UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-1
Mark one
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended July 31, 1996
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______________ to ____________________
Commission File Number 1-9974
ENZO BIOCHEM, INC.
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(Exact name of registrant as specified in its charter)
New York 13-2866202
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
60 Executive Boulevard,
Farmingdale, New York 11735
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(Address of principal executive offices) (Zip Code)
(5l6) 755-5500
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(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value The American Stock Exchange
- ---------------------------- -------------------------------------------
(Title of Class) (Name of each Exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of October 21, 1996, the Registrant had 21,951,349 shares of Common
Stock outstanding.
The aggregate market value of the Common Stock held by nonaffiliates as of
October 21, 1996 was approximately $316,492,296.
PART I
Item 1. Business
Introduction
Enzo Biochem, Inc. (the "Company" or "Enzo") employing biotechnology,
develops, manufactures and markets health care products, and also provides
medical diagnostic services to the medical community. Each of the three business
activities of the Company is performed by one of the Company's three
wholly-owned subsidiaries--Enzo Diagnostics, Inc., Enzo Therapeutics, Inc., and
Enzo Clinical Labs, Inc. ("Enzo Diagnostics", "Enzo Therapeutics" and "Enzo
Clinical Labs", respectively). These activities are: (1) diagnostic and research
product development, manufacture and marketing through Enzo Diagnostics, (2)
therapeutic product research and development through Enzo Therapeutics, and (3)
the operation of a clinical reference laboratory through Enzo Clinical Labs. For
information relating to the Company's business segments, see Note 11 of the
Notes to Consolidated Financial Statements.
For the fiscal year ended July 31, 1996 (fiscal 1996), approximately 38% of
the Company's operating revenues was derived from product sales and
approximately 62% was derived from clinical reference laboratory services. For
the fiscal years ended July 31, 1995 and 1994 (fiscal 1995 and fiscal 1994,
respectively), approximately 30% and 23%, respectively, of the Company's
operating revenues were derived from product sales and approximately 70% and
77%, respectively, were derived from clinical reference laboratory services.
Product Development Activities
The Company's product development programs incorporate various scientific
areas of expertise, including recombinant DNA, monoclonal antibody development,
enzymology, microbiology, biochemistry, organic chemistry, and fermentation. The
Company's activities in research and development are performed by the Company's
professional and scientific staff. To a lesser extent, research and development
is pursued in collaboration with outside consultants at research and academic
institutions.
The primary focus of the Company's current research is the development of
products based on gene labeling and gene regulation. The Company is funding its
research programs through its operating cash flows and cash and cash
equivalents, as well as seeking joint ventures and collaborative relationships.
Through Enzo Diagnostics, the Company has devoted a major portion of its
research and development activities to develop simple and reliable test formats
and protocols for the commercialization of nucleic acid-based diagnostics as
well as other diagnostic products. A key system for Enzo is its non-radioactive
BioProbe(R) nucleic acid probe system and the Company continued to introduce new
products based on this technology into the research market during fiscal 1996.
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The product development programs of the Company include developing
BioProbe(R) nucleic acid probe products to detect sexually transmitted diseases,
such as AIDS, herpes, chlamydia, gonorrhea, and other infectious diseases, such
as tuberculosis, cytomegalovirus, hepatitis and Epstein-Barr virus (implicated
in mononucleosis). The Company markets several product lines containing
BioProbe(R) nucleic acid probe products.
The Company, through Enzo Therapeutics, is developing therapeutic
applications of nucleic acids. In May 1987, the Company entered into an
agreement with the Research Foundation of the State University of New York which
grants the Company certain exclusive rights to a genetic engineering technology
for generating antisense RNA repressors. As a result of the technology covered
by such agreement, the Company has obtained three (3) patents. Although the
Company has not derived revenues from any of the foregoing three antisense
patents, the Company believes that this technology will be the basis for the
Company to derive meaningful revenues in the future.
Whenever the Company complements its internal research and development
activities with collaborative research arrangements with academic and private
research institutions or consultants on specific projects, the Company typically
supplies funds to cover salaries, materials, certain laboratory equipment and a
portion of the overhead. In all such collaborative research arrangements, the
Company reserves the commercial rights to any product or process developed,
subject to a royalty payment to the institution or consultant involved over a
period of years. The location of the Company in the greater New York area
affords the Company access to and interaction with a large number of research
institutions and qualified scientists.
In the fiscal years ended July 31, 1996, 1995 and 1994, the Company
incurred costs of approximately $3,083,000, $2,366,000 and $1,764,000,
respectively, for research and development activities.
Clinical Reference Laboratory
The Company, through Enzo Clinical Labs, operates a clinical reference
laboratory which offers full diagnostic services to the greater New York medical
community. The services Enzo Clinical Labs provides include chemistry, blood
tests, cytology studies, tissue pathology, hormone studies, and diagnostic
procedures which seek to detect precancerous conditions, cancers in cervical
specimens and sexually transmitted diseases. Enzo Clinical Labs provides these
services primarily to physicians as well as to clinics, nursing homes and other
clinical laboratories. Enzo Clinical Labs operates a regional clinical reference
laboratory on Long Island and also operates twelve satellite patient service
centers in the greater New York area, including a stat laboratory in Manhattan.
The patient service center collects the specimens as requested by the physician.
The specimens are sent through the Company's in-house courier system to the
Company's laboratory for testing. A "STAT lab" is a laboratory that has the
ability to perform certain routine tests quickly and report results to the
physician immediately.
Patient specimens are delivered to the Company accompanied by a test
request form. These forms, which are completed by the client, indicate the tests
to be performed and provide the necessary billing information. Once this
information is entered into the computer system, the tests are performed and the
results are entered primarily through computer interface or
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manually. Most routine testing is completed by early the next morning, and test
results are printed and prepared for distribution. Some clients have local
printer capability and have reports printed out directly in their offices.
Clients who request that they be called with a result are so notified in the
morning.
The Company currently offers over 2,000 different clinical laboratory tests
or procedures. Several hundred of these are frequently used in general patient
care by physicians to establish or support a diagnosis, to monitor treatment or
medication or to search for an otherwise undiagnosed condition. These routine
procedures are most often used by practicing physicians in their outpatient
office practices.
Approximately 86% and 85% at July 31, 1996 and 1995, respectively, of the
Company's net accounts receivable relate to its clinical reference laboratory
business which operates in the New York Metropolitan area. The Company believes
that the concentration of credit risk with respect to accounts receivable are
limited due to the diversity of the Company's client base. However, the Company
provides services to certain patients covered by various third-party payors,
including the Federal Medicare program. Revenue, net of contractual allowances,
from direct billings under the Federal Medicare program during each of the
fiscal years ended July 31, 1996, 1995 and 1994 approximated 14%, 12% and 17%,
respectively of the Company's total revenue. The Company recorded an additional
provision for uncollectible accounts receivable of $3,500,000 based on trends
that became evident in the fourth quarter of fiscal 1996 that additional
reserves were needed primarily to cover lower collection rates under the Federal
Medicare program and other third-party payors. For the year ended July 31, 1996,
1995 and 1994 no other payor accounted for more than 10% of the Company's
revenues.
In addition, the Company utilizes its clinical reference laboratory to
evaluate and demonstrate the benefits of the Company's diagnostic products (see
Note 11 of the Notes to Consolidated Financial Statements for segment
information and operating revenues and profits).
Business Objectives
The current business objectives of the Company are (1) to develop,
manufacture and market on a worldwide basis diagnostic and therapeutic products
based on the Company's research activities in biotechnology and molecular
biology, and (2) to perform diagnostic tests for the U.S. health care community.
The Company's research and development efforts are directed to both short and
long-term projects. Diagnostic products require less time to commercialize than
therapeutic products because the procedures required for attaining government
clearance are less time consuming. Therapeutic products, once developed, require
extensive clinical testing and compliance. This process can range from three to
five years and, in some instances, longer.
At such time as the Company's initial self-funded research demonstrates
technical feasibility and potential commercial importance, the Company will have
the option to pursue the opportunity on its own or to associate with another
entity for development and ultimate marketing of the product. Unless there is a
business reason to license products or processes developed by the Company, the
Company intends to retain ownership with respect to development and marketing of
a product or process.
5
Marketing Strategy
Product Development Activities
Enzo's initial commercialization program for the BioProbe(R) nucleic acid
probe systems included filing major U.S. and foreign patent applications,
clinical evaluation, and Food and Drug Administration (FDA) submissions. The
Company has obtained clearance for a number of FDA approved diagnostics for sale
to clinical reference laboratories and researchers through Enzo Diagnostics.
BioProbe(R) nucleic acid probe products are also sold to the research market,
where FDA clearance is not required. The Company has been successful in
obtaining FDA clearance for four totally Enzo-developed DNA probe products. The
Company believes that significant delays will not be encountered with any future
probe product submissions to the FDA since products based on the BioProbe(R)
nucleic acid probe system have been FDA cleared. However, there can be no
assurance that delays will not be incurred.
Through Enzo Diagnostics, the Company manufactures and markets its
BioProbe(R) nucleic acid probe products for research applications. These
BioProbe(R) research products include products which allow researchers to make
their own non-radioactive DNA probes as well as complete DNA probe kits which
contain all reagents necessary for detecting various disease pathogens in
clinical samples.
Enzo Diagnostics markets a variety of in situ hybridization kits.
PathoGene(R) DNA probe kits detect specific pathogens including human
papillomavirus (HPV), herpes simplex virus, cytomegalovirus, Epstein-Barr virus,
adenovirus, hepatitis B virus and Chlamydia trachomatis. Its BioPap(R) DNA probe
kits detect certain types of HPV in Pap smear samples. An enhanced detection
procedure that will enable the pathologist to identify the presence of fewer
virus particles by increasing the sensitivity of the assay was developed by the
Company. These products compete directly with products labeled with various
radioactive isotopes. In addition to the in situ hybridization kits, Enzo
Diagnostics also markets kits based on its proprietary microplate hybridization
format. Microplate Hybridization Assays have been developed for the detection of
the AIDS-causing virus (HIV-1). Kits are also available to detect HIV-2, another
strain of the AIDS virus, hepatitis virus, the bacteria causing tuberculosis
(TB) and members of the Mycobaterium tuberculosis (MTB) complex.
Enzo's HIV test was one of the first commercial DNA probe tests for this
pathogen in this format. Unlike most AIDS tests which detect antibodies for HIV,
Enzo's HIV Microplate Hybridization Assay detects DNA unique to HIV. Since
individuals can carry the HIV infection for up to 12 months before developing
antibodies to it, a test directed at the virus can provide earlier detection.
Because this product also can measure virus concentrations, it is easier for
researchers to determine HIV levels in patients and look for relationships
between these levels and other disease indicators such as antibody production or
appearance of symptoms. This product is currently marketed to the research
community. An enhanced version of the Microplate Hybridization Assay, has been
developed to detect the hepatitis virus directly in serum and is aimed at the
blood bank market.
6
In early stages of infection, the pathogen may be present in very small
amounts and may be difficult to detect. Samples, however, can be treated in a
way that produces copies of targeted DNA, if it is present. This amplification
process is one possible approach to detect very low levels of infection. All of
Enzo's Microplate Assays can be used to detect these pathogens in amplified as
well as unamplified samples. In order to fully integrate its technology, Enzo
has developed a new simplified amplification process for multicopy production of
nucleic acid. A patent application was filed in January 1994 and this
proprietary amplification process was incorporated into the microplate assay
format, thus providing a totally integrated assay system. This approach is being
developed for use with the hepatitis assay system and will form the basis for
all Enzo's microplate assays.
In addition to nucleic acid-based products, the Company also produces and
sells other types of research products, such as monoclonal antibodies. The
products are marketed through direct sales, an extensive product catalog,
advertising in scientific and trade journals and U.S. and foreign distributors.
In fiscal 1993, Enzo Diagnostics began to expand its non-exclusive distribution
arrangements for its proprietary products in both the U.S. and foreign markets
with various companies having worldwide distribution and with companies having
local foreign distribution. In fiscal 1994, the Company continued to expand
these distribution arrangements and began a policy of using joint labels on all
products marketed by its distributors. In April 1994, the Company signed a
multi-year non-exclusive worldwide distribution and supply agreement with
Boehringer Mannheim Biochemicals. Under the terms of this agreement, Boehringer
Mannheim distributes to the global medical research market, a broad range of
biochemical products and reagents manufactured and supplied by Enzo. The
agreement includes products based on nonradioactive DNA probe technology and
includes products that were developed and marketed by Boehringer Mannheim prior
to the agreement, as well as products developed by the Company, all of which are
covered by Enzo patents. The agreement took effect in April 1994 and extends for
the life of the last patent to expire for products involved. In February 1995, a
multi-year non-exclusive distribution agreement was signed with Amersham
International which provides for Amersham to market a broad group of products
developed and marketed by Amersham, as well as products developed by Enzo
Diagnostics. All products are based on nonradioactive DNA labeling technologies
covered by Enzo patents. See Note 1 of Notes to Consolidated Financial
Statements. A multi-year non-exclusive distribution agreement, also covering the
Company's line of proprietary DNA labeling products and reagents was concluded
in May 1995 with Dako A/S, a privately-held international company with
headquarters in Copenhagen, Denmark and subsidiaries worldwide, including the
Dako Corporation based in Carpinteria, California. In September 1995 a similar
multi-year non-exclusive distribution agreement was concluded with VWR
Scientific Products, a leader in the medical research market that was formerly
an operating unit of Baxter Health Care. The Company continues to have
discussions with other potential distributors.
At July 31, 1996 and 1995, 12% and 13% of the Company's net accounts
receivable relate to amounts due from Boehringer Mannheim and Amersham,
collectively. Operating revenues from Boehringer Mannheim represented
approximately 25% and 22% of consolidated operating revenues in fiscal 1996 and
1995, respectively.
The Company had previously entered into distribution agreements with
certain Johnson & Johnson, Inc. (J&J) subsidiaries in Europe, one of which
continues to be in effect. Ortho
7
Diagnostics continues to be the Company's distributor for marketing,
distribution and sale in Italy for the Company's BioProbe(R) and other products.
The Company, because of its various proprietary diagnostic technologies,
may enter into joint ventures with other biotechnology companies or other health
care companies with marketing resources and/or complementary technology or
products to more fully take advantage of market opportunities.
Clinical Reference Laboratory
Enzo Clinical Labs is a major regional clinical reference laboratory
offering full service diagnostic testing in the greater New York marketplace.
Its services are marketed by a professional sales force who serve client
physicians, clinics, nursing homes and other clinical laboratories in the area.
A key marketing strategy has been the strategic placement of a network of
patient service centers, where patients can go to have samples taken upon the
request of their physicians. The Company operates a stat laboratory at its
Manhattan patient service center, affording its client physicians rapid test
turnaround. The diagnostic service business provides Enzo Diagnostics with a
practical application of its products, making it possible to more appropriately
tailor diagnostic products to the end-user. The Company's BioProbe(R) nucleic
acid probe products offer Enzo Clinical Labs a marketing tool by establishing it
among the first to offer nucleic acid based tests.
