UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Quarter Ended March 31, 2002 Commission File No. 0-12957
[LOGO]ENZON, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2372868
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
20 Kingsbridge Road, Piscataway, New Jersey 08854
(Address of principal executive offices) (Zip Code)
(732) 980-4500
(Registrant's telephone number, including area code:)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of May 10, 2002, there were 42,999,673 shares of common stock, par value $.01
per share, outstanding.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, 2002 and June 30, 2001
March 31, 2002 June 30, 2001
(unaudited) *
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 128,623,024 $ 310,223,837
Short-term investments 34,197,312 129,520,083
Accounts receivable 20,495,041 11,087,748
Inventories 2,344,505 1,852,144
Other current assets 4,504,474 2,837,199
------------- -------------
Total current assets 190,164,356 455,521,011
------------- -------------
Property and equipment 18,754,368 13,181,671
Less accumulated depreciation and amortization 9,845,386 9,761,999
------------- -------------
8,908,982 3,419,672
------------- -------------
Other assets:
Marketable securities 326,574,444 76,634,780
Cost method equity investments 40,040,777 40,777
Debt issue costs, net 11,403,523 12,774,951
Patents and other assets, net 1,628,668 1,284,626
------------- -------------
379,647,412 90,735,134
------------- -------------
Total assets $ 578,720,750 $ 549,675,817
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,618,149 $ 4,670,259
Accrued expenses 4,404,376 4,740,081
Accrued interest 4,500,000 --
------------- -------------
Total current liabilities 13,522,525 9,410,340
------------- -------------
Accrued rent 561,582 581,438
Royalty advance-Aventis 694,814 694,814
Notes payable 400,000,000 400,000,000
------------- -------------
401,256,396 401,276,252
------------- -------------
Stockholders' equity:
Preferred stock-$.01 par value, authorized 3,000,000 shares; issued and
outstanding 7,000 shares at March 31, 2002 and June 30, 2001 (liquidation
preference aggregating $340,000
at March 31, 2002 and $333,000 at June 30, 2001) 70 70
Common stock-$.01 par value, authorized 90,000,000 shares, issued
and outstanding 42,998,347 shares at March 31, 2002 and
41,990,859 shares at June 30, 2001 429,984 419,909
Additional paid-in capital 262,540,017 257,682,479
Accumulated other comprehensive (loss) income (4,303,108) 884,935
Deferred compensation (1,278,958) (1,509,171)
Accumulated deficit (93,446,176) (118,488,997)
------------- -------------
Total stockholders' equity 163,941,829 138,989,225
------------- -------------
Total liabilities and stockholders' equity $ 578,720,750 $ 549,675,817
============= -------------
* Condensed from audited financial statement.
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
2
ENZON, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three and Nine Months Ended March 31, 2002 and 2001
(Unaudited)
Three months ended Nine months ended
March 31, March 31,
2002 2001 2002 2001
------------ ----------- ------------ -----------
Revenues:
Net sales $ 5,729,330 $ 5,382,060 $ 16,683,135 $14,964,832
Royalties 14,072,174 2,410,200 33,688,960 3,701,897
Contract revenue 42,649 2,139,494 217,548 2,457,784
------------ ----------- ------------ -----------
Total revenues 19,844,153 9,931,754 50,589,643 21,124,513
------------ ----------- ------------ -----------
Costs and expenses:
Cost of sales 1,376,450 988,380 4,222,870 2,860,592
Research and development expenses 5,062,732 3,684,268 12,548,297 8,829,537
Selling, general and administrative expenses 3,658,621 2,640,889 12,305,403 8,228,926
------------ ----------- ------------ -----------
Total costs and expenses 10,097,803 7,313,537 29,076,570 19,919,055
------------ ----------- ------------ -----------
Operating income 9,746,350 2,618,217 21,513,073 1,205,458
------------ ----------- ------------ -----------
Other income (expense):
Interest income 3,892,568 2,255,642 14,819,789 6,420,343
Interest expense (4,956,895) -- (14,871,764) --
Other income 3,217,878 1,483 3,217,878 13,352
------------ ----------- ------------ -----------
2,153,551 2,257,125 3,165,903 6,433,695
------------ ----------- ------------ -----------
Income before taxes 11,899,901 4,875,342 24,678,976 7,639,153
Tax benefit 267,174 632,879 363,845 577,603
------------ ----------- ------------ -----------
Net income $ 12,167,075 $ 5,508,221 $ 25,042,821 $ 8,216,756
------------ =========== ------------ ===========
Basic earnings per common share $ 0.28 $ 0.13 $ 0.59 $ 0.20
============ =========== ============ ===========
Diluted earnings per common share $ 0.28 $ 0.13 $ 0.57 $ 0.19
============ =========== ============ ===========
Weighted average number of common shares
outstanding basic 42,969,222 41,802,586 42,635,799 41,490,866
============ =========== ============ ===========
Weighted average number of common shares and dilutive
potential common shares outstanding 43,933,865 43,718,044 43,899,449 43,509,342
============ =========== ============ ===========
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
3
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2002 and 2001
(Unaudited)
Nine Months Ended
March 31, March 31,
2002 2001
------------- ------------
Cash flows from operating activities:
Net income $ 25,042,821 $ 8,216,756
Adjustment for depreciation and amortization, including debt issue costs 2,022,995 414,487
Non-cash expense for issuance of common stock 230,213 --
Loss on retirement of assets 3,832 22
Amortization of bond premium/discount (2,978,323) (725,311)
