UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
MARK ONE
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended July 31, 1996
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________________ to ________________
Commission File Number 1-9974
ENZO BIOCHEM, INC.
(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 BOULEVARD,
FARMINGDALE, NEW YORK 11735
(Address of principal executive offices) (Zip Code)
(516) 755-5500
(Registrant's telephone number,
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE THE AMERICAN STOCK EXCHANGE
(Title of Class) (Name of each Exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of 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. [ X ]
As of October 21, 1996, the Registrant had 21,951,349 shares of Common
Stock outstanding.
The aggregate market value of the Common Stock held by nonaffiliates as of
October 21, 1996 was approximately $316,492,296.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Items 11, 12 and 13 To be included in the Company's Proxy
Statement to be filed with the
Securities and Exchange Commission no
later than November 28, 1996.
Part IV - Certain exhibits listed Included in prior filings made by the
in response to Item Company under the Securities Act of
14(a)(3) 1933 and the Securities Exchange Act
of 1934
2
PART I
ITEM 1. BUSINESS
INTRODUCTION
Enzo Biochem, Inc. (the "Company" or "Enzo") employing biotechnology,
develops, manufactures and markets health care products, and also provides
medical diagnostic services to the medical community. Each of the three
business activities of the Company is performed by one of the Company's three
wholly-owned subsidiaries--Enzo Diagnostics, Inc., Enzo Therapeutics, Inc., and
Enzo Clinical Labs, Inc. ("Enzo Diagnostics", "Enzo Therapeutics" and "Enzo
Clinical Labs", respectively). These activities are: (1) diagnostic and
research product development, manufacture and marketing through Enzo
Diagnostics, (2) therapeutic product research and development through Enzo
Therapeutics, and (3) the operation of a clinical reference laboratory through
Enzo Clinical Labs. For information relating to the Company's business
segments, see Note 11 of the Notes to Consolidated Financial Statements.
For the fiscal year ended July 31, 1996 (fiscal 1996), approximately 38%
of the Company's operating revenues was derived from product sales and
approximately 62% was derived from clinical reference laboratory services. For
the fiscal years ended July 31, 1995 and 1994 (fiscal 1995 and fiscal 1994,
respectively), approximately 30% and 23%, respectively, of the Company's
operating revenues were derived from product sales and approximately 70% and
77%, respectively, were derived from clinical reference laboratory services.
PRODUCT DEVELOPMENT ACTIVITIES
The Company's product development programs incorporate various scientific
areas of expertise, including recombinant DNA, monoclonal antibody development,
enzymology, microbiology, biochemistry, organic chemistry, and fermentation.
The Company's activities in research and development are performed by the
Company's professional and scientific staff. To a lesser extent, research and
development is pursued in collaboration with outside consultants at research
and academic institutions.
The primary focus of the Company's current research is the development of
products based on gene labeling and gene regulation. The Company is funding its
research programs through its operating cash flows and cash and cash
equivalents, as well as seeking joint ventures and collaborative relationships.
Through Enzo Diagnostics, the Company has devoted a major portion of its
research and development activities to develop simple and reliable test formats
and protocols for the commercialization of nucleic acid-based diagnostics as
well as other diagnostic products. A key system for Enzo is its non-
radioactive BIOPROBE-Registered Trademark- nucleic acid probe system and the
Company continued to introduce new products based on this technology into the
research market during fiscal 1996.
3
The product development programs of the Company include developing
BIOPROBE-Registered Trademark- nucleic acid probe products to detect sexually
transmitted diseases, such as AIDS, herpes, chlamydia, gonorrhea, and other
infectious diseases, such as tuberculosis, cytomegalovirus, hepatitis and
Epstein-Barr virus (implicated in mononucleosis). The Company markets
several product lines containing BIOPROBE-Registered Trademark- nucleic acid
probe products.
The Company, through Enzo Therapeutics, is developing therapeutic
applications of nucleic acids. In May 1987, the Company entered into an
agreement with the Research Foundation of the State University of New York
which grants the Company certain exclusive rights to a genetic engineering
technology for generating antisense RNA repressors. As a result of the
technology covered by such agreement, the Company has obtained three (3)
patents. Although the Company has not derived revenues from any of the
foregoing three antisense patents, the Company believes that this technology
will be the basis for the Company to derive meaningful revenues in the future.
Whenever the Company complements its internal research and development
activities with collaborative research arrangements with academic and private
research institutions or consultants on specific projects, the Company
typically supplies funds to cover salaries, materials, certain laboratory
equipment and a portion of the overhead. In all such collaborative research
arrangements, the Company reserves the commercial rights to any product or
process developed, subject to a royalty payment to the institution or
consultant involved over a period of years. The location of the Company in the
greater New York area affords the Company access to and interaction with a
large number of research institutions and qualified scientists.
In the fiscal years ended July 31, 1996, 1995 and 1994, the Company
incurred costs of approximately $3,083,000, $2,366,000 and $1,764,000,
respectively, for research and development activities.
CLINICAL REFERENCE LABORATORY
The Company, through Enzo Clinical Labs, operates a clinical reference
laboratory which offers full diagnostic services to the greater New York
medical community. The services Enzo Clinical Labs provides include chemistry,
blood tests, cytology studies, tissue pathology, hormone studies, and
diagnostic procedures which seek to detect precancerous conditions, cancers in
cervical specimens and sexually transmitted diseases. Enzo Clinical Labs
provides these services primarily to physicians as well as to clinics, nursing
homes and other clinical laboratories. Enzo Clinical Labs operates a regional
clinical reference laboratory on Long Island and also operates twelve satellite
patient service centers in the greater New York area, including a stat
laboratory in Manhattan. In addition, the Company utilizes its clinical
reference laboratory to evaluate and demonstrate the benefits of the Company's
diagnostic products (see Note 11 of the Notes to Consolidated Financial
Statements for segment information and operating revenues and profits).
4
BUSINESS OBJECTIVES
The current business objectives of the Company are (1) to develop,
manufacture and market on a worldwide basis diagnostic and therapeutic products
based on the Company's research activities in biotechnology and molecular
biology, and (2) to perform diagnostic tests for the U.S. health care
community. The Company's research and development efforts are directed to both
short and long-term projects. Diagnostic products require less time to
commercialize than therapeutic products because the procedures required for
attaining government clearance are less time consuming. Therapeutic products,
once developed, require extensive clinical testing and compliance. This
process can range from three to five years and, in some instances, longer.
At such time as the Company's initial self-funded research demonstrates
technical feasibility and potential commercial importance, the Company will
have the option to pursue the opportunity on its own or to associate with
another entity for development and ultimate marketing of the product. Unless
there is a business reason to license products or processes developed by the
Company, the Company intends to retain ownership with respect to development
and marketing of a product or process.
MARKETING STRATEGY
Enzo's initial commercialization program for the BIOPROBE-Registered
Trademark- nucleic acid probe systems included filing major U.S. and foreign
patent applications, clinical evaluation, and Food and Drug Administration
(FDA) submissions. The Company has obtained clearance for a number of FDA
approved diagnostics for sale to clinical reference laboratories and
researchers through Enzo Diagnostics. BIOPROBE-Registered Trademark- nucleic
acid probe products are also sold to the research market, where FDA clearance
is not required. The Company has been successful in obtaining FDA clearance
for four totally Enzo-developed DNA probe products. The Company believes that
significant delays will not be encountered with any future probe product
submissions to the FDA since products based on the BIOPROBE-Registered
Trademark- nucleic acid probe system have been FDA cleared. However, there can
be no assurance that delays will not be incurred.
Through Enzo Diagnostics, the Company manufactures and markets its
BIOPROBE-Registered Trademark- nucleic acid probe products for research
applications. These BIOPROBE-Registered Trademark- research products include
products which allow researchers to make their own non-radioactive DNA probes
as well as complete DNA probe kits which contain all reagents necessary for
detecting various disease pathogens in clinical samples.
Enzo Diagnostics markets a variety of IN SITU hybridization kits.
PATHOGENE-Registered Trademark- DNA probe kits detect specific pathogens
including human papillomavirus (HPV), herpes simplex virus, cytomegalovirus,
Epstein-Barr virus, adenovirus, hepatitis B virus and CHLAMYDIA TRACHOMATIS.
Its BIOPAP-Registered Trademark- DNA probe kits detect certain types of HPV in
Pap smear samples. An enhanced detection procedure that will enable the
pathologist to identify the presence of fewer virus particles by increasing the
sensitivity of the assay was developed by the Company. These products compete
directly with products labeled
5
with various radioactive isotopes. In addition to the IN SITU hybridization
kits, Enzo Diagnostics also markets kits based on its proprietary microplate
hybridization format. Microplate Hybridization Assays have been developed for
the detection of the AIDS-causing virus (HIV-1). Kits are also available to
detect HIV-2, another strain of the AIDS virus, hepatitis virus, the bacteria
causing tuberculosis (TB) and members of the MYCOBATERIUM TUBERCULOSIS (MTB)
complex.
Enzo's HIV test was one of the first commercial DNA probe tests for this
pathogen in this format. Unlike most AIDS tests which detect antibodies for
HIV, Enzo's HIV Microplate Hybridization Assay detects DNA unique to HIV.
Since individuals can carry the HIV infection for up to 12 months before
developing antibodies to it, a test directed at the virus can provide earlier
detection. Because this product also can measure virus concentrations, it is
easier for researchers to determine HIV levels in patients and look for
relationships between these levels and other disease indicators such as
antibody production or appearance of symptoms. This product is currently
marketed to the research community. An enhanced version of the Microplate
Hybridization Assay, has been developed to detect the hepatitis virus directly
in serum and is aimed at the blood bank market.
In early stages of infection, the pathogen may be present in very small
amounts and may be difficult to detect. Samples, however, can be treated in a
way that produces copies of targeted DNA, if it is present. This amplification
process is one possible approach to detect very low levels of infection. All
of Enzo's Microplate Assays can be used to detect these pathogens in amplified
as well as unamplified samples. In order to fully integrate its technology,
Enzo has developed a new simplified amplification process for multicopy
production of nucleic acid. A patent application was filed in January 1994 and
this proprietary amplification process was incorporated into the microplate
assay format, thus providing a totally integrated assay system. This approach
is being developed for use with the hepatitis assay system and will form the
basis for all Enzo's microplate assays.
In addition to nucleic acid-based products, the Company also produces and
sells other types of research products, such as monoclonal antibodies. The
products are marketed through direct sales, an extensive product catalog,
advertising in scientific and trade journals and U.S. and foreign distributors.
In fiscal 1993, Enzo Diagnostics began to expand its non-exclusive distribution
arrangements for its proprietary products in both the U.S. and foreign markets
with various companies having worldwide distribution and with companies having
local foreign distribution. In fiscal 1994, the Company continued to expand
these distribution arrangements and began a policy of using joint labels on all
products marketed by its distributors. In April, 1994, the Company signed a non-
exclusive worldwide distribution and supply agreement with Boehringer Mannheim
Biochemicals. Under the terms of this agreement, Boehringer Mannheim
distributes to the global medical research market, a broad range of biochemical
products and reagents manufactured and supplied by Enzo. The agreement
includes products based on nonradioactive DNA probe technology and includes
products that were developed and marketed by Boehringer Mannheim prior to the
agreement, as well as products developed
6
by the Company, all of which are covered by Enzo patents. The agreement took
effect in April 1994 and extends for the life of the last patent to expire
for products involved.
In February 1995, a distribution agreement was signed with Amersham
International and includes a broad group of products developed and marketed
by Amersham, as well as products developed by Enzo Diagnostics. All products
are based on nonradioactive DNA labeling technologies covered by Enzo
patents. A second agreement, also covering the Company's line of proprietary
DNA labeling products and reagents was concluded in May 1995 with Dako A/S,
a privately-held international company with headquarters in Copenhagen,
Denmark and subsidiaries worldwide, including the Dako Corporation based in
Carpinteria, California.
During fiscal 1996, a similar distribution agreement was concluded with
VWR Scientific Products, a leader in the medical research market that was
formerly an operating unit of Baxter Health Care. Other agreements are
currently under discussion.