The Company offers its services through direct sales representatives. Sales
representatives market the laboratory services primarily to physicians, clinics,
hospitals and other laboratories. The Company's sales representatives are
compensated through a combination of salaries, commissions and bonuses, at
levels commensurate with each individual's qualifications and responsibilities.
Commissions are primarily based upon the individual's productivity in generating
new business for the Company.
The Company also employs customer service representatives ("CSR's") to
interact with clients on an ongoing basis. CSR's monitor the status of the
services being provided to clients, act as problem solvers, provide information
on new testing developments and serve as the client's regular point of contact
with the Company. CSR's are compensated with a salary commensurate with each
individual's qualifications and responsibilities.
Health care reform, the shift to managed care and increased competition by
hospitals all had an impact on the clinical laboratory testing industry. The
Company expects these trends to continue and plans to respond by shifting
additional sales staff to support the managed care market segment.
Technology and Product Development
The major focus of the Company's product development program has been
toward the commercialization of nucleic acid probe-based in vitro diagnostics
for specific pathogens. Initially, nucleic acid probes were radioactive and
required complex protocols to perform. To develop them into useful commercial
products required making such products easy-to-use, easy
8
to interpret, readily automatable and sensitive enough to detect the presence of
low levels of pathogen. As a result of this product development effort, the
Company has developed a broad technology base for the labeling, detection,
sensitivity enhancement, signal amplification and testing formats of nucleic
acid probe products. Patent protection has been aggressively pursued for this
technology base. At the end of fiscal 1996 some 173 patents issued worldwide had
been granted to or licensed by the Company in this area of technology. In fiscal
1995 and continuing during fiscal 1996, the Company began to receive significant
revenues from the distribution agreements related to these patents and believes
that the patents have positioned the Company to derive considerably more
revenues in the future as the markets for these products continue to develop.
These patents cover a variety of BioProbe(R) nucleic acid probe products,
chelation technology for easy radioactive labeling, signal amplification
methods, sensitivity enhancements, and automatable formats.
BioProbe(R) Nucleic Acid Probe Labeling and Signal Generating Systems
Nucleic acid probes used traditionally in biomedical research and
recombinant DNA technology have been radioactively labeled with isotopes of
hydrogen, phosphorous, carbon or iodine. Radioactive materials have historically
provided researchers with the most sensitive and, in many cases, the only means
to perform many important experimental or analytical tests. However, limitations
and drawbacks are associated with the use of radioactive compounds. For example,
radioactive materials are often very unstable and have a limited shelf-life.
Because of the potentially hazardous nature of radioactive materials, their use
must be licensed and elaborate safety precautions must be maintained during the
preparation, utilization and disposal of radioisotopes. In addition, radioactive
nucleotides are extremely expensive and their instability increases usage cost.
To overcome the limitations of radioactively labeled probes, the Company,
starting with basic technology licensed from Yale University ("Yale"), has
developed a proprietary technology which allows DNA probes to be used
effectively without the use of radioactivity. This development permits the
application of genetic analysis in a clinical setting without the shelf-life,
licensing and disposal problems associated with radioactively labeled probes.
In December 1987, a primary patent for the technology that is essential to
the development of nonradioactive DNA probe diagnostics was issued to Yale. In
July 1994 and in September 1995 additional patents, broadening the coverage of
the primary patent were also issued to Yale. The Company has an exclusive
license for both patents from Yale for the life of the patents. Pursuant to such
license agreement, the Company is obligated to pay Yale royalties equal to a
percentage of sales. The Company is obligated to pay Yale an annual minimum
royalty fee of $200,000 which shall continue through the end of the term of the
exclusive license.
The near term application of the BioProbe(R) nucleic acid probe system in
the human health care area is in bacterial and viral diagnostics. Nucleic acid
probe diagnostics can be developed for any organism. Advantages of the nucleic
acid probes for the direct detection of pathogens in human diagnostics are speed
(less than an hour for test results as compared to days), greater specificity,
and the capability of diagnosing a disease in an early or latent stage of
development.
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Radioactive Labeling Systems
The Company has developed a new method for labeling molecules with
radioisotopes that is safer, faster, simpler and more cost effective than
traditional methods of radiolabeling. This method is to be used in those
applications requiring more sensitivity than non-radioactive materials permit.
This method permits radiolabeling of a wide range of molecules for use in a
variety of applications, including in vivo imaging, therapeutics, and clinical
assays.
With this technology stable products are radiolabeled just prior to use,
thereby overcoming inherent limitations of classical radiolabeling technologies.
The Company's method for radiolabeling maximizes the sensitivity while
minimizing radiation exposure and radioactive waste.
In November 1987, the Company received two U.S. patents protecting aspects
of its versatile technology for linking radioactive ions or biotin to various
biologically active molecules for diagnostic and therapeutic uses. Since that
time additional patents covering aspects of this technology have been issued to
the Company.
Automatable Test Formats
In February 1991, the Company was granted a U.S. patent for its nucleic
acid probe testing technology that generates a signal in solution. This
technology allows the development of nucleic acid probe-based tests that can be
readily automated and measured or identified instrumentally. Using this
technology, probes can be detected with either chemiluminescent, fluorescent or
colorimetric methods. The Company is developing test kits employing this
technology and launched two of them to the research market during fiscal 1992.
These included a test for the HIV virus which causes AIDS, and a test for the
bacteria causing tuberculosis. In fiscal 1993 tests for other viruses, including
HIV-2, and hepatitis, were introduced to researchers. In fiscal 1994 a more
sensitive assay that can detect hepatitis B virus directly in serum and geared
to the blood banking market was developed and in fiscal 1995 the Company's
amplification technology was integrated with the enhanced hepatitis assay. The
Company is developing an instrument-based automatable system employing this and
other proprietary Enzo technologies.
Rapid, On-Site Diagnostics
The Company also has developed a diagnostic test technology which makes
possible accurate, rapid and one-step tests. The ease of performing and
interpreting tests using this proprietary gel technology suits them well for
at-home and doctor office use. Using the gel technology, the Company has
developed a fecal occult blood test used to screen for colorectal cancer. The
Company has received FDA clearance to market this occult blood test to physician
offices and plans to develop other tests utilizing the gel technology for aiding
consumer health maintenance.
Monoclonal Antibodies
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The Company markets a panel of monoclonal antibodies that are being used in
pathology laboratories to help identify the original source of a metastatic
cancer and the type of cancer in undifferentiated cancer cells. The ability to
identify the origin and type of cancer aids in the diagnosis of cancer and
assists physicians in prescribing therapy. In order to offer a full line of
state-of-the-art research products, the Company is actively engaged in expanding
its line of monoclonal antibodies.
Therapeutic Technology and Product Development
Through Enzo Therapeutics, the Company is applying its technological
capabilities for manipulating genetic material towards the development of
therapeutic treatments for a variety of cancers and infections. Enzo is
exploring applications of antisense nucleic acids employing various proprietary
technologies. During fiscal 1996, the Company developed a new gene delivery
system that is designed to provide universal and efficient delivery of any gene
to any cell. The GenSert(TM) Universal Delivery System is being combined with
Enzo's antisense technology in its therapeutic development program. Also, the
Company has developed techniques for stably attaching drugs and radioisotopes to
proteins and DNA. The Company is working towards, inter alia, the development of
products relating to HIV, certain cancers and hepatitis, however, no products
have been finalized.
In May 1987, Enzo entered into an agreement with The Research Foundation of
the State of New York (SUNY) granting the Company certain exclusive rights to a
genetic antisense technology. Because this antisense technology offers a way to
control the expression of any gene in any organism, the Company believes it has
broad therapeutic and agricultural applications. For example, this technology
should make possible a new approach to controlling viral diseases and cancers in
humans. It may also be used to control viral diseases in animals and
agriculturally important plants and may lead to a variety of other desirable
traits in agricultural crops and animals. This technology has been proven to be
effective in a variety of organisms, including plants, animals and bacteria. For
example, researchers have developed transgenic mice that are resistant to murine
leukemia virus and tomato plants which produce tomatoes that do not spoil upon
ripening. However, to date the Company has not developed any commercial products
utilizing this technology. Because this technology has such broad application,
the Company is exploring collaborative business relationships of various types
with other companies to develop the applications which Enzo is not interested in
retaining for its own activities. Three U.S. patent applications were
subsequently issued as patents by the U.S. Patent and Trademark Office. The
first patent issued in March 1993; a second patent issued in May 1993; the third
patent issued in December 1993.
In January 1995, the Company signed a collaborative research agreement with
Cornell University on behalf of its Medical College, aimed at evaluating the
Company's genetic antisense technology for use in managing the treatment of HIV,
the AIDS-causing virus. Early research results indicated, that this technology
could be applied to inhibiting the function of genes necessary for the HIV virus
to grow within the cell. In preclinical studies currently underway, Enzo
scientists and collaborators were able to demonstrate stable resistance to HIV
in human immune cells in culture that were treated with the Company's HIV
product. In May 1996, the Company expanded the HIV development program and
signed a second research agreement with
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St. Luke's-Roosevelt Hospital Center, aimed towards the development of protocols
for its next phase of human clinical studies.
In February 1996, the Company initiated a joint research program with
scientists at the Albert Einstein College of Medicine in New York City, geared
towards the development of a specific therapeutic product for the treatment of
hepatitis B based on the Company's novel gene regulation and delivery
technologies.
Manufacturing
The Company's BioProbe(R) nucleic acid probe products contained in its
PathoGene(R) and BioPap(TM) product lines are manufactured by using recombinant
DNA techniques and traditional chemical synthesis methods. The DNA sequence
which codes for a specific infectious agent or particular trait is isolated by
cloning. The sequence is then introduced into a plasmid, commonly one that grows
in E.coli bacteria, and the bacteria serves as a reproduction vehicle with the
application of standard fermentation procedures. The reproduced quantities of
the specific DNA sequences are purified from the bacteria and then labeled so
they can be detected. The detection system usually employs a non-radioactive
visualization molecule, such as a color-changing enzyme-substrate or a
fluorescent substance. The production of DNA probes does not require large
manufacturing facilities because the yields from the bacteria are high and only
small quantities of nucleic acids are required.
Monoclonal antibodies specific to certain substances are produced by fusing
a type of mouse cancer cell with certain antibody-producing white blood cells
from the spleens of mice that had been immunized with the targeted substance.
The hybrid cells which make antibodies with the desired characteristics are then
cultured to produce large quantities of that one discrete type of antibody.
Monoclonal antibody production does not require extensive facilities.
The Company's manufacturing operation uses exempt quantities of tritium
(3H) in its research and development activities and manufacturing operations.
For the fiscal year ended July 31, 1996 the Company has not had an accumulation
of tritium to be disposed.
Information Systems
The Company believes that with respect to its clinical reference laboratory
business the health care provider's need for data will continue to place high
demands on its information systems staff. The Company believes that the
efficient handling of information involving clients, patients, payors and other
parties will be a critical factor in the Company's future success.
Quality Assurance
The Company considers the quality of its clinical reference laboratory
tests to be of critical importance, and it has established a comprehensive
quality assurance program designed to help assure accurate and timely test
results. In addition to the compulsory external inspections and proficiency
programs demanded by HCFA and other regulatory agencies, Enzo Clinical Labs has
in place systems to emphasize and monitor quality assurance. The Company's
laboratory is subject to on-site evaluation, the College of American Pathologies
("CAP")
12
proficiency testing program, New York State survey and the Company's own
internal quality control programs.
External Proficiency/Accreditations
Enzo Clinical Labs participates in numerous externally-administered, blind
quality surveillance programs, including the CAP program. The blind programs
supplement all other quality assurance procedures and give Enzo Clinical Labs'
management the opportunity to review its technical and service performance from
the client's perspective.
The CAP accreditation program involves both on-site inspections of the
laboratory and participation in the CAP's proficiency testing program for all
categories in which the laboratory is accredited by the CAP. The CAP is an
independent non-governmental organization of board certified pathologists which
offers an accreditation program to which laboratories can voluntarily subscribe.
A laboratory's receipt of accreditation by the CAP satisfies the Medicare
requirement for participation in proficiency testing programs administered by an
external source. The Company's laboratory is accredited by the CAP.
Regulation and Reimbursement
Product Development Activities
The Company's present and proposed activities are regulated by the federal
government to a significant extent. This regulation applies not only to research
and development and manufacturing, but also to the marketing of products,
particularly those involving diagnostic or therapeutic applications.
Regulation of Pharmaceutical Products
New drugs are subject to regulation under the Federal Food, Drug, and
Cosmetic Act, and biological products, in addition to being subject to certain
provisions of that Act, are regulated under the Public Health Service Act. The
Company believes that products developed by it or its collaborators will be
regulated either as biological products or as new drugs. Both statutes and the
regulations promulgated thereunder govern, among other things, the testing,
manufacturing, safety, efficacy, labeling, storage, record keeping, advertising
and other promotional practices involving biologics or new drugs, as the case
may be. FDA approval or other clearances must be obtained before clinical
testing, and before manufacturing and marketing, of biologics and drugs. At the
FDA, the Center for Biological Evaluation and Research ("CBER") is responsible
for the regulation of new biologics and the Center for Drug Evaluation and
Research ("CDER") is responsible for the regulation of new drugs.
In addition, any gene therapy products (which is one of the areas in which
the Company may develop products) developed by the Company will require
regulatory clearances prior to clinical trials and additional regulatory
clearances prior to commercialization. New human gene therapy products are
expected to be subject to extensive regulation by the FDA and comparable
agencies in other countries. The precise regulatory requirements with which the
Company will have to comply are uncertain at this time due to the novelty of the
human gene therapies
13
currently under development. Currently, each protocol is reviewed by the FDA on
a case-by-case basis. The FDA has published a "Points to Consider" guidance
document with respect to the development of gene therapy protocols.
Obtaining FDA approval has historically been a costly and time consuming
process. Generally, in order to gain FDA pre-market approval, a developer first
must conduct pre-clinical studies in the laboratory and in animal model systems
to gain preliminary information on an agent's efficacy and to identify any
safety problems. The results of these studies are submitted as a part of an
investigational new drug ("IND") application, which the FDA must review before
human clinical trials of an investigational drug can start. The IND application
includes a detailed description of the clinical investigations to be undertaken.
In order to commercialize any products, the Company or its collaborator
must sponsor and file an IND and will be responsible for initiating and
overseeing the clinical studies to demonstrate the safety, efficacy and potency
that are necessary to obtain FDA approval of any such products. For Company or
collaboratory-sponsored INDs, the Company or its collaboratory will be required
to select qualified investigators (usually physicians within medical
institutions) to supervise the administration of the products, and ensure that
the investigations are conducted and monitored in accordance with FDA
regulations and the general investigational plan and protocols contained in the
IND. Clinical trials are normally done in three phases, although the phases may
overlap. Phase I trials are concerned primarily with the safety and preliminary
effectiveness of the drug, involve fewer than 100 subjects. Phase II trials
normally involve a few hundred patients and are designed primarily to
demonstrate effectiveness in treating or diagnosing the disease or condition for
which the drug is intended, although short-term side effects and risks in people
whose health is impaired may also be examined. Phase III trials are expanded
clinical trials with larger numbers of patients which are intended to gather the
additional information for proper dosage and labeling of the drug. Clinical
trials generally take two to five years, but the period may vary. Recent
regulations promulgated by the FDA may shorten the time periods and reduce the
number of patients required to be tested in the case of certain life-threatening
diseases which lack available alternative treatments.
