UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2003
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ___________________
Commission File Number 001-09974
ENZO BIOCHEM, INC.
-------------------
(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)
(631) 755-5500
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(Title of each class) (Name of each exchange on which registered)
Common Stock, $.01 par value The New York Stock Exchange
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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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [_]
The aggregate market value of the Common Stock held by non-affiliates
computed by reference to the price at which the Common Stock was last sold as of
January 31, 2003, the last business of the registrant's most recently completed
second fiscal quarter, was approximately $307,851,100. As of October 7, 2003,
the Registrant had 30,007,298 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders
in connection with the Annual Meeting of Shareholders to be held January 14,
2004 are incorporated by reference into Part III.
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PART I
Item 1. BUSINESS
OVERVIEW
Enzo Biochem, Inc. (the "Company" or "Enzo") is a leading life sciences and
biotechnology company focused on harnessing genetic processes to develop
research tools, diagnostics and therapeutics. Enzo also provides diagnostic
services to the medical community. Since our formation in 1976, we have
concentrated on developing enabling technologies for detecting and identifying
genes and for modifying gene expression. These technologies are generally
applicable for the diagnosis of infectious and other diseases and form the basis
for a portfolio of over 300 products marketed to the biomedical and
pharmaceutical research markets. We are further using these technologies as a
platform for our planned entry into the clinical diagnostics market. In
addition, our work in gene analysis has led to our development of significant
therapeutic product candidates, several of which are currently in clinical
trials, and several are in preclinical studies. In the course of our research
and development activities, we have built what we believe is a significant
patent position (comprised of 42 issued U.S. patents, over 190 issued foreign
patents and various pending applications worldwide) around our core
technologies.
The business activities of the Company are performed by one of the
Company's three wholly owned subsidiaries--Enzo Life Sciences, Inc., Enzo
Therapeutics, Inc., and Enzo Clinical Labs, Inc. These activities are: (1)
research and development, manufacturing and marketing of biomedical research
products and tools through Enzo Life Sciences and research and development of
therapeutic products through Enzo Therapeutics, and (2) the operation of a
clinical reference laboratory through Enzo Clinical Labs. For information
relating to the Company's business segments, see Note 13 of the Notes to
Consolidated Financial Statements.
The Company's primary sources of revenue have historically been from sales
of research products utilized in life science research and from the clinical
laboratory services provided to the healthcare community. For the fiscal years
ended July 31, 2003 and 2002, respectively, approximately 44% and 48% of the
Company's operating revenues were derived from product sales and approximately
56% and 52% were derived from clinical reference laboratory services.
MARKETS
BACKGROUND
DNA is the source of biological information that governs the molecular
mechanisms underlying life. This information is stored in the linear sequences
of nucleotides that comprise DNA. The sequence of the human genome, comprising
over 30,000 genes, has been identified. The challenge for the next decade will
be the determination of the function and relevance of each gene. This
information will facilitate the understanding of biological mechanisms and how
variations and mutations in such mechanisms result in disease, enabling more
rapid and accurate detection of specific diseases and the development of new
therapeutics to treat them.
TOOLS FOR BIOMEDICAL AND PHARMACEUTICAL RESEARCH
There is an increasing demand by biomedical and pharmaceutical researchers
for tools that both facilitate and accelerate the generation of biological
information. In response to this demand, a variety of formats, or tools, have
been developed that allow researchers to study biological pathways and to
identify mutations in gene sequences and variations in gene expression levels
that can lead to disease. These tools include DNA sequencing instruments,
micro-arrays, biochips, micro-spheres, and microfluidic chips. Common among
these formats is the need for reagents that allow the identification,
quantification and characterization of specific genes or nucleic acid sequences.
We believe this market will grow rapidly as a result of:
o research spending by academic, government and private organizations to
determine the function and clinical relevance of the gene sequences
identified by the Human Genome Project;
o development of commercial applications based on information derived from
this research; and
o ongoing advancements in tools that accelerate these research and
development activities.
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CLINICAL DIAGNOSTICS
The clinical diagnostics market, currently has been reported by industry
sources to be a greater than $20 billion. It is comprised of a broad range of
tests such as clinical chemistry, microbiology, immunoassay, blood screening and
cancer screening. Many of these tests employ traditional technologies, such as
immunoassays and cell culture technologies, for the detection of diseases.
Immunoassays use antibodies directed against a specific target, or antigen, to
detect that antigen in a patient sample. Cell culturing uses nutrients media to
grow, isolate and visually detect the presence of microorganisms.
There are several drawbacks to these technologies. Immunoassays do not
allow for early detection of diseases because they require minimum levels of
antigens to be produced by the microorganism for detection. These levels vary by
microorganism, and the delay involved could be several days or several years, as
seen in HIV/AIDS. Cell cultures are slow, labor intensive and not amenable to
all microorganisms. For example, gonorrhea and chlamydia are difficult to
culture.
Gene-based diagnostics have many advantages over traditional technologies.
Since gene-based diagnostics focus on the identification of diseases at the gene
level, they can identify the presence of the disease at its earliest stage of
manifestation in the body. These tests provide results more rapidly, are
applicable to a broad spectrum of microorganisms and can easily be automated in
a multiplex platform.
Several advances in technology are accelerating the adoption of gene-based
diagnostics in clinical laboratories. These advances include high through put
automated formats that minimize labor costs, non-radioactive probes and reagents
that are safe to handle, and amplification technologies that improve the
sensitivity of such diagnostics.
According to recognized industry sources, the market for molecular
diagnostic tools, assays and other products was thought to be $1.9 billion in
2002, growing to $3.1 billion in 2005 as a result of:
o rising number of diagnostic tests being developed from discoveries in
genome research;
o advances in formats and other technologies that automate and accelerate
gene-based diagnostic testing;
o growing emphasis by the health-care industry on early diagnosis and
treatment of disease; and
o application of gene-based diagnostics as tools to match therapies to
specific patient genetics, commonly referred to as pharmacogenomics.
THERAPEUTICS
Most diseases are the consequence of the expression of foreign genes, such
as those residing in viruses and pathogenic organisms, or the abnormal or
unregulated expression of the body's own genes. In other cases, it is the
failure to express a gene that causes the disease. Recent advancements in gene
analysis have provided the information and tools necessary to develop drugs that
intervene in the disease process at the gene level. For a broad spectrum of
diseases, this approach can be more precise and effective than intervening in
the downstream molecular processes of the disease. Therapies targeting genetic
processes are called gene medicines. There are two fundamental approaches to
gene medicines, synthetic and genetic.
Synthetic gene medicine involves the administration of synthetic nucleic
acid sequences called "oligos" that are designed to bind to, and thus
deactivate, RNA produced by a gene. To date, this approach has demonstrated
limited success. Since a single cell may contain thousands of strands of RNA,
large amounts of oligos are necessary to shut down the production of unwanted
proteins. Also, since oligos are synthetic, they are quickly metabolized or
eliminated by the body. As a result, large quantities of oligos must be
delivered in multiple treatments, which can be both toxic to the body as well as
costly.
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Genetic medicine or gene therapies involve the insertion of a gene into a
cell. The inserted gene biologically manufactures the therapy on an ongoing
basis. This gene may be inserted to enable a beneficial effect or to disable a
pathological mechanism within the cell. For example, the gene may be inserted to
replace a missing or malfunctioning gene responsible for synthesizing an
essential protein. On the other hand, a gene coding for a molecule to deactivate
either an overactive gene or a gene producing an unwanted protein may be
inserted. As a permanent addition to the cellular DNA, the inserted gene
produces RNA and/or proteins where needed.
A major challenge in designing gene therapy medicines has been the
efficient and safe delivery of the gene to the appropriate target cell. Gene
delivery is often accomplished using a delivery vehicle known as a vector. A
critical quality of the vector is its ability to bind to the target cell and
effectively delivers, or transduce, the gene into the cell. It is also critical
that the DNA of the vector not produce proteins or antigens that can trigger an
adverse immune response.
STRATEGY
Our objective is to be the leading developer and provider of medicines, as
well as the tools and diagnostics used to study and detect disease at the
molecular level. There can be no assurances that our objective will be met. Key
elements of our strategy include:
APPLY OUR INNOVATIVE TECHNOLOGY TO THE INFECTIOUS DISEASE MARKET
Our core technologies have broad diagnostic and therapeutic applications.
We have initially focused our efforts on the infectious disease market.
Infectious diseases are among the largest contributors of healthcare costs
worldwide. Generally, there are no long-term effective treatments for viral
pathogens as there are for bacterial pathogens. We have developed novel
technologies we believe can serve as enabling platforms for developing medicines
that genetically target and inhibit viral functions, as well as regulate immune
response. In addition to such therapeutic products, we have capitalized on our
nucleic acid labeling, amplification and detection technologies to develop
diagnostic and monitoring tests for infectious agents.
MAXIMIZE OUR RESOURCES BY COLLABORATING WITH OTHERS IN RESEARCH AND
COMMERCIALIZATION ACTIVITIES
We enter into research collaborations with leading academic and other
research centers to augment our core expertise on specific programs. We have
research collaborations with, among others, Hadassah University Hospital in
Jerusalem, Israel regarding immune regulation and Cornell University regarding
the application of our genetic antisense technology to HIV. Similarly, we seek
to fully exploit the commercial value of our technology by partnering with
for-profit enterprises in areas outside our primary commercial interests.
APPLY OUR BIOMEDICAL RESEARCH PRODUCTS TO THE CLINICAL DIAGNOSTICS MARKET
We intend to apply our gene-based tests to the clinical diagnostics market.
We currently offer over 25 gene-based tests for the research market, for the
identification of such viruses as Human Papillomavirus, Cytomegalovirus, and
Epstein-Barr virus. We also have an extensive library of probes for the
detection of various diseases. We have developed a standardized testing format
that permits multiple diagnoses to be performed on the same specimen and are in
discussions with third parties to develop instrumentation for this purpose.
LEVERAGE MARKETING AND DISTRIBUTION INFRASTRUCTURE OF LEADING LIFE SCIENCES
COMPANIES
In addition to our direct sales, we distribute our research products
through leading producers of gene analysis formats and other life sciences
companies. By partnering with these industry leaders, we are able to leverage
their established marketing and distribution infrastructure to expand the market
for our products. During fiscal 2003, we have distribution agreements with,
among others, Roche Diagnostic Systems, Amersham PLC, Perkin-Elmer Life Sciences
and Affymetrix, Inc. The Company gave notice on October 28, 2003 that it was
terminating its agreement with Affymetrix effective November 12, 2003. See Item
3. Legal Proceedings.
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EXPANDING AND PROTECTING OUR INTELLECTUAL PROPERTY ESTATE
Since our inception, we have followed a strategy to create a broad
encompassing patent position in the life sciences and therapeutics areas. We
have made obtaining patent protection a central strategic policy, both with
respect to our proprietary platform technologies and products, as well as
broadly in the areas of our research activities.
CORE TECHNOLOGIES
We have developed a portfolio of proprietary technologies with a variety of
research, diagnostic and therapeutic applications.
GENE ANALYSIS TECHNOLOGY
All gene-based testing is premised on the knowledge that DNA forms a double
helix comprised of two complementary strands that match and bind to each other.
If a complementary piece of DNA (a probe) is introduced into a sample containing
its matching DNA, it will bind to, or hybridize, to form a double helix with
that DNA. Gene-based testing is carried out by:
o amplification of the target DNA sequence (a process that is essential for
the detection of very small amounts of nucleic acid);
o labeling the probe with a marker that generates a detectable signal upon
hybridization;
o addition of the probe to the sample containing the DNA; and
o binding or hybridization of the probe to the target DNA sequence, if
present, to generate a detectable signal.
We have developed a broad technology base for the labeling, detection,
amplification and formatting of nucleic acids for gene analysis. We believe we
have a significant proprietary position in these fields.
NON-RADIOACTIVE LABELING AND DETECTION. Traditionally, nucleic acid probes
were labeled with radioactive isotopes. However, radioactively labeled probes
have a number of shortcomings. They are unstable and consequently have a limited
shelf life. They are potentially hazardous, resulting in restrictive licensing
requirements and safety precautions for preparation, use and disposal. Finally,
radioactive components are expensive. Our technologies permit gene analysis
without the problems associated with radioactively labeled probes and are
adaptable to a wide variety of formats.
FORMATS. There are various processes, or formats, for performing
probe-based tests. In certain formats, the probe is introduced to a target
sample affixed to a solid matrix; in others the probe is combined with the
sample in solution (homogeneous assay). Solid matrix assays include: in situ
assays in which the probe reaction takes place directly on a microscope slide;
dot blot assays in which the target DNA is fixed to a membrane; and microplate
and microarray assays in which the DNA is fixed on a solid surface, and the
reaction can be quantified by instrumentation.
AMPLIFICATION. In the early stages of infection, a pathogen may be present
in very small amounts and consequently may be difficult to detect. Using DNA
amplification, samples can be treated to cause a pathogen's DNA to be
replicated, or amplified, to detectable levels. We have developed a proprietary
amplification process for multicopy production of nucleic acid, as well as
proprietary techniques for amplifying the signals of our probes to further
improve sensitivity. Our amplification technologies are particularly useful for
the early detection of very small amounts of target DNA and, unlike PCR,
(currently the most commonly used method of amplification,) we have developed
isothermal amplification procedures that can be performed at constant
temperatures and thus do not require expensive heating and cooling systems or
specialized heat-resistant enzymes.
THERAPEUTIC TECHNOLOGY PLATFORMS
We have developed proprietary technologies in the areas of genetic
antisense (antisense RNA) and immune regulation that we are using as a platform
for a portfolio of novel therapeutics.
GENE REGULATION TECHNOLOGY. We are pursuing a novel approach to gene
regulation known as genetic antisense or antisense RNA. Our technology involves
the introduction into cellular DNA of a gene that codes for an RNA molecule that
binds to, and thus deactivates, RNA produced by a specific gene. To deliver our
antisense gene to the target cell, we have developed proprietary vector
technology. Our vector technology has the following three strengths:
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o EFFICIENT TRANSDUCTION. A principal problem to date of most gene therapy
programs has been inefficient transduction, or an unacceptably low rate of
delivery of operating genes to the target cells. We have achieved transduction
rates significantly higher than those reported by other researchers.
o IMMUNOLOGICALLY "QUIET." Transduced cells often produce non-essential
proteins that trigger an immune response, causing such cells to be cleared from
the body before they can produce a therapeutic effect. Cells transduced with our
Stealth Vectors(TM) have not expressed extraneous proteins.
o "SMART" VECTORS. We incorporate into the surface of our vectors proteins
that have an affinity for the surface of the cell types intended to be
transduced. By including this targeting mechanism, we create in essence "smart"
vectors that preferentially transduce the intended cell type. This may
ultimately permit us to develop a genetic antisense product that is administered
directly to the patient.
We believe that our vector technology has broad applicability in the field
of gene medicine. This can be attributed to the following properties of our
construct:
o the viral promoters are inactivated;
o insertional gene activation is prevented - a major safety factor;
o chromosomal integration;
o nuclear localization
IMMUNE REGULATION TECHNOLOGY. We have developed a novel therapeutic
approach based on immune regulation. Our immune regulation technology seeks to
control an individual's immune response to a specific antigen in the body. An
antigen is a substance that the body perceives is foreign and, consequently,
against which the body mounts an immune response. We are developing our
technology to treat immune-mediated diseases, infectious diseases and
complications arising from transplantation. Our technology utilizes oral
administration of known proteins to regulate the subject's immune response
against the antigen. Specific formulations of the protein are administered
orally to the patient according to precise dosing protocols.
We have filed patent applications relating to this technology, as well as
to our therapeutics and protocols under development, relating to areas of
infectious diseases and immunological adjustments and enhancements
characteristic of this reaction. We are applying our expertise in immune
regulation to develop proprietary therapeutics for the treatment of a variety of
diseases, including HIV-1 infection, chronic active hepatitis caused by HBV and
HCV infection, graft versus host disease and inflammatory bowel disease,
including Crohn's Disease and ulcerative colitis.
PRODUCTS AND SERVICES
We are applying our core technologies to develop novel therapeutics as well
as research tools for the life sciences and clinical diagnostics markets. In
addition, we provide clinical laboratory services to physicians and other health
care providers in the greater New York area.
RESEARCH AND DIAGNOSTIC PRODUCTS
We are a leading developer and marketer of novel research tools for gene
analysis. We manufacture over 300 products that may be sold individually or
combined in a kit to meet the specific needs of the researcher. We market these
products to biomedical and pharmaceutical firms worldwide. We have summarized
our products into the following major categories:
PRE-FORMATTED IN SITU KITS. Our pre-formatted IN SITU kits include all of
the components necessary to identify or detect a gene in a cell or tissue on a
glass slide. These components include specific labeled non-radioactive nucleic
acid probes on a glass slide, signaling reagents and buffers. We offer probes
that will detect a variety of infectious agents, such as human papillomavirus
(HPV), HBV, cytomegalovirus (CMV) and chlamydia. We market these kits under the
PATHOGENE(R) brand name. These kits target the pathology market.
PRE-FORMATTED MICROPLATE KITS. Our pre-formatted microplate kits include
all of the components necessary to identify or detect a gene in a microplate
assay. These components include specific labeled non-radioactive nucleic acid
probes on a microplate, signaling reagents and buffers. We offer probes that
will detect a variety of infectious agents, such as HIV, HBV and tuberculosis.
This microplate format enables the development of probe-based tests that can be
readily automated and quantified.
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MEMBRANE KITS. Our membrane kits include all of the reagents and buffers
necessary to perform a gene analysis on a membrane. The researcher will supply
the probe required for their individual needs. Membrane technology is broadly
used in life sciences research. We market these kits under the MAXSENSE(R) brand
name.
LABELED PROBES. We have developed a line of non-radioactive nucleic acid
probes that have been chemically-labeled to allow detection of infectious
agents. We offer labeled probes that can detect such infectious agents as
adenovirus, HBV, cytomegalovirus (CMV), herpes simplex virus (HSV) and
chlamydia, as well as certain oncogenes. These probes can be used in
hybridization and detection assays in the format chosen by the researcher. These
probes are broadly sold into the life sciences research market under the
BIOPROBE(R) brand name.
