U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended May 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 0-21354
ENDOGEN, INC.
(Exact name of Small Business Issuer as specified in its charter)
Massachusetts 04-2789249
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
30 Commerce Way 01801-1059
Woburn, Massachusetts (Zip Code)
(Address of principal executive offices)
Issuer's telephone number, including area code: (617) 937-0890
Securities registered pursuant to Section 12(b) of the Exchange 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 Exchange Act:
Common Stock, $.01 Par Value
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Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this Form, and no disclosure will be contained, to
the best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Issuer's revenues for the fiscal year ended May 31, 1997 were $9,589,301.
Aggregate market value as of July 14, 1997, of Common Stock held by
non-affiliates of the Issuer: $11,862,000, based on the closing sales price of
such stock on the Nasdaq SmallCap Market on July 14, 1997.
Number of shares of Common Stock outstanding on July 14, 1997: 3,420,319
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
The Issuer intends to file a definitive Proxy Statement pursuant to Regulation
14A within 120 days of the end of the fiscal year ended May 31, 1997. Portions
of such Proxy Statement are incorporated by reference in Part III of 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 as a Massachusetts corporation
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,
chemokines 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 54% of Endogen's fiscal 1997 sales were exported, and
approximately 44% and 33% of sales were exported in Endogen's fiscal 1996 and
1995, respectively. Endogen has sold its products to over 1,000 organizations
and institutions including pharmaceutical companies, biotechnology firms,
universities and biomedical research labs worldwide.
The Market
Biomedical researchers around the world need specialty research products to
conduct basic and applied research in cell biology and for novel drug discovery.
This research is conducted in settings that range from government research
institutions, 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
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streamline the laboratory research process by eliminating the need for customers
to independently develop and validate methods for measuring cytokines,
chemokines and related immune system factors in laboratory samples.
Cytokines and chemokines (hereafter, collectively "cytokines") are small,
hormone-like, soluble proteins secreted by activated cells of the immune system
and provide a mechanism for cell-to-cell signaling. 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 interact with specialized target receptors
and stimulate a chain of secondary messengers inside the cell 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. Cytokines are a central focus of novel drug
discovery programs by pharmaceutical companies as well. 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 more than 260 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,
laboratory animal models and flow cytometry.
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.
In Vitro Assay Kits.
Endogen currently markets 57 in vitro assay kits. Thirty-six of the kits
measure human cytokines and related biomolecules; the other twenty-one kits
measure mouse, rat and pig 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 and is approved for the diagnosis and monitoring of certain
leukemias and lymphomas in Japan. 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.
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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 animal 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 1997.
Products Under Development
Endogen is currently developing additional antibodies, recombinant proteins
and test kits for segments of the life science 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 1998. 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 developed, or if
developed, be successfully introduced into the marketplace. Research and
development expenditures totaled $1,124,910 and $1,379,544 in fiscal years 1996
and 1997, 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 was amended so
that Endogen could distribute its products directly to individual country
distributors in Europe. Biozol continues as Endogen's exclusive distributor in
Germany.
In 1994, Endogen entered into a worldwide product supply and marketing
agreement with Amersham International PLC ("Amersham") and initiated
distribution of Endogen's mouse cytokine ELISA kits under the Amersham label. In
September 1995, the agreement was broadened to include distribution of Endogen's
human cytokine ELISA kits under the Amersham label. Amersham is a leader in the
market for biomedical products such as labeled compounds, antibodies and test
kits for pharmaceutical research and drug discovery. Endogen continues to
manufacture and market human and animal test kit product lines under its own
label in addition to supplying Amersham.
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.
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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 a significant number of
the research products formerly sold under the TCD name. Endogen also
manufactures a diagnostic product, acquired from TCD, which is supplied under
contract to Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi") in Japan. Endogen
further agreed to manufacture certain diagnostic products for TCS. In February
1997, TCD converted the entire outstanding balance of the convertible
subordinated note payable into 389,347 shares of Endogen common stock.
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. In the opinion of management,
the costs associated with complying with theses laws and regulations have not
had and is currently not expected to have a material adverse effect upon the
financial position of the Company.
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 manufacture key components of its product lines. The
Company relies on outside sources for antibodies necessary to manufacture
certain other products and for certain recombinant cytokines sold directly to
its customers. 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. 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, Funakoshi, Yamanouchi and Biozol.
Amersham distributes certain of Endogen's test kits under the Amersham label,
pursuant to a worldwide product supply and marketing agreement with Endogen.
Endogen sells its products to Funakoshi for distribution in Japan under the
terms of a distribution agreement. In 1996, Endogen acquired a diagnostic
product in connection with the acquisition of TCD which is sold to Yamanouchi.
Endogen has sold its products since 1991 to Biozol for European distribution
under the terms of their distribution and supply agreement and since 1996 for
German distribution. Biozol's parent corporation, Biomedica GmbH, currently owns
approximately 3.7% of the outstanding capital stock of Endogen. See "BUSINESS --
Business Relationships" herein.
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Export Sales
Export sales to Europe accounted for approximately 34% of revenues in
fiscal 1997 compared with 28% of revenues in fiscal 1996 and 22% in fiscal 1995.
The increases in fiscal years 1996 and 1997 were related primarily to the
addition of new products sold under the Endogen name or under private label.
Export sales to Japan and the Far East accounted for 8%, 13% and 17% of Endogen
product revenue for the fiscal years 1995, 1996 and 1997, 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
whether this tendency will continue.
Backlog
There was no significant backlog for Endogen's products over the past three
years. Endogen ships most orders within two weeks of the placement of the order.
Competition
The life science market is supplied by a number of established biomedical
products manufacturers located in the United States, Europe and Japan, including
Techne Corporation, BioSource International, Genzyme Corporation and others.
Many of Endogen's competitors continue to develop 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 life science market. See "BUSINESS -- Risk Factors" herein.
Employees
Endogen had a total of 76 employees as of May 31, 1997, 68 of which were
full-time employees. 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.
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.
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Risks Related to Growth through Alliances and 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 life science 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 product lines and successfully introduce new product lines
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 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, specialty reagent 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
life science 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
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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 assurance that Endogen will be able
to further expand its sales and distribution capabilities for the life science
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 33%, 44% and 54%
in fiscal years 1995, 1996 and 1997, 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.
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ITEM 2: PROPERTIES
Endogen leases but does not own real property. On August 1, 1996, Endogen
entered into a three-year lease agreement for approximately 12,000 square feet
of office and laboratory space at 30 Commerce Way, Woburn, Massachusetts.
Subsequently, Endogen retrofitted this space to house its executive offices and
laboratory facilities. Rent payments totaled approximately $52,000 for the year
ending May 31, 1997. Annual rent payments for each of the remaining years under
the lease will average approximately $103,000 per year, payable in monthly
installments.
Endogen's sales support offices and manufacturing operations currently
occupy approximately 27,000 square feet located at 6-8 Gill Street, Woburn,
Massachusetts pursuant to a lease, acquired through the TCD acquisition, which
expires in October 1999. Rent payments at this facility totaled approximately
$243,000 for the year ending May 31, 1997. Annual rent payments for each of the
remaining years under the lease will average approximately $277,000, payable in
monthly installments.
In connection with the acquisition of TCD, Endogen consolidated 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. During the
fiscal year ended May 31, 1997, MIT reimbursed approximately $118,000 under this
agreement.
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 1997.
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Part II
ITEM 5: MARKET FOR 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
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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............................. 5-1/8 3-1/8
Second Quarter............................ 5-1/4 3-7/8
Third Quarter............................. 6-1/2 4-23/32
Fourth Quarter............................ 6-1/4 3-7/8
FISCAL 1998
First Quarter through
July 14, 1997........................... 4-7/16 4-1/8
As of July 14, 1997, there were approximately 371 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.
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ITEM 6: 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
<TABLE>
<CAPTION>
Fiscal year ended May 31,
-----------------------------------------
1995 1996 1997
=============================================================================================================
<S> <C> <C> <C>
Revenues...................................................... 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales............................................... 34.9% 37.3% 35.1%
Selling, general, and administrative ....................... 46.1% 47.3% 42.8%
Research and development.................................... 18.9% 17.0% 14.4%
Purchased in-process R&D.................................... -- 8.8% --
Income (loss) from operations................................. .1% (10.4%) 7.7%
Interest income (expense) net............................... .4% (.2%) (1.5%)
Net income (loss)............................................. .5% (10.6%) 10.2%
</TABLE>
Revenues
Total revenues for fiscal 1997 were $9,589,301, an increase of $2,967,140
or 45% from fiscal 1996 revenues of $6,622,161. Revenues increased primarily
because of growth in U.S. direct sales, expansion of Endogen's international
business through both its distribution network and its relationships with OEM
customers, the contribution of TCD product revenues for the entire fiscal year
and the introduction of new products.
Total revenues increased by $1,550,086 to $6,622,161, or 31%, from fiscal
1995 to fiscal 1996. 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 $3,365,387 and $2,476,997 for fiscal years 1997 and 1996,
respectively. Cost of sales as a percentage of product revenues was 35% in
fiscal 1997, down from 37% in fiscal 1996. The fiscal 1996 percentage was higher
due to the charge to cost of goods of finished goods acquired from TCD under
purchase accounting rules and sold during the fiscal fourth quarter.