The Company had previously entered into distribution agreements with
certain Johnson & Johnson, Inc. (J&J) subsidiaries in Europe, one of which
continues to be in effect. Ortho Diagnostics continues to be the Company's
distributor for marketing, distribution and sale in Italy for the Company's
BIOPROBE-Registered Trademark- and other products.
The Company, because of its various proprietary diagnostic technologies,
may enter into joint ventures with other biotechnology companies or other
health care companies with marketing resources and/or complementary technology
or products to more fully take advantage of market opportunities.
Enzo Clinical Labs is a major regional clinical reference laboratory
offering full service diagnostic testing in the greater New York marketplace.
Its services are marketed by a professional sales force who serve client
physicians, clinics, nursing homes and other clinical laboratories in the area.
A key marketing strategy has been the strategic placement of a network of
patient service centers, where patients can go to have samples taken upon the
request of their physicians. The Company operates a stat laboratory at its
Manhattan patient service center, affording its client physicians rapid test
turnaround. The diagnostic service business provides Enzo Diagnostics with a
practical application of its products, making it possible to more appropriately
tailor diagnostic products to the end-user. The Company's BIOPROBE-Registered
Trademark- nucleic acid probe products offer Enzo Clinical Labs a marketing
tool by establishing it among the first to offer nucleic acid based tests.
TECHNOLOGY AND PRODUCT DEVELOPMENT
The major focus of the Company's product development program has been
toward the commercialization of nucleic acid probe-based IN VITRO diagnostics
for specific pathogens. Initially, nucleic acid probes were radioactive and
required complex protocols to perform. To develop them into useful commercial
products required making such products easy-to-use, easy to interpret, readily
automatable and sensitive enough to detect the presence of low levels of
pathogen. As a result of this product development effort, the Company has
developed a broad technology base for the labeling, detection,
7
sensitivity enhancement, signal amplification and testing formats of nucleic
acid probe products. Patent protection has been aggressively pursued for
this technology base. At the end of fiscal 1996 some 173 patents issued
worldwide had been granted to or licensed by the Company in this area of
technology. In fiscal 1995 and continuing during fiscal 1996, the Company
began to receive significant revenues from the distribution agreements
related to these patents and believes that the patents have positioned the
Company to derive considerably more revenues in the future as the markets for
these products continue to develop. These patents cover a variety of
BIOPROBE-Registered Trademark- nucleic acid probe products, chelation
technology for easy radioactive labeling, signal amplification methods,
sensitivity enhancements, and automatable formats.
BIOPROBE-Registered Trademark- Nucleic Acid Probe Labeling and Signal
Generating Systems
Nucleic acid probes used traditionally in biomedical research and
recombinant DNA technology have been radioactively labeled with isotopes of
hydrogen, phosphorous, carbon or iodine. Radioactive materials have
historically provided researchers with the most sensitive and, in many cases,
the only means to perform many important experimental or analytical tests.
However, limitations and drawbacks are associated with the use of radioactive
compounds. For example, radioactive materials are often very unstable and have
a limited shelf-life. Because of the potentially hazardous nature of
radioactive materials, their use must be licensed and elaborate safety
precautions must be maintained during the preparation, utilization and disposal
of radioisotopes. In addition, radioactive nucleotides are extremely expensive
and their instability increases usage cost.
To overcome the limitations of radioactively labeled probes, the Company,
starting with basic technology licensed from Yale University ("Yale"), has
developed a proprietary technology which allows DNA probes to be used
effectively without the use of radioactivity. This development permits the
application of genetic analysis in a clinical setting without the shelf-life,
licensing and disposal problems associated with radioactively labeled probes.
In December 1987, a primary patent for the technology that is essential to
the development of nonradioactive DNA probe diagnostics was issued to Yale. In
July 1994 and in September 1995 additional patents, broadening the coverage of
the primary patent were also issued to Yale. The Company has an exclusive
license for both patents from Yale for the life of the patents. Pursuant to
such license agreement, the Company is obligated to pay Yale royalties equal to
a percentage of sales. The Company is obligated to pay Yale an annual minimum
royalty fee of $200,000 which shall continue through the end of the term of the
exclusive license.
The near term application of the BIOPROBE-Registered Trademark- nucleic
acid probe system in the human health care area is in bacterial and viral
diagnostics. Nucleic acid probe diagnostics can be developed for any organism.
Advantages of the nucleic acid probes for the direct detection of pathogens in
human diagnostics are speed (less than an hour for test results as compared to
days), greater specificity, and the capability of diagnosing a disease in an
early or latent stage of development.
8
Radioactive Labeling Systems
The Company has developed a new method for labeling molecules with
radioisotopes that is safer, faster, simpler and more cost effective than
traditional methods of radiolabeling. This method is to be used in those
applications requiring more sensitivity than non-radioactive materials permit.
This method permits radiolabeling of a wide range of molecules for use in a
variety of applications, including IN VIVO imaging, therapeutics, and clinical
assays.
With this technology stable products are radiolabeled just prior to use,
thereby overcoming inherent limitations of classical radiolabeling
technologies. The Company's method for radiolabeling maximizes the sensitivity
while minimizing radiation exposure and radioactive waste.
In November 1987, the Company received two U.S. patents protecting aspects
of its versatile technology for linking radioactive ions or biotin to various
biologically active molecules for diagnostic and therapeutic uses. Since that
time additional patents covering aspects of this technology have been issued
to the Company.
Automatable Test Formats
In February 1991, the Company was granted a U.S. patent for its nucleic
acid probe testing technology that generates a signal in solution. This
technology allows the development of nucleic acid probe-based tests that can be
readily automated and measured or identified instrumentally. Using this
technology, probes can be detected with either chemiluminescent, fluorescent or
colorimetric methods. The Company is developing test kits employing this
technology and launched two of them to the research market during fiscal 1992.
These included a test for the HIV virus which causes AIDS, and a test for the
bacteria causing tuberculosis. In fiscal 1993 tests for other viruses,
including HIV-2, and hepatitis, were introduced to researchers. In fiscal 1994
a more sensitive assay that can detect hepatitis B virus directly in serum and
geared to the blood banking market was developed and in fiscal 1995 the
Company's amplification technology was integrated with the enhanced hepatitis
assay. The Company is developing an instrument-based automatable system
employing this and other proprietary Enzo technologies.
Rapid, On-Site Diagnostics
The Company also has developed a diagnostic test technology which makes
possible accurate, rapid and one-step tests. The ease of performing and
interpreting tests using this proprietary gel technology suits them well for at-
home and doctor office use. Using the gel technology, the Company has
developed a fecal occult blood test used to screen for colorectal cancer. The
Company has received FDA clearance to market this occult blood test to
physician offices and plans to develop other tests utilizing the gel technology
for aiding consumer health maintenance.
9
Monoclonal Antibodies
The Company markets a panel of monoclonal antibodies that are being used
in pathology laboratories to help identify the original source of a metastatic
cancer and the type of cancer in undifferentiated cancer cells. The ability to
identify the origin and type of cancer aids in the diagnosis of cancer and
assists physicians in prescribing therapy. In order to offer a full line of
state-of-the-art research products, the Company is actively engaged in
expanding its line of monoclonal antibodies.
Therapeutic Technology and Product Development
Through Enzo Therapeutics, the Company is applying its technological
capabilities for manipulating genetic material towards the development of
therapeutic treatments for a variety of cancers and infections. Enzo is
exploring applications of antisense nucleic acids employing various proprietary
technologies. During fiscal 1996, the Company developed a new gene delivery
system that is designed to provide universal and efficient delivery of any gene
to any cell. The GENSERT-TM- Universal Delivery System is being combined with
Enzo's antisense technology in its therapeutic development program. Also, the
Company has developed techniques for stably attaching drugs and radioisotopes
to proteins and DNA. The Company is working towards, INTER ALIA, the
development of products relating to HIV, certain cancers and hepatitis,
however, no products have been finalized.
In May 1987, Enzo entered into an agreement with The Research Foundation
of the State of New York (SUNY) granting the Company certain exclusive rights
to a genetic antisense technology. Because this antisense technology offers a
way to control the expression of any gene in any organism, the Company believes
it has broad therapeutic and agricultural applications. For example, this
technology should make possible a new approach to controlling viral diseases
and cancers in humans. It may also be used to control viral diseases in
animals and agriculturally important plants and may lead to a variety of other
desirable traits in agricultural crops and animals. This technology has been
proven to be effective in a variety of organisms, including plants, animals and
bacteria. For example, researchers have developed transgenic mice that are
resistant to murine leukemia virus and tomato plants which produce tomatoes
that do not spoil upon ripening. However, to date the Company has not developed
any commercial products utilizing this technology. Because this technology has
such broad application, the Company is exploring collaborative business
relationships of various types with other companies to develop the applications
which Enzo is not interested in retaining for its own activities. Three U.S.
patent applications were subsequently issued as patents by the U.S. Patent and
Trademark Office. The first patent issued in March 1993; a second patent
issued in May 1993; the third patent issued in December 1993.
In January 1995, the Company signed a collaborative research agreement
with Cornell University on behalf of its Medical College, aimed at evaluating
the Company's genetic antisense technology for use in managing the treatment of
HIV, the AIDS-causing virus. Early research results indicated, that this
technology could be applied to inhibiting the function of genes necessary for
the HIV virus to grow within the cell. In
10
preclinical studies currently underway, Enzo scientists and collaborators
were able to demonstrate stable resistance to HIV in human immune cells in
culture that were treated with the Company's HIV product. In May 1996, the
Company expanded the HIV development program and signed a second research
agreement with St. Luke's-Roosevelt Hospital Center, aimed towards the
development of protocols for its next phase of human clinical studies.
In February 1996, the Company initiated a joint research program with
scientists at the Albert Einstein College of Medicine in New York City, geared
towards the development of a specific therapeutic product for the treatment of
hepatitis B based on the Company's novel gene regulation and delivery
technologies.
MANUFACTURING
The Company's BIOPROBE-Registered Trademark- nucleic acid probe products
contained in its PATHOGENE-Registered Trademark- and BIOPAP-TM- product lines
are manufactured by using recombinant DNA techniques and traditional chemical
synthesis methods. The DNA sequence which codes for a specific infectious
agent or particular trait is isolated by cloning. The sequence is then
introduced into a plasmid, commonly one that grows in E.COLI bacteria, and the
bacteria serves as a reproduction vehicle with the application of standard
fermentation procedures. The reproduced quantities of the specific DNA
sequences are purified from the bacteria and then labeled so they can be
detected. The detection system usually employs a non-radioactive visualization
molecule, such as a color-changing enzyme-substrate or a fluorescent substance.
The production of DNA probes does not require large manufacturing facilities
because the yields from the bacteria are high and only small quantities of
nucleic acids are required.
Monoclonal antibodies specific to certain substances are produced by
fusing a type of mouse cancer cell with certain antibody-producing white blood
cells from the spleens of mice that had been immunized with the targeted
substance. The hybrid cells which make antibodies with the desired
characteristics are then cultured to produce large quantities of that one
discrete type of antibody. Monoclonal antibody production does not require
extensive facilities.
The Company's manufacturing operation uses exempt quantities of tritium
(3H) in its research and development activities and manufacturing operations.
For the fiscal year ended July 31, 1996 the Company has not had an accumulation
of tritium to be disposed.
REGULATION
The Company's present and proposed activities are regulated by the federal
government to a significant extent. This regulation applies not only to
research and development and manufacturing, but also to the marketing of
products, particularly those involving diagnostic or therapeutic applications.
In order to test clinically, manufacture and market diagnostic or
therapeutic products, the Company (and/or its marketer) must obtain the
approval and comply with
11
the standards of the FDA in the United States and comparable agencies in
other countries. The FDA has established mandatory procedures and safety
standards which apply to the clinical testing, manufacture and marketing of
all diagnostic and therapeutic products. FDA approval is not required for
the sale of certain products for research use only.
The process of seeking and obtaining FDA approval of a new therapeutic
product generally takes a number of years and may require substantial
funding. The process of seeking FDA clearance and corresponding foreign
approvals is significantly less for IN VITRO diagnostic tests.
