SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2004
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 1-9974
ENZO BIOCHEM, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-2866202
- -------------------- ----------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
60 Executive Blvd., Farmingdale, New York 11735
- ----------------------------------------- -----------
(Address of Principal Executive office) (Zip Code)
(631-755-5500)
- --------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value New York Stock Exchange
- ----------------------------- -----------------------
(Title of Class) (Name of Each Exchange on which Registered)
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant has
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
_X_ Yes No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 125-2).
_X_ Yes No ___
As of May 24, 2004 the Registrant had 30,841,000 shares of Common Stock
Outstanding.
ENZO BIOCHEM, INC.
FORM 10-Q
April 30, 2004
INDEX
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
- -------
Item 1. Financial Statements
Consolidated Balance Sheet - April 30, 2004 (unaudited)
and July 31, 2003 (audited) 3
Consolidated Statement of Operations
For the nine months ended April 30, 2004 and 2003 (unaudited) 4
Consolidated Statement of Operations
For the three months ended April 30, 2004 and 2003 (unaudited) 5
Consolidated Statement of Cash Flows
For the nine months ended April 30, 2004 and 2003 (unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
Part II - Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 19
2
ENZO BIOCHEM, INC
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
April30, July 31,
2004 2003
(unaudited) (audited)
--------- ---------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 59,879 $ 63,268
Marketable securities ............................... 15,341 15,154
Accounts receivable, less allowance
for doubtful accounts ............................. 17,186 17,266
Inventories ......................................... 3,047 3,422
Prepaid expenses .................................... 1,652 2,233
Deferred taxes ...................................... 2,874 1,014
Prepaid taxes ....................................... 127 542
Income tax receiveable .............................. 695 --
--------- ---------
Total current assets .................................. 100,801 102,899
Property and equipment, at cost less accumulated
depreciation and amortization ....................... 2,332 2,200
Goodwill .............................................. 7,452 7,452
Deferred patent costs, less accumulated amortization .. 2,680 3,166
Other ................................................. 157 161
--------- ---------
$ 113,422 $ 115,878
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ............................. $ 1,250 $ 1,321
Accrued legal fees ................................. 1,810 1,915
Other accrued expenses ............................. 431 551
Accrued research and development expenses .......... 55 453
Accrued payroll .................................... 481 703
Deferred rent ...................................... 145 232
--------- ---------
Total current liabilities ............................. 4,172 5,175
Deferred taxes ........................................ 1,046 1,235
Deferred rent ......................................... -- 87
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 30,857,000
AND 30,507,000 OUTSTANDING AT APRIL 30, 2004
AND 29,975,100 at July 31, 2003 ................... 308 300
Additional paid-in capital .......................... 205,866 199,082
Treasury stock ...................................... (5,669) --
Accumulated deficit ................................. (92,155) (89,916)
Accumulated other comprehensive loss ................ (146) (85)
--------- ---------
Total stockholders' equity ............................ 108,204 109,381
--------- ---------
$ 113,422 $ 115,878
========= =========
3
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Nine Months
Ended April 30,
2004 2003
-------- --------
(In thousands,
expect per share data)
Revenues:
Research product revenues .......................... $10,942 $20,612
Clinical laboratory services ....................... 22,123 21,496
-------- --------
33,065 42,108
Costs and expenses:
Cost of research product revenues .................. 1,238 2,012
Cost of clinical laboratory services ............... 7,457 6,777
Research and development expense ................... 6,354 5,086
Selling expense .................................... 3,483 3,615
General and administrative expense ................. 7,428 6,253
Provision for uncollectible accounts receivable .... 8,354 6,432
Legal expense ...................................... 4,116 2,554
-------- --------
38,430 32,729
-------- --------
(Loss) income before interest income and
benefit (provision) for taxes on income ........... (5,365) 9,379
Interest income ...................................... 902 1060
(Loss) income before provision for taxes on income ... (4,463) 10,439
Benefit (provision) for taxes on income .............. 2,224 (4,072)
-------- --------
Net (loss) income .................................... ($2,239) $6,367
======== ========
Net (loss) income per common share:
Basic ............................................. ($0.07) $0.21
Diluted ........................................... ($0.07) $0.21
======== ========
Denominator for per share calculation:
Basic ............................................. 30,082 29,888
======== ========
Diluted ........................................... 30,082 30,467
