U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended February 28, 1999
or
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period
from _________ to ________.
Commission File No. 0-21354
ENDOGEN, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Massachusetts 04-2789249
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
30 Commerce Way
Woburn, Massachusetts 01801-1059
(Address of Principal Executive Offices)
(781) 937-0890
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) 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 registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Title Shares Outstanding as of April 8, 1999
- ------------------------------ --------------------------------------
Common Stock, $0.01 par value 3,468,202
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
Exhibit index located on page 17
Page 1 of 17
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ENDOGEN, INC.
FORM 10-QSB
QUARTER ENDED FEBRUARY 28, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION Number
- ------------------------------ ------
<S> <C>
Item 1 - Financial Statements (Unaudited)
Balance Sheet
February 28, 1999 and May 31, 1998.......................................... 3
Statement of Operations
for the three months ended February 28, 1999 and February 28, 1998 ......... 4
Statement of Operations
for the nine months ended February 28, 1999 and February 28, 1998 .......... 5
Statement of Cash Flows
for the nine months ended February 28, 1999 and February 28, 1998 .......... 6
Notes to Unaudited Financial Statements......................................... 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations................................... 9
PART II - OTHER INFORMATION
- ---------------------------
Item 6 - Exhibits and Reports on Form 8-K............................................ 15
Signatures........................................................................... 16
Index To Exhibits.................................................................... 17
</TABLE>
Page 2 of 17
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ENDOGEN, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
February 28, May 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 864,460 $ 1,175,490
Accounts receivable, net of allowance for doubtful accounts
and returns of $50,000 at February 28, 1999 and May 31, 1998 1,364,713 1,374,431
Inventories 2,141,290 1,841,135
Prepaid expenses and other current assets 509,014 449,633
Deferred income taxes 151,000 151,000
------------ ------------
Total current assets 5,030,477 4,991,689
Fixed assets, net 1,710,834 2,020,063
Intangible assets, net 238,257 299,907
Deferred income taxes 445,000 445,000
Other assets 138,705 163,662
------------ ------------
$ 7,563,273 $ 7,920,321
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of term notes payable - bank $ 178,100 $ 200,322
Current portion of capital lease obligations 8,184 6,917
Accounts payable and accrued expenses 1,253,750 1,088,840
------------ ------------
Total current liabilities 1,440,034 1,296,079
------------ ------------
Term notes payable - bank 83,735 195,061
Capital lease obligations 1,552 7,858
------------ ------------
85,287 202,919
------------ ------------
Stockholders' equity:
Common stock, $.01 par value; 10,000,000 shares authorized;
3,466,202 and 3,442,802 shares issued and outstanding
at February 28, 1999 and May 31, 1998, respectively 34,662 34,428
Additional paid-in capital 6,386,688 6,342,402
Deferred compensation (67,252) (100,876)
Retained earnings (deficit) (316,146) 145,369
------------ ------------
Total stockholders' equity 6,037,952 6,421,323
============ ============
$ 7,563,273 $ 7,920,321
============ ============
</TABLE>
See notes to unaudited financial statements
Page 3 of 17
<PAGE>
ENDOGEN, INC.
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
February 28, February 28,
1999 1998
-------------- ---------------
<S> <C> <C>
REVENUES: $ 2,376,469 $ 2,487,755
------------ -------------
COSTS AND EXPENSES:
Cost of revenues 1,028,028 980,722
Selling, general and administrative 1,088,309 990,837
Research and development 573,708 482,230
------------ -------------
2,690,045 2,453,789
------------ -------------
Income (loss) from operations (313,576) 33,966
Interest expense, net 1,323 4,396
------------ -------------
Income (loss) before income taxes (314,899) 29,570
Income tax provision - 9,000
------------ -------------
Net income (loss) $ (314,899) $ 20,570
============ =============
Basic earnings (loss) per share $ (0.09) $ 0.01
============ =============
Diluted earnings (loss) per share $ (0.09) $ 0.01
============ =============
Shares used in computing:
Basic earnings (loss) per share 3,459,702 3,440,079
============ =============
Diluted earnings (loss) per share 3,459,702 3,591,533
============ =============
</TABLE>
See notes to unaudited financial statements
Page 4 of 17
<PAGE>
ENDOGEN, INC.
