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, 2005
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.
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(Exact name of registrant as specified in its charter)
New York 13-2866202
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
60 Executive Boulevard,
Farmingdale, New York 11735
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(Address of principal executive offices) (Zip Code)
(631) 755-5500
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(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.
Yes [x] No [ ]
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 voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold as of January 31, 2005, the last business of the
registrant's most recently completed second fiscal quarter, was approximately
$462,341,000. As of October 3, 2005, the Registrant had 32,142,400 shares of
Common Stock outstanding.
DOCUMENT 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 on
or about January 20, 2006 are incorporated by reference into Part III.
PART I
Item 1. BUSINESS
OVERVIEW
Enzo Biochem, Inc. (the "Company" or "Enzo") is a life sciences and
biotechnology company focused on harnessing genetic processes to develop
research tools, diagnostics and therapeutics and the provision of 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 to the diagnosis of infectious and other diseases and form the basis
for a portfolio of products marketed to the biomedical and pharmaceutical
research markets. We are further using these technologies as platforms in the
development of products for the clinical diagnostics market. In addition, our
work in gene analysis has led to the development of 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 40 issued U.S. patents, over 167 issued foreign patents, and
various pending applications worldwide) around our core technologies.
The business activities of the Company are performed by 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
laboratory through Enzo Clinical Labs. For information relating to the Company's
business segments, see Note 15 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, 2005 and 2004, respectively, approximately 24% and
31% of the Company's operating revenues were derived from product sales and
approximately 76% and 69% 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,
microarrays, biochips, microspheres, 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 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 greater than $20 billion. It is comprised of a broad range of
tests such as clinical chemistry, microbiology, immunoassay, blood banking and
cancer screening. Many of these tests employ traditional technologies, such as
immunoassays and cell culture technologies, for the detection of diseases.
Immunoassays are based on the use of antibodies directed against a specific
target, or antigen, to detect that antigen in a patient sample. Cell culturing
techniques involve the growth, isolation and visual detection of 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
throughput 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 is now more than $3 billion per year
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.
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
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quality of the vector is its ability to bind to the target cell and effectively
deliver, 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 a leading developer and provider of medicines,
as well as a leading developer and provider of the tools and diagnostics used to
study and detect disease at the molecular level. There can be no assurance that
our objective will be met. Key elements of our strategy include:
APPLY OUR INNOVATIVE TECHNOLOGY TO THE INFECTIOUS DISEASE MARKET
We believe 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 to 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 medicines that
regulate the 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.
During the current fiscal year the Company acquired the rights and
intellectual property to a candidate drug and technology intended for use in the
treatment of autoimmune uveitis. We also entered into a collaboration agreement
with scientists at Ludwig-Maximilians University in Munich, Germany to evaluate
certain of Enzo's proprietary technology for treating uveitis in an animal model
system. In fiscal 2004, Enzo, through Enzo Therapeutics, entered into two
agreements with the University of Connecticut Health Center at Farmington, CT,
to license and cooperatively develop novel therapeutics for the stimulation and
enhancement of bone formation. The products if any, emanating from this
technology could provide potential therapy for bone disorders, including bone
loss, fractures, abnormalities, diseases, and other applications. In fiscal
2004, we also entered into a licensing agreement with Thomas Jefferson
University, Philadelphia, PA for certain patents relating to the development of
products within our therapeutic program. There can be no assurance that any of
these collaborative projects will be successful.
Similarly, we seek to fully exploit the commercial value of our
technology by partnering with for-profit enterprises in areas in order to act on
opportunities that can be accretive to our efforts in accelerating our
development program. In line with this strategy, during fiscal 2004 Enzo
acquired the assets of OraGen Corporation, Moorestown, New Jersey and a
privately owned biotechnology company specializing in immune regulation
technologies. This acquisition is expected to broaden our capabilities in the
area of immunological regulation, particularly as it relates to the treatment of
infectious diseases.
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
During fiscal 2005, Enzo Life Sciences continued to implement an
aggressive marketing program designed to more directly service its end users,
while simultaneously positioning the Company for product line expansion. The
program involves continued increases in the direct field sales force, a
comprehensive advertising campaign, increased attendance at top industry trade
meetings, as well as the enhancement of the interactive web site. In addition to
our
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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
2005, distribution agreements were in effect with, among others, Roche
Diagnostic Systems and Perkin-Elmer Life Sciences. The Company received notice
in December 2004 that Perkin-Elmer Life Sciences was terminating its agreement
with the Company. See Item 3. Legal Proceedings.
Research product revenue from Affymetrix represented approximately 0%,
0% and 22% of the consolidated revenues in fiscal 2005, 2004 and 2003,
respectively, under a non-exclusive distribution and supply agreement. At July
31, 2005 and 2004, of the Company's net accounts receivable no monies were
included from this former major distributor. Research product revenue from
Perkin-Elmer represented approximately 3%, 8% and 4% of the consolidated
revenues in fiscal 2005, 2004 and 2003, respectively, under a non-exclusive
distribution and supply agreement. At July 31, 2005 and 2004, approximately 0%
and 5%, respectively, of the Company's net accounts receivable relate to amounts
due from this distributor. Research product revenue from Amersham represented
approximately 0%, 0% and 1% of the consolidated revenues in fiscal 2005, 2004
and 2003, respectively, under a terminated non-exclusive distribution and supply
agreement. At July 31, 2004 and 2003, 0% and 2%, respectively, of the Company's
net accounts receivable relate to amounts due from this former distributor.
Research product revenue from Roche represented approximately 0%, 8% and 6% of
the consolidated revenues in fiscal 2005, 2004 and 2003, respectively, under a
non-exclusive distribution and supply agreement. At July 31, 2005 and 2004, 0%
and 0% respectively of the Company's net accounts receivable relate to amounts
due from the this distributor.
The following is a table outlining the above for the respective consolidated
fiscal years:
% of Revenue % of Accounts Receivable
2005 2004 2003 2005 2004
---- ---- ---- ---- ----
Affymetrix 0% 0% 22% 0% 0%
Perkin-Elmer 3% 8% 4% 0% 5%
Amersham 0% 0% 1% 0% 0%
Roche 0% 8% 6% 0% 0%
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.
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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:
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 though there can be no assurance 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; and
o nuclear localization.
IMMUNE REGULATION.
o ORAL IMMUNE REGULATION. We are exploring a potentially 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
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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. There can be no assurance that we will be able
to secure patents or that these programs will be successful. We are applying our
expertise in immune regulation to develop proprietary therapeutics for the
treatment of a variety of diseases, including chronic active hepatitis caused by
HBV and HCV infection, graft versus host disease and inflammatory bowel disease,
including Crohn's Disease and ulcerative colitis. During this fiscal year, the
Company acquired the rights and intellectual property to a candidate drug and
technology intended for use in the treatment of autoimmune uveitis, a chronic
inflammation of the eye that can lead to blindness.
o IMMUNE POTENTIATION. We have developed a new immunomodulator agent,
EGS21, a beta-D-glucosylceramide (GC) compound, as a potential therapeutic for
treating immune mediated disorders. GC is a glycolipid that has been shown by
Enzo scientists and collaborators to act as an anti-inflammatory agent in animal
model systems, and therefore is being evaluated as an important candidate drug
in the treatment of various immune mediated diseases, such as Crohn's disease,
hepatitis B, hepatitis C, non-alcoholic steatohepatitis (NASH) or fatty liver
and HIV. We believe that GC might be utilized either as a separate therapeutic
or as an adjunct or combination treatment with our other platforms for the
management of immune mediated disorders.
SMALL MOLECULE DEVELOPMENT
Enzo's newest therapeutic platform involves the development as
pharmaceutical agents, of protein factors or associated peptides, as well as
small molecules that interfere with protein-protein interactions. It has been
shown recently that bone density is dependent on a homeostatic mechanism
requiring the interaction of several protein factors. The interference of
factor-factor interactions by small molecules can lead to significant increases
in bone mass. Enzo is developing these observations to yield new pharmaceutical
products for the management of osteoporosis and certain periodontal disorders.
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.
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 detect and
identify genes in certain specific formats. Our line of kits for the labeling of
nucleic acids for the study of
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specific gene expression is marketed under the BIOARRAY(R) brand name. This
product line also includes a new kit for amplifying small quantities of genetic
material as well as our new GENEBEAM(TM) system for gene detection and
identification.
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 60 million
individuals worldwide living with HIV infection during 2003. There were 5
million new infections and 3 million deaths from HIV during that same year. Over
20 million have died since the first cases of AIDS were identified in 1981. At
present, two classes of products have received FDA marketing approval for HIV-1
infection: reverse transcriptase inhibitors and protease inhibitors. 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. Enzo's proprietary Stealth Vector(TM)
HGTV43(TM) gene construct is a vehicle designed to carry and deliver 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 long-term safety 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(TM) 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 60 months to date.
o all subjects tolerated the procedure;
o anti HIV-1 antisense RNA was detected in the circulation of
subjects, the longest at 60 months
o purified CD4+ cells from 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.
The next phase of clinical trials is to be conducted at University of
California San Francisco the site of the Phase I study. This study will focus on
a strategy designed to increase the percentage of engineered CD4+ cells using a
low dose of total body irradiation (TBI). Enzo's protocol for this phase of the
study successfully passed review by the National Institutes of Health
Recombinant DNA Advisory Committee (RAC) and has been submitted to the UCSF
Committee on Human Research (CHR) for approval. We anticipate initiating the
study and enrolling subjects as soon as the protocol is successfully reviewed by
CHR. The study initiated at New York Presbyterian Hospital-Cornell Medical
Center has not enrolled subjects pending completion of manufacturing protocols.
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HEPATITIS B VIRUS (HBV). We are developing HBV therapeutics utilizing
our proprietary immune regulation technology.
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.
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; and
o 33% of subjects showed a decrease in inflammation seen on
liver biopsy.
Based on these results, the Company is exploring improved manufacturing
processes and pharmaceutical partnerships are being explored.
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.
UVEITIS. Posterior uveitis, which results from inflammation of a part
of the eye known as the uvea, is believed to result from an immune reaction
against some of the antigens in the eye, specifically the S antigen protein
(Sag) and the interphotoreceptor retinoid-binding protein (IRBP). There is no
known cure for uveitis, which in the United States, according to the American
Uveitis Society, is diagnosed in approximately 38,000 people every year. While
there are steps that can be taken to preserve sight and slow the progress of
vision loss, individuals with uveitis are also at increased risk of developing
cataracts, glaucoma or retinal detachment.
Enzo recently acquired rights and intellectual property to a candidate
drug and technology intended for use in the treatment of uveitis. The drug is
the result of a discovery by scientists at the eye clinic of the Ludwig
Maximilians University in Munich, Germany, who found a small peptide that when
fed to rats with experimental allergic uveitis promoted their recovery. Based on
favorable preclinical studies, the developers conducted a small Phase I clinical
trial in Germany with encouraging results that indicated a number of the
patients treated with the study drug showed a decrease in inflammation and a few
showed improved visual acuity.
Using its immune regulation platform and the recently acquired rights
to the candidate drug, Enzo is currently composing a protocol to initiate the
next phase of clinical trials that will be submitted to the central regulatory
agencies in Germany.
INFLAMMATORY BOWEL DISEASES. We believe our immune regulation
technology may be used 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.
Patients 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 recently completed a Phase II randomized double-blind clinical
trial of ALEQUEL(TM) our innovative immune regulation medicine for treatment of
Crohn's Disease. In this study, subjects were evaluated using the Crohn's
Disease
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Activity Index (CDAI), a standard measure of the severity of the disease, with
higher scores indicating more severe disease activity. An expanded study to
broaden the diversity of the patient population is ongoing at Hadassah Hospital.
Enzo plans to continue the study at additional sites in the United States and is
currently conducting a selection review process to determine the appropriate
site at which to expand the study.
This current trial followed a successful open label Phase I study and
was 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 suggest that our immune
regulation technology could be effective in treating GvHD. Currently, clinical
protocols are in development.
EGS21 IMMUNE POTENTIATION PRODUCT. EGS21, our immune potentiation
product was tested for safety in a Phase I study in healthy human volunteers at
the Hadassah-Hebrew University Medical Center. All subjects were followed by
complete blood analysis and standard blood chemistries. All laboratory results
were within normal limits and no treatment-related adverse events were observed
during the treatment period or during the follow-up period.
NON-ALCOHOLIC STATOHEPATITIS (NASH)
Enzo is evaluating the use of EGS21 as a potential product for
treatment of fatty liver or non alcoholic steatohepatitis (NASH). Fatty liver,
often associated with a metabolic syndrome defined by hyperlipidemia, insulin
resistance and obesity, can be demonstrated by imaging studies in 25% of the
general population. Recent studies have suggested an immunologic basis for NASH.
This condition is presently considered to be a risk factor for the development
of non-alcoholic steatohepatitis (NASH), one of the top three causes of liver
disease in the USA and a form of chronic hepatitis that is increasingly
recognized as a predisposing condition for the development of liver cirrhosis.
NASH is present in 20% of obese individuals and in 2.5% of the general
population. Using experimental animal model systems, we showed that EGS21 had a
beneficial effect on NASH and its associated metabolic syndrome in these
experimental animals. A Phase 2 open label study is currently being conducted at
Hadassah-Hebrew University Medical Center.