The Company has in-house personnel to expedite the preparation and
filing of documentation necessary for FDA clearances and approvals, patent
issuances and licensing agreements. The Company has received clearance from
the FDA to market five of its diagnostic products. The Company also has
several products in various stages of clinical trial evaluation which, if
successful, are expected to be submitted to the FDA for clearance.
The Company's clinical reference laboratories are subject to various
federal, state and local licensing, permits and regulatory certifications.
In addition to the foregoing, the Company's present and future business
may be subject to regulation under the Occupational Safety and Health Act,
Environmental Protection Act, Resource Conservation and Recovery Act and
other present or possible future legislation, as well as by governmental
agencies with regulatory authority relating to the Company's business. From
time to time, legislation has been introduced to regulate various aspects of
the technology, but the Company is unaware of any proposed actions by
federal, state or local authorities which might materially impair its ability
to conduct its business.
PROPRIETARY TECHNOLOGY - PATENTS
As novel techniques, processes, products or microorganisms are developed
during the course of its research and development activities, the Company
will seek U.S. and, if deemed necessary, foreign patents. At the end of
fiscal 1996 the Company owned or licensed 34 U.S. and some 151 foreign
patents and had filed approximately 165 U.S. and foreign patent applications
covering products, methods and procedures resulting from the Company's
research projects. In fiscal 1995 and continuing this fiscal year, the
Company began to receive significant revenues from the distribution
agreements related to these patents and believes that the patents have
positioned the Company to derive considerably more revenues in the future as
the markets for these products continue to develop. Patents relating to the
BIOPROBE-Registered Trademark-nucleic acid probe system have issued in the
U.S. and Europe. Management believes that additional patents will issue
shortly and over the next several years with respect to the Company's pending
applications. There can be no assurance, however, that patents will be
issued on pending applications or that any issued patents will have
commercial benefit. The Company does not intend to rely on patent protection
as the sole basis for protecting its proprietary technology. It also relies
on its
12
trade secrets and continuing technological innovation. All employees
involved in the clinical reference laboratory division and the manufacturing
operations sign a confidentiality agreement prohibiting the employee from
disclosing any confidential information about the Company, including the
Company's technology or trade secrets.
In some instances, the Company may enter into royalty agreements with
collaborating research parties in consideration for the commercial use by the
Company of the developments of their joint research. In other instances a
patent may be obtained by the collaborating party with the Company receiving a
license to use the patented subject matter. In such cases, the Company will
seek to secure exclusive licenses.
In other instances, the Company may have an obligation to pay royalties
to, or reach a royalty arrangement with, a third party in consideration of the
Company's use of developments of such third party. The Company has an
exclusive licensing agreement with Yale for the technology used in the BIOPROBE-
Registered Trademark- nucleic acid probe products. The agreement covers
licensed patents owned by Yale and licensed to the Company for the life of the
patents which expire not earlier than 2004.
In fiscal 1987, the Company entered into an agreement with The Research
Foundation of the State University of New York giving the Company exclusive
rights to a genetic engineering technology using antisense nucleic acid control
methodologies. This technology is covered by three U.S. patents applications
subsequently issued as patents by the U.S. Patent and Trademark Office. The
first patent issued in March 1993; a second patent issued in May 1993; the
third patent issued in December 1993. (See "Therapeutic Technology and Product
Development" section, page 10). The term of the license agreement extends
through the life of such patents as may issue therefrom.
HUMAN RESOURCES
As of July 31, 1996, the Company employed 176 full-time and 51 part-time
employees. Of the full-time employees, 36 were engaged in research,
development, manufacturing and marketing of research products and 140 at the
clinical reference laboratories. The scientific staff of the Company possesses
a wide range of experience and expertise in the areas of recombinant DNA,
nucleic acid chemistry, molecular biology and immunology. The Company believes
that relations with its employees are good.
COMPETITION
The Company's biotechnology activities compete with pharmaceutical,
chemical, energy, and food companies which are diversifying into biotechnology,
and with specialized biotechnology firms in the United States and elsewhere.
Competition from existing companies and from newly formed private enterprises
is expected to increase.
Most of the Company's competitors in the biotechnology industry are
performing research in many of the same areas as the Company. Many of these
competitors are larger and have greater financial and other resources than the
Company. The primary competitive factors in the biotechnology field are the
ability to create and maintain
13
scientifically advanced technology during a period of rapid technological
development, to attract and retain a breadth and depth of human resources, to
develop proprietary products or processes and to have available adequate
financial resources for bridging the often substantial time lag between
technical concept and commercial implementation.
The Company's clinical reference laboratories activity, which is conducted
in the New York metropolitan area, competes with numerous national and local
entities, some of which are larger and have greater financial resources than
the Company. The laboratories compete based on the specialized nature of the
services performed, as well as on the reliability and speed in which they
perform the diagnostic tests.
ITEM 2. PROPERTIES
The following are the principal facilities of the Company:
Approximate Approximate Approximate
Floor Annual Expiration
Location Principal Operations Area (sq. ft.) Base Rent Date
- -------- -------------------- -------------- --------- --------------
60 Executive Blvd. Company and subsidiary 40,000 $684,000 November 2004
Farmingdale, NY corporate headquarters
and other facilities
(a building which is
owned by certain
officers of the Company)
527 Madison Ave. Executive office 6,400 $163,000 December 1998
New York, NY
On December 1, 1985, the Company entered into an Agreement with the City
of New York to lease, over a fifty-year term, a six-story building located in
New York City. In the fourth quarter of fiscal 1996, the Company negotiated a
settlement with the City of New York to relieve the Company from any further
obligations related to the lease and to return the building to the City and
the Company agreed to pay the City $2,950,000 in full settlement of all of
the City's claims for unpaid taxes and rent. The Company issued to the City
203,450 shares of the Company's common stock in August 1996 in consideration
of the settlement amount. If the City has not received the net proceeds of
$2,950,000 upon the sale of such stock by March 17, 1997, the City shall
return the remaining shares not sold, if any, and the Company shall pay the
difference in cash. As a result of this settlement with the City, the
Company incurred a charge against earnings in the amount of approximately
$7.6 million in the fourth quarter of fiscal 1996.
14
ITEM 3. LEGAL PROCEEDINGS
In March 1993, the Company filed suit in the United States District Court
for the District of Delaware charging patent infringement and acts of unfair
competition against Calgene, Inc. and seeking a declaratory judgment of
invalidity concerning Calgene's plant antisense patent. On February 9,
1994, the Company filed a second suit in the United States District Court for
the District of Delaware charging Calgene with infringement of a second
antisense patent owned by the Company. Calgene has filed a counterclaim in the
second Delaware action seeking a declaration that a third patent belonging to
the Company is invalid. The two Delaware actions have been consolidated and
were tried to the Court in April 1995. In addition, the Company filed suit on
March 22, 1994 in the United States District Court for the Western District of
Washington against Calgene and the Fred Hutchinson Cancer Research Center,
alleging that the defendants had conspired to issue a false and misleading
press release regarding a supposed "patent license" from Hutchinson to Calgene,
and conspired to damage the Company's antisense patents by improperly using
confidential information to challenge them in the Patent Office. The Complaint
further charges that Hutchinson is infringing and inducing Calgene to infringe
the Company's antisense patents. On February 2, 1996, the Delaware Court
issued an opinion ruling against Enzo and in favor of Calgene, finding certain
Enzo claims infringed, but the patent, as a whole not infringed, and finding
the claims at issue invalid for lack of enablement. Calgene's patent was found
valid (non-obvious) over the prior art. On February 29, 1996, the Delaware
Court issued an Order withdrawing its February 2, 1996 Opinion. Enzo intends
to appeal from any adverse judgment. There can be no assurance that the
Company will be successful in any of the foregoing matters or that Calgene
and/or Hutchinson will not be successful. However, even if the Company is
not successful management does not believe there will be a significant monetary
impact.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were brought to a vote of the Company's stockholders in the
fourth fiscal quarter ended July 31, 1996.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
______________________________________________
The common stock of the Company is traded on the American Stock
Exchange (Symbol:ENZ). The following table sets forth the high and low price
of the Company's Common Stock for the periods indicated as reported on the
American Stock Exchange.
HIGH LOW
---- ---
1995 Fiscal Year (August 1, 1994
to July 31, 1995):
1st Quarter $ 15 3/8 $ 9 1/8
2nd Quarter $ 13 7/8 $ 10
3rd Quarter $ 11 3/8 $ 9 1/2
4th Quarter $ 17 1/8 $ 9 1/2
1996 Fiscal Year (August 1, 1995
to July 31, 1996):
1st Quarter $ 23 $ 14 5/8
2nd Quarter $ 24 1/2 $ 15 3/8
3rd Quarter $ 20 3/8 $ 15 1/8
4th Quarter $ 21 $ 13 1/2
On October 21, 1996, the last sale price of the Common Stock of the
Company as reported on the American Stock Exchange was $18 1/8.
On October 25, 1996, the Company had approximately 1,433 shareholders of
record.
The Company has not paid a cash dividend on its Common Stock and intends
to continue to follow a policy of retaining future earnings to finance its
operations. Accordingly, the Company does not anticipate the payment of cash
dividends to holders of Common Stock in the foreseeable future.
On June 5, 1995, the Company declared a 5% stock dividend paid July 31,
1995 to shareholders of record as of July 3, 1995. On September 13, 1996, the
Company declared another 5% stock dividend payable on October 29, 1996 to
shareholders of record on October 8, 1996.
16
ITEM 6.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED JULY 31,
-------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Operating revenues $34,490 $31,700 $22,799 $20,025 $20,535
Litigation settlement,
net of legal fees -- 21,860 -- -- --
Writedown of leasehold
interest and related costs 7,613 11,400 600 3,000 401
Interest income (expense)
net 1,640 941 87 (230) (1,420)
Income (loss) before
provision (benefit) for
taxes on income (loss)
and extraordinary items (7,508) 9,749 2,156 (6,324) (1,103)
Provision (benefit) for
taxes on income 199 4,131 (2,945) 52 115
Income (loss) before
extraordinary items (7,707) 5,618 5,101 (6,376) (1,218)
Extraordinary items:
Gain on extinguishment
of debt -- -- 150 -- --
(Gain) loss on debt
conversion -- -- -- (466) 572
------ ------- ------ ------ ------
Net income (loss) ($7,707) $5,618 $5,251 $(6,842) $(646)
------ ------- ------ ------ ------
------ ------- ------ ------ ------
Per common and common
equivalent share (1):
Income (loss) before
extraordinary items ($.34) $.24 $ .22 ($.33) ($.08)
Extraordinary items -- -- .01 (.02) .04
------ ------- ------ ------ ------
Net income (loss) ($.34) $ .24 $ .23 ($.35) ($.04)
------ ------- ------ ------ ------
------ ------- ------ ------ ------
Average common and
dilutive common
equivalent (1) 22,593 23,075 22,628 19,407 15,767
17
Selected Financial Data
(in thousands, except per share data and ratios)
As at July 31,
------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- -----
Working capital (deficit) $29,451 $24,449 $17,153 $(2,411) $(2,642)
Total assets 62,838 72,458 65,043 47,569 49,793
Long-term debt and obligation
under capital lease 114 4,698 4,379 4,168 4,186
Stockholders' equity 55,253 61,113 51,245 32,396 32,993
- ------------------------------------
(1) In fiscal years 1996, 1993 and 1992, common stock equivalents have not been
included because the effect of their inclusion would have been
anti-dilutive.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
----------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company, at July 31, 1996, had cash and cash equivalents of $17.8
million, an increase of $6.7 million from July 31, 1995. The Company had net
working capital of $29.5 million at July 31, 1996 compared to $24.4 million at
July 31, 1995.
The Company's income before taxes and before the writedown of leasehold
interest and related costs was $105,000 which includes depreciation and
amortization aggregating approximately $1.8 million. The Company's positive
cash flow from operations was sufficient to meet its current cash needs for
the research and development programs and other investing activities.