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
February 28, February 28,
1999 1998
----------- ------------
<S> <C> <C>
REVENUES: $ 7,469,232 $ 7,402,215
----------- -----------
COSTS AND EXPENSES:
Cost of revenues 2,950,568 2,759,713
Selling, general and administrative 3,400,746 2,977,655
Research and development 1,576,442 1,226,729
----------- -----------
7,927,756 6,964,097
----------- -----------
Income (loss) from operations (458,524) 438,118
Interest expense, net 2,987 10,651
----------- -----------
Income (loss) before income taxes (461,511) 427,467
Income tax provision - 141,000
----------- -----------
Net income (loss) $ (461,511) $ 286,467
=========== ===========
Basic earnings (loss) per share $ (0.13) $ 0.08
=========== ===========
Diluted earnings (loss) per share $ (0.13) $ 0.08
=========== ===========
Shares used in computing:
Basic earnings (loss) per share 3,452,980 3,429,452
=========== ===========
Diluted earnings (loss) per share 3,452,980 3,634,221
=========== ===========
</TABLE>
See notes to unaudited financial statements
Page 5 of 17
<PAGE>
ENDOGEN, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
February 28, February 28,
1999 1998
----------- ------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (461,511) $ 286,467
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 703,116 621,605
Decrease in accounts receivable 9,718 133,413
Increase in inventories (300,155) (133,347)
Increase in prepaid expenses and other assets (59,381) (144,660)
Increase (decrease) in accounts payable and accrued expenses 164,910 (41,375)
----------- -----------
Net cash provided by operating activities 56,697 722,103
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (248,159) (360,471)
Acquisition of license technology (25,500) --
----------- -----------
Net cash used for investing activities (273,659) (360,471)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations and term notes payable - bank (138,588) (111,661)
Proceeds from borrowings under an equipment line of credit with a bank - 167,188
Proceeds from issuance of common stock 44,520 68,518
----------- -----------
Net cash provided by (used in) financing activities (94,068) 124,045
----------- -----------
Net increase (decrease) in cash and cash equivalents (311,030) 485,677
Cash and cash equivalents, beginning of period 1,175,490 334,050
----------- -----------
Cash and cash equivalents, end of period $ 864,460 $ 819,727
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 25,340 $ 30,193
=========== ===========
Cash paid for income taxes $ 162,956 $ 45,465
=========== ===========
</TABLE>
See notes to unaudited financial statements
Page 6 of 17
<PAGE>
ENDOGEN, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited financial statements of Endogen, Inc. (the "Company" or
"Endogen") include, in the opinion of management, all adjustments
(consisting of normal and recurring adjustments) necessary for a fair
presentation of the Company's financial position as of February 28, 1999
and the results of operations for the three and nine month periods ended
February 28, 1999 and February 28, 1998. The results of operations are not
necessarily indicative of results for a full year.
These financial statements should be read in conjunction with the
financial statements contained in the Company's Form 10-KSB filed with the
Securities and Exchange Commission (the "SEC") on August 28, 1998 pursuant
to the Securities Exchange Act of 1934, as amended. Certain information
and footnote disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to the SEC rules and regulations.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
February 28,
1999 May 31, 1998
--------------- ----------------
<S> <C> <C>
Raw materials and supplies $ 887,095 $ 793,872
Work-in-process 276,912 165,771
Finished goods 977,283 881,492
--------------- ----------------
$ 2,141,290 $ 1,841,135
=============== ================
</TABLE>
3. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
February 28,
1999 May 31, 1998
---------------- ----------------
<S> <C> <C>
Laboratory equipment $ 1,215,965 $ 1,142,160
Computer and office equipment 1,096,352 975,033
Leasehold improvements 1,768,780 1,715,745
---------------- ----------------
4,081,097 3,832,938
Accumulated depreciation and amortization (2,370,263) (1,812,875)
---------------- ----------------
$ 1,710,834 $ 2,020,063
================ ================
</TABLE>
Page 7 of 17
<PAGE>
ENDOGEN, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
4. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
February 28,
1999 May 31, 1998
---------------- ----------------
<S> <C> <C>
Acquired technology $ 305,290 $ 305,290
Patent costs 68,240 68,240
License costs 447,278 421,778
---------------- ----------------
820,808 795,308
Accumulated amortization (582,551) (495,401)
---------------- ----------------
$ 238,257 $ 299,907
================ ================
</TABLE>
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
February 28,
1999 May 31, 1998
---------------- ----------------
<S> <C> <C>
Accounts payable $ 402,691 $ 439,215
Accrued wages 287,846 219,026
Accrued royalties 180,363 123,287
Accrued professional fees 374,655 175,620
Accrued taxes payable 8,195 131,692
================ ================
$ 1,253,750 $ 1,088,840
================ ================
</TABLE>
6. Borrowings
In August 1998, the Company's existing revolving line of credit agreement
with a bank (the "Line of Credit") was amended to extend the maturity date
to August 1999 and to reduce the interest rate to the prime rate plus 0.5%
(8.25% at February 28, 1999). The Line of Credit provides for maximum
borrowings of $850,000, adjusted for the Company's eligible receivables,
as defined, and other terms and conditions of the agreement. At February
28, 1999, the Company had $618,703 available under the Line of Credit.
