##### 



SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934 For Quarter Ended June 30, 2004 Commission File Number: 000-50583 BioVeris Corporation  DELAWARE
    
    80-0076765(State or other jurisdiction
incorporation or organization)
    
    (IRS Employer
Identification No.)
 16020 INDUSTRIAL DRIVE, GAITHERSBURG, MD 20877
(Address of principal executive offices) (Zip Code) 301-869-9800
(Registrants telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Act of 1934
during the preceding 12 months, (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X
    
    No
 Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes
    
    No X
 Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. Class
    
    Outstanding at July 30, 2004Common Stock, $0.001 par value
    
    26,728,070




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##### 



BioVeris Corporation
Form 10-Q
For the Quarter Ended June 30, 2004 INDEX PAGEPART I
    
    FINANCIAL INFORMATIONItem 1:
    
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)Condensed Consolidated Balance Sheets  June 30, 2004 and March 31, 2004
    
    
    2Condensed Consolidated Statements of Operations - For the three months ended June 30, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Cash Flows - For the three months Ended June 30, 2004 and 2003
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2:
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    20Item 3:
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    34Item 4:
    
    CONTROLS AND PROCEDURES
    
    
    35PART II
    
    OTHER INFORMATIONItem 1:
    
    LEGAL PROCEEDINGS
    
    
    35Item 6:
    
    EXHIBITS AND REPORTS ON FORM 8-K
    
    
    36SIGNATURES
    
    
    37
 1




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ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 
 BioVeris Corporation
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands) June 30,2004Unaudited
    
    March 31,2004ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    62,237
    
    
    $
    182,509Short term investments
    
    
    89,739
    
    
    
    Accounts receivable, net
    
    
    6,289
    
    
    
    5,516Inventory
    
    
    8,319
    
    
    
    8,207Other current assets
    
    
    5,722
    
    
    
    4,332Total current assets
    
    
    172,306
    
    
    
    200,564Equipment and leasehold improvements, net
    
    
    11,658
    
    
    
    12,565OTHER NONCURRENT ASSETS:Technology licenses
    
    
    18,778
    
    
    
    19,266Other
    
    
    419
    
    
    
    419TOTAL ASSETS
    
    $
    203,161
    
    
    $
    232,814LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable and accrued expenses
    
    $
    7,051
    
    
    $
    7,187Accrued wages and benefits
    
    
    2,212
    
    
    
    1,876Other liabilities
    
    
    2,920
    
    
    
    Distribution gain accrual
    
    
    
    
    
    
    20,000Deferred revenue
    
    
    2,349
    
    
    
    2,273Note payable
    
    
    
    
    
    
    44Total current liabilities
    
    
    14,532
    
    
    
    31,380NONCURRENT LIABILITIES
    
    
    69
    
    
    
    54Total liabilities
    
    
    14,601
    
    
    
    31,434COMMITMENTSMINORITY INTEREST
    
    
    54
    
    
    
    54SERIES B PREFERRED STOCK, 1,000 shares designated, issued and outstanding
    
    
    7,500
    
    
    
    7,500STOCKHOLDERS EQUITY:Preferred stock, par value $0.01 per share, 15,000,000 shares authorized,
issuable in series:Series A, 600,000 shares designated, none issued
    
    
    
    
    
    
    Common stock, par value $0.001 per share, 100,000,000 shares authorized,
26,728,000 shares issued and outstanding
    
    
    27
    
    
    
    27Additional paid-in capital
    
    
    203,464
    
    
    
    203,464Accumulated deficit
    
    
    (22,516
    )
    
    
    (9,665
    )Accumulated other comprehensive income
    
    
    31
    
    
    
    Total stockholders equity
    
    
    181,006
    
    
    
    193,826TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    203,161
    
    
    $
    232,814
 The accompanying notes are an integral part of these consolidated financial statements. 2




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BioVeris Corporation
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Unaudited Three months endedJune 30,
    
    June 30,2004
    
    2003REVENUES:Product sales
    
    $
    7,839
    
    
    $
    4,796Royalty income
    
    
    320
    
    
    
    243Contract fees
    
    
    86
    
    
    
    34Total
    
    
    8,245
    
    
    
    5,073OPERATING COSTS AND EXPENSES:Product costs
    
    
    4,604
    
    
    
    2,433Research and development
    
    
    7,176
    
    
    
    5,232Selling, general, and administrative
    
    
    9,710
    
    
    
    4,776Total
    
    
    21,490
    
    
    
    12,441LOSS FROM OPERATIONS
    
    
    (13,245
    )
    
    
    (7,368
    )OTHER, NET
    
    
    394
    
    
    
    80EQUITY IN LOSS OF JOINT VENTURE
    
    
    
    
    
    
    (5,230
    )NET LOSS
    
    $
    (12,851
    )
    
    $
    (12,518
    )Net loss per common share (Basic and Diluted)
    
    $
    (0.48
    )
    
    $
    (0.47
    )COMMON SHARES OUTSTANDING (Basic and Diluted)
    
    
    26,728
    
    
    
    26,728
 The accompanying notes are an integral part of these consolidated financial statements. 3




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BioVeris Corporation
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited Three months endedJune 30,
    
    June 30,2004
    
    2003OPERATING ACTIVITIES:Net loss
    
    $
    (12,851
    )
    
    $
    (12,518
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    2,011
    
    
    
    852Loss on disposal of equipment
    
    
    34
    
    
    
    Equity in loss of joint venture
    
    
    
    
    
    
    5,230Expense related to stock options
    
    
    
    
    
    
    89Changes in assets and liabilities:Increase(decrease) in accounts receivable
    
    
    (773
    )
    
    
    735Increase (decrease) in inventory
    
    
    (35
    )
    
    
    118(Increase) decrease in other current assets
    
    
    (1,390
    )
    
    
    457Increase (decrease) in accounts payable and accrued expenses
    
    
    156
    
    
    
    (1,652
    )Increase in other liabilities
    
    
    2,920
    
    
    
    Increase (decrease) in deferred revenue
    
    
    91
    
    
    
    (27
    )Net cash used in operating activities
    
    
    (9,837
    )
    
    
    (6,716
    )INVESTING ACTIVITIES:Expenditures for equipment and leasehold improvements
    
    
    (727
    )
    
    
    (799
    )Purchase of short term investments
    
    
    (89,708
    )
    
    
    Investments in joint venture
    
    
    
    
    
    
    (10,909
    )Net cash used in investing activities
    
    
    (90,435
    )
    
    
    (11,708
    )FINANCING ACTIVITIES:Payment of distribution gain
    
    
    (20,000
    )
    
    
    Cash contributed by Parent, net
    
    
    
    
    
    
    18,424Net cash (used in) provided by financing activities
    
    
    (20,000
    )
    
    
    18,424NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (120,272
    )
    
    
    CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    182,509
    
    
    
    CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    62,237
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements. 4




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION On February 13, 2004, IGEN International, Inc. (IGEN or Parent) and Roche
Holding Ltd (Roche) consummated a transaction pursuant to which Roche acquired
IGEN and IGEN simultaneously distributed the common stock of BioVeris
Corporation (the Company), to its stockholders (the merger). The transaction
occurred in the following steps:  
    
    IGEN restructured its operations so that the Company, a newly formed,
wholly-owned subsidiary of IGEN at the time, assumed IGENs biodefense,
life science and industrial product lines as well as IGENs
opportunities in the clinical diagnostics and healthcare fields and the
ownership of IGENs intellectual property, IGENs equity interest in
Meso Scale Diagnostics, LLC. (MSD), cash and certain other rights and
licenses currently held by IGEN; and
    
    A wholly-owned subsidiary of Roche merged with and into IGEN, as a
result of which IGEN became a wholly-owned subsidiary of Roche and the
Company became an independent, publicly-traded company. Simultaneously
with the completion of the merger, certain ongoing commercial agreements
between the Company and certain affiliates of Roche became effective. The Company was organized as IGEN Integrated Healthcare, LLC, a Delaware
limited liability company, on June 6, 2003, and converted into BioVeris
Corporation, a newly formed Delaware corporation on September 22, 2003. Prior to the completion of the merger and related transactions, the assets and
businesses of the Company had historically been owned and operated by IGEN and
IGEN held all cash in a centralized treasury, providing all of the necessary
funding for the operations of the Company. The accompanying financial
statements have been prepared and are presented as if the Company had been
operating as a separate entity using IGENs historical cost basis in the assets
and liabilities and including the historical operations of the businesses and
assets transferred to the Company from IGEN as part of the restructuring. During the quarter ended June 30, 2003, the Company was
fully integrated with IGEN and these financial statements reflect the
application of certain estimates and allocations. The Companys consolidated
statement of operations for the quarter ended June 30, 2003 include all
revenues and costs that are directly attributable to the Companys businesses.
They have been prepared and are presented as if the Company had been operating
as a separate entity using IGENs historical costs basis in the assets and
liabilities and including the historical operations of the businesses and
assets transferred to the Company from IGEN as part of the restructuring. In
addition, certain expenses of IGEN have been allocated to the Company using
various assumptions. These expenses include an allocated share of general and
administrative salaries as well as certain other shared costs (primarily
facility, human resources, legal, accounting and other administrative costs).
General and administrative salaries have been allocated primarily based upon an
estimate of actual time spent on the businesses of the Company. Facilities
costs and centralized administrative services have been allocated based upon a
percentage of total product sales as well as a percentage of total headcount.
Allocated expenses of $4.8 million are included in selling, general and administrative
expenses in the accompanying consolidated statements of operations for the
three months ended June 30, 2003. These allocated expenses were derived from
total IGEN selling, general and administrative expenses of $6.1 million. 5




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Management believes these allocation methodologies and estimations are
reasonable based upon the nature of the related expenses and managements
knowledge of the level of effort and space required to support the businesses
of the Company. The financial information included herein for the three months
ended June 30, 2003 may not be indicative of what results of operations and cash
flows of the Company would have been had the Company
been operating as a stand-alone entity. Results of operations and
cash flows for the quarter ended June 30, 2004 are for the Company when it
operated as an independent entity. The accompanying condensed consolidated financial statements of the Company
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
certain information and footnote disclosures normally included in financial
statements have been condensed or omitted. In the opinion of the Companys
management, the financial statements reflect all adjustments necessary to
present fairly the results of operations and cash flows for the three month
periods ended June 30, 2004 and 2003, and the Companys financial position at
June 30, 2004. The results of operations for the interim periods are not necessarily
indicative of the results for any future interim period or for the entire year.
These financial statements should be read together with the audited financial
statements and notes for the year ended March 31, 2004 contained in the
Companys Annual Report on Form 10-K for the year ended March 31, 2004 filed
with the Securities and Exchange Commission (SEC). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation Accounting The consolidated financial statements include the
accounts of the Company and its subsidiaries. In addition, the Company adopted
FIN 46 as of March 31, 2004 and has determined that MSD (a joint venture formed
in 1995 by IGEN and Meso Scale Technologies, LLC., or MST, which is a company
established and wholly-owned by Mr. Jacob Wohlstadter, a son of the Companys
chief executive officer), qualifies as a variable interest entity and the
Company is the primary beneficiary. Accordingly, beginning March 31, 2004, the
Company has consolidated the financial results of MSD. All significant intercompany transactions and balances have been eliminated. Under the transition guidance of FIN 46, because MSD was created before
February 1, 2003, the Company has measured the assets, liabilities and
noncontrolling interests of MSD as of March 31, 2004 for purposes of the
initial consolidation. The amounts of the assets, liabilities and
noncontrolling interests are reflective of their respective carrying amounts
had FIN 46 been effective when the Company first met the conditions to be the
primary beneficiary of MSD upon MSDs inception in 1995. The Company has
historically recorded approximately 100% of MSDs losses. 6




