SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FORM 10-K/A
AMENDMENT NO. 1 TO FORM 10-K
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended May 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________to _______________.
Commission File Number 0-21354
ENDOGEN, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2789249
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
30 Commerce Way 01801
Woburn, Massachusetts (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 937-0890
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of Exchange on which registered
------------------- ------------------------------------
Common Stock, $.01 Par Value The Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value as of August 23, 1996, of Common Stock held by
non-affiliates of the registrant: $13,109,000, based on the average per share
bid and ask price of such stock on the Nasdaq SmallCap Market on August 23,
1996.
Number of shares of Common Stock outstanding on August 23, 1996: 2,952,477
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended May 31, 1996.
Portions of such Proxy Statement are incorporated by reference in Part III of
this report. Portions of the registrant's Registration Statement on Form S-4
declared effective by the Securities and Exchange Commission on February 12,
1993 are incorporated by reference in the exhibits to this report.
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PART I
This Report includes a number of forward-looking statements which reflect
the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed in "Item 1. Business" under the
subheading "Risk Factors" and in "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in this Report,
that could cause actual results to differ materially from historical results or
those currently anticipated. In this Report, the words "anticipates,"
"believes," "expects," "intends," "future" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof.
ITEM 1. BUSINESS.
Overview
Endogen, Inc. ("Endogen") was incorporated on June 1, 1983 and commenced
commercial operations in November 1985. In March 1993, Endogen became a publicly
traded company upon the consummation of the merger of Diagnostics Holding Corp.
("Diagnostics") with and into Endogen, with Endogen being the surviving
corporation. The shareholders of Diagnostics consisted of all of the former
minority shareholders of Leeco Diagnostics, Inc., a company formerly traded on
the NASD OTC Bulletin Board(SM).
Endogen is a supplier of specialty reagents and immuno-assay test kits to
customers involved in biomedical research, the biotechnology industry and
pharmaceutical drug discovery. Endogen uses monoclonal antibody and recombinant
DNA technology to develop and manufacture products in the field of cytokines and
related immune system factors, the chemical messengers which convey signals
within the immune system.
Endogen offers three major product lines. The first is in vitro
immuno-assay test kits, used for the measurement of human cytokines and related
cell surface proteins in biological samples. The second is in vitro immuno-assay
test kits, used for the measurement of mouse and other species cytokines, an
important and growing area of biomedical research. The third is specialty
reagents, including monoclonal antibodies and recombinant proteins, which are
used by the biomedical research community in the course of basic and applied
research projects. Endogen's product lines provide researchers with tools for
investigating the basic cellular mechanisms underlying the human immune system
and its response to infection, AIDS, cancer and other diseases. Endogen's
products are developed through technology in-licensing agreements with leading
medical institutions and pharmaceutical companies, followed by in-house product
development, validation, manufacturing and quality control.
Endogen's products are sold via catalog and direct selling throughout the
United States and are distributed in approximately 40 other countries worldwide.
Approximately 44% of Endogen's fiscal 1996 sales were exported, and
approximately 33% and 32% of sales were exported in Endogen's fiscal 1995 and
1994, respectively. Endogen has sold its products to almost 1,000 organizations
and institutions including pharmaceutical and biotechnology firms, hospitals,
universities and biomedical research labs worldwide.
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The Market
Biomedical researchers around the world are constantly in search of
specialty research products necessary to conduct basic and applied research.
This research is conducted in settings that range from university and medical
school laboratories to pharmaceutical and biotechnology research and development
groups. Biomedical research depends on the availability of new biomedical
products of the type developed and marketed by Endogen.
The market for biomedical research products includes specialty reagents
as well as enzyme immuno-assay ("EIA") test kits. Endogen's specialty reagents
are used by customers as part of their general biomedical research. Endogen's
EIA test kits streamline the laboratory research process by eliminating the need
for customers to independently develop and validate methods for measuring
cytokines and related immune system factors in laboratory samples.
Cytokines are small, hormone-like, soluble proteins secreted by activated
cells of the immune system. Through their activities, cytokines coordinate and
orchestrate the proper functioning of the immune system. These proteins
typically are present in extremely small quantities in both the bloodstream and
the cells by which they are produced. Cytokines are capable of exerting profound
effects on the body even when present in concentrations of less than one
nanogram per milliliter (a nanogram is one-billionth of a gram). Cytokines, like
growth factors, interact with specialized target receptors and stimulate a chain
of secondary messengers leading to a biological response. Such biological
responses result from changes in both the molecular capabilities and behaviors
of cells. For example, cytokines can activate cells to recognize and eliminate
harmful bacteria and viruses. In addition, cytokines are instrumental in the
body's defense against cancer, AIDS and other life-threatening diseases.
Cytokines are the subject of worldwide research efforts. To date, more
than 50 molecules have been identified as cytokines; this number is expected to
continue growing as research in this field expands. Cytokines have played a
role, not only in biomedical research, but in the emergence of the biotechnology
industry where gene splicing is used to produce large quantities of a single
protein for therapeutic use. Endogen believes that the products it provides to
the biomedical research market are well-matched to the growing interest in the
cytokine and cytokine-related field. There can be no assurance, however, that
this field will continue to expand or that the Company's products will be
successfully introduced into the marketplace. See "BUSINESS--Risk Factors"
herein.
Specialty Research Reagents
Endogen currently offers approximately 200 specialty reagent products.
These include recombinant DNA-derived cytokines, polyclonal and monoclonal
antibodies. Such products are used by customers to investigate the biological
responses evoked by immune system proteins. Applications for Endogen's research
reagents include a variety of laboratory experiments involving live cell
cultures or laboratory animal models.
In-licensing agreements for novel hybridoma cell lines which produce
monoclonal antibodies provide a significant source of new specialty reagents.
Endogen develops and maintains relationships with leading medical research
institutions across the United States and overseas through activities, including
attendance at scientific meetings. This allows Endogen to identify new products
and to support its existing products. There can be no assurance, however, that
the Company will maintain these relationships or that these relationships will
continue to facilitate the Company's development with respect to new and
existing products.
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In Vitro Assay Kits
Endogen currently markets 49 in vitro assay kits. Thirty-two of the kits
measure human cytokines and related biomolecules; the other seventeen kits
measure mouse, rat, pig and rabbit cytokines and related biomolecules. Most of
Endogen's test kits are for laboratory research only, not for diagnostic or
therapeutic use. One test kit acquired from T Cell Diagnostics, Inc. ("TCD")
measures soluble IL2R which is approved for the diagnosis of hairy cell
leukemia. In general, EIA kits are used by customers to precisely determine the
level of a particular cytokine in serum, plasma or other biological samples.
EIAs provide for more specific, reproducible and easier techniques for measuring
biological factors. Prior to the development of EIAs, cytokines and other
factors were measured using cell-based bioassays in which the cytokine level in
a sample is estimated by observing the experimental sample's effect on cultured
live cells, relative to a standard of known effect.
In a typical EIA test kit, an antibody specifically isolates the cytokine
from a researcher's sample during the first incubation step. A second antibody
then binds to the captured cytokine. This second antibody is linked to an
enzymatic tag which provides a measurable signal, allowing precise determination
of the cytokine concentration in the sample, even in minute concentrations.
Results from the assay are recorded using a standard laboratory instrument.
Endogen believes that the discovery of new cytokines, coupled with
ongoing research on the cellular and molecular role of cytokines in preventing
and combating disease, will continue to increase demand for this product line.
There is no assurance, however, that any of the reagents or test kits that are
presently in the research and development phase can be developed, or if
developed, successfully introduced into the marketplace. See "BUSINESS - Risk
Factors" herein.
Product Licensing
Endogen obtains commercial rights to new technologies and new products
for the research markets through in-licensing. In-licensing generally provides
Endogen with the raw materials for product development in a timely fashion,
thereby reducing the product development cycle time and supporting in-house
manufacturing capabilities.
Endogen's success will depend in part upon its ability to keep pace with
evolving technologies and market demands for specialty biological products.
Endogen is highly dependent on product licensing arrangements as a source for
the basic components utilized in the development and manufacture of both human
and mouse product lines. See "BUSINESS - Risk Factors" herein. Through certain
in-license agreements, Endogen has obtained cell lines for the production of
monoclonal antibodies utilized in the majority of the Company's human and animal
test kits. The antibodies are also sold as specialty reagents. These products,
manufactured at Endogen, accounted for a substantial portion of revenues for
fiscal 1996.
Products Under Development
Endogen is currently developing additional antibodies, recombinant
proteins and test kits for segments of the life sciences market. These programs
are expected to result in further expansion of its existing product lines and
the introduction of new product lines. Kits for the measurement of novel
biomolecules are currently in the prototype stage of development and several of
these products are expected to reach the marketplace in fiscal 1997. There is no
assurance, however, that any of the specialty reagents or test kit products that
are presently in the research and development phase can be
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developed, or if developed, be successfully introduced into the marketplace.
Research and development expenditures totaled $758,772, $956,386 and $1,124,910
in fiscal years 1994, 1995, and 1996, respectively. Purchased in-process
research and development expense related to the TCD asset purchase in March 1996
totaled $579,600. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" herein.
Business Relationships
Endogen has entered into a number of business relationships with
commercial organizations, including the following:
Endogen entered into a distribution agreement with Funakoshi Co., Ltd.
("Funakoshi") in 1988. Under the terms of the agreement, subject to certain
performance objectives, Endogen grants exclusive rights to Funakoshi to
distribute products under the Endogen label in the Japanese market.
In 1991, Endogen entered into a distribution and supply agreement with
Biozol Diagnostica Vertrieb, GmbH ("Biozol") under which Biozol has exclusively
distributed Endogen's products to individual country distributors in certain
European countries. Effective September 1, 1996, the agreement has been amended
so that Endogen will distribute its products directly to individual country
distributors in Europe. Biozol will continue as Endogen's exclusive distributor
in Germany.