7. Common Stock
On November 5, 1998, the stockholders of the Company approved an
increase in the number of shares authorized for issuance under the
Company's 1992 Stock Plan from 1,000,000 shares to 1,250,000 shares.
Page 8 of 17
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ENDOGEN, INC.
Item 2. 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. Actual results may differ
materially from those currently anticipated depending upon a variety of factors.
See "Certain Factors That May Affect Future Results" herein.
Endogen is principally engaged in the development, manufacture and sale of
specialty reagents, immuno-assay test kits and molecular research products for
pharmaceutical, biotechnology and biomedical research. Endogen's major product
lines include over 360 specialty reagents and 74 immuno-assay test kits that
measure immune system function in human, mouse, rat, or porcine samples. In
August 1998, the Company began to ship Xplore(TM) messenger RNA ("mRNA")
quantification assay kits to life science customers, the first mRNA assay kits
to provide rapid, sensitive and accurate measurement of gene expression. During
the quarter ended February 28, 1999, the Company launched four additional
Xplore(TM) mRNA kits resulting in a total of eight mRNA kits now available for
sale. Products marketed under Endogen's name are sold directly in the United
States and through distributors in over 40 foreign countries. The Company also
sells products on a private label basis to customers who market these products
under their own brand names.
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>
Three Months Ended Nine Months Ended
February 28, February 28,
-------------------- ---------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues.......................... 43.3% 39.4% 39.5% 37.3%
Selling, general and administrative....... 45.8% 39.8% 45.5% 40.2%
Research and development.................. 24.1% 19.4% 21.1% 16.6%
Income (loss) from operations............... (13.2)% 1.4% (6.1)% 5.9%
Interest expense, net..................... 0.1% 0.2% 0.1% 0.1%
Income (loss) before income taxes........... (13.3)% 1.2% (6.2)% 5.8%
Income tax provision...................... -- 0.4% -- 1.9%
Net income (loss)........................... (13.3)% 0.8% (6.2)% 3.9%
</TABLE>
Three Month Period Ended February 28, 1999 as Compared
with the Three Month Period Ended February 28, 1998
Revenues
For the three months ended February 28, 1999, total revenues were
$2,376,469 compared to $2,487,755 during the same period last year, a decrease
of $111,286, or 4.5%, primarily due to inclusion during the third quarter of
1998 of $150,000 in revenue resulting from a one-time license fee associated
with a product supply and licensing agreement. Domestic and international sales
of Endogen branded products decreased $31,119, or 1.8% during the third quarter
of fiscal 1999 compared to the third quarter of fiscal 1998. This decrease was
offset by an increase of $35,010, or 6.3%, in private label sales in the third
quarter of fiscal 1999 compared with the third quarter of fiscal 1998 due
primarily to an increase in sales to a major European private label customer.
Page 9 of 17
<PAGE>
ENDOGEN, INC.
Cost of Revenues
Cost of revenues was $1,028,028 for the three months ended February 28, 1999
compared with $980,722 for the same period last year, an increase of $47,306, or
4.8%. As a percentage of revenues, cost of revenues was 43.3% and 39.4% during
the three month periods ended February 28, 1999 and 1998, respectively. This
increase in cost of revenues as a percentage of revenues was due primarily to
additional expenses associated with product launch activities related to the
Xplore mRNA kits, changes in the mix of products sold and higher fixed overhead
costs.
Selling, General and Administrative Expenses
Selling, general and administrative expense was $1,088,309 for the three
months ended February 28, 1999 compared with $990,837 for the same period last
year, an increase of $97,472, or 9.8%. As a percentage of revenues, selling,
general and administrative expense increased to 45.8% of revenues for the three
months ended February 28, 1999 compared with 39.8% for the same period last
year. This increase was due primarily to increases in catalog expenses,
expenditures for marketing activities associated with the launch of the Xplore
mRNA product line, and increases in recruiting and consulting expenses. The
Company anticipates making continued investments in new product development and
product launch activities at similar levels in the fourth quarter of fiscal
1999.
Research and Development Expenses
Research and development expense was $573,708 for the three months ended
February 28, 1999 compared with $482,230 for the same period last year, an
increase of $91,478, or 19.0%. Research and development expense increased as a
percentage of revenues to 24.1% for the three months ended February 28, 1999
from 19.4% for the same period last year. Substantially all of the increase in
research and development expenditures relates to the investment in the mRNA
program. The Company anticipates that research and development expenses will be
at similar levels in the fourth quarter of fiscal 1999.
Interest Expense, Net
Net interest expense was $1,323 for the three months ended February 28, 1999
compared with net interest expense of $4,396 for the same period last year. This
decrease in interest expense was the result of the reduction in the average
outstanding borrowings under term notes payable and capital lease obligations.