Net cash provided by operating activities was approximately $6.1 million
and includes $5 million of cash received in connection with the litigation
settlement.
Net cash used by investing activities amounted to approximately $1
million as a result of capital expenditures and deferred patent costs. Net
cash provided by financing activities of approximately $1.6 million primarily
results from the proceeds from the exercise of stock options and warrants in
fiscal 1996.
On October 19, 1994 the Company executed a settlement agreement with
Johnson & Johnson, Inc. (J&J) pursuant to which the Company received $15.0
million and a promissory
18
note requiring J&J and its subsidiary, Ortho Diagnostics, Inc., to pay $5.0
million a year for each of the four successive anniversaries of said date.
These future payments are recorded at net present value discounted using an
interest rate of 5.25%. The litigation settlement amounted to approximately
$21.9 million, net of legal fees. Pursuant to the terms of the settlement,
all of the Company's grants, licenses and intellectual property have been
returned to the Company in totality.
In December 1985, the Company entered into an agreement with the City of
New York to lease, over a fifty year term, a building located in New York
City. In the fourth quarter of fiscal 1996, the Company negotiated a
settlement with the City of New York to relieve the Company from any further
obligations related to the lease and to return the building to the City and
the Company agreed to pay the City $2,950,000 in full settlement of all of
the City's claims for unpaid taxes and rent. The Company issued to the City
203,450 shares of the Company's common stock in August 1996 in consideration
of the settlement amount. If the City has not received the net proceeds of
$2.95 million upon the sale of such stock by March 17, 1997, the City shall
return the remaining shares not sold, if any, and the Company shall pay the
difference in cash. As a result of this settlement with the City, the
Company incurred a charge against earnings in the amount of approximately
$7.6 million in the fourth quarter of fiscal 1996.
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues from operations for the fiscal year ended July 31, 1996
("fiscal 1996") increased by $2,790,000 over revenues from operations for the
fiscal year ended July 31, 1995 ("fiscal 1995"). This increase was due to an
increase of $3,398,000 in revenues from research product sales over revenue
for the similar activity in fiscal 1995 offset by a $608,000 decrease in
revenues for the clinical reference laboratory operations. The increase in
research product sales resulted primarily from the Company's non-exclusive
distribution agreements for the Company's products. The decrease in revenues
from the clinical laboratory operations resulted primarily from a decrease in
volume of unprofitable diagnostic screening tests.
Cost of sales increased by approximately $1,563,000 as a result of the
increase of $2,644,000 in the cost of sales of research products from the
Company's distribution agreements activities offset by a decrease in the cost
of clinical laboratory services of $1,081,000. This decrease is primarily
due from the improved efficiencies of performing certain diagnostic screening
tests and the increase in the number of esoteric tests performed actually at
the laboratory.
Research and development expenses increased by approximately $717,000 as
a result of an increase in research programs and the increased amortization
of patent costs.
The provision for uncollectable accounts receivable increased by
$2,857,000 primarily due to an additional provision recorded by the Company,
based on trends that
19
became evident in the fourth quarter, that additional reserves were needed
primarily to cover lower collection rates under the Federal Medicare programs
and other third-party insurance carriers.
Selling and general and administrative expenses decreased by $2,463,000
primarily due to a decrease in legal fees in fiscal 1996 and the overall
improved efficiencies at the clinical reference laboratory.
In the fourth quarter of fiscal 1996, the Company negotiated a
settlement with the City of New York to relieve the Company from any further
obligations related to the lease and to return the building to the City and
the Company agreed to pay the City $2,950,000 in full settlement of all of the
City's claims for unpaid taxes and rent. The Company issued to the City
203,450 shares of the Company's common stock in August 1996 in consideration
of the settlement amount. If the City has not received the net proceeds of
$2.95 million upon the sale of such stock by March 17, 1997, the City shall
return the remaining shares not sold, if any, and the Company shall pay the
difference in cash. As a result of this settlement with the City of New
York, the Company incurred a charge against earnings in the amount of
approximately $7.6 million in the fourth quarter of fiscal 1996.
The operating profit from research and development activities and
related costs amounts to $449,000 in fiscal 1996, as compared to an operating
profit of $479,000 in fiscal 1995. The decrease in the profit is principally
related to the increase in research and development expenses from the
diagnostic division. The operating profit from the clinical reference
laboratories activities amounted to $124,000 as compared to an operating
profit of $2,146,000 in fiscal 1995. This decrease resulted principally from
the increase in the provision for uncollectable accounts receivable due to
the lower collection rates under Medicare programs and other third-party
insurance carriers and offsetting deduction in overall operating expenses.
RESULTS OF OPERATIONS
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues from operations for the fiscal year ended July 31, 1995
("fiscal 1995") increased by $8,901,000 over revenues from operations for the
fiscal year ended July 31, 1994 ("fiscal 1994"). This increase was due to
increases of $4,365,000 in revenues from research product sales over revenue
for the similar activity in fiscal 1994 and by a $4,536,000 increase in
revenues for the clinical reference laboratory operations. The increase in
revenues from the clinical laboratory operations resulted primarily from an
increase in volume of screening tests. The increase in research product sales
resulted primarily from the Company's non-exclusive distribution agreements
to distribute the Company's products.
Research and development expenses increased by approximately $602,000 as
a result of an increase in research programs and the amortization of patent
costs. Cost of sales increased by approximately $3,099,000 as a result of
increased revenue from the sale of
20
research products and from the clinical reference laboratory. This increase
resulted primarily from the Company's non-exclusive distribution agreements
to distribute products. Included in the general and administrative expenses
are legal fees of $2,977,000 and $1,663,000 for fiscal years 1995 and 1994,
respectively.
The provision for uncollectable accounts receivable increased by
$341,000 primarily from an increase in operating revenues at the clinical
reference laboratory operations. Selling expenses increased by approximately
$701,000 due to an increase in marketing programs and personnel costs for the
clinical reference laboratory operations.
On October 19, 1994, the Company executed a settlement agreement with
J&J pursuant to which the Company received $15.0 million in cash and a
promissory note requiring J&J to pay a total of $5.0 million a year for each
of the four successive anniversaries of said date. These future payments are
recorded at net present value discounted using an interest rate of 5.25%. The
litigation settlement amounted to approximately $21,860,000, net of legal
fees.
The Company has recorded a writedown of the leasehold in the amount of
$11,400,000 against earnings to its estimated fair market value in the fourth
quarter of fiscal 1995 due to management's decision to seek alternative uses
for the property.
The operating profit from the research and development activities and
related costs amounted to $479,000 in fiscal 1995 as compared to an operating
loss of $493,000 in fiscal 1994. The increase in this profit is principally
related to the Company's nonexclusive distribution agreements to distribute
products. The operating profit from the clinical reference laboratories
activities amounted to a profit of $2,146,000 as compared to an operating
loss of $659,000 in fiscal 1994. This increase resulted principally from an
increase in the volume of screening tests.
The provision for income taxes of $4,131,000 results from current income
taxes due and utilization of net operating loss carryforwards related to
taxable income recognized in connection with the J&J lawsuit.
Net income for the fiscal year ended July 31, 1995 increased to
approximately $5,618,000 compared with approximately $5,251,000 for the
fiscal year ended July 31, 1994.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) DIRECTORS - The following sets forth certain information regarding
directors of the Company who are not executive officers of the Company.
Information with respect to directors of the Company who are also executive
officers of the Company appears below under the subcaption "Executive
Officers." The Company has a classified Board of Directors consisting of
three classes.
JOHN B. SIAS (age 69) has been Director of the Company since January
1982. Mr. Sias has been President and Chief Executive Officer of Chronicle
Publishing Company since April 1993. From January 1986 until April 1993,
Mr. Sias was President of ABC Network Division, Capital Cities/ABC, Inc. From
1977 until January 1986 he was the Executive Vice President, President of the
Publishing Division (which includes Fairchild Publications) of Capital Cities
Communications, Inc.
JOHN J. DELUCCA (age 53) has been a Director of the Company since
January 1982. Since October 1993, Mr. Delucca has been Senior Vice President
and Treasurer of RJR Nabisco, Inc. From January 1992 until October 1993, he
was managing director and Chief Financial Officer of Hascoe Associates, Inc.
From October 1, 1990 to January 1992 he was President of The Lexington Group.
From September 1989 until September 1990 he was Senior Vice President-Finance
of the Trump Group. From May 1986 until August 1989, he was senior Vice
President-Finance at International Controls Corp. From February 1985 until
May 1986, he was a Vice President and Treasurer of Textron, Inc. Prior to
that he was a Vice President and Treasurer of the Avco Corporation, which was
acquired by Textron.
During the fiscal year ended July 31, 1996, there were three (3) formal
meetings of the Board of Directors, several actions by unanimous consent and
several informal meetings. The Board of Directors has an Audit Committee and
Stock Option Committee. The Audit Committee had one (1) formal meeting and
the Stock Option Committee had three (3) formal meetings in fiscal 1996.
The Audit Committee is authorized to review proposals of the Company's
auditors regarding annual audits, recommend the engagement or discharge of
the auditors, review recommendations of such auditors concerning accounting
principles and the adequacy of internal controls and accounting procedures
and practices, to review the scope of the annual audit, to approve or
disapprove each professional service or type of service other than standard
auditing services to be provided by the auditors, and to review and discuss
the audited financial statements with the auditors. Its members are Shahram
K. Rabbani and Messrs. Sias and Delucca.
The Stock Option Committee has the plenary authority in its discretion
to determine the purchase price of the Common Stock issuable upon the
exercise of each option, to determine the employees to whom, and the time or
times at which, options shall be granted
22
and the number of shares to be issuable upon the exercise of each option, to
interpret the plans, to prescribe, amend and rescind rules and regulations
relating to them, to determine the term and provisions of the respective
option agreements and to make all other determinations deemed necessary or
advisable for the administration of the plans. Its members are Messrs. Sias
and Delucca.
The Company does not have a formal Executive Committee or Nominating
Committee of the Board of Directors.
(b) EXECUTIVE OFFICERS - The following table sets forth the names and
positions of all of the current executive officers of the Company:
NAME POSITION
---- --------
Elazar Rabbani, Ph.D. President, Chairman of the Board of
Directors and Chief Executive Officer
Shahram K. Rabbani Executive Vice President, Treasurer, Director
Barry W. Weiner Executive Vice President, Secretary
and Director
Norman E. Kelker, Ph.D. Senior Vice President
Dean Engelhardt, Ph.D. Senior Vice President
Herbert B. Bass Vice President of Finance
Barbara E. Thalenfeld, Ph.D. Vice President, Corporate Development
David C. Goldberg Vice President, Business Development
DR. ELAZAR RABBANI (age 52) has served as President and a Director of
the Company since its organization in 1976. Dr. Rabbani received his B.A.
degree from New York University in Chemistry and his Ph.D. degree in
Biochemistry from Columbia University. He is a member of the American
Society for Microbiology.
SHAHRAM K. RABBANI (age 44) has been an Executive Vice President of the
Company since September 1981 and a Vice President, Treasurer and a Director
of the Company since its organization. Mr. Rabbani received a B.A. degree in
chemistry from Adelphi University.
BARRY W. WEINER (age 46) has been an Executive Vice President since
September 1981, a Vice President and Director of the Company since its
organization and Secretary since March 1980. He was employed by
Colgate-Palmolive Company, New York, New York from August 1974 until March
1980, when he joined the Company on a full-time basis. Mr. Weiner received
his B.S. degree in Economics from New York University and a M.B.A. from
Boston University.
DR. NORMAN E. KELKER (age 57) has been a Vice President of the Company
since September 1981. Effective January 1, 1989, he was promoted to Senior
Vice President. From 1975 until he joined the Company, Dr. Kelker was an
Associate Professor
23
in the Department of Microbiology of the New York University School of
Medicine. He holds a Ph.D. from Michigan State University.
DR. DEAN ENGELHARDT (age 56) has been Vice President since September
1981. Effective January 1, 1989, he was promoted to Senior Vice President.
Prior to joining the Company he was Associate Professor of Microbiology at
Columbia University College of Physicians and Surgeons. He obtained his
Ph.D. from Rockefeller University.
