Collateral Agent promptly after the Collateral Agent's receipt thereof (and will use its reasonable efforts to forward within two Business Days of the receipt) a copy of each document furnished to the Collateral Agent under any Financing Document (including each Withdrawal Request). (c) The Collateral Agent shall deliver to the Company and each Secured Party, within five Business Days after the end of each calendar month (commencing with the calendar month in which the first deposit is made to the Collection Account), a report in reasonable detail setting forth with respect to each Account all deposits to and disbursements from such Account during such calendar month, including the date on which made, and the balances of and any investments in such Account as of the end of such calendar month. The Collateral Agent shall provide any additional information or reports relating to any such Account and the transactions therein reasonably requested in writing from time to time by the Company or any Secured Party. (d) The Collateral Agent hereby waives any Lien it may now have, or may subsequently acquire, in or on any Collateral other than the security interests granted under the Collateral Documents, any right to apply the Collateral against claims other than claims of the Secured Parties in respect of the security interests granted under this Agreement and any right to set off claims against such Collateral other than claims of the Secured Parties in respect of such security interests. SECTION 2.2. RIGHTS OF COLLATERAL AGENT. 7 (a) The Collateral Agent may execute any of its duties under this Agreement by or through agents or attorneys-in-fact, provided that the Collateral Agent shall be liable for any willful misconduct or gross negligence on the part of any such agents or attorneys-in-fact (other than any such agents or attorneys-in-fact retained by the Collateral Agent at the direction of, or with the prior approval of, the Required Holders). (b) Neither the Collateral Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it under or in connection with this Agreement (except for its own gross negligence or its own willful misconduct), (ii) responsible in any manner to any of the Secured Parties for any recitals, statements, representations or warranties made by the Company or any other party (other than the Collateral Agent) or any representative thereof contained in the Financing Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Collateral Agent under or in connection with, any Financing Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of any Financing Document or for any failure of the Company or any other party (other than the Collateral Agent) to perform their respective obligations thereunder, (iii) responsible or liable in any manner whatever for soliciting any funds or for the sufficiency, correctness, genuineness or validity of any funds, securities or other amounts deposited with or held by it or (iv) liable for the selection of Permitted Investments or for investment losses incurred thereon. The Collateral Agent shall have no liability in respect of losses incurred as a result of the liquidation of any Permitted Investment prior to its stated maturity or the failure of the Company to provide timely written investment direction. (c) The Collateral Agent shall be entitled to conclusively rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, statement, order or other document reasonably believed by it to be genuine and correct and to have been signed, sent or made by the proper person or entity and upon advice and statements of legal counsel, independent accountants and other experts reasonably selected by the Collateral Agent. In connection with any request of the Required Holders, the Collateral Agent shall be fully protected in relying on a certificate of any Secured Party, reasonably believed by the Collateral Agent to be signed by an authorized representative of such Secured Party, setting forth the Secured Obligations held by such Secured Party as of the date of such certificate, which certificate shall state that the person signing such certificate is an authorized representative of such Secured Party and shall state specifically which provision of this Agreement pursuant to which the Collateral Agent is being directed to act. The Collateral Agent shall be entitled to conclusively rely, and shall be fully protected in relying, in good faith on such certificate. The Collateral Agent shall be fully justified in failing or refusing to take any action under this Agreement (i) if such action would, in the reasonable opinion of the Collateral Agent, be contrary to law or the terms of this Agreement, (ii) if such action is not specifically provided for in this Agreement, or it shall not have received any such advice or concurrence of the Required Holders as it deems appropriate or (iii) if, in connection with the taking of any such action that would constitute an exercise of remedies under this Agreement or the Note Purchase Agreement or is pursuant to a direction or request of the Required Holders described in 2.2(e) hereof, it shall not first be indemnified to its reasonable satisfaction by the Secured Parties against any and all liability and expense which may be incurred by it by reason of taking or 8 continuing to take any such action. The Collateral Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with a request of the Required Holders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Secured Parties. (d) If, with respect to a proposed action to be taken by it, the Collateral Agent shall reasonably conclude in good faith that the provisions of this Agreement relating to the functions or responsibilities or discretionary powers of the Collateral Agent are or may be ambiguous or inconsistent, the Collateral Agent shall notify the Secured Parties, identifying the proposed action and the provisions that it considers are or may be ambiguous or inconsistent, and may decline either to perform such function or responsibility or to exercise such discretionary