UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Mark one / / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 1996 / / or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ______________ Commission File Number 1-9974 ENZO BIOCHEM, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter New York 13-2866202 - ---------------------------- ---------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 60 Executive Blvd., Farmingdale, New York 11735 - ----------------------------------------- ---------- (Address of principal executive office) (Zip Code) (516) 755-5500 - --------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.01 par value The American Stock Exchange - ----------------------------- --------------------------- (Title of Class) (Name of each Exchange on which Registered) Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant has required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- As of March 1, 1996 the Registrant had 21,504,500 shares of Common Stock outstanding. ENZO BIOCHEM, INC. FORM 10-Q January 31, 1996 INDEX PAGE NUMBER ------ PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet - January 31, 1996 and July 31, 1995 3 Consolidated Statement of Operations For the six months ended January 31, 1996 and 1995 5 Consolidated Statement of Operations For the three months ended January 31, 1996 and 1995 6 Consolidated Statement of Cash Flows For the six months ended January 31, 1996 and 1995 7 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of 11 Financial Condition and Results of Operations PART II - OTHER INFORMATION 14 2 ENZO BIOCHEM, INC. PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED BALANCE SHEET
January 31, July 31, 1996 1995 (unaudited) ---------------------- (in thousands) A S S E T S Current assets: Cash and cash equivalents $16,369 $11,068 Accounts receivable, less allowance for doubtful accounts 12,550 10,914 Current portion of note receivable - litigation settlement 5,000 5,000 Inventories 2,408 2,198 Other 935 1,077 --- ----- Total current assets 37,262 30,257 ------ ------ Property and equipment, at cost, less accumulated depreciation and amortization 13,635 13,892 Long term portion of note receivable -- litigation settlement 8,521 13,121 Cost in excess of fair value of net tangible assets acquired, less accumulated amortization 9,860 10,046 Deferred patent costs, less accumulated amortization 4,916 4,971 Other 168 171 ----- ------- $74,362 $72,458 ------- ------- ------- -------
See accompanying notes 3 ENZO BIOCHEM, INC. LIABILITIES AND STOCKHOLDERS' EQUITY
January 31, July 31, 1996 1995 (unaudited) ---------------------- (in thousands) Current liabilities: Trade accounts payable $ 1,445 $ 1,580 Accrued legal fees 982 922 Income taxes payable 476 1,074 Other accrued expenses 1,841 2,147 Current portion of long-term debt 33 32 Current portion of obligations under capital leases 39 53 -- -- Total current liabilities 4,816 5,808 ----- ----- Long-term debt 65 81 Obligations under capital lease 4,730 4,617 Other deferred liabilities 920 840 Stockholders' equity: Preferred Stock, $.01 par value; authorized 25,000,000 shares no shares issued or outstanding Common Stock, $.01 par value; authorized 75,000,000 shares; shares issued and outstanding; 21,499,500 shares at January 31, 1996 and 21,334,600 shares at July 31, 1995 215 213 Additional paid-in capital 82,861 81,605 Accumulated deficit (19.245) (20,706) ------- ------- Total stockholders' equity 63,831 61,112 ------ ------ $74,362 $72,458 ------- ------- ------- -------
See accompanying notes 4 ENZO BIOCHEM, INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Six Months Ended January 31, ---------------------------- 1996 1995 ------------------------------------- (In thousands, except per share data) Revenues: Operating revenues $16,564 $15,069 Costs and expenses: Cost of sales and diagnostic services 7,058 6,897 Research and development expenses 1,275 1,022 Selling expenses 1,281 1,331 Provision for uncollectable accounts receivable 1,354 1,097 General and administrative expenses 4,229 3,721 Litigation settlement, net of legal fees -- (21,000) ----- ------- 15,197 (6,932) ------ ------ Income before interest and provision for income taxes 1,367 22,001 Interest income - net of expense 764 309 --- --- Income before provision for income taxes 2,131 22,310 Provision for income taxes (670) (3,030) ---- ------ Net income $ 1,461 $19,280 ------- ------- ------- ------- Net income per common and equivalent share $.07 $.88 ---- ---- ---- ---- Weighted average common shares 22,428 21,848 ------ ------ ------ ------