Decrease in accrued rent (19,856) (19,857)
Increase in royalty advance - Aventis -- 3,134
Changes in assets and liabilities (7,905,247) (10,439,859)
------------- ------------
Net cash provided by (used in) operating activities 16,396,435 (2,550,628)
------------- ------------
Cash flows from investing activities:
Capital expenditures (6,038,248) (854,726)
Purchase of cost method equity investments (40,000,000) --
Proceeds from sale of marketable securities 252,249,000 19,600
Maturities of marketable securities 88,365,387 33,488,000
Purchases of marketable securities (497,441,000) (41,009,000)
------------- ------------
Net cash used in investing activities (202,864,861) (8,356,126)
------------- ------------
Cash flows from financing activities
Proceeds from exercise of common stock options 4,867,613 4,767,984
------------- ------------
Net decrease in cash and cash equivalents (181,600,813) (6,138,770)
Cash and cash equivalents at beginning of period 310,223,837 31,935,410
------------- ------------
Cash and cash equivalents at end of period $ 128,623,024 $ 25,796,640
============= ============
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
4
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements
(Unaudited)
(1) Organization and Basis of Presentation
The unaudited consolidated condensed financial statements have been
prepared from the books and records of Enzon, Inc. and its subsidiaries in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. Accordingly, they do not include all
of the information and footnotes required for complete annual financial
statements. In the opinion of management, all adjustments (consisting only of
normal and recurring adjustments) considered necessary for a fair presentation
have been included. Certain prior year balances were reclassified to conform to
the 2002 presentation. Interim results are not necessarily indicative of the
results that may be expected for the year.
(2) Comprehensive Income
The following table reconciles net income to comprehensive income:
Three Months ended Nine Months ended
March 31, March 31,
2002 2001 2002 2001
------------ ---------- ------------ ----------
Net income $ 12,167,000 $5,508,000 $ 25,043,000 $8,217,000
Other comprehensive income (loss):
Unrealized holding gain (loss) arising
during the period on securities (3,036,000) 1,189,000 (5,188,000) 1,189,000
------------ ---------- ------------ ----------
Total other comprehensive income
(loss) (3,036,000) 1,189,000 (5,188,000) 1,189,000
------------ ---------- ------------ ----------
Total comprehensive income $ 9,131,000 $6,697,000 $ 19,855,000 $9,406,000
============ ========== ============ ==========
(3) Earnings Per Common Share
Basic earnings per share is computed by dividing the net income available
to common shareholders adjusted for cumulative undeclared preferred stock
dividends for the relevant period, by the weighted average number of shares of
Common Stock issued and outstanding during the periods. For purposes of
calculating diluted earnings per share for the three and nine months ended March
31, 2002 and 2001 the denominator includes both the weighted average number of
shares of Common Stock outstanding and the number of dilutive Common Stock
equivalents. The number of dilutive Common Stock equivalents includes the effect
of non-qualified stock options calculated using the treasury stock method, the
number of shares issuable upon conversion of the outstanding Series A preferred
stock and the unvested shares of restricted stock which have been issued. The
number of shares issuable upon conversion of the Company's 4.5% Convertible
Subordinated Notes due 2008 (the "Notes") have not been included as the effect
of their inclusion would be antidilutive. As of March 31, 2002, the Company had
6,536,000 dilutive potential common shares outstanding that could potentially
dilute future earnings per share calculations.
5
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements
(Unaudited)
The following table reconciles the basic and diluted earnings per share
calculation:
Three months ended Nine months ended
March 31, March 31,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income $12,167,000 $ 5,508,000 $25,043,000 $ 8,217,000
Less: Preferred stock dividends 4,000 4,000 11,000 11,000
----------- ----------- ----------- -----------
Net income available to common
stockholders $12,163,000 $ 5,504,000 $25,032,000 $ 8,206,000
=========== =========== =========== ===========
Weighted average number of
common shares issued and
outstanding - basic 42,969,222 41,802,586 42,635,799 41,490,866
Effect of dilutive common stock
equivalents:
Conversion of preferred stock 16,000 16,000 16,000 16,000
Assumed exercise of non-qualified
stock options 948,643 1,899,458 1,247,650 2,002,476
----------- ----------- ----------- -----------
43,933,865 43,718,044 43,899,449 43,509,342
=========== =========== =========== ===========
(4) Inventories
The composition of inventories at March 31, 2002 and June 30, 2001 is as
follows:
March 31, June 30,
2002 2001
---------- ----------
Raw materials $ 800,000 $ 421,000
Work in process 1,321,000 737,000
Finished goods 224,000 694,000
---------- ----------
$2,345,000 $1,852,000
(5) Cash Flow Information
The Company considers all highly liquid securities with original
maturities of three months or less to be cash equivalents. Cash payments for
interest were approximately $9,000,000 for the nine months ended March 31, 2002.
There were no cash payments for interest for the nine months ended March 31,
2001. There were no income tax payments made for the nine months ended March 31,
2002 and 2001.