power unless it has received the written confirmation of the Required Holders that the Required Holders concur in the circumstances that the action proposed to be taken by the Collateral Agent is consistent with the terms of this Agreement or is otherwise appropriate. The Collateral Agent shall be fully protected in acting or refraining from acting upon the confirmation of the Required Holders in this respect, and such confirmation shall be binding upon the Collateral Agent and the other Secured Parties. (e) The Collateral Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default unless and until the Collateral Agent has actual knowledge thereof or has received a written notice or a certificate from a Secured Party or the Company stating that an Event of Default has occurred. The Collateral Agent shall have no obligation after receiving such notice or certificate to inquire whether an Event of Default has in fact occurred and shall be entitled to rely conclusively, and shall be fully protected in so relying, on any notice or certificate so furnished to it. No provision of any Financing Document shall require the Collateral Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties thereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. In the event that the Collateral Agent obtains actual knowledge of, or receives such a notice of, the occurrence of any Event of Default, the Collateral Agent shall give notice thereof to the Secured Parties. The Collateral Agent shall take only such action with respect to such Event of Default as so directed in writing by the Required Holders. SECTION 2.3. INDEMNIFICATION AND FEES OF THE COLLATERAL AGENT. (a) The Company shall indemnify the Collateral Agent and its directors, officers, employees and agents from and against any and all claims, losses, liabilities, obligations, actions, judgments, suits, damages, costs, expenses and disbursements (including, without limitation, the reasonable fees, expenses and disbursements of counsel) of any kind or nature whatsoever that may at any time be incurred by the Collateral Agent (hereinafter the "INDEMNIFICATION AMOUNT") growing out of or resulting from (i) any Financing Document or any Collateral Document (including, without limitation, the enforcement of any Financing Document or any Collateral Document, but excluding any such claims, losses, liabilities, obligations, actions, judgments, suits, damages, costs, expenses or disbursements resulting from the Collateral Agent's gross negligence or willful misconduct or resulting from any action brought by a Secured Party against the Collateral Agent), (ii) any refund or adjustment of any amount paid or payable to the Collateral Agent or any Secured Party under or in respect of any Financing Document or any Collateral, or any interest thereon, which may be ordered or otherwise required by any Person, except to the extent arising out of the 9 Collateral Agent's own gross negligence or its own willful misconduct, (iii) the establishment of the Accounts, the acceptance of deposits, the purchase or sale of instruments, investments or securities, the retention of cash and instruments, investments or securities or the proceeds thereof and any payment, transfer or other application of cash or instruments, investments or securities by the Collateral Agent in accordance with the provisions of this Agreement or the Note Purchase Agreement, or as may arise by reason of any act, omission or error of the Collateral Agent made in good faith in the conduct of its duties, except to the extent arising out of the Collateral Agent's own gross negligence or willful misconduct or (iv) this Agreement except to the extent arising out of the Collateral Agent's own gross negligence or its own willful misconduct. If the Company fails to pay on demand the Indemnification Amount, interest will accrue thereon at the Default Rate from the scheduled date for payment thereof until the actual date of payment and such interest shall be added to the Indemnification Amount. (b) The Company will pay upon demand to the Collateral Agent the amount of any and all reasonable out-of-pocket expenses, including the reasonable fees and expenses of its counsel (and any local counsel) and of any experts and agents, which the Collateral Agent may incur in connection with (i) the administration of any Financing Document, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement (whether through negotiations, legal proceedings or otherwise) of any of the rights of the Collateral Agent or the Secured Parties under any Financing Document or any Collateral Document or (iv) the failure by the Company or any other person or entity to perform or observe any of the provisions of any Financing Document. (c) The Company agrees to pay to the Collateral Agent an annual collateral agency fee in advance, as agreed upon in writing by the Company and the Collateral Agent, on each anniversary of the date of Closing occurring during the period commencing on the date of Closing to and including the date on which the Secured Obligations are paid in full (or on such other dates as otherwise agreed by the Company and the Collateral Agent). (d) The provisions of this Section 2.3 shall survive termination of this Agreement and the resignation or removal of the Collateral Agent. SECTION 2.4. RESIGNATION OR REMOVAL OF THE COLLATERAL AGENT. The Collateral Agent may resign upon not less than 30 days' prior written notice to the Secured Parties and the Company and may be removed at any time with or without cause by the Required Holders, with any such resignation or removal to become effective only upon the appointment of a successor Collateral Agent under this Section 2.4. If the Collateral Agent shall resign or be removed, then the Required Holders shall (and if no such successor shall have been appointed within 60 days of the Collateral Agent's resignation or removal, the Collateral Agent may or may petition a court of competent jurisdiction to) appoint a successor agent for the Secured Parties, which successor agent shall (i) be a bank or trust company that has an office in New York, New York and that has a combined capital and surplus of at least $500,000,000 and (ii) unless a Default or Event of Default has occurred and is continuing, be reasonably acceptable to the Company, whereupon such successor 10 agent shall succeed to the rights, powers and duties of the "Collateral Agent" and the term "Collateral Agent" shall mean such successor agent effective upon its appointment, and the former Collateral Agent's rights, powers and duties as Collateral Agent shall be terminated, without any other or further act or deed on the part of such former Collateral Agent (except that the Collateral Agent resigning or being removed shall deliver all Collateral then in its possession to the successor Collateral Agent) or any of the other Secured Parties. After any retiring Collateral Agent's resignation or removal hereunder, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Collateral Agent. SECTION 2.5. SUCCESSOR COLLATERAL AGENT. Any corporation into which the Collateral Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Collateral Agent shall be a party, or any corporation succeeding to the business of the Collateral Agent shall be the successor of the Collateral Agent hereunder, provided that corporation satisfies the eligibility requirements specified in clause (i) of Section 2.4, without the execution or filing of any paper with any party hereto or any further act on the part of any of the parties hereto except where an instrument of transfer or assignment is required by law to effect such succession, anything herein to the contrary notwithstanding. SECTION 2.6. CONSENTS UNDER COLLATERAL DOCUMENTS. Without the prior written consent of the Required Holders, the Collateral Agent will not consent to any amendment, restatement, modification, supplement or waiver under any of the Collateral Documents, PROVIDED that, without the prior consent of each Secured Party, the Collateral Agent shall not (except as provided herein), (i) consent to the release of any Collateral or otherwise terminate any Lien hereunder, (ii) agree to additional obligations being secured by such Lien (other than as contemplated by Section 10 hereof) or (iii) alter the relative priorities of the obligations entitled to the benefits of the Liens created hereunder, except that no such consent shall be required, and the Collateral Agent is hereby authorized, to consent to the release of any Lien covering property that is the subject of either a disposition of property permitted hereunder or a disposition to which the Required Holders have consented. SECTION 2.7. DEPOSITARY BANK. The Depositary Bank shall be entitled to the same rights, privileges and immunities as the Collateral Agent in connection with its duties and obligations hereunder. SECTION 3. THE ACCOUNTS. SECTION 3.1. DEPOSITARY BANK; MAINTENANCE OF ACCOUNTS; LIMITED COMPANY RIGHTS. (a) DEPOSITARY BANK. For all purposes of this Agreement, any reference herein to an application or disposition of Funds held in or credited to either Account by the Collateral Agent shall be deemed to refer to an application or disposition of such Funds by the Depositary Bank, and the Collateral Agent agrees that it will cause the Depositary Bank to make all applications and dispositions of Funds held in or credited to either Account at such times and in such amounts as is required by the terms of this Agreement. (b) ACCEPTANCE OF PAYMENT ON MAINTENANCE OF ACCOUNTS. The Collateral Agent 11 hereby agrees to cause to be accepted by the Depositary Bank and the Depositary Bank hereby agrees to accept all Funds to be delivered to or held by the Collateral Agent pursuant to the terms of this Agreement. The Company shall maintain the Accounts at the Depositary Bank during the term of this Agreement. The Collateral Agent and the Depositary Bank hereby agree that the Funds held in or credited to the Accounts shall be treated as "financial assets" (as defined in Section 8-102(a)(9) of the UCC). (c) LIMITED COMPANY RIGHTS. The Company shall not have any rights against or to Funds held in or credited to the Accounts, as third party beneficiary or otherwise, except the right to receive monies held in the Accounts as permitted by Paragraph THIRD of Section 5.1 or to direct the investment of Funds held in or credited to the Accounts as permitted by Section 6. Except as expressly provided in this Agreement, in no event shall any Permitted Investments deposited in or credited to any Account be registered in the name of the Company, payable to the order of the Company or specially indorsed to the Company except to the extent that the foregoing have been specially indorsed to the Collateral Agent or in blank. (d) ENTITLEMENT ORDERS. The Depositary Bank shall comply solely with "entitlement orders" (within the meaning of Section 8-102(a)(8) of the UCC) relating to any financial asset held in any Account without further consent by the Company. Each of the Company and the Depositary Bank hereby represents that it has not entered into, and hereby agrees that until the payment in full of the Secured Obligations, it shall not enter into, any agreement with any other Person (other than the Collateral Agent) relating to the Accounts (or any Funds deposited therein or credited thereto) pursuant to which the Depositary Bank has agreed or would agree, as the case may be, to comply with entitlement orders made by such Person. Each of the Company and the Depositary Bank hereby represents that it has not entered into any other agreement with the Company or any other Person purporting to limit or condition the obligation of the Collateral Agent or the Depositary Bank to comply with entitlement orders as set forth in this Section 3.1(d). SECTION 3.2. ESTABLISHMENT OF ACCOUNTS. (a) The Collateral Agent will, prior to the date of Closing, establish with the Depositary Bank the following special, segregated securities accounts (the "ACCOUNTS"; each such Account being a "securities account" as such term is defined in Section 8-501(a) of