CLINICAL LABORATORY SERVICES
We operate a regional clinical laboratory that offers full diagnostic
services to the greater New York and New Jersey medical community. The Company's
clinical laboratory testing is utilized by physicians as an essential element in
the delivery of healthcare services. Physicians use laboratory tests to assist
in the detection, diagnoses, evaluation, monitoring and treatment of diseases
and other medical conditions. Clinical laboratory testing is generally
categorized as clinical testing and anatomic pathology testing. Clinical testing
is performed on body fluids, such as blood and urine. Anatomic pathology testing
is performed on tissues and other samples, such as human cells. Most clinical
laboratory tests are considered routine and can be performed by most commercial
clinical laboratories. Tests that are not routine and that require more
sophisticated equipment and highly skilled personnel are considered esoteric
tests and may be performed less frequently than routine tests. The Company does
not perform certain low-volume esoteric tests in-house, generally many of these
tests are referred to an esoteric clinical testing laboratory that specializes
in performing these more complex tests.
The Company offers a comprehensive menu of 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.
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We operate a full service clinical laboratory in Farmingdale, NY with
an infrastructure that includes a comprehensive information technology,
logistics, client service and billing departments. Also, we have a network of
nineteen patient service centers and a full service phlebotomy department.
Patient service centers collect the specimens as requested by physicians. 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 laboratory facilities by our
logistics department accompanied by a test requisition form. These forms, which
are completed by the ordering physician, indicate the tests to be performed and
demographic patient information. Once this information is entered into the
laboratory computer system the tests are performed and the results are entered
primarily through an interface from the laboratory testing equipment or in some
instances, manually into the laboratory computer system. Most routine testing is
completed by early the next morning, and test results are reported to the
ordering physician. These test results are either delivered electronically via
our EnzoDirect(TM) system or delivered by the logistic department directly to
the ordering physicians' offices. Physicians who request that they be called
with a result are so notified.
For fiscal years ended July 31, 2005 and 2004, respectively, 76% and
69% of the Company's revenues were derived from the clinical laboratory. At July
31, 2005 and 2004, respectively, approximately 94% and 89% of the Company's net
accounts receivable were derived from its clinical laboratory business. 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 various
numbers of third party insurance carriers, the Federal Medicare Program and the
numerous individual patient accounts. Revenue, net of contractual allowances,
from direct billings under the Federal Medicare program during the years ended
July 31, 2005, 2004 and 2003 were approximately 20%, 19%, and 11%, respectively,
of the Company's total revenue. The clinical 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 payers 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.
Billing for laboratory services is complicated. Depending on the
billing arrangement and applicable law, we must bill various payers, such as
patients, insurance companies and the Federal Medicare Program, all of which
have different requirements. In New York State, the law prohibits the Company
from billing the ordering physician. Compliance with applicable laws and
regulations as well as, internal compliance policies and procedures adds further
complexity to the billing process. We depend on the ordering physician to
provide timely, accurate billing demographic and diagnostic coding information
to us. We believe that most of our bad debt expense is primarily the result of
missing or incorrect billing information on requisitions received from the
ordering physician rather than credit related issues. We perform the requested
tests and report test results regardless of whether the billing or diagnostic
coding information is incorrect or missing. We subsequently attempt to contact
the ordering physician to obtain any missing information and rectify incorrect
billing information. Missing or incorrect information on requisition adds
complexity to and slows the billing process, creates backlogs of unbilled
requisitions, and generally increases the aging of accounts receivable. When all
issues relating to the missing or incorrect information are not resolved in a
timely manner, the related receivables are fully reserved to the allowance for
doubtful accounts or written off. Additional factors complicating the billing
process include:
o pricing differences between our fee schedules and the
reimbursement rates of the payers;
o disputes with payers as to which party is responsible for
payment; and
o disparity in coverage and information requirements among
various payers.
We incur significant additional costs as a result of our participation
in Medicare, as billing and reimbursement for clinical laboratory testing is
subject to considerable and complex federal and state regulations. These
additional costs include those related to: (1) complexity added to our billing
processes; (2) training and education of our employees and customers; (3)
compliance and legal costs; and (4) costs related to, among other factors,
medical necessity denials and advance beneficiary notices. The Centers for
Medicare & Medicaid Services, or CMS (formerly the Health Care Financing
Administration), establishes procedures and continuously evaluates and
implements changes in the reimbursement process.
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
11
years ended July 31, 2005, 2004 and 2003, the Company incurred costs of
approximately $8,452,000, $8,078,000, and $8,311,000, respectively, for research
and development activities.
INTERNAL RESEARCH PROGRAMS
Our professional staff of 45 scientists, including 23 with post
doctorate degrees, performs our internal research and development activities.
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 research products
through two distinct channels: (i) direct sales to end-users; and (ii) supply
agreements with manufacturers and distributors. We market the clinical
laboratory services to ordering physicians in the metro New York and New Jersey
region through our direct sales force, customer service and patient service
representatives.
We focus our sales efforts on obtaining and retaining profitable
accounts. We also have an active account management process to evaluate the
profitability of all of our accounts. Where appropriate, we change the service
levels and terminate accounts that are not profitable.
DIRECT SALES AND MARKETING EFFORT
We market our research products through a direct field sales group and
professional sales management team as well as through our interactive e-commerce
web site. Our domestic and 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 research products through leading life sciences
companies. Through these arrangements, we are able to leverage the established
marketing and distribution infrastructure of these companies. During fiscal
2005, we distributed under an agreement with Perkin-Elmer Life Sciences, among
other companies. Enzo Life Sciences is focused on a strategic initiative to
expand its direct sales to the end user. See Item 3. Legal Proceedings.
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 more significant 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.
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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 2005 we owned or licensed 40 U.S. and over 167
foreign patents relating to products, methods and procedures resulting from our
internal or sponsored research projects. During this year, several patents
relating the BioProbe(R) nucleic acid probe system have expired, while
additional patents 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 University 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 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
13
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.
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 product. 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.
14
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 pre-market 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 "pre-amendment" 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 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 by 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
15
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 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.
CLINICAL LABORATORY REGULATIONS
The clinical laboratory industry is subject to significant federal and
state regulation, including inspections and audits by governmental agencies.
Governmental authorities may impose fines or criminal penalties or take other
actions to enforce laws and regulations, including revoking a clinical
laboratory's federal certification to operate a clinical laboratory operation.
Changes in regulation may increase the costs of performing clinical laboratory
tests, increase the administrative requirements of claims or decrease the amount
of reimbursement. Our Clinical Laboratory and (where applicable) patient service
centers are licensed and accredited by the appropriate federal and state
agencies. CLIA (The Clinical Laboratory Improvement Act of 1967, and the
Clinical Laboratory Improvement Amendments of 1988) regulates virtually all
clinical laboratories by requiring that they be certified by the federal
government and comply with various operational, personnel and quality
requirements intended to ensure that their clinical laboratory testing services
are accurate, reliable and timely. CLIA does not preempt state laws that are
more stringent than federal laws. Many clinical laboratories 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 Secretary of Health and Human Services
("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
Billing and reimbursement for clinical laboratory testing is subject to
significant and complex federal and state regulation. Penalties for violations
of laws relating to billing federal healthcare programs and for violations of
federal fraud and abuse laws include: (1) exclusion from participation in
Medicare/Medicaid programs; (2) asset forfeitures; (3)
16
civil and criminal fines and penalties; and (4) the loss of various licenses,
certificates and authorizations necessary to operate some or all of a clinical
laboratory's business. The Company is not aware of any material violations.
The health care industry has been undergoing significant change because
third-party payers, 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 payers,
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, Medicare has 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 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 have a material adverse effect on our
business. We cannot predict, however, whether and what type of legislation will
be enacted into law. In addition, reimbursement disapprovals by the third party
payers, 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.
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.
The Federal Stark laws, and New York State law, have 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. The Company has put in place procedures to ensure compliance with
these laws and restrictions and believes that it is in compliance with these
laws.
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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 routine
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 has 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 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 in February 2003 and
went into effect April 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. We will also be
required to create additional policies and procedures in order to comply with
these requirements.
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.
18
MEDICAL REGULATED WASTE
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, 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 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
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 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 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 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
Most of the manufacturing and scientific efforts for our research and
development segment and clinical laboratory segment take place at our leased
43,000 square feet facility in Farmingdale, New York. We have a completely
integrated laboratory and manufacturing facility, with special handling
capabilities and clean rooms suitable for our operations.
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, 2005, we employed 292 full-time and 50 part-time
employees. Of the full-time employees, 59 were engaged in research, development,
manufacturing, administrative support and marketing of research products and 233
at the clinical reference laboratories. Our scientific staff, including 23
individuals with post doctorate degrees, possesses a wide range of experience
and expertise in the areas of recombinant DNA, nucleic acid chemistry,
19
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 clinical laboratory 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 systems. Computer systems are vulnerable to damage from a
variety of sources, including telecommunications or network failures, malicious
human acts and natural disasters. Moreover, despite network security measures,
some of our servers are potentially vulnerable to physical or electronic
break-ins, computer viruses and similar disruptive problems. Despite the
precautionary measures that we have taken to prevent unanticipated problems that
could affect our information technology systems, sustained or repeated system
failures that 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 with
distinction, by the CAP.
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." The SEC also maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC, which may be accessed
at http://www.sec.gov. The public may read and copy any materials we file with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549. To obtain information on the operation of the Public Reference Room,
you may call the SEC at 1-800-SEC-0330.
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,
but are not limited to:
(a) Heightened competition, including the intensification of price
competition.
20
(b) Impact of changes in payer mix, including the shift from
traditional, fee-for-service medicine to managed-cost health care.
(c) Adverse actions by governmental or other third-party payers,
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 which are in early stages of
development.
(n) Clinical trials for our products will be expensive and their
outcome is uncertain. We incur substantial expenses that might not
result in approvable or viable products.
(o) 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 Lease expiration
Location Principal Operations Area (sq. ft.) Base Rent Date
-------- -------------------- -------------- --------- ----
60 Executive Blvd Corporate headquarters, clinical 43,000 $1,161,000 March 31, 2017
Farmingdale, N.Y. laboratory, research and
manufacturing facilities
(See note 6 of Notes to
Consolidated Financial Statements)
527 Madison Ave Executive office 6,400 $367,000 December 31, 2008
New York, NY
21
In March 2005, the Company amended and extended the lease for its
Farmingdale laboratory and headquarters for a period of 12 years. We believe the
current facilities are suitable and adequate for the Company's current operating
needs for both its clinical laboratories and research and development segments,
and that the production capacity in the Farmingdale facility is being
substantially utilized.
Item 3. LEGAL PROCEEDINGS
On October 14, 2004, the Company as plaintiff finalized and executed a
settlement and license agreement with Digene Corporation to settle a patent
litigation lawsuit (the "Digene agreement"). Under the terms of the agreement,
the Company received an initial payment of $16.0 million, would earn in the
first "annual period" (October 1, 2004 to September 30, 2005) a minimum royalty
payment of $2.5 million, and receive a minimum royalty of $3.5 million in each
of the next four annual periods. In addition, the agreement provides for the
Company to receive quarterly running royalties on the net sales of Digene
products subject to the license until the expiration of the patent on April 24,
2018. These quarterly running royalties will be fully creditable against the
minimum royalty payments due in the first five years of the agreement. The
balance, if any, of the minimum royalty payment will be recognized in the final
quarter of the applicable annual royalty period. As a result of the Digene
agreement, the Company recorded a gain on patent litigation settlement of $14.0
million in the first quarter of fiscal 2005, and deferred $2 million which would
be earned from net sales of the Company's licensed products covered by the
agreement during the first annual period. As of July 31, 2005, the balance of
the deferred revenue from the settlement was $359,400.
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; 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. The defendants have answered the individual complaints
and asserted a variety of affirmative defenses and counterclaims. Fact discovery
is ongoing. The Court conducted a claim construction hearing from July 5-11,
2005. Closing arguments on claim construction issues were conducted on September
30, 2005. 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.
The Company recorded revenue from only Perkin Elmer during the fiscal year ended
July 31, 2005.
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. The Affymetrix
complaint also seeks 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 Affymetrix 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.
Initial pleadings have been completed and discovery has commenced. The Court
conducted a claim construction hearing from July 5 - 11, 2005. Closing arguments
on claim construction issues were conducted on September 30, 2005. The Company
did not record any revenue from Affymetrix during the fiscal years ended July
31, 2005 and 2004.
22
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 was filed after Enzo rejected Roche's
latest cash offer to settle Enzo's claims for, INTER ALIA, alleged breach of
contract and misappropriation of Enzo's assets. The complaint seeks declaratory
judgment (i) of patent invalidity with respect to Enzo's 4,994,373 patent (the
"'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 with appropriate affirmative defenses and counterclaims.
Enzo filed an Answer and Counterclaims on November 3, 2004 alleging multiple
breaches of the 1994 Agreement and related infringement of Enzo's 373 patent.
Discovery has commenced. The Court conducted a claim construction hearing from
July 5-11, 2005. Closing arguments on claim construction issues were conducted
on September 30, 2005. The Company did not record any revenue from Roche during
the fiscal year ended July 31, 2005.