6
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements
(Unaudited)
(6) Stock Option Plans
During the nine months ended March 31, 2002, we issued 882,583 stock
options at an average exercise price of $52.94 per share under our Non-Qualified
Stock Option Plan, as amended, of which 550,000 were granted to executive
officers and 78,333 were granted to non-employee directors of the Company. None
of the options granted during the period are exercisable as of March 31, 2002.
Of the total options granted, 645,000 contain accelerated vesting provisions,
under which the vesting and exercisability of such shares will accelerate if the
closing price of the Company's common stock exceeds $100 per share for at least
twenty consecutive trading days as reported by the NASDAQ National Market. All
options were granted with exercise prices that equaled or exceeded the fair
market value of the underlying stock on the date of grant.
On December 4, 2001, the stockholders approved a proposal to adopt the
Company's 2001 Incentive Stock Plan and to reserve 2,000,000 shares for issuance
under such plan.
(7) Stockholder's Equity
On December 4, 2001, the stockholders voted to amend the Company's
Certificate of Incorporation to increase the authorized shares of common stock
from 60,000,000 to 90,000,000.
(8) Income Taxes
The Company expects to be profitable for the year ending June 30, 2002,
and accordingly has recognized a tax provision for the three and nine months
ended March 31, 2002 of $238,000 and $493,000, respectively. The tax provision
represents the Company's anticipated Alternative Minimum Tax liability based on
the anticipated fiscal 2002 taxable income. The tax provision was offset by a
sale of a portion of the Company's New Jersey state net operating loss carry
forwards. During the nine months ended March 31, 2002 and March 31, 2001, the
Company recognized a tax benefit of $857,000 and $728,000 resulting from the
sale of approximately $10,888,000 and $9,255,000, respectively, of its state net
operating loss carry forwards.
(9) Business Segments
A single management team that reports to the Chief Executive Officer
comprehensively manages the business operations. The Company does not operate
separate lines of business or separate business entities with respect to any of
its approved products or product candidates. In addition, the Company does not
conduct any operations outside of the United States. The Company does not
prepare discrete financial statements with respect to separate product areas.
Accordingly, the Company does not have separately reportable segments as defined
by Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information".
(10) Collaborative Agreements
Schering-Plough
In August 2001, the Company's development partner for PEG-INTRON(R),
Schering-Plough Corporation, received approval from the United State Food and
Drug Administration (FDA) for PEG-INTRON for use in combination therapy with
REBETOL(R) capsules for the treatment of chronic hepatitis C. In October 2001,
Schering-Plough announced the U.S. launch of PEG-INTRON and REBETOL combination
therapy for the treatment of chronic hepatitis C. Under its licensing agreement
with Schering-Plough, Enzon is entitled to royalties on worldwide sales of
PEG-INTRON. The royalties received on these sales are recognized when earned.
Inhale Therapeutics
In January 2002, the Company entered into a broad strategic alliance with
Inhale Therapeutic Systems, Inc. that includes the following components:
7
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements
(Unaudited)
o The companies agreed to enter into a collaboration to jointly
develop three products to be specified over time using Inhale's
Inhance(TM) pulmonary delivery platform and SEDS(TM) supercritical
fluids platform. Inhale will be responsible for formulation
development, delivery system supply, and in some cases, early
clinical development. Enzon will have responsibility for most
clinical development and for commercialization.
o The two companies also agreed to collaborate on the development of
single-chain antibody (SCA(R)) products to be administered by the
pulmonary route.
o Enzon granted to Inhale the exclusive right to grant sub-licenses
under Enzon's PEG patents to third parties. Enzon will receive a
share of profits for certain products that currently incorporate
Enzon's branched PEG technology and royalties on sales of products
that are subject to new sub-licenses that Inhale grants to its
partners under Enzon's PEG patents. Enzon retains the right to use
all of its PEG technology for its own product portfolio, as well as
those products it develops in co-commercialization collaborations
with third parties.
o Enzon purchased $40 million of newly issued Inhale convertible
preferred stock in January 2002. The preferred stock is convertible
into Inhale common stock at a conversion price of $22.79 per share.
In the event Inhale's common stock price three years from the date
of issuance of the preferred stock or earlier in certain
circumstances is less than $22.79, the conversion price will be
adjusted down, although in no event will it be less than $18.23 per
share. Conversion of the preferred stock into common stock can occur
anywhere from 1 to 4 years following the issuance of the preferred
stock or earlier in certain circumstances. The preferred stock
investment will be accounted for under the cost method.
o The two companies also agreed in January 2002 to a settlement of the
patent infringement suit filed in 1998 by Enzon against Inhale's
subsidiary, Shearwater Polymers, Inc. Inhale will receive licensing
access to the contested patents under a cross-license agreement.
Enzon received a one-time payment of $3 million from Inhale to cover
expenses incurred in defending Enzon's branched PEG patents which is
included in other income.
(11) Leases
In March 2002, the Company entered into a lease for a facility in
Bridgewater, NJ which will serve as its corporate headquarters. This 19,000
square-foot space will be occupied by executive and administrative staff. The
lease has a term of five years, followed by one five year renewal option period.