See accompanying notes 5 ENZO BIOCHEM, INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Three Months Ended January 31, ------------------------------ 1996 1995 ------------------------------------- (In thousands, except per share data) Revenues: Operating revenues $8,008 $7,041 Costs and expenses: Cost of sales and diagnostic services 3,377 3,347 Research and development expenses 690 562 Selling expenses 676 731 Provision for uncollectable accounts receivable 584 565 General and administrative expenses 2,258 1,587 ----- ----- 7,585 6,792 ----- ----- Income before interest and provision for income taxes 423 249 Interest income - net of expense 387 311 --- --- Income before provision for income taxes 810 560 Provision for income taxes (253) (15) ---- --- Net income $557 $545 ---- ---- ---- ---- Net income per common and equivalent share $0.02 $0.02 ----- ----- ----- ----- Weighted average common shares 22,398 21,815 ------ ------ ------ ------
See accompanying notes 6 ENZO BIOCHEM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Six Months Ended January 31, ---------------------------- 1996 1995 (In thousands) ------------------------ Cash flows from operating activities: Net income $1,461 $19,280 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 452 433 Amortization of cost in excess of fair value of tangible assets acquired 186 185 Amortization of deferred patent costs 240 240 Provision for uncollectable accounts receivable 1,354 1,097 Expenses related to leasehold 130 -- Prepaid expenses converted into legal fees from previously issued stock 47 -- Issuance of stock for employee pension contribution 95 -- Deferred income tax provision -- 3,000 Change in assets and liabilities: Note receivable - litigation settlement 4,600 (17,650) Research contract receivable -- 6,500 Accounts receivable before provision for uncollectable amounts (2,989) (2,327) Inventories (210) (115) Prepaid expense and other assets 47 133 Trade accounts payable and other accrued expenses (441) (2,087) Accrued legal fees 60 2,453 Income taxes payable (598) -- Deferred liabilities 80 (68) Accrued interest payable -- (30) ------ ---- 3,053 (8,236) ----- ------ Net cash provided by operating activities $4,514 $11,044 ------ -------
ENZO BIOCHEM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Six Months Ended January 31, --------------------------- 1996 1995 (In thousands) --------------------------- Cash flows from investing activities: Capital expenditures (195) ($727) Patent costs deferred (137) (173) Decrease in security deposit 3 52 ------ ------ Net cash used in investing activities (329) (848) ------ ------ Cash flows from financing activities: Payment of bank debt -- (2,020) Payments of obligations under capital lease (46) (44) Proceeds from stock options 1,162 55 Payment of Debenture Bonds -- (62) ------ ------ Net cash (used) provided by financing activities 1,116 (2,071) ------ ------ Net increase in cash and cash equivalents 5,301 8,125 Cash and cash equivalents at the beginning of the year 11,068 4,151 ------ ------ Cash and cash equivalents at the end of the period $16,369 $12,276 ------- ------- ------- -------
8 ENZO BIOCHEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 31, 1996 (Unaudited) 1. The consolidated balance sheet as of January 31, 1996, the consolidated statement of operations for six months ended January 31, 1996 ("1996 Period") and 1995 ("1995 Period") and the consolidated statement of cash flows for the six months ended January 31, 1996 and 1995 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at January 31, 1996 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1995 Annual Report on Form 10-K. The results of operations for the six months ended January 31, 1996 are not necessarily indicative of the results that may be expected for the full year. 2. On October 19, 1994 the Company executed a settlement agreement with Johnson & Johnson, Inc. in the aggregate amount of $35.0 million pursuant to which the Company received $15.0 million, of which $6.5 million relates to amounts due under certain research and development agreements and which was included in research contracts receivable at July 31, 1994, and a promissory note requiring Johnson & Johnson and its subsidiary, Ortho Diagnostics, Inc., to pay $5.0 million a year for each of the four successive anniversaries of said date. These future payments are recorded at net present value discounted using an interest rate of 5.25%. Pursuant to the terms of the settlement, all of the Company's grants, licenses and intellectual property have been returned to the Company in totality. 3. In March 1993, the Company filed suit in the United States District Court for the District of Delaware charging patent infringement and acts of unfair competition against Calgene, Inc. and seeking a declaratory judgment of invalidity concerning Calgene, Inc.'s plant antisense patent. On February 9, 1994 the Company filed a second suit in the United States District Court for the District of Delaware charging Calgene with infringement of a second antisense patent owned by the Company. Calgene has filed a counterclaim in the second Delaware action seeking a declaration that a third patent belonging to the Company is invalid. The two Delaware actions have been consolidated and were tried to the Court in April 1995. In addition, the Company filed suit on March 22, 1994 in the United States District Court for the Western District of Washington against Calgene and the Fred Hutchinson Cancer Research