HERBERT B. BASS (age 48) is Vice President of Finance of the Company.
Prior to his promotion, Mr. Bass was the Corporate Controller of Enzo. Before
joining Enzo in 1986, Mr. Bass held various positions at Danziger & Friedman,
Certified Public Accountants, from 1979 to 1986, the most recent of which was
audit manager. For the preceding seven years he held various positions at
Berenson & Berenson, C.P.A.'s. Mr. Bass holds a Bachelor degree in Business
Administration from Baruch College.
DR. BARBARA E. THALENFELD (age 56) is Vice President of Corporate
Development and has been with Enzo since 1982. Prior to joining the Company
she held an NIH research fellowship at Columbia University. She received a
Ph.D. from Hebrew University-Hadassah Medical Center and an MS from Yale
University.
DAVID C. GOLDBERG (age 39) is Vice President of Business Development.
Prior to joining Enzo in 1985, he was employed at DuPont NEN Products. He
received an MS from Rutgers University and an MBA from New York University.
Dr. Elazar Rabbani and Shahram K. Rabbani are brothers and Barry W.
Weiner is their brother-in-law.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission on or before November 28, 1996 and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item will be set forth in the
Company's proxy statement to filed with the Securities and Exchange
Commission on or before November 28, 1996 and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission on or before November 28, 1996 and is incorporated herein by
reference.
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
-----------------------------------------------------
(a)(1) Consolidated Financial Statements
Consolidated Balance Sheet - July 31, 1996 and 1995
Consolidated Statement of Operations-
Years ended July 31, 1996, 1995 and 1994
Consolidated Statement of Stockholders' Equity-
Years ended July 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows-
Years ended July 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the required
information is included in the consolidated financial statements or the notes
thereto or because they are not required.
(3) Exhibits
The following documents are filed as Exhibits to this Annual Report
on Form 10-K:
EXHIBIT DESCRIPTION
NO -----------
-------
3(a) Certificate of Incorporation, as amended March 17, 1980. (1)
3(b) June 16, 1981 Certificate of Amendment of the Certificate of
Incorporation. (2)
3(c) Certificate of Amendment to the Certificate of Incorporation. (11)
3(d) Bylaws. (1)
4(a) Indenture dated as of March 15, 1986, between registrant and The
First National Bank of Boston, as Trustee. (3)
4(b) Form of Purchase Agreement dated as of March 24, 1986, between
registrant and the Purchasers. (3)
4(c) Form of Registration Rights Agreement made and entered into as
of March 24, 1986 by and among registrant and the Purchasers. (3)
4(d) Form of Note Indenture. (3)
10(a) 1980 Stock Option Plan. (1)
25
10(b) Investment Agreement between the registrant and Johnson &
Johnson Development Corp., dated June 25, 1982. (4)
10(c) Agreement between the registrant and Ortho Diagnostic System, Inc.
dated June 25, 1982. (5)
10(d) 1983 Incentive Stock Option Plan. (6)
10(e) Letter Agreement between the Company and Ortho Diagnostic
Systems, Inc. dated as of January 1, 1985. (7)
10(f) Lease Agreement dated as of December 1, 1985. (8)
10(g) Indenture of Mortgage and Trust dated as of December 1, 1985. (8)
10(h) Letter of Credit Agreement dated as of December 1, 1985. (8)
10(i) Leasehold Mortgage and Security Agreement dated as of
February 5, 1986. (8)
10(j) Loan Agreement dated as of December 31, 1985. (8)
10(k) Restricted Stock Plan. (8)
10(l) Letter Agreement dated October 27, 1987 between the registrant and
the First National Bank of Boston. (9)
10(m) Supplemental Collateral Security Agreement between the registrant and
The First National Bank of Boston. (12)
10(n) Bio Health Laboratories Inc. Stock Purchase Agreement. (10)
10(o) Extension Agreement dated October 31, 1990 between the registrant and
The First National Bank of Boston filed herewith. (13)
10(p) Agreement with First New York Bank for Business filed herewith. (14)
10(q) Agreement with BioHealth Laboratories, Inc. shareholders filed
herewith. (15)
10(r) Agreement with Johnson & Johnson, Inc. filed herewith. (16)
10(s) 1993 Incentive Stock Option Plan. (16)
10(t) Employment Agreement with Elazar Rabbani. (16)
10(u) Employment Agreement with Shahram Rabbani. (16)
10(v) Employment Agreement with Barry Weiner. (16)
10(w) 1994 Stock Option Plan (17).
10(x) Stipulation of Settlement with the City of New York filed herewith.
11 Computation of per-share earnings filed herewith.
21 Subsidiaries of the registrant:
Enzo Clinical Labs, Inc., a New York corporation.
Enzo Diagnostics, Inc., a New York corporation.
Enzo Therapeutics, Inc., a New York corporation.
23 Consent of Independent Auditors filed herewith.
26
- ------------
NOTES TO (A)(3)
(1) The exhibits were filed as exhibits to the Company's Registration
Statement on Form S-18 (File No. 2-67359) and are incorporated
herein by reference.
(2) This exhibit was filed as an exhibit to the Company's Form 10-K for the
year ended July 31, 1981 and is incorporated herein by reference.
(3) These exhibits were filed as exhibits to the Company's Current Report on
Form 8-K dated April 4, 1986 and are incorporated herein by reference.
(4) This exhibit was filed as an exhibit to the Company's Current Report on
Form 8-K dated June 29, 1982 and is incorporated herein by reference.
(5) This exhibit was filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended July 31, 1983 and is incorporated herein by
reference.
(6) This exhibit was filed with the Company's definitive proxy statement
dated February 4, 1983 and is incorporated herein by reference.
(7) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1985 and is incorporated herein by reference.
(8) These exhibits were filed as exhibits to the Company's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1986 and are incorporated
herein by reference.
(9) This exhibit was filed as an exhibit to the Company's Registration
Statement on Form S-2(33-7657) and is incorporated herein by reference.
(10) This exhibit was filed as an exhibit to the Company's Current Report on
Form 8-K dated July 12, 1990 and is incorporated herein by reference.
(11) This exhibit was filed with the Company's Annual Report on Form 10-K
for the year ended July 31, 1989 and is incorporated herein by reference.
(12) This exhibit was filed with the Company's Annual Report on Form 10-K
for the year ended July 31, 1990 and is incorporated herein by reference.
(13) This exhibit was filed with the Company's Annual Report on Form 10-K
for the year ended July 31, 1991 and is incorporated herein by reference.
(14) This exhibit was filed with the Company's Annual Report on Form 10-K
for the year ended July 31, 1992 and is incorporated herein by reference.
(15) This exhibit was filed as an exhibit to the Company's Registration
Statement on Form S-3 (33-72170) and is incorporated herein by reference.
(16) This exhibit was filed with the Company's Annual Report on Form 10-K
for the year ended July 31, 1994 and is incorporated herein by reference.
(17) This exhibit was filed with the Company's Annual Report on Form 10-K
for the year ended July 31, 1995 and is incorporated herein by reference.
27
___________________________
(b) The Company's Current Reports on Form 8-K filed during the quarter ended
July 31, 1996 -- none
(c) See Item 14(a)(3), above.
(d) See Item 14(a)(2), above.
*************
28
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ENZO BIOCHEM, INC.
Date: October 28, 1996 By: /S/ ELAZAR RABBANI
-------------------------
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/S/ ELAZAR RABBANI October 28, 1996
- -----------------------------------
Elazar Rabbani, President
and Chairman of Board of Directors
(Principal Executive Officer)
/S/ SHAHRAM K. RABBANI October 28, 1996
- -----------------------------------
Shahram K. Rabbani, Executive
Vice President, Treasurer and
Director (Principal Financial and
Accounting Officer)
/S/ BARRY W. WEINER October 28, 1996
- -----------------------------------
Barry W. Weiner, Executive
Vice President, Secretary
and Director
- -----------------------------------
John B. Sias, Director
- -----------------------------------
John J. Delucca, Director
29
FORM 10-K, ITEM 14(a) (1) AND (2)
ENZO BIOCHEM, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and financial statement
schedules of Enzo Biochem, Inc. are included in Item 14(a):
Report of Independent Auditors F-2
Consolidated Balance Sheet -- July 31, 1996 and 1995 F-3
Consolidated Statement of Operations --
Years ended July 31, 1996, 1995 and 1994 F-4
Consolidated Statement of Stockholders' Equity --
Years ended July 31, 1996, 1995 and 1994 F-5
Consolidated Statement of Cash Flows --
Years ended July 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-8
Schedule II - Valuation and Qualifying
Accounts --Years ended July 31, 1996, 1995 and 1994 F-27
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
Report of Independent Auditors
Board of Directors and Stockholders
Enzo Biochem, Inc.
We have audited the accompanying consolidated balance sheets of Enzo Biochem,
Inc. (the "Company") as of July 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended July 31,1996. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Enzo Biochem, Inc. at July 31, 1996 and 1995 and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended July 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth herein.