In 1994, Endogen entered into a three-year worldwide product supply and
marketing agreement with Amersham International PLC ("Amersham PLC") and
initiated distribution of Endogen's mouse cytokine ELISA kits under the Amersham
PLC label. In September 1995, the agreement was broadened to include
distribution of Endogen's human cytokine ELISA kits under Amersham PLC label.
Amersham PLC is a leader in the market for biomedical products such as labeled
compounds, antibodies and test kits and is a leading developer and marketer of
radiopharmaceuticals and reagents. Endogen continues to manufacture and market
human and animal test kit product lines under its own label in addition to
supplying Amersham PLC.
In 1994, Endogen entered into an investment banking and financial
advisory services agreement with Barber and Bronson, Incorporated ("B&B") which,
by its terms expired in December 1995. Pursuant to that agreement, Endogen
granted a warrant to B&B to purchase up to 180,000 shares of Endogen's common
stock. The warrant is exercisable through December 15, 1999 at exercise prices
ranging from $2.00 to $4.00 per share.
In 1996, Endogen entered into an asset purchase agreement with Cytokine
Sciences, Inc. ("CSI"), a manufacturer and seller of cytokine specialty reagents
and test kits. Under the terms of the agreement, Endogen acquired two novel
product lines in exchange for $100,000 cash and 20,984 shares of Endogen common
stock.
In 1996, Endogen entered into an agreement with T Cell Sciences, Inc.
("TCS") and T Cell Diagnostics, Inc. ("TCD") pursuant to which Endogen acquired
substantially all of the assets and operating business of TCD, TCS's subsidiary,
and certain assets of TCS, in exchange for a $2,002,978 convertible subordinated
note payable over five years beginning in September 1996, a $452,153 short-term
promissory note and $528,341 cash. Endogen now markets all of the research
products formerly sold under the TCD name. Endogen also manufactures certain
diagnostic products, acquired from TCD, one of which is approved for sale in the
U.S. and a second which is supplied under contract to a partner
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in Japan. Endogen further agreed to manufacture certain diagnostic products for
TCS for a period of five years.
Government Regulation
Most of Endogen's products are marketed as "research use only" products
and are not currently regulated by the U.S. Food and Drug Administration (the
"FDA"). As a result of the acquisition of TCD's operating business, Endogen now
manufactures certain in vitro diagnostic products which are subject to
regulation by the FDA. Consequently, the Company's manufacturing facility is
regulated by the FDA under Good Manufacturing Practices regulations and is
therefore subject to periodic site inspections.
Endogen's laboratories and manufacturing operations are subject to
regulation by a variety of other federal, state, and local governmental
agencies. See "BUSINESS - Risk Factors" herein.
Availability of Raw Materials
Endogen holds licenses to and maintains back-up stocks of various cell
lines that are necessary to the manufacture of key components of its product
lines. Endogen believes that it maintains adequate supplies of materials on hand
to allow it to continue to manufacture products and meet customer demand.
Patents, Trademarks, and Trade Secrets
Endogen relies upon trade secrets and proprietary know-how in addition to
licensing arrangements to maintain and develop its business. Although Endogen
seeks to protect its proprietary information, there can be no assurance that
others will not either independently develop the same or similar information,
obtain unauthorized access to Endogen's proprietary information or misuse
information to which Endogen has granted access.
Endogen has obtained federal trademark registration for the Endogen name
and mark in the United States. Trademark registration has also been obtained or
is pending in various foreign countries.
No assurance can be given that Endogen's products do not infringe upon
patents or proprietary rights owned or claimed by others. Except as noted below,
Endogen has not been notified that its products infringe upon proprietary rights
held by others; nor has it conducted patent infringement studies. See "BUSINESS
- - Risk Factors" herein.
Significant Customers
Endogen's largest customers are Amersham PLC, Funakoshi and Biozol.
Amersham PLC distributes certain of Endogen's test kits under the Amersham PLC
label, pursuant to a three-year worldwide product supply and marketing agreement
with Endogen. Sales to Amersham PLC totaled $1,224,000 in fiscal year 1996.
Endogen sells its products to Funakoshi for distribution in Japan under the
terms of a distribution agreement. Sales under this agreement were approximately
$473,000, $429,000 and $657,000 for the fiscal years 1994, 1995 and 1996,
respectively. Endogen has sold its
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products since 1991 to Biozol for European distribution under the terms of their
distribution and supply agreement. Sales under this agreement were approximately
$393,000, $527,000 and $492,000 for the fiscal years 1994, 1995, and 1996,
respectively. Biozol currently owns approximately 5% of the outstanding capital
stock of Endogen. See "BUSINESS - Business Relationships" herein.
Export Sales
Export sales to Europe accounted for approximately 28% of revenues in
fiscal 1996 compared with 22% of revenues in fiscal 1995 and 15% in fiscal 1994.
The increase in fiscal 1996 was related primarily to the addition of new
products sold under the Endogen name and under private label. The increase in
fiscal 1995 was primarily due to new product introductions. Export sales to
Japan and the Far East accounted for 13%, 8% and 14% of Endogen product revenue
for the fiscal years 1996, 1995 and 1994, respectively.
Seasonality of Business
Endogen's customers include university-based research centers and
hospital laboratories whose operations follow the academic calendar. Sales
levels worldwide are often lower in the summer months. Accordingly, the first
quarter of Endogen's fiscal year, which runs from June through August, tends to
be the weakest quarter of Endogen's fiscal year, although Endogen cannot predict
if this tendency will continue.
Backlog
There was no significant backlog for Endogen's products over the past
three years. Endogen ships most orders within one week of the placement of the
order.
Competition
The life science market, including research biologicals and Cytokine EIA
kits, is supplied by a number of established biomedical products manufacturers
located in the United States, Europe and Japan. Many of Endogen's competitors
are actively developing additional products for this market.
Many of Endogen's competitors have substantially greater financial,
research and development, manufacturing, marketing, and human resources than
Endogen. Consequently, Endogen expects the continuation of intensive competition
in the biomedical products market. See "BUSINESS - Risk Factors" herein.
Employees
Endogen had 59 full-time and part-time employees as of May 31, 1996.
Endogen recognizes that its future success depends in part on its ability to
recruit and retain talented and trained scientific and commercial personnel. See
"BUSINESS - Risk Factors" herein. Endogen believes that it has been generally
successful in hiring and retaining such personnel, but there can be no assurance
that such success will continue.
None of Endogen's employees is represented by a labor union, and Endogen
considers its relations with its employees to be excellent.
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Risk Factors
The Company's future business, operating results and financial condition
are subject to various risks and uncertainties, including those described below.
Capital Requirements.
In the future Endogen may need to raise substantial additional funds
through equity or debt financings, research and development financings,
collaborative relationships or otherwise. Endogen may seek to raise funds
whenever conditions are favorable, even if it does not have an immediate need
for additional capital at that time. There can be no assurance that any such
additional funding will be available to Endogen or, if available, that it will
be on reasonable terms. Any such additional funding may result in significant
dilution to existing shareholders. If adequate funds are not available, Endogen
may be required to significantly curtail its operations or obtain funds through
arrangements with collaborative partners that may require Endogen to relinquish
certain material rights to its products.
Risks Related to Growth through Acquisition.
The Company's strategy is to continue its internal growth and to pursue
additional acquisitions of, or relationships with, other companies as strategic
opportunities arise in the biomedical industry and related industries. As a
result, the Company is subject to certain growth-related risks, including the
risk that it will be unable to retain personnel or acquire other resources
necessary to adequately accommodate such growth. There can be no assurance that
any suitable opportunities for future strategic acquisitions or relationships
will arise or, if they do arise, that the transactions contemplated thereby
could be completed. There can be no assurance that the Company will be able to
integrate effectively into the Company the businesses that the Company has
acquired or those that it may acquire in the future. In addition, such
transactions are subject to various risks generally associated with the
acquisition of businesses, including the financial impact of expenses associated
with the integration of businesses and the diversion of management resources.
There can be no assurance that any recent or future acquisition or other
strategic relationship will not have an adverse impact on the Company's business
or results of operations. If suitable opportunities arise in the future, the
Company anticipates that it would finance such transactions, as well as its
internal growth, through working capital or, in certain instances, through
additional debt or equity financing. There can be no assurance, however, that
such debt or equity financing would be available to the Company on acceptable
terms when, and if, suitable strategic opportunities arise.
Uncertainty of Future Profitability.
To sustain future profitability Endogen must, among other things,
continue to market its current research products and successfully introduce new
products to the market. There can be no assurance that Endogen will be able to
continue manufacturing its current products, successfully develop new products
or that such products, if developed, will be in demand by customers. Endogen
expects to incur substantial expenses over the next several years as its product
lines and operations expand. There can be no assurance that Endogen will be able
to sustain profitability.
Dependence on Technology Licensing.
Endogen is highly dependent on technology and product licensing
arrangements as a principal source for the basic components used in the
development and manufacture of its products. Endogen
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expects to continue to need licenses to proprietary cell lines, patents or other
proprietary rights of third parties. No assurance can be given that any licenses
required under any such patents or proprietary rights would be made available on
terms acceptable to Endogen, if at all. In addition, certain of Endogen's
technology and product licenses have been obtained under non-exclusive terms. No
assurances can be given that such technologies or products will not be licensed
or commercialized by competitors and marketed to the same customers. See
"BUSINESS - Product Licensing" herein.
Competition and Risk of Technological Obsolescence.
Competitors of Endogen in the United States and abroad are numerous and
include, among others, biotechnology companies, diagnostics manufacturers and
catalog supply companies. Endogen's success depends upon developing and
maintaining a competitive position in the development of products and
technologies in its area of focus. Competition from other research products and
diagnostics companies is intense and expected to increase as new products enter
the market and new technologies become available. Endogen's competitors may also
succeed in developing technologies and products that are more effective than any
which have been or are being developed by Endogen or that render Endogen's
technologies or products obsolete or noncompetitive. Endogen's competitors may
also succeed in obtaining patent protection or other intellectual property
rights that would block Endogen's ability to develop new products. Finally, many
of these competitors have substantially greater research and development
capabilities, manufacturing, regulatory and marketing experience and financial
and managerial resources than Endogen. See "BUSINESS - Competition" herein.