Income Taxes
For the three months ended February 28, 1999 the Company did not record a
provision for income taxes and for the three months ended February 28, 1998 the
Company recorded a provision for income taxes of $9,000 based on estimated
effective tax rates at February 28, 1999 and 1998, respectively.
Nine Month Period Ended February 28, 1999 as Compared
with the Nine Month Period Ended February 28, 1998
Revenues
For the nine months ended February 28, 1999, total revenues increased to
$7,469,232 from $7,402,215 in the same period last year, an increase of $67,017,
or 0.9%. Domestic and international sales of Endogen branded products increased
to $5,494,875 during the first nine months of fiscal 1999 from $5,252,637 in the
same period last year, an increase of $242,238, or 4.6%. This growth was due
primarily to increased sales volume from existing Endogen product lines and new
product introductions. This increase was offset in part by a $86,095, or 4.5%,
decline in private label sales, which decreased to $1,844,354 in the first nine
months of fiscal 1999 from $1,930,449 during the first nine months of fiscal
1998. This decline was attributable primarily to economic conditions and
competitive pressures in the Japanese diagnostic market resulting in decreased
sales to one major private label customer. The Company expects a continued
shortfall in sales to this customer in the fourth quarter of fiscal 1999 when
compared to sales levels in fiscal 1998.
Page 10 of 17
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ENDOGEN, INC.
Cost of Revenues
Cost of revenues was $2,950,568 for the nine months ended February 28, 1999
compared with $2,759,713 for the same period last year, an increase of $190,855,
or 6.9%. As a percentage of revenues, cost of revenues was 39.5% and 37.3% in
the nine month periods ended February 28, 1999 and 1998, respectively. The
increase in cost of revenues as a percentage of revenues during the first nine
months of fiscal 1999 was due primarily to additional expenses associated with
product launch activities related to the Xplore mRNA kits, changes in the mix of
products sold and higher fixed overhead costs.
Selling, General and Administrative Expenses
Selling, general and administrative expense was $3,400,746 for the nine
months ended February 28, 1999 compared with $2,977,655 for the same period last
year, an increase of $423,091, or 14.2%. As a percentage of revenues, selling,
general and administrative expense increased to 45.5% of revenues for the nine
months ended February 28, 1999 compared with 40.2% for the same period last
year. This increase was due primarily to increases in catalog expenses,
expenditures for marketing activities associated with the launch of the Xplore
mRNA product line, and increases in recruiting and consulting expenses.
Research and Development Expenses
Research and development expense was $1,576,442 for the nine months ended
February 28, 1999 versus $1,226,729 for the same period last year, an increase
of $349,713, or 28.5%. Research and development expense increased as a
percentage of revenues to 21.1% for the nine months ended February 28, 1999 from
16.6% for the same period last year. Substantially all of the increase in
research and development expenditure between the nine-month periods relates to
investment in the mRNA product development program. Endogen plans to continue to
spend heavily on product development for new products and to upgrade existing
products.
Interest Expense, Net
Net interest expense was $2,987 for the nine months ended February 28, 1999
compared with net interest expense of $10,651 for the same period last year, a
decrease of $7,664. This decrease was the result of the reduction in the average
outstanding borrowings under term notes payable and capital lease obligations.
Income Taxes
For the nine months ended February 28, 1999, the Company did not record a
provision for income taxes and for the nine months ended February 28, 1998, the
Company recorded a provision for income taxes of $141,000 based on estimated
effective tax rates at February 28, 1999 and 1998, respectively.
Liquidity and Capital Resources
The growth of Endogen's business has led to increased liquidity requirements
to fund working capital needs and capital expenditures. This includes financing
inventories and accounts receivable to support the Company's growing operations,
as well as purchases of new laboratory equipment and leasehold improvements to
support new product development. In addition, in connection with its Product
Development and Marketing Agreement with Third Wave Technologies, Inc. ("Third
Wave"), the Company is obligated to make funding payments not to exceed
$1,050,000 in total, to Third Wave in quarterly installments over a three year
period beginning December 1, 1997.
At February 28, 1999, Endogen's cash and cash equivalent position was
$864,460, a decrease of $311,030 from May 31, 1998. Endogen has financed its
liquidity needs primarily through cash from operations, a working capital line
of credit with a bank and term notes payable with a bank. At February 28,1999,
the Company had $618,703 available under a working capital line of credit with a
bank. The interest rate on the line of credit is 0.5% above the bank's prime
rate (8.25% at February 28, 1999).
Cash Flows from Operating Activities
Net cash provided by operating activities during the nine month period ended
February 28, 1999 was $56,697 as compared to $722,103 during the same period
last year. For the first nine months of fiscal 1999, net cash provided by
operating activities consisted primarily of depreciation and amortization of
$703,116, an increase in accounts payable and accrued expenses of $164,910
and a decrease in accounts receivable of $9,718. This was offset in part by a
net loss of $461,511, an increase in inventories of
Page 11 of 17
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ENDOGEN, INC.