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 were reached with bioMerieux and Chugai;
the settlements did not have a material monetary impact on the Company. In July
2004, the district court again granted another motion by the remaining
defendants (Gen-Probe and Becton Dickinson) that all claims of the Company's
patent are invalid. The Company filed an appeal of that judgment. On September
30, 2005, the Court of Appeals affirmed the judgment of invalidity. 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 Glaser v. Hyman Gross, Barry Weiner, Enzo Biochemical Inc., Elazar
Rabbani, Shahram Rabbani, John Delucca, Dena Engelhardt, Richard Keating, Doug
Yates, and Does I-50, Case No. CA-02-1242-A, in the U.S. District Court for the
Eastern District of Virginia. This complaint was filed by an investor in the
Company who had filed for bankruptcy protection and his family. The complaint
alleged securities fraud, breach of fiduciary duty, conspiracy, and common law
fraud and sought 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. Plaintiffs thereafter appealed the decision to
the United States Court of Appeals for the Fourth Circuit. On March 21, 2005,
the Fourth Circuit affirmed the lower Court's prior dismissal of all claims
asserted in the action, with the sole exception of a portion of the claim for
common law fraud and remanded that remaining portion of the action to the U.S.
District Court for the Eastern District of Virginia. On May 20, 2005, defendants
again moved the District Court to dismiss the sole remaining claim before it. On
July 14, 2005, the District Court granted defendants' renewed motion to dismiss.
On July 29, 2005, Plaintiffs moved to amend their Complaint for reconsideration.
On August 19, 2005, the Court denied Plaintiffs' motion to amend and entered
final judgment dismissing the complaint. Thereafter, Plaintiffs appealed the
order and judgment to the Fourth Circuit. That appeal is presently pending. The
Company continues to believe that the complaint has no merit whatsoever and
intends to continue to defend the action vigorously.
On June 7, 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 is 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 answered the complaint on July 29, 2004. The answer
pleads affirmative defences of invalidity, estoppel and laches and asserts
counterclaims of non-infringement and invalidity. Fact discovery is currently
scheduled to close on February 28, 2006. Dispositive motions are currently due
on March 27, 2006. The trial date is currently scheduled for October 1, 2006.
There can be no assurance that the Company will be successful in this
litigation. Even if the Company is not successful,
23
management does not believe that there will be a significant adverse monetary
impact on the Company. The Company did not record any revenue from either of the
above during the fiscal years July 31, 2005 and 2004.
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, 2005.
24
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.
HIGH LOW
2004 Fiscal Year (August 1, 2003 to July 31, 2004):
1st Quarter $22.45 $17.35
2nd Quarter $20.95 $15.85
3rd Quarter $19.88 $14.20
4th Quarter $15.69 $12.57
2005 Fiscal Year (August 1, 2004 to July 31, 2005):
1st Quarter $17.69 $11.15
2nd Quarter $20.40 $17.27
3rd Quarter $19.27 $13.62
4th Quarter $18.24 $14.08
As of October 10, 2005, the Company had approximately 1,164
stockholders of record of its Common Stock.
The Company has not paid a cash dividend on its Common Stock and
intends to continue a policy of retaining earnings to finance and build its
operations. Accordingly, the Company does not anticipate the payment of cash
dividends to holders of Common Stock in the foreseeable future. During fiscal
2005, the Company's board of directors declared a 5% stock dividend on October
5, 2004 payable November 15, 2004 to shareholders of record as of October 25,
2004. The fiscal 2004 per share data was adjusted retroactively to reflect the
stock dividend declared on October 5, 2004. In fiscal 2003, the Company's board
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 for
fiscal 2003 have been adjusted to retroactively reflect the stock dividend in
fiscal 2003. The Company recorded a charge to accumulated deficit and offsetting
credits to both common stock and additional paid-in capital of approximately
$23,433,400 and $37,709,200 in fiscal 2005 and fiscal 2003, respectively, which
reflects the fair value of the stock dividends on the dates of declaration
25
Item 6. SELECTED FINANCIAL DATA
The following table, which is derived from the audited consolidated
financial statements of the Company for the fiscal years 2001 through 2005
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 fiscal year ended July 31,
OPERATING RESULTS (In 000's, except per share data)
--------------------------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Operating revenues $ 43,403 $ 41,644 $ 52,767 $ 54,015 $ 52,266
Gain on patent litigation settlement 14,000 - - - - - - - -
Interest income 1,523 1,152 1,355 1,350 3,003
Income (loss) before income taxes 5,217 (11,080) 5,725 10,340 12,231
(Provision) benefit for income taxes (2,213) 4,848 (1,881) (3,417) (5,418)
--------- --------- --------- --------- ---------
Net income (loss) $ 3,004 $ (6,232) $ 3,844 $ 6,923 6,813
========= ========= ========= ========= =========
Basic net (loss) income per common share: $ 0.09 $ (.20) $ 0.12 $ 0.22 $ 0.22
========= ========= ========= ========= =========
Diluted net (loss) income per common share: $ 0.09 $ (.20) $ 0.12 $ 0.21 $ 0.21
========= ========= ========= ========= =========
Denominator for per share calculation:
Basic 32,097 31,700 31,399 31,359 31,254
Diluted 32,763 31,700 32,175 32,327 32,558
FINANCIAL POSITION:
Working capital $ 97,011 $ 92,259 $ 97,723 $ 92,772 $ 85,094
Total assets 116,466 110,334 $ 115,878 109,291 102,931
Long term obligations 150 300 - - - - - -
Stockholders' equity $ 108,267 $ 104,166 $ 109,380 104,733 $ 97,517
No cash dividends have been declared on the Company's common stock.
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.
The Company's source of revenue has been from the direct sales of
research products consisting of labeling and detection reagents for the genomics
and sequencing markets, as well as through non-exclusive distribution
26
agreements with other companies. Another source of revenue has been from the
clinical laboratory service market. Payments for clinical laboratory testing
services are made by the Medicare program, healthcare insurers and patients.
Fees billed to patients, Medicare, and third party payers are billed on the
laboratory's standard gross fee schedule, subject to any limitations on fees
negotiated with the third party payers or with the ordering physicians on behalf
of their patients.
The Company incurs additional costs as a result of our participation in
the Medicare programs, as billing and reimbursement for clinical laboratory
testing is subject to considerable and complex federal regulations. Compliance
with applicable laws and regulations, as well as internal compliance policies
and procedures, adds further complexity and costs to our operations. Government
payers such as Medicare, as well as healthcare insurers have taken steps and may
continue to take steps to control the costs, utilizations and delivery of
healthcare services, including clinical laboratory services. Principally as a
result of reimbursement reductions and measures adopted by the Centers for
Medicare & Medicaid Services, or CMS, which establishes procedures and
continuously evaluates and implements changes in the reimbursement process to
control utilization, Despite the added cost and complexity of participating in
the Medicare program, we continue to participate because we believe that our
other business may depend, in part, on continued participation in Medicare since
certain ordering physicians may want a single laboratory capable of performing
all of their clinical laboratory testing services, regardless of who pays for
such services.
Information systems are used extensively in virtually all aspects of
the clinical laboratory operations, including 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 systems. Through maintenance, staffing, and investments in our
information technology system, we expect to reduce the risk associated with our
heavy reliance on these systems
The clinical laboratory is subject to seasonal fluctuations in
operating results and cash flows. Typically, testing volume declines during the
summer months, year end holiday periods and other major holidays, reducing net
revenues and operating cash flows. Testing volume is also subject to declines in
winter months due to inclement weather, which varies in severity from year to
year.
For the fiscal years ended July 31, 2005 and 2004, respectively,
approximately 24% and 31% percent of the Company's operating revenues were
derived from research product sales and approximately 76% and 69% were derived
from clinical laboratory services.
Research product revenue from Affymetrix represented approximately 0%,
0% and 22% of the consolidated revenues in fiscal 2005, 2004 and 2003,
respectively, under a non-exclusive distribution and supply agreement. At July
31, 2005 and 2004, of the Company's net accounts receivable no monies were
included from this former major distributor. Research product revenue from
Perkin-Elmer represented approximately 3%, 8% and 4% of the consolidated
revenues in fiscal 2005, 2004 and 2003, respectively, under a non-exclusive
distribution and supply agreement. At July 31, 2005 and 2004, approximately 0%
and 5%, respectively, of the Company's net accounts receivable relate to amounts
due from this distributor. Research product revenue from Amersham represented
approximately 0%, 0% and 1% of the consolidated revenues in fiscal 2005, 2004
and 2003, respectively, under a terminated non-exclusive distribution and supply
agreement. At July 31, 2004 and 2003, 0% and 2%, respectively, of the Company's
net accounts receivable relate to amounts due from this former distributor.
Research product revenue from Roche represented approximately 0%, 8% and 6% of
the consolidated revenues in fiscal 2005, 2004 and 2003, respectively, under a
non-exclusive distribution and supply agreement. At July 31, 2005 and 2004, 0%
and 0% respectively of the Company's net accounts receivable relate to amounts
due from the this distributor.
The following table summarizes research product revenues from
non-exclusive distribution agreements for the fiscal years ended July 31, 2005,
2004 and 2003:
% of Revenue % of Accounts Receivable
2005 2004 2003 2005 2004
---- ---- ---- ---- ----
Affymetrix 0% 0% 22% 0% 0%
Perkin-Elmer 3% 8% 4% 0% 5%
Amersham 0% 0% 1% 0% 0%
Roche 0% 8% 6% 0% 0%
On October 14, 2004, the Company as plaintiff finalized and executed a
settlement and license agreement with Digene Corporation to settle a patent
litigation lawsuit (the "Digene agreement"). Under the terms of the agreement,
the Company received an initial payment of $16.0 million, would earn in the
first "annual period" (October 1, 2004 to September 30, 2005) a minimum royalty
payment of $2.5 million, and receive a minimum royalty of $3.5 million in each
of the next four annual periods. In addition, the agreement provides for the
Company to receive quarterly running royalties on the net sales of Digene
products subject to the license until the expiration of the patent on April 24,
2018.
27
These quarterly running royalties will be fully creditable against the minimum
royalty payments due in the first five years of the agreement. The balance, if
any, of the minimum royalty payment will be recognized in the final quarter of
the applicable annual royalty period.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2005, our cash and cash equivalents of $77.0 million and
marketable securities of $6.7 million together totaled $83.7 million, an
increase of $12.0 million from July 31, 2004. We had working capital of $97.0
million at July 31, 2005 compared to $92.3 million at July 31, 2004. As a result
of the Digene agreement, the Company recorded a gain on patent litigation
settlement of $14.0 million in the first quarter of fiscal 2005, and deferred $2
million which would be earned from net sales of the Company's licensed products
covered by the agreement during the first annual period. As of July 31, 2005,
the balance of the deferred revenue from the settlement was $359,400. See Legal
Proceedings.
Net cash provided by operating activities for the year ended July 31,
2005 was approximately $12.8 million as compared to net cash used by operating
activities of $5.6 million for the year ended July 31, 2004. The increase in net
cash provided by operating activities in fiscal 2005 of $18.4 million was
primarily due to fiscal 2005's net income, which includes the gain from the
Digene agreement, and by the net change in operating assets and liabilities
compared to the prior year, which includes the receipt of the income tax
receivable amount of $3.9 million. In fiscal 2005, net cash provided by
investing activities increased approximately $13.2 million from fiscal 2004,
primarily due to sales of marketable securities. In fiscal 2005, net cash
provided by financing activities decreased approximately $0.4 million from
fiscal 2004 primarily as a result of the decrease in proceeds from the exercise
of stock options.
Net accounts receivable of $13.4 million and $14.8 million represented
119 days and 141 days of operating revenues at July 31, 2005 and 2004,
respectively. The change in net accounts receivable is due to a decrease in
accounts receivable at the clinical laboratory of approximately $0.6 million and
a decrease of research products accounts receivable of approximately $0.8
million. The decrease in the clinical laboratory receivable is primarily due to
improvements in the collection process. The decrease in the research products
accounts receivable is primarily due to the decrease in revenues from
distributors of research products. Net accounts receivable from our clinical
laboratory operations of $12.5 million and $13.1 million represented an average
of 143 days and 173 days of clinical laboratory services revenues at July 31,
2005 and 2004, respectively.
The Company has entered into various real estate and equipment leases.
The real estate lease for the Company's Farmingdale headquarters is with a
related party. See Note 6 to the Consolidated Financial Statements for a further
description of these various leases.
The following is a summary of future payments under the Company's
contractual obligations as of July 31, 2005:
PAYMENTS DUE BY PERIOD
Less than
Total 1 year 1-3 years 4-5 years Over 5 years
----- ------ --------- --------- ------------
Real estate and equipment leases $23,637,000 $2,601,000 $5,394,000 $4,664,000 $10,978,000
----------- ---------- ---------- ---------- -----------
Total contractual cash obligations $23,637,000 $2,601,000 $5,394,000 $4,664,000 $10,978,000
=========== ========== ========== ========== ===========
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.
28
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
RESEARCH PRODUCT REVENUES
Revenues from research product sales, exclusive of certain
non-exclusive distribution agreements, are recognized when the products are
shipped, the sales price is fixed or determinable and collectibility is
reasonably assured. 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.
CLINICAL LABORATORY SERVICES
Revenues from the clinical laboratory are recognized upon completion of
the testing process for a specific patient and reported to the ordering
physician. The Company's revenue is based on gross amounts billed or billable
for services rendered, net of estimated contractual adjustments and other
arrangements made with third-party payers to provide services at less than
established billing rates. Our accounting system does not record contractual
adjustments at the time of billing. Instead, contractual adjustments, and the
provision for doubtful accounts, are estimated based on historical collection
experience using a retrospective collection analysis and aging models.