/s/ Ernst & Young LLP
Melville, New York
October 15, 1996
F-2
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEET
July 31, 1996 and 1995
LIABILITIES AND
ASSETS 1996 1995 STOCKHOLDERS' EQUITY 1996 1995
------ ---- ---- --------------------- ---- ----
Current assets: Current liabilities:
Cash and cash equivalents $17,792,700 $11,067,900 Trade accounts payable $1,281,700 $1,579,900
Accounts receivable, less Accrued legal fees 1,392,000 921,900
allowance for doubtful accounts
of $5,398,000 in 1996 and
$2,127,000 in 1995 10,488,200 10,915,200 Income taxes payable -- 1,074,000
Accrued leasehold costs 2,950,000 1,531,800
Current portion of note
receivable --
litigation settlement 5,000,000 5,000,000 Other accrued expenses 776,400 615,400
Inventories 1,810,500 2,197,500 Current portion of long-term
debt 34,600 31,700
Current portion of obligations
under capital leases 28,700 53,000
--------- ---------
Other 822,900 1,076,500
---------- -----------
Total current assets 35,914,300 30,257,100 Total current liabilities 6,463,400 5,807,700
Property and equipment, at cost less Long-term debt 46,600 81,200
accumulated depreciation and
amortization 3,106,800 13,892,200
Obligations under capital leases 67,100 4,617,000
Long-term portion of note receivable--
litigation settlement 9,113,600 13,121,000 Other deferred liabilities 1,008,000 839,800
Cost in excess of fair value of net Commitments and contingencies
tangible assets acquired, less (Notes 6, 7 and 10)
accumulated amortization of
$3,128,000 in 1996 and
$2,758,000 in 1995 9,675,100 10,045,700 Stockholders' equity:
Preferred Stock, $.01 par value;
Deferred patent costs, less authorized 25,000,000 shares;
accumulated amortization of no shares issued or
$2,176,000 in 1996 and outstanding
$1,628,000 in 1995 4,878,600 4,971,000 Common Stock, $.01 par value;
authorized 75,000,000 shares;
shares issued and outstanding:
Other 149,700 171,300 21,624,900 in 1996 and
----------- ----------- 21,334,600 in 1995 216,400 213,500
Additional paid-in capital 83,450,000 81,605,000
Accumulated deficit (28,413,400) (20,705,900)
----------- -----------
$62,838,100 $72,458,300
----------- ----------- Total stockholders' equity 55,253,000 61,112,600
----------- ----------- ----------- -----------
$62,838,100 $72,458,300
----------- -----------
----------- -----------
See accompanying notes F-3
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended July 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Revenues:
Operating revenues $34,490,300 $31,699,900 $22,798,600
Costs and expenses:
Cost of sales and diagnostic services 15,439,700 13,876,500 10,778,000
Research and development expense 3,083,000 2,366,400 1,764,000
Selling expense 2,714,800 2,754,200 2,053,200
Provision for uncollectable accounts receivable 6,702,900 3,845,600 3,504,300
General and administrative expense 8,085,100 10,508,300 8,530,100
Recovery of research contract receivable -- -- (6,500,000)
Litigation settlement, net of legal fees -- (21,859,700) --
Writedown of leasehold interest and related costs 7,613,400 11,400,000 600,000
------------ ------------ -----------
43,638,900 22,891,300 20,729,600
------------ ------------- -----------
Income (loss) before interest income, net, provision
(benefit) for taxes on income and extraordinary item (9,148,600) 8,808,600 2,069,000
Interest income, net 1,640,200 940,700 87,200
------------ ------------- ------------
Income (loss) before provision (benefit) for taxes on
Income and extraordinary item (7,508,400) 9,749,300 2,156,200
Provision (benefit) for taxes on income 199,100 4,131,200 (2,945,000)
------------ ------------- ------------
Income (loss) before extraordinary item (7,707,500) 5,618,100 5,101,200
Extraordinary item:
Gain on extinguishment of debt -- -- 150,000
------------ --------- ---------
Net income (loss) ($7,707,500) $5,618,100 $5,251,200
========== ========= =========
Per common and common equivalent share:
Income (loss) before extraordinary item $(.34) $.24 $.22
Extraordinary item -- -- .01
---------- --------- --------
Net income (loss) $(.34) $.24 $.23
========== ========= ========
Weighted average common shares 22,593,000 23,075,100 22,627,600
========== ========== ==========
See accompanying notes
F-4
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended July 31, 1996, 1995 and 1994
Common Stock Additional Total
paid-in Accumulated Shareholders'
Shares Amount Capital deficit equity
---------- -------- ----------- ------------- -------------
Balance at July 31, 1993 18,287,100 $182,900 $58,169,700 $(25,957,100) $32,395,500
Net income for the year ended July 31, 1994 -- -- -- 5,251,200 5,251,200
Increase in common stock and paid-in capital due to
debenture conversion 50,000 500 261,800 -- 262,300
Increase in common stock and paid-in capital due to
exercise of stock options 150,500 1,500 449,600 -- 451,100
Increase in common stock due to investment from
investor, net of expenses of approximately $17,000 940,000 9,400 7,493,500 7,502,900
Increase in common stock and paid-in capital
due to exchange of stock for debt, net of
expenses of approximately $205,000 394,600 3,900 5,378,000 -- 5,381,900
---------- -------- ----------- ---------- -----------
Balance at July 31, 1994 19,822,200 $198,200 $71,752,600 $(20,705,900) $51,244,900
Net income for the year ended July 31, 1995 5,618,100 5,618,100
Increase in common stock and paid-in capital due to
exercise of stock options and warrants 210,800 2,200 1,393,400 -- 1,395,600
Increase in common stock and paid-in capital due to
exchange of stock for debt 285,600 2,900 2,851,100 -- 2,854,000
Increase in common stock and paid-in capital due to
5% stock dividend 1,016,000 10,200 5,607,900 (5,618,100) --
---------- -------- ----------- ----------- -----------
Balance at July 31, 1995 21,334,600 $213,500 $81,605,000 $(20,705,900) $61,112,600
Issuance of stock for employee 401(k) plan 10,200 100 145,700 -- 145,800
Net loss for the year ended July 31, 1996 -- -- -- (7,707,500) (7,707,500)
Increase in common stock and paid-in capital due to
exercise of stock options and warrants 280,100 2,800 1,699,300 -- 1,702,100
---------- -------- ----------- ------------ -----------
Balance at July 31, 1996 21,624,900 $216,400 $83,450,000 $(28,413,400) $55,253,000
---------- -------- ----------- ------------ -----------
---------- -------- ----------- ------------ -----------
See accompanying notes F-5
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended July 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(7,707,500) $5,618,100 $5,251,200
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Depreciation and amortization of property and equipment 894,400 862,600 736,400
Amortization of costs in excess of fair value of net tangible assets
acquired 370,600 369,600 368,800
Amortization of deferred patent costs 547,200 484,300 439,700
Provision for uncollectible accounts receivable and reimbursable costs
on research contracts 6,702,900 3,845,600 3,504,300
Writedown of leasehold interest and related costs 7,613,400 11,400,000 600,000
Deferred income tax (benefit) provision -- 2,849,300 (3,049,300)
Legal expenses converted into stock -- 1,455,700 246,000
Recovery of research contract receivable -- -- (6,500,000)
Accretion of interest on note receivable (992,600) (494,000) --
Issuance of stock for employee 401K plan 145,800 -- --
Gain on extinguishment of debt -- -- (150,000)
Deferred rent and other assets 168,200 167,300 178,100
Changes in operating assets and liabilities:
Note receivable - litigation settlement 5,000,000 (17,627,000) --
Accounts receivable before provision for uncollectable amounts (6,275,900) (5,488,900) (7,812,100)
Research contract receivable -- 6,500,000 --
Inventories 387,000 (94,800) (447,800)
Other assets 161,900 (184,900) (105,800)
Trade accounts payable, accrued leasehold costs and other
accrued expenses 143,900 (3,449,400) 2,759,800
Income taxes payable (1,074,000) 1,074,000 --
Accrued legal fees 64,200 1,834,300 785,400
Accrued interest payable -- (30,000) (51,300)
-------- -------- --------
Total adjustments 13,857,000 3,473,700 (8,497,800)
---------- --------- -----------
Net cash provided (used) by operating activities 6,149,500 9,091,800 (3,246,600)
(Continued on following page)
F-6
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended July 31, 1996, 1995, and 1994
1996 1995 1994
--------- ----------- -----------
Cash flows from investing activities:
Capital expenditures $(651,100) $(1,033,300) $(1,174,700)
Patent costs deferred (363,000) (392,600) (286,800)
(Increase) decrease in security deposits (28,400) 52,400 (48,500)
----------- ----------- -----------
Net cash used by investing activities (1,042,500) (1,373,500) (1,510,000)
Cash flows from financing activities:
Payments of obligations under capital leases (52,600) (78,400) (240,700)
Proceeds from long and short term borrowings -- -- 2,162,800
Proceeds from the exercise of stock options and warrants 1,702,100 1,395,600 451,100
Payment of loans payable to bank and long term debt (31,700) (2,118,500) (1,416,700)
Proceeds from issuance of stock -- -- 7,520,000
Payment for registration filing fees -- -- (222,800)
----------- ---------- -----------
Net cash provided (used) by financing activities 1,617,800 (801,300) 8,253,700
----------- ---------- -----------
Net increase in cash and cash equivalents 6,724,800 6,917,000 3,497,100
Cash and cash equivalents at the beginning of the year 11,067,900 4,150,900 653,800
----------- ----------- -----------
Cash and cash equivalents at the end of the year $17,792,700 $11,067,900 $4,150,900
----------- ----------- -----------
----------- ----------- -----------
See accompanying notes
F-7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Enzo Biochem, Inc. (the "Company") is engaged in research, development,
manufacturing and marketing of diagnostic and research products based on
genetic engineering, biotechnology and molecular biology. These diagnostic
products will allow for the diagnosis of and/or screening for infectious
diseases, cancers, genetic defects and other medically pertinent diagnostic
information. The Company operates a clinical reference laboratory which
offers and provides diagnostic medical testing services to the health care
community. The Company also is conducting research and development activities
in the development of therapeutic products.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany transactions
and balances have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
Cash equivalents consist of short-term debt securities of the U.S. government
that the Company intends to hold to maturity. The market values of these
securities, as determined by quoted sources, approximated cost at July 31,
1996 and 1995.
CONCENTRATION OF CREDIT RISK
Approximately 86% and 85% at July 31, 1996 and 1995, respectively, of the
Company's net accounts receivable relate to its clinical reference laboratory
business which operates in the New York Metropolitan area. Concentration of
credit risk with respect to accounts receivable are limited due to the
diversity of the Company's client base. However, the
F-8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
CONCENTRATION OF CREDIT RISK (CONT'D)
Company provides services to certain patients covered by various third-party
payors, including the Federal Medicare program. Revenue, net of contractual
allowances, from direct billings under the Federal Medicare program during each
of the fiscal years ended July 31, 1996, 1995 and 1994 approximated 14%, 12%
and 17%, respectively of revenue. The Company recorded an additional provision
for uncollectable accounts receivable of $3,500,000 based on trends that became
evident in the fourth quarter, that additional reserves were needed primarily
to cover lower collection rates under the Federal Medicare program and other
third-party payors.
At July 31, 1996 and 1995, 12% and 13% of the Company's net accounts receivable
relate to amounts due under non-exclusive world-wide distribution agreements
with Boehringer Mannheim and Amersham. Operating revenues from Boehringer
Mannheim represented approximately 25% and 22% of consolidated operating
revenues in fiscal 1996 and 1995, respectively.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Equipment is being depreciated on the straight-line and accelerated methods
over the estimated useful lives of the assets. Leasehold improvements are
amortized over the term of the related leases or estimated useful lives of the
assets, whichever is shorter.
AMORTIZATION OF INTANGIBLE ASSETS
The cost in excess of fair value of net tangible assets acquired is being
amortized on the straight-line method over periods of twenty or forty years.
PATENT COSTS
The Company has filed applications for United States and foreign patents
covering certain aspects of its technology. The costs incurred in filing such
applications have been deferred and are amortized over the estimated useful
lives of the patents beginning upon issue. Costs related to unsuccessful
patent applications are expensed.
F-9
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
REVENUE RECOGNITION
Revenues from services from the clinical reference laboratory are recognized
when services are provided. The Company's revenue is based on amounts billed
or billable for services rendered, net of contractual adjustments and other
arrangements made with third-party payors to provide services at less than
established billing rates. Revenues from research product sales are recognized
when the products are shipped.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share has been computed based upon the weighted average
number of common shares and dilutive common stock equivalents outstanding
during the year. In fiscal 1996, common stock equivalents have not been
included because the effect of their inclusion would have been anti-dilutive.
The net income (loss) per share amounts for fiscal 1996, 1995 and 1994 have
been retroactively adjusted to reflect the 5% stock dividend declared in fiscal
1995 and for the 5% stock dividend declared in September 1996. For 1994,
shares issuable upon conversion of the 9% convertible subordinated debentures
are not common stock equivalents, are antidilutive and, therefore, are also
excluded from the computation of net income (loss) per share.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". This standard is effective for the Company's financial statements
beginning in the first quarter of fiscal 1997. SFAS No. 121 establishes the
accounting for the impairment of long-lived assets, certain identifiable
intangibles and the excess of cost over net assets acquired, related to those
assets to be held and used in operations, whereby impairment losses are
required to be recorded when indicators of impairment are present and the
undiscounted cash flows estimated to be
F-10
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
RECENTLY ISSUED ACCOUNTING STANDARDS (CONT'D)
generated by those assets are less than the assets carrying amount. SFAS No. 121
also addresses the accounting for long-lived assets and certain identifiable
intangibles that are expected to be disposed of. In the opinion of the
Company's management, it is anticipated that the adoption of SFAS No. 121
will not have a material effect on the consolidated results of operations or
financial condition of the Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires adoption of the disclosure provisions in fiscal
1997. The new standard defines a fair value method of accounting for the
issuance of stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. Pursuant to SFAS No. 123, companies are encouraged, but are
not required, to adopt the fair value method of accounting for employee stock-
based transactions. Companies are also permitted to continue to account for
such transactions under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," but would be required to disclose in a note to
the 1997 consolidated financial statements proforma net income and per share
amounts as if the Company had applied the new method of accounting. SFAS No.
123 also requires increased disclosures for stock-based compensation
arrangements. The Company has not yet determined if it will elect to change to
the fair value method or provide the necessary proforma information, nor has it
determined the effect the new standard will have on its operating and per share
results should it elect to make such change.
F-11
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 2 - SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS
Cash paid for interest reconciled to interest expense for the years ended July
31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
---- ---- ----
Cash paid for interest $27,100 $166,400 $165,700
Plus non cash items:
Increase (decrease) in accrued interest
payable. -- (30,000) (51,300)
------- -------- --------
Interest expense $27,100 $136,400 $114,400
======= ======== ========
In the years ended July 31, 1996, 1995 and 1994, the Company paid cash for
income taxes of approximately $1,323,000, $232,000 and $94,000 respectively,
and received refunds of income taxes previously paid of approximately $35,000
in fiscal 1996 and $27,000 in fiscal 1994.