Government Regulation.
Endogen's research and development programs, as well as its manufacturing
and marketing operations, are subject to extensive regulation by numerous
governmental authorities in the United States and other countries. Certain of
Endogen's products are subject to governmental approval for continued commercial
sale. The manufacturing and marketing of additional products in the future for
diagnostic use would be subject to the rigorous testing and approval processes
of the FDA and corresponding foreign regulatory authorities.
Dependence on Proprietary Technology.
Endogen's success will depend, in part, on its ability to preserve its
trade secrets and operate without infringing the proprietary rights of third
parties. Endogen could encounter delays in product market introductions while it
attempts to design around such patents or other rights, or be unable to develop,
manufacture or sell such products. See "BUSINESS - Patents, Trademarks and Trade
Secrets" herein.
Endogen also seeks to protect its proprietary technology, including
technology which may not be patented or patentable, in part by confidentiality
agreements and, if applicable, inventors' rights agreements with its
collaborators, advisors, employees and consultants. There can be no assurance
that these agreements will not be breached, that Endogen will have adequate
remedies for any breach, or that Endogen's trade secrets will not otherwise be
disclosed to, or discovered by, competitors.
Commercial Sales and Marketing Requirements.
Endogen currently sells its research products directly to end-users in
the United States and through distributors abroad. While Endogen has expanded
its marketing and sales force, there can be no
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assurance that Endogen will be able to further expand its sales and distribution
capabilities for the research market without undue delays or expenditures or
that it will be successful in maintaining market acceptance for its products.
Dependence Upon Key Personnel.
Endogen is highly dependent on the members of its management and
scientific staff, the loss of whom could have a material adverse effect on
Endogen. Endogen also depends on scientific advisors, who may have commitments
that limit their availability to Endogen. In addition, Endogen believes that its
future success will depend in large part upon its ability to attract and retain
highly skilled scientific, managerial and marketing personnel. Endogen faces
significant competition for such personnel from other companies, research and
academic institutions, government entities and other organizations. There can be
no assurance that Endogen will be successful in hiring or retaining the
personnel it requires for continued growth. The failure to hire and retain such
personnel could materially and adversely affect Endogen's prospects. See
"BUSINESS - Employees" herein.
International Operations.
The percentage of revenues from international sales were 44%, 33% and 32%
in fiscal years 1996, 1995 and 1994, respectively. Endogen believes that
international sales will continue to represent a significant portion of its
business. Endogen's international business and financial performance may be
adversely affected by such matters as fluctuations in exchange rates, tariff
regulations and difficulties in obtaining export licenses. In addition,
Endogen's business may be adversely affected by lower sales levels that
typically occur during the summer months in Europe and other parts of the world.
ITEM 2. PROPERTIES.
Endogen leases but does not own real property. Endogen's executive
offices and manufacturing operations currently occupy approximately 38,000
square feet located at 6-8 Gill Street, Woburn, Massachusetts pursuant to a
lease, acquired through the TCD acquisition, which expires in June 2001. Rent
payments at this facility totaled approximately $68,000 from March 4, 1996
through May 31, 1996. Annual rent payments for each of the remaining years under
the lease will average approximately $229,000, payable in monthly installments.
In addition, Endogen pays certain operating expenses and will depreciate
approximately $938,000 of existing leasehold improvements over the
three-and-one-half years remaining in the initial term of the Gill Street lease.
In connection with the acquisition of TCD, Endogen is in the process of
consolidating all operations formerly located at 640 Memorial Drive, Cambridge,
Massachusetts to Woburn, Massachusetts. On May 31, 1996, Endogen entered into a
lease termination agreement with Massachusetts Institute of Technology ("MIT")
covering the approximately 21,000 square feet located at 640 Memorial Drive,
Cambridge, Massachusetts. Endogen has been released from all commitments under
the Cambridge lease and, in addition, will be reimbursed approximately $354,000
by MIT for undepreciated leasehold improvements over a 33-month period. Endogen
will continue to occupy approximately 5,000 square feet of laboratory space at
the Cambridge, Massachusetts location until September 29, 1996 through a
sub-lease from Millennium Pharmaceuticals, Inc.
On August 1, 1996, Endogen entered into a three-year lease agreement with
Landman Omnibus XI Limited Partnership for approximately 12,000 square feet of
office and laboratory space at 30 Commerce Way, Woburn, Massachusetts. Rent will
be payable effective December 1, 1996. Payments will total
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approximately $52,000 for the year ending May 31, 1997 and afterwards will
average approximately $103,000 per year, payable in monthly installments.
The Company believes its present facilities are adequate to meet current
needs.
ITEM 3. LEGAL PROCEEDINGS.
Endogen is not a party to and none of its property is subject to any
material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders during the
fourth quarter of the Company's fiscal 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock was traded on the NASD OTC Bulletin Board(SM)
under the symbol "ENDG" since its initial public offering on March 19, 1993. The
Company's Common Stock has been traded on the Nasdaq SmallCap Market since
September 18, 1995 under the symbol "ENDG" and on the Boston Stock Exchange
under the symbol "EDG" since May 12, 1994. Prior to March 19, 1993, there was no
public market for the Company's Common Stock. The following table sets forth the
range of quarterly high and low bid information for the Common Stock as reported
by the National Quotation Bureau Incorporated until September 17, 1995 and the
range of quarterly high and low sales prices as reported on Nasdaq SmallCap
Market from September 18, 1995 forward. Such over-the-counter market quotations
reflect inter-dealer prices, without retail markups, markdowns or commissions
and may not necessarily represent actual transactions.
High Low
Fiscal 1995
First Quarter.......................... 1 7/8 1
Second Quarter......................... 2 1
Third Quarter.......................... 3 1 1/8
Fourth Quarter......................... 3 3/16 2 1/4
Fiscal 1996
First Quarter.......................... 4 1/8 3 3/16
Second Quarter......................... 4 7/8 3
Third Quarter.......................... 4 1/8 3 1/32
Fourth Quarter......................... 5 1/4 3 1/4
Fiscal 1997
First Quarter through
August 23, 1996 5 1/8 3 3/16
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As of August 23, 1996, there were approximately 538 shareholders of
record. The Company believes that shares of the Company's Common Stock held in
bank, money management, institution and brokerage house "nominee" names may
account for at least an estimated 1,200 additional beneficial holders.
The Company has never paid cash dividends on its Common Stock and has no
present intention to pay cash dividends in the future. The Company intends to
retain any future earnings to finance the growth of the Company.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain financial data with respect to the
Company for the five fiscal years ended May 31, 1996. The annual data for the
five years ended May 31, 1996 have been derived from financial statements
audited by Price Waterhouse, LLP, independent accountants. The balance sheets at
May 31, 1995 and May 31, 1996, respectively, and the related statements of
operations, of changes in stockholders' equity and of cash flows for the three
years ended May 31, 1996 and the notes thereto, appear elsewhere in this report.
The selected financial data is qualified by reference to and
<PAGE>
-14-
should be read in conjunction with the financial statements and notes thereto
and with Management's Discussion and Analysis of Financial Condition and Results
of Operations included elsewhere in this report.
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Statement
Data:
Revenues $1,846,003 $2,557,995 $3,266,410 $5,072,075 $6,622,161
Cost of sales 676,100 769,369 1,037,048 1,772,051 2,476,997
Research and
development
expenses 397,562 513,064 758,772 956,386 1,124,910
Purchased in-process research and
development -- -- -- 579,600
Selling, general, and
administrative
expenses 941,119 1,143,891 1,872,499 2,337,700 3,130,629
Income (loss) from
operations (168,778) 131,671 (401,909) 5,938 (689,975)
Net income (loss) (174,815) 132,492 (370,089) 24,302 (700,539)
Net income (loss)
per share (.29) .02 (.14) .01 (.25)
Weighted average common and common
equivalent shares outstanding 988,467 1,990,051 2,592,600 2,792,229 2,835,697
</TABLE>
<TABLE>
<CAPTION>
May 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 397,652 $2,964,743 $1,967,888 $2,378,996 $2,143,598
Total assets 1,083,829 4,003,953 3,742,669 4,415,153 6,556,380
Total long-term debt 31,150 82,501 53,616 334,411 2,060,015
Redeemable convertible
preferred stock 1,115,214 -- -- -- --
Total stockholders'
equity(1) 657,857 3,355,153 3,021,309 3,181,774 2,891,353
</TABLE>
- -----------------------------
(1) Endogen has not declared cash dividends during any of the periods
presented.
<PAGE>
-15-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion includes forward-looking statements, including,
but not limited to, statements with respect to the Company's future financial
performance, operating results, plans and objectives, and actual results may
differ materially from those currently anticipated depending upon a variety of
factors, including those described above. See "BUSINESS - Risk Factors" herein.
Results of Operations
As an aid to understanding Endogen's operating results, the following
table shows each item from the statement of operations expressed as a percentage
of revenues.
PERCENTAGE OF REVENUES
Fiscal year ended May 31,
1994 1995 1996
----- ---- ----
Revenues 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 31.8% 34.9% 37.3%
Selling, general, and administrative 57.3% 46.1% 47.3%
Research and development 23.2% 18.9% 17.0%
Purchased in-process R&D -- -- 8.8%
Income (loss) from operations (12.3%) .1% (10.4%)
Interest income (expense) net 1.0% .4% (.2%)
Net income (loss) (11.3%) .5% (10.6%)
As described below, the primary reason for the net loss of $700,539 or
$0.25 per share for the fiscal year ended May 31, 1996 were fiscal fourth
quarter charges of $579,600, or $0.20 per share, relating to purchased
in-process research and development associated with the acquisition of
substantially all of the assets and operating business of T Cell Diagnostics
("TCD") in March 1996 as well as other charges of approximately $384,400, or
$0.14 per share, related to the TCD acquisition and integration of the two
operations.