LABELING AND SIGNALING REAGENTS. We have developed an extensive line of
nucleic acid labeling and detections reagent and kits that are designed for the
life sciences research market. The products are used by scientists to identify
and detect genes on certain formats. Our line of kits for the labeling of
nucleic acids for the study of specific gene expression are marketed under the
BIOARRAY(R) brand name.
Research product revenue from one major distributor represented
approximately 22%, 23% and 12% of the consolidated revenues in fiscal 2003, 2002
and 2001, respectively, under a non-exclusive distribution and supply agreement.
Research product revenue from this one major distributor accounted for
approximately 50% and 49% of the Company's total research product revenues in
fiscal 2003 and 2002, respectively. At July 31, 2003 and 2002, 0% and 18%
respectively of the Company's net accounts receivable relate to amounts due from
the one major distributor.
THERAPEUTIC DEVELOPMENT PROGRAMS
We have a number of therapeutic products in various stages of development
that are based on our proprietary genetic antisense and immune regulation
technologies. Our therapeutic programs are described below.
HUMAN IMMUNODEFICIENCY VIRUS (HIV-1). We are developing complementary HIV-1
therapeutics utilizing both our genetic antisense and immune regulation
technologies.
HIV-1 is a human pathogenic virus. After infection it runs a slow course in
which certain of the cells in the immune system (CD4+ cells) progressively
disappear from the body. This results in a state in which the infected person
can no longer mount an immune response. This loss of immune responsiveness is
the cause of the complex of diseases known as AIDS and ultimately of death.
According to the World Health Organization, there were 42 million
individuals worldwide living with HIV infection during 2002. There were 5
million new infections and 3.1 million deaths from HIV during that same year. At
present, two classes of products have received FDA marketing approval for HIV-1
infection: reverse transcriptase inhibitors and protease inhibitors. These drugs
are typically used in combination and may require more than a dozen tablets to
be taken at specific times each day. The cost for treatment of HIV infected
individuals, once the disease has progressed to AIDS, is estimated to exceed
$38,000 per person annually.
While combination therapy slows the progression of disease, it is not a
cure. HIV's rapid rate of mutation results in the development of viral strains
that no longer respond to these medications. This problem is often exacerbated
by interruptions in dosing, as non-compliance is common in patients on
combination therapies. Moreover, currently approved drugs produce toxic
side-effects in many patients, affecting a variety of organs and tissues,
including the peripheral nervous system and gastrointestinal tract, which
side-effects also often result in patients interrupting or discontinuing
therapy.
HGTV43(TM) GENE MEDICINE. HGTV43 is Enzo's proprietary STEALTHVECTOR(TM)
carrying anti-HIV-1 antisense RNA genes directed against the genes responsible
for viral replication. HGTV43 is designed to deliver the antisense genes to
targeted blood cells of subjects infected with HIV-1. These genes are
incorporated into the DNA of the blood cells, and subsequent production of the
antisense RNA prevents replication of the virus, providing resistance to the
virus.
Preclinical IN VITRO studies, performed in conjunction with our academic
collaborators, demonstrated resistance to HIV-1 in human immune cells into which
the antisense genes had been inserted. Our Phase I clinical trial of the HIV-1
gene medicine is in the follow up phase. In this study, white blood cell
precursors, known as stem cells, were collected from the subjects. These stem
cells were then treated EX VIVO with our Stealth Vector(R) HGTV43 transducing
vector and infused into the subject. Results of the trial have shown that all
subjects tolerated the procedure and that anti-HIV-1 antisense RNA continued to
be expressed in the subjects' circulating white blood cells, the longest running
subject at 48 months to date.
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o all subjects tolerated the procedure;
o anti HIV-1 antisense RNA was detected in the circulation of subjects,
the longest at 48 months to date;
o purified CD4+ cells from all evaluable subjects were tested for the
presence of anti HIV-1 antisense RNA and these cells contained the
antisense RNA;
o CD34+ cells from the bone marrow of all subjects were tested for the
presence of anti HIV-1 antisense RNA between 6 months and 20 months
after infusion and these cells contained the antisense RNA.
Based on these Phase I trial results demonstrating long-term survival and
functioning of antisense RNA in white blood cells, including CD4+ cells, we are
preparing for the next phase of the study in which we will test strategies to
increase the percentage of CD4+ cells that contain the anti-HIV-1 antisense
genes.
One arm of the next phase of clinical trials is expected to be conducted at
New York Presbyterian Hospital-Cornell Medical Center. Enzo's protocol for this
phase of the study was successfully presented to and approved by the National
Institutes of Health Recombinant DNA Advisory Committee (RAC) and Cornell's
Institutional Review Board ("IRB".) The Cornell site will focus on a strategy to
increase the percentage of engineered CD4+ cells by using a combination of
radiation and immune conditioning. We anticipate beginning expanded studies of
the trial at additional sites.
IMMUNE REGULATION PRODUCT. We are developing a complementary approach to
treat HIV infection and the related autoimmune aspect of the disease. It is
suggested that this autoimmune aspect may lead to depletion of CD4+ cells. This
therapeutic approach utilizes our immune regulation technology to adjust and
enhance the body's immune response to the virus. This treatment, consisting of
oral administration of an HIV protein, is designed to reduce or eliminate the
autoimmune aspect of HIV infection. In addition, it enhances the antiviral
immune response, which may increase the population of CD4+ cells in the patient.
This program is currently in pre-clinical development.
HEPATITIS B (HBV). We are developing HBV therapeutics utilizing both our
proprietary immune regulation technologies.
HBV is a viral pathogen that can lead to a condition in which the body
destroys its own liver cells through an immune response. This condition is
commonly referred to as chronic active hepatitis. According to the latest
figures published by the World Health Organization, approximately 2 billion
people are infected by HBV, of whom an estimated 350 million are chronically
infected and therefore at risk of death from liver disease.
Chronic active hepatitis is generally treated with interferon or
lamivudine. Both of these drugs, however, are toxic, and many patients cannot
tolerate their side effects. These treatments have a limited success rate
(5-15%).
EHT899 IMMUNE REGULATION PRODUCT. EHT899 is a proprietary formulation of an
HBV viral protein designed to eliminate the undesirable immune response elicited
by the HBV infection. It also apparently enhances a secondary immune response to
clear the viral infection, resulting in reduction in liver damage and decrease
in viral load.
In a clinical trial, conducted at the Liver Unit of Hadassah-Hebrew
University Medical Center, in Jerusalem, Israel, a formulation of EHT899 was
administered orally to a total of 42 subjects with chronic active hepatitis.
Subjects received the medication three times a week for 20 - 30 weeks and were
followed for an additional 20 weeks. Results of the trial have shown that:
o the drug was well tolerated in all subjects;
o 46% of subjects showed a decrease in HBV viral load and improvement in
liver function tests;
o 33% of subjects showed a decrease in inflammation seen on liver biopsy;
Based on these results, the Company is going forward to bring the
manufacturing in house preparing to begin a multi-center Phase II random-label
double blind clinical study.
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Preclinical animal studies with EHT899 showed that this medication was able
to achieve complete suppression of HBV-associated human liver cancer and
significantly reduced mortality in laboratory mice. These studies may have
significant potential application for treatment of liver and other cancers in
humans.
HEPATITIS C (HCV EHC18). We are using our proprietary immune regulation
technology in the development of a treatment for HCV. This disease affects
approximately 170 million people worldwide, including 3.9 million in the U.S.,
of which approximately 69%, or 2.7 million, are chronically infected, according
to the National Center for Infectious Diseases. Approximately 30,000 new
infections are recorded each year in the U.S. About 85% of people infected with
HCV are reported to develop chronic hepatitis, and about 20% develop cirrhosis,
an incurable disease, with approximately half of these cases progressing to
end-stage liver disease, including liver cancer. It has been predicted that
HCV-related deaths in the U.S. may soon overtake the number of AIDS-related
deaths in the U.S.
The Phase I clinical trial conducted by physicians at the Liver Unit of
Hadassah University Medical Center in Jerusalem, Israel has met its safety
endpoints. Enzo is currently looking to the next level of study.
INFLAMMATORY BOWEL DISEASES. We are applying our immune regulation
technology to treat inflammatory bowel disease (IBD), including ulcerative
colitis and Crohn's Disease. According to the Inflammatory Bowel Disease
Foundation, approximately one million persons in the United States suffer from
IBD. Although the cause of these disorders remains unknown, various features
suggest immune system involvement in their pathogenesis.
There is currently no effective treatment for these diseases. Human
subjects are managed during short-term episodes through the use of
anti-inflammatory medications, or immunosuppressants, that provide symptomatic
relief over short periods of time, but do not provide a cure. These drugs are
all based on a generalized suppression of the immune response and are
non-specific. As such, they have considerable side effects and cannot be used
for long periods of time because of their inherent toxicity.
Enzo is currently conducting a Phase II randomized double-blind clinical
trial of our innovative immune regulation medicine for treatment of Crohn's
Disease. This current trial follows a successful open label Phase I study in
which the drug was administered to ten human subjects. During the course of the
treatment, all human subjects showed a clinical response to the treatment. The
treatment is based on successful preclinical results achieved in an animal model
system. The preclinical study results showed that when laboratory animals with
experimentally induced colitis were given specific proteins by oral
administration, a remission of the condition was seen. The experimental animals
exhibited a marked amelioration of the symptoms, including significant reduction
in tissue inflammation, as well as a decrease in the levels of gamma interferon
in the serum, both indicative of remission.
GRAFT VERSUS HOST DISEASE. We are applying our immune regulation technology
to treat graft versus host disease. Graft versus Host Disease (GvHD) is a major
complication of bone marrow and stem cell transplantation accounting for many of
the failures of these transplant procedures. GvHD is characterized by an immune
response mounted by the immune cells within the engrafted tissue against the
recipient that leads to a wasting syndrome and occasionally death. It is
estimated that there are only 15,000 bone marrow transplants performed annually
worldwide due, in part, to GvHD. It is assumed that the elimination of GvHD
would lead to a dramatic rise in the number of these procedures. GvHD is
currently treated by immunosuppressant drugs, which are toxic and only reduce
the extent of the wasting reaction.
We are conducting pre-clinical and animal studies at Hadassah University
Hospital. The results of these studies have demonstrated that our immune
regulation technology could be effective in treating GvHD. Currently, clinical
studies are in development.
CLINICAL LABORATORY SERVICES
We operate a regional clinical reference laboratory that offers full
diagnostic services to the greater New York medical community. The services we
provide include chemistry, blood tests, cytology studies, tissue pathology,
hormone studies and screening for cancer and infectious diseases. We provide
these services primarily to physicians and other clinical laboratories.
The Company offers over 2,000 different routine and esoteric clinical
laboratory tests or procedures. These tests are frequently used in general
patient care by physicians to establish or support a diagnosis, to monitor
treatment or medication, or search for an otherwise undiagnosed condition. These
routine and esoteric procedures are most often used by practicing physicians in
their outpatient office practices.
9
We operate a clinical reference laboratory on Long Island and fifteen
satellite patient service centers in the greater New York area. Patient service
centers collect the specimens as requested by physicians. The specimens are sent
through our in-house courier system to our Long Island laboratory facility for
testing. We also operate a STAT laboratory in Manhattan. 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 our facilities accompanied by a test
request form. These forms, which are completed by the physician, 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 a computer interface or manually. Most
routine testing is completed by early the next morning, and test results are
printed and prepared for distribution. Some physicians have computers and or
local printer capabilities to have reports printed out directly in their
offices. Physicians who request that they be called with a result are so
notified in the morning.
We utilize our clinical reference laboratory to evaluate and demonstrate
the benefits of our internally developed gene-based diagnostic products. In
addition, our laboratory is currently performing gene-based tests in support of
our HIV-1 clinical studies.
Approximately 83% at July 31, 2003 and 69% at July 31, 2002, of the
Company's net accounts receivable relates 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 clinical laboratory's
accounts receivable is limited due to the diversity of the Company's client base
and to the various numbers of insurance carriers and the numerous individual
patient accounts. As is standard in the health care industry, substantially all
of the Company's clinical laboratory's accounts receivable are with numerous
third party insurance carriers and individual patient accounts. 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 the
years ended July 31, 2003, 2002 and 2001 were approximately 11%, 10% and 10%,
respectively, of the Company's total revenue. The clinical reference laboratory
industry is characterized by a significant amount of uncollectible accounts
receivable related to the inability to receive accurate and timely billing
information in order to forward it on to the third party payors for
reimbursement, and the inaccurate information received from the covered
individual patients for unreimbursed unpaid amounts. The Company's provision for
uncollectible accounts receivable is within historical expectations.
RESEARCH & DEVELOPMENT
Our principal research and development efforts are directed toward
expanding our research and diagnostic product lines, as well as developing
innovative new therapeutic products to meet unmet market needs. We have
developed our core research expertise in genomics through 25 years of dedicated
focus in this area. We conduct our research and other product development
efforts through internal research and collaborative relationships. In the fiscal
years ended July 31, 2003, 2002 and 2001, the Company incurred costs of
$8,311,000, $6,179,000 and $6,081,000, respectively, for research and
development activities.
INTERNAL RESEARCH PROGRAMS
A staff of approximately 30 professionals and scientists performs our
internal research and development activities, centered in Farmingdale, New York.
Our product development programs incorporate various scientific areas of
expertise, including recombinant DNA, monoclonal antibody development,
enzymology, microbiology, biochemistry, molecular biology, organic chemistry,
and fermentation. In addition, we continuously review in-licensing opportunities
in connection with new technology.
EXTERNAL RESEARCH COLLABORATIONS
We have and continue to explore collaborative relationships with prominent
companies and leading-edge research institutions in order to maximize the
application of our technology in areas where we believe such relationship will
benefit the development of our technology.
SALES AND MARKETING
Our sales and marketing strategy is to sell our products through two
distinct channels: (i) direct sales to end-users; and (ii) supply agreements
with manufacturers and distributors.
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DIRECT SALES AND MARKETING EFFORT
We internally market our products through our catalogue, direct field sales
and telemarketing, as well as through our e-commerce web site. We maintain a
team of professionals to perform direct field sales and telemarketing
activities. Our worldwide marketing efforts also consist of advertisements in
major scientific journals, direct mailings to researchers', presentations at
scientific seminars and exhibitions at scientific meetings.
SUPPLY AND DISTRIBUTION ARRANGEMENTS
We also distribute our products through leading life sciences companies.
These companies include manufacturers of instruments for gene analysis, where
our reagents are critical for the identification and detection of genes and
nucleic acid sequences. Through these arrangements, we are able to leverage the
established marketing and distribution infrastructure of these companies. During
fiscal 2003, we have distribution agreements with, among other companies:
o Affymetrix, Inc. (the Company gave notice on October 28, 2003 that it
was terminating its agreement with Affymetrix effective November 12,
2003; See Item 3. Legal Proceedings) ;
o Dako;
o Perkin Elmer Life Sciences;
o Ortho Diagnostics;
o Roche Diagnostics;
o VWR International;
o Amersham PLC.
COMPETITION
We compete with other life science and biotechnology companies, as well as
pharmaceutical, chemical and other companies. Competition in our industry is
intense and is expected to increase. Many of these companies are performing
research in the same areas as we are. Some of these competitors are larger than
we are and have greater financial resources than we do. The primary competitive
factors in our industry are the ability to create scientifically advanced
technology, successfully develop and commercialize products on a timely basis,
establish and maintain intellectual property rights and attract and retain a
breadth and depth of human resources.
Our clinical laboratory services business competes with numerous national
and local entities, some of which are larger than we are and have greater
financial resources than we do. Our laboratory 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.
INTELLECTUAL PROPERTY
We consider our intellectual property program to be a key asset and a major
strategic component to the execution of our business strategy. A broad portfolio
of issued patents and pending patent applications supports our core technology
platforms. Our policy is to seek patent protection for our core technology
platforms, as well as for ancillary technologies that support these platforms
and provide a competitive advantage.
At the end of fiscal 2003 we owned or licensed 42 U.S. and over 190 foreign
patents relating to products, methods and procedures resulting from our internal
or sponsored research projects. Patents relating to the BioProbe(R) nucleic acid
probe system have issued in the U.S. and Europe. There can be no assurance,
however, that patents will be issued on pending applications or that any issued
patents will have commercial benefit. We do not intend to rely on patent
protection as the sole basis for protecting our proprietary technology. We also
rely on our trade secrets and continuing technological innovation. We require
each of our employees to sign a confidentiality agreement that prohibits the
employee from disclosing any confidential information about us, including our
technology or trade secrets.
In some instances, we may enter into royalty agreements with collaborating
research parties in consideration for the commercial use by us of the
developments of their joint research. In other instances the collaborating party
might obtain a patent, but we receive the license to use the patented subject
matter. In such cases, we will seek to secure exclusive licenses. In other
instances, we might have an obligation to pay royalties to, or reach a royalty
arrangement with, a third party in consideration of our use of developments of
such third party. We have an exclusive licensing agreement with Yale for the
technology used in nucleic acid probe products. That agreement covers licensed
patents owned by Yale and licensed to us for the life of the patents, which
expire not earlier
11
than 2004. The Research Foundation of the State University of New York has
granted us the exclusive rights to a genetic engineering technology using
antisense nucleic acid control methodologies.
REGULATION OF PHARMACEUTICAL PRODUCTS
New drugs and biological drug products are subject to regulation under the
Federal Food, Drug and Cosmetic Act, and biological products are also regulated
under the Public Health Service Act. We believe that products developed by us or
our 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, licensing, manufacturing, marketing, distributing,
safety, and efficacy requirements, labeling, storage, exporting, record keeping,
advertising and other promotional practices involving biologics or new drugs, as
the case may be. FDA review or 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 biological drugs and the Center
for Drug Evaluation and Research ("CDER") is responsible for the regulation of
non-biological drugs. Biological drugs are licensed and other drugs are approved
before commercialization.