Future minimum lease payments associated with this lease are as follows
(these costs do not include the Company's other operating lease commitments):
Year Ending June 30,
--------------------
2002 $ 39,000
2003 470,000
2004 470,000
2005 472,000
2006 489,000
2007 and thereafter 449,000
------------------- ----------
$2,389,000
==========
8
ENZON, INC. AND SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements
(Unaudited)
(12) Subsequent Events
In April 2002 the Company entered into a multi-year strategic
collaboration with Micromet AG, a private company. The companies have agreed to
combine their patent estates and complementary expertise in single-chain
antibody (SCA) technology to create a leading platform of therapeutic products
based on antibody fragments. The companies will establish a new R&D Unit located
at Micromet's research facility in Germany. The unit will be staffed initially
with 25 scientists and plans to be fully operational by the end of calendar year
2002. In conjunction with this collaboration, Enzon will eliminate its SCA
operations and will incur a one-time charge of $500,000 to $750,000 in the
fourth quarter of fiscal year 2002. The Company and Micromet plan to share
equally the costs of research and development, and share the revenues generated
from technology licenses and from future commercialization of any developed
products. Enzon also purchased an $8 million convertible note issued by
Micromet. The note is convertible to Micromet stock at a price of $1,015 per
share, carries an interest rate of 3% and is payable in March 2006 if it is not
converted.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Information contained herein contains "forward-looking statements" which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy. We cannot assure you that the future results covered by the
forward-looking statements will be achieved. The matters set forth in the "Risk
Factors" section of the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 2001, which is incorporated herein by reference, constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results indicated
in such forward-looking statements. Other factors could also cause actual
results to vary materially from the future results indicated in such
forward-looking statements.
Results of Operations
Three months ended March 31, 2002 vs. Three months ended March 31, 2001
Revenues. Revenues for the three months ended March 31, 2002 increased by 100%
to $19,844,000, as compared to $9,932,000 for the three months ended March 31,
2001. The components of revenues are sales of our products, royalties we earn on
the sales of products by others, and contract revenues. Sales increased by 6% to
$5,729,000 for the three months ended March 31, 2002, as compared to $5,382,000
for the three months ended March 31, 2001. This increase was primarily due to
increased ONCASPAR sales. Sales of ONCASPAR during the three months ended March
31, 2002 declined compared to the three months ended December 31, 2001 by 12% or
$306,000 as we limited distribution of the product to only the approved
indication, due to a shortage of L-asparaginase, a raw material used in the
product. Additional supplies of L-asparaginase were received from our supplier
in the three months ended March 31, 2002, and we expect the distribution
restriction to be lifted during the three months ending June 30, 2002. Sales of
ADAGEN increased by 6% for the three months ended March 31, 2002 to $3,492,000
as compared to $3,307,000 for the three months ended March 31, 2001.
Royalties for the three months ended March 31, 2002, increased to
$14,072,000 as compared to $2,410,000 in the prior year. The increase was
primarily due to the commencement of sales of PEG-INTRON in combination with
REBETOL(R) in the U.S. and increased sales in Europe. Schering-Plough, our
marketing partner for PEG-INTRON, began selling PEG-INTRON in the European Union
in June 2000 and in the U.S. in February 2001. PEG-INTRON also received
marketing approval for use in combination with REBETOL for the treatment for
chronic hepatitis C in the European Union in March 2001 and in the U.S. in
August 2001. Schering-Plough launched PEG-INTRON as combination therapy with
REBETOL in the U.S. in October 2001.
We expect ADAGEN sales to grow at similar levels as achieved for the
current quarter over the next year. Royalties on PEG-INTRON are expected to
increase as Schering-Plough continues the roll out of PEG-INTRON in combination
with REBETOL in the U.S. We also expect to receive a lower revenue stream for
ONCASPAR in future quarters when Aventis resumes distribution of the product and
our revenue stream reverts back to the 27.5% royalty on sales.
During the three months ended March 31, 2002, we had export sales and
royalties on export sales of $6,870,000, of which $6,492,000 were in Europe.
Export sales and royalties recognized on export sales for the prior year quarter
were $2,979,000, of which $2,769,000 were in Europe.
Contract revenue for the three months ended March 31, 2002 decreased by
98% to $43,000 as compared to $2,139,000 in the same period in the prior year.
Contract revenue for the three months ended March 31, 2001 included a $2,000,000
milestone payment from our development partner Schering-Plough which was earned
as a result of the FDA's approval of PEG-INTRON during such quarter.
10
Cost of Sales. Cost of sales, as a percentage of sales increased to 24% for the
three months ended March 31, 2002 as compared to 18% for the prior year. This
increase was due to lower cost of goods sold during the prior year, as certain
finished goods which had previously been reserved for due to certain previously
disclosed manufacturing problems related to ONCASPAR were cleared and sold in
the prior year.
Research and Development. Research and development expenses increased by 37% to
$5,063,000 for the three months ended March 31, 2002 from $3,684,000 for the
same period last year. The increase was primarily due to increased clinical
trial costs for PROTHECAN (PEG-camptothecin) and PEG-paclitaxel and increased
payroll and related expenditures. Research and development activities are
expected to continue to increase significantly as we continue the advancement of
the current and additional Phase II clinical trials for PROTHECAN, we continue
our Phase I clinical trials for PEG-paclitaxel and we conduct pre-clinical and
clinical trials for additional compounds.
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended March 31, 2002 increased by 39% to
$3,659,000, as compared to $2,641,000 in 2001. The increase was primarily due to
increased payroll and related expenditures.