Revenues
Total revenues of Endogen were $6,622,161, $5,072,075, and $3,266,410 in
fiscal years 1996, 1995, and 1994, respectively. Total revenues increased by
$1,550,086, or 31%, from fiscal 1995 to fiscal 1996 and increased by $1,805,665,
or 55%, from fiscal 1994 to fiscal 1995. Revenues from all three years were
derived entirely from product sales. Revenues increased primarily because of
expanded sales of existing products and the introduction of new products. The
consolidation of the TCD product revenues beginning in March 1996 contributed to
the growth of revenues for the fiscal fourth quarter and year ended May 31,
1996.
Cost of Sales
Cost of sales was $2,476,997, $1,772,051, and $1,037,048 for fiscal years
1996, 1995, and 1994, respectively. Cost of sales as a percentage of product
revenues increased to 37% in fiscal 1996 from 35% in fiscal 1995, due primarily
to the increased inventory valuation, and subsequent charge to cost of goods of
the finished goods acquired from TCD under purchase accounting rules and sold
during the fiscal fourth quarter. The difference between 35% in fiscal 1995 and
32% in fiscal 1994 was due
<PAGE>
-16-
primarily to the addition of manufacturing staff in order to meet increased
customer demand for Endogen products, and also to higher overhead costs
associated with the Cambridge manufacturing facility which was occupied in April
1994.
Research and Development Expenses
Research and development expenses were $1,124,910 for the year ended May
31, 1996, up from $956,386 in fiscal 1995 and $758,772 in fiscal 1994. As a
percentage of revenues, research and development expenses were 17% in fiscal
1996, versus 19% in fiscal 1995 and 23% in fiscal 1994. The Company's 1996
spending on R&D, which increased 18% from fiscal 1995 to fiscal 1996 and 26%
from fiscal 1994 to fiscal 1995, reflects the continued commitment to invest in
the development of new products. However, R&D spending decreased from 19% of
revenues in fiscal 1995 to 17% of revenues in fiscal 1996 as a direct result of
the growth of Endogen's business.
The Company also recognized a charge of $579,600 in the fourth quarter of
fiscal 1996 for purchased in-process R&D in connection with the TCD acquisition.
The purchased in-process R&D consisted of several early-stage EIA kit
development projects. At the date of acquisition the technology underlying such
projects was unproven and had no future alternative uses. The valuation of the
purchased in-process R&D expense was conducted using discounted cash flow
analysis by offsetting the costs of completing the projects against the
projected net cash flows which could result upon commercialization. It is
estimated that to complete development of the acquired technology into
commercially viable products, it would take up to one year and an estimated
$425,000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $3,130,629, $2,337,700,
and $1,872,499 in fiscal years 1996, 1995, and 1994, respectively. Selling,
general and administrative expenses increased by $792,929 from fiscal 1995 to
fiscal 1996 as the field sales force, staffing and overhead charges increased.
Selling, general and administrative expenses were 47% as a percentage of product
revenue for fiscal 1996 versus 46% for fiscal 1995. This increase is due to
charges associated with the acquisition and integration of the TCD business into
Endogen. Looking at fiscal 1995 versus fiscal 1994, selling, general and
administrative expenses decreased to 46% of revenues from 57% due to the
substantially higher sales level and administrative cost controls.
Interest Income and Interest Expense
In fiscal 1996, net interest expense was $10,564 compared to net interest
income of $18,364 in fiscal 1995 and $31,820 in fiscal 1994. This is a result of
a decrease of cash balances over the past two years due to the expansion of
Endogen's business as well as increased borrowing levels related to the
acquisition of certain assets from TCD in March 1996.
Income Taxes
Endogen did not have a provision for income taxes for fiscal years 1996,
1995, or 1994. In fiscal year 1995, Endogen reported net income of $24,302 but
had sufficient net operating loss carryforwards to offset taxable income and
research and development tax credit carryforwards to reduce tax liabilities. In
fiscal years 1996 and 1994, Endogen reported net losses of $700,539 and
$370,089, respectively.
<PAGE>
-17-
Inflation and Changing Prices
The Company believes that inflation has not had a material effect on its
operations or on its financial condition.
Foreign Currency Transactions
Substantially all of Endogen's revenues generated outside of the United
States are negotiated, invoiced and paid in U.S. dollars. Consequently, there
have been no gains or losses to date on foreign transactions.
New Accounting Standard
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," was issued in October 1995. In fiscal
1997, the Company intends to adopt the pro forma disclosure method outlined in
SFAS No. 123 and continue to measure compensation cost under the provisions of
APB Opinion No. 25, "Accounting for Stock Issued to Employees." Because the pro
forma disclosure method has been selected, the adoption of SFAS No. 123 will not
impact the Company's results of operations or financial position.
Liquidity and Capital Resources
The continued growth of Endogen's business during the year ended May 31,
1996 has increased working capital needs. This included financing inventories
which increased by $308,208 and accounts receivable which increased by $602,350
as well as expanded manufacturing capacity in the form of property, plant and
equipment. The increased levels of inventory and accounts receivable include
amounts assumed in the CSI acquisition and the TCD acquisition. Endogen has
financed its liquidity needs primarily with cash in the bank. In addition,
Endogen issued a convertible subordinated note in the amount of $2,002,978 in
connection with the TCD acquisition. At May 31, 1996, Endogen had utilized
$450,000 of a $500,000 working capital line of credit with a bank. Subsequent to
year end, the working capital line of credit has been increased to $850,000 with
an expiration in August 1997 and a $400,000 term loan for the purchase of fixed
assets has been added.
At May 31, 1996, Endogen's cash and cash equivalents position was
$763,739, a decrease of $540,220 from May 31, 1995. Net cash provided by
operations in fiscal 1996 was $732,855, in contrast to $112,463 used in fiscal
1995. However, acquisition of fixed assets in the amount of $346,033, the cash
used in the purchase of CSI in the amount of $100,000 and cash utilized in the
acquisition of TCD in the amount of $1,230,005 resulted in a total cash use for
investing activities of $1,676,038. Further cash was provided through an
increase in borrowings of $95,751 and proceeds from the issuance of common stock
of $307,212.
The Company expects to continue expanding operations through internal
growth and strategic acquisitions offering products similar or complementary to
those offered by the Company. Although the Company has no material current
acquisition agreements or arrangements, there may be opportunities which require
additional external financing, and the Company may from time to time seek to
obtain additional funds from public or private issuance of equity or debt
securities. There can be no assurance that such financing will be available at
all or on terms acceptable to the Company. The Company estimates that its
working capital, cash flow from operations and available borrowings under credit
arrangements will be sufficient to fund the Company's current operations through
fiscal 1997.
The foregoing statements contain forward-looking statements which involve
risks and uncertainties. The Company's actual experience may differ materially
from that discussed above.
<PAGE>
-18-
Factors that might cause such a difference include, but are not limited to,
those discussed in "BUSINESS - Risk Factors," as well as future events that have
the effect of reducing the Company's available cash balances, such as
unanticipated operating losses or capital expenditures or cash expenditures
related to possible future acquisitions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is contained in the financial
statements and schedules set forth in Item 14(a) under the captions "Financial
Statements" and "Financial Statement Schedules" as a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters during the Company's two most recent
fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
The information concerning directors of the Company required under this
item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's fiscal year ended May 31, 1996
under the heading "Election of Directors."
Executive Officers
The information concerning executive officers of the Company required
under this item is incorporated herein by reference to the Company's definitive
proxy statement pursuant to Regulation 14A, to be filed with the Commission not
later than 120 days after the close of the Company's fiscal year ended May 31,
1996 under the heading "Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION.
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Commission not later than 120 days after the close of
the Company's fiscal year ended May 31, 1996, under the heading "Compensation
and Other Information Concerning Directors and Officers."
<PAGE>
-19-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Commission not later than 120 days after the close of
the Company's fiscal year ended May 31, 1996, under the headings "Principal
Stockholders" and "Election of Directors."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Commission within 120 days after the close of the
Company's fiscal year ended May 31, 1996, under the headings "Principal
Stockholders" and "Election of Directors."
<PAGE>
-20-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
For the following financial information included herein, see
Index on page F-1.
Report of Independent Accountants
Balance Sheet at May 31, 1995 and May 31, 1996.
Statement of Operations for the three years ended
May 31, 1996.
Statement of Changes in Stockholders' Equity for the
three years ended May 31, 1996.
Statement of Cash Flows for the three years ended
May 31, 1996.
Notes to Financial Statements.
2. Financial Statement Schedule.
For the following financial information included herein,
see Index on page F-1.