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The balance sheet reclassified amounts formerly recorded on a net basis as
investment in joint venture to be reflected on a gross basis primarily as
cash, accounts receivable, inventory, fixed assets, accounts payable and
accrued expenses. The statement of operations reclassified amounts formerly
recorded on a net basis as equity in loss of joint venture to be reflected on
a gross basis primarily as revenue, product costs, research and development
expenses and selling, general and administrative expenses. Estimates The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash in banks,
money market funds, securities of the U.S. Treasury, and certificates of
deposit with original maturities of three months or less. 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 approved by the Companys Board of
Directors. This policy is designed to provide 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 the Companys investment by terms and concentrations by type
and issuer. The Companys consolidated balance sheet at June 30, 2004 had cash, cash
equivalents and short-term investments of $152.0 million. Of this amount,
$32.1 million represented the cash, cash equivalents and short-term investments
of MSD. The Company has no rights or access to these funds or any other
capital resources of MSD. The amount of cash, cash equivalents and short-term
investments to which the Company and its wholly-owned subsidiaries have
unrestricted use is $119.9 million at June 30, 2004. Short-Term Investments Short-term investments consist primarily of corporate,
federal and municipal debt-securities that are classified as available for
sale. These available for sale securities, which are all due within one
year, are accounted for at their fair market value and unrealized gains and
losses on these securities, if any, are included in accumulated other
comprehensive gain or loss in stockholders equity. As of June 30, 2004, the
Company had unrealized gains on available for sale securities of
approximately $31,000. The Company uses the specific identification method in
computing realized gains and losses on the sale of investments, which are
included in results of operation as generated. For the quarter ended June 30, 2004,
the Company did not have any realized gains or losses. The following is a summary of the Companys available-for-sale marketable securities as of June 30, 2004: Gross Unrealized
    
    Gross Unrealized
    
    Estimated Fair(In thousands)
    
    Amortized Cost
    
    Gains
    
    Losses
    
    ValueU.S. government agencies
    
    $
    20,203
    
    
    $
    26
    
    
    $
    9
    
    
    $
    20,220Municipal Bonds
    
    
    44,850
    
    
    
    
    
    
    
    
    
    
    
    44,850U.S. corporate debt
    
    
    24,655
    
    
    
    23
    
    
    
    9
    
    
    
    24,669$
    89,708
    
    
    $
    49
    
    
    $
    18
    
    
    $
    89,739
 Concentration of Credit
Risk The Company has not experienced any losses on
its investments due to credit risk. During the quarters ended June 30, 2004 and
2003, agencies of the U.S. government accounted for 25% and 21% of total
revenue, respectively, and 23% and 26% of total accounts receivable as of June
30 and March 31, 2004, respectively. Additionally, one customer accounted for 11% of revenues
for the quarter ended June 30, 2004 and 21% of accounts receivable as of June 30, 2004. Allowance for Doubtful
Accounts The Company maintains reserves on customer
accounts where estimated losses may result from the inability of its customers
to make required payments. These reserves are determined based on a number of
factors, including the current financial condition of specific customers, the
age of accounts receivable balances and historical loss rates. Inventory Inventory is recorded at the lower of cost or market using the
first-in, first-out method and consists of the following: 7




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June 30,
    
    March 31,2004
    
    2004(in thousands)BioVeris and Wholly-Owned
Subsidiaries:Finished Goods
    
    $
    1,972
    
    
    $
    1,740Work in process
    
    
    624
    
    
    
    619Raw materials
    
    
    2,265
    
    
    
    2,654Total
    
    
    4,861
    
    
    
    5,013MSD:Finished Goods
    
    
    1,595
    
    
    
    757Work in process
    
    
    608
    
    
    
    366Raw materials
    
    
    1,255
    
    
    
    2,071Total
    
    
    3,458
    
    
    
    3,194$
    8,319
    
    
    $
    8,207
 Equipment and Leasehold
Improvements Equipment and leasehold improvements are
carried at cost, less accumulated depreciation and amortization. Depreciation
on equipment, which includes lab instruments and furniture, is computed over
the estimated useful lives of the assets, generally three to five years, using
straight-line. Leasehold improvements are amortized on a straight-line basis
over the life of the lease. Equipment and leasehold improvements consist of
the following: June 30,
    
    March 31,2004
    
    2004(in thousands)BioVeris and Wholly-Owned
Subsidiaries:Lab instruments and equipment
    
    $
    5,960
    
    
    $
    6,413Office furniture and equipment
    
    
    5,561
    
    
    
    5,511Leasehold improvements
    
    
    4,010
    
    
    
    3,98015,531
    
    
    
    15,904Accumulated depreciation and amortization
    
    
    (10,779
    )
    
    
    (10,432
    )Total
    
    
    4,752
    
    
    
    5,472MSD:Lab instruments and equipment
    
    
    8,204
    
    
    
    7,555Office furniture and equipment
    
    
    3,185
    
    
    
    3,166Leasehold improvements
    
    
    1,294
    
    
    
    1,32712,683
    
    
    
    12,048Accumulated depreciation and amortization
    
    
    (5,575
    )
    
    
    (4,686
    )Total
    
    
    7,108
    
    
    
    7,362Consolidating eliminations
    
    
    (202
    )
    
    
    (269
    )Total
    
    $
    11,658
    
    
    $
    12,565
 Technology Licenses Simultaneous with the execution of the merger, the
Company entered into worldwide, non-exclusive PCR license agreements with
certain affiliates of Roche. One agreement grants the Company rights to make,
import, use and sell certain PCR products within specified fields, while the
other agreement grants the Company rights to perform certain PCR services
within specified fields. 8




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The Company paid Roche a license fee of $50 million in fiscal
2004 and will also pay royalties
on sales of the licensed products in the licensed fields and on any instrument,
accessory, device or system sold for use with the licensed products in the
licensed fields at royalty rates ranging from 3% to 20% of net sales, depending
on the field, the year, the country of sale and the patents covering such
products. It will also pay royalties of $16 or $25 for every PCR plasma test
it performs or has a laboratory perform and royalties ranging from 5% to 20% of
net service revenue that the Company receives for diagnostic testing procedures
that it performs using PCR technology. The Company has performed a valuation
of the PCR technology licenses and has recorded their value of $19.5 million
and reflected a $30.5 million adjustment reducing the amount recorded for
consideration paid by Roche with respect to the merger and related
transactions. These licenses are being amortized over an estimated useful life
of ten years which is based upon a consideration of the range of patent lives
and the weighted average remaining life of the most important underlying
patents, as well as a consideration of technological obsolescence and product
life cycles. Amortization expense was $488,000 for the quarter ended June 30,
2004 and accumulated amortization was $731,000 at June 30, 2004. Amortization
expense is expected to approximate $2.0 million for each year through March 31,
2009. Evaluation of Long-lived
Assets The Company evaluates the potential
impairment of long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. In
evaluating the recoverability of an asset, managements policy is to compare
the carrying amount of an asset with the projected undiscounted future cash
flow. Management believes no impairment of these assets exists as of June 30,
2004. Warranty Reserve The Company warrants its products against defects in
material and workmanship for one year after sale and records estimated future
warranty costs at the time revenue is recognized. A reserve for future warranty
claims is recorded based upon managements review of historical claims,
supplemented by expectations of future costs. At June 30, 2004 and March 31,
2004, our warranty reserve was $450,000. The Company also offers extended
warranty arrangements to customers, for which related costs are recorded as
incurred. Other Current Assets Other current assets include certain assets of MSD
aggregating $2.7 million that represent automobiles and deposits on real
property. On June 17, 2004, MSD received $2.9 million from Mr. Jacob
Wohlstadter, as
consideration for the proposed sale by MSD of real property and automobiles,
pending approval by the MSD Board of Managers, which is recorded as an other liability. Jacob Wohlstadter, also assumed
MSDs purchase obligations with respect to a prospective real property purchase
in the approximate amount of $4.1 million. In August 2004, MSD transferred the
real property and automobiles and MSDs limited liability company interests to
Jacob Wohlstadter. Fair Value of Financial
Instruments The carrying amounts of the Companys
financial instruments, which include cash equivalents, accounts receivable,
accounts payable and accrued expenses, approximate their fair value due to
their short maturities. Comprehensive Income (Loss) Comprehensive income (loss) is comprised of net income (loss) and other items
of comprehensive income (loss). Other comprehensive income for the quarter ended June 30,
2004 includes unrealized gains on available for sale securities that are
excluded from net loss. There were no significant elements of comprehensive income (loss) for the quarter ended June 30, 2003. Revenue Recognition The Company derives revenue principally from three
sources: product sales, royalty income and contract fees. 9




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##### 



Product sales revenue is recognized when persuasive evidence of an arrangement
exists, the price to the buyer is fixed and determinable, collectibility is
reasonably assured and the product is shipped to the customer thereby
transferring title and risk of loss. For instrument sales, the instrument and
the related installation are considered to be separate elements under EITF
00-21 Accounting for revenue arrangements with multiple deliverables .
Revenue is recognized for the instrument upon shipment and is recognized for
the installation when complete based upon the residual value method. For
instrument and reagent sales, there is no option of return and refund, only the
option to repair or replace the product. Other than the installation required
for the instruments, there are no contingencies, allowances or other post-sale
obligations. For instrument leases, the instrument rental and related minimum
reagent purchases are considered to be separate elements under EITF 00-21 and,
accordingly, the sales price is allocated to the two elements based upon their
relative fair values. Instrument rental revenue is recognized ratably over the
life of the lease agreements and the related reagent revenue is recognized upon
shipment. Revenue associated with extended warranty arrangements is recognized
over the term of the extended warranty contract. Royalty income is recorded when earned, based on information provided by
licensees.
Revenue from services performed under contracts is recognized when obligations
under the contract have been satisfied. The satisfaction of obligations may
occur over the term of the underlying customer contract, if the contract is
based on the achievement of certain milestones, or may occur at the end of
the underlying customer contract, if based only upon delivery of the final work
product. Research and Development Research and development costs are expensed as
incurred. Foreign Currency Gains and losses from foreign currency transactions such as
those resulting from the settlement of foreign receivables or payables, are
included in the results of operations as incurred. These amounts were not
material during the quarters ended June 30, 2004 and 2003. 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. The Company has not recorded an income tax benefit associated with
the losses for the quarters ended June 30, 2004 and 2003 and has recorded a
full valuation allowance on its net deferred tax assets as the Company has
determined that it is more likely than not that the deferred
tax assets will not be realized. Stock-based Compensation The Company has elected to follow the recognition
and measurement principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for employee stock options and, accordingly, will not recognize
compensation cost for options granted under its 2003 Stock Incentive Plan whose
exercise price equaled the market value of a share of the underlying common
stock on the date of grant. The following table illustrates the effect on net loss and net loss per share
as if the Company had applied the fair value recognition provisions of SFAS No.
123, Accounting for Stock-Based Compensation as amended by SFAS 148,
Accounting for Stock-Based Compensation  Transition and
Disclosure  An
Amendment of SFAS 123 to stock-based employee compensation (in thousands,
except per share amounts): 10




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##### 



Quarter EndedJune 30,2004
    
    2003Net loss, as reported
    
    $
    (12,851
    )
    
    $
    (12,518
    )Deduct: Total stock-based employee compensation expense
determined under fair value method
    
    
    (145
    )
    
    
    (455
    )Pro-forma net loss
    
    $
    (12,996
    )
    
    $
    (12,973
    )Loss per share:Basic and diluted loss per common share  as
reported
    
    $
    (0.48
    )
    
    $
    (0.47
    )Basic and diluted loss per common share  pro forma
    
    $
    (0.49
    )
    
    $
    (0.49
    )
 All per share information for the Company is based on the number of shares of
common stock of the Company outstanding upon completion of the merger and
related transactions. The pro forma net loss and pro forma net
loss per share disclosed above is not representative of the effects on net loss and
net loss per share on a pro forma basis in future periods, as future periods
may include grants by the Company of options for the Companys common stock. In
addition, information for the quarter ended June 30, 2003 represents options
for IGEN common stock which were canceled upon completion of the merger. The fair value of BioVeris
options for the quarter ended June 30, 2004 was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions: Expected dividend yield
    
    
    0.00
    %Expected stock price volatility
    
    
    64.06
    %Risk-free interest rate
    
    
    3.89
    %Expected option term (in years)
    
    
    3
 Based on this calculation,
the weighted average fair value of BioVeris
options granted
during the quarter ended June 30, 2004 was $7.19. The Company did not have a
stock option plan prior to September 2003. The fair value of IGEN
options for the quarter ended June 30, 2003 was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions: Expected dividend yield
    
    
    0.00
    %Expected stock price volatility
    
    
    65.00
    %Risk-free interest rate
    
    
    2.30
    %Expected option term (in years)
    