======== ========
4
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Three Months
Ended April 30,
2004 2003
-------- --------
(In thousands,
expect per share data)
Revenues:
Research product revenues .......................... $4,215 $4,181
Clinical laboratory services ....................... 7,550 7,459
-------- --------
11,765 11,640
Costs and expenses:
Cost of research product revenues .................. 441 285
Cost of clinical laboratory services ............... 2,619 2,432
Research and development expense ................... 2,073 1,664
Selling expense .................................... 1,290 1,062
General and administrative expense ................. 2,353 2,114
Provision for uncollectible accounts receivable .... 2,849 2,234
Legal expense ...................................... 1,337 225
-------- --------
12,962 10,016
-------- --------
(Loss) income before interest income and benefit
(provision) for taxes on income .................... (1,197) 1,624
Interest income ...................................... 306 398
-------- --------
(Loss) income before provision for taxes on income ... (891) 2,022
Benefit (provision) for taxes on income .............. 431 (789)
-------- --------
Net (loss) income .................................... (460) $1,233
======== ========
Net (loss) income per common share:
Basic .............................................. ($0.02) $0.04
======== ========
Diluted ............................................ ($0.02) $0.04
======== ========
Denominator for per share calculation:
Basic .............................................. 30,203 29,889
======== ========
Diluted ............................................ 30,203 30,409
======== ========
5
ENZO BIOCHEM, INC
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months
Ended April 30,
2004 2003
-------- --------
(In Thousands)
Cash flows from operating activities:
Net (loss) income ...................................... (2,239) $6,367
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization of property and
equipment .......................................... 793 760
Amortization of deferred patent costs ................ 900 649
Provision for uncollectible accounts receivable ...... 8,354 6,432
Issuance of stock for 401 K plan ..................... 282 --
Deferred rent ........................................ (174) (147)
Deferred taxes ....................................... (2,010) --
Changes in operating assets and liabilities:
Accounts receivable before provision for
uncollectible amounts ............................ (8,274) (4,052)
Inventories ........................................ 375 (25)
Income taxes receiveable ........................... (695) --
Prepaid expenses ................................... 581 (179)
Prepaid taxes ...................................... 415 1,968
Trade accounts payable and other accrued
expenses ......................................... (191) (959)
Income taxes payable ............................... -- 1,632
Accrued research and development expenses .......... (398) --
Accrued legal fees ................................. (105) 610
Accrued payroll .................................... (222) (156)
-------- --------
Total adjustments .................................. (369) 6,533
-------- --------
Net cash (used in) provided by
operating activities ........................ (2,608) 12,900
-------- --------
Cash flows from investing activities:
Capital expenditures ................................... (938) (636)
Patent costs deferred .................................. (414) (300)
Purchase of marketable securities ...................... (287) --
Security deposits ...................................... 4 (6)
-------- --------
Net cash used in investing activities ................ (1,635) (942)
-------- --------
Cash flows from financing activities:
Proceeds from the exercise of stock options ............ 841 23
Proceeds from insurance loss ........................... 13 --
-------- --------
Net cash provided by financing activities ............ 854 23
-------- --------
Net (decrease) increase in cash and cash equivalents ..... (3,389) 11,981
Cash and cash equivalents at the beginning of
the period ............................................. 63,268 67,135
-------- --------
Cash and cash equivalents at the end of the period ....... $59,879 $79,116
======== ========
SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS
- ---------------------------------------------------
In April 2004, certain officers of the Company had exercised incentive stock
options. The Company had issued 769,290 shares of common stock, and the Officers
swapped matured share. The Company recorded the 349,932 shares received as
Treasury Stock.
6
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2004
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The consolidated financial statements
should be read in conjunction with the consolidated financial statements for the
year ended July 31, 2003 and notes thereto contained in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission. The
results of operations for the nine months ended April 30, 2004 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending July 31, 2004.
STOCK BASED 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.
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.
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,
regardless of whether they account for that compensation using the fair value
method of SFAS No. 123 or the intrinsic value method of APB No. 25. The Company
adopted SFAS No. 148 effective January 31, 2003.