the UCC)) in the name of the Collateral Agent, which shall be maintained at all times until the termination of this Agreement: 1. the Collection Account; and 2. the Reserve Account. (b) The Depositary Bank represents that the Accounts have been established on the books and records of the Corporate Trust Department of the Depositary Bank and that each such Account is a "securities account" (as defined in section 8-501(a) of the UCC) in respect of which the Depositary Bank is a "securities intermediary" (as defined in Section 8-102(a)(14) of the UCC) and the Collateral Agent is the "entitlement holder" (as defined in Section 8-102(a)(7) of the UCC). The Depositary Bank represents that the "securities intermediary's jurisdiction"" (within the meaning of Section 8-110(e) of the UCC) of the Depositary Bank with respect to the 12 Accounts is the State of New York. (c) The account numbers of the Accounts established by, and in the name of, the Collateral Agent will be notified by the Collateral Agent to the Company and each Secured Party promptly upon the establishment thereof. (d) All Funds from time to time deposited in or credited to each Account shall be held in the name of the Collateral Agent for the benefit of the Secured Parties in the custody of the Collateral Agent for the purposes and on the terms set forth in this Agreement. All such Funds shall constitute a part of the Collateral and shall not constitute payment of any Indebtedness or any other obligation of the Company until applied as hereinafter provided. SECTION 4. DEPOSITS INTO ACCOUNTS. SECTION 4.1. DEPOSIT OF ROYALTY PAYMENTS, ETC. All (i) Royalty Payments payable to or for the benefit of the Company under the License Agreement and (ii) all other amounts specified in Sections 7(c) and 7(d) shall be paid directly to, and any such amounts received by the Company shall be deposited by the Company with, on the day of receipt of such amounts, the Collateral Agent on behalf of the Secured Parties for deposit in the Collection Account. SECTION 4.2. NOTICE OF DEPOSITS TO COLLATERAL AGENT. Promptly after obtaining knowledge that the Collateral Agent will receive funds for deposit into the Collection Account, the Company shall notify the Collateral Agent that the Collateral Agent will be receiving such funds and the approximate date of such deposit and will specify the source of such funds. SECTION 4.3. INITIAL DEPOSIT INTO RESERVE ACCOUNT. On the date of Closing, the Company shall cause $600,000 to be deposited into the Reserve Account. SECTION 5. DISBURSEMENTS FROM ACCOUNTS. SECTION 5.1. DISBURSEMENTS FROM THE COLLECTION ACCOUNT. On each Note Payment Date, the Collateral Agent shall withdraw Funds from the Collection Account for application in the following order of priority (such withdrawals to be made not later than 11:00 a.m. (New York time) on such Note Payment Date and only to the extent Funds are available therefor in the Collection Account): FIRST, the Collateral Agent shall make pro rata payments of principal of, interest on, and the Make-Whole Amount, if any, owing in respect of, the Notes and all other Secured Obligations then due and owing; SECOND, if the Reserve Account Balance is less than the Required Reserve Balance as of such Note Payment Date, the Collateral Agent shall transfer to the Reserve Account an amount of Funds equal to such deficiency; and THIRD, if (x) no Default or Event of Default has occurred and is continuing and (y) the Royalty Payment Coverage Ratio is equal to or greater than 1.25 to 1.00 as of the end of the fiscal quarter of the Company ending on or immediately preceding such Note Payment Date (as certified in the applicable Withdrawal Request), the Collateral Agent shall transfer 13 the balance, if any, of Funds held in or credited to the Collection Account to the Company. Not later than two Business Days prior to each Note Payment Date, the Company shall provide the Collateral Agent with a Withdrawal Request specifying the information needed to enable the Collateral Agent to calculate the amount of Funds to be withdrawn from the Collection Account and applied in accordance with this Section 5.1. Notwithstanding anything in this Section 5.1 to the contrary, if the Company fails to deliver a Withdrawal Request for the transfer of funds under this Section 5.1, the Collateral Agent is authorized upon the written instructions of the Required Holders to make withdrawals from the Collection Account for application in accordance with Paragraphs FIRST and SECOND above. SECTION 5.2. DISBURSEMENTS FROM THE RESERVE ACCOUNT. (a) On each Note Payment Date, if the aggregate amount of Funds transferred by the Collateral Agent pursuant to Paragraph FIRST of Section 5.1 on such Note Payment Date is less than the aggregate amount of principal of, interest on, and Make-Whole Amount, if any, payable in respect of, the Notes and all other Secured Obligations due and owing as of such Note Payment Date (prior to giving effect to such transfer), the Collateral Agent shall withdraw Funds from the Reserve Account (such withdrawals to be made not later than 11:00 a.m. (New York time) on such Note Payment Date and only to the extent funds are available therefor) in an amount equal to such deficiency and shall transfer such Funds to the applicable Secured Parties. (b) On each Note Payment Date, in the event (after giving effect to the transfers referred to above) the Reserve Account Balance exceeds the Required Reserve Balance, the Collateral Agent shall withdraw from the Reserve Account and deposit in the Collection Account the amount of Funds equal to such excess. 