Cost of sales was $2,476,997 and $1,772,051 for fiscal years 1996 and 1995,
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.
-12-
<PAGE>
Research and Development Expenses
Research and development expenses were $1,379,544 for the year ended May
31, 1997, up from $1,124,910 in fiscal 1996, an increase of $254,634. The
Company's 1997 spending on R&D, which increased 23% from fiscal 1996 to fiscal
1997, reflects the continued commitment to invest in the development of new
products. However, R&D spending as a percentage of revenues decreased from 17%
of revenues in fiscal 1996 to 14% of revenues in fiscal 1997 as a direct result
of the growth of Endogen's business.
Research and development expenses increased by 18% to $1,124,910 in fiscal
1996 from $956,386 in fiscal 1995. In the fourth quarter of fiscal 1996, the
Company recognized an additional charge of $579,600 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 for which the underlying
technology was unproven and had no future alternative uses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $976,634 or 31% in
fiscal 1997 to $4,107,263. Approximately $437,000 of the increase is
attributable to expanded sales and marketing activities in fiscal 1997 as the
Company grew its domestic sales force to eight persons and augmented its
marketing support worldwide. The remainder of the selling, general and
administrative expense increase reflects higher administrative costs associated
with the assimilation of the TCD acquisition, the consolidation of operations in
Woburn, Massachusetts and increases in administrative headcount to support the
Company's growth during fiscal 1997. As a percentage of revenues, selling,
general and administrative expenses declined to 43% from 47% in fiscal 1996 as a
direct result of the growth of Endogen's business and careful cost controls.
Selling, general and administrative expenses were $3,130,629 and $2,337,700
in fiscal years 1996 and 1995, respectively. Selling, general and administrative
expenses increased by $792,929, or 34%, 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 was due to charges associated
with the acquisition and integration of the TCD business into Endogen.
Interest Income and Interest Expense
In fiscal 1997, net interest expense was $142,512 compared to net interest
expense of $10,564 in fiscal 1996 and net interest income of $18,364 in fiscal
1995. The increase in net interest expense is due primarily to a convertible
subordinated note in the original principal amount of $2,002,978 issued by
Endogen in connection with the TCD acquisition in March 1996 and borrowings
under a term loan with a bank. In February 1997, TCD exercised its right to
convert the convertible subordinated note into 389,347 shares of the Company's
common stock at a conversion price equal to $4.63 per share.
Income Taxes
For fiscal 1997, the Company recorded a net income tax benefit of $381,000,
consisting of a current provision of $87,000 and a deferred benefit of $468,000,
in the fourth quarter of fiscal 1997, $373,000 of which represented a reduction
in the beginning of the year valuation allowance for deferred tax assets based
on management's expected realization of such assets. In establishing the
valuation allowance, management considers positive factors, including positive
earnings in the current and recent fiscal years (excluding fiscal 1996 which
reflects acquisition and integration related expenses incurred in connection
with the TCD transaction) and negative factors, including the competitive nature
of the industry and stage of the Company's growth. Based on these factors,
primarily positive earnings, the Company reversed $373,000 of the valuation
allowance in the fourth quarter of fiscal 1997. At May 31, 1997, management
believes, that based on the weight of available evidence, it is more likely than
not that the Company will not realize all the benefits from its net deferred tax
asset, and accordingly, has recorded a valuation allowance of $119,000 against
the net deferred tax asset at May 31, 1997. Management continues to assess the
realizability of the net deferred tax asset on an ongoing basis, and believes
that it is reasonably possible that an additional portion of the valuation
allowance will be reduced in the near term. The Company did not have a provision
for income taxes for fiscal years 1996 and 1995. In fiscal 1996 The Company
reported net losses of $700,539. In
-13-
<PAGE>
fiscal year 1995, The Company 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.
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.
Liquidity and Capital Resources
The substantial growth of Endogen's business during fiscal years 1996 and
1997 has led to increased liquidity requirements to fund working capital needs
and capital expenditures. At May 31, 1997, Endogen's cash and cash equivalents
position was $334,050, a decrease of $429,689 from May 31, 1996. At May 31,
1996, cash and cash equivalents were $763,739 compared to $1,303,959 at May 31,
1995, a decrease of $540,220. Endogen has financed its liquidity needs primarily
through cash from operations, a working capital line of credit with a bank and a
term loan payable with a bank. At May 31, 1997, the Company had $850,000
available under the working capital line of credit with a bank. The interest
rate on the line is 1.5% above the bank's prime rate.
Cash Flows from Operating Activities.
Net cash provided by operations in fiscal 1997 was $793,584 as compared to
$732,855 in fiscal 1996 and in contrast to $112,463 used in fiscal 1995. In
fiscal 1997, the financing of accounts receivable, which increased by $183,561,
and inventories, which increased by $527,538, was offset in part by a decrease
of $127,913 in prepaid expenses and other assets and an increase by $166,601 of
accounts payable and accrued expenses.
Cash Flows from Investing Activities.
Investments in capital equipment totaled $979,450 in fiscal 1997 and
primarily reflect the purchase of $71,233 in new R&D and production equipment,
$220,978 in computer and office equipment and an investment of $687,239 in
leasehold improvements for new R&D laboratories and office space at 30 Commerce
Way, Woburn, Massachusetts. Acquisitions of fixed assets totaled $346,033 and
$259,763 in fiscal years 1996 and 1995, respectively.
Cash Flows from Financing Activities.
In fiscal 1997, cash was used to decrease borrowings by $397,739 and was
offset in part by proceeds from the issuance of common stock of $153,916. In
fiscal 1996, 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.
Based on management's current projections, Endogen believes that its
financial resources and cash flow from operations, together with the bank credit
line and term loan currently available, will be sufficient to finance the
Company's current and planned operations through fiscal 1998. There can be no
assurance, however, that the Company will not require additional working capital
and, if it does require such capital, that such capital will be available to the
Company on acceptable terms, if at all.
-14-
<PAGE>
The foregoing statements contain forward-looking statements which involve
risks and uncertainties. The Company's actual experience may differ materially
from that discussed above.
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 7: FINANCIAL STATEMENTS
For the following information required by this item, see the Index to
Financial Statements on Page F-1 included as a part of this report:
Report of Independent Accountants
Balance Sheet at May 31, 1996 and May 31, 1997.
Statement of Operations for the three years ended May 31, 1997.
Statement of Changes in Stockholders' Equity for the three years ended
May 31, 1997.
Statement of Cash Flows for the three years ended May 31, 1997.
Notes to Financial Statements.
ITEM 8: 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.
-15-
<PAGE>
Part III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
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, 1997 under the headings "Election of
Directors," "Occupations of Directors and Executive Officers" and "Compensation
and Other Information Concerning Directors and Officers."
ITEM 10: 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, 1997, under the heading "Compensation
and Other Information Concerning Directors and Officers."
ITEM 11: 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, 1997, under the heading "Management and
Principal Stockholders."
ITEM 12: 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, 1997, under the headings "Certain
Relationships and Related Transactions," "Management and Principal Stockholders"
and "Occupations of Directors and Executive Officers."
-16-
<PAGE>
Part IV
ITEM 13: EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) Exhibits.
Description of Exhibits
-----------------------
Exhibit Number
3.1 Restated Articles of Organization of Endogen, Inc.*
3.2 By-laws of Endogen, Inc., as amended.*
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)**
-17-
<PAGE>
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 Lease Termination Agreement dated as of May 31, 1996 between Endogen,
Inc. and Massachusetts Institute of Technology.**
10.22 Lease dated July 29, 1996 between Endogen, Inc. and Landman Omnibus XI
Limited Partnership.**
10.23 Loan and Security Agreement dated August 28, 1996 between Endogen, Inc.
and Silicon Valley Bank.**
10.24 $850,000 Revolving Promissory Note dated August 28, 1996 of Endogen, Inc.
to Silicon Valley Bank.**
10.25 $400,000 Term Promissory dated August 28, 1996 of Endogen, Inc. to
Silicon Valley Bank.**
10.26 Commercial Lease dated October 13, 1994, as amended, between Cummings
Properties Management, Inc. and T Cell Diagnostics, Inc.**
10.27 Lease Assignment dated March 4, 1996 between T Cell Diagnostics, Inc. and
Endogen, Inc.**
10.28 Employment Agreement dated as of December 4, 1996 between Avery W. Catlin
and Endogen, Inc. (filed herewith).
11.1 Statement re: Computation of earnings per share (filed herewith).
23.1 Consent of Independent Accountants (filed herewith).
27.1 Financial Data Schedule (filed herewith).
* 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.
No Reports on Form 8-K were filed during the last quarter of the period
covered by this Report.
-18-
<PAGE>
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 report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Woburn, Commonwealth of Massachusetts, on the 28th day of July, 1997.
ENDOGEN, INC.