Any gene medicine products that we develop will require regulatory review
before clinical trials, and additional regulatory clearances before
commercialization. New human gene medicine products, as therapeutics, are
subject to regulation by the FDA and comparable agencies in other countries. The
precise regulatory requirements with which we will have to comply are uncertain
at this time because of the novelty of the human gene therapies currently under
development. The FDA on a case-by-case basis currently reviews each protocol.
The FDA has published "Points to Consider" guidance documents with respect to
the development of gene medicine protocols. The National Institutes of Health
("NIH") is also involved in the oversight of gene therapies and the FDA has
required compliance with certain NIH requirements.
Obtaining FDA approval has historically been a costly and time-consuming
process. Generally, to gain FDA approval, a developer first must conduct
pre-clinical studies in the laboratory evaluating product chemistry, formulation
and stability and, if appropriate, in animal model systems, to gain preliminary
information on safety and efficacy. Pre-clinical safety tests must be conducted
by laboratories that comply with FDA regulations governing Good Laboratory
Practices. The results of those studies are submitted with information
characterizing the product and its manufacturing process and controls as a part
of an investigational new drug ("IND") application, which the FDA must review
and declare effective 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 addition to other pertinent information about
the product, including descriptions of any previous human experience and the
company's future plans for studying the drug.
In order to commercialize any products, we (as the sponsor) file an IND and
will be responsible for initiating and overseeing the clinical studies to
demonstrate the safety and efficacy necessary to obtain FDA marketing approval
of any such products. For INDs that we sponsor, we will be required to select
qualified clinical sites (usually physicians affiliated with 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. Each clinical study is reviewed and approved by an Institutional Review
Board (IRB). The IRB will consider, among other things, ethical factors and the
safety of human subjects. Clinical trials are normally conducted in three
phases, although the phases might overlap. Phase I trials, concerned primarily
with the safety and tolerance of the drug, and its pharmacokinetics (or how it
behaves in the body including its absorption and distribution) involve fewer
than 100 subjects. Phase II trials normally involve a few hundred patients and
are designed primarily to demonstrate preliminary effectiveness and the most
suitable dose or exposure level for 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, adequate and well-controlled clinical trials with larger numbers
of patients and 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. Certain 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 medicine
products are a new category of therapeutics. There can be no assurance regarding
the length of the clinical trial period, the number of patients that the FDA
will require to be enrolled in the clinical trials in order to establish the
safety, purity and potency of human gene medicine products, or that the clinical
and other data generated will be acceptable to the FDA to support marketing
approval.
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After completion of clinical trials of a new product, FDA marketing
approval must be obtained before the product can be sold in the United States.
If the product is regulated as a new biologic, CBER requires the submission and
approval of a Biologics License Application (BLA) before commercial marketing of
the Biologic. If the product is classified as a new drug, we must file a New
Drug Application ("NDA") with CDER and receive approval before commercial
marketing of the drug. The NDA or BLA must include results of product
development, pre-clinical studies and clinical trials. The testing and approval
processes require substantial time and effort and there can be no assurance that
any approval will be granted on a timely basis, if at all. The median time to
obtain new product approvals after submission to the FDA is approximately 12
months. If questions arise during the FDA review process, approval can take
longer. Before completing its review, the FDA may seek guidance from an Advisory
Committee of outside experts at a public or closed meeting. While the advice of
these committees is not binding on the FDA, it is often followed.
Notwithstanding the submission of relevant data, the FDA might ultimately decide
that the NDA or BLA does not satisfy its regulatory criteria for approval and,
thus, reject the application, refuse to approve it, or require additional
clinical, preclinical or chemistry studies. Even after FDA regulatory approval
or licensure, a marketed drug product is subject to continual review by the FDA.
In addition, if previously unknown problems are discovered or we fail to comply
with the applicable regulatory requirements, we might be restricted from
marketing a product, we might be required to withdraw the product from the
market, and we might possibly become subject to seizures, injunctions, voluntary
recalls, or civil, monetary 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.
For commercialization of our biological or other drug products, the
manufacturing processes described in our NDA or BLA must receive FDA approval
and the manufacturing facility must successfully pass an inspection prior to
approval or licensure of the product for sale within the United States. The
pre-approval inspection assesses whether, for example, the facility complies
with the FDA's current good manufacturing practices (cGMP) regulations. These
regulations elaborate testing, control, documentation, personnel, record keeping
and other quality assurance procedure requirements that must be met. Once the
FDA approves our biological or other drug products for marketing, we must
continue to comply with the cGMP regulations. The FDA periodically inspects
biological and other drug manufacturing facilities to ensure compliance with
applicable cGMP requirements. Failure to comply with the statutory and
regulatory requirements subjects the manufacturer to possible legal or
regulatory action, such as suspension of manufacturing, seizure of product or
voluntary recall of a product.
If a developer obtains designations by the FDA of a biologic or other drug
as an "orphan" 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
possible for drugs for rare diseases, including many genetic diseases, which
means the drug is for a disease that has a prevalence of less than 200,000
patients in the United States. The first applicant who receives an orphan drug
designation and who obtains approval of a marketing application for such drug
acquires the exclusive marketing rights to that drug for that use for a period
of seven years unless the subsequent drug can be shown to be clinically
superior. Accordingly, no other company would be allowed to market an identical
orphan drug with the same active ingredient for the use approved by the FDA for
seven years after the approval.
REGULATION OF DIAGNOSTICS
The diagnostic products that are developed by our collaborators or us are
likely to be regulated by the FDA as medical devices. Unless an exemption
applies, medical devices must receive either "510(k) clearance" or pre-market
approval ("PMA") from the FDA before marketing them in the United States. The
FDA's 510(k) clearance process usually takes from four to 12 months, but it can
last longer. The process of obtaining PMA approval is much more costly, lengthy
and uncertain. It generally takes from one to three years or even longer. We
cannot be sure that 510(k) clearance or PMA approval will ever be obtained for
any product we propose to market.
The FDA decides whether a device must undergo either the 510(k) clearance
or PMA approval process based upon statutory criteria. These criteria include
the level of risk that the agency perceives is associated with the device and a
determination whether the product is a type of device that is similar to devices
that are already legally marketed. Devices deemed to pose relatively less risk
are placed in either class I or II, which requires the manufacturer to submit a
premarket notification requesting 510(k) clearance, unless an exemption applies.
The premarket notification must demonstrate that the proposed device is
"substantially equivalent" in intended use and in safety and effectiveness to a
legally marketed "predicate device" that is either in class I, class II, or is a
"preamendment" class III device (i.e., one that was in commercial distribution
before May 28, 1976) for which the FDA has not yet called for submission of a
PMA application.
After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance or could
require a PMA approval. The FDA
13
requires each manufacturer to make this determination in the first instance, but
the FDA can review any such decision. If the FDA disagrees with a manufacturer's
decision not to seek a new 510(k) clearance, the agency may retroactively
require the manufacturer to seek 510(k) clearance or PMA approval. The FDA also
can require the manufacturer to cease marketing and/or recall the modified
device until 510(k) clearance or PMA approval is obtained.
Devices deemed by the FDA to pose the greatest risk, such as
life-sustaining, life-supporting or implantable devices, or deemed not
substantially equivalent to a legally marketed class I or class II predicate
device, or to a preamendment class III device for which PMAs have not been
called, are placed in class III. Such devices are required to undergo the PMA
approval process in which the manufacturer must prove the safety and
effectiveness of the device to the FDA's satisfaction. A PMA application must
provide extensive preclinical and clinical trial data and also information about
the device and its components regarding, among other things, device design,
manufacturing and labeling. After approval of a PMA, a new PMA or PMA supplement
is required in the event of a modification to the device, it's labeling or its
manufacturing process.
Although clinical investigations of most devices are subject to the
investigational device exemption ("IDE") requirements, clinical investigations
of in vitro diagnostic ("IVDs") tests are exempt from the IDE requirements,
including the need to obtain the FDA's prior approval, provided the testing is
noninvasive, does not require an invasive sampling procedure that presents a
significant risk, does not introduce energy into the subject, and is not used as
a diagnostic procedure without confirmation by another medically established
test or procedure. In addition, the IVD must be labeled for Research Use Only
(RUO) or Investigational Use Only (IUO), and distribution controls must be
established to assure that IVDs distributed for research or investigation are
used only for those purposes. The FDA expressed its intent to exercise
heightened enforcement with respect to IUO and RUO devices improperly
commercialized prior to receipt of FDA clearance or approval.
We have developed products that we currently distribute in the United
States on a RUO basis. There can be no assurance that the FDA would agree that
our distribution of these products meets the requirements for RUO distribution.
Furthermore, failure of us or recipients of our RUO products to comply with the
regulatory limitations on the distribution and use of such devices could result
in enforcement action by the FDA, including the imposition of restrictions on
our distribution of these products.
Any devices that we manufacture or distribute will be subject to a host of
regulatory requirements, including the Quality System Regulation (which requires
manufacturers to follow elaborate design, testing, control, documentation and
other quality assurance procedures), the Medical Device Reporting regulation
(which requires that manufacturers report to the FDA certain types of adverse
events involving their products), labeling regulations, and the FDA's general
prohibition against promoting products for unapproved or "off label" uses. Class
II devices also can have special controls such as performance standards, post
market surveillance, patient registries, and FDA guidelines that do not apply to
class I devices. Unanticipated changes in existing regulatory requirements or
adoption of new requirements could hurt our business, financial condition and
results of operations.
We are subject to inspection and market surveillance by the FDA to
determine compliance with regulatory requirements. If the FDA finds that we have
failed to comply, the agency can institute a wide variety of enforcement
actions, ranging from a public warning letter to more severe sanctions such as
fines, injunction, civil penalties, recall or seizure of our products, the
issuance of public notices or warnings, operating restrictions, partial
suspension or total shutdown of production, refusal of our requests for 510(k)
clearance or PMA approval of new products, withdrawal of 510(k) clearance or PMA
approvals already granted, and criminal prosecution.
The FDA also has the authority to request repair, replacement or refund of
the cost of any medical device manufactured or distributed by us. Our failure to
comply with applicable requirements could lead to an enforcement action that may
have an adverse effect on our financial condition and results of operations.
Unanticipated changes in existing regulatory requirements, our failure to
comply with such requirements or adoption of new requirements could have a
material adverse effect on us.
We have employees to expedite the preparation and filing of documentation
necessary for FDA clearances and approvals, patent issuances and licensing
agreements. We have received clearance from the FDA to market five of our in
vitro diagnostic products.
We cannot assure you that future clinical diagnostic products developed by
us or our collaborators will not be required to be reviewed by FDA under the
more expensive and time consuming pre-market approval process.
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CLINICAL LABORATORY REGULATIONS
The clinical laboratory industry is 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 of 1988 (collectively, as amended, "CLIA"), our clinical laboratories
must be certified by the Federal government, or exempt from Federal
certification, as discussed below. Many clinical laboratories also must meet
other governmental standards, undergo proficiency testing, and are subject to
inspection. Clinical laboratory certificates or licenses are also required by
various state and local laws.
CLIA places all tests into one of three categories of complexity (waived,
moderate complexity and high complexity) and establishes varying requirements
depending upon the complexity category 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 waived tests may apply for a certificate of waiver from most of the
requirements of CLIA. Our facility is certified to perform highly complex tests.
In general, the HHS regulations require laboratories that perform high or
moderate complexity tests to implement systems that ensure the accurate
performance and reporting of test results, establish quality control and quality
assurance systems ensure hiring of personnel that meet specified standards,
engage in proficiency testing by approved agencies and undergo biennial
inspections.
Clinical laboratories also are subject to state regulation. CLIA provides
that a state may adopt different or more stringent regulations than Federal law,
and permits states to apply for exemption from CLIA if HHS determines that the
state's laboratory laws are equivalent to, or more stringent than, CLIA. The
State of New York's clinical laboratory regulations contain provisions that are
more stringent than Federal law, and New York has received exemption from CLIA.
Therefore, as long as New York maintains its CLIA-exempt status, laboratories in
New York, including our laboratory, are regulated under New York law rather than
CLIA. Our laboratory is licensed in New York and has continuing programs to
ensure that its operations meet all applicable regulatory requirements.
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, or adverse action against, a license, the imposition of a fine, or
future changes in Federal, state and local laboratory laws and regulations (or
in the interpretation of current laws and regulations) could have a material
adverse effect on our business.
CLINICAL LABORATORY REIMBURSEMENT
The health care industry has been undergoing significant change because
third-party payors, such as Medicare (serving primarily patients 65 and older),
Medicaid serving primarily indigent patients, health maintenance organizations
and commercial insurers, have increased their efforts to control the cost,
utilization and delivery of health care services. 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. Additional health care reform efforts are
likely to be proposed in the future. In particular, we believe 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,
commercial insurer and health maintenance organizations are likely to occur as
well. We cannot predict the effect that health care reform, if enacted, would
have on our business, and there can be no assurance that such reforms, if
enacted, would not have a material adverse effect on our business and
operations.
Containment of health care costs, including reimbursement for clinical
laboratory services, has been a focus of ongoing governmental activity. In 1984,
Congress established the Medicare fee schedule for clinical laboratory services,
which is applicable to patients covered under Part B of the Medicare program as
well as patients receiving Medicaid. Clinical laboratories must bill Medicare
directly for the services provided to Medicare beneficiaries and may only
collect the amounts permitted under this fee schedule. Reimbursement to clinical
laboratories under the Medicare Fee Schedule has been steadily declining since
its inception. Furthermore, and Medicare have mandated use of the Physicians
Current Procedural Terminology ("CPT") for coding of laboratory services which
has altered the way we bill these programs for some of our services, thereby
reducing the reimbursement that we receive.
In March 1996, HCFA (now, the Center for Medicare and Medicaid Services or
CMS) 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 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
15
this change. Because a significant portion of our costs is fixed, these Medicare
reimbursement reductions and changes have a direct adverse effect on our net
earnings and cash flows. Future changes in Federal, state and local regulations
(or in the interpretation of current regulations) affecting governmental
reimbursement for clinical laboratory testing could result in material adverse
effect on our business. In addition, reimbursement disapprovals by the third
party payors, commercial insures and health maintenance organizations,
reductions or delays in the establishment of reimbursement rates, and carrier
limitations on the insurance coverage of the Company's services or the use of
the Company as a service provider could have a negative effect on the Company's
future revenues.
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 our
business. We cannot predict, however, whether and what type of legislation will
be enacted into law.
ANTI FRAUD AND ABUSE LAWS
Existing Federal laws governing Medicare, as well as state laws, also
regulate certain aspects of the relationship between healthcare providers,
including clinical laboratories and their referral sources such as physicians,
hospitals and other laboratories. One provision of these laws, known as the
"Anti-Kickback Law," contains extremely broad proscriptions. Violation of this
provision may result in criminal penalties, exclusion from Medicare, and
significant civil monetary penalties. Under another Federal law, known as the
"Stark" law or "self-referral prohibition," physicians who have an investment or
compensation relationship with an entity furnishing clinical laboratory services
(including anatomic pathology and clinical chemistry services) may not, subject
to certain exceptions, refer clinical laboratory testing for Medicare patients
to that entity. Similarly, laboratories may not bill Medicare or Medicaid or any
other party for services furnished pursuant to a prohibited referral. Violation
of these provisions may result in disallowance of Medicare for the affected
testing services, as well as the imposition of civil monetary penalties. New
York State also has laws similar to the Federal Stark and Anti-Kickback laws.
In recent years, the Federal Stark law, as well as New York State law, has
also placed restrictions on the supplies and other items that laboratories may
provide to their clients. These laws specify that laboratories may only provide
clients with items or devices that are used solely to collect, transport or
store specimens for the laboratory or to communicate results or tests. Items
such as biopsy needles, snares and reusable needles are specifically prohibited
from being supplied by laboratories to their clients. These laws represent a
significant deviation from practices that previously occurred throughout the
industry.
In February 1997, the OIG released a model compliance plan for
laboratories. One key aspect of the model compliance plan is an emphasis on the
responsibilities of laboratories to notify physicians that Medicare covers only
medically necessary services. These requirements, and their likely effect on
physician test ordering habits, focus on chemistry tests, especially routing
tests, rather than on anatomic pathology services or the non-automated tests,
which make up the majority of the Company's business measured in terms of net
revenues. Nevertheless, they potentially could affect physicians test ordering
habits more broadly. The Company is unable to predict whether, or to what
extent, these developments may have an impact or the utilization of the
Company's services.
The Company seeks to structure its arrangements with physicians and other
customers to be in compliance with the anti-kickback, Stark and state laws, and
to keep up-to-date on developments concerning their application by various
means, including consultation with legal counsel. In addition, in order to
address these various Federal and state laws, the Company have developed its own
Corporate Compliance Program based upon the OIG' model program. The Company's
Program focuses on establishing clear standards, training and monitoring of the
Company's billing and coding practices. Furthermore, as part of this Program,
the Company's Corporate Compliance Committee meets on a regular basis to review
various operations and relationships as well as to adopt policies addressing
these issues.
However, the Company is unable to predict how the laws described above will
be applied in the future, and no assurances can be given that its arrangements
or processes will not become subject to scrutiny under these laws.
CONFIDENTIALITY OF HEALTH INFORMATION
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
was signed into law on August 21, 1996, and it includes "administrative
simplification" provisions designed to standardize common electronic
transactions in health care and to protect the security and privacy of health
information. Congress' purpose in promulgating HIPAA was to increase the
efficiency of health care transactions while, at the same time, protecting the
confidentiality of patient information. Final regulations have been
16
adopted for electronic transaction, privacy and security standards. Further,
final regulations adopting a national employer identifier to be used in
electronic health care transactions have been finalized. These provisions have
very broad applicability and they specifically apply to health care providers,
which include physicians and clinical laboratories.