The following is a table of the clinical laboratory segment's gross
billing percentages by billing category:
Fiscal year Fiscal year
Gross July 31, 2005 July 31, 2004
Billing category % to total % to total
---------------- ---------- ----------
Medicare 29% 31%
Third party carriers 40% 40%
Patient self-pay 13% 10%
HMO's 18% 19%
---- ----
Total 100% 100%
---- ----
CONTRACTUAL ALLOWANCES
Medicare regulations and the various third party payers and 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 based on our interpretation
of the applicable regulations and historical calculations. The Company estimates
its contractual allowance based on historical collection experience using a
retrospective collection analysis and aging models. 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.
The process the Company uses to determine its estimate of the
contractual allowances for its laboratory services segment is based upon a
rolling monthly weighted average of historical reimbursement statistics. During
the fiscal years ended July 31, 2005, 2004, and 2003, the contractual allowance
percentages, determined using the rolling monthly weighted average historical
reimbursement statistics, were 72.5%, 70.9%, and 68.0%, respectively.
29
The Company projects (by using a sensitivity analysis) that each 1% change in
the contractual allowance percentage could result in a change in the net
accounts receivable of approximately $531,000 and $596,000, as of July 31, 2005
and 2004, respectively, and a change in clinical laboratory services revenues of
approximately $1,202,000, $987,000, and $922,000 for the fiscal years ended July
31, 2005, 2004, and 2003, respectively.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company utilizes a historical collection analysis to establish
allowances for doubtful accounts for each receivable category, which considers
the aging of the receivables and results in an increase in the allowances as the
aging of the related receivables increases. The Company believes collection of
receivables from self payers is subject to credit risk and the patient's ability
to pay.
The allowance for doubtful accounts also includes the uncollectible
balances from third party payers for the insufficient diagnosis information
received from the ordering physician, which result in denials of payment. In
addition, the allowance is increased when a receivable from a third party or HMO
remains open due to a denial of coverage based upon the provider relationships.
The Company reserved for or wrote off 100% of all accounts receivable (for all
payers) over 210 days during fiscal 2005 as it assumed all these accounts are
uncollectible. The written off amounts are kept on the aging for patient billing
and demographic information. The Company also set up reserves for accounts under
210 days in fiscal 2005. The Company adjusts the estimate for any recoveries on
an ongoing basis through the historical collection analysis.
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 payer
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.
30
RESULTS OF OPERATIONS
COMPARATIVE FINANCIAL DATA FOR THE FISCAL YEARS ENDED JULY 31,
(in 000's)
Increase Increase
2005 Decrease) % Change 2004 (Decrease) % Change 2003
---------------------------------------------------------------------------------
Revenues:
Research product sales and royalties $ 10,546 $ (2,426) (19) $ 12,972 ($10,281) (44) $ 23,253
Clinical laboratory services 32,857 4,184 15 28,672 (842) (3) 29,514
-------- -------- -------- -------- -------- -------- --------
Total revenue 43,403 1,758 4 41,644 (11,123) (21) 52,767
Costs and expenses and other (income):
Cost of research products 2,196 (322) (13) 2,518 (871) (26) 3,389
Cost of laboratory services 12,548 1,962 19 10,586 993 10 9,593
Research & development 8,452 374 5 8,078 (233) (3) 8,311
Selling, general and administrative 20,069 5,702 40 14,367 2,270 19 12,097
Provision for uncollectible A/R 4,967 (7,020) (59) 11,987 2,642 28 9,345
Legal expenses 5,476 (864) (14) 6,340 679 12 5,661
Interest income (1,523) (371) 32 (1,152) 203 (15) (1,355)
Gain on patent litigation settlement (14,000) (14,000) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Costs and expenses 38,186 (14,538) (28) 52,724 5,683 12 47,041
Operating income (loss) $ 5,217 $ 16,297 -- $(11,080) $(16,806) -- $ 5,726
======== ======== ========
FISCAL 2005 COMPARED TO FISCAL 2004
Fiscal 2005 research product revenues and royalty income was $10.5
million compared to $13.0 million in fiscal 2004, a decrease of $2.4 million or
19%. The decrease was primarily due to the Company not recording revenue due to
the ongoing dispute with certain distributors on the sales of certain licensed
products, partially offset by the increase in direct sales of our research
products and royalty income from Digene. The decline in the gross profit margin
on research product sales and royalties in fiscal 2005 compared to fiscal 2004
is due to the decline in revenues from distributors with whom we had supply
agreements. Revenues from these distributors were net of manufacturing costs.
See Legal Proceedings.
Fiscal 2005 clinical laboratory revenues were $32.9 million compared to
$28.7 million in fiscal 2004, an increase of $4.2 million or 15%, primarily due
to the increase in the number of customer accounts being serviced. This increase
in new customer accounts is due to the expansion into the New Jersey and
Westchester market that commenced in the fourth quarter of fiscal 2004.
The cost of research products revenues in fiscal 2005 was $2.2 million
compared to $2.5 million in fiscal 2004, a decrease of $0.3 million or 13%,
primarily due to lower royalty costs because of the expiration of a licensed
patent agreement with Yale University.
The cost of clinical laboratory services in fiscal 2005 was $12.5
million compared to $10.6 million in fiscal 2004, an increase of $1.9 million or
19%, primarily due to the increased number of tests performed and higher costs
incurred to perform certain esoteric tests. The increase in tests performed is
due to the new accounts being serviced through the expansion into New Jersey
markets.
Fiscal 2005 research and development expenses were $8.5 million
compared to $8.1 million in fiscal 2004, an increase of $0.4 million or 5%
primarily due to increases in clinical trial study costs for the development of
therapeutic products.
Fiscal 2005 selling, general and administrative expenses were $20.1
million compared to $14.4 million in fiscal 2004, an increase of $5.7 million or
40%. The increase was primarily due to an increase in direct selling
expenditures for our clinical reference laboratory and life science divisions,
an increase in information technology costs for the expansion of the information
technology connectivity system and data center personnel costs including
infrastructure expenses and accounting related fees for the compliance with the
Sarbanes-Oxley Act of 2002.
Fiscal 2005 provision for uncollectible accounts receivable in the
clinical reference laboratory segment was $5.0 million, compared to $12.0
million during the same period in 2004, a decrease of $7.0 million or 59%. The
percentage of the provision for uncollectible accounts receivable as a
proportion of clinical laboratory services revenues decreased to 15.0% in fiscal
2005 compared to 36% for the 2004 period. This decrease was primarily due to
improved collection
31
procedures and due to the change in the mix of the demographics of the patients
from the New Jersey new customer accounts.
Fiscal 2005 legal expenses were $5.5 million compared to $6.3 million
in fiscal 2004, a decrease of $0.8 million or 14%. The decrease is primarily due
to the reduction of legal activities because of the settlement with Digene
Corporation during fiscal 2005's first quarter ended October 31, 2004.
Fiscal 2005 interest income increased $0.4 million or 32% to $1.5
million compared to $1.2 million during fiscal 2004, due to the increased amount
of cash available for investment and the increase in interest rates offered on
debt securities.. The Company earns interest on its cash and cash equivalents by
investing primarily in short term (90 days or less) diverse financial
instruments with high credit ratings.
On October 14, 2004, the Company as plaintiff finalized and executed a
settlement and license agreement with Digene Corporation to settle a patent
litigation lawsuit (the "Digene agreement"). Under the terms of the agreement,
the Company received an initial payment of $16.0 million, would earn in the
first "annual period" (October 1, 2004 to September 30, 2005) a minimum royalty
payment of $2.5 million, and receive a minimum royalty of $3.5 million in each
of the next four annual periods. In addition, the agreement provides for the
Company to receive quarterly running royalties on the net sales of Digene
products subject to the license until the expiration of the patent on April 24,
2018. These quarterly running royalties will be fully creditable against the
minimum royalty payments due in the first five years of the agreement. The
balance, if any, of the minimum royalty payment will be recognized in the final
quarter of the applicable annual royalty period.
As a result of the above settlement, the Company recorded a gain on
patent litigation settlement of $14.0 million in the first quarter of fiscal
2005, and deferred $2 million which would be earned from net sales of the
Company's licensed products covered by the agreement during the first annual
period. As of July 31, 2005, the balance of the revenue deferred from the
settlement was $359,400. See Legal Proceedings.
In fiscal 2005, the Company's provision for income taxes was $2.2
million which was based on the effective federal, state and local income tax
rates applied to the fiscal year's taxable income. The provision for income
taxes, at an effective rate of 42%, was different from the U.S. federal
statutory rate of 34% due to state income taxes, net of federal tax deduction of
approximately 6%, expenses not deductible for income tax return purposes of 2%,
a benefit for foreign sales(-1%) and other adjustments of 1%. In fiscal 2004,
the Company's benefit for income taxes was $4.8 million which was based on the
effective federal, state and local income tax rates applied to the fiscal year's
taxable income. The benefit for income taxes, at an effective rate of 44%, was
different from the U.S. federal statutory rate of 34% due to state income tax
benefit, net of federal, of approximately 4%, a benefit for foreign sales of 2%
and other benefits, net, of 4%.
The research and development segment's fiscal 2005 income before income
taxes was $11.5 million compared to a loss of $1.3 million in fiscal 2004. The
fiscal 2005 increase resulted from the $14 million gain and related earned
royalties from the Digene agreement. The gain was partially offset by a decline
in research product revenues due to the ongoing dispute with certain
distributors on the sales of certain licensed products. The clinical reference
laboratory segment's income before income taxes was $2.8 million versus a loss
of $1.5 million. The increase is due to higher revenues, due to the increase in
the number of customer accounts being serviced, and a lower provision for
uncollectible accounts, due to the change in the mix of payers and the expansion
into the New Jersey markets. The Other segment's (loss) before income taxes was
($9.0) million versus ($8.3) million in fiscal 2004, primarily due to accounting
related fees for compliance with the Sarbanes-Oxley Act of 2002 not incurred in
the 2004 period.
FISCAL 2004 COMPARED TO FISCAL 2003
Revenues from operations for the fiscal year ended July 31, 2004 were
$41.6 million a decrease of $11.1 million over revenues from operations for the
fiscal year ended July 31, 2003. This decrease was due to a decrease of $10.3
million in revenues from our research product sales operations and decrease of
$.8 million in revenues from clinical reference laboratory operation over
revenues for such activities in fiscal 2004.
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 Affymetrix, a
major distributor. Research product revenue from this one major distributor
accounted for approximately 0% and 50% of the Company's total research product
revenues in fiscal 2004 and 2003, respectively. See Item 3. Legal Proceedings.
The decrease of clinical laboratory services revenue was due primarily
to the recent downward trends that had indicated a decrease in the
reimbursements rates from the Medicare Program, certain third party payers and
HMO's. Clinical laboratory services are provided to patients covered by various
third party payer programs, including Medicare
32
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. The effect of such reduced reimbursement rates have been reflected in
fiscal 2004. 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.
The cost of research products sold decreased by $0.9 million from the
prior fiscal year. This decrease was primarily due to the decrease in research
product revenue based on the termination of a contract with one major
distributor.
The cost of clinical laboratory services increased by $1.0 million
during this period primarily due to an increase in costs with certain esoteric
tests and costs related to performing more testing in house.
Research and development expenses decreased by approximately $0.2
million as a result of a decrease in the expenses related to the clinical trial
activities and other research projects.
Selling, general and administrative expenses increased by $2.2 million
during this fiscal year, as compared to the prior year's fiscal year. This
increase was primarily due to an increase in both the sales personnel and
marketing expenditures for research product sales and clinical laboratory
services, an increase at the clinical lab in the information technology
expenditures, and an increase in the in-house legal patent costs
The Company's provision for uncollectible accounts receivable increased
by $2.6 million to $11.9 million from $9.3 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 increased to
35.7% this fiscal year as compared to 29.6% for last year. These increases were
primarily due to the change in the mix of payers during the current fiscal year.
The company wrote off $1.8 million of an uncollectible receivable from one of
its distributors at the Life Science division this fiscal year. See Item 3.
Legal Proceedings.
The Company's legal expenses increased by $0.6 million to $6.3 million
from $5.7 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.
Interest income was comparable to the prior fiscal year.
In fiscal 2004, we recorded a benefit for income taxes of $4.8 million,
based upon an $11.1 million loss before benefit for taxes on income in the
current year as compared to a provision for income taxes of $1.9 million in
fiscal 2003, which were based on the combined effective federal, state and local
income tax rates.
Net accounts receivable from our clinical laboratory operations of
$13.1 million and $14.4 million represented an average of 167 days and 174 days
of operating revenues at July 31, 2004 and 2003, respectively.
Loss before provision for taxes on income from the research and
development segment activities and related costs was $1.3 million in fiscal
2004, as compared to income before provision for taxes on income of $9.4 million
in fiscal 2003. 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 Affymetrix a major distributor. Loss before
provision for taxes on income from the clinical reference laboratories segment
amounted to a $1.5 million for fiscal 2004, as compared to income of $3.0
million for fiscal 2003. The decrease in income before taxes for the clinical
laboratory segment was primarily due to the reduction in reimbursement rates
from third party payers. Loss before provision for taxes on income at the other
segment amounted to a loss of $8.3 million for fiscal 2004, as compared to a
loss of $6.7 million for fiscal 2003, due to the increase in legal expenses in
fiscal 2004.
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
The Company believes that it does not have any material exposure to
market risk associated with interest rate risk, foreign currency exchange rate
risk, commodity price risk, equity price risk, or other market risks.
33
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
DISCLOSURE CONTROLS AND PROCEDURES.