    
    5
 Based on this calculation, the weighted average fair value of IGEN
options granted
during the quarter ended June 30, 2003 was
$21.09. Loss Per Share- The Company uses SFAS No. 128 Earnings per Share for the
calculation of basic and diluted earnings (loss) per share. For the quarters
ended June 30, 2004 and 2003, the Company incurred a net loss; therefore, net
loss per common share does not reflect the potential dilution that could occur
to common shares related to outstanding stock options. For the quarter ended
June 30, 2003, the unaudited pro-forma net loss per share is based on the
number of common shares outstanding upon completion of the merger and related
transactions. As the Company incurred a loss for the quarter ended June 30, 2004,
it did not assume exercise of 20,300 options because to do so would
have been anti-dilutive. New Accounting Standards
For a discussion of FASB Interpretation No. 46, see
Note 2-Summary of Significant Accounting Policies-Consolidation Accounting. 3. MESO SCALE DIAGNOSTICS JOINT VENTURE 11




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##### 



MSD is a joint venture formed by MST and IGEN in 1995. As part of the merger
and related restructuring, IGEN transferred its equity interest in MSD to the
Company and assigned the MSD agreements to the Company. MSD was formed for the
development, manufacture, marketing and sale of products utilizing a
combination of MSTs multi-array technology together with IGENs technology. MST is a company established and wholly-owned by Mr. Jacob Wohlstadter. In
August 2001, there were amendments to the MSD joint venture agreement, the MSD
limited liability company agreement and certain license and other agreements
with MSD and MST to continue the MSD joint venture and various related
agreements (the MSD agreements). An independent committee of IGENs board of
directors, with the advice of independent advisors and counsel, negotiated and
approved the MSD agreements. As part of the merger agreement and related
transaction agreements, the Company, IGEN and MSD agreed that the MSD joint
venture agreement would expire upon completion of the merger and related
transactions. MSD manufactures, markets and sells instrument systems, including the Sector
HTS and the Sector PR, which combine MSTs multi-array technology and the
Companys ECL technology. The Sector HTS is an ultra high throughput drug
discovery system engineered for applications such as high throughput screening
and large-scale proteomics. The Sector PR is a smaller system designed for
benchtop applications such as assay development, research in therapeutic areas,
cellular biology and medium throughput screening. MSD also manufactures and
markets a line of its own reagents, assays and plates that are used on these
systems. MSD commenced product sales in October 2002. Under the MSD agreements, IGENs funding commitment was based on an annual
budget of MSD approved by the Joint Venture Oversight Committee (JVOC), a
committee of the IGEN board of directors consisting of independent directors.
The JVOC approved funding for MSD for the period from January 1, 2003 to
November 30, 2003 in an amount of $20.6 million, subject to a permitted
variance of 15%, of which approximately $19.1 million was spent by MSD and
funded by the Company. The funding commitment was satisfied in part through
in-kind contributions of scientific and administrative personnel and shared
facilities. MSD asserted that the Company was obligated to pay MSD up to an
additional $4.6 million, which is the difference between the amount spent by
MSD and the budgeted amount plus the permitted variance.
As part of an August 2004 settlement agreement between the parties,
the Company agreed to pay MSD the net amount of $3.0 million which represents full and complete satisfaction of amounts due to MSD pursuant to the MSD agreements, including this dispute regarding unsatisfied committed funding obligations, certain intellectual property matters, and the previously outstanding dispute regarding the payment of certain legal fees and expenses incurred by MSD in connection
with its participation and involvement in the merger and related transactions.
The Companys $3.0 million payment will be net of a $2.0 million non-refundable
pre-payment by MSD to the Company for future amounts payable by MSD
to the Company pursuant to the buyout of the Company's interest in
MSD. The Company made no
contributions to MSD in the quarter ended June 30, 2004. For the quarter ended
June 30, 2003, the total contributions made to MSD was $10.9 million. After the restructuring, and subject to MSDs and MSTs right to buy the
Companys interests in MSD, the Company replaced IGEN as a member of MSD and
holds a 31% voting equity interest in MSD and is entitled to a preferred return
on approximately $114 million of the funds previously invested by IGEN in MSD
through the date of the merger and on the additional funds invested by the
Company thereafter. This preferred return would be payable out of a portion of
both future profits and certain third-party financings of MSD, generally before
any payments are made to other equity holders. The Company and MST are the
sole members of MSD, and each held
one seat on MSDs two-member board of managers. Dr. Richard Massey, the Companys
president and chief operating officer, was the Companys representative on the
MSD board of managers and also served as the treasurer and secretary of MSD.
The other member of the MSD board of managers is Mr. Jacob Wohlstadter, who is
the sole owner of MST and serves as president and chief executive officer of
MSD. As part of an August 2004 settlement agreement between the parties, the
Companys representative on the MSD board of managers has resigned and the
Company has executed an amendment to the MSD agreements for the purpose of
changing the composition of the MSD board of managers to one person designated
by MST. 12




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##### 



Under the terms of one of the MSD agreements, IGEN granted to MSD a worldwide,
perpetual, exclusive license (with certain exceptions) to IGENs technology,
including ECL technology, for use in MSDs research program, defined in the MSD
agreements. If the Company ceases to be a member of MSD, it will become
entitled to receive royalty payments from MSD on all products developed and
sold by MSD using the Companys patents. MST holds a worldwide, perpetual, non-exclusive sublicense from MSD for certain
non-diagnostic applications of the Companys technology. The Company is
entitled to receive royalty payments from MST on any products developed and
sold by MST using the patents the Company received as part of the
restructuring. Upon completion of the merger and related transactions, the MSD joint venture
agreement expired. As a result, MSD and MST have the option to purchase the
Companys interest in MSD and as part of an August 2004 settlement agreement
between the parties, they agreed to do so. As of June 30, 2004 and March 31,
2004, the Company has recorded a $1.2 million liability representing the value
of MSDs option to purchase the Companys interests in MSD. The purchase price will be equal to fair market value (determined in
accordance with the MSD agreements), which includes third-party appraisal if
the parties are unable to agree on fair market value) minus a 7.5% discount
factor. The parties have commenced the valuation process and the initial
appraisers reports are due on August 30, 2004. If those reports do not
reflect fair market value calculations within 10% of each other, then a third
appraiser will be appointed to provide a report on or about October 15, 2004.
The average of the two closest appraisals will be the purchase price. MSD or
MST will be required to pay the Company the outstanding purchase price plus
simple (cumulated, not compounded) interest at the fixed annual rate of 0.5%
over the prime rate in effect on the purchase date. The purchase price is
payable over time in installments equal to the sum of 5% of MSD net sales, as
determined in accordance with the MSD agreements, and 20% of the net proceeds
realized by MSD from the sale of its debt or equity securities in any
third-party financing after the date of the sale of the Companys interest in
MSD. There is no assurance the purchase price will be paid in full. The Company
expects that MSD will require substantial additional funding for its ongoing operations. If MSD is not able to
obtain this funding, it may not be able to pay the purchase price in full and we could
lose our ability to realize the value of most or all of our $41.2 million investment in MSD. As part of an August 2004 settlement agreement between the parties, the Company
received a $2.0 million non-refundable pre-payment from MSD for future amounts
payable by MSD to the Company pursuant to the buy-out of its interest in MSD.
The amount of the pre-payment credit outstanding from time to time shall bear
simple interest (cumulated, not compounded) at the fixed annual rate of 0.5%
over the prime rate in effect on the date that MSD or MST, as the case may be,
purchases the Companys interests in MSD. The amount of the outstanding credit
balance of the prepayment credit, including accrued interest, shall be reduced
for amounts due and payable to the Company pursuant to the buy-out of its
interest in MSD and no further cash payments will be payable by MSD to the
Company until the $2.0 million prepayment credit, including accrued interest,
is utilized. In the event future net sales or third-party financings in excess
of the prepayment credit and accrued interest do not materialize, the Company
will not receive any additional payments from MSD or MST, as the case may be,
for the purchase of the Companys interest in MSD. As security for the payment
obligation, the Company will hold a security interest in the interests in MSD
that are being purchased. MST or MSD, as the case may be, may repay all or any
part of the outstanding purchase price plus accrued interest at any time and
from time to time without penalty. The holder of the Companys Series B
preferred stock will be entitled to a pro-rata share, representing the
proportionate amount of the Companys class C interest in MSD that was funded
by the sale of the Series B stock, of the portion of the $2.0 million that is
allocable to our Class C interests. 13




---



##### 



Upon expiration of the MSD joint venture agreement, many of the licenses and
other arrangements with MSD and MST assigned to the Company continue
indefinitely in accordance with their terms and the Company may not use the
improvements granted to it by MSD if doing so would compete with MSD in the
diagnostic field or use research technologies defined in the MSD agreements. Following the expiration of the MSD joint venture agreement, MSD is entitled to
continue to lease certain facilities and related equipment from the Company
(including laboratory facilities located in the Companys corporate
headquarters) pursuant to the terms of the existing sublease agreements with
MSD. The term of each sublease will expire one day prior to the expiration of
the prime lease for that facility. Each sublease agreement provides that,
subject to certain exceptions, the Company must exercise all available
extension rights under the prime lease. Each of MSD and the Company may
unilaterally terminate any or all of the subleases by providing at least 18
months prior written notice of termination and on February 29, 2004, the
Company elected to terminate all of the subleases effective the earlier of
September 1, 2005, or the date on which the applicable prime lease terminates.
As part of an August 2004 settlement agreement between the parties, MSDs
rental and expense payment obligations under the sublease agreements, for the
period from March 1, 2004 through August 31, 2005, for approximately $2.2
million will be added into the price payable to the Company for the purchase of
its interest in MSD, in lieu of current payments. MSD may elect,
notwithstanding any termination of the sublease, to remain in the subleased
facility after the 18 month period expires for any period of time selected by
MSD, but not longer than one day prior to the expiration of the prime lease
(including any extensions of the prime lease). In that event, MSD will be
required to pay rent in cash for any additional rental period MSD may elect. MSD has an employment agreement with Mr. Jacob Wohlstadter, its president and
chief executive officer, the current term of which runs through November 30,
2005. The term of the employment agreement will automatically renew for a
12-month period on November 30 of each year unless either MSD or Mr. Jacob
Wohlstadter gives notice of termination no later than 180 days prior to that
renewal date. That employment agreement provides for a salary at the annual
rate of $250,000 through November 30, 2004, and 2005. Thereafter, the salary is
to be increased as agreed to by MSD and Mr. Jacob Wohlstadter. In addition,
Mr. Jacob Wohlstadter is also eligible to receive an annual cash bonus in an
amount not to exceed 20% of his annual salary upon the achievement of
agreed-upon performance factors. Mr. Jacob Wohlstadter is also entitled to
receive pension, welfare and fringe benefits comparable to those received by
senior executives of the Company and other insurance benefits. If MSD
terminates the employment agreement without cause, or Mr. Jacob Wohlstadter
terminates the employment agreement for good reason (which includes a change
in control of the Company, as defined), Mr. Jacob Wohlstadter will be entitled
to receive, in addition to salary and pro rata bonus and adjustments earned
through the 60th day following the notice of termination, an amount equal to
from 3 to 12 times (depending on the reason for the termination) the monthly
pro rata salary, bonus and adjustments in effect at the time of the
termination. Under the employment agreement Mr. Jacob Wohlstadter is also
entitled to receive a gross-up for any parachute excise tax that may be
imposed on payments made or benefits provided pursuant to the agreement. The
Company is obligated to maintain in effect directors and officers liability
insurance coverage for Mr. Jacob Wohlstadter and to pay Mr. Jacob Wohlstadter
the applicable salary, pro rata bonus and adjustments in effect at the time of
termination as described above and a gross-up for any parachute excise tax
that may be imposed. MSD and Mr. Jacob Wohlstadter have each agreed that the merger and related
transactions did not constitute a change in control for purposes of the MSD
agreements and the employment agreement. The Company will also indemnify Mr.
Jacob Wohlstadter against certain liabilities, including certain liability from
the MSD joint venture relating to the period of IGENs or the Companys
involvement with MSD. 14