7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2004
(Unaudited)
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based compensation for the periods ended April 30, 2004 and 2003:
Nine Months Three Months
Ended April 30, Ended April 30,
2004 2003 2004 2003
------ ------ ------ ------
(In thousands, except for share data)
Net (loss) income, as reported ($2,239) $6,367 ($460) $1,233
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards 2,285 2,330 983 937
------ ------ ------ ------
Pro forma net (loss) income (4,524) 4,037 (1,443) $296
====== ====== ====== ======
Earnings (loss) per share:
Basic - as reported $(.07) $.21 $(.02) $.04
Basic - pro forma $(.15) $.14 $(.05) $.01
Diluted - as reported $(.07) $.21 $(.02) $.04
Diluted - pro forma $(.15) $.13 $(.05) $.01
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". The following table sets forth
the computation of basic and diluted earnings per share pursuant to SFAS 128.
Nine Months Three Months
Ended April 30, Ended April 30,
2004 2003 2004 2003
------ ------ ------ ------
(In thousands, except for share data)
Numerator:
Net income (loss) for numerator
for basic and diluted earnings
per common share ($2,239) $6,367 ($460) $1,233
Denominator:
Denominator for basic earnings per
common equivalent share during
the period 30,082 29,888 30,203 29,889
Effect of dilutive securities
Employee and director stock options
and warrants -- 579 -- 520
------ ------ ------ ------
Denominator for diluted earnings (loss)
per common equivalent share and
assumed conversions 30,082 30,467 30,203 30,409
====== ====== ====== ======
Basic earnings (loss) per share ($.07) $.21 ($.02) $.04
====== ====== ====== ======
Diluted earnings (loss) per share ($.07) $.21 ($.02) $.04
====== ====== ====== ======
The following table summarized, for each period presented, the number of shares
excluded form the computation of diluted earnings per share, as their effect
upon potential issuance was anti-dilutive.
Nine Months Three Months
Ended April 30, Ended April 30,
2004 2003 2004 2003
------ ------ ------ ------
(In thousands)
Employee and director stock options
and warrants 916 -- 617 --
8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2004
(Unaudited)
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 shares and per share data
have been adjusted to retroactively reflect this stock dividend for all periods
presented.
Inventories
Inventories consist of the following as of:
April 30, 2004 July 31, 2003
-------------- -------------
(In thousands)
Raw Materials $111 $168
Work in process 1,889 2,058
Finished products 1,047 1,196
------ ------
$3,047 $3,422
====== ======
9
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2004
(Unaudited)
Note 3 - SEGMENT INFORMATION
The Company follows the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"). 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 which 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 has not been included in the reportable
segments below.
The following financial information (in thousands) represents the reportable
segments of the Company:
RESEARCH CLINICAL REFERENCE OTHER CONSOLIDATED
AND DEVELOPMENT
NINE MONTHS NINE MONTHS NINE MONTHS NINE MONTHS
ENDED APRIL 30, ENDED APRIL 30, ENDED APRIL 30, ENDED APRIL 30,
2004 2003 2004 2003 2004 2003 2004 2003
------- ------- -------- ------- ------ -------- -------- -------
Operating revenues:
Research product revenues $10,942 $20,612 -- -- -- -- 10,942 $20,612
Clinical laboratory services -- -- $22,123 $21,496 -- -- 22,123 $21,496
Cost and expenses:
Cost of research product revenues .. 1,238 2,012 -- -- -- 1,238 2,012
Cost of clinical laboratory services -- 7,457 6,777 -- -- 7,457 6,777
Research and development expense 6,354 5,086 -- -- -- 6,354 5,086
Provision for uncollectible
accounts receivable 8,354 6,432 -- -- 8,354 6,432
Other costs and expenses 1,740 2,171 7,053 5,870 6,234 4,381 15,027 12,422
Interest income -- -- 902 1,060 902 1,060
Income (loss) before provision for
taxes on income $1,610 $11,343 (741) $2,417 (5,332) $(3,321) (4,463) $10,439
======= ======= ======== ======= ====== ======== ======== =======
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED APRIL 30, ENDED APRIL 30, ENDED APRIL 30, ENDED APRIL 30,
2004 2003 2004 2003 2004 2003 2004 2003
------- ------- -------- ------- ------ -------- -------- -------
Operating revenues:
Research product revenues $4,215 $4,181 -- -- -- $4,215 4,181
Clinical laboratory services -- -- $7,550 $7,459 -- 7,550 7,459
Cost and expenses:
Cost of research product revenues 441 285 -- 441 285
Cost of clinical laboratory services -- 2,619 2,432 -- 2,619 2,432
Research and development expense 2,073 1,664 -- 2,073 1,664
Provision for uncollectible
accounts receivable 2,849 2,234 2,849 2,234
Other costs and expenses 642 606 2,396 1,942 1,942 853 4,980 3,401
Interest income -- 306 398 306 398
Income (loss) before provision for
taxes on income 1,059 $1,626 (314) $851 (1,636) $(455) (891) $2,022
======= ======= ======== ======= ====== ======== ======== =======
10
Item 2. 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 2 of the Notes to Consolidated Financial
Statements.