Other Income/Expense. Interest income for the three months ended March 31, 2002
increased to $3,893,000, as compared to $2,256,000 for the prior year. The
increase in interest income was attributable to the increase in interest bearing
investments primarily due to the issuance of $400,000,000 of 4.5% convertible
subordinated notes during June 2001. Other income increased to $3,218,000
primarily due to a $3,000,000 payment from Inhale Therapeutics related to the
settlement of the patent infringement suit against Inhale's subsidiary
Shearwater Polymers, Inc. This one-time payment was reimbursement for expenses
incurred in defending Enzon's branched PEG patent. Interest expense increased to
$4,957,000 for the three months ended March 31, 2002 due to the issuance of the
$400,000,000 in 4.5% convertible subordinated notes in June 2001.
Provision for taxes. We expect to be profitable for the year ending June 30,
2002, and accordingly have recognized a tax provision for the three months ended
March 31, 2002. The tax provision represents our anticipated Alternative Minimum
Tax liability based on our anticipated fiscal 2002 taxable income. The tax
provision was offset by the sale of a portion of our New Jersey State net
operating loss carry forwards. During the quarter ended March 31, 2002 and March
31, 2001, we recognized a tax benefit of $505,000 and $728,000 from the sale of
approximately $6,410,000 and $9,255,000, respectively, of our state net
operating loss carry forwards. A tax provision of $238,000 for the quarter ended
March 31, 2002 and $95,000 for the quarter ended March 31, 2001 was recorded.
Nine months ended March 31, 2002 vs. Nine months ended March 31, 2001
Revenues. Revenues for the nine months ended March 31, 2002 increased by 139% to
$50,590,000 as compared to $21,125,000 for the same period last year. The
components of revenues are sales, which consist of our sales of products and
royalties we earn on the sale of products by others, and contract revenues.
Sales increased by 6% to $16,683,000 for the nine months ended March 31, 2002,
as compared to $14,965,000 for the prior year. The increase was due to increased
ONCASPAR sales. The increase in ONCASPAR sales was due to the lifting of FDA
imposed distribution and labeling restrictions, which were in place during a
substantial portion of the prior year period. ADAGEN sales for the nine months
ended March 31, 2002 and 2001 were $9,745,000 and $9,796,000, respectively.
Royalties for the nine months ended March 31, 2002, increased to
$33,689,000 as compared to $3,702,000 in the prior year period. The increase was
primarily due to the commencement of sales of PEG-INTRON in combination with
REBETOL in the U.S. and increased sales of PEG-INTRON in Europe. Schering-Plough
launched PEG-INTRON as combination therapy with REBETOL in the U.S. in October
2001.
Contract revenue for the nine months ended March 31, 2002 decreased by 98%
to $217,000 as compared to $2,458,000 in the same period in the prior year. This
decrease was related primarily to a $2,000,000 milestone payment from our
development partner Schering-Plough which was earned as a result of the FDA'a
approval of PEG-INTRON in the nine months ended March 31, 2001.
11
During the nine months ended March 31, 2002, we had export sales and
royalties on export sales of $18,872,000, of which $17,679,000 were in Europe.
Export sales and royalties recognized on export sales for the prior year period
were $6,669,000, of which $6,148,000 were in Europe.
Cost of Sales. Cost of sales, as a percentage of sales increased to 25% for the
nine months ended March 31, 2002, as compared to 19% for the nine months ended
March 31, 2001. This increase was due to lower cost of goods sold during the
prior year period as certain finished goods, which had previously been reserved
for due to the previously disclosed manufacturing problems related to ONCASPAR,
were cleared and sold in the prior year.
Research and Development. Research and development expenses increased by 42% to
$12,548,000, as compared to $8,830,000 for the nine months ended March 31, 2001.
The increase was primarily due to increased clinical trial costs for PROTHECAN
and PEG-paclitaxel and increased payroll and related expenditures.
Selling, General and Administrative. Selling, general and administrative
expenses for the nine months ended March 31, 2002 increased by 50% to
$12,305,000, as compared to $8,229,000 in the prior year. The increase was
primarily due to (i) increased payroll and related expenditures, (ii) increased
costs related to patent litigation with Shearwater Polymers, Inc., and (iii)
costs related to the identification and review of potential strategic alliances
to gain access to technologies, products and companies.
Other Income/Expense. Interest income for the nine months ended March 31, 2002
increased to $14,820,000, as compared to $6,420,000 for the prior year. The
increase in interest income was primarily due to the increase in interest
bearing investments as a result of the issuance of $400,000,000 of 4.5%
convertible subordinated notes during June 2001. Other income increased to
$3,218,000 primarily due to a $3,000,000 payment from Inhale Therapeutics due to
the settlement of the patent infringement suit against Inhale's subsidiary
Shearwater Polymers, Inc. This one-time payment was reimbursement for expenses
incurred in defending Enzon's branched PEG patent. Interest expense increased to
$14,872,000 for the nine months ended March 31, 2002 due to the issuance of the
$400,000,000 in 4.5% convertible subordinated notes in June 2001.