OTHER NONCASH ITEMS:
During fiscal 1996, 1995 and 1994, the Company acquired property and equipment
in the amount of $ 0, $129,300 and $76,400, respectively, which was financed
through capital lease obligations.
During fiscal 1996, 1995 and 1994, approximately $1,418,000, $1,082,000 and
$282,000, respectively, has been accrued for construction costs, rent and legal
fees related to the New York City leasehold. Interest accretion on the capital
lease obligation for the New York City leasehold was approximately $ 0,
$318,000 and $331,000, for fiscal 1996, 1995 and 1994, respectively.
F-12
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 2 - SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS (CONT'D)
OTHER NONCASH ITEMS (CONT'D):
During fiscal 1994, Debentures of $262,000 were converted into 50,000 shares of
the Company's Common Stock. On January 13, 1995, the Company paid in full the
outstanding balance of the Debentures.
In fiscal 1994, the Company exchanged approximately $2,600,000 of accrued legal
fees, construction costs and patent costs for approximately 205,000 shares of
the Company's Common Stock. The Company also settled a lawsuit against the
former owners of its subsidiary, Enzo Clinical Labs, Inc., by issuing
approximately 190,000 shares with a market value of approximately $3,000,000.
In fiscal 1995, the Company issued approximately 286,000 shares of common stock
in exchange for approximately $2,900,000 in legal fees of which approximately
$1,456,000 related to legal fees incurred in fiscal 1995.
NOTE 3 - INVENTORIES
At July 31, 1996 and 1995 inventories consist of:
1996 1995
---- ----
Raw materials $74,000 $ 60,800
Work in process 1,232,000 1,508,200
Finished products 504,500 628,500
------- -------
$1,810,500 $2,197,500
========== ==========
F-13
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 4 - PROPERTY AND EQUIPMENT
At July 31, 1996 and 1995 property and equipment consist of:
1996 1995
---- ----
Laboratory machinery and equipment $1,964,100 $ 1,941,500
Leasehold improvements 2,194,300 2,146,200
Office furniture and equipment 3,639,000 3,422,400
--------- ---------
7,797,400 7,510,100
Accumulated depreciation and amortization 4,690,600 3,893,800
--------- ---------
3,106,800 3,616,300
Building under capital lease and related
construction costs, including
capitalized interest of $4,364,700
in 1995 and net of cumulative writedown
to estimated fair market value of
$19,901,000 in 1995 -- 10,275,900
--------- ----------
$3,106,800 $13,892,200
========== ===========
In the fourth quarter of fiscal 1996, the Company negotiated a settlement with
the City of New York to relieve the Company from any further obligations
related to the lease and to return the building to the City and the Company
agreed to pay the City $2,950,000 in full settlement of all of the City's
claims for unpaid taxes and rent. The Company issued to the City 203,450
shares of the Company's common stock in August 1996 in consideration of the
settlement amount. If the City has not received the net proceeds of $2,950,000
upon the sale of such stock by March 17, 1997, the City shall return the
remaining shares not sold, if any, and the Company shall pay the difference in
cash. As a result of this settlement with the City, the Company incurred a
charge against earnings in the amount of approximately $7,613,000 in the fourth
quarter of fiscal 1996.
NOTE 5 - LOAN PAYABLE AND LONG-TERM DEBT
At July 31, 1996 and 1995, long-term debt consists of the following:
1996 1995
---- ----
8.75% loan payable to bank at $3,360
per month through 1998 $81,200 112,900
Less current portion 34,600 31,700
------ ------
Total long-term debt $46,600 $81,200
======= =======
F-14
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 6 - LEASE OBLIGATIONS
CAPITAL LEASES
In December 1985, the Company entered into an agreement with the City of New
York to lease, over a fifty-year term, a building located in New York City. In
the fourth quarter of fiscal 1996, the Company negotiated a settlement with the
City of New York to relieve the Company from any further obligations related to
the lease and to return the building to the City (see Note 4).
The Company also leases certain office equipment and computers under capital
leases. The cost and accumulated amortization of assets acquired under
capitalized leases is approximately $259,000 and $144,000 at July 31, 1996 and
$3,529,000 and $94,000 at July 31, 1995, respectively.
Minimum annual rentals under capital lease obligations for fiscal years ending
July 31 are as follows:
EQUIPMENT LEASES
1997 $ 37,700
1998 33,900
1999 33,900
2000 8,400
-----
Total of future annual
minimum lease payments 113,900
Less amount representing
interest 18,100
------
Present value of minimum
lease payments $ 95,800
========
OPERATING LEASES
Enzo Clinical Labs, Inc., ("Enzo Clinical Labs"), a wholly-owned subsidiary of
the Company, leases its office and laboratory space under several leases which
expire between September 1, 1994 and November 30, 2004. Certain officers of
the Company own the building which Enzo Clinical Labs uses as its main
facility. In addition to the minimum annual rentals of space, this lease is
subject to an escalation clause. Rent expense under this lease approximated
$751,000, $684,000 and $683,000 in fiscal 1996, 1995 and 1994, respectively.
F-15
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 6 - LEASE OBLIGATIONS (CONT'D)
OPERATING LEASES (CONT'D)
Total consolidated rent expense incurred by the Company during fiscal 1996, 1995
and 1994 was approximately $1,227,000, $1,132,000 and $1,108,000, respectively.
Minimum annual rentals under operating lease commitments for fiscal years ending
July 31 are as follows:
1997 1,053,000
1998 1,129,000
1999 1,092,000
2000 1,094,000
2001 1,071,000
Thereafter 1,406,000
---------
$6,845,000
=========
NOTE 7 - LITIGATION
ORTHO DIAGNOSTIC SYSTEMS, INC.
On January 1, 1985, the Company entered into a follow-on agreement with Ortho
Diagnostic Systems, Inc. ("Ortho"), a subsidiary of Johnson and Johnson, Inc.
("J&J") pursuant to the 1982 agreement, whereby Ortho agreed to pay the Company
$11,000,000 over a four and one-half year period on a cost recovery basis in
support of research and development projects. Ortho paid $4,500,000 to the
Company under this agreement up to January 1987 at which time Ortho indicated
its intention to suspend future scheduled payments under the agreements pending
resolution of certain matters. At July 31, 1994, the Company had a receivable
from Ortho of approximately $6,500,000. Even though the Company continued to
perform its obligations under the agreements, it provided a total of $6,500,000
in prior years for the potentially uncollectable receivable from Ortho pending
resolution of the disputed items and the outcome of the civil suit filed by the
Company against Ortho and J&J. This allowance for uncollectable receivable of
$6,500,000 was reversed in the fourth quarter of fiscal 1994 due to the
resolution of this matter, as discussed below.
F-16
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 7 - LITIGATION (CONT'D)
ORTHO DIAGNOSTIC SYSTEMS, INC. (CONT'D)
The outside legal counsel was compensated on a contingency basis. During fiscal
1995, the Company issued approximately 110,000 shares in exchange for $1.1
million in accrued legal fees.
On October 19, 1994, the Company executed a settlement agreement with J&J
pursuant to which the Company received $15.0 million in cash, of which $6.5
million related to amounts due under the agreements referred to above, and a
promissory note requiring J&J Ortho to pay a total of $5.0 million a year for
each of the four successive anniversaries of said date. Pursuant to the terms
of the settlement, all of the Company's grants, licenses and intellectual
property have been returned to the Company in totality. These future payments
are recorded at their net present value of $14.1 million at July 31, 1996 in
the accompanying consolidated balance sheet, using a discount rate of 5.25%.
CALGENE, INC.
In March 1993, the Company filed suit in the United States District Court
for the District of Delaware charging patent infringement and acts of unfair
competition against Calgene, Inc. and seeking a declaratory judgment of
invalidity concerning Calgene, Inc.'s plant antisense patent. On February 9,
1994, the Company filed a second suit in the United States District Court for
the District of Delaware charging Calgene with infringement of a second
antisense patent owned by the Company. Calgene filed a counterclaim in the
second Delaware action seeking a declaration that a third patent belonging to
the Company is invalid. The two Delaware actions were consolidated and were
tried to the Court in April 1995. In addition, the Company filed suit on March
22, 1994 in the United States District Court for the Western District of
Washington against Calgene and the Fred Hutchinson Cancer Research Center,
alleging that the defendants had conspired to issue a false and misleading
press release regarding a supposed "patent license" from Hutchinson to Calgene,
and conspired to damage the Company's antisense patents by improperly using
confidential information to challenge them in the Patent Office. The Complaint
further charges that Hutchinson is infringing and inducing Calgene to infringe
the Company's antisense patents.
F-17
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 7 - LITIGATION (CONT'D)
CALGENE, INC.(CONT'D)
On February 2, 1996, the Delaware Court issued an opinion ruling against Enzo
and in favor of Calgene, finding certain Enzo claims infringed, but the patent,
as a whole not infringed, and finding the claims at issue for lack of
enablement. Calgene's patent was found valid (non-obvious) over the prior art.
On February 29, 1996, the Delaware Court issued an Order withdrawing its
February 2, 1996 Opinion. Enzo intends to appeal from any adverse judgment.
There can be no assurance that the Company will be successful in any of the
foregoing matters or that Calgene, Inc. and/or Hutchinson will not be
successful. However, even if the Company is not successful management does not
believe there will be a significant monetary impact.
NOTE 8 - INCOME TAXES
The tax provision (benefit) is calculated under the provisions in Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes".
1996 1995 1994
---- ---- ----
Current
Federal -- $400,000 --
State and local 199,100 881,900 $104,300
Deferred
Federal -- 5,650,000 --
State and local -- 1,799,300 (49,300)
Change in deferred tax asset
valuation reserve related
to net operating losses -- (4,600,000) (3,000,000)
-------- ----------- -----------
Provision (benefit) for income taxes $199,100 $4,131,200 $(2,945,000)
======== ========== ============
F-18
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 8 - INCOME TAXES (CONT'D)
Current income taxes provided for in fiscal 1996 relate primarily to state and
local taxes computed based upon capital.
Current income taxes of approximately $1,300,000 provided for in the fourth
quarter of fiscal 1995 are primarily calculated on the alternative minimum tax
method.
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
The components of deferred income taxes are as follows:
1996 1995 1994
---- ---- ----
Deferred tax liability:
Deferred patent costs $(2,037,000) $(2,076,000) $(2,110,000)
Other -- (310,000) (310,000)
----------- --------- ---------
Total deferred tax liabilities (2,037,000) (2,386,000) (2,420,000)
Deferred tax assets:
Writedown of leasehold interest -- 7,573,000 3,390,000
Provision for uncollectable
accounts receivable and
research contract 1,240,000 574,000 490,000
Net operating loss carryforwards 9,543,000 36,000 8,199,000
Alternative minimum tax credits 403,000 600,000 --
Other 422,000 352,000 282,000
------- ------- -------
11,608,000 9,135,000 12,361,000
Valuation allowance for deferred
tax assets (9,571,000) (6,749,000) (7,092,000)
----------- ----------- -----------
Net deferred tax asset (liability) $ 0 $ 0 $2,849,000
=========== =========== ==========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will be realized. The ultimate realization of the deferred tax asset is
dependent upon the generation of future taxable income. Management considers
scheduled reversals of deferred tax liabilities, projected future taxable
income and tax planning strategies which can be implemented by the Company in
making this assessment. The Company has provided a full valuation allowance
for the net deferred tax asset at July 31, 1996 and 1995. The
F-19
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 8 - INCOME TAXES (CONT'D)
decrease in the valuation allowance for deferred tax assets of $4,084,000 in
fiscal 1994 relates primarily to the expected utilization of net operating
loss carryforwards and deferred tax assets related to the Johnson & Johnson,
Inc. settlement (see Note 7).
The Company has net operating loss carryforwards of approximately $22.8
million which are due to expire in 2011. The Company also has alternative
minimum tax credits which are due to expire in 2001.