---



##### 



In addition, the Company will be obligated to the extent provided in the MSD
agreements to indemnify each board member or officer of MSD with respect to any
action taken by such person prior to the termination of the MSD joint venture
agreement by reason of the fact that such person is or was a board member or an
officer of MSD. In connection with the audit of MSD, the Company will
indemnify MSD, MST and Jacob Wohlstadter and their respective directors,
officers, employees and agents for any losses, costs, fees and expenses arising
out of or related in any way to past, current or future audits of MSD, the
preparation of MSD financial statements requested by the Company, and with
respect to regulatory or legal proceedings and investigations resulting from or
related to the fact that the Company is a public company. With respect to such
indemnification obligations, there are no pending or known matters covered by
these indemnification provisions that would have a material effect on the
Companys financial position or results of operations. Since inception of the MSD joint venture through March 31, 2004, the equity
method has been utilized to account for this investment. Prior to July 1,
2001, given MSDs status as a development stage enterprise without having
established technological feasibility of its intended product offering, the
Company considered its investments in MSD to be other than temporarily
impaired. As such, any residual investment book value, after recognizing the
Companys share of MSD losses in accordance with the equity method, was written
off upon contribution. All expenses related to the MSD investment prior to
July 1, 2001 were recorded as research and development expenses based upon the
significance and character of the MSD losses as substantially all contributions
supported research and development initiatives. Beginning on July 1, 2001, taking into account the progress made by MSD in the
development of its products, the Company determined that no additional
impairments were required to its prospective contributions and thus ceased
writing-off the amount of its contributions to MSD that were in excess of MSDs
losses. At that time, MSD was transitioning from a development stage entity to
a commercial enterprise and milestones establishing the continued viability of
MSD were first achieved in the quarter ended September 30, 2001. For example,
prototypes had been assembled demonstrating product feasibility, and MSD was
anticipating initial product launch in approximately one year. As a result of
this transition, MSDs expenses were no longer primarily research and
development. Accordingly, since July 1, 2001, the Company has recorded only
its proportionate share of MSD losses, representing approximately 100% of MSDs
losses, for each respective period as equity in loss of joint venture
consistent with accounting for equity method investments. MSD-related losses included in equity in loss of joint venture were $5.2
million for the quarter ended June 30, 2003. Beginning March 31, 2004, the
Company has consolidated the financial results of MSD. During the
quarters
ended June 30, 2004 and June 30, 2003, operating costs allocated to MSD by the Company
in connection with shared personnel and facilities totaled $526,000 and $2.0
million, respectively. Since July 1, 2001 and through March 31, 2004, these
allocated operating costs reduced certain operating costs and expenses and
increased Equity in Loss of Joint Venture in the accompanying consolidated
statements of operations. At June 30, 2004 and March 31, 2004, the Companys
investment in joint venture has been eliminated as part of the consolidation of
MSDs balance sheet. See Note 2 for a discussion of consolidation accounting
for MSD. 4. LITIGATION In June 2004, the Audit Committee of the Companys Board of Directors commenced an
investigation of MSD that was prompted by the discovery of a series of
transactions undertaken by MSD involving the actual or proposed purchase by MSD
of residential real property and luxury automobiles having an aggregate cost of
approximately $7 million. The transactions were entered into by MSD upon Jacob
Wohlstadters sole approval and without the Companys knowledge. 15




---



##### 



On June 15, 2004, the Company filed an action in the Court of Chancery of the
State of Delaware, which we refer to in this Form 10-K as the court, against
Jacob Wohlstadter, MSD and MST, seeking Court confirmation that we remained
entitled to designate one of the two members of the MSD Board of Managers, and
asking the Court to enter an order, pending the outcome of the litigation,
prohibiting MSD from taking any actions outside the ordinary course of MSDs
business without providing prior notice to us. On June 17, 2004, the Court
ordered that, pending the courts final determination of the lawsuit, the
Companys representative on the MSD Board of Managers shall remain on the MSD
Board of Managers and that MSD would not engage in any transaction outside the
ordinary course of business which has a value in excess of $10,000 without the
approval of both members of the MSD Board of Managers. Also on June 15, 2004,
the Company submitted a formal demand to MSD requesting the right to examine
certain books and records of MSD to aid the Audit Committee in its
investigation and to permit us to value the Companys interest in MSD.
Beginning late June, MSD permitted the Companys to examine the requested books
and records. On June 17, 2004, MSD received $2.9 million from Jacob Wohstadter as
consideration for the proposed sale by MSD to Jacob Wohlstadter of real
property and automobiles, pending approval by the Board of Managers. Jacob
Wohlstadter also assumed MSDs purchase obligations with respect to a
prospective real property purchase in the approximate amount of $4.1 million. Also on June 17, 2004, the Company was informed by the staff of the Securities
and Exchange Commission that it had commenced an informal inquiry as to certain
issues relating to MSD. On July 6, 2004, the Company entered into an agreement with MSD, MST and Jacob
Wohlstadter pursuant to which it was agreed that the first lawsuit would be
stayed, that the parties would not file new litigation against each other, and
that the valuation process in connection with MSTs and MSDs right to purchase
our interest in MSD would be stayed. This stay agreement was intended to
permit the parties to engage in substantive negotiations to resolve the
disputed matters and in order to permit us to finalize our Form 10-K. This
stay agreement terminated automatically on July 13, 2004 because MSDs
representation letters to the auditors of MSD were not executed. Because the Company is required to consolidate the financial information of MSD
pursuant to FASB interpretation No. 46, which was adopted as of March 31, 2004,
the Company requires the audited financial statements of MSD to complete its
Form 10-K. The Company was not able to file its Form 10-K on timely basis
because the MSD financial statements were not available and because the Company
was unable to conclude on the appropriate accounting for MSD. On July 14, 2004, the Company filed a second action with the Court against MSD,
MST and Jacob Wohlstadter. The action alleged, among other things, breach of
fiduciary duty and contract, and sought relief including the dissolution of MSD
and the appointment of a liquidating trustee. Also in July 2004, the Audit Committee retained an independent special counsel
to investigate whether the Companys management had any prior knowledge of the
real property and automobile transactions of MSD described above. This special
counsel has completed its investigation and issued a report to the Audit
Committee that there is no evidence that any member of our management knew of
the MSD transactions at issue before they occurred. On July 16, 2004, the Company received a letter from the staff of the Nasdaq
Listing Qualifications Department notifying the Company that its common stock
was subject to delisting from The Nasdaq Stock Market, Inc. because the Company
had not filed its Form 10-K for the period ending March 31, 2004. 16




---



##### 



In accordance with applicable NASD Marketplace Rules, the Company requested a
hearing to review the Nasdaq staff determination before a Nasdaq Listing
Qualifications Panel, which is scheduled for August 19, 2004. As a result of
such request, the delisting of the Companys stock was automatically stayed. On July 19, 2004, all members of the Board of Directors met to review the MSD
litigation and related issues. This review included a consideration of the
status of the litigation, as well as the effects of the disputes on us
generally, including managements ability to conduct its business and to pursue
its strategy and the notification from Nasdaq concerning possible delisting of
its common stock as a result of its failure to file a Form 10-K on a timely
basis. All members of the Board of Directors participated in this review,
although some discussions were conducted by the independent directors without
the management directors, Samuel J. Wohlstadter and Richard Massey or other
members of management. As a result of this review, the Board of Directors,
with all members participating, unanimously approved a resolution that
delegated to the Joint Venture Oversight Committee, or JVOC, the power and
authority to (i) initiate, review, evaluate and determine the course of action
the Company should pursue with respect to the pending litigation and any
additional litigation against MSD, (ii) communicate and negotiate the terms of
any proposed settlement of such litigations and any other matters with respect
to MSD and (iii) otherwise deal with MSD in a manner the JVOC deemed to be in
the best interests of the Company and its stockholders. The resolution also
appointed Messrs. Quinn and Crowley as additional members of the JVOC,
resulting in the JVOC consisting of all five independent directors, and
provided that action of the JVOC should be unanimous approval of its members.
The resolution also directed the JVOC to consult with management and members of
the Board of Directors who are not on the JVOC regarding the MSD maters. In addition, by
unanimous vote of the five independent directors without the participation of
Messrs. Wohlstadter and Massey, the Board of Directors approved a resolution
directing the JVOC to pursue negotiations to settle the litigation and other
outstanding disputes with MSD, MST and Jacob Wohlstadter and setting forth
general terms that would be acceptable for such a settlement. Between July 19, 2004 and August 3, 2004, there were meetings, telephone
conferences and other communications among representatives of the JVOC, MSD,
MST and Jacob Wohlstadter to discuss the terms of a settlement. On July 21,
2004, the Company entered into an agreement with MSD, MST and Jacob Wohlstadter
to stay the litigation during these negotiations. During this period the JVOC
also communicated from time to time with management (other than Samuel
Wohlstadter) concerning various aspects of the settlement. Members of
management (other than Samuel Wohlstadter) also communicated directly with MSD,
MST and Jacob Wohlstadter on particular aspects of the settlement. On August 3, 2004, the JVOC unanimously approved a draft settlement agreement.
Following this approval, a telephone meeting of the full Board of Directors was
held to review the status of the SEC investigation, the status of the Nasdaq
notification regarding possible delisting, and proposed settlement. During
this meeting, the management directors, who were previously provided with a
copy of the draft settlement agreement, were invited to ask questions or give
comments concerning the draft settlement agreement. The management directors
informed the independent directors that they had no questions or comments. On August 12, 2004 the parties entered into the settlement agreement. Under the
settlement, the parties agreed to the following:  
    
    All proceedings relating to the two lawsuits against MSD, MST and
Jacob Wohlstadter will be suspended and the parties will file with the
Court stipulations dismissing the lawsuits with prejudice. 17




---



##### 




    
    Except for claims to enforce the terms of the settlement and certain
of the parties indemnity and property rights, all claims we may have
against MSD, MST and Jacob Wohlstadter or any of their affiliates are
fully, finally and forever, dismissed and released with prejudice by the
Company, and all claims MSD, MST and Jacob Wohlstadter may have against
the Company or any of its affiliates are fully, finally and forever,
dismissed and released with prejudice by them.
    
    MSD or MST will purchase, and the Company will sell, its interests in
MSD pursuant to the buyout process set forth in the MSD joint venture
agreement, irrespective of the ultimate purchase price. The parties
agreed to certain terms and procedures to determine the purchase price
for the buyout, which will be paid over time from a percentage of net
sales of MSD or proceeds of certain financings of MSD. MSD is required
to provide written reports to the Company within 60 days after the end
of each fiscal quarter stating its aggregate net sales (as defined in
the MSD agreement) and the net proceeds, if any, realized by MSD during
such quarter from the sales of MSD debt or equity securities in any
third party financings (as defined in the MSD agreement). The Company
also has the right to conduct an audit of such net sales or net
proceeds, which will be our sole and exclusive remedy for resolving
disputes as to the appropriate amount of payments.
    
    Until the second anniversary of the purchase of the Companys
interests, unless certain advance notice and approval requirements are
met MSD will not purchase certain assets defined as real property that
is used or contemplated to be used primarily for residential purposes,
any automobile with a value, at the time of purchase, equal to or in
excess of $75,000, or any airplane. MSD may cure any alleged failure to
comply with this restriction if it exchanges, contributes, disposes of
or otherwise transfers the asset and receives consideration in return
equal to the full net purchase price of such asset, and in no event are
we permitted to seek injunctive or declaratory relief
    
    In consideration for the prior receipt by MSD of approximately $2.9
million from Jacob Wohlstadter, MSD will transfer certain real property
and automobiles and MSDs limited liability company interests in MSVE,
LLC and MS RE, LLC to Jacob Wohlstadter or an entity or entities wholly
owned by Jacob Wohlstadter. Jacob Wohlstadter also assumed MSDs
obligation to purchase another residential property from $4.1 million.
    
    The Companys representative on the MSD Board of Managers will resign
and the Company will execute an amendment to the MSD agreements to
change the composition of the MSD board of managers to one person
designated by MSD
    
    MSD provided the representation letters requested by its and the
Companys auditors in connection with MSDs financial statements for the
year ended December 31, 2003, concurrently with the execution of the
settlement, and subsequently provided to the Company a copy of its
audited financial statements for the year ended December 31, 2003. In
addition, until such time as the Company is no longer required to
consolidate or include the unaudited quarterly or audited annual
financial results of MSD in its filings with the Securities and Exchange
Commission, MSD will deliver to the Company, per the Companys request,
copies of its unaudited and audited financial statements on a timely
basis. 18




---



##### 




    
    The Company will pay the fees of MSDs independent auditor in
connection with the audit of MSD and will indemnify MSD, MST and Jacob
Wohlstadter and their respective directors, officers, employees and
agents for any losses, costs, fees and expenses arising out of or
related in any way to past, current or future audits of MSD, the
preparation of MSD financial statements requested by the Company, and
with respect to regulatory or legal proceedings and investigations
resulting from or related to the fact that the Company is a public
company. The Company is not required to indemnify MSD for acts either
resulting in a criminal conviction or finally adjudged by a court of
competent jurisdiction to constitute fraud or intentional
misrepresentation.
    