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") as of July 31, 2005. Based on this evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that, as of July
31, 2005, the Company's disclosure controls and procedures were effective to
provide reasonable assurance that information is accumulated and communicated to
the Company's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure, and ensure that information required to be disclosed in the reports
the Company files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING.
Management of Enzo Biochem, Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Management utilized the criteria set forth in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO, to conduct an assessment of
the effectiveness of the Company's internal control over financial reporting as
of July 31, 2005. Based on the assessment, management has concluded that, as of
July 31, 2005, the Company's internal control over financial reporting is
effective.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of July 31, 2005, has been audited by Ernst
& Young LLP an independent registered public accounting firm. Ernst & Young LLP
has issued an attestation report on management's assessment of the Company's
internal control over financial reporting, which is included herein.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
The Company has expended significant resource in achieving compliance
with Section 404 of the Sarbanes-Oxley Act. Through internal resources and the
assistance of outside consultants, the Company developed and executed a plan to
evaluate, document, test and improve, where necessary, its internal controls
over financial reporting. Although, as stated below, the Company has not made
any changes during the most recent fiscal quarter that have materially affected
internal controls over financial reporting, in the course of achieving
compliance with the Section 404 of the Sarbanes-Oxley Act, the Company has made
changes designed to improve several areas within its system of internal
controls. The nature of these changes included greater segregation of
responsibilities, better documentation of work procedures and managerial review,
dual approvals, revisions to delegation of authority and tightening access
restrictions to systems, data and assets.
There has been no change in the Company's internal control over
financial reporting that occurred during the Company's fiscal fourth quarter
ended July 31, 2005 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Enzo Biochem, Inc.
We have audited management's assessment, included in Item 9A, that Enzo
Biochem, Inc. (the "Company") maintained effective internal control over
financial reporting as of July 31, 2005, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Enzo Biochem,
Inc.'s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Enzo Biochem, Inc.
maintained effective internal control over financial reporting as of July 31,
2005, is fairly stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Enzo Biochem, Inc. maintained, in all material respects,
effective internal control over financial reporting as of July 31, 2005, based
on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Enzo Biochem, Inc. (the "Company") as of July 31, 2005 and 2004, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended July 31, 2005 and our
report dated October 12, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Melville, NY
October 12, 2005
35
ITEM 9B. OTHER INFORMATION
None
PART III
Item 10. 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 sub caption "Executive
Officers." The Company has a classified Board of Directors consisting of three
classes.
JOHN B. SIAS (age 78) has been a Director of the Company since 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 62) has been a Director of the Company since 1982.
From 2003 to 2004, Mr. Delucca was Executive Vice President and Chief Financial
Officer of REL Consulting Group. Mr. Delucca was the Chief Financial Officer &
Executive Vice President, Finance & Administration of Coty, Inc., from 1999 to
2002. From 1993 until 1999, he was Senior Vice President and Treasurer of RJR
Nabisco, Inc. From 1992 to 1993, he was managing director and Chief Financial
Officer of Hascoe Associates, Inc. From 1990 to 1992, he was President of The
Lexington Group. From 1989 to 1990, he was Senior Vice President-Finance of the
Trump Group. From 1986 until 1989, he was senior Vice President-Finance at
International Controls Corp. From 1985 to 1986, he was a Vice President and
Treasurer of Textron, Inc. Prior to that, he was a Vice President and Treasurer
of the Avco Corporation, which was acquired by Textron.
IRWIN C. GERSON (age 75) has been a Director of the Company since May
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.
MELVIN F. LAZAR, CPA (age 66) has been a Director of the Company since
August 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 chairman of the audit committee of Arbor Realty
Trust, Inc. (ABR:NYSE). Arbor is a real estate investment trust (REIT) formed to
invest in real estate related bridge and mezzanine loans, preferred equity
investments and other real estate related assets. 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 holds a Bachelor of Business Administration degree from The City College
of New York (Baruch College).
MARCUS A. CONANT, M.D. (age 69) was appointed to the board in July
2004. Dr. Conant received his B.S. and M.D. degrees from Duke University. He was
an exchange student at Hammersmith Hospital in London, England and held an
Elective Fellowship in Biochemistry at the London Hospital. Dr. Conant has been
the recipient of numerous awards, and has served as a member of or consultant to
a broad array of scientific societies and associations, community organizations
and government committees and has authored or co-authored more than 70 published
papers. Dr. Conant is a Clinical Professor at the University of California San
Francisco (UCSF) and has been on the faculty of UCSF since 1967. He currently
serves as Chairman of the Board of the Conant Foundation, an HIV/AIDS education
and research foundation based in San Francisco. Dr. Conant served as principal
investigator for Enzo's Phase I clinical trial of its gene medicine for HIV-1
infection.
36
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 61) 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 53) 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 the
New York State Clinical Laboratory Association, a professional board. Mr.
Rabbani is a trustee of Adelphi University and serves as Chairman of its audit
committee. He received a Bachelor of Arts Degree in Chemistry from Adelphi
University, located in Long Island, New York.
BARRY W. WEINER (age 55) 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 65) 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 66) 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 57) 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 65) Vice President of Corporate
Development for Enzo Biochem and Vice President of Clinical Affairs for Enzo
Therapeutics. Dr. Thalenfeld has been employed with the Company since 1982. She
has authored numerous scientific papers in the areas of molecular biology and
genetics, and is a member of the American Society of Gene Therapy, the
Association of Clinical Research Professionals, and the Drug Development
Association. Dr. Thalenfeld received her Ph.D. at the Institute of Microbiology
at Hebrew University in Jerusalem, Israel and a Master of Science degree in
Molecular Biology from Yale University. She also completed a Post Doctoral
Fellowship in the Department of Biological Sciences at Columbia University.
37
DAVID C. GOLDBERG (age 48) 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.
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, 2005 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, 2005 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, 2005 and is incorporated herein by
reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this item will be set forth in the
Company's proxy statement expected to be filed with the Securities and Exchange
Commission on or before November 28, 2005 and is incorporated herein by
reference.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) (1) Consolidated Financial Statements
Consolidated Balance Sheets - July 31, 2005 and 2004
Consolidated Statements of Operations- Years ended
July 31, 2005, 2004 and 2003
Consolidated Statements of Stockholders' Equity -
Years ended July 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows - Years ended
July 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the required information
is included in the consolidated financial statements or the notes thereto or
because they are not required.
(3) Exhibits
The following documents are filed as Exhibits to this Annual Report on
Form 10-K:
Exhibit 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.
(3)
3(d) Bylaws. (1)
10(b) 1993 Incentive Stock Option Plan. (5)
38
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(r) Code of Ethics (10)
10(s) Settlement and License Agreement with Digene Corporation
effective as of September 30, 2004 (10) (12)
10(t) Joint Stipulation and Order of Dismissal with Prejudice dated
October 14, 2004 (10) (12).
10(u) 2005 Equity Compensation Incentive Plan (11)
10(v) Lease agreement with Pari Management (filed herewith)
14(a) Code of Ethics (10)
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 Registered Public Accounting Firm
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.
39
Notes to exhibits
(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.
(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.
(10) This exhibit filed with the Company's Annual Report on Form
10-K for the year ended July 31, 2004 and is incorporated
herein by reference
(11) This exhibit was filed as an exhibit to the Company's Proxy
Statement of Schedule 14A filed on January 19, 2005 and is
incorporated herein by reference
(12) These exhibits are subject to a confidential treatment
request pursuant to securities exchange act rules.
(b) See Item 15(a) (3), above.
(c) See Item 15(a) (2), above.
40
SIGNATURES
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 14, 2005 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 14, 2005
-----------------------------
Elazar Rabbani
Chairman of Board of Directors
(Principal Executive Officer)
By: /s/ Shahram K. Rabbani October 14, 2005
----------------------------
Shahram K. Rabbani,
Chief Operating Officer, Secretary and Director
By: /s/ Barry W. Weiner October 14, 2005
------------------------
Barry W. Weiner,
President, Chief Financial Officer, and Director
By: /s/ John B. Sias October 14, 2005
---------------------
John B. Sias, Director
By: /s/ John J. Delucca October 14, 2005
------------------------
John J. Delucca, Director
By: /s/ Irwin Gerson October 14, 2005
---------------------------
Irwin Gerson, Director
By: /s/ Melvin F. Lazar October 14, 2005
-------------------------
Melvin F. Lazar, Director
Marcus A. Conant, Director
41
FORM 10-K, ITEM 15(a) (1) and (2)
ENZO BIOCHEM, INC.
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 Registered Public Accounting Firm F-2
Consolidated Balance Sheets -- July 31, 2005 and 2004 F-3
Consolidated Statements of Operations --
Fiscal years ended July 31, 2005, 2004 and 2003 F-4
Consolidated Statements of Stockholders' Equity --
Years ended July 31, 2005, 2004 and 2003 F-5
Consolidated Statements of Cash Flows --
Years ended July 31, 2005, 2004 and 2003 F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts --
Years ended July 31, 2005, 2004 and 2003 S-1
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 REGISTERED PUBLIC ACCOUNTING FIRM
The 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, 2005, and 2004, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended July 31, 2005. Our audits also included the
financial statement schedules listed in the Index at Item 15(a). These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Enzo Biochem, Inc.
at July 31, 2005 and 2004, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended July 31, 2005,
in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of July 31, 2005, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated October
12, 2005, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Melville, NY
October 12, 2005
F-2
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
July 31,
-----------------------------------
Current assets: 2005 2004
---- ----
Cash and cash equivalents ............................................................. $ 76,980,900 $ 54,499,100
Marketable securities ................................................................. 6,713,600 17,241,500
Accounts receivable, net of allowance for doubtful accounts of $2,291,700
in 2005 and $2,770,300 in 2004 ...................................................... 13,420,500 14,794,400
Income tax receivable ................................................................. -- 3,906,900
Inventories ........................................................................... 2,876,100 3,434,300
Prepaid expenses ...................................................................... 2,579,900 1,832,500
Prepaid taxes ......................................................................... 1,329,200 --
Deferred taxes ........................................................................ 899,700 1,974,800
------------- -------------
Total current assets ..................................................................... 104,799,900 97,683,500
Property and equipment, net of accumulated depreciation
and amortization of $7,278,700 in 2005 and $7,681,000 in 2004 ........................ 2,669,500 2,414,600
Goodwill ................................................................................. 7,452,000 7,452,000
Patent costs, net of accumulated amortization of $9,695,300 in 2005
and $8,383,600 in 2004 ................................................................... 1,332,800 2,624,500
Other .................................................................................... 211,600 159,600
------------- -------------
$ 116,465,800 $ 110,334,200
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued legal fees .................................................................... $ 2,716,800 $ 2,050,500
Trade accounts payable ................................................................ 2,413,600 2,092,300
Other accrued expenses ................................................................ 1,347,900 494,300
Accrued payroll ....................................................................... 515,100 475,400
Deferred revenue ...................................................................... 359,400 --
Accrued research and development expenses ............................................. 286,300 225,000
Installment payable ................................................................... 150,000 --
Deferred rent ......................................................................... -- 86,700
------------- -------------
Total current liabilities ................................................................ 7,789,100 5,424,200
Deferred taxes ........................................................................... 260,000 444,200
Long term installment payable ............................................................ 150,000 300,000
Commitments
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: 32,526,800 in 2005 and 30,864,800 in 2004 ................................. 325,300 308,600
Additional paid-in capital ............................................................ 230,643,800 205,920,000
Less treasury stock at cost: 384,400 shares in 2005
and 349,900 shares in 2004 ........................................................ (5,994,400) (5,668,900)
Accumulated deficit ................................................................... (116,577,400) (96,148,000)
Accumulated other comprehensive loss .................................................. (130,600) (245,900)
------------- -------------
Total stockholders' equity ............................................................... 108,266,700 104,165,800
------------- -------------
$ 116,465,800 $ 110,334,200
============= =============
F-3
See accompanying notes
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal years ended July 31,
---------------------------------------------------------
2005 2004 2003
---- ---- ----
Revenues:
Research product revenues and royalty income .................. $ 10,546,000 $ 12,972,200 $ 23,253,100
Clinical laboratory services .................................. 32,856,600 28,672,200 29,513,900
------------ ------------ ------------
43,402,600 41,644,400 52,767,000
Costs and expenses and other (income):
Cost of research product revenues ............................. 2,196,400 2,517,800 3,388,900
Cost of clinical laboratory services .......................... 12,547,600 10,586,200 9,592,900
Research and development expense .............................. 8,452,400 8,078,300 8,311,200
Selling, general, and administrative expense .................. 20,069,200 14,367,200 12,097,400
Provision for uncollectible accounts receivable ............... 4,967,100 11,986,500 9,345,300
Legal expense ................................................. 5,475,500 6,339,900 5,661,000
Interest income ............................................... (1,522,900) (1,151,800) (1,355,000)
Gain on patent litigation settlement .......................... (14,000,000) -- --
------------ ------------ ------------
38,185,300 52,724,100 47,041,700
Income (loss) before income taxes ................................ 5,217,300 (11,079,700) 5,725,300
(Provision) benefit for income taxes ............................. (2,213,300) 4,848,100 (1,881,300)
------------ ------------ ------------
Net income (loss) ................................................ $ 3,004,000 ($ 6,231,600) $ 3,844,000
============ ============ ============
Net income (loss) per common share:
Basic ......................................................... $ 0.09 ($ 0.20) $ 0.12
============ ============ ============
Diluted ....................................................... $ 0.09 ($ 0.20) $ 0.12
============ ============ ============
Weighted average common shares outstanding:
Basic ......................................................... 32,097,000 31,700,000 31,399,000
============ ============ ============
Diluted ....................................................... 32,763,000 31,700,000 32,175,000
============ ============ ============
F-4
See accompanying notes
ENZO BIOCHEM INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JULY 31, 2005, 2004 AND 2003
COMMON TREASURY Common Additional Treasury
STOCK STOCK Stock Paid-in Stock
SHARES SHARES Amount Capital Amount
------ ------ ------ ------- ------
Balance at July 31, 2002 ....................... 28,459,800 -- $ 284,600 $ 160,499,800 --
Net income for the year ended July 31, 2003 .... -- -- -- -- --
Unrealized loss on available for-sale
securities, net of tax ..................... -- -- -- -- --
Comprehensive income ...........................