Provision for taxes. We expect to be profitable for the year ending June 30,
2002, and accordingly we have recognized a tax provision for the nine months
ended March 31, 2002. The tax provision represents our anticipated Alternative
Minimum Tax liability based on our anticipated fiscal 2002 taxable income. The
tax provision was offset by the sale of a portion of our New Jersey State net
operating loss carry forwards. During the nine months ended March 31, 2002 and
March 31, 2001 we recognized a tax benefit of $857,000 and $728,000 from the
sale of approximately $10,888,000 and $9,255,000, respectively, of our state net
operating loss carry forwards. A tax provision of $493,000 for the nine months
ended March 31, 2002 and $150,397 for the nine months ended March 31, 2001 was
recorded.
Liquidity and Capital Resources
Total cash reserves, which include cash, cash equivalents and marketable
securities, were $489,395,000 as of March 31, 2002, as compared to $516,379,000
as of June 30, 2001. The decrease in total cash reserves was due to the purchase
of $40 million of Inhale Therapeutics convertible preferred stock as part of the
strategic alliance entered into in January 2002. We invest our excess cash
primarily in United States government-backed securities.
As of March 31, 2002, we had $400,000,000 of 4.5% convertible subordinated
notes outstanding. The notes bear interest at an annual rate of 4.5%. Interest
is payable on January 1 and July 1 of each year beginning January 1, 2002.
Accrued interest on the notes was approximately $4,500,000 as of March 31, 2002.
The holders may convert all or a portion of the notes into common stock at any
time on or before July 1, 2008. The notes are convertible into our common stock
at a conversion price of $70.98 per share, subject to adjustment in certain
events. The notes are subordinated to all existing and future senior
indebtedness. On or after July 7, 2004, we may redeem any or all of the notes at
specified redemption prices, plus accrued and unpaid interest to the day
preceding the redemption date. The notes will mature on July 1, 2008 unless
earlier converted, redeemed at our option or redeemed at the option of the
noteholder upon a fundamental change, as described in the indenture for the
notes.
12
Neither we nor any of our subsidiaries are subject to any financial covenants
under the indenture. In addition, neither we nor any of our subsidiaries are
restricted under the indenture from paying dividends, incurring debt, or issuing
or repurchasing our securities.
To date, our sources of cash have been the proceeds from the sale of our
stock through public offerings and private placements, the issuance of the 4.5%
convertible subordinated notes, sales of and royalties on sales of ADAGEN,
ONCASPAR and PEG-INTRON, sales of our products for research purposes, contract
research and development fees, technology transfer and license fees and royalty
advances.
Under our amended license agreement with Aventis, we received a payment of
$3,500,000 in advance royalties in January 1995. Royalties due under the amended
license agreement will be offset against an original credit of $5,970,000, which
represents the royalty advance plus reimbursement of certain amounts due Aventis
under the original agreement and interest expense, before cash payments will be
made under the agreement. The royalty advance is shown as a long-term liability.
The corresponding current portion of the advance is included in accrued expenses
on the consolidated balance sheets. We will reduce the advance as royalties are
recognized under the agreement. Through March 31, 2002, an aggregate of
$4,307,000 in royalties payable by Aventis has been offset against the original
credit.
As of March 31, 2002, 1,043,000 shares of Series A preferred stock had
been converted into 3,325,000 shares of common stock. Accrued dividends on the
converted Series A preferred stock in the aggregate of $3,770,000 were settled
by the issuance of 235,000 shares of common stock and cash payments of
$1,947,000. The preferred shares outstanding at March 31, 2002 are convertible
into approximately 16,000 shares of common stock. Dividends accrue on the
remaining outstanding shares of Series A preferred stock at a rate of $14,000
per year. As of March 31, 2002, there were accrued and unpaid dividends totaling
$168,000 on the 7,000 shares of Series A preferred stock outstanding. We have
the option to pay these dividends in either cash or common stock.
Our current sources of liquidity are cash, cash equivalents, marketable
securities and interest earned on such cash reserves, sales of and royalties
earned on sales of ADAGEN, ONCASPAR and PEG-INTRON, and license fees. Based upon
our currently planned research and development activities and related costs and
our current sources of liquidity, we anticipate our current cash reserves will
be sufficient to meet our capital, debt service and operational requirements for
the foreseeable future.
We may seek additional financing, such as through future offerings of
equity or debt securities or agreements with collaborators with respect to the
development and commercialization of products, to fund future operations and
potential acquisitions. We cannot assure you, however, that we will be able to
obtain additional funds on acceptable terms, if at all.
In January 2002, we purchased $40 million of newly issued Inhale
convertible preferred stock. The preferred stock is convertible into Inhale
common stock at a conversion price of $22.79 per share. In the event Inhale's
common stock price three years from the date of issuance of the preferred stock,
or earlier in certain circumstances, is less than $22.79, the conversion price
will be adjusted down, although in no event will it be less than $18.23 per
share.
In March 2002, we entered into a lease for a 19,000 square feet facility
located in Bridgewater, NJ that will serve as our corporate headquarters. The
lease has a term of 5 years, followed by one five year renewal option period.
The future minimum lease payments are approximately $2,389,000 throughout the
five year term of the lease. Total other commitments for operating leases total
$5,059,000 through the year 2007.