By: /s/ Owen A. Dempsey
--------------------------------
Owen A. Dempsey
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ Owen A. Dempsey President, Chief Executive Officer and Director July 28, 1997
- -----------------------------
Owen A. Dempsey
/s/ Wallace G. Dempsey Director July 30, 1997
- -----------------------------
Wallace G. Dempsey
/s/ Irwin J. Gruverman Director July 31, 1997
- -----------------------------
Irwin J. Gruverman
/s/ Hayden H. Harris Director July 30, 1997
- -----------------------------
Hayden H. Harris
/s/ Wolfgang Woloszczuk Director July 31, 1997
- -----------------------------
Wolfgang Woloszczuk
/s/ Avery W. Catlin Vice President, Finance and July 28, 1997
- ------------------------------ Chief Financial Officer (Principal
Avery W. Catlin Financial and Accounting Officer)
</TABLE>
-19-
<PAGE>
Index to Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants......................................................................... F-2
Balance Sheet at May 31, 1996 and 1997.................................................................... F-3
Statement of Operations for the three years ended May 31, 1997 ........................................... F-4
Statement of Changes in Stockholders' Equity for the three years ended May 31, 1997 ...................... F-5
Statement of Cash Flows for the three years ended May 31, 1997 ........................................... F-6
Notes to Financial Statements............................................................................. F-7
</TABLE>
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 1997, and the results of its operations and
its cash flows for each of the three years in the period ended May 31, 1997, 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.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
July 24, 1997
F-2
<PAGE>
Balance Sheet
<TABLE>
<CAPTION>
May 31,
-----------------------------
1996 1997
============================================================================================================================
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 763,739 $ 334,050
Accounts receivable, net of allowance for doubtful accounts and returns of
$20,000 and $50,000 at May 31, 1996 and 1997, respectively ............................. 1,429,347 1,612,908
Inventories.............................................................................. 1,289,902 1,817,440
Prepaid expenses and other current assets................................................ 265,622 221,862
Deferred income taxes.................................................................... -- 188,000
------------- ------------
Total current assets................................................................. 3,748,610 4,174,260
------------- ------------
Fixed assets, net.......................................................................... 1,894,982 2,327,550
Intangible assets, net..................................................................... 495,146 395,730
Deferred income taxes...................................................................... -- 280,000
Other assets............................................................................... 417,642 300,213
------------- ------------
$6,556,380 $7,477,753
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable - bank................................................... $ 64,723 $ 7,633
Current portion of convertible note payable.............................................. 400,596 --
Current portion of term note payable..................................................... -- 133,333
Current portion of capital lease obligations............................................. 13,355 5,528
Accounts payable and accrued expenses.................................................... 1,126,338 1,292,939
------------- ------------
Total current liabilities............................................................ 1,605,012 1,439,433
------------- ------------
Borrowings under line of credit............................................................ 450,000 --
Note payable - bank........................................................................ 7,633 --
Term note payable - bank................................................................... -- 200,000
Convertible note payable................................................................... 1,602,382 --
Capital lease obligations and other note payable........................................... -- 14,776
------------- ------------
2,060,015 214,776
------------- ------------
Stockholders' equity:
Common stock, $.01 par value; 5,000,000 and 10,000,000 shares authorized; 2,949,346
and 3,416,319 shares issued and outstanding at May 31, 1996 and 1997, respectively ...... 29,493 34,162
Additional paid-in capital................................................................. 4,149,740 6,101,667
Accumulated deficit........................................................................ (1,287,880) (312,285)
------------- ------------
Total stockholders' equity........................................................... 2,891,353 5,823,544
------------- ------------
$6,556,380 $7,477,753
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
Year ended May 31,
---------------------------------------------
1995 1996 1997
============================================================================================================================
<S> <C> <C> <C>
REVENUE
Product sales........................................................... $5,072,075 $6,622,161 $9,589,301
COSTS AND EXPENSES
Cost of sales........................................................... 1,772,051 2,476,997 3,365,387
Selling, general and administrative..................................... 2,337,700 3,130,629 4,107,263
Research and development................................................ 956,386 1,124,910 1,379,544
Purchased in-process research and development .......................... -- 579,600 --
------------ ----------- ------------
5,066,137 7,312,136 8,852,194
------------ ----------- ------------
Income (loss) from operations........................................... 5,938 (689,975) 737,107
Interest income (expense), net............................................ 18,364 (10,564) (142,512)
------------ ----------- ------------
Income (loss) before income taxes....................................... 24,302 (700,539) 594,595
Income tax benefit........................................................ -- -- (381,000)
------------ ------------ ------------
Net income (loss)......................................................... $ 24,302 $ (700,539) $ 975,595
============ ============ ============
Net income (loss) per share............................................... $ .01 $ (.25) $ .29
============ ============ ============
Weighted average common and common equivalent shares outstanding ......... 2,792,229 2,835,697 3,394,662
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
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, 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 -- -- 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
Sale of common stock pursuant to exercise
of stock options.................................. 77,626 776 153,140 -- 153,916
Issuance of common stock upon
conversion of convertible note payable .......... 389,347 3,893 1,798,787 -- 1,802,680
Net income.......................................... -- -- -- 975,595 975,595
----------- ---------- ----------- ------------ ------------
Balance at May 31, 1997............................. 3,416,319 $34,162 $6,101,667 $ (312,285) $5,823,544
=========== ========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
Statement of Cash Flows
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Year ended May 31,
----------------------------------------
1995 1996 1997
==========================================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................................ $ 24,302 $ (700,539) $975,595
Adjustments to reconcile net income (loss) to net cash (used for) provided by
operating activities:
Depreciation and amortization............................................. 325,550 492,191 723,074
Deferred income taxes..................................................... -- -- (468,000)
Loss on disposal of fixed assets.......................................... -- 50,944 --
Purchased in-process research and development ............................ -- 579,600 --
Increase in accounts receivable........................................... (314,422) (258,360) (183,561)
(Increase) decrease in inventories........................................ (293,989) 251,422 (527,538)
Decrease in prepaid expenses and other assets ............................ 33,568 149,393 127,913
Increase in intangible assets............................................. (58,439) (76,334) (20,500)
Increase in accounts payable and accrued expenses ........................ 170,967 244,538 166,601
------------- ------------ -----------
Net cash (used for) provided by operations ......................... (112,463) 732,855 793,584
------------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets.................................................... (259,763) (346,033) (979,450)
Purchase of Cytokines Sciences, Inc. ("CSI") ................................ -- (100,000) --
Purchase of T Cell Diagnostics ("TCD")....................................... -- (1,230,005) --
------------- ------------ ------------
Net cash used for investing activities.............................. (259,763) (1,676,038) (979,450)
------------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayments) from borrowings under line of credit .................. 250,000 200,000 (50,000)
Repayment of borrowings under term loan payable ............................. -- -- (66,667)
Repayments of convertible note payable....................................... -- -- (200,298)
Net proceeds (repayments) from note payable - bank .......................... 127,382 (63,632) (64,723)
Repayments from borrowings under capital lease obligations .................. (36,330) (40,617) (16,051)
Proceeds from issuance of common stock....................................... 61,163 307,212 153,916
------------- ------------ ------------
Net cash provided by (used for) financing activities ............... 402,215 402,963 (243,823)
------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents ........................ 29,989 (540,220) (429,689)
Cash and cash equivalents, beginning of year ................................ 1,273,970 1,303,959 763,739
------------- ------------ ------------
Cash and cash equivalents, end of year ...................................... $ 1,303,959 $ 763,739 $ 334,050
============= ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest....................................................... $ 23,361 $ 42,360 $ 175,378
============= ============ ============
Cash paid for income taxes................................................... $ -- $ -- $ 75,000
============= ============ ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITY
Capital lease additions...................................................... $ -- $ -- $ 23,000
============= ============ ===========
Issuance of common stock upon conversion of convertible note payable ....... $ -- $ -- $1,802,680
============= ============ ===========
Conversion of line of credit to term loan payable ........................... $ -- $ -- $ 400,000
============= ============ ===========
</TABLE>
In connection with the purchase of CSI in January 1996 (Note 15), the Company
issued 20,984 shares of common stock valued at $78,690.
In connection with the purchase of TCD in March 1996 (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>
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
worldwide 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, totaling $36,536 and $37,539 at May 31, 1996 and 1997,
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 provided that
collection of the related receivable is probable. A provision for estimated
future returns is recorded at the time of shipment.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentration
of credit risk include cash and cash equivalents and accounts receivable. The
Company performs ongoing evaluations of customers' financial conditions and
generally does not require collateral. In addition, the Company maintains
reserves for potential credit losses, and such losses, in the aggregate, have
not exceeded management's expectations. Two customers accounted for 18% and 12%
of accounts receivable at May 31, 1997. One customer accounted for 19 % of
accounts receivable at May 31, 1996.
Financial Instruments
Fair value of the Company's financial instruments which include cash and
cash equivalents, notes receivable and short and long-term debt are based on
assumptions concerning the amount and timing of estimated future cash flows and
assumed discount rates reflecting varying degrees of perceived risk. The
carrying value of these financial statements approximates their fair value at
May 31, 1996 and 1997.
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.