The electronic transaction standards regulations create guidelines for
certain common health care transactions. With certain exceptions, these
standards require that when we conduct certain transactions electronically with
another provider, clearinghouse or health plan we must comply with the standards
set forth in the regulations. The regulations establish standard data content
and format for submitting electronic claims and other administrative health
transactions. All health care providers will be able to use the electronic
format to bill for their services and all health plans and providers will be
required to accept standard electronic claims, referrals, authorizations, and
other transactions. The Company believes it is in compliance with these
standards. Despite the initial costs, the use of uniform standards for all
electronic transactions could lead to greater efficiency in processing claims
and in handling health care information.
The privacy regulations, which went into effect in April 2003, create
specific requirements for the use and disclosure of protected health information
("PHI"). We are required to maintain numerous policies and procedures in order
to comply with these requirements. Furthermore, we need to continuously ensure
that there mechanisms to safeguard the PHI, which is used or maintained in any
format (E.G., oral, written, or electronic). Failure to comply with these
requirements can result in criminal and civil penalties.
The security regulations, which were finalized on February 20, 2003 and go
into effect in April 20, 2005, require us to ensure the confidentiality,
integrity and availability of all electronic protected health information
("EPHI") that we create, receive, maintain, or transmit. We have some
flexibility to fashion our own security measures to accomplish these goals, but,
in general, the starting point is to determine what security measures we need to
take. The security regulations strongly emphasize that we must conduct an
accurate and thorough assessment of the potential risks and vulnerabilities of
the confidentiality, integrity and availability of our EPHI and then document
our response to the various security regulations on the basis of that
assessment.
Complying with the electronic transaction, privacy and security rules will
require significant effort and expense for virtually all entities that conduct
health care transactions electronically and handle patient health information.
We have already implemented almost all of the requirements of the privacy and
electronic transactions standards and will now focus on the security
regulations; however, at this time, because we have not yet completed the
required security risk assessment, we are unable to estimate the total cost or
impact of the regulations.
INFECTIOUS WASTES AND RADIOACTIVE MATERIALS
We are 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 our laboratories are required to operate in
accordance with applicable federal and state laws and regulations relating to
biohazard disposal of all facilities specimens and we use outside vendors to
dispose such specimens. Although we believe that we comply in all material
respects with such federal, state and local laws, our failure to comply with
those laws could subject us 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. The Federal
Drug Enforcement Administration regulates the use of controlled substances in
testing for drugs of abuse. We are also subject to OSHA's requirement that
employers using hazardous chemicals communicate the properties and hazards
presented by those chemicals to their employees. We believe that we are in
material compliance with these OSHA requirements. Our failure to comply with
those regulations and requirements could subject us to tort liability, civil
fines, criminal penalties and/or other enforcement actions.
OTHER REGULATION
Our business is and will continue to be subject to regulation under various
state and federal environmental, safety and health laws, including the
Occupational Safety and Health Act, the Resource Conservation and Recovery Act,
and the Atomic Energy Act or
17
their state law analogs. These and other laws govern our use, handling and
disposal of various biological, chemical and radioactive substances used in our
operations and wastes generated by our operations. We are required to possess
licenses under, or are otherwise subject to federal and state regulations
pertaining to, the handling and disposal of medical specimens, infectious and
hazardous waste and radioactive materials.
We believe that we are in material compliance with applicable
environmental, safety and health laws and that our continual compliance with
these laws will not have a material adverse effect on our business. All of our
laboratories are operated in accordance with applicable federal and state laws
and regulations relating to hazardous substances and wastes, and we use
qualified third-party vendors to dispose of biological specimens and other
hazardous wastes. Although we believe that we comply in all material respects
with such federal, state and local laws, our failure to comply with those laws
could subject us to denial of the right to conduct business, civil fines,
criminal penalties and/or other enforcement actions. Environmental contamination
resulting from spills or disposal of hazardous substances generated by our
operations, even if caused by a third-party contractor or occurring at a remote
location could result in material liability.
MANUFACTURING AND FACILITIES
We manufacture the majority of our products internally. Most of our
production and clinical laboratory operations take place at our 43,000 square
feet facilities in Farmingdale, New York. We have a completely integrated
manufacturing facility, with special handling facilities and clean rooms.
We also contract with qualified third-party contractors to manufacture our
products in cases where we deem it appropriate, for example, when it is not
cost-effective to produce a product ourselves or where we seek to leverage the
expertise of another manufacturer in a certain area.
EMPLOYEES
As of July 31, 2003, we employed 218 full-time and 37 part-time employees.
Of the full-time employees, 50 were engaged in research, development,
manufacturing, administrative support and marketing of research products and 168
at the clinical reference laboratories. Our scientific staff possesses a wide
range of experience and expertise in the areas of recombinant DNA, nucleic acid
chemistry, molecular biology and immunology. We believe that the relationships
we have established with our employees are good.
INFORMATION SYSTEMS
Information systems are used extensively in virtually all aspects of our
business, including laboratory testing, billing, customer service, logistics,
and management of medical data. Our success depends, in part, on the continued
and uninterrupted performance of our information technology (IT) systems.
Despite safeguards and controls that are in place, sustained or repeated system
failures that may interrupt our ability to process test orders, deliver test
results or perform tests in a timely manner could adversely affect our
reputation and result in a loss of customers and net revenues.
QUALITY ASSURANCE
We consider the quality of our clinical reference laboratory tests to be of
critical importance, and, therefore, we 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 the Medicare program and other regulatory agencies, our clinical
laboratory has in place systems to emphasize and monitor quality assurance.
In addition to our own internal quality control programs, our laboratory
participates in numerous externally administered, blind quality surveillance
programs, including on-site evaluation by the College of American Pathologies
("CAP") proficiency testing program and the New York State survey program. The
blind programs supplement all other quality assurance procedures and give our
management the opportunity to review our technical and service performance from
the client's perspective.
The CAP accreditation program involves both on-site inspections of our
laboratory and participation in the CAP's proficiency testing program for all
categories in which our laboratory is accredited by the CAP. The CAP is an
independent nongovernmental 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. Our clinical laboratory facilities are accredited by the CAP.
18
AVAILABLE INFORMATION
We make available free of charge on or through our Internet website our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to those reports, if any, filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after they are electronically filed with, or
furnished to, the Securities and Exchange Commission. Our Internet website
address is WWW.ENZO.COM and you can find these reports under "Investor
Information - SEC Filings."
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth certain information with regard to directors and
executive officers of the Company.
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 76) has been a Director of the Company since January
1982. Mr. Sias had been President and Chief Executive Officer of Chronicle
Publishing Company from April 1993 to September 2000. 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 60) has been a Director of the Company since January
1982. Since April 2003, Mr. Delucca is Executive Vice President and Chief
Financial Officer of REL Consulting Group. Mr. Delucca had been the Chief
Financial Officer & Executive Vice President, Finance & Administration of Coty,
Inc., from January 1999 to January 2002. From October 1993 until January 1999,
he was 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.
Before that, he was a Vice President and Treasurer of the Avco Corporation,
which was acquired by Textron.
IRWIN C. GERSON (age 73) has been a Director of the Company since May 8,
2001. From 1995 until December 1998, Mr. Gerson served as Chairman of Lowe
McAdams Healthcare and prior thereto had been, since 1986, Chairman and Chief
Executive Officer of William Douglas McAdams, Inc., one of the largest
advertising agencies in the U.S. specializing in pharmaceutical marketing and
communications to healthcare professionals. In February 2000, he was inducted
into the Medical Advertising Hall of Fame. Mr. Gerson has a Bachelor of Science
in Pharmacy from Fordham University and an MBA from the NYU Graduate School of
Business Administration. He is a director of Andrx Corporation, a NASDAQ listed
company which specializes in proprietary drug delivery technologies. From
1990-1999, he was Chairman of the Council of Overseers of the Arnold and Marie
Schwartz College of Pharmacy and has served as a trustee of The Albany College
of Pharmacy and Long Island University.
STANFORD S. WARSHAWSKY (age 66) has been a Director of the Company since
August 2002. Mr. Warshawsky was Co-President of Arnhold and S. Bleichroeder
Holdings from 1994 and a director from 1974 until October 2003, having joined
the firm in 1972. He previously was with the law firm of Shearman & Sterling.
Mr. Warshawsky is Chairman of First Eagle Funds, Inc., and First Eagle Variable
Funds, Inc. Mr. Warshawsky is a member of the New York Stock Exchange's
Nominating Committee, of which he also was a former Chairman, and a member of
the Big Board's New York Area Firms Advisory Committee. He is a Director of the
German-American Chamber of Commerce, a fellow in the Foreign Policy Association
and Vice Chairman of the Arthur F. Burns Fellowship. He is a member of the Bar
Associations of both New York State and Virginia State. Mr. Warshawsky holds a
Bachelor of Business Administration degree from the University of Michigan and a
JD from the University Of Virginia School Of Law.
MELVIN F. LAZAR, CPA (age 64) has been a Director of the Company since
August 1, 2002. Mr. Lazar was a founding partner of the public accounting firm
of Lazar, Levine & Felix (LLP) from 1969 until October 2002. Mr. Lazar and his
firm served the business and legal communities for over 30 years. He is an
expert on the topic of business valuations and merger and acquisition
activities. Mr. Lazar is a board member and serves as the Chairman of the Audit
Committee of privately owned Active Media Services, Inc., the largest corporate
barter company in the nation. Mr. Lazar is also a board member and serves as the
Chairman of
19
the Audit Committee of Ceco Environmental Corp., which is a provider of
innovative solutions to industrial ventilating and air quality problems. Mr.
Lazar holds a Bachelor of Business Administration degree from The City College
of New York (Baruch College).
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. Chief Executive Officer,
Chairman of the Board of Directors
Shahram K. Rabbani Chief Operating Officer, Secretary, Treasurer
Barry W. Weiner President, Chief Financial Officer
Dean Engelhardt, Ph.D. Executive Vice President
Norman E. Kelker, 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 59) Enzo Biochem's founder has served as the
Company's Chairman of the Board of Directors and Chief Executive Officer since
its inception in 1976. Dr. Rabbani has authored numerous scientific publications
in the field of molecular biology, in particular, nucleic acid labeling and
detection. He is also the lead inventor of many of the company's pioneering
patents covering a wide range of technologies and products. Dr. Rabbani received
his Bachelor of Arts degree from New York University in Chemistry and his Ph.D.
in Biochemistry from Columbia University. He is a member of the American Society
for Microbiology.
SHAHRAM K. RABBANI (age 51) Chief Operating Officer, Treasurer, Secretary
and Director, is a founder and has been with the Company since its inception. He
is also President of Enzo Clinical Labs. Mr. Rabbani serves on numerous
professional boards, including the New York State Clinical Laboratory
Association and Action Long Island. He received a Bachelor of Arts Degree in
Chemistry from Adelphi University, located in Long Island, New York.
BARRY W. WEINER (age 53) President, Chief Financial Officer and Director,
is a founder of Enzo Biochem, Inc. He has served as the Company's President
since 1996, and previously held the position of Executive Vice President. Before
his employment with Enzo, he worked in several managerial and marketing
positions at the Colgate Palmolive Company. Mr. Weiner is a Director of the New
York Biotechnology Association. He received his Bachelor of Arts degree in
Economics from New York University and a Master of Business Administration in
Finance from Boston University.
DR. DEAN ENGELHARDT (age 63) Executive Vice President, has held this
position since July 2000. Since joining the Company in 1981, Dr. Engelhardt has
held several other executive and scientific positions within Enzo Biochem. In
addition, Dr. Engelhardt has authored many papers in the area of nucleic acid
synthesis and protein production and has been a featured presenter at numerous
scientific conferences and meetings. He holds a Ph.D. degree in Molecular
Genetics from Rockefeller University.
DR. NORMAN E. KELKER (age 64) Senior Vice President, has held this position
since 1989. Before this, he was the Company's Vice President for Scientific
Affairs. Dr. Kelker has authored numerous scientific papers and presentations in
the biotechnology field. He is a member of American Society of Microbiology and
the American Association of the Advancement of Science. Dr. Kelker received his
Ph.D. in Microbiology and Public Health from Michigan State University.
HERBERT B. BASS (age 55) Vice President of Finance for the Company and is
also Senior Vice President of Enzo Clinical Labs. Before his promotion in 1989
to Vice President of Finance, Mr. Bass served as the Corporate Controller of the
Company. Mr. Bass has been with the Company since 1986. From 1977 to 1986, Mr.
Bass held various positions at Danziger and Friedman, Certified Public
Accountants, the most recent of which was audit manager. For the preceding seven
(7) years, he held various positions at Berenson & Berenson, Certified Public
Accountants. Mr. Bass received a Bachelor of Business Administration degree in
Accounting from Bernard M. Baruch College, in New York City.
DR. BARBARA E. THALENFELD (age 63) Vice President of Corporate Development
for Enzo Biochem and Vice President of Clinical Affairs for Enzo Therapeutics,
has been employed with the Company since 1982. Dr. Thalenfeld has authored over
20 scientific papers in the areas of molecular biology and genetics, and is a
member of the American Society of Gene Therapy and the Drug Development
Association. Dr. Thalenfeld received her Ph.D. at the Institute of Microbiology
at Hebrew University in
20
Jerusalem and a Master of Science degree in Biochemistry from Yale University.
She also completed a Post Doctoral Fellowship in the Department of Biological
Sciences at Columbia University.
DAVID C. GOLDBERG (age 46) Vice President of Business Development for Enzo
Biochem and Senior Vice President of Enzo Clinical Labs, has been employed with
the company since 1985. He has held several managerial positions within Enzo
Biochem. Mr. Goldberg also held management and marketing positions with
DuPont-NEN and Gallard Schlesinger Industries before joining the Company. He
received a Master of Science degree in Microbiology from Rutgers University and
a Master of Business Administration in Finance from New York University.
Dr. Elazar Rabbani and Shahram K. Rabbani are brothers and Barry W. Weiner
is their brother-in-law.
FORWARD - LOOKING AND CAUTIONARY STATEMENTS
This Annual Report contains "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. All statements other than
statements of historical fact, including, without limitation, the statements
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" are "forward-looking statements." Forward-looking statements may
include the words "believes," "expects," "plans," "intends," "anticipates,"
"continues" or other similar expressions. These statements are based on the
Company's current expectations of future events and are subject to a number of
risks and uncertainties that may cause the Company's actual results to differ
materially from those described in the forward-looking statements. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. These factors and uncertainties include,
among others:
(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.
(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 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 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 retirement 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.
(m) Dependence on new technologies for our product development and dependence
on product candidates in early stages of development.
21
(n) Clinical trials for our products will be expensive and their outcome is
uncertain. We incur substantial expenses that might not result in viable
products.
(o) May need additional capabilities in the future, if additional capital is
not available, we may need to curtail or cease operations.
(p) Fluctuations in quarterly results resulting from uneven customer order
flow.
These and other risks and uncertainties are disclosed from time to time in
the Company's filings with the Securities and Exchange Commission, in the
Company's press releases and in oral statements made by or with the approval of
authorized personnel. The Company assumes no obligation to update any
forward-looking statements as a result of new information or future events or
developments.
Item 2. PROPERTIES
The following are the principal facilities of the Company:
Approximate Approximate
Floor Annual Expiration
Location Principal Operations Area (sq. ft.) Base Rent Date
- -------- -------------------- -------------- ----------- ----------
60 Executive Blvd. Corporate headquarters, 43,000 $1,302,000 November 30, 2004
Farmingdale, N.Y. clinical laboratory,
research and manufacturing
facilities (See note
6 of Notes to Consolidated
Financial Statements)
527 Madison Ave. Executive office 6,400 $288,000 December, 2003
New York, NY
We believe that the current facilities are suitable and adequate for the
Company's current operating needs and the production capacity in such facilities
is substantially being utilized.
Item 3. LEGAL PROCEEDINGS
In June 1999, the Company filed suit in the United States District Court for the
Southern District of New York against Gen-Probe Incorporated, Chugai Pharma
U.S.A., Inc., Chugai Pharmaceutical Co., Ltd., bioMerieux, Inc., bioMerieux SA,
and Becton Dickinson and Company, charging them with infringing the Company's
U.S. Patent 4,900,659, which concerns probes for the detection of the bacteria
that causes gonorrhea. On January 26, 2001, the court granted the defendants'
motion for summary judgment that the Company's patent is invalid. On July 15,
2002, the Court of Appeals for the Federal Circuit reversed the judgment of
invalidity and remanded the case to the district court for further proceedings.
In March 2003, settlements have been reached with bioMerieux and Chugai; the
settlements did not have a material monetary impact on the Company. There can be
no assurance that the Company will be successful in the on-going proceedings.
However, even if the Company is not successful, management does not believe that
there will be a significant adverse monetary impact to the Company.
On March 6, 2002, the Company was named, along with certain of its officers and
directors among others, in a complaint entitled Lawrence F. Glaser and Maureen
Glaser, individually and on behalf of Kimberly, Erin, Hannah, and Benjamin
Glasser v. Hyman Gross, Barry Weiner, Enzo Biochemical Inc., Elazar Rabbani,
Shahram Rabbani, John Delucca, Dean Engelhardt, Richard Keating, Doug Yates and
Docs 1-50, in the U.S. District Court for the Eastern District of Virginia. The
complaint was filed by an investor in the Company who has filed for bankruptcy
protection and his family. The complaint alleged securities and common law fraud
and breach of fiduciary duty and seeks in excess of $150 million in damages. On
August 22, 2002, the complaint was voluntarily dismissed; however a new
substantially similar complaint was filed at the same time. On October 21, 2002,
the Company and the other defendants filed a motion to dismiss the complaint,
and the plaintiffs responded by amending the complaint and dropping their claims
against defendants Keating and Yates. On November 18, 2002, the Company and the
other defendants again moved to dismiss
22
the Amended Complaint. On July 16, 2003, the Court issued a Memorandum Opinion
dismissing the Amended Complaint in its entirety with prejudice. Plaintiffs
thereafter moved for reconsideration but the Court denied the motion on
September 8, 2003. The plaintiffs subsequently appealed to the Fourth Circuit
and that appeal is presently pending. The Company does not believe that the
complaint has any merit and was correctly dismissed, and intends to continue to
defend the complaint vigorously in any event.