II - Valuation and Qualifying Accounts and
Reserves
3. List of Exhibits.
Exhibit
Number
- -------
2.1 Asset Purchase Agreement dated as of March 4, 1996 by and between
Endogen, Inc., T Cell Diagnostics, Inc. and T Cell Sciences, Inc.**
3.1 Restated Articles of Organization of Endogen, Inc.*
3.2 By-laws of Endogen, Inc., as amended.*
4.1 $2,002,978 Convertible Subordinated Note dated March 4, 1996 of
Endogen, Inc. to T Cell Diagnostics, Inc.**
10.1 Endogen 1992 Stock Plan.*
10.1A 1993 Non-Employee Director Stock Option Plan.**
10.2 Key Man Life Insurance in the amount of $250,000 with Columbian
Mutual Life Insurance Company (Owen Dempsey).*
<PAGE>
-21-
10.3 Non-competition Agreement with Owen Dempsey dated November 30, 1990
(Schedule of Additional Agreements).*
10.4 License Agreement dated as of January 25, 1989 between Endogen and
Dana-Farber Cancer Institute.*
10.5 License Agreement dated as of March 30, 1990 between Endogen and
Dana-Farber Cancer Institute.*
10.6 License Agreement dated as of December 1, 1990, as amended on
September 3, 1991, and September 2, 1992, between Endogen and
Schering Corporation.*
10.7 Exclusive License Agreement dated as of October 22, 1990 between
Endogen and The Wistar Institute of Anatomy and Biology.*
10.8 Distribution and Supply Agreement dated as of March 6, 1991, as
amended on September 2, 1991, between Endogen and Biozol Diagnostica
Vertrieb GmbH.*
10.9 Supply Agreement dated as of September 6, 1990 between Endogen and
Peprotech Incorporated.*
10.10 Stockholder's Agreement dated November 3, 1986 by and among Endogen
and Mark Allegretta, Owen Dempsey, Roy Dempsey, Wallace Dempsey, and
Phillip Servidori*, as amended on March 19, 1993.**
10.11 Stock Purchase Agreement dated December 23, 1986 by and between
Endogen and Roy Dempsey (Schedule of Additional Agreements)*, as
amended on March 19, 1993.**
10.12 Registration Rights Agreement dated as of November 30, 1990, as
amended on April 4, 1991, by and among Endogen, G&G Diagnostics
Limited Partnership, Biozol Diagnostica Vertrieb GmbH, and
Massachusetts Technology Development Corporation*, as amended on
March 19, 1993.**
10.13 License Agreement dated November 15, 1992 between Endogen and Syntex
(U.S.A.) Inc.**
10.14 Agreement dated February 10, 1993 between Endogen and Schering
Corporation.**
<PAGE>
-22-
10.15 Amendment to Exclusive License Agreement dated as of August 18, 1993
between Endogen and Wistar Institute of Anatomy and Biology.**
10.16 Amendments to Agreement dated February 10, 1993 between Endogen and
Schering Corporation dated September 22, 1993 and May 9, 1994.**
10.17 Distribution Agreement dated November 1, 1994 between Endogen, Inc.
and Amersham International PLC. (Filed without schedules)**
10.18 Financial Consulting Agreement dated as of December 15, 1994 by and
between Endogen, Inc. and Barber and Bronson, Incorporated.**
10.19 Amendment dated March 3, 1995 to Distribution and Supply Agreement
dated as of March 6, 1991, as amended on September 2, 1991, between
Endogen and Biozol Diagnostica Vertrieb GmbH.**
10.20 Asset Purchase Agreement dated as of March 4, 1996 by and among
Endogen, Inc., T Cell Diagnostics, Inc. and T Cell Sciences, Inc.**
10.21 $2,002,978 Convertible Subordinated Note dated March 4, 1996 of
Endogen, Inc. to T Cell Diagnostics, Inc.**
10.22 Registration Rights Agreement dated
March 4, 1996 between Endogen, Inc. and T Cell Diagnostics, Inc.**
<PAGE>
-23-
10.23 Lease Termination Agreement dated as of May 31, 1996 between
Endogen, Inc. and Massachusetts Institute of Technology.**
10.24 Lease dated July 29, 1996 between Endogen, Inc. and Landman Omnibus
XI Limited Partnership.**
10.25 Loan and Security Agreement dated August 28, 1996 between Endogen,
Inc. and Silicon Valley Bank.**
10.26 $850,000 Revolving Promissory Note dated August 28, 1996 of Endogen,
Inc. to Silicon Valley Bank.**
10.27 $400,000 Term Promissory dated August 28, 1996 of Endogen, Inc. to
Silicon Valley Bank.**
10.28 Commercial Lease dated October 13, 1994, as amended, between
Cummings Properties Management, Inc. and T Cell Diagnostics, Inc.**
10.29 Lease Assignment dated March 4, 1996 between T Cell Diagnostics,
Inc. and Endogen, Inc.**
11.1 Statement re: Computation of earnings per share.**
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.**
- ------------
*Previously filed as an exhibit to the Company's Registration Statement on Form
S-4 No. 33-54430 and incorporated herein by reference.
**Previously filed with the Securities and Exchange Commission and incorporated
herein by reference.
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K dated March 4, 1996, on
March 19, 1996 and a Report on Form 8-K/A on May 20, 1996 in connection with the
Asset Purchase Agreement by and among the Company, T Cell Diagnostics, Inc. and
T Cell Sciences, Inc. The Report on 8-K/A includes an audited balance sheet of
TCD at December 31, 1995 and 1994 and audited statements of operations and cash
flows for TCD's fiscal years ended December 31, 1995, 1994 and 1993.
(c) Exhibits.
The Company hereby files as exhibits to this Form 10-K/A those
exhibits listed in Item 14(a)(3), above.
(d) Financial Statement Schedules.
The Company hereby files as financial statement schedules to
this Form 10-K/A those financial statement schedules listed in Item 14(a)(2),
above, which are attached hereto.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused this
Amendment to the Registrant's Report on Form 10-K to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Woburn, Commonwealth
of Massachusetts, on the 25th day of September, 1996.
ENDOGEN, INC.
By: /s/ Owen A. Dempsey
------------------------------
Owen A. Dempsey
President and Chief Executive Officer
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants.........................................F-2
Balance Sheet at May 31, 1995 and 1996....................................F-3
Statement of Operations for the three years ended
May 31, 1996............................................................F-4
Statement of Changes in Stockholders' Equity for
the three years ended May 31, 1996......................................F-5
Statement of Cash Flows for the three years ended
May 31, 1996............................................................F-6
Notes to Financial Statements.............................................F-7
Financial Statement Schedules for the three years ended May 31, 1996:
Schedule II - Valuation and Qualifying Accounts
and Reserves..........................................................F-18
All other schedules are omitted since the required information is inapplicable
or has been presented in the financial statements and related notes.
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Endogen, Inc.
In our opinion, the accompanying financial statements listed in the Index on
page F-1 present fairly, in all material respects, the financial position of
Endogen, Inc. at May 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended May 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
[Signature of Price Waterhouse LLP]
PRICE WATERHOUSE LLP
Boston, Massachusetts
August 2, 1996, except as to Note 16,
which is as of August 28, 1996
F-2
<PAGE>
Endogen, Inc.
Balance Sheet
<TABLE>
<CAPTION>
May 31,
1995 1996
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $1,303,959 $ 763,739
Accounts receivable, net of allowance for doubtful accounts of
$11,750 and $20,000 at May 31, 1995 and 1996, respectively 735,993 1,280,280
Accounts receivable - stockholder 91,004 149,067
Inventories 981,694 1,289,902
Prepaid expenses and other current assets 165,314 265,622
--------- -----------
Total current assets 3,277,964 3,748,610
Fixed assets, net 810,293 1,894,982
Patent and license costs, net 203,830 205,120
Other assets 123,066 707,668
--------- -----------
$4,415,153 $ 6,556,380
========= ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of note payable - bank $ 62,882 $ 64,723
Current portion of convertible note payable - 400,596
Current portion of capital lease obligations and other
note payable 42,667 13,355
Accounts payable and accrued expenses 793,419 1,126,338
--------- -----------
Total current liabilities 898,968 1,605,012
--------- -----------
Borrowings under line of credit 250,000 450,000
Note payable - bank 73,106 7,633
Convertible note payable - 1,602,382
Capital lease obligations and other note payable 11,305 -
--------- -----------
334,411 2,060,015
--------- -----------
Stockholders' equity:
Common stock, $.01 par value; 5,000,000 shares authorized; 2,711,561 and
2,949,346 shares issued and outstanding at
May 31, 1995 and 1996, respectively 27,116 29,493
Additional paid-in capital 3,741,999 4,149,740
Accumulated deficit (587,341) (1,287,880)
--------- -----------
Total stockholders' equity 3,181,774 2,891,353
--------- -----------
$4,415,153 $ 6,556,380
========= ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-3
<PAGE>
Endogen, Inc.
Statement of Operations
<TABLE>
<CAPTION>
Year ended May 31,
1994 1995 1996
<S> <C> <C> <C>
Revenue:
Product sales $2,873,586 $4,545,078 $6,129,958
Product sales to stockholder 392,824 526,997 492,203
--------- --------- -----------
3,266,410 5,072,075 6,622,161
--------- --------- -----------
Costs and expenses:
Cost of sales 900,271 1,567,908 2,289,960
Cost of sales to stockholder 136,777 204,143 187,037
Selling, general and administrative 1,872,499 2,337,700 3,130,629
Research and development 758,772 956,386 1,124,910
Purchased in-process research and
development - - 579,600
--------- --------- -----------
3,668,319 5,066,137 7,312,136
--------- --------- -----------
Income (loss) from operations (401,909) 5,938 (689,975)
Interest income (expense), net 31,820 18,364 (10,564)
--------- --------- -----------
Net income (loss) $(370,089) $ 24,302 $(700,539)
========= ========= ===========
Net income (loss) per share $ (.14) $ .01 $ (.25)
========= ========= ===========
Weighted average common and common equivalent
shares outstanding 2,592,600 2,792,229 2,835,697
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-4
<PAGE>
Endogen, Inc.
Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Number of Additional Total
shares of Par paid-in Accumulated stockholders'
common stock Value capital deficit equity
<S> <C> <C> <C> <C> <C>
Balance at May 31, 1993 2,560,563 $25,606 $3,571,101 $ (241,554) $3,355,153
Sale of common stock, pursuant to exercise
of stock options 45,498 455 35,790 - 36,245
Net loss - - - (370,089) (370,089)
---------- ------- --------- ------------- ----------
Balance at May 31, 1994 2,606,061 26,061 3,606,891 (611,643) 3,021,309
Sale of common stock, pursuant to exercise
of stock options 105,500 1,055 60,108 - 61,163
Issuance of warrants for
financial advisory services (Note 10) - - 75,000 - 75,000
Net income - - - 24,302 24,302
---------- ------- --------- ------------- ----------
Balance at May 31, 1995 2,711,561 27,116 3,741,999 (587,341) 3,181,774
Sale of common stock, pursuant to exercise
of stock options 210,079 2,100 305,112 - 307,212
Common stock issued pursuant to
acquisitions 27,706 277 102,629 - 102,906
Net loss - - - (700,539) (700,539)
---------- ------- --------- ------------- ----------
Balance at May 31, 1996 2,949,346 $29,493 $4,149,740 $(1,287,880) $2,891,353
========== ======= ========= ============= ==========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-5
<PAGE>
Endogen, Inc.
Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Year ended May 31,
1994 1995 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (370,089) $ 24,302 $ (700,539)
Adjustments to reconcile net (loss) income
to net cash (used for) provided by
operating activities:
Depreciation and amortization 170,508 325,550 492,191
Loss on disposal of fixed assets -- -- 50,944
Purchased in-process research and development -- -- 579,600
Increase in accounts receivable (113,963) (300,621) (200,297)
Decrease (increase) in accounts receivable-stockholder 5,772 (13,801) (58,063)
(Increase) decrease in inventories (183,326) (293,989) 251,422
(Increase) decrease in prepaid expenses
and other assets (238,708) 33,568 149,393
Increase in patent and license costs (30,201) (58,439) (76,334)
Increase (decrease) in accounts payable
and accrued expenses 252,661 170,967 244,538
----------- ----------- -----------
Net cash (used for) provided by operations (507,346) (112,463) 732,855
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of fixed assets (635,566) (259,763) (346,033)
Purchase of Cytokines Sciences, Inc. ("CSI") -- -- (100,000)
Purchase of T Cell Diagnostics ("TCD") -- -- (1,230,005)
----------- ----------- -----------
Net cash used for investing activities (635,566) (259,763) (1,676,038)
Cash flows from financing activities:
Net proceeds (repayments) from borrowings
under line of credit (150,000) 250,000 200,000
Proceeds from note payable - bank -- 135,988 --
Repayment of note payable - bank (22,375) (8,606) (63,632)
Repayment of capital lease obligations and
other note payable (30,726) (36,330) (40,617)
Proceeds from issuance of common stock 36,245 61,163 307,212
----------- ----------- -----------
Net cash (used for) provided by financing activities (166,856) 402,215 402,963
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (1,309,768) 29,989 (540,220)
Cash and cash equivalents, beginning of year 2,583,738 1,273,970 1,303,959
----------- ----------- -----------
Cash and cash equivalents, end of year $ 1,273,970 $ 1,303,959 $ 763,739
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 22,871 $ 23,361 $ 42,360
=========== =========== ===========
Supplemental disclosure of non-cash investing and
financing activity:
Capital lease additions $ 23,000 $ -- $ --
=========== =========== ===========
</TABLE>
In connection with the purchase of CSI (Note 15), the Company issued 20,984
shares of common stock valued at $78,690.
In connection with the purchase of TCD (Note 15), the Company issued a
convertible note payable in the amount of $2,002,978 to TCD as part of the
consideration paid. Furthermore, in connection with this acquisition, the
Company issued 6,722 shares of its common stock to a consultant.
In May 1996, the Company sold certain leasehold improvements in exchange for a
note receivable in the amount of $307,341.
The Company ascribed a value of $75,000 to warrants issued in connection with an
investment banking and advisory services agreement entered into in December 1994
(Note 10).
The accompanying notes are an integral part of
these financial statements.
F-6
<PAGE>
Endogen, Inc.
Notes to Financial Statements
1. Organization and History
Endogen, Inc. (the "Company") is principally engaged in the development,
manufacture and sale of biological products and test kits for the
medical research industry. The Company was incorporated in Massachusetts
in June 1983.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company invests its excess cash in money market accounts with
banks. These investments, totalling $1,032,704 and $36,536 at May 31,
1995 and 1996, respectively, mature within three months of the initial
investment. Accordingly, the investments are subject to minimal credit
and market risk and are considered by the Company to be cash
equivalents. In accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the Company has classified its investments as
held-to-maturity which have been recorded at amortized cost on the
Company's balance sheet, which approximates fair value.
Revenue Recognition
The Company recognizes revenue upon product shipment.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method.
Fixed Assets
Fixed assets are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Repair and
maintenance expenditures are charged to expense as incurred.
Patent and License Costs
Costs associated with patents and licensing arrangements are capitalized
as incurred and amortized on a straight-line basis over the estimated
economic lives, which range from 5 to 10 years.
Advertising Costs
Costs associated with sales catalogues are capitalized as incurred and
amortized as the catalogues are distributed.
Income Taxes
The Company utilizes the liability method of accounting for income
taxes, as set forth in Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes". Under this method, deferred tax
liabilities and assets are recognized for the expected future tax
consequences of temporary differences between the carrying amounts and
the tax basis of assets and liabilities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-7
<PAGE>
Endogen, Inc.
Notes to Financial Statements - (Continued)
Net Income (Loss) Per Share
Net income (loss) per share is determined by dividing net income (loss)
by the weighted average number of common shares and common share
equivalents outstanding during the period. Common share equivalents have
been excluded from the computation for periods in which the Company
incurred a net loss because their effect would be antidilutive.
New Accounting Standard
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123").
"Accounting for Stock-Based Compensation," was issued in October 1995.
In fiscal 1997, the Company intends to adopt the pro forma disclosure
method outlined in SFAS No. 123 and continue to measure compensation
cost under the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Because the pro forma disclosure method has been
selected, the adoption of SFAS No. 123 will not impact the Company's
results of operations or financial position.
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
May 31,
1995 1996
<S> <C> <C>
Raw materials and supplies $ 274,544 $ 294,176
Work-in-process 283,463 314,976
Finished goods 423,687 680,750
---------- -----------
$ 981,694 $ 1,289,902
========== ===========
</TABLE>
4. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
Useful life May 31,
in years 1995 1996
<S> <C> <C> <C>
Laboratory equipment 5-7 $ 464,036 $ 896,056
Computer and office
equipment 3-7 307,038 603,540
Leasehold improvements lease term 584,704 945,736
---------- -----------
1,355,778 2,445,332
Accumulated depreciation
and amortization (545,485) (550,350)
----------- ------------
$ 810,293 $ 1,894,982
========== ===========
</TABLE>
At May 31, 1996 and 1995, included in computer and office equipment
are capital leases at a cost of $79,662 with accumulated amortization
of $58,785 and $39,831 at May 31, 1996 and 1995, respectively.
Additionally, included in laboratory equipment at a cost of $84,079
with accumulated depreciation of $58,855, is equipment purchased using
cash resources of $20,000 and issuance of a note payable in the amount
of $64,079 (Note 6).
In May 1996, the Company sold certain leasehold improvements in
exchange for a note receivable in the amount of $307,341. Payments on
this note are due in 33 equal payments commencing July 1, 1996. At May
31, 1996, amounts due within one year, $93,025, are included in prepaid
expenses and other current assets. The remaining balance of $214,316 is
included in other assets.
F-8
<PAGE>
Endogen, Inc.
Notes to Financial Statements - (Continued)
5. Patent and License Costs
Patent and license costs consist of the following:
May 31,
1995 1996
Patent costs $ 68,240 $ 68,240
License costs 304,725 381,059
--------------- ---------------
372,965 449,299
Accumulated amortization (169,135) (244,179)
---------------- ----------------
$ 203,830 $ 205,120
=============== ===============
6. Borrowings
Borrowing Under Line of Credit/Notes Payable - Bank
In February 1995, the Company entered into a line of credit agreement
with a bank providing for maximum borrowings of $500,000. Outstanding
borrowings bear interest at 1.5% above the bank's prime rate (9.75% at
May 31, 1996). The Company had outstanding borrowings of $250,000 at May
31, 1995 which were repaid by the Company in September 1995. In
connection with the Company's acquisition of TCD (Note 15), the Company
borrowed $450,000 under this credit agreement to finance a portion of
the purchase price. On August 28, 1996, the Company entered into a
replacement line of credit agreement with this same bank (Note 16).
In May 1994 and December 1994, the Company entered into fixed asset line
of credit agreements with this same bank. Drawings under the agreements
were permitted through a certain date at which point the line of credit
converted into a term loan payable in thirty equal monthly principal
installments plus interest. Outstanding borrowings under both notes
payable bear interest at 2% above the bank's prime rate (10.25% at May
31, 1996).
Aggregate maturities of the Company's two notes payable are as follows:
1997 $ 64,723
1998 7,633
--------------
$ 72,356
==============
Outstanding borrowings under the agreements are secured by all corporate
assets. The Company is required to comply with certain covenants
including maintaining certain financial statement ratios, a minimum
tangible net worth and minimum profitability levels. At May 31, 1996,
the Company was in compliance with the terms of the agreements or had
obtained the appropriate waiver.
Convertible Note Payable
In connection with the company's acquisition of TCD (Note 15), the
Company issued a convertible note payable in the amount of $2,002,978.
This convertible note payable is payable in semi-annual principal
installments of $200,298 each commencing September 1, 1996. This note
bears interest at 7%. At the option of the holder, such note is
convertible into shares of the Company's common stock at an initial
conversion price equal to $4.63 per share of common stock. Such
conversion is subject to adjustment as defined in the agreement.
F-9
<PAGE>
Endogen, Inc.
Notes to Financial Statements - (Continued)
Aggregate maturities of this convertible note payable are as follows:
1997 $ 400,596
1998 400,596
1999 400,596
2000 400,596
2001 400,594
---------
$2,002,978
=========
Capital Lease Obligations and Other Note Payable
The Company has entered into three capital leases for equipment. The
gross amount of assets recorded under the leases aggregated $79,662 at
May 31, 1996 and 1995 and the total accumulated amortization on those
assets at May 31, 1996 and 1995 aggregated $58,785 and $39,381,
respectively. The remaining principal balance of $13,355 is due in
fiscal 1997.
In July 1992, the Company issued a note payable in the amount of $64,079
in connection with the purchase of certain equipment (Note 4). The
outstanding borrowings are payable in monthly installments of $1,641,
including principal and interest. The outstanding borrowings bear
interest at 10% and are secured by laboratory equipment having a book
value of approximately $25,000 at May 31, 1996. The outstanding
obligations were paid in full in fiscal 1996.
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
May 31,
1995 1996
Accounts payable $ 521,517 $ 624,043
Accrued wages 132,680 138,204
Accrued royalties 80,637 147,357
Accrued professional fees 58,585 216,734
--------- ----------
$ 793,419 $1,126,338
========= ==========
8. Export Sales
The Company generates revenue through product sales to customers outside
the United States. Product sales by geographic area are as follows:
Year ended May 31,
1994 1995 1996
United States $2,211,151 $3,391,600 $3,713,088
Europe 484,120 1,141,061 1,884,371
Japan 473,325 429,145 846,938
Other 97,814 110,269 177,764
---------- ---------- ----------
$3,266,410 $5,072,075 $6,622,161
========== ========== ==========
F-10
<PAGE>
Endogen, Inc.