    The Company will pay MSD the net amount of $3.0 million in full and
complete satisfaction of all amounts Jacob Wohlstadter claimed the
Company owed MSD pursuant to the MSD agreements, including amounts owed
by the Company pursuant to the license agreement between us and MSD and
MST, the outstanding dispute regarding unsatisfied committed funding
obligations and the outstanding dispute regarding the payment of certain
legal fees and expenses incurred by MSD in connection with settlement of
litigation involving Roche and IGEN. The Companys $3.0 million payment
is net of a $2.0 million credit, which represents a non-refundable
prepayment by MSD to the Company for future amounts payable by MSD to
the Company pursuant to the buy-out of the Companys interest in MSD.
The amount of the pre-payment credit outstanding from time to time shall
bear simple interest (cumulated, not compounded) at the fixed annual
rate of 0.5% over the prime rate in effect on the date that MSD or MST,
as the case may be, purchases the Companys interests in MSD. The
amount that is deemed outstanding is the total amount of the prepayment
credit pursuant to the buyout, including accrued interest, reduced from
time to time by the amounts due and payable to the Company pursuant to
the buy-out of its interest in MSD. No further cash payments will be
payable by MSD to us pursuant to the buyout until the $2.0 million
prepayment credit, including accrued interest, is no longer deemed
outstanding. A total of $5.0 million is to be treated as a Class C
capital contribution by the Company to MSD. There is no assurance that the Company will be able
to realize the value of this additional contribution.
    
    MSDs rent for the lease of certain facilities and related equipment
from the Company (including laboratory facilities located in the
Companys corporate headquarters) pursuant to the terms of the existing
sublease agreements with MSD, for the period from March 1, 2004 through
August 31, 2005, will be added into the price payable to the Company for
the purchase of its interest in MSD, in lieu of current payments.
    
    In accordance with the terms of the original MSD agreements, subject
to certain expectations, the Company consented to the sublicensing by
MSD of the license granted pursuant to the IGEN/MSD license agreement to
any affiliate of MSD. Any such sublicense is required to, among other
things, make royalty payments to the Company in accordance with the
IGEN/MSD license agreement. The Company is involved, from time to time, in various routine legal
proceedings arising out of the normal and ordinary operation of its business,
which it does not anticipate will have a material adverse impact on its
business, financial condition, results of operations or cash flows. However,
the Company may in the future be involved in litigation relating to its
business, products or intellectual property, which could adversely affect its
prospects or impair its financial resources. 19




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##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Managements Discussion and Analysis of Financial Condition and Results of
Operations as of June 30, 2004 and for the three months ended June 30, 2004 and
2003 should be read in conjunction with the Managements Discussion and
Analysis of Financial Condition and Results of Operations included in our
Annual Report on Form 10-K for the year ended March 31, 2004 filed with the SEC. This quarterly report contains forward-looking statements within the meaning of
the safe harbor provision of the Private Securities Litigation Reform Act of
1995. All statements in this quarterly report that are not historical facts are
hereby identified as forward-looking statements including any statements
about revenue growth, market acceptance of new products, business operations,
trends and changes in financial or operating performance, technology or product
plans. The words may, should, will, expect, could, anticipate,
believe, estimate, plan, intend and similar expressions have been used
to identify certain of the forward-looking statements. These forward-looking
statements are based on managements current expectations, estimates and
projections and they are subject to a number of risks, uncertainties and
assumptions that could cause actual results to differ materially from those
described in the forward-looking statements. These statements are not
guarantees of future performance, involve certain risks, uncertainties, and
assumptions that are difficult to predict, and are based upon assumptions as to
future events that may not prove accurate. Therefore, actual outcomes and
results may differ materially from what is expressed herein. In any forward-looking statement in which we express an expectation or belief
as to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement or expectation or belief will result or be achieved or accomplished.
The following important factors are among those that may cause actual results
to differ materially from our forward-looking statements:  
    
    changes in our strategy and business plan, including our plans for
the clinical diagnostics, biodefense, life science and industrial
markets and other healthcare opportunities;
    
    our ability to develop and introduce new or enhanced products,
including incorporating unit dose cartridges;
    
    our ability to enter into new collaborations on favorable terms, if at all;
    
    our ability to expand the distribution and increase sales of existing products;
    
    the demand for rapid testing products in each of our markets;
    
    our ability to expand our manufacturing capabilities or find a
suitable manufacturer on acceptable terms or in a timely manner,
including the completion of pending negotiations for contract
manufacturing of one of our instruments;
    
    our ability to develop our selling, marketing and distribution
capabilities;
    
    our and our licensees ability to obtain FDA and other governmental
approvals for our and their clinical testing products; 20




---



##### 




    
    the ability of our licensees to effectively develop and market
products based on the technology we license to them;
    
    domestic and foreign governmental and public policy changes,
particularly related to healthcare costs, that may affect new
investments and purchases made by our customers;
    
    availability of financing and financial resources in the amounts, at
the times and on the terms required to support our future business;
    
    rapid technological developments in each of our markets and our
ability to respond to those changes in a timely, cost-effective manner;
    
    any potential future disputes regarding the scope, permitted use and
other material terms of our license agreements, including those with
MSD;
    
    the outcome of the litigation and arbitration commenced against Roche
Holding Ltd, which we refer to in this Form 10-Q as Roche, by Applera
Corporation and its affiliate Applied Biosystems, which we refer to in
this Form 10-Q as Applied Biosystems;
    
    protection and validity of our patent and other intellectual property
rights;
    
    statements regarding relationships between us and certain companies
with which we are affiliated; and
    
    changes in general economic, business and industry conditions. These forward-looking statements are found at various places throughout this
quarterly report. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this quarterly
report. We undertake no obligation to publicly update or release any revisions
to these forward-looking statements to reflect events or circumstances after
the date of this quarterly report or to reflect the occurrence of unanticipated
events. The foregoing list sets forth some, but not all, of the factors that could have
an impact upon our ability to achieve results described in any forward-looking
statements. Investors are cautioned not to place undue reliance on such
statements that speak only as of the date made. Investors also should
understand that it is not possible to predict or identify all such factors and
that this list should not be considered a complete statement of all potential
risks and uncertainties. Investors should also realize that if underlying
assumptions prove inaccurate or unknown risks or uncertainties materialize,
actual results could vary materially from our projections. As used herein, BioVeris, we, us and our refer to BioVeris Corporation
and its subsidiaries. M-SERIES, TRICORDER and BIOVERIS are our trademarks.
This quarterly report also contains brand names, trademarks or service marks of
other companies, and these brand names, trademarks or service marks are the
property of those other holders. 21




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##### 



Overview We develop, manufacture and market our M-SERIES® family of products, which
can serve as a platform for diagnostic systems to be used for the detection and
measurement of biological or chemical substances. We incorporate our
technologies into our instrument systems, tests and reagents, which are the
biological and chemical components used to perform such tests. Using the
M-SERIES platform, we intend to integrate technologies and products to develop
small, expandable and modular systems that can perform a wide variety of
immunodiagnostic and nucleic acid tests. Our products are designed to be sold in the worldwide diagnostics markets,
including:  
    
    Clinical diagnostics.The clinical diagnostics market includes the
testing of patient samples to measure the presence of disease and
monitor medical conditions. We are developing products to be used in the
clinical diagnostics market and believe that our products are best
suited for the immunodiagnostic and nucleic acid testing market segments
of the clinical testing market.
    
    Non-clinical diagnostics for the biodefense, life science and
industrial markets.The non-clinical diagnostics market includes
biodefense products for the detection of bacteria, viruses and toxins
that may pose a military or public health threat; life science testing
for drug discovery and development that is performed by pharmaceutical
and biotechnology companies; and industrial testing for the detection of
foodborne and waterborne disease causing pathogens. We believe that the emergence of simple, more accurate and cost-effective
clinical diagnostic products is shifting the site of clinical diagnostic
testing from clinical reference laboratories and central hospital laboratories
to decentralized patient care centers, such as physicians offices, ambulatory
clinics, hospital emergency rooms, surgical and intensive care units, hospital
satellite laboratories and nurses stations, which are collectively referred to
as clinical point-of-care sites. Our own product development efforts are focused on M-SERIES instruments and
tests for the clinical diagnostics market, particularly for point-of-care
sites. We are seeking to develop, market and sell products for the clinical
point-of-care market segment through a combination of direct efforts and
collaborative arrangements. We also are pursuing opportunities in the clinical
reference laboratory and central hospital laboratory market segments through
collaborative arrangements. The first clinical diagnostic system being developed by us is an M-SERIES
clinical analyzer that builds on the M-SERIES instruments we sell in the
biodefense and life science markets. We are developing the assays using, among
other things, improvements licensed from an affiliate of Roche. We believe
that these improvements will reduce product development timelines. We also
believe that the clinical analyzer will provide results to a physician rapidly
with the same levels of sensitivity, accuracy or consistency as a large
instrument in a clinical reference laboratory or in a central laboratory,
thereby permitting the physician to make a more timely decision regarding the
patients course of treatment. We will seek approval from the FDA for the
clinical analyzer and other in vitrodiagnostics products at the appropriate
stage of their product development. Our M-SERIES instruments are already being used in biodefense programs for
homeland security, including by the Department of Defense, or DOD. We believe
there will be an increasing opportunity to sell our products for biodefense
tools by governmental and military organizations around the world, as well as
in public health. We are also selling two types of M-SERIES instruments for
life science research to pharmaceutical and biotechnology researchers, as well
as to scientists at academic and government research institutions. 22




---



##### 



On February 13, 2004, IGEN and Roche completed the merger and related
transactions pursuant to which Roche acquired IGEN and IGEN simultaneously
distributed shares of our common stock to its stockholders. The transaction
occurred in the following steps:  
    
    IGEN restructured its operations so that we, a wholly-owned
subsidiary of IGEN at the time, assumed IGENs biodefense, life science
and industrial product lines as well as IGENs opportunities in the
clinical diagnostics and healthcare fields and the ownership of IGENs
intellectual property, IGENs equity interest in MSD, cash and certain
other rights and licenses currently held by IGEN; and
    
    A wholly-owned subsidiary of Roche merged with and into IGEN, as a
result of which IGEN became a wholly-owned subsidiary of Roche and we
became an independent, publicly-traded company. Simultaneously with the
completion of the merger, certain ongoing commercial agreements between
certain affiliates of Roche and us became effective. Prior to February 13, 2004, our assets and businesses were owned and operated
by IGEN. Our financial statements have been prepared and are presented as if we
had been operating as a separate entity in periods prior to February 13, 2004
using the historical cost basis in the assets and liabilities of IGEN and
including the historical operations of businesses and assets transferred to us
from IGEN as part of the merger and related transactions. Results of operations in the future are likely to fluctuate substantially from
quarter to quarter as a result of various factors, which include:  
    
    the volume and timing of orders and product deliveries for biodefense
products, M-SERIES systems or other products, which orders and
deliveries are based on our customers requirements that may vary over
time;
    
    the success of M-SERIES system upgrades and enhancements, which
upgrades and enhancements involve increased product costs at the time of
the upgrade or enhancement, and customer acceptance of those
enhancements and upgrades;
    
    the amount of revenue recognized from royalties and other contract
revenues, which revenues are dependent upon the efforts of our licensees
and collaborators;
    
    whether our instruments are sold or leased to customers, which will
affect the timing of the recognition of revenue from the sale or lease;
    
    the timing of our introduction of new products, which could involve
increased expenses associated with product development and marketing;
    
    the volume and timing of product returns and warranty claims, which,
if products are returned or have warranty claims that are unexpected,
may involve increased costs in excess of amounts reserved for returns or
claims;
    
    our competitors introduction of new products, which may affect the
purchase decision of or timing of orders by our customers and
prospective customers while the competitors product is assessed; 23