In April 2002, we entered into a multi-year strategic collaboration with
Micromet AG, a private company to combine our patent estates and complementary
expertise in single-chain antibody (SCA) technology to create a leading platform
of therapeutic products based on antibody fragments. As part of the
collaboration, we purchased an $8 million note issued by Micromet. The note is
convertible to Micromet stock at a price of $1,015 per share,
13
carries an interest rate of 3% and is due March 2006.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants discuss their
most "critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We
believe the following accounting policy to be critical:
Revenue Recognition. We have formed collaborative research and development
agreements and alliances with several pharmaceutical companies. These agreements
are in the form of research and development and license option agreements. The
agreements are for both early and late stage compounds. For the early stage
compounds, the agreements are relatively short-term agreements that are
renewable depending on the success of the compounds as they move through
preclinical development. The agreements call for milestone payments on achieving
significant milestone events, and in some cases ongoing research funding. The
agreements also contemplate royalty payments on sales if and when the compound
receives FDA marketing approval.
In accordance with Staff Accounting Bulletin No. 101 ("SAB 101") Revenue
Recognition in Financial Statements, upfront payments are recorded as deferred
revenue and recognized over the estimated service period. If the estimated
service period is subsequently modified, the period over which the upfront fee
is recognized is modified accordingly on a prospective basis. Nonrefundable
revenue from the achievement of research and development milestones, which
represent the achievement of a significant step in the research and development
process, are recognized when and if the specific milestones are achieved. None
of the payments received to date are refundable regardless of the outcome of the
project. Research funding is recorded in the period during which the expenses
covered by the funding occurred.
Recently Issued Accounting Standards
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that all
business combinations be accounted for under a single method - the purchase
method. Use of the pooling-of-interests method no longer is permitted. SFAS 141
requires that the purchase method be used for business combinations initiated
after June 30, 2001. SFAS 142 requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. SFAS 142 which will officially
be adopted July 1, 2002, has no impact on our historical financial statements as
we do not have any goodwill or intangible assets, which resulted from business
combinations.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets. Since the requirement is to recognize the obligation when incurred,
approaches that have been used in the past to accrue the asset retirement
obligation over the life of the asset are no longer acceptable. SFAS 143 also
requires the enterprise to record the contra to the initial obligation as an
increase to the carrying amount of the related long-lived asset (i.e., the
associated asset retirement costs) and to depreciate that cost over the life of
the asset. The liability is increased at the end of each period to reflect the
passage of time (i.e., accretion expense) and changes in the estimated future
cash flows underlying the initial fair value measurement. Enterprises are
required to adopt SFAS 143 for fiscal years beginning after June 15, 2002. We
are in the process of evaluating SFAS 143 and the effect that it will have on
our consolidated financial statements and current impairment policy, but we do
not expect any material effect.
14
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. SFAS 144 is effective for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.
Our holdings of financial instruments are comprised of debt securities,
and time deposits. All such instruments are classified as securities
available-for-sale. We do not invest in portfolio equity securities or
commodities or use financial derivatives for trading purposes. Our debt security
portfolio represents funds held temporarily pending use in our business and
operations. We manage these funds accordingly. We seek reasonable assuredness of
the safety of principal and market liquidity by investing in rated fixed income
securities while at the same time seeking to achieve a favorable rate of return.
Our market risk exposure consists principally of exposure to changes in interest
rates. Our holdings are also exposed to the risks of changes in the credit
quality of issuers. We typically invest the majority of our investments in the
shorter-end of the maturity spectrum, and at March 31, 2002 all of our holdings
were in instruments maturing in four years or less.
The table below presents the principal amounts and related weighted
average interest rates by year of maturity for our investment portfolio as of
March 31, 2002.
2002 2003 2004 2005 2006 Total
----------- ----------- ------------ ------------ ------------ ---------------
Fixed Rate $14,109,000 $71,207,000 $ 76,937,000 $122,693,000 $ 80,129,000 $ 365,075,000
Average Interest Rate 6.18% 2.41% 3.48% 3.80% 4.37% 3.68%
----------- ----------- ------------ ------------ ------------ ---------------
$14,109,000 $71,207,000 $ 76,937,000 $122,693,000 $ 80,129,000 $ 365,075,000
=========== =========== ============ ============ ============ ===============
Our 4.5% convertible subordinated notes in the principal amount of
$400,000,000 due July 1, 2008 have fixed interest rates. The fair value of fixed
interest rate convertible notes is affected by changes in interest rates and by
changes in the price of our common stock.
15
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On January 7, 2002, we settled our previously reported patent infringement
lawsuit against Shearwater Polymers, Inc. a wholly-owned subsidiary of Inhale
Therapeutic Systems, Inc. for a description of the terms on certain agreements
entered into in connection with such settlement, see Note 9 to the unaudited
financial statements included in Item 1 of Part I hereof.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K).