Notes to Financial Statements - (Continued)
9. Income Taxes
The provision (benefit) for income taxes differs from the amount of
income tax determined by applying the applicable U.S. statutory federal
income tax rate to pretax operating results as a result of the following
differences:
<TABLE>
<CAPTION>
Year ended May 31,
1994 1995 1996
<S> <C> <C> <C>
Expected tax (benefit) $(130,000) $ 9,000 $(245,000)
State and local taxes, net (18,000) 11,000 (4,000)
Purchased in-process research and
development -- -- 203,000
Nondeductible items 18,000 22,000 6,000
Research and development
tax credits (45,000) (74,000) (60,000)
Enacted rate changes (2,000) -- --
--------- --------- ---------
(177,000) (32,000) (100,000)
Benefit of loss not recognized,
increase in valuation allowance 177,000 32,000 100,000
--------- --------- ---------
Provision for income tax $ -- $ -- $ --
========= ========= =========
</TABLE>
F-11
<PAGE>
Endogen, Inc.
Notes to Financial Statements - (Continued)
Components of deferred taxes consist of the following:
<TABLE>
<CAPTION>
May 31,
1995 1996
<S> <C> <C>
Assets:
Accounts receivable reserve $ 5,000 $ 8,000
Inventory reserve 10,000 13,000
Accrued expenses 11,000 7,000
Loss and tax credit carryforwards 331,000 412,000
Consulting expense 20,000 -
Fixed assets 31,000 64,000
Miscellaneous - 8,000
--------------- ---------------
Gross deferred tax assets 408,000 512,000
Deferred tax asset valuation allowance (392,000) (492,000)
---------------- ----------------
16,000 20,000
---------------- ----------------
Liabilities:
Patent costs $ 14,000 $ 9,000
Miscellaneous 2,000 11,000
--------------- ---------------
Gross deferred tax liability 16,000 20,000
--------------- ---------------
$ - $ -
=============== ==============
</TABLE>
At May 31, 1996, the Company has net operating loss carryforwards
available to reduce future federal taxable income and research and
development tax credit carryforwards available to reduce future federal
tax liabilities which expire as follows:
<TABLE>
<CAPTION>
Research and
development
Year of Net operating loss tax credit
expiration carryforward carryforwards
<S> <C> <C>
2003 $ - $ 2,000
2004 - 12,000
2005 - 20,000
2006 - 14,000
2007 - 19,000
2008 - 22,000
2009 200,000 49,000
2010 - 46,000
2011 50,000 10,000
--------------- -----------------
$ 250,000 $ 194,000
============== ================
</TABLE>
F-12
<PAGE>
Endogen, Inc.
Notes to Financial Statements - (Continued)
At May 31, 1996, the Company has net operating loss carryforwards of
$333,000 available to reduce future state taxable income and research
and development and investment tax credit carryforwards available to
reduce future state tax liabilities of $116,000 and $53,000,
respectively. These carryforwards expire in various amounts through
1999.
An ownership change, as defined in the Internal Revenue Code, may limit
the amount of net operating loss and tax credit carryforwards which can
be utilized annually to offset future taxable income or tax liability.
The amount of the annual limitation is determined based upon the
Company's value immediately prior to the ownership change. Future
ownership changes may affect the limitation in future years.
10. Common Stock Warrants
On December 15, 1994, the Company entered into a financial advisory
agreement with an investment banking and brokerage firm. The
compensation agreement with this financial advisor included a five-year
warrant to purchase up to 180,000 shares of the common stock of the
Company at prices ranging from $2.00 to $4.00 per share. The Company
ascribed a value of $75,000 to such warrants which was expensed over the
one year term of the agreement.
11. Stock Option and Stock Purchase Plan
In June 1989, the Company adopted the 1989 Stock Option and Stock
Purchase Plan (the "Plan") which was amended in August 1992 to comply
with Section 16 of the Securities and Exchange Act of 1934 and to make
certain other changes. Under the Plan, officers, employees and certain
other individuals may be awarded shares of common stock or granted
options and rights to purchase up to 768,499 shares of common stock.
Options granted may be either incentive stock options or non-qualified
options. As of May 31, 1996, 152,349 shares are available for future
grant.
Incentive stock options may be granted to any employee at an exercise
price per share of not less than the fair market value per common share
on the date of such grant as determined by the board of directors (not
less than 110% of such value in the case of holders of 10% or more of
the total combined voting power of all classes of the Company's stock).
Non-qualified options may be granted to any employee, officer, director
or consultant at an exercise price per share of not less than the lesser
of book value per common share or fifty percent of the fair market value
per common share on the date of grant.
All options under the Plan are exercisable over periods determined by
the board of directors, not to exceed ten years from the date of grant
(five years in the case of incentive stock options granted to holders of
10% or more of the total combined voting power of all classes of the
Company's stock). The duration of options granted under the Plan has
generally been six to ten years. In the event of termination of the
optionee's relationship with the Company, options not yet exercised
terminate 90 days from the optionee's termination date unless otherwise
specified in the agreement.
F-13
<PAGE>
Endogen, Inc.
Notes to Financial Statements - (Continued)
A summary of stock option activity of the Plan is as follows:
<TABLE>
<CAPTION>
Number of Option
shares price
<S> <C> <C>
Options outstanding at May 31, 1993 114,000 $.33-$1.36
Granted 245,600 $2.25-$2.50
Canceled (10,002) $1.36
Exercised (40,998) $.33-$1.36
---------
Options outstanding at May 31, 1994 308,600 $.33-$2.50
Granted 202,000 $2.00 - $2.75
Canceled (142,200) $1.36 - $2.50
Exercised (1,500) $.33
---------
Options outstanding at May 31, 1995 366,900 $.33 - $2.75
Granted 265,500 $2.00 - $3.94
Canceled (29,250) $1.36 - $3.94
Exercised (29,550) $.33 - $2.75
---------
Options outstanding at May 31, 1996 573,600 $1.36 - $3.94
========
Options exercisable at May 31, 1996 165,425 $1.36-$3.94
========
</TABLE>
The Company has granted non-qualified options to purchase common shares
which were not pursuant to the Plan. At May 31, 1996, there were
outstanding options to purchase 9,000 common shares at $4.71 per share.
At May 31, 1996, all of the non-qualified options not granted pursuant
to the Plan were exercisable.
In fiscal 1994, the Company adopted the 1993 Non-Employee Stock Option
Plan. This plan provides for automatic grants to Board of Director
members, who are not employees or officers of the Company, on successive
anniversary dates, as determined under this plan. Options granted under
this plan shall not exceed 200,000 and shall be at a purchase price that
equals the fair market value per common share on the date of grant.
Options generally vest over a two year period and have a term of ten
years from the date of grant.
F-14
<PAGE>
Endogen, Inc.
Notes to Financial Statements - (Continued)
A summary of stock option activity from inception of the plan is as
follows:
<TABLE>
<CAPTION>
Number of Option
shares price
<S> <C> <C>
Options granted in fiscal 1994 and outstanding at May 31, 1994 36,000 $2.25
Granted 36,000 $2.00
--------
Options outstanding at May 31, 1995 72,000 $2.00 - $2.25
Granted 36,000 $3.94
Cancelled (16,000) $2.25 - $3.94
Exercised (20,000) $2.00 - $3.94
---------
Options outstanding at May 31,1996 72,000 $2.00 - $3.94
========
Options exercisable at May 31, 1996 48,000 $2.00 - $3.94
========
</TABLE>
12. Commitments
The Company has entered into license agreements pursuant to which it
pays royalties generally ranging from 1% to 10% on sales of certain
products. Royalty rates may be higher on bulk sales of certain products
to other resellers. Royalty payments made in connection with these
agreements in fiscal 1994, 1995 and 1996 were $132,000, $194,000 and
$243,000 respectively.
The Company leases its office and laboratory space under non-cancelable
operating leases which expire through October 1999. The Company also
leases certain office and computer equipment under operating leases.
Future minimum rental commitments under these operating leases are as
follows:
1997 $ 328,000
1998 384,000
1999 397,000
2000 168,000
---------------
$ 1,277,000
===============
For the years ended May 31, 1994, 1995 and 1996 rent expense was
approximately $145,000, $233,000, and $313,000, respectively. In
addition, the Company is required to pay a portion of certain tax and
operating expenses incurred by the lessor.
13. Significant Customers
During the year ended May 31, 1994, the Company recorded revenue of
approximately $393,000 (Note 14) and $473,000 from two customers. During
the year ended May 31, 1995, the Company recorded revenue of
approximately $527,000 (Note 14) and $543,000 from two customers. During
the year ended May 31, 1996, the Company recorded revenue of
approximately $1,224,000 and $657,000 from two customers.
F-15
<PAGE>
Endogen, Inc.
Notes to Financial Statements - (Continued)
14. Related Party Transactions
In March 1991, the Company entered into a distribution agreement with a
corporate stockholder. The agreement entitled the stockholder to
exclusively distribute the Company's labeled products to individual
country distributors in certain European countries. Under the agreement,
the Company is required to sell its products to the distributor at 50%
of the Company's current United States list price. Effective September
1, 1996 the agreement has been amended so that Endogen will distribute
its products directly to individual country distibutors in Europe. The
shockholder will continue as Endogen's exclusive distributor in Germany.
Sales under this agreement and accounts receivable from this stockholder
are reflected on the statement of operations and the balance sheet,
respectively.
The Company paid a director of the Company $38,000, $112,000 and $47,000
under a consulting contract in fiscal 1994, 1995, and 1996,
respectively.
15. Acquisitions
T-Cell Diagnostics
On March 4, 1996, the Company acquired substantially all of the net
assets of T-Cell Diagnostics ("TCD"), a biomedical products
manufacturer, for a total purchase price of approximately $3,300,000,
including acquisition costs of approximately $270,000. In connection
with the acquisition, the Company is required to make additional
payments to TCD if annual net sales of certain products exceed a
predetermined level during the two year period following the close of
the acquisition. The Company's results for the year ended May 31, 1996
include the operations of TCD from the date of acquisition.