14 SECTION 5.3. TRANSFERS WHEN AN EVENT OF DEFAULT IS CONTINUING. Upon receipt by the Collateral Agent of written notice that an Event of Default has occurred and is continuing, the Collateral Agent shall make transfers from the Accounts in accordance with Section 9. SECTION 5.4. DISPOSITION OF ACCOUNTS UPON PAYMENT OF SECURED OBLIGATIONS. Upon final indefeasible payment in full of the Secured Obligations, the Collateral Agent shall hold all Funds held in or credited to the Accounts to the order of the Company or as otherwise required by applicable law. SECTION 6. PERMITTED INVESTMENTS. Upon the request of the Company, the Collateral Agent shall invest and reinvest any Funds held in or credited to either Account from time to time in Permitted Investments as instructed by the Company; PROVIDED, that (a) if the Company fails to so instruct the Collateral Agent or upon the occurrence and continuance of an Event of Default, the Collateral Agent shall invest and reinvest such Funds in Permitted Investments of the type described in clause (e) of the definition of such term or as otherwise directed by the Required Holders and (b) the maturity of any Permitted Investment shall not exceed 270 days (or, in the case of any Permitted Investment held in or credited to the Collection Account, the maturity thereof shall not extend beyond the Business Day immediately preceding the Note Payment Date next succeeding the date of acquisition thereof). Earnings on Permitted Investments held in or credited to each Account shall be deposited in such Account for application as provided for herein. All such investments and reinvestments shall be held in the name, and shall be under the sole dominion and control, of the Collateral Agent. All Funds held in or credited to either Account that are invested in a Permitted Investment are deemed to be held in such Account for all purposes of this Agreement. The Collateral Agent shall have no liability for any loss in investment of Funds held in or credited to either Account invested in Permitted Investments. SECTION 7. COLLATERAL. As collateral security for the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the Secured Obligations, now existing or hereafter arising, the Company hereby pledges, hypothecates, assigns, and transfers to the Collateral Agent for the equal and ratable benefit of the Secured Parties, and hereby grants to the Collateral Agent for the equal and ratable benefit of the Secured Parties a security interest in, all of the Company's right, title and interest in, to and under the following property, whether now owned by the Company or hereafter acquired and whether now existing or hereafter coming into existence and wherever located (all being collectively referred to herein as "COLLATERAL"): (a) each Account and all Funds held in or credited to each thereof; (b) all cash, investments and securities at any time on deposit in any Account, including all income or gain earned thereon and any proceeds thereof; (c) all Royalty Payments and all rights of the Company to receive moneys due and to become due under or pursuant to the License Agreement with respect thereto; (d) the proceeds of any judgments, settlements or other payments in connection with the BMG Litigation or any other litigation, arbitration or other legal proceeding relating to the Royalty Payments; and 15 (e) without limiting the provisions of the preceding clauses of this Section 7, all proceeds, products, accessions, benefits, substitutions and replacements of and to any of the property of the Company described in the preceding clauses of this Section 7. SECTION 8. FURTHER ASSURANCES; REMEDIES. In furtherance of the grant of the pledge and security interest pursuant to Section 7, the Company hereby agrees with each Secured Party as follows: SECTION 8.1. DELIVERY AND OTHER PERFECTION. The Company shall: (a) give, execute, deliver, file and record any financing statement, notice, instrument, document, agreement or other papers that may be necessary or desirable (in the judgment of the Collateral Agent) to create, preserve, perfect or validate the security interest granted pursuant hereto or to enable the Collateral Agent to exercise and enforce its rights hereunder with respect to such pledge and security interest; (b) keep full and accurate books and records relating to the Collateral, and stamp or otherwise mark such books and records in such manner as the Collateral Agent may reasonably require in order to reflect the security interests granted by this Agreement; and (c) permit representatives of the Collateral Agent, upon reasonable notice, at any time during normal business hours to (i) inspect and make abstracts from its books and records pertaining to the Collateral and (ii) be present at the Company's place of business to receive copies of all communications and remittances relating to the Collateral, and forward copies of any notices or communications received by the Company with respect to the Collateral, all in such manner as the Collateral Agent may reasonably require. SECTION 8.2. OTHER FINANCING STATEMENTS AND LIENS. The Company shall not file or suffer to be on file, or authorize or permit to be filed or to be on file, in any jurisdiction, any financing statement or like instrument with respect to the Collateral in which the Collateral Agent is not named as the sole secured party for the benefit of the Secured Parties. SECTION 8.3. PRESERVATION OF RIGHTS. The Collateral Agent shall not be required to take steps necessary to preserve any rights against prior parties to any of the Collateral. SECTION 8.4. SPECIAL PROVISIONS RELATING TO LICENSE AGREEMENT. (a) Anything herein to the contrary notwithstanding, the Company shall remain liable to perform all of its duties and obligations under the License Agreement and in respect of the Collateral to the same extent as if this Agreement had not been executed. The exercise by the Collateral Agent or any other Secured Party of any of the rights and remedies hereunder shall not release the Company from any of its duties or obligations under the License Agreement or in respect of the Collateral. Neither the Collateral Agent nor any of the other Secured Parties shall have any obligation or liability under the License Agreement or otherwise in respect of the Collateral by reason of this Agreement or be obligated to perform any of the obligations or duties of the Company under the License Agreement or otherwise in respect of the Collateral or to take 16 any action to