In March 2002, Enzo Life Sciences, a subsidiary of the Company, filed suit in
the United States District Court for the District of Delaware against Digene
Corp., charging it with infringing the Company's U.S. Patent No. 6,221,581 B1,
which concerns a novel process for detecting nucleic acids of interest. On May
31, 2002, Digene filed counterclaims in that suit against Enzo Life Sciences and
the Company, including business tort counterclaims relating to the `581 patent.
Digene further contends that the Company has caused it substantial damage by
interfering with business and financial opportunities. There can be no assurance
that the Company and Enzo Life Sciences will be successful in these proceedings.
However, even if Enzo Life Sciences is not successful in its patent infringement
suit, management does not believe that there will be a significant adverse
monetary impact to the Company. With respect to Digene's counterclaims, the
Company and Enzo Life Sciences believe them to be without merit and intend to
defend themselves vigorously. Trial is scheduled for March 2004.
In October 2002, the Company filed suit in the United States District Court of
the Southern District of New York against Amersham plc, Amersham Biosciences,
Perkin Elmer, Inc., Perkin Elmer Life Sciences, Inc., Sigma-Aldrich Corporation,
Sigma Chemical Company, Inc., Molecular Probes, Inc. and Orchid Biosciences,
Inc. In January 2003, the Company amended its complaint to include defendants
Sigma Aldrich Co. and Sigma Aldrich, Inc. The counts set forth in the suit are
for breach of contract; patent infringement; unfair competition under state law;
unfair competition under federal law; tortuous interference with business
relations; and fraud in the inducement of contract. The complaint alleges that
these counts arise out of the defendants' breach of distributorship agreements
with the Company concerning labeled nucleotide products and technology, and the
defendants' infringement of patents covering the same. In April, 2003, the Court
directed that individual complaints be filed separately against each defendant.
Enzo has done so and has added Yale for technical reasons relating to its
standing to enforce the four Yale patents of which Enzo is exclusive licensee.
Yale and Enzo are aligned in protecting the validity and enforceability of the
subject patents. In June, 2003, the Court directed all parties to submit a
stipulation setting forth dates for the completion of discovery. A stipulation
to this effect is currently being negotiated and is likely to provide for
discovery to take place through early 2004, with a trial to take place in 2004.
Defendants have not yet answered the individual complaints although it is
anticipated that the answers, when filed, will include a number of affirmative
defenses and, possible, counterclaim. There can be no assurance that the Company
will be successful in this litigation. However, even if the Company is not
successful, management does not believe that there will be a significant adverse
monetary impact to the Company.
On October 28, 2003, the Company and Enzo Life Sciences, Inc., a subsidiary of
the Company, filed suit in the United States District Court of the Eastern
District of New York against Affymetrix, Inc. The Complaint alleges that
Affymetrix improperly transferred or distributed substantial business assets of
the Company to third parties, including portions of the Company's proprietary
technology, reagent systems, detection reagents and other intellectual property.
The Complaint also charges that Affymetrix failed to account for certain
shortfalls in sales of the Company's products, and that Affymetrix improperly
induced collaborators and customers to use the Company's products in
unauthorized fields or otherwise in violation of the agreement. The Complaint
seeks full compensation from Affymetrix to the Company for its substantial
damages, in addition to injunctive and declaratory relief to prohibit, among
other things, Affymetrix's unauthorized use, development, manufacture, sale,
distribution and transfer of the Company's products, technology, and/or
intellectual property, as well as to prohibit Affymetrix from inducing
collaborators, joint venture partners, customers and other third parties to use
the Company's products in violation of the terms of the agreement and the
Company's rights.
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 fourth
fiscal quarter ended July 31, 2003.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The common stock of the Company is traded on the New York 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 New York
Stock Exchange.
23
HIGH LOW
---- ---
2002 Fiscal Year (August 1, 2001
to July 31, 2002):
1st Quarter $28.88 $13.58
2nd Quarter $26.13 $19.02
3rd Quarter $21.99 $17.30
4th Quarter $19.45 $11.09
2003 Fiscal Year (August 1, 2002
to July 31, 2003):
1st Quarter $16.40 $11.64
2nd Quarter $15.86 $12.76
3rd Quarter $15.23 $11.50
4th Quarter $30.10 $14.78
As of October 7, 2003, the Company had approximately 1,212 record
holders of its Common Stock.
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.
The Company declared a 5% stock dividend on June 10, 2003 payable July
14, 2003 to shareholders of record as of June 30, 2003. The Company declared a
5% stock dividend on January 23, 2002 payable February 27, 2002 to shareholders
of record as of February 2, 2002. The Company declared a 5% stock dividend on
January 16, 2001 payable March 20, 2001 to shareholders of record as of February
27, 2001. The shares and per share data have been adjusted to retroactively
reflect the stock dividends. The Company recorded a charge to accumulated
deficit and a credit to common stock and additional paid-in capital in the
amounts of approximately $37,709,000, $26,988,000 and $32,274,000 in fiscal
2003, fiscal 2002 and fiscal 2001, respectively, which reflects the fair value
of the dividends on the dates of declaration.
EQUITY COMPENSATION PLAN DISCLOSURE
The following table summarizes equity compensation plans approved by
security holders and equity compensation plans that were not approved by
security holders as of July 31, 2003:
Number of securities
Number of Securities remaining available for
To be Issued Upon Weighted-Average future issuance under
Exercise of outstanding Exercise Price of equity compensation plans
options, warrants outstanding options, (excluding securities
Plan category and rights warrants and rights reflected in column (a)
- ----------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
(stock options) approved by
security holders 3,235,321 $10.36 635,960
Equity compensation plans not
Approved by security holders --- --- ---
--------- ------ -------
Total 3,235,321 $10.36 635,960
========= ====== =======
Item 6. SELECTED FINANCIAL DATA
The selected operating results for the years ended July 31, 2003, 2002
and 2001 and the financial position data as of July 31, 2003 and 2002, have been
derived from the Company's audited consolidated financial statements included
elsewhere in this Annual Report on Form 10-K. The selected operating results for
the years ended July 31, 2000 and 1999, and the selected financial position data
as of July 31, 2001, 2000 and 1999 are derived from the Company's audited
consolidated financial statements which are not included in this Annual Report
on Form 10-K.
24
The following tables summarize the Company's consolidated statement of
operations and balance sheet data. This information should be read together with
the discussion in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and notes to those statements included elsewhere in this Annual Report on Form
10-K.
For the Years Ended July 31,
--------------------------------------------------------------
(In thousands, except per share data)
2003 2002 2001 2000 1999
-------- -------- -------- ------- -------
OPERATING RESULTS:
Operating revenues $ 52,767 $ 54,015 $ 52,266 $42,847 $36,966
Interest income 1,355 1,350 3,003 2,585 1,984
Income before (provision) benefit
for taxes on income 5,725 10,340 12,231 7,668 5,387
(Provision) benefit for taxes
on income (1,881) (3,417) (5,418) (1,044) 1,128
Net income $ 3,844 $ 6,923 $ 6,813 $ 6,624 $ 6,515
======== ======== ======== ======= =======
Basic net income per common share: $ 0.13 $ 0.23 $ 0.23 $ 0.23 $ 0.23
======== ======== ======== ======= =======
Diluted net income per common share: $ 0.13 $ 0.22 $ 0.22 $ 0.21 $ 0.22
======== ======== ======== ======= =======
Denominator for per share calculation:
Basic 29,904 29,866 29,766 29,323 28,863
Diluted 30,643 30,788 31,008 31,240 29,493
FINANCIAL POSITION:
Working capital $ 97,723 $ 92,772 $ 85,094 $74,094 $59,323
Total assets $115,878 $109,291 $102,931 $92,886 $78,901
Stockholders' equity $109,380 $104,733 $ 97,517 $87,176 $75,648
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements. See "Forward-Looking and
Cautionary Statements." Because of the foregoing factors, you should not rely on
past financial results as an indication of future performance. We believe that
period-to-period comparisons of our financial results to date are not
necessarily meaningful and expect that our results of operations might fluctuate
from period to period in the future.
Enzo Biochem, Inc. (the "Company" or "Enzo") is a leading life sciences
and biotechnology company focused on harnessing genetic processes to develop
research tools, diagnostics and therapeutics. Enzo also provides clinical
laboratory services to the medical community. In addition, our work in gene
analysis has led to our development of significant therapeutic product
candidates, several of which are currently in clinical trials, and several are
in preclinical studies.
The business activities of the Company are performed by the Company's
three wholly owned subsidiaries. These activities are: (1) research and
development, manufacturing and marketing of biomedical research products and
tools through Enzo Life Sciences and research and development of therapeutic
products through Enzo Therapeutics, and (2) the operation of a clinical
reference laboratory through Enzo Clinical Labs. For information relating to the
Company's business segments, see Note 13 of the Notes to Consolidated Financial
Statements.
25
The Company's source of revenue has been from the direct sales of research
products of labeling and detection reagents for the genomics and sequencing
markets, as well as through non-exclusive distribution agreements with other
companies. Another source of revenue has been from the clinical laboratory
service market. Clinical laboratory services are provided to patients covered by
various third party insurance programs, including Medicare and self payors for
the services provided. The clinical laboratory is subject to seasonal
fluctuations in operating results. Volume of testing generally declines during
the summer months, the year-end holiday periods and other major holidays. In
addition, volume declines due to inclement weather may reduce net revenues.
Therefore, comparison of the results of successive quarters may not accurately
reflect trends or results for the full year. For the fiscal years ended July 31,
2003 and 2002, respectively, approximately 44% and 48% of the Company's
operating revenues were derived from research product sales and approximately
56% and 52% were derived from clinical laboratory services. Research product
revenue from one major distributor represented approximately 22% and 23% of the
consolidated revenues in fiscal 2003 and 2002, respectively, under a
non-exclusive distribution and supply agreement. Research product revenue from
this one major distributor accounted for approximately 50% and 49% of the
Company's total research product revenues in fiscal 2003 and 2002, respectively.
At July 31, 2003 and 2002, 0% and 18% respectively of the Company's net accounts
receivable relate to amounts due from the one major distributor. On October 28,
2003, the Company's Life Sciences subsidiary filed a lawsuit against this
distributor. See "Item 3. Legal Proceedings." The Company anticipates that
revenues for its Enzo Life Sciences, Inc. subsidiary in the first quarter of
fiscal 2004 will be comparable to the fourth quarter of fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2003, our cash and cash equivalents and marketable
securities totaled $78.4 million, an increase of $11.3 million from July 31,
2002. We had working capital of $97.7 million at July 31, 2003 compared to $92.8
million at July 31, 2002.
Net cash provided by operating activities for the year ended July 31,
2003 was approximately $12.1 million as compared to net cash provided by
operating activities of $9.6 million for the year ended July 31, 2002. The
increase in net cash provided by operating activities from fiscal 2002 to fiscal
2003 was primarily due to lower net income in the current year offset by the net
change in operating assets and liabilities compared to the prior year.
Net cash used in investing activities increased approximately $15.5
million from fiscal 2002, primarily as a result of an investment in marketable
securities and an increase in capital expenditures.
Net cash provided by financing activities increased by $.6 million from
fiscal 2002 primarily as a result of the increase in proceeds from the exercise
of stock options.
Net accounts receivable of $17.3 million and $20.3 million represented
119 days and 137 days of operating revenues at July 31, 2003 and 2002,
respectively. The change in net accounts receivable is due to an increase in
accounts receivable at the clinical reference laboratory of approximately $.6
million and a decrease of research products accounts receivable of approximately
$3.6 million. This decrease is primarily due to the decrease in revenue from one
specific customer of research products.
The Company has entered into various real estate operating leases with
both related and unrelated parties. See Note 6 to the Consolidated Financial
Statements for a further description of these various leases.
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. See Note 10 to the Consolidated Financial Statement.
The total future payments under the Company's contractual obligations
as of July 31, 2003 are as follows:
PAYMENTS DUE BY PERIOD
LESS THAN
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS
---------- ---------- ---------- ---------
Operating Leases $3,148,000 $1,837,000 $1,005,000 $306,000
---------- ---------- ---------- ---------
Total Contractual
Cash Obligations $3,148,000 $1,837,000 $1,005,000 $306,000
========== ========== ========== ========
26
We believe that our current cash position is sufficient for our
foreseeable liquidity and capital resource needs, although there can be no
assurance that future events will not alter such view.
Management is not aware of any material claims, disputes or settled
matters concerning third-party reimbursements that would have a material effect
on our financial statements.
CRITICAL ACCOUNTING POLICIES
GENERAL
The Company's discussion and analysis of its financial condition and
results of operations are based upon Enzo Biochem, Inc. consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses; these estimates
and judgments also affect related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to contractual allowance, allowance for uncollectible accounts,
intangible assets and income taxes. The Company bases its estimates on
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
REVENUE RECOGNITION
Revenues from the clinical laboratory are recognized as services are
rendered upon completion of the testing process for a specific patient. 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, exclusive of certain non-exclusive distribution
agreements, are recognized when the products are shipped.
The Company has certain non-exclusive distribution agreements, which
provide for consideration to be paid to the distributors for the manufacture of
certain products. The Company records such consideration provided to
distributors under these non-exclusive distribution agreements as a reduction to
research product revenues. The revenue from these non-exclusive distribution
agreements are recognized when shipments are made to their respective customers
and reported to the Company.
CONTRACTUAL ALLOWANCES
The percentage of the Company's revenues derived from Medicare, third
party payers, commercial insurers and managed care patients continue to
increase. The Medicare regulations and various managed care contracts are often
complex and may include multiple reimbursement mechanisms for different types of
services provided in our clinical laboratory. We estimate the allowance for
contractual allowances on a payer-specific basis given our interpretation of the
applicable regulations and historical calculations. However, the services
authorized and provided and related reimbursement are often subject to
interpretation that could result in payments that differ from our estimates.
Additionally, updated regulations occur frequently necessitating continual
review and assessment of the estimation process by management.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company's ability to collect outstanding receivables from third
party payers is critical to its operating performance and cash flows. The
primary collection risk lies with uninsured patients or patients for whom
primary insurance has paid but a patient portion remains outstanding. The
Company estimates the allowance for doubtful accounts primarily based upon the
age of the accounts since invoice date. The Company continually monitors its
accounts receivable balances and utilizes cash collections data to support the
basis for its estimates of the provision for doubtful accounts. Significant
changes in payer mix or regulations could have a significant impact on the
Company's results of operations and cash flows. In addition, the Company has
implemented a process to estimate and review the collectibles of its receivables
based on the period they have been outstanding. Historical collection and payor
reimbursement experience is an integral part of the estimation process related
to reserves for doubtful accounts. The Company also assesses the current state
of its billing functions in order to identify any known collection or
reimbursement issues in order to assess the impact, if any, on the reserve
estimates, which involves judgment. The Company believes that the collectibility
of its receivables is directly linked to the quality of its billing processes,
most notably, those related to obtaining the correct information in order to
bill effectively for the services provided. Revisions in reserve for doubtful
accounts estimates are recorded as an adjustment to bad debt
27
expense. The Company believes that its collection and reserves processes, along
with the close monitoring of its billing processes, helps reduce the risk
associated with material revisions to reserve estimates resulting from adverse
changes in collection and reimbursement experience and billing operations.
INCOME TAXES
The Company accounts for income taxes under the liability method of
accounting for income taxes. Under the liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. The liability method requires
that any tax benefits recognized for net operating loss carry forwards and other
items be reduced by a valuation allowance where it is more likely than not the
benefits may not be realized. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
the liability method, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the requirement to recognize impairment losses on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Company management believes that no
impairment to its long-lived assets has occurred.
RESULTS OF OPERATIONS
FISCAL 2003 COMPARED TO FISCAL 2002
Revenues from operations for the fiscal year ended July 31, 2003 were
$52.8 million a decrease of $1.2 million over revenues from operations for the
fiscal year ended July 31, 2002. This decrease was due to a decrease of $2.7
million in revenues from our research product sales operations offset by an
increase of $1.5 million in revenues from clinical reference laboratory
operation over revenues for such activities in fiscal 2003.
The decrease in research product sales resulted primarily from a
decrease in direct sales of research products of labeling and detection reagents
for the genomics and sequencing markets related to shipments to one major
distributor. Research product revenue from this one major distributor accounted
for approximately 50% and 49% of the Company's total research product revenues
in fiscal 2003 and 2002, respectively.
The increase of clinical laboratory services revenue was due primarily
to increase volume of higher priced esoteric tests. Clinical laboratory services
are provided to patients covered by various third party payor programs,
including Medicare and health maintenance organizations ("HMO's"). Billings for
services are included in revenue net of allowances for contractual discounts and
allowances paid for differences between the amounts billed and the estimated
amount to be paid. Recent trends had indicated a decrease in the collection
rates from the Medicare Program, certain third party payors and HMO's. The
effect of such reduced collection rates have been reflected in fiscal 2003. The
clinical laboratory is subject to seasonal fluctuations in operating results.
Volume of testing generally declines during the summer months, the year-end
holiday periods and other major holidays. In addition, volume declines due to
inclement weather may reduce net revenues. Therefore, comparison of the results
of successive quarters may not accurately reflect trends or results for the full
year.
Although, research product revenue decreased for the fiscal year, the
cost of research products sold increased by $1.5 million to $2.2 million from
the prior fiscal year. This increase was primarily due to the increase in
reagent costs, the expansion of the manufacturing, processing capabilities and
an increase in headcount in these areas, due to the unusually high volume of the
orders shipped in the first quarter of fiscal 2003 to one major distributor that
did not continue for the balance of fiscal 2003.
The cost of clinical laboratory services decreased by $.5 million
during this period primarily due to a reduction in personnel costs and the
improved efficiency of performing certain esoteric tests in-house that reduced
certain other expenses.
Research and development expenses increased by approximately $2.1
million as a result of an increase in the expenses related to the clinical trial
activities and other research projects.
28
Selling expenses increased by $.4 million during this fiscal year, as
compared to the prior year's fiscal year. This increase was primarily due to
costs associated with the unusually high volume of the orders shipped in the
first quarter of fiscal 2003 to one major distributor of research products.