$300,155 and an increase in prepaid expenses and other assets of $59,381. For
the first nine months of fiscal 1998, net cash provided by operating activities
consisted primarily of net income of $286,467, depreciation and amortization of
$621,605 and a decrease in accounts receivable of $133,413. This was partially
offset by an increase in inventories of $133,347, an increase in prepaid
expenses and other assets of $144,660 and a decrease in accounts payable and
accrued expenses of $41,375.
Cash Flows from Investing Activities
Net cash used for investing activities during the nine month periods ended
February 28, 1999 and 1998 was $273,659 and $360,471, respectively, and
consisted of investments in capital equipment and acquisition of license
technology.
Cash Flows from Financing Activities
During the nine month period ended February 28, 1999, net cash used for
financing activities was $94,068 and consisted of repayments of capital lease
obligations and term notes payable of $138,588, offset in part by proceeds from
the issuance of common stock of $44,520. During the nine months ended February
28, 1998, net cash provided by financing activities was $124,045 and consisted
of proceeds of $167,188 from borrowings under an equipment line of credit and
$68,518 from the issuance of common stock, offset in part by cash used to
decrease borrowings of $111,661.
The Company expects to continue expanding operations through internal growth
and strategic acquisitions which offer 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 anticipated cash flow from operations, together with the
revolving line of credit currently available, will be sufficient to finance its
current and planned operations for at least the next twelve months. 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.
The foregoing statements contain forward-looking statements which involve
risks and uncertainties. The Company's actual experience may differ materially
from that discussed above.
Year 2000 Compliance
The "Year 2000 Issue" is the result of computer programs being written using
two digits rather than four digits to define the applicable year. The Company's
computer equipment and software and devices with embedded technology that are
time sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or otherwise engage in normal business
activities. The Company is at risk for both its own Year 2000 Issues and for the
Year 2000 Issues of those with whom it does business, particularly suppliers of
materials and services as well as customers placing orders and making payments
on invoices.
The Company has established a team to study and address its Year 2000 Issues.
This team, lead by the Company's Controller, consists of members of each
department within the Company and reports to the Company's Vice President,
Operations and Finance. The following is a summary of the Company's Year 2000
state of readiness as set forth by category.
o Information Technology Systems
- Accounting / Business System. The Company has upgraded the system
software to a version which is Year 2000 compliant, but testing has
not yet been completed. The Company anticipates completing this
testing by June 1999.
Page 12 of 17
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ENDOGEN, INC.
- Production System. The Company has upgraded the system software to a
version which is Year 2000 compliant, but testing has not yet been
completed. The Company anticipates completing this testing by June
1999.
- Sales Reporting System. The Company has upgraded the system software
to a version which is Year 2000 compliant, but testing has not yet
been completed. The Company anticipates completing this testing by
June 1999.
- Contact Management System. The Company has upgraded the system
software to a version which is Year 2000 compliant, but testing has
not yet been completed. The Company anticipates completing this
testing by June 1999.
o Non-Information Technology System
The Company has not yet completed a review of the Year 2000 compliance
of its non-information technology systems (i.e., embedded technology such as
micro-controllers and processors). These systems include manufacturing, research
and development, telecommunications and office equipment which may contain
embedded technology. The Company initiated such a review beginning in December
1998 and anticipates completing this review no later than June 1999.
o Third Party Compliance
Management believes that the most significant risk to the Company of
Year 2000 Issues is the effect such issues may have on its suppliers and
customers. In addition, news reports have indicated that various agencies within
the federal, state and local governments may have difficulty becoming Year 2000
compliant before the year 2000. The Company has not yet completed its assessment
of such third party compliance or undertaken to quantify the effect of such
non-compliance or to determine whether such quantification is even possible. The
Company began an assessment of the Year 2000 compliance of the various third
parties with which it maintains a material business relationship in December
1998 and anticipates completing this assessment no later than June 1999.
The Company is in the process of quantifying the historical costs incurred
and creating an estimate of future costs associated with becoming Year 2000
compliant. The Company plans to have an initial estimate of costs completed by
June 1999.
The Company has not yet completed a comprehensive analysis of the operational
problems and costs (including loss of revenues) that would be reasonably likely
to result from the failure of the Company and certain third parties to complete
efforts necessary to achieve Year 2000 compliance on a timely basis. A
contingency plan has not been developed for dealing with the most reasonably
likely worst case scenario and such scenario has not yet been clearly
identified. The Company began such an analysis in December 1998 and anticipates
completing this analysis no later than June 1999.
The Company presently believes that the Year 2000 Issue will not pose
significant operational problems for the Company. However, if all Year 2000
Issues are not properly identified, or assessment, remediation and testing are
not effected timely with respect to Year 2000 problems that are identified,
there can be no assurance that the Year 2000 Issue will not materially adversely
impact the Company's results of operations or materially adversely affect the
Company's relationships with customers, suppliers or others.