collect or enforce any claim for payment or any other right assigned hereunder. (b) The Company will at all times maintain instructions with BMG directing BMG to make all Royalty Payments directly to the Collection Account. (c) If the Company fails to perform any agreement contained herein, the Collateral Agent may, with reasonable notice to the Company, itself perform, or cause the performance of, such agreement, and the reasonable expenses of the Collateral Agent incurred in connection therewith shall be payable by the Company and shall be Secured Obligations to the Collateral Agent secured under Section 7. SECTION 8.5. EVENTS OF DEFAULT, ETC.During the period during which an Event of Default shall have occurred and be continuing: (i) the Collateral Agent may make any reasonable compromise or settlement deemed desirable with respect to any of the Collateral and may extend the time of payment, arrange for payment in installments, or otherwise reasonably modify the terms of, any of the Collateral; (ii) the Collateral Agent shall have all of the rights and remedies with respect to the Collateral of a secured party under the UCC (whether or not the UCC is in effect in the jurisdiction where the rights and remedies are asserted) and such additional rights and remedies to which a secured party is entitled under the laws in effect in any jurisdiction where any rights and remedies hereunder may be asserted, including, without limitation, the right, to the maximum extent permitted by law, to exercise all voting, consensual and other powers of ownership pertaining to the Collateral as if the Collateral Agent were the sole and absolute owner thereof (and the Company agrees to take all such action as may be appropriate to give effect to such right); (iii) the Collateral Agent may, in its name or in the name of the Company or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral, but shall be under no obligation to do so; (iv) the Collateral Agent may, upon 10 Business Days' prior notice to the Company of the time and place, with respect to the Collateral or any part thereof which shall then be or shall thereafter come into the possession, custody or control of the Collateral Agent, the other Secured Parties or any of their respective agents, sell, lease, assign or otherwise dispose of all or any part of such Collateral, at such place or places as the Collateral Agent deems best, and for cash or for credit or for future delivery (without thereby assuming any credit risk), at public or private sale, without demand of performance or notice of intention to effect any such disposition or of the time or place thereof (except such notice as is required above or by applicable statute and cannot be waived), and the Collateral Agent or any other Secured Party or anyone else may be the purchaser, lessee, assignee or recipient of any or all of the Collateral so disposed of at any public sale (or, to the extent permitted by law, at any private sale) and thereafter hold the same absolutely, 17 free from any claim or right of whatsoever kind, including any right or equity of redemption (statutory or otherwise), of the Company, any such demand, notice and right or equity being hereby expressly waived and released; and the Collateral Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the sale may be so adjourned; and (v) The Collateral Agent's and any Secured Party's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the UCC or otherwise, shall be to deal with it in the same manner as the Collateral Agent or such Secured Party deals with similar property for its own account. None of the Collateral Agent or the Secured Parties, nor their respective directors, officers, employees, or agents, shall be liable to the Company for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any of the Collateral upon the request of the Company or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The rights of the Collateral Agent and the Secured Parties hereunder shall not be conditioned or contingent upon the pursuit by the Collateral Agent or any Secured Party of any right or remedy against the Company or against any other Person which may be or become liable in respect of all or any part of the Secured Obligations or against any collateral security therefor, guarantee thereof or right of offset with respect thereto. The proceeds of each collection or other disposition under this Section 8.5 shall be applied in accordance with Section 9. SECTION 8.6. REMOVALS, ETC.Without at least 30 days' prior notice to the Collateral Agent, the Company shall not (a) maintain any of its Records at any office or maintain its principal place of business at any place other than at the address specified in Section 5.21 of the Note Purchase Agreement or (b) change its name, or the name under which it does business, from the name shown on the signature pages hereto. SECTION 8.7. PRIVATE SALE.The Collateral Agent and the other Secured Parties, respectively, shall incur no liability as a result of the sale of the Collateral, or any part thereof, at any private sale, pursuant to Section 8.5, conducted in a commercially reasonable manner. The Company hereby waives any claims against the Collateral Agent or any other Secured Party arising by reason of the fact that the price at which the Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale or was less than the aggregate amount of the Secured Obligations, even if the Collateral Agent accepts the first offer received and does not offer the Collateral to more than one offeree. SECTION 8.8. ATTORNEY-IN-FACT.Without limiting any rights or powers granted by this Agreement to the Collateral Agent while no Event of Default has occurred and is continuing, upon the occurrence and during the continuance of any Event of Default the Collateral Agent is hereby appointed the attorney-in-fact of the Company for the purpose of carrying out the provisions of this Section 8 18 and taking any action and executing any instruments which the Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, so long as