General and administrative expenses increased by $1.2 million due to
the increase in overall insurance costs of professional, directors & officers,
liability insurance premiums and an increase in data processing personnel costs.
The Company's legal expenses increased by $3.6 million to $5.7 million
from $2.1 million as compared to the previous year. This increase is primarily
due to the increase in patent infringement proceedings and the increase in the
overall legal activities on these infringement proceedings.
The Company's provision for uncollectible accounts receivable decreased
by $5.5 million to $8.7 million from $14.2 million as compared to last year at
the clinical laboratory division. The percentage of the provision for
uncollectible accounts receivable as a relationship to revenue decreased to
30.8% this fiscal year as compared to 50.6% for last year. These decreases were
primarily due to the change in the mix of payors and improved collection
procedures and the effect of the canceled HMO contract last year. In addition,
during the current fiscal year, the Company wrote off $.6 million as an
uncollectible receivable from one of its distributors at the Life Science
division.
Interest income was comparable to the prior fiscal year.
In fiscal 2003 and 2002, we recorded a provision for income taxes of
$1.8 and $3.4 million, respectively, which was based on the combined effective
federal, state and local income tax rates.
Net accounts receivable from our clinical laboratory operations of
$14.4 million and $13.8 million represented an average of 174 days and 180 days
of operating revenues at July 31, 2003 and 2002, respectively.
Income before provision for taxes on income from the research and
development segment activities and related costs was $9.4 million in fiscal
2003, as compared to income before provision for taxes on income of $16.6
million in fiscal 2002. The decrease in the profit resulted primarily from a
decrease in direct sales of research products of labeling and detection reagents
for the genomics and sequencing markets to one specific customer. Income before
provision for taxes on income from the clinical reference laboratories segment
amounted to a $3.0 million for fiscal 2003, as compared to a loss of $3.8
million for fiscal 2002. The increase in income before taxes for the clinical
laboratory segment was primarily due to the increase in revenue from an increase
in higher gross margin reimbursement and an increase in volume of esoteric tests
being ordered by physicians. These esoteric tests have higher pricing levels as
compared to the regular tests performed at the laboratory.
FISCAL 2002 COMPARED TO FISCAL 2001
Revenues from operations for the fiscal year ended July 31, 2002 were
$54.0 million an increase of $1.8 million over revenues from operations for the
fiscal year ended July 31, 2001. This increase was due to an increase of $8.9
million in revenues from our research product sales operations offset by a
decrease of $7.1 million in revenues from clinical reference laboratory
operation over revenues for such activities in fiscal 2001. The decline of
clinical laboratory services revenue was due primarily to reduced reimbursement
rates which have been experienced from various managed care agreements and the
negative results of an unprofitable contract which was cancelled in fiscal 2002.
Clinical laboratory services are provided to patients covered by various third
party payor programs, including Medicare and health maintenance organizations
("HMO's"). Billings for services are included in revenue net of allowances for
contractual discounts and allowances paid for differences between the amounts
billed and the estimated amount to be paid. Recent trends had indicated a
decrease in the collection rates from the Medicare Program, certain third party
payors and HMO's. The effect of such reduced collection rates have been
reflected in fiscal 2002. The increase in research product sales resulted
primarily from an increase in direct sales of research products of labeling and
detection reagents for the genomics and sequencing markets. The Company has
certain non-exclusive distribution agreements, which provide for consideration
to be paid to the distributors for the manufacture of certain products. Such
consideration was previously included in cost of research product revenues. In
accordance with recently issued accounting pronouncements, the Company has
reclassified consideration provided to distributors under these non-exclusive
distribution agreements as a reduction to research product revenues. The prior
year's comparative amounts have been reclassified to be consistent with the
current year presentation. This change reflects a new reporting presentation
only and did not affect the Company's gross profit or net income as previously
reported.
29
The cost of clinical laboratory services decreased by $.4 million
primarily due to a decrease in direct operating expenses based on decreased
volume of testing in fiscal 2002. The cost of sales for research products
decreased as a result of improved efficiency in the manufacturing of the direct
sales of research products.
Research and development expenses increased by approximately $.1
million as a result of an increase in the clinical trial studies.
Selling expenses increased by approximately $.5 million primarily due
to an increase in costs associated with the increase in revenue.
General and administrative expenses decreased by approximately $1.0
million primarily due to the reduction in headcount and the related personnel
costs associated with the canceled HMO contract at the clinical laboratory.
Legal expenses increased by approximately $.7 million due to the
increase in the legal activities associated with the on-going patent
infringement proceedings.
Our provision for uncollectible accounts receivable increased by $2.2
million, primarily due to the recent trends that indicated a decrease in the
collection rates from the certain third party payors and HMO's. The effect of
such reduced collection rates have been reflected in fiscal 2002.
Interest income decreased by $1.7 million as a result of a decrease in
interest rates in fiscal 2002 as compared to fiscal 2001.
In fiscal 2002 and 2001, we recorded a provision for income taxes of
$3.4 and $5.4 million, respectively, which was based on the combined effective
federal, state and local income tax rates. In fiscal 2002, we realized the
benefit of certain tax credits and certain extraterritorial income is excludable
from taxes that resulted in a lower effective tax rate in fiscal 2002 as
compared to fiscal 2001.
Net accounts receivable from our clinical laboratory operations of
$13.8 million and $20.1 million represented an average of 180 days and 208 days
of operating revenues at July 31, 2002 and 2001, respectively.
Income before provision for taxes on income from research and
development activities and related costs was $16.6 million in fiscal 2002, as
compared to income before provision for taxes on income of $8.3 million in
fiscal 2001. The increase in the profit resulted primarily from an increase in
direct sales of research products of labeling and detection reagents for the
genomics and sequencing markets. Income (loss) before provision for taxes on
income from the clinical reference laboratories activities amounted to a $3.8
million loss for fiscal 2002, as compared to $3.8 million of income for fiscal
2001. The loss is primarily due to the recent trends that indicated a decrease
in the collection rates from the Medicare Program, certain third party payors
and HMO's.
The Company does not have any "off-balance sheet arrangements" as such
term is defined in Item 303(a)(4) of Regulation S-K.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of
this report. See Item 15(a) (1) and (2)
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to
ensure that information required to be disclosed in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the specified time periods. As of the end of the period
covered by this report, the Company's Chief Executive Officer and Chief
30
Financial Officer evaluated, with the participation of the Company's management,
the effectiveness of the Company's disclosure controls and procedures. Based on
that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective. There were no changes in the Company's internal control over
financial reporting that occurred during the Company's most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
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, 2003 and is incorporated herein by
reference.
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, 2003 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 be filed with the Securities and Exchange
Commission on or before November 28, 2003 and is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, 2003 and is incorporated herein by
reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not applicable because this report is filed for a period ending
prior to December 15, 2003.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) (1) Consolidated Financial Statements
Consolidated Balance Sheets - July 31, 2003 and 2002
Consolidated Statements of Operations-
Years ended July 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity-
Years ended July 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows-
Years ended July 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements.
31
(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 DESCRIPTION
NO -----------
-------
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)
10(a) 1983 Incentive Stock Option Plan. (4)
10(b) 1993 Incentive Stock Option Plan. (5)
10(c) Employment Agreement with Elazar Rabbani. (5)
10(d) Employment Agreement with Shahram Rabbani. (5)
10(e) Employment Agreement with Barry Weiner. (5)
10(f) 1994 Stock Option Plan (6).
10(g) Agreement with Corange International Limited (Boehringer Mannheim)
effective April 1994. (19) (7)
10(h) Agreement with Amersham International effective February 1995. (7)
10(i) Agreement with Dako A/S effective May 1995. (7)
10(j) Agreement with Baxter Healthcare Corporation (VWR Scientific
Products) effective September 1995. (7)
10(k) Agreement with Yale University and amendments thereto. (7)
10(l) Agreement with The Research Foundation of the State of New York
effective May 1987. (7)
10(m) 1999 Stock Option Plan filed. (8)
10(n) Amendment to Elazar Rabbani's employment agreement. (9)
10(o) Amendment to Shahram Rabbani's employment agreement. (9)
10(p) Amendment to Barry Weiner's employment agreement. (9)
10(q) Lease Addendum (9)
32
14 Code of Ethics filed herewith.
21 Subsidiaries of the registrant:
Enzo Clinical Labs, Inc., a New York corporation.
Enzo Life Sciences, Inc., a New York corporation.
Enzo Therapeutics, Inc., a New York corporation.
23 Consent of Independent Auditors filed herewith.
31(a) Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 filed herewith.
31(b) Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 filed herewith.
32(a) Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 filed herewith.
32(b) Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 filed herewith.
(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) 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.
(4) This exhibit was filed with the Company's definitive proxy statement
dated February 4, 1983 and is incorporated herein by reference.
(5) 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.
(6) 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.
(7) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1996 or previously filed amendment thereto and is
incorporated herein by reference.
(8) This exhibit was filed with the Company's Registration Statement on Form
S-8 (333-87153) and is incorporated herein by reference.
(9) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 2000 and is incorporated herein by reference.
(b) The Company's Current Reports on Form 8-K filed during the quarter ended
July 31, 2003
The Company filed a Current Report on Form 8-K on June 18, 2003 related
to the disclosure pursuant to Item 12 01 Form 8-K, in which the Company
furnished a press release announcing its operating results for the quarter and
nine months ended April 30, 2003.
(c) See Item 15(a)(3), above.
(d) See Item 15(a)(2), above.
*************
33
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: October 29, 2003 By: /s/ ELAZAR RABBANI PH.D.
------------------------
Chairman of the Board
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.
BY: /s/ ELAZAR RABBANI PH.D. October 29, 2003
- --------------------------------
Elazar Rabbani
Chairman of Board of Directors
(Principal Executive Officer)
BY: /s/ SHAHRAM K. RABBANI October 29, 2003
- --------------------------------
Shahram K. Rabbani,
Chief Operating Officer, Secretary
and Director
BY: /s/ BARRY W. WEINER October 29, 2003
- --------------------------------
Barry W. Weiner,
President, Chief Financial Officer, and Director
BY: /s/ JOHN B. SIAS October 29, 2003
- --------------------------------
John B. Sias, Director
BY:
- --------------------------------
John J. Delucca, Director
BY: /s/ IRWIN GERSON October 29, 2003
- --------------------------------
Irwin Gerson, Director
BY: /s/ STANFORD S. WARSHAWSKY October 29, 2003
- --------------------------------
Stanford S. Warshawsky, Director
BY: /s/ MELVIN F. LAZAR October 29, 2003
- --------------------------------
Melvin F. Lazar, Director
34
LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements and financial statement schedule
of Enzo Biochem, Inc. are included in Item 15(a):
Report of Independent Auditors F-2
Consolidated Balance Sheets -- July 31, 2003 and 2002 F-3
Consolidated Statements of Operations --
Years ended July 31, 2003, 2002 and 2001 F-4
Consolidated Statements of Stockholders' Equity --
Years ended July 31, 2003, 2002 and 2001 F-5
Consolidated Statements of Cash Flows --
Years ended July 31, 2003, 2002 and 2001 F-6
Notes to Consolidated Financial Statements F-8
Schedule II - Valuation and Qualifying
Accounts --Years ended July 31, 2003, 2002 and 2001 F-19
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, 2003 and 2002, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended July 31, 2003. Our audits also included the
financial statement schedule listed in the Index at Item 15(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 auditing standards generally accepted
in the United States. 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, 2003 and 2002 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
July 31, 2003, in conformity with accounting principles generally accepted in
the United States. 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 therein.
/s/ Ernst & Young LLP
Melville, New York
October 15, 2003, except for the
last paragraph of Note 7, as to
which the date is October 28, 2003
F-2
ENZO BIOCHEM, INC
CONSOLIDATED BALANCE SHEETS
JULY 31, 2003 AND 2002
ASSETS 2003 2002
------------ ------------
Current assets:
Cash and cash equivalents ...................... $ 63,267,600 $ 67,135,000
Marketable securities .......................... 15,154,100 --
Accounts receivable, less allowance for
doubtful accounts of $4,900,000 in 2003
and $4,445,000 in 2002 ....................... 17,266,400 20,267,500
Inventories .................................... 3,421,800 4,190,200
Prepaid expenses ............................... 2,232,900 1,491,000
Deferred taxes ................................. 1,013,800 777,500
Prepaid taxes .................................. 542,300 1,968,600
------------ ------------
Total current assets ............................. 102,898,900 95,829,800
Property and equipment, at cost less accumulated
depreciation and amortization .................. 2,199,800 2,301,100
Goodwill ......................................... 7,452,000 7,452,000
Deferred patent costs, less accumulated
amortization of $7,097,200 in 2003
and $6,347,100 in 2002 ......................... 3,166,200 3,562,300
Other ............................................ 161,000 146,200
------------ ------------
$115,877,900 $109,291,400
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ....................... $ 1,321,000 $ 1,512,300
Accrued legal fees ........................... 1,915,200 140,000
Other accrued expenses ....................... 551,000 734,400
Accrued research and development expenses .... 453,400 --
Accrued payroll .............................. 703,000 475,900
Deferred rent ................................ 232,300 195,400
------------ ------------
Total current liabilities ...................... 5,175,900 3,058,000
Deferred taxes ................................. 1,234,800 1,180,900
Deferred rent .................................. 87,000 319,300
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $01 par value; authorized
25,000,000 shares; no shares issued
or outstanding
Common Stock, $01 par value; authorized
75,000,000 shares; shares issued and
outstanding: 29,975,100 in 2003 and
28,459,800 in 2002 ......................... 299,800 284,600
Additional paid-in capital ................... 199,081,800 160,499,800
Accumulated deficit .......................... (89,916,400) (56,051,200)
Accumulated other comprehensive loss ......... (85,000) --
------------ ------------
Total stockholders' equity ..................... 109,380,200 104,733,200
------------ ------------
$115,877,900 $109,291,400
============ ============
F-3
See accompanying notes.
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED JULY 31, 2003, 2002 AND 2001
2003 2002 2001
----------- ----------- -----------
Revenues:
Research product revenues ........... $23,253,100 $25,963,400 $17,055,800
Clinical laboratory services ........ 29,513,900 28,051,700 35,210,100
----------- ----------- -----------
52,767,000 54,015,100 52,265,900
Costs and expenses:
Cost of research product revenues ... 2,188,900 737,100 785,200
Cost of clinical laboratory
services .......................... 9,592,900 10,109,500 10,498,400
Research and development expense .... 8,311,200 6,178,600 6,080,800
Selling expense ..................... 4,706,100 4,342,800 3,856,300
Provision for uncollectible
accounts receivable ............... 9,345,300 14,188,400 11,999,200
Legal expense ....................... 5,661,000 2,111,000 1,425,000
General and administrative expense .. 8,591,300 7,358,200 8,392,800
----------- ----------- -----------
48,396,700 45,025,600 43,037,700
----------- ----------- -----------
Income before interest income and
provision for on income ............. 4,370,300 8,989,500 9,228,200
Interest income ....................... 1,355,000 1,350,400 3,003,000
----------- ----------- -----------
Income before provision for taxes
on income ........................... 5,725,300 10,339,900 12,231,200
Provision for taxes on income ......... (1,881,300) (3,417,100) (5,418,400)
----------- ----------- -----------
Net income ............................ $ 3,844,000 $ 6,922,800 $ 6,812,800
=========== =========== ===========
Net income per common share:
Basic ............................... $ 0.13 $ 0.23 $ 0.23
=========== =========== ===========
Diluted ............................. $ 0.13 $ 0.22 $ 0.22
=========== =========== ===========
Denominator for per share calculation:
Basic ............................... 29,904,000 29,866,000 29,766,000
=========== =========== ===========
Diluted ............................. 30,643,000 30,788,000 31,008,000
=========== =========== ===========
F-4
See accompanying notes
ENZO BIOCHEM, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JULY 31, 2003, 2002 AND 2001
Accumulated
Other
Common Common Additional Compre- Total
Stock Stock Paid-in Accumulated hensive Stockholders'
Shares Amount Capital Deficit Loss Equity
---------- -------- ------------ ------------ -------- ------------
Balance at July 31, 2000 .......................... 25,583,700 $255,800 $ 97,349,600 ($10,429,100) -- $ 87,176,300
Net income for the year ended July 31, 2001 ....... -- -- -- 6,812,800 -- 6,812,800
5% stock dividend (fair value on date declared) ... 1,284,500 12,800 32,260,700 (32,273,500) -- --
Increase in common stock and paid-in capital
due to exercise of stock options ................ 202,200 2,000 1,231,900 -- -- 1,233,900
Issuance of stock for employee 401(k) plan ........ 9,700 100 230,700 -- -- 230,800
Tax benefit from stock options exercised .......... -- -- 1,780,000 -- -- 1,780,000
Increase in paid-in capital due to stock
issued for services performed ................... -- -- 283,200 -- -- 283,200
---------- -------- ------------ ------------ -------- ------------
Balance at July 31, 2001 .......................... 27,080,100 270,700 133,136,100 (35,889,800) -- 97,517,000
Net income for the year ended July 31, 2002 ....... -- -- -- 6,922,800 -- 6,922,800
5% stock dividend (fair value on date declared) ... 1,353,500 13,600 26,974,000 (26,987,600) -- --
Payment of cash for fractional shares for the
5% stock dividend ............................... -- -- -- (96,600) -- (96,600)
Increase in common stock and paid-in capital
due to exercise of stock options ................ 15,200 200 127,800 -- -- 128,000
Tax benefit from stock options exercised .......... -- -- 15,000 -- -- 15,000
Issuance of stock for employee 401(k) plan ........ 11,000 100 246,900 -- -- 247,000
---------- -------- ------------ ------------ -------- ------------
Balance at July 31, 2002 .......................... 28,459,800 284,600 160,499,800 (56,051,200) -- 104,733,200
Net income for the year ended July 31, 2003 ....... -- -- -- 3,844,000 -- 3,844,000
Net unrealized loss on available for-sale
securities, net of tax .......................... -- -- -- -- ($85,000) (85,000)
------------
Comprehensive income .............................. 3,759,000
============
5% stock dividend (fair value on date declared) ... 1,423,600 14,300 37,694,900 (37,709,200) -- --
Increase in common stock and paid-in capital
due to exercise of stock options ................ 73,300 700 630,100 -- -- 630,800
Issuance of stock for employee 401(k) plan ........ 18,400 200 257,000 -- -- 257,200
---------- -------- ------------ ------------ -------- ------------
Balance at July 31, 2003 .......................... 29,975,100 $299,800 $199,081,800 ($89,916,400) ($85,000) $109,380,200
========== ======== ============ ============ ======== ============
F-5
See accompanying notes
ENZO BIOCHEM, INC
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED JULY 31, 2003, 2002 AND 2001
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities:
Net income ............................................. $ 3,844,000 $ 6,922,800 $ 6,812,800
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment .......................................... 1,058,000 989,900 1,131,200
Amortization of costs in excess of fair value
of net tangible assets acquired .................... -- 370,700 370,500
Amortization of deferred patent costs ................ 750,000 793,600 750,600
Provision for uncollectible accounts receivable ...... 9,345,300 14,188,400 11,999,200
Deferred income tax provision ........................ (128,100) 720,000 2,003,000
Issuance of stock as compensation for
services performed ................................. -- -- 283,200
Issuance of stock for employee 401(k) plan ........... 257,200 247,000 230,800
Tax benefit from stock options exercised ............. -- 15,000 1,780,000
Deferred rent ........................................ (195,400) (160,300) (120,700)
Changes in operating assets and liabilities:
Accounts receivable before provision for
uncollectible amounts ............................ (6,344,200) (9,896,900) (16,347,000)
Inventories ........................................ 768,400 (2,170,400) (220,900)
Prepaid expenses ................................... (741,900) (358,700) (61,200)
Prepaid taxes ...................................... 1,426,300 (1,618,400) (350,200)
Trade accounts payable and accrued expenses ........ (374,700) (527,200) 504,000
Accrued research and development expenses .......... 453,400 -- --
Income taxes payable ............................... -- -- (375,700)
Accrued legal fees ................................. 1,775,200 (111,000) (413,600)
Accrued payroll .................................... 227,100 153,600 20,900
----------- ----------- -----------
Total adjustments .................................. 8,276,600 2,635,300 1,184,100
----------- ----------- -----------
Net cash provided by operating activities ... 12,120,600 9,558,100 7,996,900
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures ................................... (956,700) (620,400) (1,013,900)
Patent costs deferred .................................. (353,900) (490,700) (567,900)
Purchase of marketable securities ...................... (15,293,400) -- --
Security deposits ...................................... (14,800) (14,400) (5,000)
----------- ----------- -----------
Net cash used in investing activities ................ (16,618,800) (1,125,500) (1,586,800)
----------- ----------- -----------
Cash flows from financing activities:
Payment for fractional shares of stock dividend ........ -- (96,600) --
Proceeds from the exercise of stock options ............ 630,800 128,000 1,233,900
----------- ----------- -----------
Net cash provided in financing activities ............ 630,800 31,400 1,233,900
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents ..... (3,867,400) 8,464,000 7,644,000
Cash and cash equivalents at the beginning of the year ... 67,135,000 58,671,000 51,027,000
----------- ----------- -----------
Cash and cash equivalents at the end of the year ......... $63,267,600 $67,135,000 $58,671,000
=========== =========== ===========
F-6
See accompanying notes
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003, 2002 AND 2001
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 products are designed
for the diagnosis of and/or screening for infectious diseases, cancers, genetic
defects and other medically pertinent diagnostic information. The Company is
conducting research and development activities in the development of therapeutic
products based on the Company's technology platform of genetic modulation and
immune modulation. The Company also operates a clinical reference laboratory
that offers and provides diagnostic medical testing services to the health care
community.