Additionally, there can be no assurance that the Year 2000 Issues of other
entities will not have a material adverse impact on the Company's systems or
results of operations.
The costs of the Company's Year 2000 identification, assessment, remediation
and testing efforts and the dates on which the Company believes it will complete
such efforts are based upon management's best estimates, which were derived
using numerous assumptions regarding future events and actual results could
differ materially from those currently anticipated. Specific factors that could
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in Year 2000 Issues, the ability to
identify, assess, remediate and test all relevant computer codes and embedded
technology, and similar uncertainties.
Page 13 of 17
<PAGE>
ENDOGEN, INC.
Certain Factors That May Affect Future Results
The Company does not provide forecasts of the future financial performance of
the Company. However, from time to time, information provided by the Company or
statements made by its employees may contain "forward-looking" information that
involve risks and uncertainties. In particular, statements contained in this
Form 10-QSB that are not historical facts constitute forward-looking statements
and are made under the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The Company's actual results of operations and
financial condition have varied and may in the future vary significantly from
those stated in any forward-looking statements. The Company's future operating
results are subject to risks and uncertainties and are dependent upon many
factors, including, without limitation, the Company's ability to (i) meet its
working capital and future liquidity needs, (ii) successfully implement its
strategic growth strategies, (iii) understand, anticipate and respond to rapidly
changing technologies, market trends and customer needs, (iv) develop,
manufacture and deliver high quality, technologically advanced products on a
timely basis to withstand competition from competitors which may have greater
financial, information gathering and marketing resources than the Company, (v)
obtain and protect licensing and intellectual property rights necessary for the
Company's technology and product development and on terms favorable to the
Company, (vi) recruit and retain highly talented professionals in a competitive
job market, and (vii) successfully address its Year 2000 Issues as more fully
described above. The Company's ability to market and sell its products could
also be adversely affected by the emergence of new competitors in the market
place and by changes resulting in increased government regulation of the
manufacture and sale of its products. In addition, a significant portion of the
Company's revenues are attributable to international customers, which may be
adversely affected by factors including fluctuations in exchange rates, adverse
political and economic conditions, tariff regulation, and difficulties in
obtaining export licenses. Each of these factors, and others, are discussed from
time to time in the filings made by the Company with the Securities and Exchange
Commission, including, but not limited to, the Company's Annual Report on Form
10-KSB filed on August 28, 1998 and its Quarterly Reports on Form 10-QSB filed
on October 14, 1998 and January 14, 1999.
Page 14 of 17
<PAGE>
ENDOGEN, INC.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) - EXHIBITS
10.1 Fourth Loan Modification Agreement dated as of January 27, 1999 by
and between Endogen, Inc. and Silicon Valley Bank.
10.2 1992 Stock Plan, as amended on November 5, 1998 (filed as Exhibit
4.1 to the Company's Registration Statement No. 333-72871 on Form
S-8 and incorporated herein by reference).
11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) - REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter for which this
report is filed.
Page 15 of 17
<PAGE>
ENDOGEN, INC.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ENDOGEN, INC.
BY:
Date: April 12, 1999 /s/ Owen A. Dempsey
--------------------------------
Owen A. Dempsey
Director, President and
Chief Executive Officer
(Principal Executive Officer)
Date: April 12, 1999 /s/ Avery W. Catlin
--------------------------------
Avery W. Catlin
Vice President, Operations and Finance,
Treasurer and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 16 of 17
<PAGE>
ENDOGEN, INC.
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
10.1 Fourth Loan Modification Agreement dated as of January 27, 1999 by
and between Endogen, Inc. and Silicon Valley Bank.
10.2 1992 Stock Plan, as amended on November 5, 1998 (filed as Exhibit
4.1 to the Company's Registration Statement No. 333-72871 on Form
S-8 and incorporated herein by reference).
11.1 Statement Re: Computation of Earnings per Share.
27.1 Financial Data Schedule.
Page 17 of 17
FOURTH LOAN MODIFICATION AGREEMENT
This FOURTH LOAN MODIFICATION AGREEMENT is entered into as of January
27, 1999, by and between SILICON VALLEY BANK, a California-chartered bank with
its principal place of business at 3003 Tasman Drive, Santa Clara, CA 95054 and
with a loan production office located at Wellesley Office Park, 40 William
Street, Suite 350, Wellesley, MA 02181, doing business under the name "Silicon
Valley East ("Bank"), and ENDOGEN, INC., a MASSACHUSETTS corporation with its
principal place of business at 30 COMMERCE WAY, WOBURN, MASSACHUSETTS 01801
("Borrower").