the Collateral Agent shall be entitled under this Section 8 to make collections in respect of the Collateral, the Collateral Agent shall have the right and power, with reasonable notice to the Company, to receive, endorse and collect all checks made payable to the order of the Company representing any dividend, payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. SECTION 8.9. PERFECTION.Prior to or concurrently with the execution and delivery of this Agreement, the Company shall deliver to the Collateral Agent in form for filing such financing statements and other documents in such offices as the Collateral Agent may reasonably request to perfect the security interests granted by Section 3 of this Agreement. The Company hereby authorizes the Collateral Agent to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral without the signature of the Company where permitted by law. SECTION 8.10. TERMINATION OF SECURITY INTEREST.When all Secured Obligations shall have been finally and indefeasibly paid in full, the security interest created by this Agreement shall terminate and the Collateral Agent shall forthwith cause to be assigned, transferred and delivered, against receipt but without any recourse, warranty or representation whatsoever, any remaining Collateral and money received in respect thereof, to or on the order of the Company. SECTION 8.11. EXPENSES.The Company agrees to reimburse each of the Secured Parties and the Collateral Agent for all costs and expenses of the Secured Parties and the Collateral Agent (including, without limitation, the fees and expenses of legal counsel) in connection with (a) any Event of Default and any enforcement or collection proceeding resulting therefrom, including, without limitation, all manner of participation in or other involvement with (i) performance by the Collateral Agent of any obligation that the Company has failed or refused to perform, (ii) bankruptcy, insolvency, receivership, foreclosure, winding up or liquidation proceedings, or any actual or attempted sale, or any exchange, enforcement, collection, compromise or settlement in respect of any of the Collateral, and for the care of the Collateral and defending or asserting rights and claims of the Collateral Agent in respect thereof, by litigation or otherwise, including expenses of insurance, (iii) judicial or regulatory proceedings, (iv) workout, restructuring or other negotiations or proceedings (whether or not the workout, restructuring or transaction contemplated thereby is consummated) and (v) enforcement proceedings hereunder in respect of the Collateral and (b) the enforcement of this Section 8.11, and all such costs and expenses shall be Secured Obligations entitled to the benefits of the collateral security provided pursuant to Section 7. SECTION 8.12. FURTHER ASSURANCES.The Company agrees that, from time to time upon the request of the Collateral Agent, the Company will execute and deliver such further documents and do such other acts and things as the Collateral Agent may reasonably request in order fully to effectuate the purposes of this Agreement. SECTION 9. APPLICATION OF PROCEEDS.After an Event of Default has occurred and is continuing, except as otherwise expressly provided herein, the proceeds of any collection, sale or 19 other realization of all or any part of the Collateral pursuant to any Collateral Document, and any Funds held in or credited to the Accounts and cash at the time held by the Collateral Agent under this Section 9 shall be distributed by the Collateral Agent at the times specified in the following order of priority: FIRST, to the Collateral Agent in an amount equal to (a) the cost of any indemnity to be provided to the Collateral Agent in respect of the enforcement of any of the rights of the Collateral Agent or other Secured Parties under the Collateral Documents and (b) the fees and expenses of the Collateral Agent then due and owing; SECOND, to the Secured Parties in an amount equal to the fees and expenses (including counsel fees and expenses) of the Secured Parties in respect of the enforcement of any of the rights of the Secured Parties under the Financing Documents to the extent permitted by such documents; THIRD, to the Noteholders in an amount equal to the unpaid interest on the Notes, whether or not then due and owing and, in case such proceeds shall be insufficient to pay in full such interest, then to the payment thereof ratably (without priority of any one over any other) in proportion to the unpaid amounts thereof on the relevant date; FOURTH, to the Noteholders in an amount equal to the unpaid principal of the Notes whether or not then due and owing and, in case such proceeds shall be insufficient to pay in full such principal, then to the payment thereof ratably (without priority of any one over any other) in proportion to the unpaid amounts thereof on the relevant date; FIFTH, to the Secured Parties in an amount equal to all other Secured Obligations due such Secured Parties under the Financing Documents and, in case such proceeds shall be insufficient to pay in full such Secured Obligations, then to the payment thereof ratably (without priority of any one over any other) in proportion to the unpaid amounts thereof on the relevant date; and SIXTH, after payment in full of all Secured Obligations, any surplus then remaining shall be transferred to the Company or its successors or assigns, or to whomever may be lawfully entitled to receive the same, or as a court of competent jurisdiction may direct. As used in this Section 9, "proceeds" of Collateral shall mean cash, securities and other property realized in respect of, and distributions in kind of, Collateral, including any such amounts received under any reorganization, liquidation, or adjustment of debt of the Company. SECTION 10. ADDITIONAL SECURED INDEBTEDNESS.If the Company shall at any time desire to incur any additional Secured Indebtedness in compliance with the provisions of Section 10.6 of the Note Purchase Agreement, the Company shall give written notice