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 nine months ended April 30,
2004 and 2003, respectively, approximately 33% and 49% of the Company's
operating revenues were derived from research product sales and approximately
67% and 51% were derived from clinical laboratory services.
Liquidity and Capital Resources
At April 30, 2004, our cash and cash equivalents and marketable
securities totaled $75.2 million, a decrease of $3.4 million from July 31, 2003.
We had working capital of $96.6 million at April 30, 2004 compared to $97.7
million at July 31, 2003.
Net cash used by operating activities for the period ended April 30,
2004 was approximately $2.6 million as compared to net cash provided by
operating activities of $12.9 million for the period ended April 30, 2003. The
decrease in net cash provided by operating activities was primarily due to the
net loss in the 2004 period as compared to the net income in the 2003 period.
11
Net cash used in investing activities increased approximately $.7
million from the 2003 period, primarily as a result of an increase investment in
marketable securities and an increase in capital expenditures.
Net cash provided by financing activities increased by $.8 million from
the 2003 period primarily as a result of the increase in proceeds from the
exercise of stock options.
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.
12
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 that necessitates 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 collections 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 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.
13
Results of Operations
NINE MONTHS ENDED APRIL 30, 2004 COMPARED WITH NINE MONTHS ENDED APRIL 30, 2003
Revenues from operations for the nine months ended April 30, 2004 were
$33.1 million a decrease of $9.0 million over revenues from operations for the
nine months ended April 30, 2003. This decrease was due to a decrease of $9.7
million in revenues from our research product sales operations offset by an
increase of $.6 million in revenues from clinical reference laboratory operation
over revenues for such activities in the period ended April 30, 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 the decrease sales based on the
termination of a contract with one major distributor.
The increase of clinical laboratory services revenue was due primarily to
increased 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
clinical laboratory is subject to seasonal fluctuations in operating results.
Volume of testing generally declines during the summer months, harsh winter
conditions, 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.
The cost of research products sold decreased by $.8 million from the prior
nine month period. This decrease was primarily due to the decrease in
expenditures related to the decreased sales based on the termination of a
contract with one major distributor.
The cost of clinical laboratory services increased by $.7 million during
this period primarily due to an increase in costs associated with certain
esoteric tests and the costs related to the accelerated process of performing
more tests in-house.
Research and development expenses increased by approximately $1.2 million
as a result of an increase in the expenses related to the clinical trial
activities and other research projects.
Selling expenses were comparable to the prior year.
General and administrative expenses increased by $1.2 million due to the
increase in overall insurance costs and an increase in data processing personnel
costs and an increase in legal personnel costs.
The Company's legal expenses increased by $1.6 million to $4.1 million from
$2.6 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 increased by
$1.9 million to $8.3 million from $6.4 million as compared to the same nine
month period last year at the clinical laboratory division. The percentage of
the provision for uncollectible accounts receivable as a relationship to revenue
for clinical laboratory services increased to 38% for
14
these nine months ended as compared to 30% for the same nine month period last
year. This increase was primarily due to the change in the mix of payors.
Interest income was comparable to last years prior nine months ended.
For the nine months ended April 30, 2004, the Company recorded a benefit
for income taxes of $2.0 million based upon the combined effective federal,
state and local income tax rates. For the nine months ended April 30, 2003, the
Company recorded a provision for income taxes of $4.1 million which was based on
the combined effective federal, state and local income tax rates.
Income (loss) before (provision) benefit for taxes on income from the
research and development segment activities and related costs was $1.6 million
in for period ended April 30, 2004, as compared to income before provision for
taxes on income of $11.3 million in for period ended April 30, 2003. The
decrease in the income resulted primarily from a decrease in direct sales of
research products of labeling and detection reagents for the genomics and
sequencing markets to one major distributor. Income (loss) before provision for
taxes on income from the clinical reference laboratories segment amounted to a
loss of $.8 million for period ending April 30, 2004, as compared to income of
$2.4 million for fiscal 2003. The decrease in income before taxes for the
clinical laboratory segment was primarily due to the increase in costs based on
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, and also due to an increase in the provision for
uncollectible accounts receivable due to the change in the estimate of
uncollectible receivables percentages.