5% stock dividend (fair value on date declared) 1,423,600 -- 14,300 37,694,900 --
Increase in common stock and paid-in capital
due to exercise of stock options ............ 73,300 -- 700 630,100 --
Issuance of stock for employee 401(k) plan match 18,400 -- 200 257,000 --
--------------------------------------------------------------------------------
Balance at July 31, 2003 ....................... 29,975,100 -- 299,800 199,081,800 --
Net loss for the year ended July 31, 2004 ...... -- -- -- -- --
Unrealized loss on available for-sale
securities, net of tax ..................... -- -- -- -- --
Comprehensive loss .............................
Purchase of treasury stock ..................... -- 349,900 -- -- ($5,668,900)
Increase in common stock and paid-in capital
due to exercise of stock options ............ 873,900 -- 8,700 6,556,100 --
Issuance of stock for employee 401(k) plan match 15,800 -- 100 282,100 --
--------------------------------------------------------------------------------
Balance at July 31, 2004 ....................... 30,864,800 349,900 308,600 205,920,000 (5,668,900)
Net income for the year ended July 31, 2005 .... -- -- -- -- --
Unrealized gain on available for-sale
securities, net of tax ..................... -- -- -- -- --
Reclassification adjustment for net loss
realized and reported in net income ............ -- -- -- -- --
Valuation reserve ..............................
Comprehensive loss .............................
5% stock dividend (fair value on date declared) 1,543,600 17,500 15,500 23,417,900 --
Purchase of treasury stock ..................... -- 17,000 (325,500)
Tax benefit for stock options exercised ........ 124,300
Increase in common stock and paid-in capital
due to exercise of stock options ............ 100,300 -- 1,000 830,200 --
Issuance of stock for employee 401(k) plan match 18,100 200 351,400 --
--------------------------------------------------------------------------------
Balance at July 31, 2005 ....................... 32,526,800 384,400 $ 325,300 $ 230,643,800 ($5,994,400)
================================================================================
Accumulated
Other Total
Accumulated Comprehensive Stockholders'
Deficit Loss Equity
------- ---- ------
Balance at July 31, 2002 ....................... ($ 56,051,200) -- $ 104,733,200
Net income for the year ended July 31, 2003 .... 3,844,000 -- 3,844,000
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) (37,709,200) -- --
Increase in common stock and paid-in capital
due to exercise of stock options ............ -- -- 630,800
Issuance of stock for employee 401(k) plan match -- -- 257,200
-------------------------------------------------
Balance at July 31, 2003 ....................... (89,916,400) (85,000) 109,380,200
Net loss for the year ended July 31, 2004 ...... (6,231,600) -- (6,231,600)
Unrealized loss on available for-sale
securities, net of tax ..................... -- (160,900) (160,900)
-------------
Comprehensive loss ............................. (6,392,500)
=============
Purchase of treasury stock ..................... -- -- (5,668,900)
Increase in common stock and paid-in capital
due to exercise of stock options ............ -- -- 6,564,800
Issuance of stock for employee 401(k) plan match -- -- 282,200
-------------------------------------------------
Balance at July 31, 2004 ....................... (96,148,000) (245,900) 104,165,800
Net income for the year ended July 31, 2005 .... $ 3,004,000 -- 3,004,000
Unrealized gain on available for-sale
securities, net of tax ..................... -- 43,100
Reclassification adjustment for net loss
realized and reported in net income ............ -- 122,000
Valuation reserve .............................. (49,800) 115,300
--------- -------------
Comprehensive loss ............................. 3,119,300
=============
5% stock dividend (fair value on date declared) (23,433,400) -- --
Purchase of treasury stock ..................... -- -- (325,500)
Tax benefit for stock options exercised ........ 124,300
Increase in common stock and paid-in capital
due to exercise of stock options ............ -- -- 831,200
Issuance of stock for employee 401(k) plan match -- -- 351,600
-------------------------------------------------
Balance at July 31, 2005 ....................... ($116,577,400) ($130,600) $ 108,266,700
=================================================
F-5
See accompanying notes
ENZO BIOCHEM, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal years ended July 31,
---------------------------------------------------
2005 2004 2003
---- ---- ----
OPERATING ACTIVITIES
Net income (loss) ......................................................... $ 3,004,000 ($ 6,231,600) $ 3,844,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and equipment .............. 1,020,400 1,076,000 1,058,000
Amortization of patent costs ......................................... 1,311,700 1,285,500 750,000
Provision for uncollectible accounts receivable ...................... 4,967,100 11,986,500 9,345,300
Deferred taxes ....................................................... 890,900 (1,650,700) (128,100)
Issuance of stock for 401 K plan employer match ...................... 351,600 282,200 257,200
Deferred rent ........................................................ (86,700) (232,600) (195,400)
Loss on sales of marketable securities ............................... 200,200 -- --
Tax benefit on stock option exercise ................................. 124,300 -- --
Other ................................................................ (51,900) 1,400 (14,800)
Changes in operating assets and liabilities:
Accounts receivable before provision for
uncollectible amounts ............................................. (3,593,200) (9,514,500) (6,344,200)
Inventories ....................................................... 558,200 (12,500) 768,400
Income taxes receivable ........................................... 3,906,900 (3,364,600) 1,426,300
Prepaid expenses .................................................. (747,400) 400,400 (741,900)
Prepaid taxes ..................................................... (1,329,200) -- --
Trade accounts payable and other accrued expenses ................. 1,174,900 714,600 (374,700)
Accrued research and development expenses ......................... 61,300 (228,400) 453,400
Deferred revenue .................................................. 359,400 -- --
Accrued legal fees ................................................ 666,300 135,300 1,775,200
Accrued payroll ................................................... 39,700 (227,600) 227,100
------------ ------------ ------------
Total adjustments ................................................. 9,824,500 651,000 8,261,800
------------ ------------ ------------
Net cash provided by (used in) operating activities ............ 12,828,500 (5,580,600) 12,105,800
------------ ------------ ------------
INVESTING ACTIVITIES
Capital expenditures .................................................. (1,275,700) (1,303,800) (956,700)
Patent costs deferred ................................................. (19,700) (443,800) (353,900)
Sales (purchases) of marketable securities, net ....................... 10,442,800 (2,349,000) (15,293,400)
------------ ------------ ------------
Net cash provided by (used in) investing activities ............ 9,147,400 (4,096,600) (16,604,000)
------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from the exercise of stock options, net ...................... 505,900 895,700 630,800
Proceeds from insurance loss .......................................... -- 13,000 --
------------ ------------ ------------
Net cash provided by financing activities ...................... 505,900 908,700 630,800
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ...................... 22,481,800 (8,768,500) (3,867,400)
Cash and cash equivalents at the beginning of the year .................... 54,499,100 63,267,600 67,135,000
------------ ------------ ------------
Cash and cash equivalents at the end of the year .......................... $ 76,980,900 $ 54,499,100 $ 63,267,600
============ ============ ============
See Note 2 for supplemental disclosure for statement of cash flows - non cash
transactions
F-6
See accompanying notes
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005, 2004 AND 2003
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
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.
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 its investments in highly liquid corporate debt
instruments with maturities of three months or less at the date of purchase to
be cash equivalents. The Company limits concentration of credit risk by
diversifying its investments among a variety of high credit quality issuers.
MARKETABLE SECURITIES
Investments with a maturity greater than three months at the date of purchase
are designated as marketable securities. At July 31, 2005 and 2004, management
designated marketable securities held by the Company as available-for-sale
securities, for purposes of Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities". Securities
available-for-sale are carried at fair value with the unrealized losses reported
in stockholders' equity under the caption "Accumulated other comprehensive
loss".
The Company periodically reviews its investment portfolio to determine if there
is an impairment that is other than temporary. In testing for impairment, the
Company considers, among other factors, the length of time and the extent of a
security's unrealized loss, the financial condition and near term prospects of
the issuer, economic forecasts and market or industry trends. The cost of
marketable securities sold is based on the original cost basis plus any
reinvested dividends.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments that subject the Company to significant concentrations of
credit risk primarily consist of cash and cash equivalents, marketable
securities, net accounts receivable, accounts payable and accrued liabilities,
which are carried at cost, which management believes approximates fair value.
The Company's cash equivalents and marketable securities are invested in
financial instruments with high credit ratings.
F-7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005, 2004 AND 2003
CONCENTRATION OF CREDIT RISK
At July 31, 2005 and 2004, approximately 94% and 89%, respectively, 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, the number of insurance carriers it deals with, and its 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.
The Company also provides services to certain patients covered by various
third-party payers, including the Federal Medicare program. Revenue, net of
contractual allowances, from direct billings under the Federal Medicare program
during the years ended July 31, 2005, 2004 and 2003 were approximately 20%, 19%
and 11%, respectively, of the Company's total revenue. The clinical reference
laboratory industry is characterized by a significant amount of uncollectible
accounts receivable resulting from the inability to receive accurate and timely
billing information in order to forward it to the third party payers for
reimbursement, and the inaccurate information received from the covered
individual patients for unreimbursed unpaid amounts.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Work-in-process and finished goods inventories consist of material, labor,
outside processing costs and manufacturing overhead.
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 certain 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 or the life of the patent, whichever is
shorter, 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.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130"), requires reporting and displaying of comprehensive loss and
its components. In accordance with SFAS 130, the accumulated balance of other
comprehensive loss, which is comprised of net unrealized losses on marketable
securities, is disclosed as a separate component of stockholders' equity.
REVENUE RECOGNITION
Revenues from the clinical laboratory are recognized upon completion of the
testing process for a specific patient and reported to the ordering physician.
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 payers to provide services at less than established billing rates.
The Company's contractual adjustments, and the provision for doubtful accounts,
are estimated based on historical collection experience using a retrospective
collection analysis and aging models. Should circumstances change (e.g. shift in
payer mix, decline in economic conditions, or deterioration in aging of patient
receivables), our estimates of the net realizable value of patient receivables
could be reduced by a material amount.
F-8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005, 2004 AND 2003
Revenues from research product sales, exclusive of certain non-exclusive
distribution agreements, are recognized when the products are shipped, the sales
price is fixed or determinable and collectibility is reasonably assured. 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. During the fiscal years ended July 31, 2005, 2004, and 2003, the
manufacturing and processing cost of these products sold was $0.7 million, $7.4
million, and $7.0 million, respectively. The revenue from these non-exclusive
distribution agreements are recognized when shipments are made 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 $299,000, $384,000, and $414,000 for fiscal years
ended July 31, 2005, 2004, and 2003, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are charged to research and development expenses
as incurred. Such costs include costs of scientific personnel, supplies,
consultants, allocated facility costs, costs related to pre-clinical and
clinical trials, and amortization of patent expense.
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.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to current year
presentation.
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 has performed their annual
F-9
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005, 2004 AND 2003
impairment testing during the fourth quarter of its fiscal year. Based on this
testing, there is no impairment to the goodwill recorded on the accompanying
balance sheet as of July 31, 2005 and 2004.
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.
The Company periodically evaluates the recoverability of the net carrying value
of its property, and intangible assets. An impairment loss is recognized when
the carrying value of the long-lived asset exceeds its undiscounted future cash
flows and its fair value. A loss on impairment would be recognized through a
charge to earnings. No impairment charges were required in fiscal 2005, 2004, or
2003.
SEGMENT REPORTING
The FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" which
establishes standards for reporting information on operating segments in interim
and annual financial statements. An enterprise is required to separately report
information about each operating segment that engages in business activities
from which the segment may earn revenues and incur expenses, whose separate
operating results are regularly reviewed by the chief operating decision maker
regarding allocation of resources and performance assessment and which exceed
specific quantitative thresholds related to revenue and profit or loss. During
all fiscal periods presented, the Company met these requirements, and
accordingly has two reportable segments (see Note 13).
STOCK DIVIDENDS
During fiscal 2005, the Company's board of directors declared a 5% stock
dividend on October 5, 2004 payable November 15, 2004 to shareholders of record
as of October 25, 2004. The fiscal 2004 per share data was adjusted
retroactively to reflect the stock dividend declared on October 5, 2004. In
fiscal 2003, the Company's board 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 for fiscal 2003 have been adjusted to retroactively reflect
the stock dividend in fiscal 2003. The Company recorded a charge to accumulated
deficit and offsetting credits to both common stock and additional paid-in
capital of $23,433,400 and $37,709,200 in fiscal 2005 and fiscal 2003,
respectively, which reflects the fair value of the stock dividends on the dates
of declaration
NET INCOME (LOSS) PER SHARE
The Company applies SFAS No. 128, "Earnings per Share." SFAS No. 128 establishes
standards for computing and presenting earnings per share. Basic net income
(loss) per share represents net income (loss) divided by the weighted average
number of common shares outstanding during the period. The dilutive effect of
potential common shares, consisting of outstanding stock options, is determined
using the treasury stock method in accordance with SFAS No. 128. Diluted
weighted average shares outstanding for 2004 do not include the potential common
shares from stock options because to do so would have been antidilutive.