Intangible Assets
Intangible assets include patent and license costs and acquired technology.
Costs associated with patents and licensing arrangements are capitalized as
incurred and amortized on a straight-line basis over the estimated economic
lives, which
F-7
<PAGE>
range from 5 to 10 years. Amortization expense related to patent and license
costs was $53,096, $75,044 and $58,860 for the years ended May 31, 1995, 1996
and 1997, respectively. Acquired technology capitalized in fiscal 1996 is
attributable to the acquisition of TCD (Note 15) and is being amortized on a
straight-line basis over five years from the date of acquisition. Amortization
expense related to acquired technology was $15,264 and $61,056 for the years
ended May 31, 1996 and 1997, respectively.
Advertising Costs
Costs associated with sales catalogues are capitalized as incurred and
amortized as the catalogues are distributed. Other advertising costs are charged
to expense as incurred. Capitalized advertising costs were insignificant at May
31, 1996 and 1997. Advertising costs were approximately $196,000, $301,000 and
$256,000 for the years ended May 31, 1995, 1996 and 1997, respectively.
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.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income" and No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise
and Related Information." SFAS 130 establishes standards for reporting and
displaying comprehensive income and its components in the financial statements.
SFAS 131 establishes standards for reporting information on operating segments
in interim and annual financial statements. Both statements are effective for
the Company in fiscal 1999. The Company is currently assessing the impact of
adoption of these statements in its financial statements.
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.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share" which
replaces primary and fully diluted earnings per share with basic and diluted
earnings per share. SFAS 128 is effective for the Company beginning in the third
quarter of fiscal 1998 and requires restatement of all previously reported
interim and annual earnings per share data. Pro forma net income (loss) per
share data assuming application of SFAS 128 for each of the respective periods
follows:
Year ended May 31,
------------------------------------------
1995 1996 1997
===========================================================================
Basic......................... $0.01 $(0.25) $0.32
Diluted....................... $0.01 $(0.25) $0.32
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No.25 (APB No. 25), "Accounting for Stock
Issued to Employees" and related interpretations. In June 1996, the Company
adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-based Compensation (Note
11).
Reclassifications
Certain 1996 amounts were reclassified to conform to the 1997
presentations.
F-8
<PAGE>
3: INVENTORIES
Inventories consist of the following:
May 31,
----------------------------
1996 1997
===========================================================================
Raw materials and supplies.................... $ 294,176 $ 797,104
Work-in-process............................... 314,976 369,290
Finished goods................................ 680,750 651,046
---------- ----------
$1,289,902 $1,817,440
========== ==========
During the fourth quarter of fiscal 1997, the Company wrote off
approximately $123,000 of obsolete inventory resulting in a decrease in net
income of $106,000, or $.03 per share, for both the fourth quarter and fiscal
1997.
4: FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
May 31,
Useful life -----------------------------
in years 1996 1997
==================================================================================================
<S> <C> <C> <C>
Laboratory equipment................................. 5-7 $ 896,056 $ 967,289
Computer and office equipment........................ 3-7 603,540 847,518
Leasehold improvements............................... lease term 945,736 1,632,975
-----------------------------
2,445,332 3,447,782
Accumulated depreciation and amortization ........... (550,350) (1,120,232)
-----------------------------
$1,894,982 $2,327,550
=============================
</TABLE>
At May 31, 1996 and 1997, included in computer and office equipment are
capital leases at a cost of $79,662 and $102,662, respectively, with accumulated
amortization of $58,785 and $83,495 at May 31, 1996 and 1997, respectively.
In May 1996, the Company sold certain leasehold improvements in exchange
for a non-interest bearing note receivable in the amount of $307,341. Payments
on this note are due in 33 equal payments of principal which commenced July 1,
1996. The note receivable has been discounted using an imputed interest rate of
10.25%. The initial discount of $47,000 is being recognized as interest income
over the life of the receivable using the effective interest method. At May 31,
1997, principal amounts due within one year, $112,296, are included in prepaid
expenses and other current assets. The remaining balance of $103,275 is included
in other assets.
Effective September 1, 1996, the Company changed its estimate of the
remaining service life of certain fixed assets. The effect of the change in
estimate was a decrease in depreciation expense of approximately $160,000 and an
increase in net income per share of $.05 for fiscal 1997.
F-9
<PAGE>
5: INTANGIBLE ASSETS
Intangible assets consist of the following:
May 31,
---------------------------
1996 1997
===============================================================================
Acquired technology................................ $305,290 $305,290
Patent costs....................................... 68,240 68,240
License costs...................................... 381,059 401,559
--------------------------
754,589 775,089
Accumulated amortization........................... (259,443) (379,359)
--------------------------
$495,146 $395,730
==========================
6: BORROWINGS
Borrowing Under Line of Credit, Term Loan and 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. 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 providing for maximum borrowings of $850,000. Outstanding borrowings bear
interest at 1.5% above the bank's prime rate (10.25% at May 31, 1997) and must
be paid in full by August 27, 1997.
In November 1996, the Company converted $400,000 of outstanding borrowings
under the line of credit into a term loan with this bank. Such term loan is
payable in thirty-six equal monthly principal installments plus interest at 1.5%
above the bank's prime rate (10.25% at May 31, 1997). At May 31, 1997, there was
an outstanding principal balance of $333,333 under the term loan. Aggregate
future maturities of this term loan are $133,333, $133,333 and $66,667 in fiscal
1998, 1999 and 2000, respectively.
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 (10.75% at May 31, 1997). At May 31, 1997, the
outstanding balance due on the remaining note payable was $7,632 which matures
in fiscal 1998.
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, 1997, the Company was in compliance
with the terms of the agreements.
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. The convertible
note was payable in semi-annual installments of $200,298 commencing September 1,
1996 and bore interest at 7% per annum. On February 10, 1997, TCD exercised its
right to convert the then outstanding principal balance of $1,802,680 into
389,347 shares of the Company's common stock at the stated conversion price of
$4.63 per share.
F-10
<PAGE>
Capital Lease Obligations
The Company has entered into a capital lease for equipment which bears
interest at 10% and expires in fiscal 2000. Aggregate future maturities due on
this capital lease are $5,528, $6,918 and $7,858 in fiscal 1998, 1999 and 2000,
respectively.
7: ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
Year ended May 31,
---------------------------
1996 1997
=============================================================================
Accounts payable................................ $ 624,043 $ 756,957
Accrued wages................................... 138,204 221,608
Accrued royalties............................... 147,357 241,751
Accrued professional fees....................... 216,734 72,623
---------------------------
$1,126,338 $1,292,939
===========================
8: EXPORT SALES
The Company generates revenue through product sales to customers outside
the United States. Product sales by geographic area are as follows:
<TABLE>
<CAPTION>
Year ended May 31,
---------------------------------------------
1995 1996 1997
================================================================================================
<S> <C> <C> <C>
United States............................... $3,391,600 $3,713,088 $4,417,391
Europe...................................... 1,141,061 1,884,371 3,303,248
Japan....................................... 429,145 846,938 1,604,291
Other....................................... 110,269 177,764 264,371
----------------------------------------------
$5,072,075 $6,622,161 $9,589,301
==============================================
</TABLE>
9: INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
Year ended May 31,
-----------------------------------
1995 1996 1997
===============================================================================
Current:
Federal ............................... $ -- $ -- $ 87,000
State ................................. -- -- --
-----------------------------------
-- -- 87,000
-----------------------------------
Deferred:
Change in Valuation Allowance ......... $ -- $ -- $ (373,000)
Federal ............................... -- -- (62,000)
State ................................. -- -- (33,000)
-----------------------------------
-- -- (468,000)
-----------------------------------
Income tax benefit ...................... $ -- $ -- $ (381,000)
===================================
F-11
<PAGE>
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,
----------------------------------------
1995 1996 1997
===========================================================================================
<S> <C> <C> <C>
Expected tax (benefit)...................... $ 9,000 $ (245,000) $ 219,000
State and local taxes, net ................. 11,000 (4,000) --
Purchased in-process research and
development .............................. -- 203,000 (14,000)
Nondeductible items......................... 22,000 6,000 10,000
Realization of deferred tax assets ......... (74,000) (60,000) (223,000)
----------------------------------------
(32,000) (100,000) (8,000)
Change in valuation allowance .............. 32,000 100,000 (373,000)
Provision (benefit) for income tax ......... $ -- $ -- $ (381,000)
=========================================
</TABLE>
Components of deferred taxes consist of the following:
<TABLE>
<CAPTION>
May 31,
------------------------------
1996 1997
==================================================================================================
<S> <C> <C>
Assets
Accounts receivable reserve................................... $ 8,000 $ 8,000
Inventory reserve............................................. 13,000 8,000
Accrued expenses.............................................. 7,000 6,000
Loss and tax credit carryforwards............................. 412,000 330,000
Amortization of intangible assets............................. -- 61,000
Fixed assets.................................................. 64,000 176,000
Miscellaneous................................................. 8,000 4,000
------------------------------
Gross deferred tax assets..................................... 512,000 593,000
Deferred tax asset valuation allowance ....................... (492,000) (119,000)
------------------------------
20,000 474,000
------------------------------
Liabilities
Patent costs.................................................. $ 9,000 $ 6,000
Miscellaneous................................................. 11,000 --
------------------------------
Gross deferred tax liability.................................. 20,000 6,000
------------------------------
$ -- $ 468,000
==============================
</TABLE>
At May 31, 1997, the Company has research and development tax credit
carryforwards available to reduce future federal tax liabilities which expire as
follows:
Research and
development
Year of tax credit
expiration carryforwards
================================================================================
2008................................................... $ 17,000
2009................................................... 49,000
2010................................................... 47,000
2011................................................... 6,000
2012................................................... 12,000
-----------
$ 131,000
===========
F-12
<PAGE>
Additionally, the Company has federal alternative minimum tax credit
carryforwards of $72,000 which may be used indefinitely to reduce regular
federal income tax. At May 31, 1997, the Company has research and development
and investment tax credit carryforwards available to reduce future state tax
liabilities of $196,000. These carryforwards expire in various amounts through
1999.