The provision (benefit) for income taxes were at rates different from U.S.
federal statutory rates for the following reasons:
1996 1995 1994
---- ---- ----
Federal statutory rate 34% 34% 34%
Expenses not deductible for income
tax return purposes (2%) 2% 7%
State income taxes, net of federal (2%) 10% 2%
No benefit for operating losses (33%) 44% (41%)
Change in valuation reserve related
to benefits from operating losses -- (48%) (139%)
---- ----- ------
(3%) 42% (137%)
==== === ======
NOTE 9 - STOCK OPTIONS AND WARRANTS
The Company has a nonqualified stock option plan, an incentive stock option
plan and a restricted stock incentive plan and has issued other options and
warrants, as described below. All share information has been adjusted to
reflect the 5% stock dividends declared on September 13, 1996 and June 5, 1995.
NONQUALIFIED STOCK OPTION PLAN
The Company has a nonqualified stock option plan (the "Plan") under which
options for up to 793,800 shares of Common Stock may be issued. No additional
options may be granted under such plan. The exercise price of options granted
under the terms of the Plan will be determined by the Board of Directors.
F-20
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 9 - STOCK OPTIONS AND WARRANTS (CONT'D)
A summary of nonqualified stock option transactions for the three years ended
July 31, 1996 is as follows:
NUMBER
OF SHARES EXERCISE PRICE
--------- --------------
Outstanding - July 31, 1993 168,384 $3.07
Exercised (13,892) $3.07
--------
Outstanding - July 31, 1994 and 1995 154,492 $3.07
Exercised (21,525) $3.07
--------
Outstanding - July 31, 1996 132,967 $3.07
=======
The options granted are generally exercisable at 25% per year after one year
and expire ten years after the date of grant and, at July 31, 1996 all
nonqualified options were exercisable.
INCENTIVE STOCK OPTION PLAN
The Company has an incentive stock option plan ("1983 plan") under which the
Company may grant options for up to 992,250 shares of common stock. No
additional options may be granted under the 1983 plan. The exercise price of
options granted under such plan is equal to or greater than fair market value
of the common stock on the date of grant. The Company has stock option plans
("1993 plan" and "1994 plan") under which the Company may grant options for up
to 1,653,750 shares (1993 plan) and for up to 1,047,375 shares (1994 plan) of
common stock. The options granted pursuant to the plans may be either
incentive stock options or nonstatutory options. To date, the Company
has only granted incentive stock
F-21
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 9 - STOCK OPTIONS AND WARRANTS (CONT'D)
options under these plans. A summary of incentive stock option transactions for
the three years ended July 31, 1996 is as follows:
NUMBER
OF SHARES EXERCISE PRICE
--------- --------------
Outstanding - July 31, 1993 1,118,055 $1.36 - 7.03
Exercised (42,557) $1.36 - 4.09
Canceled (140,079) $1.36 - 7.03
Issued 758,582 $8.96 - 14.52
-------
Outstanding - July 31, 1994 1,694,001 $1.36 - 14.52
Exercised (115,938) $1.36 - 7.03
Canceled (2,756) $3.07
Issued 298,778 $8.73 - 10.31
-------
Outstanding - July 31, 1995 1,874,085 $1.36 - 14.52
Exercised (117,210) $1.36 - 9.07
Canceled (67,961) $1.36 - 9.07
Issued 357,525 $13.57 - 18.81
-------
Outstanding - July 31, 1996 2,046,439 $1.36 - 18.81
=========
Incentive stock options generally become exercisable at 25% per year after
one year and expire ten years after the date of grant. At July 31, 1996,
under the incentive stock option plans 1,049,837 options were exercisable.
RESTRICTED STOCK INCENTIVE PLAN
The Company has a restricted stock incentive plan whereby the Company may
award up to 220,500 shares of its common stock. Under the terms of the plan,
any shares issued are restricted in regard to sales and transfers for a
period of five years after award. Such restrictions begin to expire at 25%
per year after the second year of ownership. As of July 31, 1996, the
Company has not awarded any shares of common stock under this plan.
F-22
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 9 - STOCK OPTIONS AND WARRANTS (CONT'D)
OTHER OPTIONS AND WARRANTS
In fiscal 1982, the Company issued 33,736 warrants in connection with the
sale of stock. These warrants were exercisable at $8.31 per share through
June 1996 of which 16,868 warrants were exercised in fiscal 1994 and in
fiscal 1996. As part of the restructuring of the Debenture in November 1991,
the Company issued additional warrants to purchase 283,343 shares of common
stock with an exercise price of $1.81 per share expiring ten years after the
date of issue. In fiscal 1996, 1995 and 1994, 7,140, 4410 and 92,059 of
these warrants were exercised, respectively. In connection with the issuance
of newly issued shares of the Company's Common Stock to a private investor in
fiscal 1994, the Company issued warrants to purchase 275,625 shares of common
stock with exercise prices ranging from $7.26 to $10.89 per share. In fiscal
1996, 1995 and 1994, 121,275, 110,250 and 44,100 of these warrants were
exercised, respectively. In fiscal 1996, the Company issued warrants to
purchase 85,575 shares of common stock with an exercise price ranging from
$9.51 to $16.67 per share which expire five years after the date of issue.
In fiscal 1996, 9,975 of these warrants were exercised and 12,075 were
cancelled.
* * * * *
As of July 31, 1996, the Company has reserved 4,334,058 shares under the
arrangements described above.
F-23
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 10 - COMMITMENTS
The Company has an exclusive licensing agreement to an invention covered by
licensed patents. Under this agreement, the Company is required to make
certain minimum royalty payments of $200,000 per year through the life of the
patents.
F-24
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
Note 11 - Lines of business
The Company operates two lines of business: (i) conducting research and development activity and selling products derived from
such research and (ii) operating clinical reference laboratories which provide diagnostic services to the health care community.
The following financial information (in thousands) with respect to such lines of business (industry segments) is based on the
guidelines contained in Statement of Financial Accounting Standards No. 14.
AT JULY 31, 1996 AND FOR AT JULY 31, 1995 AND FOR
THE YEAR THEN ENDED THE YEAR THEN ENDED
------------------- -------------------
RESEARCH CLINICAL RESEARCH CLINICAL
AND REFERENCE AND REFERENCE
DEVELOPMENT LABORITORIES TOTAL DEVELOPMENT LABORITORIES TOTAL
----------- ------------ ----- ----------- ------------ -----
Operating revenues:
Sales and diagnostic services $12,946 $21,544 $34,490 $9,548 $22,152 $31,700
======= ======= ======= ====== ======= =======
Operating profit (loss) $449 $124 $573 $479 $2,146 $2,625
==== ==== ==== ======
Investment income 1,667 1,077
Corporate expenses (2,135) (4,413)
Writedown of leasehold interest
and related costs (7,613) (11,400)
Recovery of research contract
receivable -- --
Litigation settlement, net of
legal fees -- 21,860
------ ------
Income (loss) before provision
(benefit) for taxes on income
and extraordinary items $(7,508) $9,749
======= ======
Identifiable assets $22,309 $22,731 $45,040 $27,196 $23,867 (a) $51,063
======= ======= ======= =======
Corporate assets, principally
cash and cash equivalents,
short-term investments,
deferred financing costs,
building under capital leases
and funds held in escrow 17,798 21,395
------ ------
$62,838 $72,458
======= =======
Depreciation and amortization $576 $1,236 $1,812 $514 $1,202 $1,716
==== ====== ====== ==== ====== ======
Property and equipment
expenditures $45 $388 $433 $41 $989 $1,030
=== ==== === ====
Corporate property and
equipment expenditures 266 132
--- ---
$699 $1,162
==== ======
AT JULY 31, 1994 AND FOR
THE YEAR THEN ENDED
-------------------
RESEARCH CLINICAL
AND REFERENCE
DEVELOPMENT LABORITORIES TOTAL
----------- ------------ -----
Operating revenues:
Sales and diagnostic services $5,183 $17,616 $22,799
====== ======= =======
Operating profit (loss) ($493) ($659) ($1,152)
====== =======
Investment income 202
Corporate expenses (2,794)
Writedown of leasehold interest
and related costs (600)
Recovery of research contract
receivable 6,500
Litigation settlement, net of
legal fees --
------
Income (loss) before provision
(benefit) for taxes on income
and extraordinary items $2,156
======
Identifiable assets $17,261 $20,393 (a) $37,654
======= =======
Corporate assets, principally
cash and cash equivalents,
short-term investments,
deferred financing costs,
building under capital leases
and funds held in escrow 27,389
------
$65,043
=======
Depreciation and amortization $484 $1,061 $1,545
==== ====== ======
Property and equipment
expenditures $16 $839 $855
=== ====
Corporate property and
equipment expenditures 930
----
$1,785
======
(a) Includes cost in excess of fair value of net tangible assets acquired of
$9,675 in 1996, $10,046 in 1995, and $10,391 in 1994.
F-25
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996, 1995 and 1994
NOTE 12 - EMPLOYEE BENEFIT PLAN
The Company has a qualified Salary Reduction Profit Sharing Plan (the "Plan")
for eligible employees under Section 401(k) of the Internal Revenue Code. The
Plan provides for voluntary employee contributions through salary reduction and
voluntary employer contributions at the discretion of the Company. For the
years ended July 31, 1996, 1995 and 1994, the Company has authorized employer
contributions of 25% of the employees' contribution up to 6% of the employees'
compensation in Enzo Biochem, Inc. common stock. The 401(k) employer
contributions expense converted into the Company's common stock was $145,800 in
fiscal year 1996. The 401(k) employer contribution expense in 1995 and 1994
was not material.
NOTE 13 - SUPPLEMENTARY EARNINGS PER SHARE
The Company converted $262,000 in principal of the Company's outstanding
Debentures into 52,500 shares of Common Stock in 1994. Pro forma earnings per
share information as if the conversion had occurred at the beginning of the
period would be as follows:
1994
----
Income before extraordinary items $.22
Extraordinary items .01
-----
Net income $.23
====
Weighted average common shares 22,632,800
==========
NOTE 14 - STOCK DIVIDEND
On June 5, 1995, the Company declared a 5% stock dividend paid July 31, 1995 to
shareholders of record as of July 3, 1995. The stock price on the date of
declaration was $10.125. The dividend has been charged against accumulated
deficit to the extent of net income in fiscal 1995. On September 13, 1996, the
Company declared another 5% stock dividend payable on October 29, 1996 to
shareholders of record as of October 8, 1996.
F-26
ENZO BIOCHEM, INC.
SCHEDULE II - VALUATION
AND QUALIFYING ACCOUNTS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
ADDITIONS
---------
BALANCE AT CHARGED CHARGED
BEGINNING TO COSTS TO OTHER (ADDITIONS) BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ----------- ---------- ------------ -------- ----------- -------------
1996
Allowance for doubtful accounts
receivable $2,127,000 $6,702,900 - $3,431,900(1) $5,398,000
Allowance for deferred tax
valuation $6,749,000 - - $(2,822,000) $9,571,000
1995
Allowance for doubtful accounts
receivable $1,956,000 $3,845,600 - $3,674,600(1) $2,127,000
Allowance for deferred tax valuation $7,092,000 - - $343,000(1) $6,749,000
1994
Allowance for doubtful accounts
receivables $2,016,000 $3,504,300 - $3,564,300(1) $1,956,000
Allowance for deferred tax valuation $11,176,000 - - $4,084,000 $7,092,000
Allowance for doubtful research
contract receivable $6,500,000 - - $6,500,000(2) $ -
(1) Write-off of uncollectable accounts receivable.
(2) Recovery of research contract receivable.
F-27
INDEX
OF
EXHIBITS FILED WITH
FORM 10-K FOR FISCAL YEAR ENDED
JULY 31, 1996
OF
ENZO BIOCHEM, INC
EXHIBIT EXHIBIT NUMBER PAGE
- ------- -------------- ----
Stipulation of Settlement 10(x) E-2
with the City of New York
Computation of per-share 11 E-25
earnings
Consent of Ernst & Young LLP 23 E-26
E-1