Accordingly, basic and diluted net loss per share is the same. The number of
potential common shares excluded from the calculation of diluted earnings per
share during the year ended July 31, 2004 was 798,349 shares.
F-10
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005, 2004 AND 2003
The following table sets forth the computation of basic and diluted net income
(loss) per share pursuant to SFAS No. 128.
Fiscal years ended July 31, 2005 2004 2003
---- ---- ----
Numerator:
Net income (loss) for numerator for basic and diluted net
income per common share $3,004,000 $(6,231,600) $3,844,000
========== ============ ==========
Denominator:
Denominator for basic net income (loss) per common
share-weighted-average shares 32,097,000 31,700,000 31,399,000
Effect of dilutive employee and director stock options
666,000 - - 776,000
------- --- -------
Denominator for diluted net income (loss) per share-adjusted
weighted-average shares 32,763,000 31,700,000 32,175,000
Basic net income (loss) per share $.09 $(.20) $.12
==== ====== ====
Diluted net income (loss) per share $.09 $(.20) $.12
==== ====== ====
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, in the periods in which such options have a dilutive effect under
the treasury stock method.
For the fiscal years ended July 31, 2005, 2004 and 2003, the effect of
approximately 818,300, 554,500, and 79,900, respectively, of outstanding options
to purchase common shares were excluded from the calculation of diluted net
income (loss) per share because their effect would be anti-dilutive.
STOCK COMPENSATION PLANS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 "Share-Based Payment" ("SFAS 123(R)"). The statement requires that the
compensation cost relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the fair value of the
equity or liability instrument issued. The statement covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. The Company was required to adopt SFAS 123(R) as of August 1,
2005, the first day of its fiscal year ending July 31, 2006. The adoption of
SFAS 123(R) will have a material impact on the consolidated financial statements
of the Company.
For the fiscal year ending July 31, 2005, the Company continued to account 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 income (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
F-11
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005, 2004 AND 2003
31, 2005, 2004, and 2003: 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 0.71, 0.74, and 0.77, respectively, for all grants.
During the fiscal years ended July 31, 2005 and 2004, the Company followed the
provisions of FASB 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 did
not amend SFAS No. 123 to require companies to account for employee stock
options using the fair value method, as SFAS No. 123(R) did, 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 the disclosure provisions of SFAS No. 148
effective January 31, 2004.
On June 3, 2005, the Board of Directors approved the acceleration of vesting of
unvested "out of the money" stock options held by employees, including executive
officers, and directors. The stock options considered as out of the money were
those with an exercise price that was $1.50 or greater than $14.82, the closing
price of the Company's common stock on June 3, 2005. All other terms and
conditions of these "out of the money" options remain unchanged. As a result of
the acceleration, options to purchase approximately 666,000 shares of the
Company's common stock (which represents approximately 21% of the Company's
currently outstanding stock options) became exercisable immediately. The
accelerated options range in exercise prices from $16.39 to $19.02 and the
weighted average exercise price of the accelerated options was $17.55 per share.
The total number of options subject to acceleration include options to purchase
575,000 shares held by executive officers and directors of the Company. This
action was taken to avoid expense recognition in future financial statements
upon adoption of SFAS 123(R). The accelerated vesting of these "out of the
money" options does not result in a charge in the Company's statement of
operations for the fiscal year ended July 31, 2005 based on U.S. generally
accepted accounting principles. The Company reported approximately $10.1 million
of pro forma compensation expense for the fiscal year ended July 31, 2005 in the
pro forma SFAS footnote disclosure below, of which $6.0 million is applicable to
these "out of the money" options.
The following table illustrates the effect on net income (loss) if the Company
had applied the fair value recognition provisions of SFAS No. 123:
Fiscal years ended July 31, 2005 2004 2003
---- ---- ----
Reported net income (loss) $3,004,000 ($6,231,600) $3,844,000
Pro forma compensation expense (10,128,600) (3,239,800) (3,010,900)
----------- ---------- ----------
Pro forma net income (loss) ($7,124,600) ($9,471,400) $833,100
=========== =========== ========
Pro forma net income (loss) per share:
Basic ($.22) ($.30) $.03
Diluted ($.22) ($.30) $.03
F-12
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005, 2004 AND 2003
NOTE 2 - SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS
In the years ended July 31, 2005, 2004 and 2003, the Company paid cash for
income taxes of approximately $3,566,000, $219,000 and $583,000 respectively.
In fiscal 2005, a director exercised 31,660 shares of incentive stock options.
The director surrendered 17,000 previously owned shares of the Company's common
stock to be utilized to exercise the stock options. The Company recorded the
market value of surrendered shares as treasury stock of approximately $325,500
as a non cash transaction.
In fiscal 2004, certain officers exercised 769,300 shares of incentive stock
options. The officers surrendered 349,900 of previously owned shares of the
Company's common stock to be utilized to exercise the stock options. The Company
recorded the 349,900 of surrendered shares as treasury stock of approximately
$5.7 million as a non cash transaction.
In fiscal 2004, the Company purchased the assets of a privately held company for
$650,000, of which $350,000 was paid in cash during fiscal 2004 and the
remaining $300,000 is to be paid in two $150,000 installments on the 18 and 36
month anniversary date of the acquisition.
NOTE 3 - MARKETABLE SECURITIES
Marketable securities are recorded at fair value. The following is a summary of
available-for-sale securities:
Fair Value Unrealized Holding (Loss)
---------- -------------------------
Fiscal Years Ended July 31, 2005 2004 2005 2004
---- ---- ---- ----
Income bond mutual fund $ 5,638,600 $15,401,300 $ (125,900) $ (271,600)
Marketable debt securities:
U.S. Government and agency securities 449,100 1,063,100 --- ---
Corporate debt securities 625,900 777,100 (4,700) (129,400)
----------- ----------- ----------- -----------
(Average of remaining maturity of debt $ 6,713,600 $17,241,500 $ (130,600) $ (401,000)
securities was approximately four months at =========== =========== =========== ===========
July 31, 2005 and 2004)
During fiscal 2005, the Company realized proceeds of approximately $10.7 million
from maturities and sales of marketable securities, on which it realized a loss
of approximately $200,000, based on the average cost. There were no realized
gains or losses on marketable security transactions during fiscal 2004 or fiscal
2003. The Company's cost basis in these marketable securities as of July 31,
2005 and 2004 was $6,844,200 and $17,642,500, respectively.
The following is a summary of other comprehensive (loss), which relates to the
Company's investments in marketable securities:
Tax (Expense) Net-of-Tax
Before-Tax Amount or Benefit Amount
----------------- ---------- ------
Fiscal 2003 unrealized (loss) $(139,300) $54,300 $(85,000)
Fiscal 2004 unrealized (loss) (261,700) 100,800 (160,900)
Fiscal 2005 realized loss 200,000 (78,000) 122,000
Fiscal 2005 unrealized gain 70,400 (27,300) 43,100
------ ------- ------
(130,600) 49,800 (80,800)
Valuation reserve - - (49,800) (49,800)
--- ------- -------
Cumulative balance at July 31, 2005.... ($130,600) $0 ($130,600)
========== == =========
F-13
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005, 2004 AND 2003
NOTE 4 - INVENTORIES
At July 31, 2005 and 2004 inventories consist of:
2005 2004
---- ----
Raw materials $51,700 $124,900
Work in process 1,767,200 2,188,000
Finished products 1,057,200 1,121,400
---------- ----------
$2,876,100 $3,434,300
========== ==========
NOTE 5 - PROPERTY AND EQUIPMENT
At July 31, 2005 and 2004 property and equipment consist of:
2005 2004
---- ----
Laboratory machinery and equipment $2,098,100 $1,901,900
Leasehold improvements 2,771,100 2,543,400
Office furniture and equipment 5,079,000 5,650,300
--------- ---------
9,948,200 10,095,600
Accumulated depreciation and amortization (7,278,700) (7,681,000)
---------- ----------
$2,669,500 $2,414,600
========== ==========
The Company's fixed assets have been assigned useful lives of between three and
five years. In fiscal 2005, the Company removed the cost basis and accumulated
depreciation and amortization of fixed assets that were fully depreciated and
disposed.
NOTE 6 - LEASE OBLIGATIONS
The Company leases office and laboratory space under several leases that expire
between December 31, 2005 and March 2017. An entity owned by certain executive
officers/directors of the Company owns the building that the Company leases as
its main facility for laboratories and research and manufacturing operations,
and corporate headquarters. In March 2005, the Company amended and extended the
lease for another 12 years. In addition to the minimum annual rentals of space,
the lease is subject to annual increases, based on the consumer price index.
Annual increases are limited to 3% per year. Rent expense under this renewed
lease and the prior lease approximated $1,289,000, $1,370,000 and $1,302,000 in
fiscal years 2005, 2004 and 2003, respectively.
Total consolidated rent expense incurred by the Company during fiscal 2005, 2004
and 2003 was approximately $2,140,000, $1,801,000 and $1,742,000 respectively.
Minimum annual rentals under operating lease commitments for fiscal years ending
July 31, are as follows:
Fiscal Year ended July 31, Minimum Annual Rents
- -------------------------- --------------------
2006 $2,601,000
2007 2,750,000
2008 2,644,000
2009 2,464,000
2010 2,200,000
Thereafter 10,978,000
-----------
$23,637,000
===========
F-14
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005, 2004 AND 2003
NOTE 7 - LITIGATION
On October 14, 2004, the Company as plaintiff finalized and executed a
settlement and license agreement with Digene Corporation to settle a patent
litigation lawsuit (the "Digene agreement"). Under the terms of the agreement,
the Company received an initial payment of $16.0 million, would earn in the
first "annual period" (October 1, 2004 to September 30, 2005) a minimum royalty
payment of $2.5 million, and receive a minimum royalty of $3.5 million in each
of the next four annual periods. In addition, the agreement provides for the
Company to receive quarterly running royalties on the net sales of Digene
products subject to the license until the expiration of the patent on April 24,
2018. These quarterly running royalties will be fully creditable against the
minimum royalty payments due in the first five years of the agreement. The
balance, if any, of the minimum royalty payment will be recognized in the final
quarter of the applicable annual royalty period. As a result of the Digene
agreement, the Company recorded a gain on patent litigation settlement of $14.0
million in the first quarter of fiscal 2005, and deferred $2 million which would
be earned from net sales of the Company's licensed products covered by the
agreement during the first annual period. As of July 31, 2005, the balance of
the deferred revenue from the settlement was $359,400.
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; 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.
The defendants have answered the individual complaints and asserted a variety of
affirmative defenses and counterclaims. Fact discovery is ongoing. The Court
conducted a claim construction hearing from July 5-11, 2005. Closing arguments
on claim construction issues were conducted on September 30, 2005. 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. The Company
recorded revenue from only Perkin Elmer during the fiscal year ended July 31,
2005.
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. The Affymetrix
complaint also seeks 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 Affymetrix 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.
Initial pleadings have been completed and discovery has commenced. The Court
conducted a claim construction hearing from July 5 - 11, 2005. Closing arguments
on claim
F-15
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005, 2004 AND 2003
construction issues were conducted on September 30, 2005. The Company did not
record any revenue from Affymetrix during the fiscal years ended July 31, 2005
and 2004.
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 was filed after Enzo rejected Roche's
latest cash offer to settle Enzo's claims for, INTER ALIA, alleged breach of
contract and misappropriation of Enzo's assets. The complaint seeks declaratory
judgment (i) of patent invalidity with respect to Enzo's 4,994,373 patent (the
"'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 with appropriate affirmative defenses and counterclaims.
Enzo filed an Answer and Counterclaims on November 3, 2004 alleging multiple
breaches of the 1994 Agreement and related infringement of Enzo's 373 patent.
Discovery has commenced. The Court conducted a claim construction hearing from
July 5-11, 2005. Closing arguments on claim construction issues were conducted
on September 30, 2005. The Company did not record any revenue from Roche during
the fiscal year ended July 31, 2005.
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 were reached with bioMerieux and Chugai; the
settlements did not have a material monetary impact on the Company. In July
2004, the district court again granted another motion by the remaining
defendants (Gen-Probe and Becton Dickinson) that all claims of the Company's
patent are invalid. The Company filed an appeal of that judgment. On September
30, 2005, the Court of Appeals affirmed the judgment of invalidity. 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
Glaser v. Hyman Gross, Barry Weiner, Enzo Biochemical Inc., Elazar Rabbani,
Shahram Rabbani, John Delucca, Dena Engelhardt, Richard Keating, Doug Yates, and
Does I-50, Case No. CA-02-1242-A, in the U.S. District Court for the Eastern
District of Virginia. This complaint was filed by an investor in the Company who
had filed for bankruptcy protection and his family. The complaint alleged
securities fraud, breach of fiduciary duty, conspiracy, and common law fraud and
sought 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. Plaintiffs thereafter appealed the decision to
the United States Court of Appeals for the Fourth Circuit. On March 21, 2005,
the Fourth Circuit affirmed the lower Court's prior dismissal of all claims
asserted in the action, with the sole exception of a portion of the claim for
common law fraud and remanded that remaining portion of the action to the U.S.