An ownership change, as defined in the Internal Revenue Code, may limit the
amount of 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.
The Company's net deferred tax asset consists primarily of the future tax
benefit of net operating loss and tax credit carryforwards and differences
between financial accounting and tax bases of fixed assets. Realization of the
net deferred tax asset and future reversals of the valuation allowance depend
upon the Company's ability to generate taxable income during the respective
carryforward periods.
Under Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes", the Company is required to recognize all or a
portion of its net deferred tax asset if it believes that it is more likely than
not that all or a portion of the benefits of the net deferred tax asset will be
realized.
In establishing the valuation allowance, management considers positive
factors, including positive earnings in the current and recent fiscal years
(excluding fiscal 1996 which reflects acquisition and integration related
expenses incurred in connection with the TCD transaction) and negative factors,
including the competitive nature of the industry and stage of the Company's
growth. Based on these factors, primarily positive earnings, the Company
reversed $373,000 of the valuation allowance in the fourth quarter of fiscal
1997. At May 31, 1997, management believes, that based on the weight of
available evidence, it is more likely than not that the Company will not realize
all the benefits from its net deferred tax asset, and accordingly, has recorded
a valuation allowance of $119,000 against the net deferred tax asset at May 31,
1997. Management continues to assess the realizability of the net deferred tax
asset on an ongoing basis, and believes that it is reasonably possible that an
additional portion of the valuation allowance will be reduced in the near term.
The Company did not have a provision for income taxes for fiscal years 1996 and
1995. In fiscal 1996 The Company reported net losses of $700,539. In fiscal year
1995, The Company 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.
10: COMMON STOCK AND COMMON STOCK WARRANTS
On November 6, 1996, the stockholders of the Company approved an increase
in the number of authorized shares of common stock from 5,000,000 to 10,000,000
shares.
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 "1989 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
F-13
<PAGE>
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 stock
options. As of May 31, 1997, 49,024 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 1989 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).
Options granted under the 1989 Plan generally vest ratably over four 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.
A summary of stock option activity under the 1989 Plan is as follows:
<TABLE>
<CAPTION>
Year ended May 31,
------------------------------------------
1996 1997
------------------ -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
=================================================================================================
<S> <C> <C> <C> <C>
Options outstanding, beginning of period ... 366,900 $2.04 573,600 $2.85
Granted..................................... 265,500 $3.80 159,600 $4.45
Canceled.................................... (29,250) $2.43 (56,275) $2.92
Exercised................................... (29,550) $1.79 (66,315) $1.97
--------- ---------
Options outstanding, end of period ......... 573,600 610,610
========= =========
Options exercisable, end of period ......... 165,425 236,426
========= =========
Weighted average fair value of
options granted during the period ........ $2.00 $2.31
======= =======
</TABLE>
The Company has granted non-qualified stock options to purchase common
shares which were not pursuant to the Plan. At May 31, 1997, there were
outstanding options to purchase 9,000 common shares at $4.71 per share, all of
which were exercisable.
In fiscal 1994, the Company adopted the 1993 Non-Employee Stock Option Plan
(the "1993 Director Plan") which provides for automatic grants to Board of
Director members, who are not employees or officers of the Company, on
successive anniversary dates, as defined under this Plan. Options granted under
the 1993 Director 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 ratably over a three year period and have a term of ten years
from the date of grant.
F-14
<PAGE>
A summary of stock option activity under the 1993 Director Plan is as
follows:
<TABLE>
<CAPTION>
Year ended May 31,
-------------------------------------------
1996 1997
-------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
=================================================================================================
<S> <C> <C> <C> <C>
Options outstanding, beginning of period ... 72,000 $2.13 72,000 $2.73
Granted..................................... 36,000 $3.94 24,000 $4.00
Canceled.................................... (16,000) $3.46 --
Exercised................................... (20,000) $2.15 (12,000) $2.13
--------- ---------
Options outstanding, end of period ......... 72,000 84,000
========= =========
Options exercisable, end of period ......... 48,000 60,000
========= =========
Weighted average fair value of
options granted during the period ........ $2.11 $2.31
======= =======
</TABLE>
The following tables summarize information about stock options outstanding
at May 31, 1997:
<TABLE>
<CAPTION>
Options outstanding at May 31, 1997
--------------------------------------------------
Weighted
Average Weighted
Remaining Average
Contractual Number Exercise
Range of Exercise Prices Life (years) Outstanding Price
==============================================================================================================
<S> <C> <C> <C>
$1.36................................................ 4.3 16,500 $1.36
$2.00 to $2.75....................................... 6.6 241,010 $2.16
$3.50 to $3.94....................................... 8.8 325,500 $3.85
$4.00 to $6.00....................................... 9.7 111,600 $4.70
-------
694,610
=======
</TABLE>
<TABLE>
<CAPTION>
Options exercisable at May 31, 1997
------------------------------------------
Weighted
Average
Number Exercise
Range of Exercise Prices Exercisable Price
======================================================================================================
<S> <C> <C>
$1.36................................................ 16,500 $1.36
$2.00 to $2.75....................................... 175,260 $2.17
$3.50 to $3.94....................................... 89,166 $3.85
$4.00 to $6.00....................................... 15,500 $4.00
-------
296,426
=======
</TABLE>
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
Year ended May 31,
----------------------------
1996 1997
===============================================================================
Expected life (years)....................... 5 5
Risk free interest rate..................... 5.5% - 6.4% 5.9% - 6.5%
Volatility.................................. 55% 61%
Dividend yield.............................. -- --
F-15
<PAGE>
No compensation expense has been recognized for the Company's stock option
grants under APB No. 25. Had compensation cost for the Company's stock option
grants been determined based on the fair value at the grant dates, as prescribed
in SFAS 123, the Company's net income (loss) and net income (loss) per share
would have been as follows:
Year ended May 31,
--------------------------
1996 1997
===========================================================================
Net income (loss)
As reported.............................. $(700,539) $975,594
Pro forma................................ $(741,399) $798,579
Net income (loss) per share
As reported.............................. $ (.25) $ .29
Pro forma................................ $ (.26) $ .24
Since stock options vest over several years and additional stock option
grants are expected to be made each year, the above pro forma disclosures are
not necessarily representative of pro forma effects of reported operations for
future years.
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 1995, 1996
and 1997 were $194,000, $243,000 and $213,000 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:
1998........................................................ $ 384,000
1999........................................................ 403,000
2000........................................................ 173,000
2001........................................................ 3,000
2002........................................................ 2,000
------------
$ 965,000
============
For the years ended May 31, 1995, 1996 and 1997 rent expense was
approximately $233,000, $313,000, and $304,000, 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, 1995, the Company recorded revenue of
approximately $527,000 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. During the year ended May 31, 1997, the Company
recorded revenue of approximately $1,906,000 from one customer.
F-16
<PAGE>
14: RELATED PARTY TRANSACTIONS
The Company paid a director of the Company $112,000 and $47,000 under a
consulting contract in fiscal 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. In fiscal 1997, net sales of these products did not
reach the predetermined level.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the net assets acquired based
on their estimated fair values. A portion of the purchase price was allocated to
in-process research and development ($579,600), which was expensed upon the
close of the acquisition, and acquired technology ($305,290), which is included
in intangible assets on the accompanying balance sheet. Acquired technology is
being amortized over a period of five years commencing on the date of
acquisition. The results of operations of TCD have been included in the
Company's results of operations since the date of acquisition.
In connection with this acquisition, the Company agreed to manufacture and
sell certain diagnostic products to T Cell Sciences ("TCS"). In fiscal years
1996 and 1997, net sales to TCS of products subject to the agreement totaled
approximately $2,000 and $19,800, respectively.
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 financial historical information of the Company for the year ended
May 31, 1995 and the unaudited historical financial 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.
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 was $(0.21) and $(0.20) for fiscal 1995 and 1996,
respectively.
F-17
<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 was accounted for by the purchase method
of accounting and, accordingly, the purchase price was 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.