Center, alleging that the defendants had conspired to issue a false and misleading press release regarding a supposed "patent license" from Hutchinson to Calgene, and conspired to damage the Company's antisense patents by improperly using confidential information to challenge them in the Patent Office. The Complaint further charges that Hutchinson is infringing and inducing Calgene to infringe 9 the Company's antisense patents. On February 2, 1996 the Delaware Court issued an opinion ruling against Enzo and in favor of Calgene, finding certain Enzo claims infringed, but the patent as a whole not infringed, and finding the claims at issue invalid for lack of enablement. Calgene's patent was found valid (non-obvious) over the prior art. On February 29, 1996, the Delaware Court issued an Order withdrawing its February 2, 1996 Opinion. Enzo intends to appeal from any adverse judgment. There can be no assurance that the Company will be successful in any of the foregoing matters or that Calgene, Inc. and/or Hutchinson will not be successful. However, even if the Company is not successful management does not believe there will be a significant monetary impact. 4. Effective December 1, 1985, the Company entered into an agreement with the City of New York to lease, over a fifty-year term, a six-story building located in New York City. During 1992 this lease was renegotiated. The Company has recorded the fair market value of the real property in the amount of $3,000,000 as a capital lease obligation due in installments through 2036. Financing for the renovation and equipping of such facility came principally from the Company's own funds. The Company is carrying the capital leasehold interest at its estimated fair market value. 5. In April, 1994, the Company signed a non-exclusive worldwide distribution and supply agreement with Boehringer Mannheim Biochemicals. During fiscal 1995 similar agreements were signed with Amersham International and with Dako A/S. In September 1995, a fourth agreement was concluded with VWR Scientific Products (acquired from Baxter Healthcare). Under the terms of these agreements, the distributor companies sells to the global medical research market, a broad range of biochemical products and reagents manufactured and supplied by Enzo. The agreements include products based on nonradioactive DNA probe technology and include products that were developed and marketed by these companies prior to the agreement, as well as products developed by Enzo, all of which are covered by Enzo patents. The agreements extend for the life of the last patent to expire for products involved. 10 Item 2- Management's Discussion and Analysis of Financial Condition and Results of Operations LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $4,514,000 for the six months ended January 31, 1996, compared with $11,044,000 for the six months ended January 31, 1995. This decrease was a result of a decrease in proceeds from the J&J settlement offset by changes in operating assets and liabilities. Net cash provided from financing activities was approximately $1,116,000 for the six months ended January 31, 1996 primarily as a result of $1,162,000 from proceeds of exercised stock options, as compared to net cash used from financing activities of approximately $2,071,000 for the six months ended January 31, 1995 which was primarily used for repayment of bank debt. The Company's internal source of cash generated by operations in addition to the proceeds from the litigation settlement was sufficient to meet the Company's needs for investing and other financing activities. At January 31, 1996 the Company had working capital of approximately $32,446,000. The Company has a $5,000,000 line of credit with a bank at an interest rate of prime. As of January 31, 1996, the Company did not use the line of credit. On October 19, 1994 the Company executed a settlement agreement with Johnson & Johnson, Inc. pursuant to which the Company received $15.0 million and a promissory note requiring Johnson & Johnson and its subsidiary, Ortho Diagnostics, Inc., to pay $5.0 million a year for each of the four successive anniversaries of said date. These future payments are recorded at net present value discounted using an interest rate of 5.25%. Pursuant to the terms of the settlement, all of the Company's grants, licenses and intellectual property have been returned to the Company in totality. Effective December 1, 1985, the Company entered into an agreement with the City of New York to lease, over a fifty-year term, a six-story building located in New York City. During 1992 this lease was renegotiated. The Company has recorded the fair market value of the real property in the amount of $3,000,000 as a capital lease obligation due in installments through 2036. Financing for the renovation and equipping of such facility came principally from the Company's own funds. The Company has decided to carry the capital leasehold interest at its estimated fair market value. 