The FDA receives reports on the progress of each phase of clinical testing,
and it may require the modification, suspension, or termination of clinical
trials if an unwarranted risk is presented to patients. Human gene therapy
products (which is one of the areas in which the Company may develop products)
are a new category of therapeutics, and there can be no assurance as to the
length of the clinical trial period, the number of patients the FDA will require
to be enrolled in the clinical trials in order to establish the safety, efficacy
and potency of human gene therapy products, or that the clinical data generated
in these studies will be acceptable to the FDA to support marketing approval.
After completion of clinical trials of a new product, FDA marketing
approval must be obtained. If the product is regulated as a new biologic, CBER
will require the submission and approval of both a Product License Application
("PLA") and an Establishment License Application before commercial marketing of
the biologic. If the product is classified as a new drug, the Company must file
a New Drug Application ("NDA") with CDER and receive approval before commercial
marketing of the drug. The NDA or PLA must include results of product
development, pre-clinical studies and clinical trials. The testing and approval
processes
14
require substantial time and effort and there can be no assurance that any
approval will be granted on a timely basis, if at all. NDAs and PLAs submitted
to the FDA can take, on average, two to five years to receive approval. If
questions arise during the FDA review process, approval can take more than five
years. Notwithstanding the submission of relevant data, the FDA may ultimately
decide that the NDA or PLA does not satisfy its regulatory criteria for approval
and require additional clinical studies. Even if FDA regulatory clearances are
obtained, a marketed product is subject to continual review, and later discovery
of previously unknown problems or failure to comply with the applicable
regulatory requirements may result in restrictions on the marketing of a product
or withdrawal of the product from the market as well as possible civil or
criminal sanctions. In addition, the FDA may condition marketing approval on the
conduct of specific post-marketing studies to further evaluate safety and
effectiveness.
If a developer obtains designations by the FDA of a biologic or drug as an
"orphan" drug for a particular use, the developer may request grants from the
federal government to defray the costs of qualified testing expenses in
connection with the development of such drug. Orphan drug designation is given
to drugs for rare diseases, including many genetic diseases. The first applicant
who has obtained designation of a drug as an orphan drug and who obtains
approval of a marketing application for such drug is entitled to marketing
exclusivity for a period of seven years. This means that no other company can
market a molecularly identical orphan drug for the use approved by the FDA for
seven years after the approval.
Regulation of Diagnostics
Some of the diagnostic products developed by the Company or its
collaborators are likely to be regulated by the FDA as devices rather than
drugs. The nature of the FDA requirements applicable to such diagnostic devices
depends on their classification by the FDA. A diagnostic device developed by the
Company or its collaborators would be automatically classified as a Class III
device, requiring pre-market approval, unless the sponsor could demonstrate to
the FDA, in the required pre-market notification procedure, that the device was
substantially equivalent to an existing device that has been classified in Class
I or Class II or to a pre-1976 device that has not yet been classified. If the
Company or its collaborators were unable to demonstrate such substantial
equivalence, it would be required to undertake the closely and time consuming
process, comparable to that for new drugs, of conducting pre-clinical studies,
obtaining an investigational device exemption to conduct clinical tests, filing
a pre-market approval application, and obtaining FDA approval.
If the Company or its collaborators can demonstrate substantial equivalence
to a Class I product, the "general controls" of the Food, Drug, and Cosmetic Act
- - chiefly adulteration, misbranding, and good manufacturing practice
requirements - will apply. If substantial equivalence to a Class II device can
be shown, the general controls plus "special controls" - such as performance
standards, guidelines for safety and effectiveness, and postmarket surveillance
- - will apply. While demonstrating substantial equivalence to a Class I or Class
II product is not as costly or time-consuming as the pre-market approval process
for Class III devices, it can in some cases also involve conducting clinical
tests to demonstrate that any differences between the new device and devices
already on the market do not affect safety or effectiveness.
15
Other
In addition to the foregoing, the Company's business is and will be subject
to regulation under various state and federal environmental laws, including the
Occupational Safety and Health Act, the Recourse Conservation and Recovery Act
and the Toxic Substances Control Act. These and other laws govern the Company's
use, handling and disposal of various biological, chemical and radioactive
substances used in and wastes generated by its operations. The Company believes
that it is in material compliance with applicable environmental laws and that
its continual compliance therewith will not have a material adverse effect on
its business. The Company cannot predict, however, whether new regulatory
restrictions on the production, handling and marketing of biotechnology products
will be imposed by state or federal regulators and agencies.
The Company has in-house personnel to expedite the preparation and filing
of documentation necessary for FDA clearances and approvals, patent issuances
and licensing agreements. The Company has received clearance from the FDA to
market five of its diagnostic products. The Company also has several products in
various stages of clinical trial evaluation which, if successful, are expected
to be submitted to the FDA for clearance.
Clinical Laboratory Activities
The clinical laboratory industry is also subject to significant
governmental regulation at the Federal, state and local levels. Under the
Clinical Laboratory Improvement Act of 1967 and the Clinical Laboratory
Improvement Amendments to 1988 (collectively, as amended, "CLIA"), virtually all
clinical laboratories, including the Company's, must be certified by the Federal
government. Many clinical laboratories also must meet governmental standards,
undergo proficiency testing and are subject to inspection. Certificates or
licenses are also required by various state and local laws.
The health care industry is undergoing significant change as third-party
payors, such as Medicare (which principally serves patients 65 and older) and
Medicaid (which principally serves indigent patients) and insurers, increase
their efforts to control the cost, utilization and delivery of health care
services. In an effort to address the problem of increasing health care costs,
legislation has been proposed or enacted at both the Federal and state levels to
regulate health care delivery in general and clinical laboratories in
particular. Some of the proposals include managed competition, global budgeting
and price controls. Although the Clinton Administration's health care reform
proposal, initially advanced in 1994, was not enacted, such proposal or other
proposals may be considered in the future. In particular, the Company believes
that reductions in reimbursement for Medicare services will continue to be
implemented from time to time. Reductions in the reimbursement rates of other
third-party payors are likely to occur as well. The Company cannot predict the
effect health care reform, if enacted, would have on its business, and there can
be no assurance that such reforms, if enacted, would not have a material adverse
effect on the company's business and operations.
In 1992, the U.S. Department of Health and Human Services ("HHS") published
regulations implementing CLIA. The quality standards and enforcement procedure
regulations became effective in 1992, although certain personnel, quality
control and proficiency testing
16
requirements are currently being phased in by HHS. The quality standards
regulations divide all tests into three categories (waivered, moderate
complexity and high complexity) and establish varying requirements depending
upon the complexity of the test performed. A laboratory that performs high
complexity tests must meet more stringent requirements than a laboratory that
performs only moderate complexity tests, while those that perform only one or
more of either routine "waivered" tests may apply for a waiver from most
requirements of CLIA. The Company's facility is certified by CLIA to perform
high complexity testing. Generally, the HHS regulations require, for
laboratories that perform high complexity or moderate complexity tests, the
implementation of systems that ensure the accurate performance and reporting of
test results, establishment of quality control systems, proficiency testing by
approved agencies and biennial inspections.
The sanction for failure to comply with these regulations may be
suspension, revocation or limitation of a laboratory's CLIA certificate
necessary to conduct business, significant fines and criminal penalties. The
loss of a license, imposition of a fine or future changes in such Federal, state
and local laws and regulations (or in the interpretation of current laws and
regulations) could have a material adverse effect on the Company.
The Company is also subject to state regulation. CLIA provides that a state
may adopt more stringent regulations than Federal law. The State of New York's
clinical laboratory regulations contain provisions that are more stringent than
Federal law.
The Company's laboratory has continuing programs to ensure that their
operations meet all applicable regulatory requirements.
Containment of health care costs, including reimbursement for clinical
laboratory services, has been a focus of ongoing governmental activity. In 1984,
Congress established a Medicare fee schedule for clinical laboratory services
performed for patients covered under Part B of the Medicare program.
Subsequently, Congress imposed a national ceiling on the amount that can be paid
under the fee schedule. Laboratories must accept the scheduled amount as payment
in full for most tests performed on behalf of Medicare beneficiaries and must
bill the program directly. In fiscal 1996, the Company derived approximately 14%
of its net sales from tests performed for beneficiaries of Medicare and Medicaid
programs. In addition, the Company's other business depends significantly on
continued participation on these programs because clients often want a single
laboratory to perform all of their testing services. Since 1984, Congress has
periodically reduced the ceilings on Medicare reimbursement to clinical
laboratories from previously authorized levels. Because a significant portion of
the Company's costs are relatively fixed, these Medicare reimbursement
reductions have a direct adverse effect on the Company's net earnings and cash
flows. The Company cannot predict if additional Medicare reductions will be
implemented.
On January 1, 1993, numerous changes in the Physicians' Current Procedural
Terminology ("CPT") were published. The CPT is a coding system that is published
by the American Medical Association. It lists descriptive terms and identifying
codes for reporting medical and medically related services. The Medicare and
Medicaid programs require suppliers, including laboratories, to use the CPT
codes when they bill the programs for services performed. HCFA implemented these
CPT changes for Medicare and Medicaid on August 1, 1993. The
17
CPT changes have altered the way the Company bills Medicare and Medicaid for
some of its services, thereby reducing the reimbursement the Company receives
from those programs for some of its services.
In March 1996, the HCFA implemented changes in the policies used to
administer Medicare payments to clinical laboratories for the most frequently
performed automated blood chemistry profiles. Among other things, the changes
established a consistent standard nationwide for the content of the automated
chemistry profiles. Another change incorporated in the HCFA proposal requires
laboratories performing certain automated blood chemistry profiles to obtain and
provide documentation of the medical necessity of tests included in the profiles
for each Medicare beneficiary. Reimbursements have been reduced as a result of
this change.
Future changes in Federal, state and local regulations (or in the
interpretation of current regulations) affecting governmental reimbursement for
clinical laboratory testing could have a material adverse effect on the Company.
The Company is unable to predict, however, whether and what type of legislation
will be enacted into law.
Fraud and Abuse Regulations. The Medicare and Medicaid anti-kickback laws
prohibit intentionally paying anything of value to influence the referral of
Medicare and Medicaid business.
Infectious Wastes and Radioactive Materials. The Company is subject to
licensing and regulation under Federal, state and local laws relating to the
handling and disposal of medical specimens, infectious and hazardous waste and
radioactive materials as well as to the safety and health of laboratory
employees. All Company laboratories are operated in accordance with applicable
Federal and state laws and regulations relating to biohazard disposal of all
laboratory specimens and the Company utilizes outside vendors for disposal of
such specimens. Although the Company believes that it is currently in compliance
in all material respects with such Federal, state and local laws, failure to
comply could subject the Company to denial of the right to conduct business,
fines, criminal penalties and/or other enforcement actions.
Occupational Safety. In addition to its comprehensive regulation of safety
in the workplace, the Federal Occupational Safety and Health Administration
("OSHA") has established extensive requirements relating to workplace safety for
health care employers, including clinical laboratories, whose workers may be
exposed to blood-borne pathogens such as HIV and the hepatitis B virus. These
regulations, among other things, require work practice controls, protective
clothing and equipment, training, medical follow-up, vaccinations and other
measures designed to minimize exposure to, and transmission of, blood-borne
pathogens.
Controlled Substances. The use of controlled substances in testing for
drugs of abuse is regulated by the Federal Drug Enforcement Administration.
Proprietary Technology - Patents
As novel techniques, processes, products or microorganisms are developed
during the course of its research and development activities, the Company will
seek U.S. and, if deemed
18
necessary, foreign patents. At the end of fiscal 1996 the Company owned or
licensed 34 U.S. and some 151 foreign patents and had filed approximately 165
U.S. and foreign patent applications covering products, methods and procedures
resulting from the Company's research projects. In fiscal 1995 and continuing
this fiscal year, the Company began to receive significant revenues from the
distribution agreements related to these patents and believes that the patents
have positioned the Company to derive considerably more revenues in the future
as the markets for these products continue to develop. Patents relating to the
BioProbe(R) nucleic acid probe system have issued in the U.S. and Europe.
Management believes that additional patents will issue shortly and over the next
several years with respect to the Company's pending applications. There can be
no assurance, however, that patents will be issued on pending applications or
that any issued patents will have commercial benefit. The Company does not
intend to rely on patent protection as the sole basis for protecting its
proprietary technology. It also relies on its trade secrets and continuing
technological innovation. All employees involved in the clinical reference
laboratory division and the manufacturing operations sign a confidentiality
agreement prohibiting the employee from disclosing any confidential information
about the Company, including the Company's technology or trade secrets.
In some instances, the Company may enter into royalty agreements with
collaborating research parties in consideration for the commercial use by the
Company of the developments of their joint research. In other instances a patent
may be obtained by the collaborating party with the Company receiving a license
to use the patented subject matter. In such cases, the Company will seek to
secure exclusive licenses.
In other instances, the Company may have an obligation to pay royalties to,
or reach a royalty arrangement with, a third party in consideration of the
Company's use of developments of such third party. The Company has an exclusive
licensing agreement with Yale for the technology used in the BioProbe(R) nucleic
acid probe products. The agreement covers licensed patents owned by Yale and
licensed to the Company for the life of the patents which expire not earlier
than 2004. See "Business Technology and Product Development - BioProbe(R)
Nucleic Acid Probe Labeling and Signal Generating System."
In fiscal 1987, the Company entered into an agreement with The Research
Foundation of the State University of New York giving the Company exclusive
rights to a genetic engineering technology using antisense nucleic acid control
methodologies. This technology is covered by three U.S. patents applications
subsequently issued as patents by the U.S. Patent and Trademark Office. The
first patent issued in March 1993; a second patent issued in May 1993; the third
patent issued in December 1993. (See "Therapeutic Technology and Product
Development" section). The term of the license agreement extends through the
life of such patents as may issue therefrom. See "Business Technology and Patent
Development - Therapeutic Technology and Product Development."
Human Resources
As of July 31, 1996, the Company employed 176 full-time and 51 part-time
employees. Of the full-time employees, 36 were engaged in research, development,
manufacturing and marketing of research products and 140 at the clinical
reference laboratories. The scientific staff of the Company possesses a wide
range of experience and expertise in the areas of recombinant
19
DNA, nucleic acid chemistry, molecular biology and immunology. The Company
believes that relations with its employees are good.
Competition
The Company's biotechnology activities compete with pharmaceutical,
chemical, energy, and food companies which are diversifying into biotechnology,
and with specialized biotechnology firms in the United States and elsewhere.
Competition from existing companies and from newly formed private enterprises is
expected to increase.