---



##### 




    
    the amount of expenses we incur in connection with the operation of
our business, including:  
    
    research and development costs, which increases or decreases
based on the product in development and
    
    sales and marketing costs, which are based on product launches
or promotions and sales incentives that might be in effect from time
to time;  
    
    the amount that we will record each quarter related to the
amortization or impairment of the license to use PCR technology, which
may increase based on the outcome of the litigation and arbitration
commenced against Roche by Applied Biosystems relating to Roches and
Applied Biosystems respective rights to PCR technology;
    
    unexpected termination of government contracts or orders, which could
result in decreased sales and increased costs due to excess capacity,
inventory personnel and other expenses;
    
    MSDs financial results, which for the years ended December 31, 2003
and 2002 included losses of $20.4 million and $17.1 million,
respectively, and which we have commenced consolidating as of March 31,
2004; and
    
    additional costs which we may incur as we explore new health care
opportunities, including costs for acquisitions of technologies,
facilities and personnel. We expect to incur additional operating losses as a result of our expenses for
manufacturing, marketing and sales capabilities, research and product
development, general and administrative costs, and the net loss of MSD, whose
financial results have been consolidated with ours beginning as of March 31,
2004. Our ability to become profitable in the future will be affected by,
among other things, our ability to expand the distribution and increase sales
of existing products, upgrade and enhance the M-SERIES family of products,
introduce new products into the market, generate higher revenue, develop
marketing, sales and distribution capabilities cost-effectively, and continue
collaborations established by IGEN or establish successful new collaborations
with corporate partners to develop, manufacture, market and sell products that
incorporate our technologies. Investment in MSD MSD is a joint venture formed by MST and IGEN in 1995. MSD was formed for the
development, manufacture, marketing and sale of products utilizing a
proprietary combination of MSTs multi-array technology together with our ECL
technology. We have recorded our proportionate share of MSD losses,
representing approximately 100% of MSDs losses. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, or FIN 46. FIN 46 provides guidance on variable
interest entities such as the MSD joint venture and the framework through which
an enterprise assesses consolidation of a variable interest entity. We adopted
FIN 46 as of March 31, 2004 and have determined that MSD qualifies as a
variable interest entity. Accordingly, beginning as of March 31, 2004 we have
consolidated the financial results of MSD. Under the transition guidance of
FIN 46, because MSD was created before February 1, 2003, we have measured the
assets, liabilities and noncontrolling interests of MSD as of March 31, 2004
for purposes of the initial consolidation. 24




---



##### 



The amounts of the assets, liabilities and noncontrolling interests are
reflective of their respective carrying amounts had FIN 46 been effective when
we first met the conditions to be the primary beneficiary of MSD upon MSDs
inception in 1995. We have historically recorded approximately 100% of MSDs
losses. Beginning with the quarter ended June 30, 2004, we reclassified amounts in the statement of
operations formerly recorded on a net basis as equity
in loss of joint venture to amounts recorded on a gross basis primarily as
revenue, product costs, research and development expenses and selling, general
and administrative expenses. As a result, our revenues and expenses
for the quarter ended June 30, 2004 increased significantly. The MSD joint venture agreement expired upon completion of the merger and
related transactions. As a result, MSD and MST had the option to purchase our
interest in MSD. As of March 31, 2004, the value of such option was $1.2
million. Pursuant to the settlement, MSD or MST will purchase, and we will
sell, our entire interest in MSD. We are in the process of evaluating the
impact of this purchase on the future of accounting treatment for MSD under the
provisions of FIN 46. For a more complete description of this
purchase right and the MSD agreements, see Part I  ITEM
1 Condensed Consolidated Financial Statements
(Unaudited)  Notes
to Condensed Consolidated Financial Statements (Unaudited) Note 4
Litigation. We expect that MSD will require substantial additional funding for its ongoing
operations. If MSD is not able to obtain this funding, we could lose our
ability to realize the value of most or all of our investment of
approximately $41.2 million at June 30, 2004 in MSD. In June and July 2004, we commenced legal actions against MSD, MST and Jacob
Wohlstadter in the Court of Chancery in the State of Delaware that were
prompted by the discovery of a series of actual and proposed transactions
undertaken by MSD without our knowledge. These lawsuits were settled in August
2004. For a more complete description of the lawsuits and related
settlement, see Part IITEM 1Condensed Consolidated
Financial Statements (Unaudited)Notes to Condensed Consolidated
Financial Statements (Unaudited)Note 4Litigation for
a more complete description of the lawsuits and the related
settlement. For a more detailed description of our business, you should refer to our Annual
Report on Form 10-K filed with the SEC. Supplemental Consolidated Balance Sheet Data: March 31, 2004BioVeris andWholly-Owned
    
    
    
    
    
    Consolidating
    
    ConsolidatedSubsidiaries
    
    MSD
    
    Eliminations
    
    BioVerisAssetsCurrent Assets:Cash and cash equivalents
    
    $
    147,398
    
    
    $
    35,111
    
    
    $
    
    
    
    $
    182,509Accounts receivable, net
    
    
    3,417
    
    
    
    2,099
    
    
    
    
    
    
    
    5,516Inventory
    
    
    5,013
    
    
    
    3,194
    
    
    
    
    
    
    
    8,207Other current assets
    
    
    2,459
    
    
    
    2,053
    
    
    
    (180
    )
    
    
    4,332Total current assets
    
    
    158,287
    
    
    
    42,457
    
    
    
    (180
    )
    
    
    200,564Equipment and leasehold improvements, net
    
    
    5,472
    
    
    
    7,362
    
    
    
    (269
    )
    
    
    12,565Investment in joint venture
    
    
    46,208
    
    
    
    
    
    
    
    (46,208
    )
    
    
    Technology licenses
    
    
    19,256
    
    
    
    10
    
    
    
    
    
    
    
    19,266Other
    
    
    354
    
    
    
    65
    
    
    
    
    
    
    
    419Total assets
    
    $
    229,577
    
    
    $
    49,894
    
    
    $
    (46,657
    )
    
    $
    232,814Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable and accrued expenses
    
    $
    26,220
    
    
    $
    3,067
    
    
    $
    (180
    )
    
    $
    29,107Other current liabilities
    
    
    1,977
    
    
    
    296
    
    
    
    
    
    
    
    2,273Total current liabilities
    
    
    28,197
    
    
    
    3,363
    
    
    
    (180
    )
    
    
    31,380Noncurrent liabilities
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    54Total liabilities
    
    
    28,251
    
    
    
    3,363
    
    
    
    (180
    )
    
    
    31,434Minority interest
    
    
    
    
    
    
    
    
    
    
    54
    
    
    
    54Series B preferred stock
    
    
    7,500
    
    
    
    
    
    
    
    
    
    
    
    7,500Stockholders Equity:Common stock
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    27Additional paid-in capital
    
    
    203,464
    
    
    
    116,707
    
    
    
    (116,707
    )
    
    
    203,464Net investment by parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated deficit
    
    
    (9,665
    )
    
    
    (70,176
    )
    
    
    70,176
    
    
    
    (9,665
    )Total stockholders equity
    
    
    193,826
    
    
    
    46,531
    
    
    
    46,531
    
    
    
    193,826Total liabilities and stockholders equity
    
    $
    229,577
    
    
    $
    49,894
    
    
    $
    46,657
    
    
    $
    232,814
 25




---



##### 



Supplemental Consolidated Balance Sheet Data: June 30, 2004BioVeris andWholly-Owned
        
        
        
        
        
        Consolidating
        
        ConsolidatedSubsidiaries
        
        MSD
        
        Eliminations
        
        BioVerisAssetsCurrent Assets:Cash and cash equivalents
        
        $
        30,148
        
        
        $
        32,089
        
        
        $
        
        
        
        $
        62,237Short term investments
        
        
        89,739
        
        
        
        
        
        
        
        
        
        
        
        89,739Accounts receivable,
            net
        
        
        4,128
        
        
        
        2,161
        
        
        
        
        
        
        
        6,289Inventory
        
        
        4,861
        
        
        
        3,458
        
        
        
        
        
        
        
        8,319Other current assets
        
        
        3,065
        
        
        
        3,477
        
        
        
        (820
        )
        
        
        5,722Total current assets
        
        
        131,941
        
        
        
        41,185
        
        
        
        (820
        )
        
        
        172,306Equipment and leasehold
            improvements, net
        
        
        4,752
        
        
        
        7,108
        
        
        
        (202
        )
        
        
        11,658Investment in consolidated joint
            venture
        
        
        41,214
        
        
        
        
        
        
        
        (41,214
        )
        
        
        Technology licenses
        
        
        18,768
        
        
        
        10
        
        
        
        
        
        
        
        18,778Other
        
        
        354
        
        
        
        65
        
        
        
        
        
        
        
        419Total assets
        
        $
        197,029
        
        
        $
        48,368
        
        
        $
        (42,236
        )
        
        $
        203,161Liabilities and
            Stockholders EquityCurrent Liabilities:Accounts payable
            and accrued expenses
        
        $
        6,389
        
        
        $
        3,694
        
        
        $
        (820
        )
        
        $
        9,263Other current liabilities
        
        
        2,065
        
        
        
        3,204
        
        
        
        
        
        
        
        5,269Total current liabilities
        
        
        8,454
        
        
        
        6,898
        
        
        
        (820
        )
        
        
        14,532Noncurrent liabilities
        
        
        69
        
        
        
        
        
        
        
        
        
        
        
        69Total liabilities
        
        
        8,523
        
        
        
        6,898
        
        
        
        (820
        )
        
        
        14,601Minority interest
        
        
        
        
        
        
        
        
        
        
        54
        
        
        
        54Series B preferred
            stock
        
        
        7,500
        
        
        
        
        
        
        
        
        
        
        
        7,500Stockholders
            Equity:Common stock
        
        
        27
        
        
        
        
        
        
        
        
        
        
        
        27Additional paid-in
            capital
        
        
        203,464
        
        
        
        116,707
        
        
        
        (116,707
        )
        
        
        203,464Accumulated deficit
        
        
        (22,516
        )
        
        
        (75,237
        )
        
        
        75,237
        
        
        
        (22,516
        )Accumulated other comprehensive income
        
        
        31
        
        
        
        
        
        
        
        
        
        
        
        31Total stockholders
            equity
        
        
        181,006
        
        
        
        41,470
        
        
        
        (41,470
        )
        
        
        181,006Total liabilities
            and stockholders equity
        
        $
        197,029
        
        
        $
        48,368
        
        
        $
        (42,236
        )
        
        $
        203,161
 26




---



##### 



Supplemental Consolidated Statements of Operations Data: Quarter Ended June 30, 2003
    
    Quarter Ended June 30, 2004BioVeris and
    
    BioVeris andWholly-Owned
    
    Wholly-Owned
    
    
    
    
    
    ConsolidatingSubsidiaries(1)
    
    Subsidiaries
    
    MSD
    
    Eliminations
    
    Consolidated(In thousands, except
per share data)Consolidated Statements of Operations Data:Revenues:Product sales
    
    $
    4,796
    
    
    $
    4,886
    
    
    $
    2,953
    
    
    $
    
    
    
    $
    7,839Royalty income
    
    
    243
    
    
    
    320
    
    
    
    
    
    
    
    
    
    
    
    320Contract fees
    
    
    34
    
    
    
    20
    
    
    
    66
    
    
    
    
    
    
    
    86Total
    
    
    5,073
    
    
    
    5,226
    
    
    
    3,019
    
    
    
    
    
    
    
    8,245Operating costs and expenses:Product costs
    
    
    2,433
    
    
    
    2,264
    
    
    
    2,340
    
    
    
    
    
    
    
    4,604Research and development
    
    
    5,232
    
    
    
    4,561
    
    
    
    2,682
    
    
    
    (67
    )
    
    
    7,176Selling, general and administrative
    
    
    4,776
    
    
    
    6,608
    
    
    
    3,102
    
    
    
    
    
    
    
    9,710Total operating costs and expenses
    
    
    12,441
    
    
    
    13,433
    
    
    
    8,124
    
    
    
    (67
    )
    
    
    21,490Loss from operations
    
    
    (7,368
    )
    
    
    (8,207
    )
    
    
    (5,105
    )
    
    
    67
    
    
    
    (13,245
    )Other, net
    
    
    80
    
    
    
    350
    
    
    
    44
    
    
    
    
    
    
    