RECITALS
Borrower has borrowed money from Bank pursuant to certain Existing Loan
Documents, as defined below. In consideration of certain financial
accommodations from Bank, and Borrower's continuing obligations under the
Existing Loan Documents, Borrower and Bank agree as follows:
AGREEMENT
1. DESCRIPTION OF EXISTING INDEBTEDNESS. Among other indebtedness which
may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to a
Revolving Promissory Note dated August 28, 1996 in the maximum principal amount
of $850,000 (the "Revolving Note") a Term Promissory Note dated August 28, 1996
in the maximum principal amount of $400,000 (the "Term Note") and an Equipment
Line Promissory Note dated October 8, 1997 in the maximum principal amount of
$250,000 (the "Equipment Note"). The Revolving Note, the Term Note and the
Equipment Note are governed by the terms of a Loan and Security Agreement dated
August 28, 1996 between Borrower and Bank, as amended by Loan Modification
Agreements dated as of May 7, 1997, August 27, 1997 and August 27, 1998 between
Borrower and Bank, and as such Loan and Security Agreement may be further
amended from time to time (the "Loan Agreement").
Hereinafter, all indebtedness owing by Borrower to Bank under the
Revolving Note, the Term Note and the Loan Agreement shall be referred to as the
"Indebtedness."
2. DESCRIPTION OF COLLATERAL. Repayment of the Indebtedness is secured
pursuant to the Loan Agreement. Hereinafter, the Loan Agreement, the Revolving
Note, the Term Note and the Equipment Note, together with all other documents
securing payment of the Indebtedness, shall be referred to as the "Existing Loan
Documents."
3. DESCRIPTION OF CHANGES IN TERMS.
3.1 Modification to Profitability Covenant. Section 6.11 of the Loan
Agreement is hereby replaced in its entirety with the following:
6.11 Profitability. Borrower shall be profitable for each fiscal
quarter beginning with the fiscal quarter ending May 31, 1999,
provided, however, that Borrower shall not suffer a loss greater
than ONE HUNDRED FIFTY THOUSAND AND NO/100THS Dollars ($150,000) in
the fiscal quarter ending February 28, 1999.
3.2 Modifications to Debt Service Covenant. Section 6.12 of the Loan
Agreement is hereby replaced in its entirety with the following:
6.12 Minimum Debt Service. Borrower shall maintain, as of the last
day of the fiscal quarter ending November 30, 1998 and as of the
last day of each fiscal quarter beginning with the fiscal quarter
ending August 31, 1999, a Debt Service ratio of at least 1.50 to
1.00.
<PAGE>
4. WAIVER OF PRIOR DEFAULT. Bank hereby waives Borrower's violation of
the Profitability Covenant, as set forth in section 6.11 of the Loan Agreement
prior to the date of this Fourth Loan Modification Agreement, for the period
ending November 30, 1998.
5. CONDITIONS PRECEDENT TO FURTHER ADVANCES. The obligation of Bank to
make further advances to Borrower under this line is subject to the condition
precedent that Bank shall have received, in form and substance satisfactory to
Bank, the following:
(a) this Fourth Loan Modification Agreement duly executed by
Borrower;
(b) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
6. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described in this Fourth Loan
Modification Agreement.
7. NO DEFENSES OF BORROWER. Borrower agrees that as of this date, it
has no defenses against any of the obligations to pay any amounts under the
Indebtedness.
8. CONTINUING VALIDITY. Borrower understands and agrees that (i) in
modifying the Existing Loan Documents, Bank is relying upon Borrower's
representations, warranties and agreements, as set forth in the Existing Loan
Documents, (ii) except as expressly modified pursuant to this Fourth Loan
Modification Agreement (including the effects of Section 6 hereof), the Existing
Loan Documents remain unchanged and in full force and effect, (iii) Bank's
agreement to modify the Existing Loan Documents pursuant to this Fourth Loan
Modification Agreement shall in no way obligate Bank to make any future
modifications to the Existing Loan Documents, (iv) it is the intention of Bank
and Borrower to retain as liable parties all makers and endorsers of the
Existing Loan Documents, unless a party is expressly released by Bank in
writing, (v) no maker, endorser or guarantor will be released by virtue of this
Fourth Loan Modification Agreement, and (vi) the terms of this Section 8 apply
not only to this Fourth Loan Modification Agreement but also to all subsequent
loan modification agreements, if any.
9. EFFECTIVENESS. This Agreement shall become effective only when it
shall have been executed by Borrower and Bank (provided, however, in no event
shall this Agreement become effective until signed by an officer of Bank in
California).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as a sealed instrument as of the date first set forth above.