Most of the Company's competitors in the biotechnology industry are
performing research in many of the same areas as the Company. Many of these
competitors are larger and have greater financial and other resources than the
Company. The primary competitive factors in the biotechnology field are the
ability to create and maintain scientifically advanced technology during a
period of rapid technological development, to attract and retain a breadth and
depth of human resources, to develop proprietary products or processes and to
have available adequate financial resources for bridging the often substantial
time lag between technical concept and commercial implementation.
The Company's clinical reference laboratories activity, which is conducted
in the New York metropolitan area, competes with numerous national and local
entities, some of which are larger and have greater financial resources than the
Company. Enzo Clinical Labs competes primarily on the basis of the quality and
specialized nature of its testing, reporting and information services, its
reputation in the medical community, the pricing of its services, its
reliability and speed in performing diagnostic tests, and its ability to employ
qualified laboratory personnel. The Company also believes that its ability to
compete also depends on its ability to make investments in equipment and
management information systems.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a new "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement. The
Company desires to take advantage of the new "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and is including this section
herein in order to do so. Accordingly, the Company hereby identifies the
following important factors that could cause the Company's actual financial
results to differ materially from those projected, forecast, estimated, or
budgeted by the Company in forward-looking statements.
(a) Heightened competition, including the intensification of price
competition.
(b) Impact of changes in payor mix, including the shift from
traditional, fee-for-service medicine to managed-cost health care.
20
(c) Adverse actions by governmental or other third-party payors,
including unilateral reduction of fee schedules payable to the Company.
(d) The impact upon the Company's collection rates or general or
administrative expenses resulting from compliance with Medicare administrative
policies including specifically the HCFA's recent requirement that laboratories
performing certain automated blood chemistry profiles to obtain and provide
documentation of the medical necessity of tests included in the profiles for
each medicare beneficiary.
(e) Failure to obtain new customers, retain existing customers or
reduction in tests ordered or specimens submitted by existing customers.
(f) Adverse results in significant litigation matters.
(g) Denial of certification or licensure of any of the Company's
clinical laboratories under CLIA, by Medicare and Medicaid programs or other
Federal, state or local agencies.
(h) Adverse publicity and news coverage about the Company or the
clinical laboratory industry.
(i) Inability to carry out marketing and sales plans.
(j) Loss or retirements of key executives.
(k) Impact of potential patent infringement by others or the Company.
(l) Inability to obtain patent protection or secure and maintain
proprietary positions on its technology.
Item 2. Properties
The following are the principal facilities of the Company:
21
Approximate Approximate Approximate
Floor Annual Expiration
Location Principal Operations Area (sq. ft.) Base Rent Date
- -------- -------------------- -------------- --------- ----------
60 Executive Blvd. Corporate headquarters, 40,000 $684,000 November 2004
Farmingdale, NY clinical reference laboratory,
and research and development
facilities (See note 6 of Notes
to Consolidated Financial
Statements)
527 Madison Ave. Executive office 6,400 $163,000 December 1998
New York, NY
Management believes that the current facilities will be adequate for
current and foreseeable future operating needs.
On December 1, 1985, the Company entered into an Agreement with the City of
New York to lease, over a fifty-year term, a six-story building located in New
York City. In the fourth quarter of fiscal 1996, the Company negotiated a
settlement with the City of New York to relieve the Company from any further
obligations related to the lease and to return the building to the City and the
Company agreed to pay the City $2,950,000 in full settlement of all of the
City's claims for unpaid taxes and rent. The Company issued to the City 213,623
shares of the Company's common stock in August 1996 in consideration of the
settlement amount. If the City has not received the net proceeds of $2,950,000
upon the sale of such stock by March 17, 1997, the City shall return the
remaining shares not sold, if any, and the Company shall pay the difference in
cash. As a result of this settlement with the City, the Company incurred a
charge against earnings in the amount of approximately $7.6 million in the
fourth quarter of fiscal 1996.
Item 3. Legal Proceedings
In March 1993, the Company filed suit in the United States District Court
for the District of Delaware charging patent infringement and acts of unfair
competition against Calgene, Inc. and seeking a declaratory judgment of
invalidity concerning Calgene's plant antisense patent. On February 9, 1994, the
Company filed a second suit in the United States District Court for the District
of Delaware charging Calgene with infringement of a second antisense patent
owned by the Company. Calgene has filed a counterclaim in the second Delaware
action seeking a declaration that a third patent belonging to the Company is
invalid. The two Delaware actions have been consolidated and were tried to the
Court in April 1995. In addition, the Company filed suit on March 22, 1994 in
the United States District Court for the Western District of Washington against
Calgene and the Fred Hutchinson Cancer Research Center, alleging that the
defendants had conspired to issue a false and misleading press release regarding
a supposed "patent license" from Hutchinson to Calgene, and conspired to damage
the Company's antisense patents by improperly using confidential information to
challenge them in the Patent Office. The
22
Complaint further charges that Hutchinson is infringing and inducing Calgene to
infringe the Company's antisense patents. On February 2, 1996, the Delaware
Court issued an opinion ruling against Enzo and in favor of Calgene, finding
certain Enzo claims infringed, but the patent, as a whole not infringed, and
finding the claims at issue invalid for lack of enablement. Calgene's patent was
found valid (non-obvious) over the prior art. On February 29, 1996, the Delaware
Court issued an Order withdrawing its February 2, 1996 Opinion. Enzo intends to
appeal from any adverse judgment. There can be no assurance that the Company
will be successful in any of the foregoing matters or that Calgene and/or
Hutchinson will not be successful. However, even if the Company is not
successful management does not believe there will be a significant monetary
impact.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were brought to a vote of the Company's stockholders in the
fiscal quarter ended July 31, 1996.
23
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The common stock of the Company is traded on the American Stock Exchange
(Symbol:ENZ). The following table sets forth the high and low price of the
Company's Common Stock for the periods indicated as reported on the American
Stock Exchange.
High Low
---- ---
1995 Fiscal Year (August 1, 1994
to July 31, 1995):
1st Quarter $ 15 3/8 $ 9 1/8
2nd Quarter $ 13 7/8 $ 10
3rd Quarter $ 11 3/8 $ 9 1/2
4th Quarter $ 17 1/8 $ 9 1/2
1996 Fiscal Year (August 1, 1995
to July 31, 1996):
1st Quarter $ 23 $ 14 5/8
2nd Quarter $ 24 1/2 $ 15 3/8
3rd Quarter $ 20 3/8 $ 15 1/8
4th Quarter $ 21 $ 13 1/2
On October 21, 1996, the last sale price of the Common Stock of the Company
as reported on the American Stock Exchange was $18 1/8.
On October 25, 1996, the Company had approximately 1,433 shareholders of
record.
The Company has not paid a cash dividend on its Common Stock and intends to
continue to follow a policy of retaining future earnings to finance its
operations. Accordingly, the Company does not anticipate the payment of cash
dividends to holders of Common Stock in the foreseeable future.
On June 5, 1995, the Company declared a 5% stock dividend paid July 31,
1995 to shareholders of record as of July 3, 1995. On September 13, 1996, the
Company declared another 5% stock dividend payable on October 29, 1996 to
shareholders of record on October 8, 1996.
24
Item 6.
Selected Financial Data
(In thousands, except per share data)
For the Years Ended July 31,
---------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Operating revenues $ 34,490 $31,700 $ 22,799 $ 20,025 $ 20,535
Litigation settlement, net of legal
fees -- 21,860 -- -- --
Writedown of leasehold interest
and related costs 7,613 11,400 600 3,000 401
Interest income (expense) net 1,640 941 87 (230) (1,420)
Income (loss) before provision
(benefit) for taxes on income
and extraordinary items (7,508) 9,749 2,156 (6,324) (1,103)
Provision (benefit) for taxes on
income 199 4,131 (2,945) 52 115
Income (loss) before extraordinary
items (7,707) 5,618 5,101 (6,376) (1,218)
Extraordinary items:
Gain on extinguishment of debt -- -- 150 -- --
(Gain) loss on debt conversion -- -- -- (466) 572
-------- ------- -------- -------- --------
Net income (loss) $ (7,707) $ 5,618 $ 5,251 $ (6,842) $ (646)
======== ======= ======== ======== ========
Per common and common
equivalent share(1):
Income (loss) before extraordinary
items $ (.34) $ .24 $ .22 $ (.33) $ (.08)
Extraordinary items -- -- .01 (.02) --
-------- ------- -------- -------- --------
Net income (loss) $ (.34) $ .24 $ .23 $ (.35) $ (.04)
======== ======= ======== ======== ========
Average common and dilutive
common equivalent (1) 22,593 23,075 22,628 19,407 15,767
25
Selected Financial Data
(in thousands, except per share data and ratios)
As at July 31,
------------------------------------------------------
1996 1995 1994 1993 1992
---- ----- ----- ---- ----
Working capital (deficit) $29,451 $24,449 $17,153 $ (2,411) $ (2,642)
Total assets 62,838 72,458 65,043 47,569 49,793
Long-term debt and
obligation
under capital lease 114 4,698 4,379 4,168 4,186
Stockholders' equity 55,253 61,113 51,245 32,396 32,993
- ----------
(1) In fiscal years 1996, 1993 and 1992, common stock equivalents have not been
included because the effect of their inclusion would have been anti-dilutive.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Company, at July 31, 1996, had cash and cash equivalents of $17.8
million, an increase of $6.7 million from July 31, 1995. The Company had net
working capital of $29.5 million at July 31, 1996 compared to $24.4 million at
July 31, 1995.
The Company's income before taxes and before the writedown of leasehold
interest and related costs was $105,000 which includes depreciation and
amortization aggregating approximately $1.8 million. The Company's positive cash
flow from operations was sufficient to meet its current cash needs for the
research and development programs and other investing activities. The Company
believes that its current cash position is sufficient for its foreseeable
liquidity and capital resource needs, although there can be no assurance that
future events will not alter such view.
Net cash provided by operating activities for the 1996 fiscal year was
approximately $6.1 million and includes $5 million of cash received in
connection with the litigation settlement as compared to net cash provided by
operating activities of $9.1 million for the 1995 fiscal year. The decrease in
net cash provided by operating activities from fiscal 1995 to fiscal 1996 was
primarily due to the Company's net loss for 1996, which was partially offset
by an increased provision for uncollectible accounts receivable of $2.9
million (resulting primarily from a reduction in collection rates under
Medicare), a decrease in writedown of leasehold interest and related costs
of $3.8 million and by a decrease in the note receivable litigation
settlement of $5 million in fiscal 1996 compared to an increase of
$17.6 million in fiscal 1995.
26
Net cash used by investing activities in fiscal 1996 amounted to
approximately $1 million as a result of capital expenditures and deferred patent
costs as compared to net cash used by investing activities of $1.4 million in
fiscal 1995. The decrease relates primarily from reduced capital expenditures in
fiscal 1996 compared to fiscal 1995.
Net cash provided by financing activities of approximately $1.6 million
primarily results from the proceeds from the exercise of stock options and
warrants which represents an increase of $2.4 million compared to fiscal 1995
primarily due to payments of loans payable and long term debt in fiscal 1995.
The Company's net accounts receivable of $10.5 million and $10.9 million
represent 111 average days and 126 average days of operating revenues at
July 31, 1996 and 1995 respectively. The average age of the Company's
receivables at July 31, 1996 was 113 average days as compared with 116 average
days as of July 31, 1995. The change in net accounts receivable is due to a
decrease in accounts receivable at the clinical reference laboratory of
approximately $180,000 and a decrease of research products accounts receivable
of approximately $220,000. The Company does not believe that the reduction in
net receivables and the age of such receivables has had a material effect on
the Company's liquidity or capital position.
On October 19, 1994 the Company executed a settlement agreement with
Johnson & Johnson, Inc. (J&J) pursuant to which the Company received $15.0
million and a promissory note requiring J&J and its subsidiary, Ortho
Diagnostics, Inc., to pay $5.0 million a year for each of the four successive
anniversaries of said date. These future payments are recorded at net present
value discounted using an interest rate of 5.25%. The litigation settlement
amounted to approximately $21.9 million, net of legal fees. Pursuant to the
terms of the settlement, all of the Company's grants, licenses and intellectual
property have been returned to the Company in totality.
In December 1985, the Company entered into an agreement with the City of
New York to lease, over a fifty year term, a building located in New York City.
In the fourth quarter of fiscal 1996, the Company negotiated a settlement with
the City of New York to relieve the Company from any further obligations related
to the lease and to return the building to the City and the Company agreed to
pay the City $2,950,000 in full settlement of all of the City's claims for
unpaid taxes and rent. The Company issued to the City 203,450 shares of the
Company's common stock in August 1996 in consideration of the settlement amount.
If the City has not received the net proceeds of $2.95 million upon the sale of
such stock by March 17, 1997, the City shall return the remaining shares not
sold, if any, and the Company shall pay the difference in cash. As a result of
this settlement with the City, the Company incurred a charge against earnings in
the amount of approximately $7.6 million in the fourth quarter of fiscal 1996.
Management is not aware of any material claims, disputes or settled matters
concerning third-party reimbursements which would have a material effect on
the Company's financial statements.
Results of Operations
Fiscal 1996 Compared to Fiscal 1995
Revenues from operations for the fiscal year ended July 31, 1996 ("fiscal
1996") increased by $2,790,000 over revenues from operations for the fiscal year
ended July 31, 1995
27
("fiscal 1995"). This increase was due to an increase of $3,398,000 in revenues
from research product sales over revenue for the similar activity in fiscal 1995
offset by a $608,000 decrease in revenues for the clinical reference laboratory
operations. The increase in research product sales resulted primarily from the
Company's non-exclusive distribution agreements for the Company's products and
generally was the result of significantly higher volume of sales of product. The
decrease in revenues from the clinical laboratory operations resulted primarily
from a decrease in volume of unprofitable diagnostic screening tests.
Cost of sales increased by approximately $1,563,000 as a result of the
increase of $2,644,000 in the cost of sales of research products from the
Company's distribution agreements activities offset by a decrease in the cost of
clinical laboratory services of $1,081,000. This decrease is primarily due from
the improved efficiencies of performing certain diagnostic screening tests and
the increase in the number of esoteric tests performed actually at the
laboratory.
Research and development expenses increased by approximately $717,000 as a
result of an increase in research programs and the increased amortization of
patent costs.
The provision for uncollectible accounts receivable increased by $2,857,000
primarily due to an additional provision recorded by the Company in the fourth
quarter of fiscal 1996 primarily to cover lower collection rates under the
Federal Medicare programs and other third-party insurance carriers. Effective
March 1, 1996, the Medicare policy of allowing payment for all tests contained
in an automated profile when at least one of the tests in the profile was
covered was eliminated. When one or more of the tests on the newly standardized
list are reported on a claim, carriers are to pay only for medically necessary
tests in a profile. The former standard was to allow payment for the entire
profile if at least one of the tests was medically necessary. The amount paid
for a profile is limited to what would have been paid had only the medically
necessary tests been ordered. Based on collection rate data in the fourth
quarter of fiscal 1996, which was the first period evidence was available to
show the effects of the change in Medicare policy, it became evident that
additional reserves were needed to cover these lower collection rates,
including reduced reimbursement by Medicare for periods prior to March 1, 1996,
the effective date of the policy change. Accordingly, the Company recorded an
additional provision of $3.5 million in the fourth quarter of fiscal 1996 to
reflect the reduced reimbursements received by the Company from Medicare and
other third party insurers who generally follow the reimbursement policies of
Medicare.