THREE MONTHS ENDED APRIL 30, 2004 COMPARED WITH THREE MONTHS ENDED
APRIL 30, 2003
Revenues from operations for the three months ended April 30, 2004 were
$11.8 million an increase of $.1 million over revenues from operations for the
three months ended April 30, 2003. This increase was primarily due to an
increase of $.1 million in revenues from our clinical laboratory operations. The
revenues from the research product sales operation were comparable to the
previous three month period.
The cost of research products sold increased by $.2 million as compared to
the prior year's three months. This increase was primarily due to the initial
start up costs related to the production of certain new products just recently
introduced to the market.
The cost of clinical laboratory services increased by $.2 million during
this period primarily due to an increase in cost associated with certain
esoteric tests.
Research and development expenses increased by approximately $.4 million as
a result of an increase in the expenses related to the clinical trial activities
and other research projects.
Selling expenses increased by $.2 million during the three months ended, as
compared to the prior year's three months. This increase was primarily due to an
increase in personnel headcount of sales from our clinical laboratory operation.
General and administrative expenses increased by $.2 million due to the
increase in data processing personnel costs and an increase in legal personnel
costs.
The Company's legal expenses increased by $1.1 million to $1.3 million from
$.2 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.
15
The Company's provision for uncollectible accounts receivable increased by
$.6 million to $2.8 million from $2.2 million as compared to the same three
month period last year at the clinical laboratory division. The percentage of
the provision for uncollectible accounts receivable as a relationship to revenue
increased to 38% for these three months ended as compared to 30% for the same
three month period last year. This increase was primarily due to the change in
the mix of payors.
Interest income was comparable to last years prior three months ended.
For the three months ended April 30, 2004, the Company recorded a benefit
for income taxes of $.4 million based upon the combined effective federal, state
and local income tax rates. For the three months ended April 30, 2003, the
Company recorded a provision for income taxes of $.8 million which was based on
the combined effective federal, state and local income tax rates.
Income (loss) before (provision) benefit for taxes on income from the
research and development segment activities and related costs was $1.1 million
in for period ended April 30, 2004, as compared to income before provision for
taxes on income of $1.6 million in for period ended April 30, 2003. The decrease
in the income resulted primarily from a decrease in direct sales of research
products of labeling and detection reagents for the genomics and sequencing
markets to one major distributor. Income (loss) before provision for taxes on
income from the clinical reference laboratories segment amounted to a $(.3)
million for period ending April 30, 2004, as compared to income of $.9 million
for fiscal 2003. The decrease in income before taxes for the clinical laboratory
segment was primarily due to the increase in costs based on 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, and also due to an increase in the provision for uncollectible
accounts receivable due to the change in the estimate of uncollectible
receivables percentages.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
investment grade corporate and U.S. government securities. Under its current
policies, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14c within
90 days of the filing date of this quarterly report. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that
these disclosure controls and procedures are effective. There were no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of their
evaluation.
16
PART II - Other Information
Item 1. 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 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 Enzo Life Sciences' 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. On June 10, 2004, the district court issued its
decision on construction of the claims (referred to as a "Markman" ruling) of
the '581 patent. A Markman ruling sets forth the scope of the products and
methods that are embraced by the claims. In its decision, the district court
ruled in favor of Enzo Life Sciences and against Digene on all disputed issues
concerning construction of the patent claims. Following issuance of that
decision, the district court adjourned the scheduled start of the first phase of
the trial, which was to have started on June 15, 2004 on the issues of
infringement and damages (all other issues, including validity and Digene's
counterclaims, were to be tried separately). The district court has not yet set
a new trial date, but the Company expects that a trial date will be scheduled
within the next several months if the case is not otherwise resolved.
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.,
17
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; tortious 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. A number of
the defendants have answered the individual complaints and asserted a variety of
affirmative defenses and counterclaims. In addition, two of the Defendants filed
motions to dismiss Enzo's patent infringement claims as to four of the
patents-in-suit on the grounds that Enzo is not the exclusive licensee of such
patents. By order dated March 11, 2004, the court denied the motions to dismiss.