Page Number
or
Exhibit Incorporation
Number Description By Reference
------ ----------- ------------
3(i) Certificate of Incorporation as amended ~~
3(ii) By laws, as amended *(4.2)
3(iv) Certificate of Amendment to Certificate of Incorporation of Enzon, #
Inc. dated December 4, 2001
4.1 Indenture dated as of June 26, 2001, between the Company and
Wilmington Trust Company, as trustee, including the form of
4 1/2% Convertible Subordinated Note due 2008 attached as
Exhibit A thereto ++++(4.1)
4.2 Registration Rights Agreement dated as of June 26, 2001, between the
Company and the initial purchasers ++++(4.2)
10.1 Form of Change of Control Agreements dated as of January 20, 1995
entered into with the Company's Executive Officers ###(10.2)
10.2 Lease - 300-C Corporate Court, South Plainfield, New Jersey ***(10.3)
10.3 Lease dated April 1, 1995 regarding 20 Kingsbridge Road,
Piscataway, New Jersey ###(10.7)
10.4 Lease 300A-B Corporate Court, South Plainfield, New Jersey ++(10.10)
10.5 Form of Stock Purchase Agreement between the Company and the
purchasers of the Series A Cumulative Convertible Preferred Stock +(10.11)
10.6 Employment Agreement with Peter G. Tombros dated as of
August 10, 2000 //(10.15)
10.7 Stock Purchase Agreement dated as of June 30, 1995 ~(10.16)
10.8 Independent Directors' Stock Plan ~~~(10.24)
10.9 Underwriting Agreement dated March 20, 2000 with Morgan Stanley
& Co. Inc., CIBC World Markets Corp., and SG Cowen Securities
Corporation /(10.29)
10.10 Employment Agreement dated May 9, 2001, between the Company
and Arthur J. Higgins ///(10.30)
10.11 Amendment dated May 23, 2001, to Employment Agreement between
the Company and Arthur J. Higgins dated May 9, 2001 ///(10.31)
10.12 Form of Restricted Stock Award Agreement between the Company and
Arthur J. Higgins ////(4.3)
10.13 Form of Employee Retention Agreement dated as of August 3, 2001
between the Company and certain key employees +++
10.14 Lease - 685 Route 202/206, Bridgewater, New Jersey o
10.15 Employment Agreement with Ulrich Grau dated as of March 6, 2002 o
10.16 Amendment dated May 31, 2001 to Employment Agreement between o
the Company and Peter G. Tombros
o Filed herewith.
* Previously filed as an exhibit to the Company's Registration
Statement on Form S-2 (File No. 33-34874) and incorporated
herein by reference thereto.
*** Previously filed as an exhibit to the Company's Registration
Statement on Form S-18 (File No. 2-88240-NY) and incorporated
herein by reference thereto.
+ Previously filed as an exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-39391) filed with the
Commission and incorporated herein by reference thereto.
++ Previously filed as an exhibit to the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1993 and
incorporated herein by reference thereto.
+++ Previously filed as an exhibit to the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 2001 and
incorporated herein by reference thereto.
++++ Previously filed as an exhibit to the Company's Registration
Statement on Form S-3 (File No. 333-67509) filed with the
Commission and incorporated herein by reference thereto.
## Previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1997
and incorporated herein by reference thereto.
### Previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995 and
incorporated herein by reference thereto.
~ Previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1995
and incorporated herein by reference thereto.
~~ Previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996 and
incorporated herein by reference thereto.
~~~ Previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1996
and incorporated herein by reference thereto.
/ Previously filed as an exhibit to the Company's Registration
Statement on Form S-3 (File No. 333-30818) filed with the
Commission and incorporated herein by reference thereto.
// Previously filed as an exhibit to the Company's Annual Report
on Form 10-K for the year ended June 30, 2000 and incorporated
herein by reference thereto.
/// Previously filed as an exhibit to the Company's Current Report
on Form 8-K filed with the Commission on June 13, 2001 and
incorporated herein by reference thereto.
//// Previously filed as an exhibit to the Company's Registration
Statement on Form S-8 (File No. 333-64110) filed with the
Commission and incorporated herein by reference thereto.
# Previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 2001
and incorporated herein by reference thereto.
(b) Reports on Form 8-K.
On January 8, 2002 we filed with the Commission a current report on Form
8-K dated January 7, 2002 reporting under Item 5 our broad strategic alliance
with Inhale Therapeutic Systems, Inc.
On January 16, 2002 we filed with the Commission a Current Report on Form
8-K dated January 16, 2002 reporting under Item 5 that Schering-Plough believes
that the Access Assurance Program will soon need to transition to a wait list
for newly enrolling patients in the U.S. initially.
On February 26, 2002 we filed with the Commission a Current Report on Form
8-K dated February 25, 2002 reporting under Item 5 that Robert Parkinson, Jr.
was elected to the Board of Directors.
On February 26, 2002 we filed with the Commission a Current Report on Form
8-K dated February 26, 2002 reporting under Item 5 that Inhale Therapeutic
Systems, Inc. entered into two licensing agreements which will involve Enzon's
proprietary PEG technology.
On March 7, 2002 we filed with the Commission a Current Report on Form 8-K
dated March 7, 2002 that Schering-Plough would remove a large block of patients
from the PEG-INTRON Access Assurance Program wait list since the program was
transitioned to a wait-list system in January 2002.
On March 19, 2002 we filed with the Commission a Current Report on Form
8-K dated March 18, 2002 reporting under Item 5 that Ulrich M. Grau, Ph.D. was
appointed as the Company's Chief Scientific Officer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENZON, INC.
(Registrant)
Date: May 15, 2002 By: /s/ Arthur J. Higgins
---------------------------------
Arthur J. Higgins
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kenneth J. Zuerblis
---------------------------------
Kenneth J. Zuerblis
Vice President, Finance,
Chief Financial Officer
(Principal Financial
and Accounting Officer) and
Corporate Secretary