The Company's net accounts receivable from the clinical laboratory
operations of $9.0 million and $9.2 million represent an average of 150 days of
operating revenue at July 31, 1996 and 1995, respectively. The $3.5 million
additional provision relates to the increase in the mix of Medicare invoicing in
the fourth quarter and the change in reimbursement policy rates on this
invoicing. The Company expects that as a result of the revised Medicare
reimbursement policies that the Company will receive less revenues from the
performance of these tests than they did in the past.
Selling and general and administrative expenses decreased by $2,463,000
primarily due to a decrease in legal fees in fiscal 1996 and the overall
improved efficiencies at the clinical reference laboratory.
28
In the fourth quarter of fiscal 1995, management decided that it was not in
the best interests of the Company to continue further renovations on the
leasehold interest since the continuing expenses associated with such
renovations were not deemed justifiable in light of the uncertainty of
recoupment of such expenses and because the likelihood of occupancy of the
leasehold interest was in question. A decision was made to dispose of the
leasehold interest as is, and an independent appraisal of the leasehold interest
on a current condition basis indicated that a writedown of the leasehold
interest was required in the amount of $11,400,000 which was recorded in the
fourth quarter of fiscal 1995. During fiscal 1996, the Company made extensive
efforts to find a developer for the leasehold interest. In addition, the
Company commenced negotiations with the City to also assist the Company in
identifying and approving a buyer or developer for the leasehold interest.
Simultaneously, the Company commenced negotiations with the City for a full
surrender of the leasehold interest back to the City. Based on the limited
interest in the leasehold by any developer, the Company determined that it was
in the best interest of the Company to negotiate a complete and full
settlement with the City. On July 31, 1996, the Company negotiated a
settlement with the City of New York (the "City") to relieve the Company from
any further obligations related to the lease and to return the building to the
City and the Company agreed to pay the City $2,950,000 in full settlement of
all of the City's claims for unpaid taxes and rent. The Company issued to the
City 213,623 shares of the Company's common stock in August 1996 in
consideration of the settlement amount. If the City has not received the net
proceeds of $2.95 million upon the sale of such stock by March 17, 1997, the
City shall return the remaining shares not sold, if any, and the Company
shall pay the difference in cash. As a result of this settlement with the
City of New York, the Company incurred a charge against earnings in the amount
of approximately $7.6 million in the fourth quarter of fiscal 1996.
The operating profit from research and development activities and related
costs amounts to $449,000 in fiscal 1996, as compared to an operating profit of
$479,000 in fiscal 1995. The decrease in the profit is principally related to
the increase in research and development expenses from the diagnostic division.
The operating profit from the clinical reference laboratories activities
amounted to $124,000 (.6% of operating revenues) as compared to an operating
profit of $2,146,000 (10% of operating revenues) in fiscal 1995. This decrease
resulted principally from the increase in the provision for uncollectible
accounts receivable due to the lower collection rates under Medicare programs
and other third-party insurance carriers and offsetting deduction in overall
operating expenses in fiscal 1996.
Results of Operations
Fiscal 1995 Compared to Fiscal 1994
Revenues from operations for the fiscal year ended July 31, 1995 ("fiscal
1995") increased by $8,901,000 over revenues from operations for the fiscal year
ended July 31, 1994 ("fiscal 1994"). This increase was due to increases of
$4,365,000 in revenues from research product sales over revenue for the similar
activity in fiscal 1994 and by a $4,536,000 increase in revenues for the
clinical reference laboratory operations. The increase of revenues from the
clinical laboratory operations resulted primarily from an increase in volume of
screening tests. The increase in the volume of research product sales resulted
primarily from the Company's
29
non-exclusive distribution agreements entered into in April 1994 and February
1995 to distribute the Company's products.
Research and development expenses increased by approximately $602,000 as a
result of an increase in research programs and the amortization of patent costs.
Cost of sales increased by approximately $3,099,000 as a result of increased
revenue from the sale of research products and from the clinical reference
laboratory. This increase resulted primarily from the Company's non-exclusive
distribution agreements to distribute products. Included in the general and
administrative expenses are legal fees of $2,977,000 and $1,663,000 for fiscal
years 1995 and 1994, respectively.
The provision for uncollectible accounts receivable increased by $341,000
primarily from an increase in operating revenues at the clinical reference
laboratory operations. Selling expenses increased by approximately $701,000 due
to an increase in marketing programs and personnel costs for the clinical
reference laboratory operations.
On October 19, 1994, the Company executed a settlement agreement with J&J
pursuant to which the Company received $15.0 million in cash and a promissory
note requiring J&J to pay a total of $5.0 million a year for each of the four
successive anniversaries of said date. These future payments are recorded at net
present value discounted using an interest rate of 5.25%. The litigation
settlement amounted to approximately $21,860,000, net of legal fees.
The operating profit from the research and development activities and
related costs amounted to $479,000 in fiscal 1995 as compared to an operating
loss of $493,000 in fiscal 1994. The increase in this profit is principally
related to the Company's nonexclusive distribution agreements to distribute
products. The operating profit from the clinical reference laboratories
activities amounted to a profit of $2,146,000 as compared to an operating loss
of $659,000 in fiscal 1994. This increase resulted principally from an increase
in the volume of screening tests.
The provision for income taxes of $4,131,000 results from current income
taxes due and utilization of net operating loss carryforwards related to taxable
income recognized in connection with the J&J lawsuit.
Net income for the fiscal year ended July 31, 1995 increased to
approximately $5,618,000 compared with approximately $5,251,000 for the fiscal
year ended July 31, 1994.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted in a separate section of this
report.
30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors - The following sets forth certain information regarding
directors of the Company who are not executive officers of the Company.
Information with respect to directors of the Company who are also executive
officers of the Company appears below under the subcaption "Executive Officers."
The Company has a classified Board of Directors consisting of three classes.
JOHN B. SIAS (age 69) has been Director of the Company since January 1982.
Mr. Sias has been President and Chief Executive Officer of Chronicle Publishing
Company since April 1993. From January 1986 until April 1993, Mr. Sias was
President of ABC Network Division, Capital Cities/ABC, Inc. From 1977 until
January 1986 he was the Executive Vice President, President of the Publishing
Division (which includes Fairchild Publications) of Capital Cities
Communications, Inc.
JOHN J. DELUCCA (age 53) has been a Director of the Company since January
1982. Since October 1993, Mr. Delucca has been Senior Vice President and
Treasurer of RJR Nabisco, Inc. From January 1992 until October 1993, he was
managing director and Chief Financial Officer of Hascoe Associates, Inc. From
October 1, 1990 to January 1992 he was President of The Lexington Group. From
September 1989 until September 1990 he was Senior Vice President-Finance of the
Trump Group. From May 1986 until August 1989, he was senior Vice
President-Finance at International Controls Corp. From February 1985 until May
1986, he was a Vice President and Treasurer of Textron, Inc. Prior to that he
was a Vice President and Treasurer of the Avco Corporation, which was acquired
by Textron.
During the fiscal year ended July 31, 1996, there were three (3) formal
meetings of the Board of Directors, several actions by unanimous consent and
several informal meetings. The Board of Directors has an Audit Committee and
Stock Option Committee. The Audit Committee had one (1) formal meeting and the
Stock Option Committee had three (3) formal meetings in fiscal 1996.
The Audit Committee is authorized to review proposals of the Company's
auditors regarding annual audits, recommend the engagement or discharge of the
auditors, review recommendations of such auditors concerning accounting
principles and the adequacy of internal controls and accounting procedures and
practices, to review the scope of the annual audit, to approve or disapprove
each professional service or type of service other than standard auditing
services to be provided by the auditors, and to review and discuss the audited
financial
31
statements with the auditors. Its members are Shahram K. Rabbani and Messrs.
Sias and Delucca.
The Stock Option Committee has the plenary authority in its discretion to
determine the purchase price of the Common Stock issuable upon the exercise of
each option, to determine the employees to whom, and the time or times at which,
options shall be granted and the number of shares to be issuable upon the
exercise of each option, to interpret the plans, to prescribe, amend and rescind
rules and regulations relating to them, to determine the term and provisions of
the respective option agreements and to make all other determinations deemed
necessary or advisable for the administration of the plans. Its members are
Messrs. Sias and Delucca.
The Company does not have a formal Executive Committee or Nominating
Committee of the Board of Directors.
(b) Executive Officers - The following table sets forth the names and
positions of all of the current executive officers of the Company:
Name Position
---- --------
Elazar Rabbani, Ph.D. President, Chairman of the Board of Directors
and Chief Executive Officer
Shahram K. Rabbani Executive Vice President, Treasurer, Director
Barry W. Weiner Executive Vice President, Secretary and Director
Norman E. Kelker, Ph.D. Senior Vice President
Dean Engelhardt, Ph.D. Senior Vice President
Herbert B. Bass Vice President of Finance
Barbara E. Thalenfeld, Ph.D. Vice President, Corporate Development
David C. Goldberg Vice President, Business Development
DR. ELAZAR RABBANI (age 52) has served as President and a Director of the
Company since its organization in 1976. Dr. Rabbani received his B.A. degree
from New York University in Chemistry and his Ph.D. degree in Biochemistry from
Columbia University. He is a member of the American Society for Microbiology.
SHAHRAM K. RABBANI (age 44) has been an Executive Vice President of the
Company since September 1981 and a Vice President, Treasurer and a Director of
the Company since its organization. Mr. Rabbani received a B.A. degree in
chemistry from Adelphi University.
BARRY W. WEINER (age 46) has been an Executive Vice President since
September 1981, a Vice President and Director of the Company since its
organization and Secretary since March 1980. He was employed by
Colgate-Palmolive Company, New York, New York from August 1974 until March 1980,
when he joined the Company on a full-time basis. Mr. Weiner received his B.S.
degree in Economics from New York University and a M.B.A. from Boston
University.
32
DR. NORMAN E. KELKER (age 57) has been a Vice President of the Company
since September 1981. Effective January 1, 1989, he was promoted to Senior Vice
President. From 1975 until he joined the Company, Dr. Kelker was an Associate
Professor in the Department of Microbiology of the New York University School of
Medicine. He holds a Ph.D. from Michigan State University.
DR. DEAN ENGELHARDT (age 56) has been Vice President since September 1981.
Effective January 1, 1989, he was promoted to Senior Vice President. Prior to
joining the Company he was Associate Professor of Microbiology at Columbia
University College of Physicians and Surgeons. He obtained his Ph.D. from
Rockefeller University.
HERBERT B. BASS (age 48) is Vice President of Finance of the Company. Prior
to his promotion, Mr. Bass was the Corporate Controller of Enzo. Before joining
Enzo in 1986, Mr. Bass held various positions at Danziger & Friedman, Certified
Public Accountants, from 1979 to 1986, the most recent of which was audit
manager. For the preceding seven years he held various positions at Berenson &
Berenson, C.P.A.'s. Mr. Bass holds a Bachelor degree in Business Administration
from Baruch College.
DR. BARBARA E. THALENFELD (age 56) is Vice President of Corporate
Development and has been with Enzo since 1982. Prior to joining the Company she
held an NIH research fellowship at Columbia University. She received a Ph.D.
from Hebrew University- Hadassah Medical Center and an MS from Yale University.
DAVID C. GOLDBERG (age 39) is Vice President of Business Development. Prior
to joining Enzo in 1985, he was employed at DuPont NEN Products. He received an
MS from Rutgers University and an MBA from New York University.
Dr. Elazar Rabbani and Shahram K. Rabbani are brothers and Barry W. Weiner
is their brother-in-law.
Item 11. Executive Compensation
The information required under this item will be set forth in the Company's
proxy statement to be filed with the Securities and Exchange Commission on or
before November 28, 1996 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item will be set forth in the Company's
proxy statement to filed with the Securities and Exchange Commission on or
before November 28, 1996 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
33
The information required under this item will be set forth in the Company's
proxy statement to be filed with the Securities and Exchange Commission on or
before November 28, 1996 and is incorporated herein by reference.
34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
---------------------------------------------
(a) (1) Consolidated Financial Statements
Consolidated Balance Sheet - July 31, 1996 and 1995
Consolidated Statement of Operations-
Years ended July 31, 1996, 1995 and 1994
Consolidated Statement of Stockholders' Equity-
Years ended July 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows-
Years ended July 31, 1996, 1995 and 1994 Notes to
Consolidated Financial Statements.
(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the required information is
included in the consolidated financial statements or the notes thereto or
because they are not required.
(3) Exhibits
The following documents are filed as Exhibits to this Annual Report on Form
10-K:
Exhibit
No Description
------- -----------
3(a) Certificate of Incorporation, as amended March 17, 1980. (1)
3(b) June 16, 1981 Certificate of Amendment of the Certificate of
Incorporation. (2)
3(c) Certificate of Amendment to the Certificate of Incorporation. (11)
3(d) Bylaws. (1)
4(d) Form of Note Indenture. (3)
10(a) 1980 Stock Option Plan. (1)
10(b) Investment Agreement between the registrant and Johnson & Johnson
Development Corp. dated June 25, 1982. (4)
35
10(c) Agreement between the registrant and Ortho Diagnostic System, Inc.
dated June 25, 1982. (5)
10(d) 1983 Incentive Stock Option Plan.(6)
10(e) Letter Agreement between the Company and Ortho Diagnostic Systems,
Inc. dated as of January 1, 1985. (7)
10(f) Lease Agreement dated as of December 1, 1985. (8)
10(g) Indenture of Mortgage and Trust dated as of December 1, 1985. (8)
10(h) Letter of Credit Agreement dated as of December 1, 1985.(8)
10(i) Leasehold Mortgage and Security Agreement dated as of February 5,
1986. (8)
10(j) Loan Agreement dated as of December 31, 1985. (8)
10(k) Restricted Stock Plan. (8)
10(p) Agreement with First New York Bank for Business. (14)
10(q) Agreement with BioHealth Laboratories, Inc. shareholders filed
herewith. (15)
10(r) Agreement with Johnson & Johnson, Inc. filed herewith. (16)
10(s) 1993 Incentive Stock Option Plan. (16)
10(t) Employment Agreement with Elazar Rabbani. (16)
10(u) Employment Agreement with Shahram Rabbani. (16)
10(v) Employment Agreement with Barry Weiner. (16)
10(w) 1994 Stock Option Plan (17).
10(x) Stipulation of Settlement with the City of New York (18).
10(y) Agreement with Corange International Limited (Boehringer Mannheim)
effective April 1994.
10(z) Agreement with Amersham International effective February 1995.
10(aa) Agreement with Dako A/S effective May 1995.