The moving defendants then moved the court to certify its decision to the
Federal Circuit Court of Appeals for appellate review. This motion is currently
pending before the court. Although the court has now lifted all discovery stays,
due to the motions to dismiss and the pending motion for certification,
discovery has yet to re-commence in earnest. While fact discovery is currently
scheduled to close on November 5, 2004, it is anticipated that the court will
extend this deadline given the extensive motion practice. 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. Subsequent to the filing of the Complaint against Affymetrix,
Inc. referenced above, on or about November 10, 2003, Affymetrix, Inc. filed its
own complaint against the Company and its subsidiary, Enzo Life Sciences, Inc.,
in the United States District Court for the Southern District of New York,
seeking among other things, declaratory relief that Affymetrix, Inc., has not
breached the parties' agreement, that it has not infringed certain of Enzo's
Patents, and that certain of Enzo's patents are invalid, and damages for alleged
breach of the parties' agreement, unfair competition, and tortuous interference,
as well as certain injunction relief to prevent alleged unfair competition and
tortuous interference. The Company does not believe that the complaint has any
merit and intends to defend vigorously. Affymetrix also moved to transfer venue
of Enzo's action to the Southern District of New York, where other actions
commenced by Enzo were pending as well as Affymetrix's subsequently filed
action. On January 30, 2004, Affymetrix's motion to transfer was granted.
Accordingly, the Enzo and Affymetrix actions are now both pending in the
Southern District of New York. Pleadings have not been completed and discovery
has not commenced.
18
On June 2, 2004 Roche Diagnostic GmbH and Roche Molecular Systems, Inc.
(collectively "Roche") filed suit in the U.S. District Court of the Southern
District of New York against Enzo Biochem, Inc. and Enzo Life Sciences, Inc.
(collectively "Enzo"). The complaint seeks declaratory judgment (i) of patent
invalidity with respect to Enzo's 4,994,373 patent, (ii) of no breach by Roche
of its 1994 Distribution and Supply Agreement with Enzo (the "1994 Agreement"),
(iii) that non-payment by Roche to Enzo for certain sales of Roche products does
not constitute a breach of the 1994 Agreement, and (iv) that Enzo's claims of
ownership to proprietary inventions, technology and products developed by Roche
are without basis. In addition the suit claims tortious interference and unfair
competition. The Company does not believe that the complaint has merit and
intends to vigorously respond to such action.
On June 8, 2004, the Company and its wholly-owned subsidiary, Enzo Life
Sciences, Inc., filed suit in the United States District Court for the District
of Connecticut against Applera Corporation and its wholly-owned subsidiary
Tropix, Inc. The complaint alleges infringement of six patents (relating to DNA
sequencing systems, labelled nucleotide products, and other technology). Yale
University is the owner of four of the patents and the Company is the exclusive
licensee. Accordingly, Yale was also a plaintiff in the lawsuit. Yale and Enzo
are aligned in protecting the validity and enforceability of the patents. Enzo
Life Sciences is the owner of the remaining two patents. The complaint seeks
permanent injunction and damages (including treble damages for wilful
infringement). Defendants' answers to the complaint are due in early July of
2004. It is anticipated that the answers will include multiple affirmative
defences, and potentially, counterclaims. A trial date has not been set.
Discovery has not yet commenced. There can be no assurance that the Company will
be successful in this litigation. Even if the Company is not successful,
management does not believe that there will be a significant adverse monetary
impact on the Company.
19
Item G. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Exhibit
31(a) Certification of Elazar Rabbani,
Ph.D. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31(b) Certification of Barry Weiner pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32(a) Certification of Elazar Rabbani, Ph.D. pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32(b) Certification of Barry Weiner pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K.
One Form 8-K dated March 16, 2004, furnished to the Securities
and Exchange Commission during the quarter ended April 30, 2004, pursuant to
Item 12 of Form 8-K. Pursuant to General Instruction B of Form 8-K, information
furnished pursuant to Item 12 is not deemed to be "filed" for the purpose of
Section 18 of the Securities Exchange Act of 1934, is not incorporated by
reference into this Report on Form 10-Q and Enzo does not intend to incorporate
that report on Form 8-K by reference into any filing under the Securities Act of
1933 or the Securities Exchange Act of 1934.
20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENZO BIOCHEM, INC.
------------------
(registrant)
Date: June 14, 2004 by: /s/ Barry Weiner
----------------
Chief Financial Officer,