The acquisition was accounted for using the purchase method of
accounting. Accordingly, the purchase price has been allocated to the
net assets acquired based on their estimated fair values. A portion of
the purchase price has been allocated to inprocess research and
development ($579,600), which was expensed upon the close of the
acquisition, and acquired technology ($305,290), which is included in
other assets at May 31, 1996. Acquired technology will be amortized over
a period of five years commencing on the date of acquisition.
Amortization expense related to acquired technology was not material for
the year ended May 31, 1996.
The following unaudited pro forma financial information combines the
results of operations as if the acquisition had occurred at the
beginning of each respective period after giving effect to certain pro
forma adjustments. The unaudited pro forma financial information for the
year ended May 31, 1995 combines the historical financial information of
the Company for the year ended May 31, 1995 and the unaudited financial
historical information of TCD for the twelve months ended March 31,
1995. The unaudited pro forma financial information for the year ended
May 31, 1996 combines the historical financial information of the
Company for the nine months ended February 29, 1996, the unaudited
financial historical information of TCD for the nine months ended
December 31, 1995, and the consolidated results of the combined
companies from the date of acquisition, March 4, 1996, through May 31,
1996. This pro forma financial information is presented for
informational purposes only and management believes it is not indicative
of the results of operations which will occur in the future.
Year Ended May 31,
1995 1996
------------ -----------
Revenue $ 7,793,912 $ 8,339,238
=========== ===========
Net loss $(2,717,246) $(1,662,812)
=========== ===========
Net loss per share $ (0.97) $ (0.59)
=========== ===========
The above pro forma financial information does not include a $579,600
non-recurring charge for purchased in-process research and development
that was expensed upon the close of the acquisition. The pro forma per
share amount of this non-recurring charge is $(0.21) and $(0.20) for
fiscal 1995 and 1996, respectively.
In connection with this acquisition, the Company is committed to enter
into a manufacture and supply agreement with TCD whereby the Company has
agreed to manufacture and sell certain products to TCD over a five year
period. In fiscal 1996 Net sales to TCD of products which will be
subject to the agreement totaled approximately $2,000.
F-16
<PAGE>
Cytokine Sciences, Inc.
In January 1996, the Company purchased substantially all of the assets
of Cytokine Sciences, Inc. (CSI), a manufacturer and seller of
biological products and test kits. The purchase price included $100,000
cash and 20,984 shares of Endogen common stock. The acquisition has been
accounted for by the purchase method of accounting and, accordingly, the
purchase price has been allocated to the net assets acquired based on
their estimated fair values. The results of operations of CSI have been
included in the combined results of operations since the date of
acquisition.
16. Subsequent Event
On August 28, 1996, the Company entered into a replacement line of
credit agreement with a bank providing for maximum borrowings of
$850,000. Outstanding borrowings, which include the $450,000 discussed
in the first paragraph of Note 6, bear interest at 1.5% above the bank's
prime rate (9.75% at May 31, 1996) and must be paid in full by August
27, 1997.
Also, on August 28, 1996 the Company borrowed an additional $400,000
from this bank in the form of a term loan. Such term loan is payable in
thirty-six equal monthly principal installments plus interest at 1.5%
above the bank's prime rate.
F-17
<PAGE>
Schedule II
Endogen, Inc.
Valuation and Qualifying Accounts and Reserves
<TABLE>
<CAPTION>
Additions
-----------------------
(1) (2)
Charged to Charged
Balance at Costs and to Other Deductions- Balance at
Description May 31, expenses accounts write-offs May 31, 1996
- ----------- -------- ---------- ---------- ------------ ------------
1995
----
<S> <C> <C> <C> <C> <C>
Deferred tax asset
valuation allowance $392,000 100,000 - - $492,000
Additions
------------------------
(1) (2)
Charged to Charged
Balance at Costs and to Other Deductions- Balance at
Description May 31, expenses accounts write-offs May 31, 1995
- ----------- -------- ---------- ---------- ------------ ------------
1994
----
Deferred tax asset
valuation allowance $360,000 32,000 - - $392,000
Additions
--------------------------
(1) (2)
Charged to Charged
Balance at Costs and to Other Deductions- Balance at
Description May 31, expenses accounts write-offs May 31, 1994
- ----------- -------- ---------- ---------- ------------ ------------
1993
----
Deferred tax asset
valuation allowance $183,000 177,000 - - $360,000
</TABLE>
F-18
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- -------
2.1 Asset Purchase Agreement dated as of March 4, 1996 by and between
Endogen, Inc., T Cell Diagnostics, Inc. and T Cell Sciences, Inc.**
3.1 Restated Articles of Organization of Endogen, Inc.*
3.2 By-laws of Endogen, Inc., as amended.*
4.1 $2,002,978 Convertible Subordinated Note dated March 4, 1996 of
Endogen, Inc. to T Cell Diagnostics, Inc.**
10.1 Endogen 1992 Stock Plan.*
10.1A 1993 Non-Employee Director Stock Option Plan.**
10.2 Key Man Life Insurance in the amount of $250,000 with Columbian
Mutual Life Insurance Company (Owen Dempsey).*
10.3 Non-competition Agreement with Owen Dempsey dated November 30, 1990
(Schedule of Additional Agreements).*
10.4 License Agreement dated as of January 25, 1989 between Endogen and
Dana-Farber Cancer Institute.*
10.5 License Agreement dated as of March 30, 1990 between Endogen and
Dana-Farber Cancer Institute.*
10.6 License Agreement dated as of December 1, 1990, as amended on
September 3, 1991, and September 2, 1992, between Endogen and
Schering Corporation.*
10.7 Exclusive License Agreement dated as of October 22, 1990 between
Endogen and The Wistar Institute of Anatomy and Biology.*
10.8 Distribution and Supply Agreement dated as of March 6, 1991, as
amended on September 2, 1991, between Endogen and Biozol Diagnostica
Vertrieb GmbH.*
10.9 Supply Agreement dated as of September 6, 1990 between Endogen and
Peprotech Incorporated.*
10.10 Stockholder's Agreement dated November 3, 1986 by and among Endogen
and Mark Allegretta, Owen Dempsey, Roy Dempsey, Wallace Dempsey, and
Phillip Servidori*, as amended on March 19, 1993.**
10.11 Stock Purchase Agreement dated December 23, 1986 by and between
Endogen and Roy Dempsey (Schedule of Additional Agreements)*, as
amended on March 19, 1993.**
10.12 Registration Rights Agreement dated as of November 30, 1990, as
amended on April 4, 1991, by and among Endogen, G&G Diagnostics
Limited Partnership, Biozol Diagnostica Vertrieb GmbH, and
Massachusetts Technology Development Corporation*, as amended on
March 19, 1993.**
10.13 License Agreement dated November 15, 1992 between Endogen and Syntex
(U.S.A.) Inc.**
10.14 Agreement dated February 10, 1993 between Endogen and Schering
Corporation.**
10.15 Amendment to Exclusive License Agreement dated as of August 18, 1993
between Endogen and Wistar Institute of Anatomy and Biology.**
10.16 Amendments to Agreement dated February 10, 1993 between Endogen and
Schering Corporation dated September 22, 1993 and May 9, 1994.**
10.17 Distribution Agreement dated November 1, 1994 between Endogen, Inc.
and Amersham International PLC. (Filed without schedules)**
10.18 Financial Consulting Agreement dated as of December 15, 1994 by and
between Endogen, Inc. and Barber and Bronson, Incorporated.**
10.19 Amendment dated March 3, 1995 to Distribution and Supply Agreement
dated as of March 6, 1991, as amended on September 2, 1991, between
Endogen and Biozol Diagnostica Vertrieb GmbH.**
10.20 Asset Purchase Agreement dated as of March 4, 1996 by and among
Endogen, Inc., T Cell Diagnostics, Inc. and T Cell Sciences, Inc.**
<PAGE>
10.21 $2,002,978 Convertible Subordinated Note dated March 4, 1996 of
Endogen, Inc. to T Cell Diagnostics, Inc.**
10.22 Registration Rights Agreement dated
March 4, 1996 between Endogen, Inc. and T Cell Diagnostics, Inc.**
10.23 Lease Termination Agreement dated as of May 31, 1996 between
Endogen, Inc. and Massachusetts Institute of Technology.**
10.24 Lease dated July 29, 1996 between Endogen, Inc. and Landman Omnibus
XI Limited Partnership.**
10.25 Loan and Security Agreement dated August 28, 1996 between Endogen,
Inc. and Silicon Valley Bank.**
10.26 $850,000 Revolving Promissory Note dated August 28, 1996 of Endogen,
Inc. to Silicon Valley Bank.**
10.27 $400,000 Term Promissory dated August 28, 1996 of Endogen, Inc. to
Silicon Valley Bank.**
10.28 Commercial Lease dated October 13, 1994, as amended, between
Cummings Properties Management, Inc. and T Cell Diagnostics, Inc.**
10.29 Lease Assignment dated March 4, 1996 between T Cell Diagnostics,
Inc. and Endogen, Inc. (filed herewith).**
11.1 Statement re: Computation of earnings per share.**
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.**
- ------------
*Previously filed as an exhibit to the Company's Registration Statement on Form
S-4 No. 33-54430 and incorporated herein by reference.
**Previously filed with the Securities and Exchange Commission and incorporated
herein by reference.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-64440 and No. 33-77576) of Endogen, Inc. of our
report dated August 2, 1996, except as to Note 16, which is as of August 28,
1996, appearing on page F-2 of this Form 10-K/A. We also consent to the
reference to us under the heading "Selected Financial Data" in this Form 10-K/A.
However, it should be noted that Price Waterhouse LLP has not prepared or
certified such "Selected Financial Data".
[Signature of Price Waterhouse LLP]
PRICE WATERHOUSE LLP
Boston, Massachusetts
September 24, 1996