10(bb) Agreement with Baxter Healthcare Corporation (VWR Scientific
Products) effective September 1995.
36
10(cc) Agreement with Yale University and amendments thereto.
10(dd) Agreement with The Research Foundation of the State of New York
effective May 1987.
11 Computation of per-share earnings (18).
21 Subsidiaries of the registrant:
23 Consent of Independent Auditors filed herewith.
Notes to (a)(3)
- ----------
(1) The exhibits were filed as exhibits to the Company's Registration Statement
on Form S-18 (File No. 2-67359) and are incorporated herein by reference.
(2) This exhibit was filed as an exhibit to the Company's Form 10-K for the
year ended July 31, 1981 and is incorporated herein by reference.
(3) These exhibits were filed as exhibits to the Company's Current Report on
Form 8-K dated April 4, 1986 and are incorporated herein by reference.
(4) This exhibit was filed as an exhibit to the Company's Current Report on
Form 8-K dated June 29, 1982 and is incorporated herein by reference.
(5) This exhibit was filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended July 31, 1983 and is incorporated herein by
reference.
(6) This exhibit was filed with the Company's definitive proxy statement dated
February 4, 1983 and is incorporated herein by reference.
(7) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1985 and is incorporated herein by reference.
(8) These exhibits were filed as exhibits to the Company's Quarterly Report on
Form 10- Q for the quarter ended January 31, 1986 and are incorporated
herein by reference.
(9) This exhibit was filed as an exhibit to the Company's Registration
Statement on Form S-2(33-7657) and is incorporated herein by reference.
(10) This exhibit was filed as an exhibit to the Company's Current Report on
Form 8-K dated July 12, 1990 and is incorporated herein by reference.
37
(11) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1989 and is incorporated herein by reference.
(12) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1990 and is incorporated herein by reference.
(13) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1991 and is incorporated herein by reference.
(14) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1992 and is incorporated herein by reference.
(15) This exhibit was filed as an exhibit to the Company's Registration
Statement on Form S-3 (33-72170) and is incorporated herein by reference.
(16) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1994 and is incorporated herein by reference.
(17) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1995 and is incorporated herein by reference.
(18) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1995 and is incorporated by reference.
- ----------
(b) The Company's Current Reports on Form 8-K filed during the quarter ended
July 31, 1996 -- none.
(c) See Item 14(a)(3), above.
(d) See Item 14(a)(2), above.
*************
38
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) 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.
ENZO BIOCHEM, INC.
Date: December 23, 1996 By: /s/ Elazar Rabbani
---------------------
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Elazar Rabbani December 23, 1996
- ------------------------------------
Elazar Rabbani, President
and Chairman of Board of Directors
(Principal Executive Officer)
/s/ Shahram K. Rabbani December 23, 1996
- ------------------------------------
Shahram K. Rabbani, Executive
Vice President, Treasurer and
Director (Principal Financial and
Accounting Officer)
/s/ Barry W. Weiner December 23, 1996
- ------------------------------------
Barry W. Weiner, Executive
Vice President, Secretary
and Director
- ------------------------------------
John B. Sias, Director
- ------------------------------------
John J. Delucca, Director
39
FORM 10-K, ITEM 14(a) (1) AND (2)
ENZO BIOCHEM, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and financial statement
schedules of Enzo Biochem, Inc. are included in Item 14(a):
Report of Independent Auditors F-2
Consolidated Balance Sheet -- July 31, 1996 and 1995 F-3
Consolidated Statement of Operations --
Years ended July 31, 1996, 1995 and 1994 F-4
Consolidated Statement of Stockholders' Equity --
Years ended July 31, 1996, 1995 and 1994 F-5
Consolidated Statement of Cash Flows --
Years ended July 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-8
Schedule II - Valuation and Qualifying
Accounts --Years ended July 31, 1996, 1995 and 1994 F-27
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
Report of Independent Auditors
Board of Directors and Stockholders
Enzo Biochem, Inc.
We have audited the accompanying consolidated balance sheets of Enzo Biochem,
Inc. (the "Company") as of July 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended July 31,1996. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Enzo Biochem, Inc. at July 31, 1996 and 1995 and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended July 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth herein.
/s/ Ernst & Young LLP
Melville, New York
October 15, 1996
F-2
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEET
July 31, 1996 and 1995
LIABILITIES AND
ASSETS 1996 1995 STOCKHOLDERS' EQUITY 1996 1995
------ ---- ---- --------------------- ---- ----
Current assets: Current liabilities:
Cash and cash equivalents $17,792,700 $11,067,900 Trade accounts payable $1,281,700 $1,579,900
Accounts receivable, less Accrued legal fees 1,392,000 921,900
allowance for doubtful accounts
of $5,398,000 in 1996 and
$2,127,000 in 1995 10,488,200 10,915,200 Income taxes payable -- 1,074,000
Accrued leasehold costs 2,950,000 1,531,800
Current portion of note
receivable --
litigation settlement 5,000,000 5,000,000 Other accrued expenses 776,400 615,400
Inventories 1,810,500 2,197,500 Current portion of long-term
debt 34,600 31,700
Current portion of obligations
under capital leases 28,700 53,000
--------- ---------
Other 822,900 1,076,500
---------- -----------
Total current assets 35,914,300 30,257,100 Total current liabilities 6,463,400 5,807,700
Property and equipment, at cost less Long-term debt 46,600 81,200
accumulated depreciation and
amortization 3,106,800 13,892,200
Obligations under capital leases 67,100 4,617,000
Long-term portion of note receivable--
litigation settlement 9,113,600 13,121,000 Other deferred liabilities 1,008,000 839,800
Cost in excess of fair value of net Commitments and contingencies
tangible assets acquired, less (Notes 6, 7 and 10)
accumulated amortization of
$3,128,000 in 1996 and
$2,758,000 in 1995 9,675,100 10,045,700 Stockholders' equity:
Preferred Stock, $.01 par value;
Deferred patent costs, less authorized 25,000,000 shares;
accumulated amortization of no shares issued or
$2,176,000 in 1996 and outstanding
$1,628,000 in 1995 4,878,600 4,971,000 Common Stock, $.01 par value;
authorized 75,000,000 shares;
shares issued and outstanding:
Other 149,700 171,300 21,624,900 in 1996 and
----------- ----------- 21,334,600 in 1995 216,400 213,500
Additional paid-in capital 83,450,000 81,605,000
Accumulated deficit (28,413,400) (20,705,900)
----------- -----------
$62,838,100 $72,458,300
----------- ----------- Total stockholders' equity 55,253,000 61,112,600
----------- ----------- ----------- -----------
$62,838,100 $72,458,300
----------- -----------
----------- -----------
See accompanying notes F-3
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended July 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Revenues:
Research product revenues $12,946,300 $ 9,548,400 $ 5,183,200
Clinical laboratory services 21,544,000 22,152,500 17,615,400
------------ ------------ -----------
34,490,300 31,700,900 21,798,600
Costs and expenses:
Cost of research product revenues 8,351,000 5,706,400 3,035,700
Cost of laboratory services 7,088,700 8,170,100 7,742,300
Research and development expense 3,083,000 2,366,400 1,764,000
Selling expense 2,714,800 2,754,200 2,053,200
Provision for uncollectable accounts receivable 6,702,900 3,845,600 3,504,300
General and administrative expense 8,085,100 10,508,300 8,530,100
Recovery of research contract receivable -- -- (6,500,000)
Litigation settlement, net of legal fees -- (21,859,700) --
Writedown of leasehold interest and related costs 7,613,400 11,400,000 600,000
------------ ------------ -----------
43,638,900 22,891,300 20,729,600
------------ ------------- -----------
Income (loss) before interest income, net, provision
(benefit) for taxes on income and extraordinary item (9,148,600) 8,808,600 2,069,000
Interest income, net 1,640,200 940,700 87,200
------------ ------------- ------------
Income (loss) before provision (benefit) for taxes on
Income and extraordinary item (7,508,400) 9,749,300 2,156,200
Provision (benefit) for taxes on income 199,100 4,131,200 (2,945,000)
------------ ------------- ------------
Income (loss) before extraordinary item (7,707,500) 5,618,100 5,101,200
Extraordinary item:
Gain on extinguishment of debt -- -- 150,000
------------ --------- ---------
Net income (loss) ($7,707,500) $5,618,100 $5,251,200
========== ========= =========
Per common and common equivalent share:
Income (loss) before extraordinary item $(.34) $.24 $.22
Extraordinary item -- -- .01
---------- --------- --------
Net income (loss) $(.34) $.24 $.23
========== ========= ========
Weighted average common shares 22,593,000 23,075,100 22,627,600
========== ========== ==========
See accompanying notes
F-4
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended July 31, 1996, 1995 and 1994
Common Stock Additional Total
paid-in Accumulated Shareholders'
Shares Amount Capital deficit equity
---------- -------- ----------- ------------- -------------
Balance at July 31, 1993 18,287,100 $182,900 $58,169,700 $(25,957,100) $32,395,500
Net income for the year ended July 31, 1994 -- -- -- 5,251,200 5,251,200
Increase in common stock and paid-in capital due to
debenture conversion 50,000 500 261,800 -- 262,300
Increase in common stock and paid-in capital due to
exercise of stock options 150,500 1,500 449,600 -- 451,100
Increase in common stock due to investment from
investor, net of expenses of approximately $17,000 940,000 9,400 7,493,500 7,502,900
Increase in common stock and paid-in capital
due to exchange of stock for debt, net of
expenses of approximately $205,000 394,600 3,900 5,378,000 -- 5,381,900
---------- -------- ----------- ---------- -----------
Balance at July 31, 1994 19,822,200 $198,200 $71,752,600 $(20,705,900) $51,244,900
Net income for the year ended July 31, 1995 5,618,100 5,618,100
Increase in common stock and paid-in capital due to
exercise of stock options and warrants 210,800 2,200 1,393,400 -- 1,395,600
Increase in common stock and paid-in capital due to
exchange of stock for debt 285,600 2,900 2,851,100 -- 2,854,000
Increase in common stock and paid-in capital due to
5% stock dividend 1,016,000 10,200 5,607,900 (5,618,100) --
---------- -------- ----------- ----------- -----------
Balance at July 31, 1995 21,334,600 $213,500 $81,605,000 $(20,705,900) $61,112,600
Issuance of stock for employee 401(k) plan 10,200 100 145,700 -- 145,800
Net loss for the year ended July 31, 1996 -- -- -- (7,707,500) (7,707,500)
Increase in common stock and paid-in capital due to
exercise of stock options and warrants 280,100 2,800 1,699,300 -- 1,702,100
---------- -------- ----------- ------------ -----------
Balance at July 31, 1996 21,624,900 $216,400 $83,450,000 $(28,413,400) $55,253,000
---------- -------- ----------- ------------ -----------
---------- -------- ----------- ------------ -----------
See accompanying notes F-5
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended July 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(7,707,500) $5,618,100 $5,251,200
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Depreciation and amortization of property and equipment 894,400 862,600 736,400
Amortization of costs in excess of fair value of net tangible assets
acquired 370,600 369,600 368,800
Amortization of deferred patent costs 547,200 484,300 439,700
Provision for uncollectible accounts receivable and reimbursable costs
on research contracts 6,702,900 3,845,600 3,504,300
Writedown of leasehold interest and related costs 7,613,400 11,400,000 600,000
Deferred income tax (benefit) provision -- 2,849,300 (3,049,300)
Legal expenses converted into stock -- 1,455,700 246,000
Recovery of research contract receivable -- -- (6,500,000)
Accretion of interest on note receivable (992,600) (494,000) --
Issuance of stock for employee 401K plan 145,800 -- --
Gain on extinguishment of debt -- -- (150,000)
Deferred rent and other assets 168,200 167,300 178,100
Changes in operating assets and liabilities:
Note receivable - litigation settlement 5,000,000 (17,627,000) --
Accounts receivable before provision for uncollectable amounts (6,275,900) (5,488,900) (7,812,100)
Research contract receivable -- 6,500,000 --
Inventories 387,000 (94,800) (447,800)
Other assets 161,900 (184,900) (105,800)
Trade accounts payable, accrued leasehold costs and other
accrued expenses 143,900 (3,449,400) 2,759,800
Income taxes payable (1,074,000) 1,074,000 --
Accrued legal fees 64,200 1,834,300 785,400
Accrued interest payable -- (30,000) (51,300)
-------- -------- --------
Total adjustments 13,857,000 3,473,700 (8,497,800)
---------- --------- -----------
Net cash provided (used) by operating activities 6,149,500 9,091,800 (3,246,600)
(Continued on following page)
F-6
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended July 31, 1996, 1995, and 1994
1996 1995 1994
--------- ----------- -----------
Cash flows from investing activities:
Capital expenditures $(651,100) $(1,033,300) $(1,174,700)
Patent costs deferred (363,000) (392,600) (286,800)
(Increase) decrease in security deposits (28,400) 52,400 (48,500)
----------- ----------- -----------
Net cash used by investing activities (1,042,500) (1,373,500) (1,510,000)
Cash flows from financing activities:
Payments of obligations under capital leases (52,600) (78,400) (240,700)
Proceeds from long and short term borrowings -- -- 2,162,800
Proceeds from the exercise of stock options and warrants 1,702,100 1,395,600 451,100
Payment of loans payable to bank and long term debt (31,700) (2,118,500) (1,416,700)
Proceeds from issuance of stock -- -- 7,520,000
Payment for registration filing fees -- -- (222,800)
----------- ---------- -----------
Net cash provided (used) by financing activities 1,617,800 (801,300) 8,253,700
----------- ---------- -----------
Net increase in cash and cash equivalents 6,724,800 6,917,000 3,497,100
Cash and cash equivalents at the beginning of the year 11,067,900 4,150,900 653,800
----------- ----------- -----------
Cash and cash equivalents at the end of the year $17,792,700 $11,067,900 $4,150,900
----------- ----------- -----------
----------- ----------- -----------
See accompanying notes
F-7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Enzo Biochem, Inc. (the "Company") is engaged in research, development,
manufacturing and marketing of diagnostic and research products based on
genetic engineering, biotechnology and molecular biology. These diagnostic
products will allow for the diagnosis of and/or screening for infectious
diseases, cancers, genetic defects and other medically pertinent diagnostic
information. The Company operates a clinical reference laboratory which
offers and provides diagnostic medical testing services to the health care
community. The Company also is conducting research and development activities
in the development of therapeutic products.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany transactions
and balances have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
Cash equivalents consist of short-term debt securities of the U.S. government
that the Company intends to hold to maturity which range from August 7, 1996
to September 30, 1996. The market values of these
securities, as determined by quoted sources, approximated cost at July 31,
1996 and 1995.