F-18
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number
3.1 Restated Articles of Organization of Endogen, Inc.*
3.2 By-laws of Endogen, Inc., as amended.*
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 Lease Termination Agreement dated as of May 31, 1996 between Endogen,
Inc. and Massachusetts Institute of Technology.**
10.22 Lease dated July 29, 1996 between Endogen, Inc. and Landman Omnibus XI
Limited Partnership.**
10.23 Loan and Security Agreement dated August 28, 1996 between Endogen, Inc.
and Silicon Valley Bank.**
10.24 $850,000 Revolving Promissory Note dated August 28, 1996 of Endogen, Inc.
to Silicon Valley Bank.**
10.25 $400,000 Term Promissory dated August 28, 1996 of Endogen, Inc. to
Silicon Valley Bank.**
10.26 Commercial Lease dated October 13, 1994, as amended, between Cummings
Properties Management, Inc. and T Cell Diagnostics, Inc.**
10.27 Lease Assignment dated March 4, 1996 between T Cell Diagnostics, Inc. and
Endogen, Inc.**
10.28 Employment Agreement dated as of December 4, 1996 between Avery W. Catlin
and Endogen, Inc. (filed herewith).
11.1 Statement re: Computation of earnings per share (filed herewith).
23.1 Consent of Independent Accountants (filed herewith).
27.1 Financial Data Schedule (filed herewith).
* 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.
EMPLOYMENT AGREEMENT
This AGREEMENT (the "Agreement") is made as of December 4, 1996 (the
"Effective Date"), by and between Endogen, Inc., a corporation with its
headquarters located in Woburn, Massachusetts (the "Employer"), and Avery W.
Catlin (the "Executive"). In consideration of the mutual covenants contained in
this Agreement, the Employer and the Executive agree as follows:
1. Employment. The Employer agrees to employ the Executive and the
Executive agrees to be employed by the Employer on the terms and conditions set
forth in this Agreement.
2. Capacity. The Executive shall serve the Employer as Vice President -
Finance, Treasurer and Chief Financial Officer or such other position as may be
agreed to by the Employer and the Executive from time to time.
3. Term. Subject to the provisions of Section 6, the term of employment
pursuant to this Agreement (the "Term") shall be three (3) years from the
Effective Date and shall be renewed automatically for periods of one (1) year
commencing at the third anniversary of the Effective Date and on each subsequent
anniversary thereafter, unless either the Executive or the Employer gives
written notice to the other not less than thirty (30) days prior to the date of
any such anniversary of such party's election not to extend the Term.
4. Compensation and Benefits. The regular compensation and benefits
payable to the Executive under this Agreement shall be as follows:
(a) Salary. For all services rendered by the Executive under
this Agreement, the Employer shall pay the Executive a salary (the
"Salary") at the annual rate of $120,000 for the first year of the
Term, $130,000 for the second year of the Term and such other amounts
as is determined by the Board of Directors of the Company (the "Board
of Directors") for the remaining years of the Term. The Salary shall be
payable in periodic installments in accordance with the Employer's
usual practice for its senior executives.
(b) Bonus. Beginning immediately on the Effective Date and
continuing for the Term of this Agreement, the Executive shall be
entitled to receive on a quarterly basis bonuses as set forth herein or
determined in the future under the Employer's Incentive Pay Plan with
the agreement of the Executive. Notwithstanding anything to the
contrary contained herein, the bonus to be paid to the Executive for
the first year of the Term of the Agreement shall be no less than
thirty-four thousand dollars ($34,000.00) consisting of (i) a sign-up
bonus of ten thousand dollars ($10,000.00) (the "Sign-up Bonus), such
amount to be paid on January 10, 1997, and (ii) a minimum annual bonus
of twenty-four thousand dollars ($24,000.00) (the "Minimum Annual
Bonus"), to be paid quarterly in the amount of $6,000.00 per quarter
and being made prior to the following dates in 1997: March 31; June 30;
September 30; and
<PAGE>
December 31 (such dates referred to hereinafter collectively as the
"Bonus Payment Dates"). The actual amount of the bonus to be paid to
the Executive for the first year of the Term of this Agreement (in
addition to the Minimum Annual Bonus) shall be determined for the March
31, 1997 and June 30, 1997 dates pursuant to formulas and matrixes
already agreed to by the Employer and the Executive (the "Initial
Formulas and Matrixes"). The amount of Bonus payments to the Executive
(in addition to the Minimum Annual Bonus) for all fiscal quarters of
the Term commencing on and after June 1, 1997 shall be determined as
follows: at least thirty days prior to beginning of each fiscal year of
the Company the Employer and Executive shall agree on the formulas and
matrixes that will be used to determine the amount of Bonus payments to
be made to the Employee for each quarter for the following fiscal year
with the understanding that such formulas and matrixes shall be similar
in nature to the Initial Formulas and Matrixes and Bonus payments are
to be made on each Bonus Payment Date for the prior fiscal quarter.
(c) Regular Benefits. The Executive shall also be entitled to
participate in any employee benefit plans, medical insurance plans,
life insurance plans, disability income plans, retirement plans,
vacation plans, expense reimbursement plans and other benefit plans
which the Employer may from time to time have in effect for all or most
of its senior executives. Such participation shall be subject to the
terms of the applicable plan documents, generally applicable policies
of the Employer, applicable law and the discretion of the Board of
Directors, the Compensation Committee or any administrative or other
committee provided for in or contemplated by any such plan.
(d) Additional Benefits. The Employer shall provide the
following additional benefits to the Executive:
(i) Home Office. The Employer shall provide the
Executive with a home office such that the Executive shall be
able when necessary to conduct all of his duties pursuant to
this Agreement at his home. Such home office shall include
such equipment (the "Equipment") necessary for the Executive
to so conduct all such duties when necessary, including,
without limitation, a computer and printer, a phone and a
dedicated phone line so as to allow the Executive to
communicate with the headquarters of the Employer by voice and
electronically by modem and shall all be to the reasonable
satisfaction of the Executive. The Employer shall either pay
directly for the Equipment and the establishment of the home
office or shall reimburse the Executive for all such Equipment
and the expenses in connection with the establishment of the
home office upon presentation to the Company of receipts for
such Equipment and expenses, provided that authorization has
been received in advance by the Executive for purchases in
excess of $2,000.
(ii) Cellular Phone. The Employer shall provide the
Executive with a cellular phone and related long distance and
local phone services all as is
2
<PAGE>
reasonably satisfactory to the Executive and the Employer
shall pay for all reasonable business expenses in connection
with the Executive's use of such cellular phone during the
Term.
(iii) Vacation. During each 12 month period during
the Term the Executive shall be entitled to vacation time of
not less than 4 weeks, during which time the Executive's
Salary shall be paid in full.
(e) Equity Compensation. The Employer has granted on December
4, 1996 to the Employee an incentive stock option pursuant to, and
subject to the terms of, the Stock Option Agreement attached hereto as
Exhibit A. The Employee shall be eligible to be considered for
additional grants of stock options and restricted stock at future grant
dates at the discretion of the Board of Directors or Compensation
Committee of the Employer.
5. Extent of Service. During the Executive's employment under this
Agreement, the Executive shall devote the Executive's full business time to the
discharge of the Executive's duties and responsibilities under this Agreement.
The Executive shall not engage in any other substantial business activity;
provided that nothing in this Agreement shall be construed as preventing the
Executive from:
(a) investing the Executive's assets in any company or other
entity and in such form or manner as shall not require any material
activities on the Executive's part in connection with the operations or
affairs of the companies or other entities in which such investments
are made; or
(b) engaging in religious, charitable or other community or
non-profit activities (including, without limitation, the Association
for Corporate Growth, the Financial Executives Institute and the
National Investor Relations Institute) that do not impair the
Executive's ability to fulfill the Executive's duties and
responsibilities under this Agreement.
6. Termination and Termination Benefits. The Executive's employment
under this Agreement may terminate under the following circumstances set forth
in this Section 6.
(a) Termination by the Employer for Cause. The Employer may
terminate the employment of the Executive and this Agreement and all of
its obligations hereunder, except for obligations accrued but unpaid to
the effective date of termination, for Cause; provided, however, that
(i) the Employer shall provide five (5) business days' advance written
notice to the Executive that the Board of Directors is considering a
termination for Cause and the Executive shall be given an opportunity
in person, personally to be heard by the Board of Directors of the
Employer; (ii) such advance notice shall describe, in reasonable
detail, the circumstances constituting Cause. Any purported termination
for Cause which fails to conform to the procedures
3
<PAGE>
set forth in the foregoing sentence prior to the Employer terminating
the employment of the Employee shall be treated as a termination
without Cause. Only the following shall constitute "cause" for such
termination:
(i) an act of fraud, embezzlement, theft or any
other material violation of law involving
dishonesty in connection with the
Executive's duties or in the course of his
employment with the Employer or the
commission of a felony or intentional
disregard of the written rules or policies
of the Employer;
(ii) intentional wrongful damage to material
assets of the Employer; or
(iii) intentional wrongful disclosure of material
confidential information of the Employer.