    394Equity in loss of joint venture
    
    
    (5,230
    )
    
    
    (4,994
    )
    
    
    
    
    
    
    4,994
    
    
    
    Net loss
    
    $
    (12,518
    )
    
    $
    (12,851
    )
    
    $
    (5,061
    )
    
    $
    5,061
    
    
    $
    (12,851
    )Net loss per common share (Basic and Diluted)
    
    $
    (0.47
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (0.48
    )Shares used in computing net loss per
common share (Basic and Diluted)
    
    
    26,728
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,728
  (1)
    
    For the quarter ended June 30, 2003, we did not provide information for MSD or consolidating
eliminations as we did not consolidate MSDs financial results prior to our adoption of FIN 46 as of March 31, 2004. Results of Operations Quarters Ended June 30, 2004 and 2003 Revenues.Our consolidated revenues for the quarter ended June 30, 2004 increased by
approximately $3.1 million or 63% to $8.2 million from $5.1 million in the
corresponding prior year period. Of the $3.1 million increase, $3.0
million represents MSD revenues which were consolidated with BioVeris revenue
for the first time during this current quarter. Our consolidated product sales were $7.8 million for the quarter ended June 30, 2004, an
increase of 64%, from $4.8 million in the corresponding prior year period. The $3.0 million increase was due to the consolidation of MSDs
product sales. 27




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##### 



BioVeriss product sales in the current quarter were from biodefense products,
an increase over the same quarter the prior year of $800,000 to $2.3
million, and products for the life science market, decreased $700,000 to $2.6
million. These changes in product sales in the current quarter reflect the
change of orders and product deliveries for biodefense products, which orders
and deliveries are based on our customers requirements. We anticipate increases in biodefense-related sales as a result of our ongoing
biodefense initiatives. As part of the merger and related transactions, we
assumed a contract between IGEN and the DOD pursuant to which the DOD may
purchase tests for the detection of specific toxins in environmental samples.
Under the contract, the DOD may, at its option, make purchases of up to $23.0
million over a period of up to 48 months. As of June 30, 2004, the DOD had
purchased approximately
$4.4 million of products
during the first year of the contract. Sales of our products for the life science market are subject to a number of
uncertainties, including the fact that we are not a party to significant
long-term contracts for the sale of our products for the life science market
that would provide predictable sales. Therefore, the volume and timing of
product orders from our life science customers are based on their requirements,
which may vary over time. As a result, we believe that we do not have
sufficient information to reasonably project our future sales in the life
science market. Operating Costs and Expenses. Our consolidated product costs were $4.6 million (59% of total
product sales) for the quarter ended June 30, 2004 compared to $2.4 million
(51% of total product sales) in the corresponding prior year period. The total
increase of $2.2 million consists of $2.3 million due to the consolidation of
MSD offset by a $100,000 reduction in the Bioveriss costs. BioVeriss product costs, as a percentage of total product sales, decreased due
to reduced costs incurred in connection with instrument upgrades and detection module upgrades for
existing life science customers. These voluntary upgrades occurred in the
prior year and were provided to enhance overall customer satisfaction. The
instrument and detection module upgrade programs were substantially completed
as of December 31, 2003. Our future profit margin is subject to chance due to
a number of uncertainties relating to, among other things, the launch of new
instrument systems. Our research and development expenses increased $1.9 million, or 37%, to $7.2
million for the quarter ended June 30, 2004 from $5.2 million in the
corresponding prior year period. The increase consists of $2.7 million from
the consolidation of MSDs expenses, offset by a $700,000 reduction in the
Companys expenses. BioVeriss research and development expenses decreased in the current quarter
due primarily to reduced personnel and facilities costs. Research and
development expenses primarily relate to ongoing development costs and product
enhancements associated with the M-SERIES family of products, development of
new assays and research and development of new systems and technologies,
including point-of-care products. We expect research and development costs to
increase as product development and core research expand, including costs
associated with our efforts in developing clinical diagnostics and biodefense
testing products, and as we explore other opportunities in the healthcare
field. Our selling, general and
administrative expenses were $9.7 million for the quarter
ended June 30, 2004, an increase of $4.9 million (103%)
from $4.8 million in the corresponding
prior year period. Of the total increase, $3.1 million was due to the
consolidation of MSD expenses and $1.8 million was an increase in
Bioveriss expenses. 28




---



##### 



BioVeriss increase in selling, general and administrative expenses of approximately $1.8 million was
primarily attributable to higher personnel costs and professional fees in the
current quarter, including costs associated with our litigation with MSD.
Until the completion of the merger and related transactions on February 13,
2004, we were fully integrated with IGEN and the accompanying consolidated
financial statements reflect the application of certain estimates and
allocations. For periods prior to February 13, 2004, our consolidated
statements of operations include all revenues and costs that were directly
attributable to our businesses. In addition, certain expenses of IGEN were
allocated to us using various assumptions that, in the opinion of management,
are reasonable. These expenses include an allocated share of general and
administrative salaries as well as certain other shared costs (primarily
facility, human resources, legal, accounting and other administrative costs)
which were allocated based upon percentage of total revenue, or percentage of
total headcount, or estimates of actual time spent on businesses, as
appropriate. These allocated expenses comprise all of our
selling, general and administrative expenses for the three months ended June
30, 2003. Interest Expense and Other. Interest income, net of interest and other
expense, was $394,000 for the quarter ended June 30, 2004 and $80,000 in the
corresponding prior year period. This increase in net interest income resulted
from a growth in interest earned in the current year period due to a higher
balance of invested funds. Equity in Loss of Joint Venture.We recorded our proportionate share of MSD
losses, representing approximately 100% of MSDs losses for the quarter ended
June 30, 2003. Accordingly, equity in loss of joint venture for the three
months ended June 30, 2003 totaled $5.2 million. We adopted FIN 46 as of March 31, 2004 and have determined that MSD qualifies
as a variable interest entity. Accordingly, we have consolidated the financial
results of MSD as of March 31, 2004 and including the quarter ended June 30,
2004. For the quarter ended June 30, 2004, the statement of operations
reflects amounts formerly recorded on a net basis as equity in loss of joint
venture that are reclassified and reflected on a gross basis primarily as
revenue, product costs, research and development expenses and selling, general
and administrative expenses. Net Loss.The net loss for the quarter ended June 30, 2004 was $12.9 million
($0.48 per common share, compared to a net loss of $12.5 million ($0.47 per
common share) for the quarter ended June 30, 2004. The increase in the net
loss is primarily caused by operating expenses exceeding our revenues. Liquidity and Capital Resources Beginning as of March 31, 2004, we have consolidated the financial results of
MSD in accordance with the requirements of FIN 46. Our consolidated balance
sheet at June 30, 2004 had cash, cash equivalents and short-term investments of
$152.0 million. Of this amount, $32.1 million represented the cash, cash
equivalents and short-term investments of MSD. BioVeris has no rights or
access to these funds or any other capital resources of MSD. The amount of
cash, cash equivalents and short-term investments to which BioVeris and its
wholly-owned subsidiaries have unrestricted use is $119.9 million at June 30,
2004. In addition, our consolidated balance sheet includes the accounts
receivable, inventory and other assets and liabilities of MSD. We have no
rights or access to MSDs assets and we do not have obligations with respect to
MSDs liabilities, except that we agreed to pay MSD certain
amounts in the August 2004 settlement in respect of certain of its
liabilities. See Part I  Item 1  Condensed Consolidated
Financial Statements (Unaudited)  Notes to Condensed Consolidated
Financial Statements (Unaudited)  Note 4  Litigation. Net cash used in operations was $9.8 million and $6.7 for the quarters ended
June 30, 2004 and 2003, respectively. Cash used for operations for the quarter
ended June 30, 2004 primarily resulted from the net loss partially offset by
changes in working capital. 29




---



##### 



Cash used for operations for the quarter
    ended June 30, 2003 primarily resulted from the net loss, partially offset
    by an adjustment for the equity in loss of joint venture. We used approximately $700,000 and $800,000
    of cash for the acquisition of equipment and leasehold improvements during
    the quarters ended June 30, 2004 and 2003, respectively. We made no investment
    payments to MSD for the quarter ended June 30, 2004. Our investment payments
    to MSD totaled $10.9 million for the quarter ended June 30, 2003. We believe that material commitments
    for capital expenditures and additional or expanded facilities may be required
    in a variety of areas, such as product development programs. We have not,
    at this time, made material commitments for any such capital expenditures
    or facilities and have not secured additional sources, if necessary, to fund
    such commitments. As of June 30, 2004, our material future obligations were as follows: Years Ending March 31,2010 andContractual Obligations (in thousands)
    
    Total
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    ThereafterBioVeris and Wholly-Owned Subsidiaries:Operating leases
    
    $
    17,857
    
    
    $
    2,386
    
    
    $
    3,164
    
    
    $
    3,241
    
    
    $
    3,338
    
    
    $
    3,333
    
    
    $
    2,395MSD Payment
    
    
    3,046
    
    
    
    3,046Total contractual obligations
    
    $
    20,903
    
    
    $
    5,432
    
    
    $
    3,164
    
    
    $
    3,241
    
    
    $
    3,338
    
    
    $
    3,333
    
    
    $
    2,395
 Under the MSD agreements, IGENs funding commitment was based on an annual
budget of MSD approved by the JVOC. The JVOC approved funding for MSD for the
period from January 1, 2003 to November 30, 2003 in an amount of $20.6 million,
subject to a permitted variance of 15%, of which approximately $19.1 million
was spent by MSD and funded by us. MSD asserted that we were obligated to pay
MSD up to an additional $4.6 million, which is the difference between the
amount spent by MSD and the budgeted amount plus the permitted variance. As
part of the settlement, we agreed to pay MSD the net amount of $3.0 million
which represents full and complete satisfaction of amounts due to MSD pursuant
to the MSD agreements, including this dispute regarding unsatisfied committed
funding obligations, certain intellectual property matters, and the previously
outstanding dispute regarding the payment of certain legal fees and expenses
incurred by MSD in connection with its participation and involvement in the
merger and related transactions. 30




---



##### 



Our $3.0 million payment is net
    of a $2.0 million non-refundable pre-payment by MSD to us for future
    amounts payable by MSD to us pursuant to the buy-out of our interest in MSD.
    The amount of the pre-payment credit outstanding from time to time will bear
    simple interest (cumulated, not compounded) at the fixed annual rate of 0.5%
    over the prime rate in effect on the date that MSD or MST, as the case may
    be, purchases our interests in MSD. The amount of the prepayment credit that
    is deemed outstanding is the total amount, including accrued interest, reduced
    from time to time by the amount due and payable to us pursuant to the buy-out
    of our interest in MSD. No further cash payments will be payable by MSD to
    us until the $2.0 million prepayment credit, including accrued interest,
    is utilized. A total of $5.0 million is to be treated as a Class C
    capital contribution. There is no assurance that we will be able to realize
    any value from the additional contribution. For the quarter ended June 30,
    2003, total contributions to MSD were $10.9 million. The funding commitment
    was satisfied in part through in-kind contributions of scientific and administrative
    personnel and shared facilities. In accordance with the MSD joint venture
    agreement, the value of these in-kind contributions is based upon costs incurred
    by us as determined through allocation methods that include time-spent and
    square footage utilized. During the quarter ended June 30, 2003, operating
    costs allocated to MSD in connection with shared personnel and facilities
    totaled $2.0 million. There were no operating costs allocated
    to MSD during the quarter ended June 30, 2004. In August 2004, we made
    payments to MSD in connection with the settlement as described in the preceding
    paragraph. We have no intention to provide additional funding to MSD
except that we agreed to pay MSD certain amounts in the August 2004 settlement in respect of certain of its liabilities.
See Part I  ITEM 1  Condensed Consolidated Financial Statements (Unaudited)  Notes to Condensed Consolidated
Financial Statements (Unaudited)  Note 4  Litigation.
 We cannot predict whether MSD will obtain additional funding.
If MSD is not able to obtain this funding, we could lose our ability to realize the value of most or all of our investment in MSD. As noted above, MSD or MST will purchase our interest in MSD for a purchase
price equal to fair market value less a discount of 7.5%, with fair market
value to be determined by an appraisal process. The current book value of our
investment is $41.2 million. There is no assurance that the purchase price
will enable us to recover the book value of our investment. In addition,
because the purchase price is payable in installments from a percentage of
future MSD net sales or financings, there is no assurance that we will receive
all or any portion of the purchase price, other than the $2.0 million
prepayment credit we received in connection with the settlement,
and we could lose our ability to realize the value of most or all of our investment in MSD. Product development for our clinical diagnostic products is at an early
development stage and products based on the PCR technology being licensed from
Roche are not yet under development. Product development is subject to a
number of technical and commercial uncertainties and in part depends upon our
ability to enter into new collaborative arrangements. Accordingly, we have not
yet completed a business plan for our clinical diagnostic products, including
immunodiagnostic and PCR technology-based products, do not have definitive
product introduction timelines or budgets and have not determined the
additional funding, personnel, facilities, equipment or technology that may be
required to implement our plans. Our ability to become profitable in the future will depend on, among other
things, the introduction of new products to the market. If we are unable to
develop new products, including products based on PCR technology, our business
prospects and financial results would be adversely affected. Furthermore, we will need substantial amounts of money to fund our operations
on an ongoing basis. We expect our available cash to be sufficient to fund our
operations for at least one year, but we cannot predict how long our available
cash will be sufficient to fund our operations thereafter. In this regard, we
expect that we will from time to time have discussions with third parties,
including multinational corporations, regarding various business arrangements
including distribution, marketing, research and development, joint venture and
other business agreements, which could provide for substantial up-front fees or
payments. 31