CONCENTRATION OF CREDIT RISK
Approximately 86% and 85% at July 31, 1996 and 1995, respectively, of the
Company's net accounts receivable relate to its clinical reference laboratory
business which operates in the New York Metropolitan area. Concentration of
credit risk with respect to accounts receivable are limited due to the
diversity of the Company's client base. However, the
F-8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
CONCENTRATION OF CREDIT RISK (CONT'D)
Company provides services to certain patients covered by various third-party
payors, including the Federal Medicare program. Revenue, net of contractual
allowances, from direct billings under the Federal Medicare program during each
of the fiscal years ended July 31, 1996, 1995 and 1994 approximated 14%, 12%
and 17%, respectively of revenue. The Company recorded an additional provision
for uncollectable accounts receivable of $3,500,000 based on trends that became
evident in the fourth quarter, that additional reserves were needed primarily
to cover lower collection rates under the Federal Medicare program and other
third-party payors. Management is not aware of any material claims, disputes
or settled matters concerning third-party reimbursement which would have a
material effect on the Company's financial statements.
In April, 1994, the Company signed a non-exclusive worldwide distribution and
supply agreement with Boehringer Mannheim Biochemicals. Under the terms of
this agreement, Boehringer Mannheim distributes to the global medical
research market, a broad range of biochemical products and reagents
manufactures and supplied by Enzo. The agreement includes products based on
nonradioactive. DNA probe technology and includes products that were
developed and marketed by Boehringer Mannheim prior to agreement, as well as
products developed by the Company, all of which are convered by Enzo patents.
The agreement took effect in April 1994 and entends of the life of the last
patent to expire for products involved. In February 1995, a distribution
agreement was signed with Amersham International and includes a broad group
of products developed and marketed by Amersham, as well as products developed
by Enzo Diagnostics. All products are based on nonradioactive DNA labeling
technoligies covered by Enzo patents.
At July 31, 1996 and 1995, 12% and 13% of the Company's net accounts
receivable relate to amounts due from Boehringer Mannheim and Amersham
collectively. Operating revenues from Boehringer Mannheim represented
approximately 25% and 22% of consolidated operating revenues in fiscal
1996 and 1995, respectively.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Equipment is being depreciated on the straight-line and accelerated methods
over the estimated useful lives of the assets. Leasehold improvements are
amortized over the term of the related leases or estimated useful lives of the
assets, whichever is shorter.
AMORTIZATION OF INTANGIBLE ASSETS
The cost in excess of fair value of net tangible assets acquired is being
amortized on the straight-line method over periods of twenty or forty years.
PATENT COSTS
The Company has filed applications for United States and foreign patents
covering certain aspects of its technology. The costs incurred in filing such
applications have been deferred and are amortized over the estimated useful
lives of the patents beginning upon issue. Costs related to unsuccessful
patent applications are expensed.
F-9
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
REVENUE RECOGNITION
Revenues from services from the clinical reference laboratory are recognized
when services are provided. The Company's revenue is based on amounts billed
or billable for services rendered, net of contractual adjustments and other
arrangements made with third-party payors to provide services at less than
established billing rates. Revenues from research product sales are recognized
when the products are shipped.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share has been computed based upon the weighted average
number of common shares and dilutive common stock equivalents outstanding
during the year. In fiscal 1996, common stock equivalents have not been
included because the effect of their inclusion would have been anti-dilutive.
The net income (loss) per share amounts for fiscal 1996, 1995 and 1994 have
been retroactively adjusted to reflect the 5% stock dividend declared in fiscal
1995 and for the 5% stock dividend declared in September 1996. For 1994,
shares issuable upon conversion of the 9% convertible subordinated debentures
are not common stock equivalents, are antidilutive and, therefore, are also
excluded from the computation of net income (loss) per share.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". This standard is effective for the Company's financial statements
beginning in the first quarter of fiscal 1997. SFAS No. 121 establishes the
accounting for the impairment of long-lived assets, certain identifiable
intangibles and the excess of cost over net assets acquired, related to those
assets to be held and used in operations, whereby impairment losses are
required to be recorded when indicators of impairment are present and the
undiscounted cash flows estimated to be
F-10
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
RECENTLY ISSUED ACCOUNTING STANDARDS (CONT'D)
generated by those assets are less than the assets carrying amount. SFAS No. 121
also addresses the accounting for long-lived assets and certain identifiable
intangibles that are expected to be disposed of. In the opinion of the
Company's management, it is anticipated that the adoption of SFAS No. 121
will not have a material effect on the consolidated results of operations or
financial condition of the Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires adoption of the disclosure provisions in fiscal
1997. The new standard defines a fair value method of accounting for the
issuance of stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. Pursuant to SFAS No. 123, companies are encouraged, but are
not required, to adopt the fair value method of accounting for employee stock-
based transactions. Companies are also permitted to continue to account for
such transactions under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," but would be required to disclose in a note to
the 1997 consolidated financial statements proforma net income and per share
amounts as if the Company had applied the new method of accounting. SFAS No.
123 also requires increased disclosures for stock-based compensation
arrangements. The Company has not yet determined if it will elect to change to
the fair value method or provide the necessary proforma information, nor has it
determined the effect the new standard will have on its operating and per share
results should it elect to make such change.
F-11
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 2 - SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS
Cash paid for interest reconciled to interest expense for the years ended July
31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
---- ---- ----
Cash paid for interest $27,100 $166,400 $165,700
Plus non cash items:
Increase (decrease) in accrued interest
payable. -- (30,000) (51,300)
------- -------- --------
Interest expense $27,100 $136,400 $114,400
======= ======== ========
In the years ended July 31, 1996, 1995 and 1994, the Company paid cash for
income taxes of approximately $1,323,000, $232,000 and $94,000 respectively,
and received refunds of income taxes previously paid of approximately $35,000
in fiscal 1996 and $27,000 in fiscal 1994.
OTHER NONCASH ITEMS:
During fiscal 1996, 1995 and 1994, the Company acquired property and equipment
in the amount of $ 0, $129,300 and $76,400, respectively, which was financed
through capital lease obligations.
During fiscal 1996, 1995 and 1994, approximately $1,418,000, $1,082,000 and
$282,000, respectively, has been accrued for construction costs, rent and legal
fees related to the New York City leasehold. Interest accretion on the capital
lease obligation for the New York City leasehold was approximately $ 0,
$318,000 and $331,000, for fiscal 1996, 1995 and 1994, respectively.
F-12
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 2 - SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS (CONT'D)
OTHER NONCASH ITEMS (CONT'D):
During fiscal 1994, Debentures of $262,000 were converted into 50,000 shares of
the Company's Common Stock. On January 13, 1995, the Company paid in full the
outstanding balance of the Debentures.
In fiscal 1994, the Company exchanged approximately $2,600,000 of accrued legal
fees, construction costs and patent costs for approximately 205,000 shares of
the Company's Common Stock. The Company also settled a lawsuit against the
former owners of its subsidiary, Enzo Clinical Labs, Inc., by issuing
approximately 190,000 shares with a market value of approximately $3,000,000
which was recorded against amounts due to former owners of $3,450,000 and the
difference of $450,000 was recorded as a reduction of cost in excess of fair
value of net tangible assets acquired. In fiscal 1995, the Company issued
approximately 286,000 shares of common stock in exchange for approximately
$2,900,000 in legal fees of which approximately $1,456,000 related to legal
fees incurred in fiscal 1995.
NOTE 3 - INVENTORIES
At July 31, 1996 and 1995 inventories consist of:
1996 1995
---- ----
Raw materials $74,000 $ 60,800
Work in process 1,232,000 1,508,200
Finished products 504,500 628,500
------- -------
$1,810,500 $2,197,500
========== ==========
F-13
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 4 - PROPERTY AND EQUIPMENT
At July 31, 1996 and 1995 property and equipment consist of:
1996 1995
---- ----
Laboratory machinery and equipment $1,964,100 $ 1,941,500
Leasehold improvements 2,194,300 2,146,200
Office furniture and equipment 3,639,000 3,422,400
--------- ---------
7,797,400 7,510,100
Accumulated depreciation and amortization 4,690,600 3,893,800
--------- ---------
3,106,800 3,616,300
Building under capital lease and related
construction costs, including
capitalized interest of $4,364,700
in 1995 and net of cumulative writedown
to estimated fair market value of
$19,901,000 in 1995 -- 10,275,900
--------- ----------
$3,106,800 $13,892,200
========== ===========
In the fourth quarter of fiscal 1995, management decided that it was not in
the best interests of the Company to continue further renovations on the
leasehold interest since the continuing expenses associated with such
renovations were not deemed justifiable in light of the uncertainty of
recoupment of such expenses and the likelihood of occupany was in question. A
decision was made to dispose of the leasehold interest as is, and an
independent appraisal of the leasehold interest on a liquidation basis
indicated that a writedown of the leasehold interest was required in the
amount of $11,400,000 which was recorded in the fourth quarter of fiscal 1995.
During fiscal 1996, the Company made extensive efforts to find a developer
for the leasehold interest and the Company commenced negotiations with the
City of New York to also assist the Company in identifying a buyer or
developer for the leasehold interest. Simultaneously, the Company commenced
negotations with the City for a full surrender of the leasehold interest back
to the City. Based on the limited interest in the leasehold by any developer,
the Company determined during the fourth quarter of fiscal 1996 that it was
in the best interests of the Company to negotiate a complete and full
settlement with the City and
F-14
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
on July 31, 1996, the Company negotiated a settlement with the City of New
York to relieve the Company from any further obligations related to the lease
and to return the building to the City and the Company agreed to pay the City
$2,950,000 in full settlement of all of the City's claims for unpaid taxes
and rent. The Company issued to the City 203,450 shares of the Company's
common stock in August 1996 in consideration of the settlement amount. If
the City has not received the net proceeds of $2,950,000 upon the sale of
such stock by March 17, 1997, the City shall return the remaining shares not
sold, if any, and the Company shall pay the difference in cash. The Company
would receive the net proceeds in excess of $2,950,000. The excess or
deficiency of the net proceeds received by the Company or paid to the City
shall be recorded to additional paid-in capital. As a result of this
settlement with the City, the Company incurred a charge against earnings in
the amount of approximately $7,613,000 in the fourth quarter of fiscal 1996
which was comprised of $6.2 million in write down of the net book value of
the leasehold property and the balance of $1.4 million is related to final
settlement for unpaid rent and real estate taxes on the property.
NOTE 5 - LOAN PAYABLE AND LONG-TERM DEBT
At July 31, 1996 and 1995, long-term debt consists of the following:
1996 1995
---- ----
8.75% loan payable to bank at $3,360
per month through 1998 $81,200 112,900
Less current portion 34,600 31,700
------ ------
Total long-term debt $46,600 $81,200
======= =======
NOTE 6 - LEASE OBLIGATIONS
CAPITAL LEASES
In December 1985, the Company entered into an agreement with the City of New
York to lease, over a fifty-year term, a building located in New York City. In
the fourth quarter of fiscal 1996, the Company negotiated a settlement with the
City of New York to relieve the Company from any further obligations related to
the lease and to return the building to the City (see Note 4).
The Company also leases certain office equipment and computers under capital
leases. The cost and accumulated amortization of assets acquired under
capitalized leases is approximately $259,000 and $144,000 at July 31, 1996 and
$3,529,000 and $94,000 at July 31, 1995, respectively.
F-15
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 6 - LEASE OBLIGATIONS (CONT'D)
OPERATING LEASES (CONT'D)
Minimum annual rentals under capital lease obligations for fiscal years ending
July 31 are as follows:
EQUIPMENT LEASES
1997 $ 37,700
1998 33,900
1999 33,900
2000 8,400
-----
Total of future annual
minimum lease payments 113,900
Less amount representing
interest 18,100
------
Present value of minimum
lease payments $ 95,800
========
OPERATING LEASES
Enzo Clinical Labs, Inc., ("Enzo Clinical Labs"), a wholly-owned subsidiary of
the Company, leases its office and laboratory space under several leases which
expire between September 1, 1994 and November 30, 2004. Certain officers of
the Company own the building which Enzo Clinical Labs uses as its main
facility. In addition to the minimum annual rentals of space, this lease is
subject to an escalation clause. Rent expense under this lease approximated
$751,000, $684,000 and $683,000 in fiscal 1996, 1995 and 1994, respectively.
Total consolidated rent expense incurred by the Company during fiscal 1996, 1995
and 1994 was approximately $1,227,000, $1,132,000 and $1,108,000, respectively.
Minimum annual rentals under operating lease commitments for fiscal years ending
July 31 are as follows:
1997 1,053,000
1998 1,129,000
1999 1,092,000
2000 1,094,000
2001 1,071,000
Thereafter 1,406,000
---------
$6,845,000
=========
F-16
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 7 - LITIGATION
ORTHO DIAGNOSTIC SYSTEMS, INC.
On January 1, 1985, the Company entered into a follow-on agreement with Ortho
Diagnostic Systems, Inc. ("Ortho"), a subsidiary of Johnson and Johnson, Inc.
("J&J") pursuant to the 1982 agreement, whereby Ortho agreed to pay the Company
$11,000,000 over a four and one-half year period on a cost recovery basis in
support of research and development projects. Ortho paid $4,500,000 to the
Company under this agreement up to January 1987 at which time Ortho indicated
its intention to suspend future scheduled payments under the agreements pending
resolution of certain matters. At July 31, 1994, the Company had a receivable
from Ortho of approximately $6,500,000. Even though the Company continued to
perform its obligations under the agreements, it provided a total of $6,500,000
in prior years for the potentially uncollectable receivable from Ortho pending
resolution of the disputed items and the outcome of the civil suit filed by the
Company against Ortho and J&J. This allowance for uncollectable receivable of
$6,500,000 was reversed in the fourth quarter of fiscal 1994 due to the
resolution of this matter, as discussed below.
The outside legal counsel was compensated on a contingency basis. During fiscal
1995, the Company issued approximately 110,000 shares in exchange for $1.1
million in accrued legal fees.
On October 19, 1994, the Company executed a settlement agreement with J&J
pursuant to which the Company received $15.0 million in cash, of which $6.5
million related to amounts due under the agreements referred to above, and a
promissory note requiring J&J Ortho to pay a total of $5.0 million a year for
each of the four successive anniversaries of said date. Pursuant to the terms
of the settlement, all of the Company's grants, licenses and intellectual
property have been returned to the Company in totality. These future payments
are recorded at their net present value of $14.1 million at July 31, 1996 in
the accompanying consolidated balance sheet, using a discount rate of 5.25%.
CALGENE, INC.
In March 1993, the Company filed suit in the United States District Court
for the District of Delaware charging patent infringement and acts of unfair
competition against Calgene, Inc. and seeking a declaratory judgment of
invalidity concerning Calgene, Inc.'s plant antisense patent. On February 9,
1994, the Company filed a second suit in the United States District Court for
the District of Delaware charging Calgene with infringement of a second
antisense patent owned by the Company. Calgene filed a counterclaim in the
second
F-17
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 7 - LITIGATION (CONT'D)
CALGENE, INC. (CONT'D)
Delaware action seeking a declaration that a third patent belonging to the
Company is invalid. The two Delaware actions were consolidated and were
tried to the Court in April 1995. In addition, the Company filed suit on
March 22, 1994 in the United States District Court for the Western District
of Washington against Calgene and the Fred Hutchinson Cancer Research Center,
alleging that the defendants had conspired to issue a false and misleading
press release regarding a supposed "patent license" from Hutchinson to
Calgene, and conspired to damage the Company's antisense patents by
improperly using confidential information to challenge them in the Patent
Office. The Complaint further charges that Hutchinson is infringing and
inducing Calgene to infringe the Company's antisense patents.