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 domestic companies that the Company
intends to hold to maturity through August 2003. The market values of these
securities, as determined by quoted sources, aggregated $32,201,000 and
$64,089,300 at July 31, 2003 and 2002, respectively, and approximated cost at
the respective dates. The Company has approximately $28,295,500 and $0 in
interest bearing money market accounts at July 31, 2003 and 2002, respectively.
MARKETABLE SECURITIES
Management determines the appropriate classification of marketable
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. The Company classifies its marketable securities as
"available for sale" and, accordingly, carries these investments at their
aggregate fair value. Unrealized gains or losses, net of tax, on these
marketable securities are included as a separate component of stockholders'
equity. Realized gains and losses and declines in value judged to be
other-than-temporary on the marketable securities are included in investment
income. The cost of securities sold is based on the specific identification
method. The Company's marketable securities as of July 31, 2003 consisted of a
high income bond mutual fund. This security carried a weighted average interest
rate of approximately 2.77% at July 31, 2003.
CONCENTRATION OF CREDIT RISK
Approximately 83% at July 31, 2003 and 69% at July 31, 2002, of the
Company's net accounts receivable relates 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 clinical laboratory's
accounts receivable is limited due to the diversity of the Company's client base
and to the various numbers of insurance carriers and the numerous individual
patient accounts. As is standard in the health care industry, substantially all
of the Company's clinical laboratory's accounts receivable is with numerous
third party insurance carriers and individual patient accounts. 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 the
years ended July 31, 2003, 2002 and 2001 were approximately 11%, 10% and 10%,
respectively, of the Company's total revenue. The clinical reference laboratory
industry is characterized by a significant amount of uncollectible accounts
receivable related to the inability to receive accurate and timely billing
information in order to forward it on to the third party payors for
reimbursement, and the inaccurate information received from the covered
individual patients for unreimbursed unpaid amounts. The Company's provision for
uncollectible accounts receivable is within historical expectations.
F-7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003, 2002 AND 2001
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Research product revenue from one major distributor represented approximately
22%, 23% and 12% of the consolidated revenues in fiscal 2003, 2002 and 2001,
respectively, under a non-exclusive distribution and supply agreement. Research
product revenue from this one major distributor accounted for approximately 50%
and 49% of the Company's total research product revenues in fiscal 2003 and
2002, respectively. At July 31, 2003 and 2002, 0% and 18% respectively of the
Company's net accounts receivable relate to amounts due from the one major
distributor.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, and depreciated on the
straight-line basis 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.
PATENT COSTS
The Company capitalizes legal costs directly incurred in pursuing patent
applications as deferred patent costs under its research and development
segment. When such applications result in an issued patent, the related costs
are amortized over a ten year period, using the straight-line method. The
Company reviews its issued patents and pending patent applications, and if it
determines to abandon a patent application or that an issued patent no longer
has economic value, the unamortized balance in deferred patent costs relating to
that patent is immediately expensed.
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, excluding
certain non-exclusive distribution agreement revenues, are recognized when the
products are shipped.
The Company has certain non-exclusive distribution agreements, which
provide for consideration to be paid to the distributors for the manufacture of
certain products. In accordance with EITF 00-25 and EITF 01-09, the Company
records such consideration provided to distributors under these non-exclusive
distribution agreements as a reduction to research product revenues. The revenue
from these non-exclusive distribution agreements are recognized when shipments
are made from the distributors to their respective customers and reported to the
Company.
REIMBURSEMENT CONTINGENCIES
Laws and regulations governing Medicare are complex and subject to
interpretation for which action for noncompliance includes fines, penalties and
exclusion from the Medicare programs. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing.
SHIPPING AND HANDLING COSTS
Research product revenue shipping and handling costs included in selling
expense amounted to approximately $414,000, $325,000 and $279,000 for fiscal
years ended July 31, 2003, 2002 and 2001, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
F-8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003, 2002 AND 2001
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
INCOME TAXES
The Company accounts for income taxes under the liability method of
accounting for income taxes. Under the liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. The liability method requires
that any tax benefits recognized for net operating loss carryforwards and other
items be reduced by a valuation allowance where it is more likely than not that
the benefits may not be realized. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under the liability method, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
GOODWILL AND OTHER INTANGIBLES
The Company follows the provisions of the Financial Accounting Standards
Board ("FASB") Statement No. 142 ("SFAS 142"), Goodwill and Other Intangibles.
Under SFAS 142, goodwill is no longer subject to amortization over its estimated
useful life. Rather, goodwill is subject to at least an annual assessment for
impairment by applying a fair-value based test. Additionally, an acquired
intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
intangible asset can be sold, transferred, licensed, rented or exchanged,
regardless of the acquirer's intent to do so. All of the Company's goodwill is
related to their clinical reference laboratory segment. The Company adopted SFAS
No. 142 as of August 1, 2002 and has performed the requisite impairment testing.
The Company performed their annual impairment testing on the first day of the
fourth quarter of their fiscal year. Based on this testing, there is no
impairment to the goodwill recorded on the accompanying balance sheet.
SFAS 142 requires the disclosure of net income and earning per share
computed on a pro forma basis by reversing the goodwill amortized in the periods
presented. Such pro forma disclosures are required in the period of adoption and
thereafter until all periods presented reflect goodwill accounted for in
accordance with SFAS 142. The goodwill amortized in the years ended July 31,
2002 and 2001 was $370,700 and $370,500 respectively. Therefore, had SFAS 142
been effective prior to August 1, 2002, the Company's net income would have been
$7,293,500 and $7,183,300 for the years ended July 31, 2002 and 2001
respectively. Basic net income per share would have been $.24 and $.24 for the
years ended July 31, 2003 and 2002, respectively. Diluted net income per share
would have been $.24 and $.23 for the years ended July 31, 2003 and 2002,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for its investments in long-lived assets in accordance
with FASB Statement No. 144 ("SFAS No. 144"), Accounting for the Impairment or
Disposal of Long-Lived Assets and Long-Lived Assets. The Company adopted SFAS
No. 144 on August 1, 2002. SFAS No. 144 requires a company to review its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Factors
the Company considers important, which could trigger an impairment review,
include, among others, the following:
o a significant adverse change in the extent or manner in which a
long-lived asset is being used;
o a significant adverse change in the business climate that could affect
the value of a long-lived asset; and
o a significant decrease in the market value of assets.
If the Company determines that the carrying value of long-lived assets may
not be recoverable, based upon the existence of one or more of the above
indicators of impairment, the Company compares the carrying value of the asset
group to the undiscounted cash flows expected to be generated by the group. If
the carrying value exceeds the undiscounted cash flows, an impairment charge may
be needed. To determine the amount of the impairment charge, the Company
compares the carrying value of the applicable asset group to its fair value. If
the fair value is less than the carrying value, such amount is recognized as an
impairment charge. As of July 31, 2003 the Company has not recorded an
impairment charge.
F-9
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003, 2002 AND 2001
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
STOCK DIVIDEND
The Company declared a 5% stock dividend on June 10, 2003 payable July 14,
2003 to shareholders of record as of June 30, 2003. The Company declared a 5%
stock dividend on January 23, 2002 payable February 27, 2002 to shareholders of
record as of February 2, 2002. The Company declared a 5% stock dividend on
January 16, 2001 payable March 20, 2001 to shareholders of record as of February
27, 2001. The shares and per share data have been adjusted to retroactively
reflect these stock dividends. The Company recorded a charge to accumulated
deficit and a credit to common stock and additional paid-in capital in the
amounts of approximately $37,709,000, $26,988,000 and $32,274,000 in fiscal
2003, fiscal 2002 and fiscal 2001, respectively, which reflects the fair value
of the dividends on the dates of declaration.
NET INCOME PER SHARE
The Company reported basic and diluted earnings per share in accordance
with SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). Basic earnings per
share exclude any dilutive effects of options and warrants. Diluted earnings
includes the dilutive effects of common stock equivalents such as stock options
and warrants.
The following table sets forth the computation of basic and diluted net
income per share pursuant to SFAS No. 128.
2003 2002 2001
----------- ----------- -----------
Numerator:
Net income for numerator for
basic and diluted net income
per common share $ 3,844,000 $ 6,922,800 $ 6,812,800
=========== =========== ===========
Denominator:
Denominator for basic net
income per common share-
weighted-average shares 29,904,000 29,866,000 29,766,000
Effect of dilutive employee
and director stock options
and warrants 739,000 922,000 1,242,000
----------- ----------- -----------
Denominator for diluted net
income per share-adjusted
weighted-average shares 30,643,000 30,788,000 31,008,000
=========== =========== ===========
Basic net income per share $ .13 $ .23 $ .23
=========== =========== ===========
Diluted net income per share $ .13 $ .22 $ .22
=========== =========== ===========
Basic earnings per share have been computed using the weighted-average
number of shares of common stock outstanding. Diluted earnings per share has
been computed using the basic weighted-average shares of common stock issued
plus outstanding stock options and warrants, in the periods in which such
options and warrants, have a dilutive effect under the treasury stock method.
STOCK COMPENSATION PLANS
The Company accounts for stock option grants to employees under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. Under APB No. 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recorded.
F-10
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003, 2002 AND 2001
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Pro forma information regarding net loss applicable to common stockholders
is required by FASB Statement No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which also requires that the information be determined as if the
Company has accounted for its stock options under the fair value method of that
statement. For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The fair
value for these options was estimated using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for all grants in the
years ended July 31, 2003, 2002, and 2001: no dividend yield, weighted-average
expected life of the option of seven years, risk-free interest rate ranges of 3%
to 6.88% and a volatility of .77, .78 and .80 for all grants.
In December 2002, the FASB issued Statement No. 148 ("SFAS 148"),
"Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No.
148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition to SFAS No. 123's fair value method of
accounting for stock-based employee compensation. SFAS No. 148 also amends the
disclosure provisions of SFAS No. 123 to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income. While
SFAS No. 148 does not amend SFAS No. 123 to require companies to account for
employee stock options using the fair value method, the disclosure provisions of
SFAS No. 148 are applicable to all companies with stock-based employee
compensation, method of SFAS No. 123 or the intrinsic value method of APB No.
25. The Company adopted SFAS No. 148 effective January 31, 2003. The
implementation of SFAS No. 148 had no impact on the Company's consolidated
financial statements as of and for the year ended July 31, 2003.
The following table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
compensation:
Year ended July 31, 2003 2002 2001
---------- ---------- ----------
Reported net income ................. $3,844,000 $6,922,800 $6,812,800
Stock compensation expense
included in net income ............ -- -- --
Pro forma compensation expense ...... (3,010,900) (2,597,800) (2,414,800)
---------- ---------- ----------
Pro forma net income ................ $ 833,100 $4,325,000 $4,398,000
========== ========== ==========
Pro forma earnings per share:
Basic ............................ $ .03 $ .14 $ .15
Diluted .......................... $ .03 $ .14 $ .14
NOTE 2 - SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS
In the years ended July 31, 2003, 2002 and 2001, the Company paid cash for
income taxes of approximately $583,000, $4,300,000 and $2,267,000 respectively.
F-11
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003, 2002 AND 2001
NOTE 3 - MARKETABLE SECURITIES
The following is a summary of available-for-sale securities at July 31, 2003:
AVAILABLE-FOR-SALE
SECURITIES
----------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR MARKET
COST BASIS GAINS LOSS VALUE
----------- ---------- ---------- -----------
Mutual Fund $15,293,400 $ -- $139,300 $15,154,100
======== ======== ===========
There were no realized gains during fiscal 2003 on the Company's marketable
securities.
The following is a summary of income tax effects relating to other
comprehensive income (LOSS):
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
---------- ------------ ----------
Fiscal 2003 unrealized loss ...... (139,300) 54,300 (85,000)
--------- ------- --------
Balance at July 31, 2003 ......... $(139,300) $54,300 $(85,000)
========= ======= ========
NOTE 4 - INVENTORIES
At July 31, 2003 and 2002 inventories consist of:
2003 2002
---------- ----------
Raw ...................................... $167,900 $119,500
materials
Work in process .......................... 2,057,900 2,635,700
Finished products ........................ 1,196,000 1,435,000
---------- ----------
$3,421,800 $4,190,200
========== ==========
Note 5 - Property and equipment
At July 31, 2003 and 2002 property and equipment consist of:
2003 2002
---------- ----------
Laboratory machinery and equipment ........... $1,866,700 $1,702,600
Leasehold improvements ....................... 2,327,400 2,257,400
Office furniture and equipment ............... 4,896,500 4,313,800
---------- ----------
9,090,600 8,273,800
Accumulated depreciation and amortization .... 6,890,800 5,972,700
---------- ----------
$2,199,800 $2,301,100
========== ==========
These assets are stated at cost and are being depreciated and amortized
over their estimated useful lives on a straight-line basis. Leasehold
improvements are amortized over the term of the related leases or estimated
useful lives of the assets, whichever is shorter. Expenditures for maintenance
and repairs, which do not improve or extend the useful lives of the respective
assets, are expensed as incurred.
F-12
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003, 2002 AND 2001
NOTE 6 - LEASE OBLIGATIONS
The Company leases its office and laboratory space under several leases
that expire between August 31, 2002 and November 30, 2004. Certain officers /
directors of the Company own the building that the Company uses as its main
facility for laboratories and research and manufacturing. In addition to the
minimum annual rentals of space, this lease is subject to an escalation clause.
Rent expense under this lease approximated $1,302,000, $1,238,000 and $890,000
in fiscal 2003, 2002 and 2001, respectively.
The Company has various other operating leases for office and laboratory
space, which expire through fiscal 2008.
Total consolidated rent expense incurred by the Company during fiscal 2003,
2002 and 2001 was approximately $1,742,000, $1,710,000 and $1,631,000
respectively. Minimum annual rentals under operating lease commitments for
fiscal years ending July 31 are as follows:
2004 $1,837,000
2005 $774,000
2006 $231,000
2007 $167,000
2008 $139,000
----------
$3,148,000
NOTE 7 - LITIGATION
PATENT INFRINGEMENT
In June 1999, the Company filed suit in the United States District Court for the
Southern District of New York against Gen-Probe Incorporated, Chugai Pharma
U.S.A., Inc., Chugai Pharmaceutical Co., Ltd., bioMerieux, Inc., bioMerieux SA,
and Becton Dickinson and Company, charging them with infringing the Company's
U.S. Patent 4,900,659, which concerns probes for the detection of the bacteria
that causes gonorrhea. On January 26, 2001, the court granted the defendants'
motion for summary judgment that the Company's patent is invalid. On July 15,
2002, the Court of Appeals for the Federal Circuit reversed the judgment of
invalidity and remanded the case to the district court for further proceedings.