thereof to the Collateral Agent and the other Secured Parties, and any such notice shall include calculations in reasonable detail demonstrating that the incurrence of such Indebtedness (on the proposed date of issuance thereof) will comply with the requirements of Section 10.6 of the Note Purchase Agreement. Upon receipt of any such notice, the Collateral Agent and the Secured Parties agree to execute and deliver such further instruments (including an amendment to this Agreement) and do such other acts and things as may be reasonably required to cause the Lien created by this Agreement 20 to equally and ratably secure the obligations of the Company in respect of such additional Secured Indebtedness. SECTION 11. MISCELLANEOUS. SECTION 11.1. NO WAIVER.No failure on the part of the Collateral Agent to exercise, no course of dealing and no delay in exercising any right, power or remedy under this Agreement shall operate as a waiver thereof, and no single or partial exercise of any right, power or remedy under this Agreement shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 21 SECTION 11.2. SEVERABILITY.Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 11.3. SUCCESSORS AND ASSIGNS.This Agreement shall bind and inure to the benefit of and be enforceable by the Company, the Collateral Agent and the other Secured Parties and their respective permitted successors and assigns hereunder and, in addition, shall inure to the benefit of and be enforceable by all Secured Parties from time to time; provided, however, that the Company shall not assign or transfer its rights or obligations hereunder without the prior written consent of the Required Holders. SECTION 11.4. COUNTERPARTS.This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto. SECTION 11.5. AMENDMENT, WAIVER, ETC.No amendment or waiver of any provision of this Agreement shall be effective unless the same shall be in writing and signed by the Collateral Agent, the Required Holders and the Company, and any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given (PROVIDED that (i) no amendment, modification or waiver shall, unless by an instrument signed by all of the Secured Parties or by the Collateral Agent acting with the consent of all of the Secured Parties, amend or waive Sections 2.3, 5 or 9 or this Section 11.5). SECTION 11.6. HEADINGS. The table of contents and captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. SECTION 11.7. NOTICES.All notices, requests, consents and demands hereunder shall be in writing and telecopied or delivered to the intended recipient at its "Address for Notices" specified pursuant to Section 18 of the Note Purchase Agreement or, if to the Collateral Agent or the Depositary Bank, at the "Address for Notices" specified below its name on the signature pages hereof or, as to any party, at such other address as shall be designated by such party in a notice to each other party, and in any case, shall be deemed to have been given at the times specified in said Section 18. SECTION 11.8. REINSTATEMENT.This Agreement and any Lien created hereunder shall automatically be reinstated if and to the extent that for any reason any payment by or on behalf of the Company in respect of the Secured Obligations is rescinded or must otherwise be restored by any Secured Party, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and the Company shall indemnify the Collateral Agent and each other Secured Party on demand for all reasonable costs and expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by the Collateral Agent or such other Secured Party in connection with such rescission or restoration. SECTION 11.9. TERMINATION. 22 This Agreement shall remain in full force and effect until all Secured Obligations shall have been finally and indefeasibly paid in full. The provisions of Section 2.3 shall survive any termination of this Agreement. SECTION 11.10. NO THIRD PARTY BENEFICIARIES. The agreements of the parties hereto are solely for the benefit of the Company, the Collateral Agent and the Secured Parties, and no Person (other than the Secured Parties and their successors and permitted assigns hereunder) shall have any rights hereunder. SECTION 11.11. GOVERNING LAW. This agreement shall be governed by and construed in accordance with the law of the State of New York (excluding choice of law principles of the law of such State that would require the application of the law of a jurisdiction other than such State). 23 IN WITNESS WHEREOF, the Company, each Purchaser, the Collateral Agent and the Depositary Bank have caused this Agreement to be duly executed by their duly authorized officers all as of the date first above written. IGEN INTERNATIONAL, INC. By: -------------------------------- Title: BANKERS TRUST COMPANY, as Collateral Agent By: -------------------------------- Name: Title: Address for Notices: Bankers Trust Company Corporate Trust & Agency Services Four Albany Street 10th Floor New York, New York 10006 Telephone No.: 212-250-6137 Facsimile No.: 212-250-6439 Attention: Structured Finance BANKERS TRUST COMPANY, as Depositary Bank By: -------------------------------- Name: Title: Address for Notices: Bankers Trust Company Corporate Trust & Agency Services Four Albany Street 10th Floor New York, New York 10006 Telephone No.: 212-250-6137 Facsimile No.: 212-250-6439 Attention: Structured Finance 24 EX-23.1 3 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration Statements No. 33-77132 and 333-45355 of IGEN International, Inc. on Form S-8 dated March 31,1994 and Form S-3 dated April 15, 1998 of our report dated May 10, 1999, appearing in this Annual Report on Form 10-K of IGEN International, Inc. for the year ended March 31, 1999. DELOITTE & TOUCHE LLP Washington, DC June 25, 1999 EX-27 4 EXHIBIT 27
5 1,000 YEAR MAR-31-1999 APR-01-1998 MAR-31-1999 1,320 33,654 3,298 46 1,455 775 9,025 5,397 45,823 7,529 0 0 1 15 5,574 45,823 4,949 14,898 1,340 28,858 (36) 0 687 (13,309) 0 0 0 0 0 (13,309) (1.00) (1.00) INTEREST INCOME, NET OF INTEREST EXPENSE.
-----END PRIVACY-ENHANCED MESSAGE-----