On February 2, 1996, the Delaware Court issued an opinion ruling against Enzo
and in favor of Calgene, finding certain Enzo claims infringed, but the patent,
as a whole not infringed, and finding the claims at issue for lack of
enablement. Calgene's patent was found valid (non-obvious) over the prior art.
On February 29, 1996, the Delaware Court issued an Order withdrawing its
February 2, 1996 Opinion. Enzo intends to appeal from any adverse judgment.
There can be no assurance that the Company will be successful in any of the
foregoing matters or that Calgene, Inc. and/or Hutchinson will not be
successful. However, even if the Company is not successful management does not
believe there will be a significant monetary impact.
NOTE 8 - INCOME TAXES
The tax provision (benefit) is calculated under the provisions in Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes".
1996 1995 1994
---- ---- ----
Current
Federal -- $400,000 --
State and local 199,100 881,900 $104,300
Deferred
Federal -- 5,650,000 --
State and local -- 1,799,300 (49,300)
Change in deferred tax asset
valuation reserve related
to net operating losses -- (4,600,000) (3,000,000)
-------- ----------- -----------
Provision (benefit) for income taxes $199,100 $4,131,200 $(2,945,000)
======== ========== ============
F-18
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 8 - INCOME TAXES (CONT'D)
Current income taxes provided for in fiscal 1996 relate primarily to state and
local taxes computed based upon capital.
Current income taxes of approximately $1,300,000 provided for in the fourth
quarter of fiscal 1995 are primarily calculated on the alternative minimum tax
method.
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
The components of deferred income taxes are as follows:
1996 1995 1994
---- ---- ----
Deferred tax liability:
Deferred patent costs $(2,037,000) $(2,076,000) $(2,110,000)
Other -- (310,000) (310,000)
----------- --------- ---------
Total deferred tax liabilities (2,037,000) (2,386,000) (2,420,000)
Deferred tax assets:
Writedown of leasehold interest -- 7,573,000 3,390,000
Provision for uncollectable
accounts receivable and
research contract 1,240,000 574,000 490,000
Net operating loss carryforwards 9,543,000 36,000 8,199,000
Alternative minimum tax credits 403,000 600,000 --
Other 422,000 352,000 282,000
------- ------- -------
11,608,000 9,135,000 12,361,000
Valuation allowance for deferred
tax assets (9,571,000) (6,749,000) (7,092,000)
----------- ----------- -----------
Net deferred tax asset (liability) $ 0 $ 0 $2,849,000
=========== =========== ==========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will be realized. The ultimate realization of the deferred tax asset is
dependent upon the generation of future taxable income. Management considers
scheduled reversals of deferred tax liabilities, projected future taxable
income and tax planning strategies which can be implemented by the Company in
making this assessment. The Company has provided a full valuation allowance
for the net deferred tax asset at July 31, 1996 and 1995. The
F-19
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 8 - INCOME TAXES (CONT'D)
decrease in the valuation allowance for deferred tax assets of $4,084,000 in
fiscal 1994 relates primarily to the expected utilization of net operating
loss carryforwards and deferred tax assets related to the Johnson & Johnson,
Inc. settlement (see Note 7).
The Company has net operating loss carryforwards of approximately $22.8
million which are due to expire in 2011. The Company also has alternative
minimum tax credits which are due to expire in 2001.
The provision (benefit) for income taxes were at rates different from U.S.
federal statutory rates for the following reasons:
1996 1995 1994
---- ---- ----
Federal statutory rate 34% 34% 34%
Expenses not deductible for income
tax return purposes (2%) 2% 7%
State income taxes, net of federal (2%) 10% 2%
No benefit for operating losses (33%) 44% (41%)
Change in valuation reserve related
to benefits from operating losses -- (48%) (139%)
---- ----- ------
(3%) 42% (137%)
==== === ======
NOTE 9 - STOCK OPTIONS AND WARRANTS
The Company has a nonqualified stock option plan, an incentive stock option
plan and a restricted stock incentive plan and has issued other options and
warrants, as described below. All share information has been adjusted to
reflect the 5% stock dividends declared on September 13, 1996 and June 5, 1995.
NONQUALIFIED STOCK OPTION PLAN
The Company has a nonqualified stock option plan (the "Plan") under which
options for up to 793,800 shares of Common Stock may be issued. No additional
options may be granted under such plan. The exercise price of options granted
under the terms of the Plan will be determined by the Board of Directors.
F-20
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 9 - STOCK OPTIONS AND WARRANTS (CONT'D)
A summary of nonqualified stock option transactions for the three years ended
July 31, 1996 is as follows:
NUMBER
OF SHARES EXERCISE PRICE
--------- --------------
Outstanding - July 31, 1993 168,384 $3.07
Exercised (13,892) $3.07
--------
Outstanding - July 31, 1994 and 1995 154,492 $3.07
Exercised (21,525) $3.07
--------
Outstanding - July 31, 1996 132,967 $3.07
=======
The options granted are generally exercisable at 25% per year after one year
and expire ten years after the date of grant and, at July 31, 1996 all
nonqualified options were exercisable.
INCENTIVE STOCK OPTION PLAN
The Company has an incentive stock option plan ("1983 plan") under which the
Company may grant options for up to 992,250 shares of common stock. No
additional options may be granted under the 1983 plan. The exercise price of
options granted under such plan is equal to or greater than fair market value
of the common stock on the date of grant. The Company has stock option plans
("1993 plan" and "1994 plan") under which the Company may grant options for up
to 1,653,750 shares (1993 plan) and for up to 1,047,375 shares (1994 plan) of
common stock. The options granted pursuant to the plans may be either
incentive stock options or nonstatutory options. To date, the Company
has only granted incentive stock
F-21
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 9 - STOCK OPTIONS AND WARRANTS (CONT'D)
options under these plans. A summary of incentive stock option transactions for
the three years ended July 31, 1996 is as follows:
NUMBER
OF SHARES EXERCISE PRICE
--------- --------------
Outstanding - July 31, 1993 1,118,055 $1.36 - 7.03
Exercised (42,557) $1.36 - 4.09
Canceled (140,079) $1.36 - 7.03
Issued 758,582 $8.96 - 14.52
-------
Outstanding - July 31, 1994 1,694,001 $1.36 - 14.52
Exercised (115,938) $1.36 - 7.03
Canceled (2,756) $3.07
Issued 298,778 $8.73 - 10.31
-------
Outstanding - July 31, 1995 1,874,085 $1.36 - 14.52
Exercised (117,210) $1.36 - 9.07
Canceled (67,961) $1.36 - 9.07
Issued 357,525 $13.57 - 18.81
-------
Outstanding - July 31, 1996 2,046,439 $1.36 - 18.81
=========
Incentive stock options generally become exercisable at 25% per year after
one year and expire ten years after the date of grant. At July 31, 1996,
under the incentive stock option plans 1,049,837 options were exercisable.
RESTRICTED STOCK INCENTIVE PLAN
The Company has a restricted stock incentive plan whereby the Company may
award up to 220,500 shares of its common stock. Under the terms of the plan,
any shares issued are restricted in regard to sales and transfers for a
period of five years after award. Such restrictions begin to expire at 25%
per year after the second year of ownership. As of July 31, 1996, the
Company has not awarded any shares of common stock under this plan.
F-22
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 9 - STOCK OPTIONS AND WARRANTS (CONT'D)
OTHER OPTIONS AND WARRANTS
In fiscal 1982, the Company issued 33,736 warrants in connection with the
sale of stock. These warrants were exercisable at $8.31 per share through
June 1996 of which 16,868 warrants were exercised in fiscal 1994 and in
fiscal 1996. As part of the restructuring of the Debenture in November 1991,
the Company issued additional warrants to purchase 283,343 shares of common
stock with an exercise price of $1.81 per share expiring ten years after the
date of issue. In fiscal 1996, 1995 and 1994, 7,140, 4410 and 92,059 of
these warrants were exercised, respectively. In connection with the issuance
of newly issued shares of the Company's Common Stock to a private investor in
fiscal 1994, the Company issued warrants to purchase 275,625 shares of common
stock with exercise prices ranging from $7.26 to $10.89 per share. In fiscal
1996, 1995 and 1994, 121,275, 110,250 and 44,100 of these warrants were
exercised, respectively. In fiscal 1996, the Company issued warrants to
purchase 85,575 shares of common stock with an exercise price ranging from
$9.51 to $16.67 per share which expire five years after the date of issue.
In fiscal 1996, 9,975 of these warrants were exercised and 12,075 were
cancelled.
* * * * *
As of July 31, 1996, the Company has reserved 4,334,058 shares under the
arrangements described above.
F-23
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 10 - COMMITMENTS
The Company has an exclusive licensing agreement to an invention covered by
licensed patents. Under this agreement, the Company is required to make
certain minimum royalty payments of $200,000 per year through the life of the
patents.
F-24
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
Note 11 - Lines of business
The Company operates two lines of business: (i) conducting research and development activity and selling products derived from
such research and (ii) operating clinical reference laboratories which provide diagnostic services to the health care community.
The following financial information (in thousands) with respect to such lines of business (industry segments) is based on the
guidelines contained in Statement of Financial Accounting Standards No. 14.
AT JULY 31, 1996 AND FOR AT JULY 31, 1995 AND FOR
THE YEAR THEN ENDED THE YEAR THEN ENDED
------------------- -------------------
RESEARCH CLINICAL RESEARCH CLINICAL
AND REFERENCE AND REFERENCE
DEVELOPMENT LABORITORIES TOTAL DEVELOPMENT LABORITORIES TOTAL
----------- ------------ ----- ----------- ------------ -----
Operating revenues:
Sales and diagnostic services $12,946 $21,544 $34,490 $9,548 $22,152 $31,700
======= ======= ======= ====== ======= =======
Operating profit (loss) $449 $124 $573 $479 $2,146 $2,625
==== ==== ==== ======
Investment income 1,667 1,077
Corporate expenses (2,135) (4,413)
Writedown of leasehold interest
and related costs (7,613) (11,400)
Recovery of research contract
receivable -- --
Litigation settlement, net of
legal fees -- 21,860
------ ------
Income (loss) before provision
(benefit) for taxes on income
and extraordinary items $(7,508) $9,749
======= ======
Identifiable assets $22,309 $22,731 $45,040 $27,196 $23,867 (a) $51,063
======= ======= ======= =======
Corporate assets, principally
cash and cash equivalents,
short-term investments,
deferred financing costs,
building under capital leases
and funds held in escrow 17,798 21,395
------ ------
$62,838 $72,458
======= =======
Depreciation and amortization $576 $1,236 $1,812 $514 $1,202 $1,716
==== ====== ====== ==== ====== ======
Property and equipment
expenditures $45 $388 $433 $41 $989 $1,030
=== ==== === ====
Corporate property and
equipment expenditures 266 132
--- ---
$699 $1,162
==== ======
F-25
AT JULY 31, 1994 AND FOR
THE YEAR THEN ENDED
-------------------
RESEARCH CLINICAL
AND REFERENCE
DEVELOPMENT LABORITORIES TOTAL
----------- ------------ -----
Operating revenues:
Sales and diagnostic services $5,183 $17,616 $22,799
====== ======= =======
Operating profit (loss) ($493) ($659) ($1,152)
====== =======
Investment income 202
Corporate expenses (2,794)
Writedown of leasehold interest
and related costs (600)
Recovery of research contract
receivable 6,500
Litigation settlement, net of
legal fees --
------
Income (loss) before provision
(benefit) for taxes on income
and extraordinary items $2,156
======
Identifiable assets $17,261 $20,393 (a) $37,654
======= =======
Corporate assets, principally
cash and cash equivalents,
short-term investments,
deferred financing costs,
building under capital leases
and funds held in escrow 27,389
------
$65,043
=======
Depreciation and amortization $484 $1,061 $1,545
==== ====== ======
Property and equipment
expenditures $16 $839 $855
=== ====
Corporate property and
equipment expenditures 930
----
$1,785
======
(a) Includes cost in excess of fair value of net tangible assets acquired of
$9,675 in 1996, $10,046 in 1995, and $10,391 in 1994.
F-25 (cont.)
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 12 - EMPLOYEE BENEFIT PLAN
The Company has a qualified Salary Reduction Profit Sharing Plan (the "Plan")
for eligible employees under Section 401(k) of the Internal Revenue Code. The
Plan provides for voluntary employee contributions through salary reduction and
voluntary employer contributions at the discretion of the Company. For the
years ended July 31, 1996, 1995 and 1994, the Company has authorized employer
contributions of 25% of the employees' contribution up to 6% of the employees'
compensation in Enzo Biochem, Inc. common stock. The 401(k) employer
contributions expense converted into the Company's common stock was $145,800 in
fiscal year 1996. The 401(k) employer contribution expense in 1995 and 1994
was not material.
NOTE 13 - SUPPLEMENTARY EARNINGS PER SHARE
The Company converted $262,000 in principal of the Company's outstanding
Debentures into 52,500 shares of Common Stock in 1994. Pro forma earnings per
share information as if the conversion had occurred at the beginning of the
period would be as follows:
1994
----
Income before extraordinary items $.22
Extraordinary items .01
-----
Net income $.23
====
Weighted average common shares 22,632,800
==========
NOTE 14 - STOCK DIVIDEND
On June 5, 1995, the Company declared a 5% stock dividend paid July 31, 1995 to
shareholders of record as of July 3, 1995. The stock price on the date of
declaration was $10.125. The dividend has been charged against accumulated
deficit to the extent of net income in fiscal 1995. On September 13, 1996, the
Company declared another 5% stock dividend payable on October 29, 1996 to
shareholders of record as of October 8, 1996.
F-26
ENZO BIOCHEM, INC.
SCHEDULE II - VALUATION
AND QUALIFYING ACCOUNTS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
ADDITIONS
---------
BALANCE AT CHARGED CHARGED
BEGINNING TO COSTS TO OTHER (ADDITIONS) BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ----------- ---------- ------------ -------- ----------- -------------
1996
Allowance for doubtful accounts
receivable $2,127,000 $6,702,900 - $3,431,900(1) $5,398,000
Allowance for deferred tax
valuation $6,749,000 - - $(2,822,000) $9,571,000
1995
Allowance for doubtful accounts
receivable $1,956,000 $3,845,600 - $3,674,600(1) $2,127,000
Allowance for deferred tax valuation $7,092,000 - - $343,000(1) $6,749,000
1994
Allowance for doubtful accounts
receivables $2,016,000 $3,504,300 - $3,564,300(1) $1,956,000
Allowance for deferred tax valuation $11,176,000 - - $4,084,000 $7,092,000
Allowance for doubtful research
contract receivable $6,500,000 - - $6,500,000(2) $ -
(1) Write-off of uncollectable accounts receivable.
(2) Recovery of research contract receivable.
F-27