---



##### 



We cannot assure you that we will successfully complete any of the foregoing
arrangements and access to funds could be adversely impacted by many factors,
including the volatility of the price of our common stock, continuing losses
from our operations, establishment of new business arrangements, the status of
new product launches, general market conditions and other factors. If we are
unable to raise additional capital, we may have to scale back, or even
eliminate, some programs. Alternatively, we may consider pursuing arrangements
with other companies, such as granting licenses or entering into joint ventures
or collaborations, on terms that may not be favorable to us. As of June 30, 2004, we had no special purpose entities. Critical Accounting Policies A critical accounting policy is one that is both important to the portrayal of
our financial position and results of operations and requires the application
of difficult, subjective or complex judgments by management. As a result,
critical accounting policies are subject to an inherent degree of uncertainty. In applying those policies, management uses its judgment to determine the
appropriate assumptions to be used in the determination of certain estimates.
These estimates are based on our managements experience, terms of existing
contracts, observance of trends in the industry, information provided by
customers, and information available from other outside sources, as
appropriate. Our critical accounting polices include: Expense Allocations Prior to February 13, 2004, our assets and businesses
were owned, operated and fully integrated with IGEN. Our financial statements
have been prepared and are presented as if we had been operating as a separate
entity during the periods shown. In order to fairly present our operating
results, these financial statements reflect the application of certain
estimates and allocations for periods prior to February 13, 2004. For such
periods, our consolidated statements of operations include all costs that were
directly attributable to our businesses, as well as certain expenses of IGEN
that were allocated to us using various assumptions. These expenses include an
allocated share of general and administrative salaries as well as certain other
shared costs (primarily facility, human resources, legal, accounting and other
administrative costs) which were allocated based upon percentage of total
revenue or percentage of total headcount, as appropriate. While management
believes that the allocation methodologies are reasonable and appropriate,
different allocation methodologies could result in changes to our operating
results. Revenue Recognition We derive revenue principally from three sources: product
sales, royalty income and contract fees. Product sales revenue is generally
recognized when persuasive evidence of an arrangement exists, the price to the
buyer is fixed and determinable, collectibility is reasonably assured and the
product is shipped to the customers thereby transferring title and risk of
loss. For instrument sales, the instrument and the related installation are
considered to be separate elements under EITF 00-21. Revenue is recognized for
the instrument upon shipment and is recognized for the installation when
complete based upon the residual value method. For instrument and reagent
sales, there is no option of return and refund, only the option to repair or
replace. Other than the installation required for the instruments, there are
no contingencies, allowances or other post-sale obligations. For instrument
leases, the instrument rental and related minimum reagent purchases are
considered to be separate elements under EITF 00-21 and, accordingly, the sales
price is allocated to the two elements based upon their relative fair values.
Instrument rental revenue is recognized ratably over the life of the lease
agreements and the related reagent revenue is recognized upon shipment.
Revenue associated with extended warranty arrangements is recognized over the
term of the extended warranty contract. Royalty income is recorded when
earned, based on information provided by licensees. 32




---



##### 



Revenue from services performed under contracts is recognized when obligations
under the contract have been satisfied. The satisfaction of obligations may
occur over the term of the underlying customer contract, if the contract is
based on the achievement of certain milestones, or may occur at the end of
the underlying customer contract, if based only upon delivery of the final work
product. The majority of our product sales and contract fees contain standard terms and
conditions. Certain transactions may contain negotiated terms that require
contract interpretation to determine the appropriate amount of revenue to be
recognized. In addition, we must assess whether collectibility is reasonably
assured. While management believes its interpretations and judgments are
reasonable, different assumptions could result in changes in the timing of
revenue recognition. Joint Venture Accounting For periods prior to March 31, 2004, we accounted
for our ownership in the MSD joint venture on the equity method, as we have
determined that we do not control MSDs operations. Factors considered in
determining our level of control include the fact that we have less than 50% of
the voting equity interest in MSD; that we do not have exclusive authority over
MSD decision making and have no ability to unilaterally modify the joint
venture agreements; and that we have the right to appoint only one out of two
seats on MSDs board of managers. A different assessment of these factors could
have provided for the use of consolidation accounting rather than the equity
method, in which case a consolidation of our financial statements with those of
MSD would have been appropriate. Consolidation accounting would have required
certain reclassifications within our consolidated financial statements but
would not have materially affected our financial position or net loss. See
Part I  ITEM 1  Condensed Consolidated Financial
Statements (Unaudited)  Notes to Condensed Consolidated
Financial Statements (Unaudited)  Note 3  Meso Scale Diagnostics Joint Venture. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, or FIN 46. FIN 46 provides guidance on variable
interest entities such as the MSD joint venture and the framework through which
an enterprise assesses consolidation of a variable interest entity. We have
adopted FIN 46 as of March 31, 2004 and have determined that MSD qualifies as a
variable interest entity based upon the following rationale:  
    
    We have provided substantially all of MSDs funding since inception
through capital contributions consisting of class B and C non-voting
equity interests. Such funding is not considered at risk as the
investments do not participate significantly in the profits of MSD given
their stated return rates. As such, the at risk equity of MSD is
insufficient to absorb MSDs expected future losses.
    
    We hold 31% of the voting rights in MSD while providing 100% of MSDs
funding, and are thereby considered to be involved in all of MSDs
activities as defined under FIN 46. Accordingly, beginning as of March 31, 2004 we have consolidated the financial
results of MSD. Under the transition guidance of FIN 46, because MSD was
created before February 1, 2003, we have measured the assets, liabilities and
noncontrolling interests of MSD as of March 31, 2004 for purposes of the
initial consolidation. The amounts of the assets, liabilities and
noncontrolling interests are reflective of their respective carrying amounts
had FIN 46 been effective when we first met the conditions to be the primary
beneficiary of MSD upon MSDs inception in 1995. We have historically recorded
approximately 100% of MSDs losses. 33




---



##### 



The balance sheet
as of March 31,2004 reclassified amounts formerly recorded on a net basis as
investment in joint venture to be reflected on a gross basis primarily as
cash, accounts receivable, inventory, fixed assets, accounts payable and
accrued expenses. The statement of operations for periods subsequent to March
31, 2004 have reclassified amounts formerly recorded on a net basis as equity
in loss of joint venture to be reflected on a gross basis primarily as
revenue, product costs, research and development expenses and selling, general
and administrative expenses. InventoryWe record our inventory at the lower of cost or market using the
first-in, first-out method. We regularly review inventory quantities on hand
and record a reserve for excess and obsolete inventory based primarily on an
estimated forecast of product demand and production requirements for the next
twelve months. Reserves are recorded for the difference between the cost and
the market value. Those reserves are based on significant estimates. Our estimates of future
product demand may prove to be inaccurate, in which case we may have
understated or overstated the provision required for excess and obsolete
inventory. In addition, our industry is characterized by technological change,
frequent new product development and product obsolescence that could result in
an increase in the amount of obsolete inventory quantities on hand. Although
we make every effort to ensure the accuracy of our forecasts of future product
demand, any significant unanticipated changes in demand or technological
developments could have a significant impact on the values of our inventory and
our reported operating results Evaluation of Long-lived Assets We have different long-lived assets recorded
on our balance sheet that include equipment and leasehold improvements,
investments, licenses and other assets. We evaluate the potential impairment of
long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. In evaluating the
recoverability of an asset, managements policy is to compare the carrying
amount of an asset with the projected undiscounted cash flow. While management
believes that its projections are reasonable and that no impairment of these
assets exists, different assumptions could affect these evaluations and result
in impairment charges against the carrying value of these assets. Warranty Reserve We warrant our products against defects in material and
workmanship for one year after sale and record estimated future warranty costs
at the time revenue is recognized. A reserve for future warranty claims is
recorded based upon managements review of historical results, supplemented by
expectations of future costs. Unanticipated changes in actual warranty costs
could impact our operating results. Recent Accounting Pronouncements See discussion of FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, under  Critical Accounting Policies above. 
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Prior to the completion of the merger and related transactions on February 13,
2004, our assets and businesses were owned and operated by IGEN. IGEN held all cash in a centralized treasury and provided all of
the necessary funding for our operations. Accordingly, no cash is reflected on
our consolidated balance sheets prior to February 13, 2004. 34




---



##### 



We are exposed to changes in exchange rates where we sell direct in local
currencies, primarily in the United Kingdom and Germany. Certain other foreign
sales are denominated in U.S. dollars and have no exchange rate risk. Gains
and losses resulting from foreign currency transactions have historically not
been material. Beginning as of March 31, 2004, we have consolidated the financial results of
MSD in accordance with the requirements of FIN 46. Our consolidated balance
sheet at June 30, 2004 had cash, cash equivalents and short-term investments of
$152.0 million. Of this amount, $32.1 million represented cash and cash
equivalents of MSD. We have no rights or access to these funds. The amount of
cash, cash equivalents and short-term investments to which we and our wholly-owned subsidiaries have
unrestricted use is $119.9 million, which is 59.8 % of total consolidated
assets at March 31, 2004. We invest excess cash in accordance with a policy approved by our Board of
Directors. The policy is designed to provide 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 our investments by terms and concentrations by type and issuer.
We invest our excess cash in money market funds, securities of the U.S.
Treasury, and certificates of deposit with original maturities of three months
or less. Also, as of June 30, 2004, we had invested $89.7 million in securities of the U.S. government, municipal bonds,
and U.S. corporate debt, which were recorded as short-term investments. Our invested cash is sensitive to changes in the general level of interest
rates. Based on our cash and cash equivalents balance at June 30, 2004, a 100
basis point movement in interest rates would have an approximately $1.2 million
impact on our annual interest income and annual net loss. Actual changes in
rates may differ from the hypothetical assumption used in computing this
exposure. 
 ITEM 4: CONTROLS AND PROCEDURES We, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of
the period covered by this Form 10-Q. Based on that evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely making known to them material
information relating to our company required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934. 
 PART II  OTHER INFORMATION 
 ITEM 1  LEGAL
PROCEEDINGS  See Part I  ITEM 1  Condensed Consolidated Financial
Statements (Unaudited)  Notes to Consolidated Financial Statements (Unaudited)  Note 4  Litigation. 35




---



##### 



Item 6:
    
    Exhibits and Reports on Form 8-K.(a)
    
    Exhibits:31.1
    
    Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002(b)
    
    Reports on Form 8-K:  During the quarter ended June 30, 2004, we filed reports on Form 8-K
with the Securities and Exchange Commission on the dates indicated
below:  
    
    May 5, 2004, reporting on Item 5Other Events and Regulation FD Disclosure;
    
    May 27, 2004, reporting on Item 5Other Events and Regulation FD Disclosure; and
    
    June 15, 2004, reporting on Item 5Other Events and Regulation FD Disclosure. 36




---



##### 



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. BioVeris CorporationDate: August 17, 2004
    
    /s/ George V. MigauskyGeorge V. MigauskyVice President of Finance and
Chief Financial Officer(On behalf of the Registrant and as
Its Principal Financial Officer.)
 37