(iv) the substantial and continuing gross and
willful failure of the Executive to render
services to the Employer substantially in
accordance with his or her obligations under
this Agreement, which materially and
adversely affects the business, financial
condition, operations, property or affairs
of the Employer, after 30 days' notice from
the Board of Directors of the Employer, such
notice setting forth in reasonable detail
the nature of such failure;
(v) dishonesty, breach of fiduciary duty or
breach of the terms of this Agreement or the
other agreements executed in connection
herewith;
(vi) the commission of an act which induces any
customer of the Employer to breach a
contract with the Employer.
In the event of a termination "for cause," inclusive, the Executive
shall be entitled to no severance or other termination benefits except as
required by law.
No act, or failure to act, on the part of the Executive shall be deemed
"intentional" if it was due primarily to an error in judgment or negligence, but
shall be deemed "intentional" only if done, or omitted to be done, by the
Executive not in good faith and without reasonable belief that his action or
omission was in the best interest of the Employer. Failure to meet performance
standards or objectives of the Employer shall not constitute Cause for purposes
hereof.
(b) Termination by the Executive Upon Death. The Executive's
employment under this Agreement shall be terminated upon the death of
the Executive.
4
<PAGE>
(c) Termination by the Executive for Good Reason. The
Executive may terminate his employment with the Company (a termination
"For Good Reason") at any time subsequent to the occurrence of any of
the following events:
(i) that there has been a significant adverse change
in the nature or scope of the Executive's responsibilities,
authorities, powers, functions or duties;
(ii) a reduction in the Executive's salary as defined
in Section 4(a), except in the case where the CEO and all who
report to the CEO are taking comparable reductions in salary;
(iii) the relocation of the Employer's offices at
which the Executive is principally employed to a location more
than 50 miles from the location where the Executive is
principally employed; or
(iv) the failure by the Employer to pay to the
Executive any portion of his current compensation or the
failure by the Employer to continue in effect any material
compensation, incentive, bonus or benefit plan in which the
Executive participates unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has
been made with respect to such plan, or the failure by the
Employer to continue the Executive's participation therein (or
in such substitute or alternative plan) on a basis not
materially less favorable, both in terms of the amount of
benefits provided and the level of the Executive's
participation relative to other participants. In the event the
Employer's fails to adhere to any portion of the above
compensation, incentive, bonus or benefits plan, the Executive
has thirty days in which to provide written notice of the
failure to the Employer. The Employer has thirty days, from
the receipt of written notice from the Executive, to cure the
deficiency.
(d) Termination by the Employer Without Cause. The Executive's
employment under this Agreement may be terminated by the Employer
without cause upon written notice to the Executive at least thirty (30)
days prior to such termination. During such thirty (30) day notice
period, the Executive will be available on a full time basis, for the
benefit of the Employer, to assist the Employer in making the
transition to a new successor of the Executive.
(e) Payment Through Termination Date and Certain Termination
Benefits. In all cases of termination of the Executive's employment the
Executive shall be paid (i) his Salary owed to him through the
termination date and (ii) any Bonus due to the Executive as of the date
of termination and all such payments shall be made on such termination
date. In addition, as soon as possible following the termination of the
Employee a calculation shall be made according to Section 4(b) hereof
of the amount
5
<PAGE>
of Bonus due to the Employee on a pro rata basis through the date of
termination and such payment shall promptly be paid to the Employee. In
addition, in the event of termination of the Executive's employment
with the Employer pursuant to Section 6 (c), (d) or (f) the Employer
shall provide to the Executive (or in the case of death, his
beneficiaries) the following termination benefits ("Termination
Benefits"):
(i) continuation of the Executive's Salary at
the rate then in effect pursuant to Section
4(a) for six (6) months from the termination
date;
(ii) continuation of the benefits, subject to the
terms and conditions of the applicable
benefit plans, being provided to the
Executive pursuant to Section 4(c) at the
time of termination for six (6) months from
the termination date;
(iii) if terminated under Section 6(d), all
outstanding options which have been granted
to the Executive, including without
limitation the options evidenced by the
Stock Option Agreement, which have not
vested shall vest in full upon the date of
termination and shall be exercisable in
full; and
(iv) commencing immediately on the date which is
six (6) months after the date of
termination, the continuation of group
health plan benefits to the extent
authorized by and consistent with 29 U.S.C.
ss. 1161 et seq. (commonly known as
"COBRA"), with the cost of the regular
premium for such benefits to be paid by the
Executive.
The Termination Benefits set forth in (i) and (ii) above shall continue
effective until the date which is six (6) months after the date of
termination.
(f) Disability. If the Executive shall be disabled so as to be
unable to perform the essential functions of the Executive's then
existing position or positions under this Agreement with or without
reasonable accommodation, the Employer may remove the Executive from
any responsibilities and/or reassign the Executive to another position
with the Employer for the remainder of the Term or during the period of
such disability. Notwithstanding any such removal or reassignment, the
Executive shall continue to receive the Executive's full Salary and
benefits under Section 4 of this Agreement for six (6) months. If any
question shall arise as to whether during any period the Executive is
disabled so as to be unable to perform the essential functions of the
Executive's then existing position or positions with or without
reasonable accommodation, the Executive may, and at the request of the
Employer shall, submit to the Employer a certification in reasonable
detail by a physician selected by the Employer to whom the Executive or
the Executive's guardian has no reasonable
6
<PAGE>
objection as to whether the Executive is so disabled or how long such
disability is expected to continue, and such certification shall for
the purposes of this Agreement be conclusive of the issue.
(g) Termination Pursuant to a Change of Control. If there is a
Change of Control, as defined in Section 6(g)(i) below, during the
Term, the provisions of this Section 6(g) shall apply and shall
continue to apply throughout the remainder of the term of this
Agreement. If, within one (1) year following a Change of Control, the
Executive's employment is terminated by the Employer or the Executive
following the occurrence of any of the events listed in Section
6(g)(ii) below (as determined by the Executive) or if the Executive's
employment is terminated without cause (in accordance with Section 6(d)
above), the Employer shall pay to the Executive (or the Executive's
estate, if applicable) a lump sum amount equal to the annual rate of
the Executive's Salary on the date of termination (for example, if such
termination occurred during the second year of the Term the Executive
would receive a lump sum payment of $130,000). All outstanding options
which have been granted to the Executive, including without limitation
the options evidenced by the Stock Option Agreement, which have not
vested shall vest in full upon the date of termination and shall be
exercisable in full; and
(i) Change of Control shall mean the occurrence of
one or more of the following events:
(A) any "person" (as such term is used in
Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange
Act")) becomes a "beneficial owner" (as such term is
defined in Rule 13d-3 promulgated under the Exchange
Act) directly or indirectly, of securities of the
Employer, representing fifty percent (50%) or more of
the combined voting power of the Employer's then
outstanding securities; or
(B) persons who, as of the Effective Date,
constituted the Employer's Board of Directors (the
"Incumbent Board") cease to constitute at least a
majority of the Board of Directors, provided that any
person becoming a director of the Employer subsequent
to the Effective Date whose election was approved by
at least a majority of the directors then comprising
the Incumbent Board shall, for purposes of this
Section 6(g), be considered a member of the Incumbent
Board; or
(C) the stockholders of the Employer approve
a merger or consolidation of the Employer with any
other corporation or other entity, other than (1) a
merger or consolidation which would result in the
voting securities of the Employer outstanding
immediately prior
7
<PAGE>
thereto continuing to represent (either by remaining
outstanding or by being converted into voting
securities of the surviving entity) more than fifty
percent (50%) of the combined voting power of the
voting securities of the Employer or such surviving
entity outstanding immediately after such merger or
consolidation or (2) a merger or consolidation
effected to implement a recapitalization of the
Employer (or similar transaction) in which no
"person" (as hereinabove defined) acquires more than
fifty percent (50%) of the combined voting power of
the Employer's then outstanding securities; or
(D) the stockholders of the Employer approve
a plan of complete liquidation of the Employer or an
agreement for the sale or disposition by the Employer
of all or substantially all of the Employer's assets;
or
(E) The Employer files a report or proxy
statement with the Securities and Exchange Commission
pursuant to the Exchange Act disclosing in response
to Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) that a
change in control of the Employer has or may have
occurred or will or may occur in the future pursuant
to any then-existing contract or transaction; or
Notwithstanding the foregoing provisions of Section 6(g)(i)(A) or (E)
hereof, a "Change in Control" shall not be deemed to have occurred for purposes
of this Agreement solely because (i) the Employer, (ii) an entity in which the
Employer directly or indirectly beneficially owns 50% or more of the voting
securities, or (iii) any Employer-sponsored employee stock ownership plan or any
other employee benefit plan of the Employer, either files or becomes obligated
to file a report or a proxy statement under or in response to Schedule 13D,
Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or
report or item therein) under the Exchange Act, disclosing beneficial ownership
by it of shares of Voting Stock, whether in excess of 50% or otherwise, or
because the Employer reports that a change in control of the Employer has or may
have occurred or will or may occur in the future by reason of such beneficial
ownership.