In March 2003, settlements have been reached with bioMerieux and Chugai; the
settlements did not have a material monetary impact on the Company. There can be
no assurance that the Company will be successful in the on-going proceedings.
However, even if the Company is not successful, management does not believe that
there will be a significant adverse monetary impact to the Company.
On March 6, 2002, the Company was named, along with certain of its officers and
directors among others, in a complaint entitled Lawrence F. Glaser and Maureen
Glaser, individually and on behalf of Kimberly, Erin, Hannah, and Benjamin
Glasser v. Hyman Gross, Barry Weiner, Enzo Biochemical Inc., Elazar Rabbani,
Shahram Rabbani, John Delucca, Dean Engelhardt, Richard Keating, Doug Yates and
Docs 1-50, in the U.S. District Court for the Eastern District of Virginia. The
complaint was filed by an investor in the Company who has filed for bankruptcy
protection and his family. The complaint alleged securities and common law fraud
and breach of fiduciary duty and seeks in excess of $150 million in damages. On
August 22, 2002, the complaint was voluntarily dismissed; however a new
substantially similar complaint was filed at the same time. On October 21, 2002,
the Company and the other defendants filed a motion to dismiss the complaint,
and the plaintiffs responded by amending the complaint and dropping their claims
against defendants Keating and Yates. On November 18, 2002, the Company and the
other defendants again moved to dismiss the Amended Complaint. On July 16, 2003,
the Court issued a Memorandum Opinion dismissing the Amended Complaint in its
entirety with prejudice. Plaintiffs thereafter moved for reconsideration but the
Court denied the motion on September 8, 2003. The plaintiffs subsequently
appealed to the Fourth Circuit and that appeal is presently pending. The Company
does not believe that the complaint has any merit and was correctly dismissed,
and intends to continue to defend the complaint vigorously in any event.
F-13
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003, 2002 AND 2001
NOTE 7 - LITIGATION (CON'T)
In March 2002, Enzo Life Sciences, a subsidiary of the Company, filed suit in
the United States District Court for the District of Delaware against Digene
Corp., charging it with infringing the Company's U.S. Patent No. 6,221,581 B1,
which concerns a novel process for detecting nucleic acids of interest. On May
31, 2002, Digene filed counterclaims in that suit against Enzo Life Sciences and
the Company, including business tort counterclaims relating to the `581 patent.
Digene further contends that the Company has caused it substantial damage by
interfering with business and financial opportunities. There can be no assurance
that the Company and Enzo Life Sciences will be successful in these proceedings.
However, even if Enzo Life Sciences is not successful in its patent infringement
suit, management does not believe that there will be a significant adverse
monetary impact to the Company. With respect to Digene's counterclaims, the
Company and Enzo Life Sciences believe them to be without merit and intend to
defend themselves vigorously. Trial is scheduled for March 2004.
In October 2002, the Company filed suit in the United States District Court of
the Southern District of New York against Amersham plc, Amersham Biosciences,
Perkin Elmer, Inc., Perkin Elmer Life Sciences, Inc., Sigma-Aldrich Corporation,
Sigma Chemical Company, Inc., Molecular Probes, Inc. and Orchid Biosciences,
Inc. In January 2003, the Company amended its complaint to include defendants
Sigma Aldrich Co. and Sigma Aldrich, Inc. The counts set forth in the suit are
for breach of contract; patent infringement; unfair competition under state law;
unfair competition under federal law; tortuous interference with business
relations; and fraud in the inducement of contract. The complaint alleges that
these counts arise out of the defendants' breach of distributorship agreements
with the Company concerning labeled nucleotide products and technology, and the
defendants' infringement of patents covering the same. In April 2003, the Court
directed that individual complaints be filed separately against each defendant.
Enzo has done so and has added Yale University ("Yale") for technical reasons
relating to its standing to enforce the four Yale patents of which Enzo is
exclusive licensee. Yale and Enzo are aligned in protecting the validity and
enforceability of the subject patents. In June 2003, the Court directed all
parties to submit a stipulation setting forth dates for the completion of
discovery. A stipulation to this effect is currently being negotiated and is
likely to provide for discovery to take place through early 2004, with a trial
to take place in 2004. Defendants have not yet answered the individual
complaints although it is anticipated that the answers, when filed, will include
a number of affirmative defenses and, possible, counterclaim. There can be no
assurance that the Company will be successful in this litigation. However, even
if the Company is not successful, management does not believe that there will be
a significant adverse monetary impact to the Company.
On October 28, 2003, the Company and Enzo Life Sciences, Inc., a subsidiary of
the Company, filed suit in the United States District Court of the Eastern
District of New York against Affymetrix, Inc. The Complaint alleges that
Affymetrix improperly transferred or distributed substantial business assets of
the Company to third parties, including portions of the Company's proprietary
technology, reagent systems, detection reagents and other intellectual property.
The Complaint also charges that Affymetrix failed to account for certain
shortfalls in sales of the Company's products, and that Affymetrix improperly
induced collaborators and customers to use the Company's products in
unauthorized fields or otherwise in violation of the agreement. The Complaint
seeks full compensation from Affymetrix to the Company for its substantial
damages, in addition to injunctive and declaratory relief to prohibit, among
other things, Affymetrix's unauthorized use, development, manufacture, sale,
distribution and transfer of the Company's products, technology, and/or
intellectual property, as well as to prohibit Affymetrix from inducing
collaborators, joint venture partners, customers and other third parties to use
the Company's products in violation of the terms of the agreement and the
Company's rights.
NOTE 8 - INCOME TAXES
The tax provision is calculated under the provisions of SFAS No. 109.
2003 2002 2001
---------- ---------- ----------
Current
Federal ...................... $1,828,000 $2,211,600 $2,783,400
State and local .............. 181,400 485,500 632,000
Deferred ....................... (128,100) 720,000 2,003,000
---------- ---------- ----------
Provision for income taxes ..... 1,881,300 $3,417,100 $5,418,400
========== ========== ==========
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:
2003 2002
---------- ----------
Deferred tax assets:
Provision for uncollectible
accounts Receivable ................ $837,100 $777,500
Other ................................ 176,700 208,300
---------- ----------
1,013,800 985,800
Deferred tax liability:
Deferred patent costs .............. (1,234,800) (1,389,200)
========== ----------
Net deferred TAX LIABILITY ............. ($221,000) $(403,400)
========== ==========
F-14
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003, 2002 AND 2001
NOTE 8 - INCOME TAXES (CON'T)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or the entire 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 that can be implemented by the Company in making
this assessment.
The provisions for income taxes were at rates different from U.S. federal
statutory rates for the following reasons:
2003 2002 2001
---- ---- ----
Federal statutory rate ................. 34% 34% 34%
Expenses not deductible for
income tax return purposes ........... 2% 2% 1%
State income taxes, net of
federal tax deduction ................ 3% 5% 9%
Benefit of foreign sales ............... (4%) (4%) --
Benefit of tax credits ................. -- (4%) --
Other .................................. (2%) -- --
--- --- --
33% 33% 44%
=== === ==
NOTE 9 - STOCK OPTIONS
The Company has an incentive stock option plan and a restricted stock
incentive plan, as described below.
INCENTIVE STOCK OPTION PLAN
The Company has stock option plans ("1993 plan" and "1994 plan") under which the
Company may grant options for up to 2,010,143 shares (1993 plan) and for up to
1,273,090 shares (1994 plan) of common stock. No additional options may be
granted under the 1993 plan or the 1994 plan. In fiscal 1999, the Company set up
a new incentive stock option plan ("1999 plan") under which the Company may
grant up to 2,202,244 shares of common stock. The exercise price of options
granted under such plans is equal to or greater than fair market value of the
common stock on the date of grant. 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 options under these plans.
A summary of the information pursuant to the Company's stock option plans for
the years ended July 31, 2003, 2002 and 2001 under SFAS No. 123 is as follows:
2003 2002 2001
------------------------------- ------------------------------- -----------------------------
Weighted - Average Weighted - Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
---------- ------------------ ---------- ------------------ ---------- ----------------
Outstanding at
beginning of year 2,706,096 9.85 2,728,186 $9.29 2,541,363 $8.70
Granted 629,738 12.35 24,806 21.21 420,328 13.57
Exercised (76,036) 7.19 (16,790) 7.70 (229,171) 5.14
Terminated (24,477) 13.13 (30,106) 11.22 (4,334) 13.55
--------- --------- ---------
Outstanding at
end of year 3,235,321 10.37 2,706,096 $9.85 2,728,186 $9.29
========= ========= =========
Exercisable at
end of year 2,371,431 9.43 2,188,484 $9.25 1,875,790 $8.84
========= ========= =========
Weighted average
fair value of
options granted
during year $8.91 $14.89 $9.74
========= ========= =========
F-15
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003, 2002 AND 2001
NOTE 9 - STOCK OPTIONS (CONT'D)
The following table summarizes information for stock options outstanding at
July 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
Weighted-Average
Range of Remaining Weighted-Average Weighted-Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
-------- ------ --------- ---------------- ---------------- --------- ----------------
$5.69 - 8.48 1,233,628 2.13 years 7.03 1,233,927 7.03
$8.74 - 12.86 1,784,900 6.68 years 11.59 1,005,453 10.95
$13.58 - 15.08 140,721 5.83 years 15.69 93,395 16.36
$21.21 - 25.64 58,708 4.41 years 22.49 21,292 23.00
$37.85 17,364 6.46 years 37.85 17,364 37.85
--------- ---------
3,235,321 2,371,431
========= =========
Incentive stock options generally become exercisable at 25% per year after
one year and expire ten years after the date of grant.
RESTRICTED STOCK INCENTIVE PLAN
The Company has a restricted stock incentive plan whereby the Company may
award up to 268,019 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, 2003, the Company has not awarded
any shares of common stock under this plan.
**********
As of July 31, 2003, the Company has reserved 3,453,192 shares under the
arrangements described above.
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.
NOTE 11 - 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, 2003, 2002 and 2001, the Company has authorized
employer contributions of 50% of the employees' contribution up to 10% of the
employees' compensation in Enzo Biochem, Inc. common stock. The 401(k) employer
contributions expense was $257,200, $247,000, and $230,800 in fiscal years 2003,
2002 and 2001, respectively.
F-16
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003, 2002 AND 2001
NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly financial data (in thousands, except per share amounts)
for fiscal 2003 and 2002 is summarized as follows:
THREE MONTHS ENDED
-------------------------------------------------
OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
2002 2003 2003 2003
----------- ----------- --------- --------
Revenues $17,356 $13,112 $11,640 $10,659
Gross profit 13,966 10,340 8,923 7,756
Income (loss) before
provision for taxes
on income 6,047 2,370 2,022 (4,714)
Net income (loss) $3,688 $1,446 $1,233 ($2,523)
======= ======= ======= ========
Basic income (loss)
per common share $.13 $.05 $.04 ($.08)
======= ======= ======= ========
Diluted income (loss)
per common share $.13 $.05 $.04 ($.08)
======= ======= ======= ========
THREE MONTHS ENDED
-------------------------------------------------
OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
2001 2002 2002 2002
----------- ----------- --------- --------
Revenues $13,386 $11,827 $15,021 $13,781
Gross profit 10,543 8,650 12,616 11,360
Income before
provision for taxes
on income 3,143 1,307 4,291 1,599
Net income $1,825 $822 $2,551 $1,725
======= ======= ======= ========
Basic income
per common share
$0.06 $0.03 $0.09 $0.06
======= ======= ======= ========
Diluted income
per common share
$0.06 $0.03 $0.09 $0.06
======= ======= ======= ========
F-17
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003, 2002 AND 2001
Note 13--Segment Reporting
The Company has two reportable segments: research and development and
clinical reference laboratories. The Company's research and development segment
conducts research and development activities as well as selling products derived
from these activities. The clinical reference laboratories provide diagnostic
services to the health care community. The Company evaluates performance based
on income before provision for taxes on income. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. Costs excluded from income before provision for
taxes on income and reported as other consist of corporate general and
administrative costs that are not allocable to the two reportable segments.
Management of the Company assesses assets on a consolidated basis only and
therefore, assets by reportable segment have not been included in the reportable
segments below.
The following financial information (in thousands) represents the reportable
segments of the Company:
CLINICAL REFERENCE
RESEARCH AND DEVELOPMENT LABORATORIES OTHER CONSOLIDATED
------------------------- ------------------------- -------------------------- -------------------------
FISCAL YEAR ENDED JULY 31, FISCAL YEAR ENDED JULY 31, FISCAL YEAR ENDED JULY 31, FISCAL YEAR ENDED JULY 31,
------------------------- ------------------------- ------------------------- -------------------------
2003 2002 2001 2003 2002 2001 2003 2002 2001 2003 2002 2001
------- ------- ------- ------- ------- ------- ------- ------- ------ ------- ------- -------
Operating revenues:
Research product
revenues .......... $23,253 $25,963 $17,056 -- -- -- -- -- -- $23,253 $25,963 $17,056
Clinical laboratory
services .......... -- -- -- $29,514 $28,052 $35,210 -- -- -- 29,514 28,052 35,210
Cost and expenses:
Cost of research
product revenues .. 2,189 737 785 -- -- -- -- -- -- 2,189 737 785
Cost of clinical
laboratory
services .......... -- -- -- 9,593 10,110 10,498 -- -- -- 9,593 10,110 10,498
Research and
development
expense ........... 8,311 6,179 6,081 -- -- -- -- -- -- 8,311 6,179 6,081
Depreciation and
amortization ...... 881 923 856 893 1,231 1,397 $ 34 -- -- 1,808 2,154 2,253
Provision for
uncollectible
accounts .......... 616 -- -- 8,729 14,188 11,999 -- -- -- 9,345 14,188 11,999
Other costs and
expenses .......... 1,809 1,520 1,044 7,294 6,279 7,521 8,048 $ 3,858 $2,857 17,151 11,657 11,422
Interest income ..... -- -- -- -- -- -- 1,355 1,350 3,003 1,355 1,350 3,003
------- ------- ------- ------- ------- ------- ------- ------- ------ ------- ------- -------
Income (loss) before
provision for
taxes on income ... $ 9,447 $16,604 $ 8,290 $ 3,005 $(3,756) $ 3,795 ($6,727) ($2,508) $ 146 $ 5,725 $10,340 $12,231
======= ======= ======= ======= ======= ======= ======= ======= ====== ======= ======= =======
The Company's reportable segments are determined based on the services they
performed and the products they sell, not on the geographic area in which they
operate. The Company's clinical reference laboratories segment operates 100% in
the United States with all revenue derived from this country. The research and
development segment earns revenue both in the United States and foreign
countries. The following is a summary of research and development revenues
attributable to customers located in the United States and foreign countries:
2003 2002 2001
------- ------- -------
United States ....... $19,492 $21,431 $14,257
Foreign Countries ... 3,761 4,532 2,799
------- ------- -------
$23,253 $25,963 $17,056
======= ======= =======
F-18
ENZO BIOCHEM, INC
SCHEDULE II - VALUATION
AND QUALIFYING ACCOUNTS
Years ended July 31, 2003, 2002 and 2001
Additions
-------------------------------------------------
Balance at Charged (credited) Charged
Beginning to costs to other (Additions) Balance at
Description of Period and Expenses Accounts Deductions End of Period
- ----------- ---------- ------------------ --------- ---------- -------------
2003
- ----
Allowance for doubtful accounts receivable $4,445,000 $9,345,000 --- $8,890,000(1) $4,900,000
2002
- ----
Allowance for doubtful accounts receivable $6,526,000 $14,188,000 --- $16,269,000(1) $4,445,000
2001
- ----
Allowance for doubtful accounts receivable $5,890,000 $11,999,000 --- $11,363,000(1) $6,526,000
(1) Write-off of uncollectible accounts receivable.
S-1
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NO -----------
-------
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)
10(a) 1983 Incentive Stock Option Plan. (4)
10(b) 1993 Incentive Stock Option Plan. (5)
10(c) Employment Agreement with Elazar Rabbani. (5)
10(d) Employment Agreement with Shahram Rabbani. (5)
10(e) Employment Agreement with Barry Weiner. (5)
10(f) 1994 Stock Option Plan (6).
10(g) Agreement with Corange International Limited (Boehringer Mannheim)
effective April 1994. (19) (7)
10(h) Agreement with Amersham International effective February 1995. (7)
10(i) Agreement with Dako A/S effective May 1995. (7)
10(j) Agreement with Baxter Healthcare Corporation (VWR Scientific
Products) effective September 1995. (7)
10(k) Agreement with Yale University and amendments thereto. (7)
10(l) Agreement with The Research Foundation of the State of New York
effective May 1987. (7)
10(m) 1999 Stock Option Plan filed. (8)
10(n) Amendment to Elazar Rabbani's employment agreement. (9)
10(o) Amendment to Shahram Rabbani's employment agreement. (9)
10(p) Amendment to Barry Weiner's employment agreement. (9)
10(q) Lease Addendum (9)
14 Code of Ethics filed herewith.
21 Subsidiaries of the registrant:
Enzo Clinical Labs, Inc., a New York corporation.
Enzo Life Sciences, Inc., a New York corporation.
Enzo Therapeutics, Inc., a New York corporation.
23 Consent of Independent Auditors filed herewith.
31(a) Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 filed herewith.
31(b) Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 filed herewith.
32(a) Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 filed herewith.
32(b) Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 filed herewith.
(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) 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.
(4) This exhibit was filed with the Company's definitive proxy statement
dated February 4, 1983 and is incorporated herein by reference.
(5) 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.
(6) 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.
(7) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1996 or previously filed amendment thereto and is
incorporated herein by reference.
(8) This exhibit was filed with the Company's Registration Statement on Form
S-8 (333-87153) and is incorporated herein by reference.
(9) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 2000 and is incorporated herein by reference.