District Court for the Eastern District of Virginia. On May 20, 2005, defendants
again moved the District Court to dismiss the sole remaining claim before it. On
July 14, 2005, the District Court granted defendants' renewed motion to dismiss.
On July 29, 2005, Plaintiffs moved to amend their Complaint for reconsideration.
On August 19, 2005, the Court denied Plaintiffs' motion to amend and entered
final judgment dismissing the complaint. Thereafter, Plaintiffs appealed the
order and judgment to the Fourth Circuit. That appeal is presently pending. The
Company continues to believe that the complaint has no merit whatsoever and
intends to continue to defend the action vigorously.
On June 7, 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.
F-16
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005, 2004 AND 2003
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 is 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 answered the complaint on July 29, 2004. The answer pleads
affirmative defences of invalidity, estoppel and laches and asserts
counterclaims of non-infringement and invalidity. Fact discovery is currently
scheduled to close on February 28, 2006. Dispositive motions are currently due
on March 27, 2006. The trial date is currently scheduled for October 1, 2006.
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. The
Company did not record any revenue from either of the above during the fiscal
years July 31, 2005 and 2004.
NOTE 8 - INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109
"Accounting for Income Taxes". The (provision) benefit for income taxes is as
follows:
Fiscal year ended July 31, 2005 2004 2003
---- ---- ----
Current (provision) benefit:
Federal $(1,386,700) $ 3,288,000 $(1,828,000)
State and local 64,300 (191,500) (181,400)
Deferred (provision) benefit (890,900) 1,751,600 128,100
----------- ----------- -----------
(Provision) benefit for income taxes $(2,213,300) $ 4,848,100 $(1,881,300)
=========== =========== ===========
Deferred tax assets and liabilities arise from temporary differences between the
tax basis of assets and liabilities and their reported amounts in the financial
statements. The components of deferred tax assets (liabilities) as of July 31,
2005 and 2004 are as follows:
July 31, 2005 July 31, 2004
------------- -------------
Current deferred tax assets (liabilities):
Provision for uncollectible accounts receivable $889,000 $1,072,500
State and local tax carry forward losses 244,700 720,900
Other, net (234,000) 181,400
Realized and unrealized losses on marketable securities 129,100 --
Less: Valuation reserve for realized and unrealized losses (129,100) --
-------- ----------
Net current deferred tax assets 899,700 1,974,800
-------- ----------
Non current deferred tax (liability):
Deferred patent costs (293,000) (906,200)
Non current deferred tax asset:
Depreciation 33,000 462,000
-------- ----------
Deferred tax liability non current, net (260,000) (444,200)
-------- ----------
Deferred tax assets - net $639,700 $1,530,600
======== ==========
In assessing if deferred tax assets are realizable, 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 against which the the
deferred tax asset can be applied. 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.
During fiscal 2005, the Company determined that it is not likely that it will
generate taxable income against which the deferred tax asset for the realized
and unrealized losses on marketable securities can be applied. Therefore, it has
established a valuation reserve against this deferred tax asset. As of July 31,
2005 and 2004, there were no carry forward losses for federal taxes. As of July
31, 2005 and 2004, the Company has state and local tax carry forward losses of
approximately $4.2 million and $11.2 million, respectively.
F-17
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005, 2004 AND 2003
The (provision) benefit for income taxes were at rates different from U.S.
federal statutory rates for the following reasons:
Fiscal year ended July 31, 2005 2004 2003
---- ---- ----
Federal statutory rate (34%) 34% (34%)
Expenses not deductible for income tax return purposes (2%) (3%) (2%)
State income taxes, net of (benefit) of federal tax deduction. (6%) 4% (3%)
Benefit of foreign sales 1% 2% 4%
Fixed asset basis difference - 8% -
Other (1%) (1%) 2%
---- ---- ----
(42%) 44% (33%)
==== ==== ====
NOTE 9 - STOCKHOLDERS' EQUITY
TREASURY STOCK
In fiscal 2005, a director exercised 31,660 shares of incentive stock options.
The director surrendered 17,000 previously owned shares of the Company's common
stock to be utilized to exercise the stock options. The Company recorded the
market value of surrendered shares as treasury stock of approximately $325,500,
and is a non cash transaction.
In fiscal 2004, certain officers exercised 769,300 shares of incentive stock
options. The officers surrendered 349,900 of previously owned shares of the
Company's common stock to be utilized to exercise the stock options. The Company
recorded the market value of surrendered shares as treasury stock of
approximately $5.7 million, and is a non cash transaction.
INCENTIVE STOCK OPTION PLANS
The Company has incentive stock option plans ("1994 plan" and "1999 plan") under
which the Company may grant options for up to 1,336,745 shares (1994 plan) and
up to 2,312,356 shares (1999 plan) of common stock. No additional options may be
granted under the 1994 plan. In fiscal 2005, the Company set up a new incentive
stock options plan ("2005 plan") under which the Company may grant up to
1,000,000 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 non statutory options. Incentive stock options
generally become exercisable at 25% per year after one year and expire ten years
after the date of grant. To date, the Company has only granted incentive stock
options under these plans.
F-18
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005, 2004 AND 2003
A summary of the information pursuant to the Company's stock option plan for the
years ended July 31, 2005, 2004 and 2003 under SFAS No. 123 is as follows:
2005 2004 2003
------------------------------ ----------------------------- -------------------------------
Weighted - Weighted -
Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
Outstanding at
beginning of year 2,856,801 $11.86 3,397,087 $9.88 2,841,401 $9.38
Granted 431,975 $16.57 428,925 $17.02 661,225 $11.76
Exercised (100,332) $7.39 (917,539) $7.16 (79,838) $6.85
Cancelled (34,319) $11.64 (51,672) $10.13 (25,701) $12.51
--------- - --------- ---------
Outstanding at
end of year 3,154,125 $12.61 2,856,801 $11.86 3,397,087 $9.88
========= ========= =========
Exercisable at
end of year 2,126,442 $11.28 1,770,492 $10.54 2,490,003 $8.98
========= ========= =========
Weighted average fair
value of options
granted during year $11.76 $12.40 $8.49
====== ====== =====
The following table summarizes information for stock options outstanding at July
31, 2005:
Options outstanding Options exercisable
------------------- -------------------
Weighted-Average Weighted- Weighted-
Range of Exercise Remaining Average Exercise Average Exercise
Prices Shares Contractual Life Price Shares Price
------ ------ ---------------- ----- ------ -----
$5.45-8.08 291,451 3.2 years $5.64 291,451 $5.64
$8.33-12.25 1,830,092 4.7 years $11.06 1,540,066 $10.91
$12.93-19.02 952,706 8.3 years $16.72 215,050 $16.60
$20.20-24.42 61,644 6.0 years $21.42 61,644 $21.42
$36.05 18,233 4.4 years $36.05 18,233 $36.05
--------- ---------
3,154,125 2,126,444
========= =========
As of July 31, 2005, there were approximately 806,800 shares available for grant
under the arrangements described above.
NOTE 10 - COMMITMENTS
The Company had an exclusive licensing agreement to an invention covered by
licensed patents. Under this agreement, the Company was required to make certain
minimum royalty payments of $200,000 per year through the life of the patents.
The patent expired in December, 2004.
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, 2005, 2004 and 2003, the Company authorized employer matched
contributions of 50% of the employees' contribution up to 10% of the employees'
compensation, payable in Enzo Biochem, Inc. common stock. The 401(k) employer
matched contributions expense was $351,600, $282,200, and $257,200 in fiscal
years 2005, 2004 and 2003, respectively.
F-19
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005, 2004 AND 2003
NOTE 12 - SUMMARY OF SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains statement of operations information for each
quarter of the fiscal years ended July 31, 2005 and 2004. The Company believes
that the following information reflects all normal recurring adjustments
necessary for a fair presentation of the information for the periods presented.
The operating results for any quarter are not necessarily indicative of results
for any future period.
Unaudited quarterly financial data (in thousands, except per share amounts) for
fiscal 2005 and 2004 is summarized as follows:
FISCAL 2005
Quarter Ended
------------------------------------------------------------
October 31, January 31, April 30, July 31,
----------- ----------- --------- --------
2004 2005 2005 2005
---- ---- ---- ----
Total revenues $10,301 $11,235 $11,000 $10,867
Gross profit 6,812 7,821 7,035 6,991
Income (loss) before income taxes 12,173 (944) (2,553) (3,459)
Net income (loss) 7,021 (528) (1,497) (1,992)
Basic income (loss) per common share $0.22 ($0.02) ($0.05) ($0.06)
Diluted income (loss) per common share $0.22 ($0.02) ($0.05) ($0.06)
FISCAL 2004
Quarter Ended
------------------------------------------------------------
October 31, January 31, April 30, July 31,
----------- ----------- --------- --------
2003 2004 2004 2004
---- ---- ---- ----
Total revenues $10,273 $11,028 $11,765 $8,578
Gross profit 7,567 8,099 8,705 4,167
Loss before income taxes (816) (2,755) (891) (6,618)
Net loss (323) (1,455) (460) (3,994)
Basic loss per common share ($0.01) ($0.05) ($0.02) ($0.12)
Diluted loss per common share ($0.01) ($0.05) ($0.02) ($0.12)
F-20
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005, 2004 AND 2003
Note 13--Segment Reporting
The Company applies SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." SFAS No. 131 establishes standards for reporting
information regarding operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS No. 131 also establishes
standards for related disclosures about products and services and geographic
areas. The chief operating decision maker, or decision-making group, in making
decision how to allocate resources and assess performance, identifies operating
segments as components of an enterprise about which separate discrete financial
information is available for evaluation.
The Company has two reportable segments: research and development and clinical
laboratories. The Company's research and development segment conducts research
and development activities and sells products derived from these activities. The
clinical laboratories segment provides diagnostic services to the health care
community. The Company evaluates segment performance based on segment income
(loss) before taxes. Costs excluded from segment income (loss) before taxes 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 have not been included in the reportable segments below. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies
The following financial information (in thousands) represents the reportable
segments of the Company:
Research and Development Clinical Reference Laboratories
------------------------ -------------------------------
Fiscal Year Ended July 31, Fiscal Year Ended July 31,
-------------------------- --------------------------
2005 2004 2003 2005 2004 2003
---- ---- ---- ---- ---- ----
Operating revenues:
Research product and royalty income $ 10,546 $ 12,972 $ 23,253 -- -- --
expenses and (other income):
Clinical laboratory services -- -- -- $ 32,857 $ 28,672 $ 29,514
Expenses and (other income):
Cost of research product 2,196 2,518 3,389 -- -- --
revenues
Cost of clinical laboratory -- -- -- 12,548 10,586 9,593
services
Research and development 8,452 8,078 8,311 -- -- --
expense
Depreciation and amortization 1,396 1,414 881 887 902 893
amamoramortization
Provision for uncollectible -- 1,753 616 4,967 10,234 8,729
accounts
Other expenses 1,009 508 609 11,618 8,429 7,294
eexpenses
Interest income -- -- -- -- -- --
Gain on patent litigation settlement (14,000) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes $ 11,493 $ (1,299) $ 9,447 $ 2,837 $ (1,479) $ 3,005
======== ======== ======== ======== ======== ========
Other Consolidated
----- ------------
Fiscal Year Ended July 31, Fiscal Year Ended July 31,
-------------------------- --------------------------
2005 2004 2003 2005 2004 2003
---- ---- ---- ---- ---- ----
Operating revenues:
Research product and royalty income -- -- -- $ 10,546 $ 12,972 $ 23,253
expenses and (other income):
Clinical laboratory services -- -- -- 32,857 28,672 29,514
Expenses and (other income):
Cost of research product -- -- -- 2,196 2,518 3,389
revenues
Cost of clinical laboratory -- -- -- 12,548 10,586 9,593
services
Research and development -- -- -- 8,452 8,078 8,311
expense
Depreciation and amortization 50 $ 45 $ 34 2,333 2,361 1,808
amamoramortization
Provision for uncollectible -- -- -- 4,967 11,987 9,345
accounts
Other expenses 10,586 9,409 8,048 23,213 18,346 15,951
eexpenses
Interest income (1,523 (1,152) (1,355) (1,523) (1,152) (1,355)
Gain on patent litigation settlement -- -- -- (14,000) -- --
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes $ (9,112) $ (8,302) ($ 6,727) $ 5,217 $(11,080) $ 5,725
======== ======== ======== ======== ======== ========
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 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:
2005 2004 2003
---- ---- ----
United States .................. $ 7,985 $ 8,029 $19,492
Foreign countries .............. 2,561 4,943 3,761
------- ------- -------
$10,546 $12,972 $23,253
======= ======= =======
F-21
ENZO BIOCHEM, INC
SCHEDULE II - VALUATION
AND QUALIFYING ACCOUNTS
Years ended July 31, 2005, 2004 and 2003
Additions
---------
Balance at Charged Charged
Beginning (credited) to costs to other (Additions) Balance at
Description of period and expenses accounts Deductions end of period
- ----------- --------- ------------ -------- ---------- -------------
2005
Allowance for doubtful accounts receivable $ 2,770,300 $ 4,967,100 -- $ 5,445,700 (1) $ 2,291,700
2004
Allowance for doubtful accounts receivable $ 2,257,400 $11,986,500 -- $ 11,473,600 (1) $ 2,770,300
2003
Allowance for doubtful accounts receivable $ 2,862,600 $ 9,345,000 -- $ 9,950,200 (1) $ 2,257,400
(1) Write-off of uncollectible accounts receivable.
S-1