(ii) The events referred to in Section 6(g) above
shall be as follows:
(A) that there has been a significant change
in the nature or scope of the Executive's
responsibilities, authorities, powers, functions or
duties from the responsibilities, authorities,
powers, functions or duties exercised by the
Executive, as reasonably determined by the Executive
in good faith, immediately prior to a Change of
Control;
(B) a reduction in the Executive's monetary
compensation as compared to that being paid to the
Executive prior to the Change of Control;
8
<PAGE>
(C) the relocation of the Employer's offices
at which the Executive is principally employed
immediately prior to the date of the Change of
Control to a location more than 50 miles from the
location where the Executive is principally employed
immediately prior to the date of the Change of
Control;
(D) the failure by the Employer to pay to
the Executive any portion of his current compensation
or the failure by the Employer to continue in effect
any material compensation, incentive, bonus or
benefit plan in which the Executive participates
immediately prior to the Change of Control, unless an
equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with
respect to such plan, or the failure by the Employer
to continue the Executive's participation therein (or
in such substitute or alternative plan) on a basis
not materially less favorable, both in terms of the
amount of benefits provided and the level of the
Executive's participation relative to other
participants, as existed at the time of the Change of
Control; or
(E) the failure of the Employer to obtain a
satisfactory agreement from any successor to assume
and agree to perform this Agreement or enter into a
new agreement on substantially the same terms.
(iii) It is the intention of the Executive and of the
Employer that no payments by the Employer to or for the
benefit of the Executive under this Agreement or any other
agreement or plan, if any, pursuant to which the Executive is
entitled to receive payments or benefits shall be
nondeductible to the Employer by reason of the operation of
Section 280G of the Code relating to parachute payments or any
like statutory or regulatory provision. Accordingly, and
notwithstanding any other provision of this Agreement or any
such agreement or plan, if by reason of the operation of said
Section 280G or any like statutory or regulatory provision,
any such payments exceed the amount which can be deducted by
the Employer, such payments shall be reduced to the maximum
amount which can be deducted by the Employer. To the extent
that payments exceeding such maximum deductible amount have
been made to or for the benefit of the Executive, such excess
payments shall be refunded to the Employer with interest
thereon at the applicable Federal rate determined under
Section 1274(d) of the Code, compounded annually, or at such
other rate as may be required in order that no such payments
shall be nondeductible to the Employer by reason of the
operation of said Section 280G or any like statutory or
regulatory provision. To the extent that there is more than
one method of reducing the payments to bring them within the
limitations
9
<PAGE>
of said Section 280G or any like statutory or regulatory
provision, the Executive shall determine which method shall be
followed, provided that if the Executive fails to make such
determination within forty-five (45) days after the Employer
has given notice of the need for such reduction, the Employer
may determine the method of such reduction in its sole
discretion.
7. Confidential Information and Cooperation. On the date herein, the
Executive will have entered into the standard Endogen Confidentiality and
Non-Compete Agreement, in the form attached hereto as Exhibit B.
8. Arbitration of Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof or otherwise arising out of the
Executive's employment or the termination of that employment (including, without
limitation, any claims of unlawful employment discrimination whether based on
age or otherwise) shall, to the fullest extent permitted by law, be settled by
arbitration in any forum and form agreed upon by the parties or, in the absence
of such an agreement, under the auspices of the American Arbitration Association
("AAA") in Boston, Massachusetts in accordance with the Employment Dispute
Resolution Rules of the AAA, including, but not limited to, the rules and
procedures applicable to the selection of arbitrators, except that the
arbitrator shall apply the law as established by decisions of the U.S. Supreme
Court, the Court of Appeals for the First Circuit and the U.S. District Court
for the District of Massachusetts in deciding the merits of claims and defenses
under federal law or any state or federal anti-discrimination law, and any
awards to the Executive for violation of any anti-discrimination law shall not
exceed the maximum award to which the Executive could be entitled under the
applicable (or most analogous) federal anti-discrimination or civil rights laws.
In the event that any person or entity other than the Executive or the Employer
may be a party with regard to any such controversy or claim, such controversy or
claim shall be submitted to arbitration subject to such other person or entity's
agreement. Judgment upon the award rendered by the arbitrator may be entered in
any court having jurisdiction thereof. This Section 8 shall be specifically
enforceable. Notwithstanding the foregoing, this Section 8 shall not preclude
either party from pursuing a court action for the sole purpose of obtaining a
temporary restraining order or a preliminary injunction in circumstances in
which such relief is appropriate; provided that any other relief shall be
pursued through an arbitration proceeding pursuant to this Section 8.
9. Consent to Jurisdiction. To the extent that any court action is
permitted consistent with or to enforce Section 8 of this Agreement, the parties
hereby consent to the jurisdiction of the Superior Court of the Commonwealth of
Massachusetts and the United States District Court for the District of
Massachusetts.
10. Integration. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes all
prior agreements between the parties with respect to any related subject matter,
with the exception of the Incentive Stock Option Agreement and the
Confidentiality and Non-Competition Agreements attached hereto as Exhibits A and
B, respectively.
10
<PAGE>
11. Assignment; Successors and Assigns, etc. Neither the Employer nor
the Executive may make any assignment of this Agreement or any interest herein,
by operation of law or otherwise, without the prior written consent of the other
party; provided that the Employer may assign its rights under this Agreement
without the consent of the Executive in the event that the Employer shall effect
a reorganization, consolidate with or merge into any other corporation,
partnership, organization or other entity, or transfer all or substantially all
of its properties or assets to any other corporation, partnership, organization
or other entity. This Agreement shall inure to the benefit of and be binding
upon the Employer and the Executive, their respective successors, executors,
administrators, heirs and permitted assigns.
12. Enforceability. If any portion or provision of this Agreement
(including, without limitation, any portion or provision of any section of this
Agreement) shall to any extent be declared illegal or unenforceable by a court
of competent jurisdiction, then the remainder of this Agreement, or the
application of such portion or provision in circumstances other than those as to
which it is so declared illegal or unenforceable, shall not be affected thereby,
and each portion and provision of this Agreement shall be valid and enforceable
to the fullest extent permitted by law.
13. Waiver. No waiver of any provision hereof shall be effective unless
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
14. Notices. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by a nationally recognized overnight courier service or by
registered or certified mail, postage prepaid, return receipt requested, to the
Executive at the last address the Executive has filed in writing with the
Employer or, in the case of the Employer, at its main offices, attention of the
Chief Executive Officer, and shall be effective on the date of delivery in
person or by courier or three (3) days after the date mailed.
15. Amendment. This Agreement may be amended or modified only by a
written instrument signed by the Executive and by a duly authorized
representative of the Employer.
16. Governing Law. This is a Massachusetts contract and shall be
construed under and be governed in all respects by the laws of the Commonwealth
of Massachusetts, without giving effect to the conflict of laws principles of
such Commonwealth.
17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be taken to be
an original; but such counterparts shall together constitute one and the same
document.
11
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by the Employer, by its duly authorized officer, and by the
Executive, as of the Effective Date.
ENDOGEN, INC.
By: /s/ Owen A. Dempsey
---------------------------
Owen A. Dempsey
President and CEO
/s/ Avery W. Catlin
---------------------------
Avery W. Catlin
12
EXHIBIT 11.1
Endogen, Inc.
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Year ended May 31,
-----------------------------------------------------------------
1995 1996 1997
------------- -------------- -------------
<S> <C> <C> <C>
Primary earnings per share:
Weighted average number of
shares outstanding..................... 2,649,920 2,835,697 3,095,262
Shares deemed outstanding from
the assumed exercise of stock
options and warrants................... 142,309 -- 299,400
------------- ------------- -------------
Total 2,792,229 2,835,697 3,394,662
============= ============= =============
Net income (loss) applicable to
common shares.......................... $ 24,302 $ (700,539) $ 975,595
============= ============= =============
Primary earnings (loss) per share
of common stock........................ $ 0.01 $ (0.25) $ 0.29
============= ============= =============
</TABLE>
Consent of Independent Accountants
----------------------------------
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (File No. 333-11241)
and the Registration Statements on Form S-8 (File Nos. 33-64440 and 33-77576) of
Endogen, Inc. of our report dated July 24, 1997, appearing on page F-2 of this
Form 10-KSB.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Boston, Massachusetts
August 7, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements included in the Annual Report on Form 10-KSB of Endogen,
Inc. to which this exhibit is a part and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000894020
<NAME> Endogen, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> May-31-1997
<PERIOD-START> Jun-01-1996
<PERIOD-END> May-31-1997
<EXCHANGE-RATE> 1.00
<CASH> 334
<SECURITIES> 0
<RECEIVABLES> 1,663
<ALLOWANCES> 50
<INVENTORY> 1,817
<CURRENT-ASSETS> 4,174
<PP&E> 3,448
<DEPRECIATION> 1,120
<TOTAL-ASSETS> 7,478
<CURRENT-LIABILITIES> 1,439
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 5,824
<TOTAL-LIABILITY-AND-EQUITY> 7,478
<SALES> 9,589
<TOTAL-REVENUES> 9,589
<CGS> 3,365
<TOTAL-COSTS> 8,852
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 143
<INCOME-PRETAX> 595
<INCOME-TAX> (381)
<INCOME-CONTINUING> 976
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 976
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