<TABLE>
<S> <C>
"Borrower": ENDOGEN, INC. "Bank": SILICON VALLEY BANK, doing
business as SILICON VALLEY EAST
By: __________________________________ By: ______________________________
Owen A. Dempsey, President Phillip S. Ernst, VP
SILICON VALLEY BANK
By: _______________________________
Title: ______________________________
(Signed in Santa Clara County, California)
</TABLE>
EXHIBIT D FOLLOWS
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
Borrower: Endogen, Inc. Lender: Silicon Valley Bank
30 Commerce Way 3003 Tasman Drive
Woburn, MA 01801 Santa Clara, CA 95054
The undersigned authorized officer of ENDOGEN, INC. hereby certifies
that in accordance with the terms and conditions of the Loan and Security
Agreement dated AUGUST 28, 1996 between Borrower and Bank, as amended (the "Loan
Agreement"), (i) Borrower is in complete compliance for the period ending
___________ of all required conditions and terms except as noted below and (ii)
all representations and warranties of Borrower stated in the Agreement are true,
accurate and complete in all material respects as of the date hereof. Attached
herewith are the required documents supporting the above certification. The
Officer further certifies that these are prepared in accordance with Generally
Accepted Accounting Principals (GAAP) and are consistent from one period to the
next except as explained in an accompanying letter or footnotes.
Please indicate compliance status by circling Yes/No under '"Complies" column
<TABLE>
<CAPTION>
Reporting Covenant Required Complies
------------------ -------- --------
<S> <C> <C>
SEC Form 10Q Within 5 days of SEC filing Yes No
SEC Form 10K Within 5 days of SEC filing Yes No
A/R & A/P Agings Monthly within 25 days Yes No
A/R Audit Annual Yes No
</TABLE>
<TABLE>
<CAPTION>
Financial Covenants Required Actual Complies
------------------- -------- ------ --------
<S> <C> <C> <C>
Maintain on a Quarterly Basis:
- ------------------------------
Minimum Quick Ratio commencing 8/31/97 1.10:1.0 __________:1.0 Yes No
Maximum Debt/TNW 0.75:1.0 __________:1.0 Yes No
Minimum Profitability commencing FQE 5/31/99 $1 $____________ Yes No
Maximum Loss - FQE 2/28/99 ($150,000) $____________ Yes No
Minimum Debt Service commencing FQE 8/31/99 1.5:1.0 __________:1.0 Yes No
</TABLE>
Comments Regarding Exceptions:
On behalf of Borrower, the Officer further acknowledges that at any such time as
Borrower is out of compliance with any of the terms set forth in the Agreement,
including, without limitation, any of the financial covenants, Borrower cannot
receive any advances.
Sincerely,
<PAGE>
-----------------------------------
- ----------------------------------- BANK USE ONLY
Signature
- ----------------------------------- Received by:
TITLE ___________________________
Date:
- ----------------------------------- _________________________________
DATE Verified:
______________________________
Date:
_________________________________
Compliance Status: Yes No
-----------------------------------
EXHIBIT 11.1
Computation of Net Income (Loss) Per Share
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
1999 1998 1999 1998
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
BASIC
Weighted average number of common
shares outstanding 3,459,702 3,440,079 3,452,980 3,429,452
============== ============== =============== ==============
Net income (loss) applicable to common shares $ (314,899) $ 20,570 $ (461,511) $ 286,467
============== ============== =============== ==============
Basic earnings (loss) per share $ (0.09) $ 0.01 $ (0.13) $ 0.08
============== ============== =============== ==============
DILUTED
Weighted average number of common
shares outstanding 3,459,702 3,440,079 3,452,980 3,429,452
Weighted average incremental shares from the
assumed exercise of stock options and warrants - 151,454 - 204,769
-------------- -------------- --------------- --------------
3,459,702 3,591,533 3,452,980 3,634,221
============== ============== =============== ==============
Net income (loss) applicable to common shares
and common equivalent shares $ (314,899) $ 20,570 $ (461,511) $ 286,467
============== ============== =============== ==============
Diluted earnings (loss) per share $ (0.09) $ 0.01 $ (0.13) $ 0.08
============== ============== =============== ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements included in the Form 10-QSB for the quarter ended February
28, 1999, of Endogen, Inc. to which this exhibit is a part and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 864
<SECURITIES> 0
<RECEIVABLES> 1,415
<ALLOWANCES> 50
<INVENTORY> 2,141
<CURRENT-ASSETS> 5,030
<PP&E> 4,081
<DEPRECIATION> 2,370
<TOTAL-ASSETS> 7,563
<CURRENT-LIABILITIES> 1,440
<BONDS> 0
0
0
<COMMON> 35
<OTHER-SE> 6,003
<TOTAL-LIABILITY-AND-EQUITY> 7,563
<SALES> 7,339
<TOTAL-REVENUES> 7,469
<CGS> 2,951
<TOTAL-COSTS> 7,928
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (462)
<INCOME-TAX> 0
<INCOME-CONTINUING> (462)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (462)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