11 RESULTS OF OPERATIONS SIX MONTHS ENDED JANUARY 31, 1996 COMPARED WITH SIX MONTHS ENDED JANUARY 31, 1995 Operating revenues for the six months ended January 31, 1996 ("1996 period") increased by $1,495,000 over operating revenues for the six months ended January 31, 1995 ("1995 period"). This increase was due to an increase of $1,992,000 of research product revenues offset by a $497,000 decrease in revenues from the clinical reference laboratory as compared to the 1995 period. Revenues at the laboratory were impacted by a reduced number of billing days due to unusually bad weather, as well as a change in the test mix of services provided. Revenues from the sale of research products increased as a result of the Company's distribution agreements. Cost of sales increased by approximately $161,000 primarily due to increased revenues from research products related to the distribution agreements. Research and development expenses increased by $253,000 due to expanded research and development and clinical programs. Selling expenses decreased by $50,000 due to a decrease in marketing programs and sales personnel for the clinical reference laboratory. The increase in general and administrative expenses of $508,000 was primarily due to increased legal expenses. The provision for bad debts increased by $257,000 due to an adjustment in reimbursement rates from insurance carriers for the clinical reference laboratory. Interest income increased by $455,000 as a result of the proceeds from investment of the Company's cash equivalents. The provision for taxes decreased approximately $2,360,000 primarily due to a reduction of income resulting from the prior year litigation settlement. THREE MONTHS ENDED JANUARY 31, 1996 COMPARED WITH THREE MONTHS ENDED JANUARY 31, 1995 Operating revenues for the three months ended January 31, 1996 ("1996 period") increased by $967,000 over revenues from operations for the three months ended January 31, 1995 ("1995 period"). This increase was due to an increase in research product sales of $1,576,000 offset by decreases of $609,000 in revenues from the clinical reference laboratory for the similar activity in the 1995 period. Cost of sales increased by $30,000 primarily as a result of increased revenues by research product sales. Research and development expenses increased by $128,000 due to expanded research and development and clinical programs. 12 Selling expenses decreased by $55,000 as a result of a decrease in personnel costs related to the clinical reference laboratory. General and administrative expenses increased by approximately $671,000 as a result of an increase of legal expenses. 13 ENZO BIOCHEM, INC. PART II - OTHER INFORMATION Item 1 - Legal Proceedings In March 1993, the Company filed suit in the United States District Court for the District of Delaware charging patent infringement and acts of unfair competition against Calgene, Inc. and seeking a declaratory judgment of invalidity concerning Calgene, Inc.'s plant antisense patent. On February 9, 1994 the Company filed a second suit in the United States District Court for the District of Delaware charging Calgene with infringement of a second antisense patent owned by the Company. Calgene has filed a counterclaim in the second Delaware action seeking a declaration that a third patent belonging to the Company is invalid. The two Delaware actions have been consolidated and were tried to the Court in April 1995. In addition, the Company filed suit on March 22, 1994 in the United States District Court for the Western District of Washington against Calgene and the Fred Hutchinson Cancer Research Center, alleging that the defendants had conspired to issue a false and misleading press release regarding a supposed "patent license" from Hutchinson to Calgene, and conspired to damage the Company's antisense patents by improperly using confidential information to challenge them in the Patent Office. The Complaint further charges that Hutchinson is infringing and inducing Calgene to infringe the Company's antisense patents. On February 2, 1996 the Delaware Court issued an opinion ruling against Enzo and in favor of Calgene, finding certain Enzo claims infringed, but the patent as a whole not infringed, and finding the claims at issue invalid for lack of enablement. Calgene's patent was found valid (non-obvious) over the prior art. On February 29, 1996, the Delaware Court issued an Order withdrawing its February 2, 1996 Opinion. Enzo intends to appeal from any adverse judgment. There can be no assurance that the Company will be successful in any of the foregoing matters or that Calgene, Inc. and/or Hutchinson will not be successful. However, even if the Company is not successful management does not believe there will be a significant monetary impact. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits - none (b) Reports on form 8-K - none 14 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. ENZO BIOCHEM, INC. ------------------ (registrant) Date: March 12, 1996 by: /s/ Barry W.Weiner --------------------- Barry W. Weiner, Executive Vice President-Secretary 15