UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Mark one /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 1996 / / or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ______________ Commission File Number 1-9974 ENZO BIOCHEM, INC. --------------------------------------------- (Exact name of registrant as specified in its charter NEW YORK 13-2866202 - ------------------ ---------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 60 EXECUTIVE BLVD., FARMINGDALE, NEW YORK 11735 - ----------------------------------------- ----------- (Address of principal executive office) (Zip Code) (516-755-5500) - ------------------ (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, $.01 PAR VALUE THE AMERICAN STOCK EXCHANGE - ---------------------------- --------------------------- (Title of Class) (Name of each Exchange on which Registered) Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant has required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- As of December 13, 1996 the Registrant had 23,085,016 shares of Common Stock outstanding. ENZO BIOCHEM, INC. FORM 10-Q October 31, 1996 INDEX ----- PAGE NUMBER PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet - October 31, 1996 and July 31, 1996 3 Consolidated Statement of Operations For the three months ended October 31, 1996 and 1995 5 Consolidated Statement of Cash Flows For the three months ended October 31, 1996 and 1995 6 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 2 ENZO BIOCHEM, INC. PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED BALANCE SHEET October 31, July 31, 1996 1996 (unaudited) _____________________ (in thousands) ASSETS Current assets: Cash and cash equivalents $ 23,518 $ 17,793 Accounts receivable, less allowance for doubtful accounts 9,901 10,488 Current portion of note receivable - litigation settlement 5,000 5,000 Inventories 1,736 1,810 Other 2,204 823 --------- -------- Total current assets 42,359 35,914 Property and equipment, at cost, less accumulated depreciation and amortization 2,983 3,107 Long term portion of note receivable - litigation settlement 4,364 9,114 Cost in excess of fair value of net tangible assets acquired, less accumulated amortization 9,582 9,675 Deferred patent costs, less accumulated amortization 4,778 4,878 Other 144 150 -------- -------- $ 64,210 $ 62,838 -------- -------- -------- -------- 3 ENZO BIOCHEM, INC. LIABILITIES AND STOCKHOLDERS' EQUITY October 31, July 31, 1996 1996 (unaudited) ________________________ (in thousands) Current liabilities: Trade accounts payable $ 1,010 $ 1,281 Accrued legal fees 1,064 1,392 Accrued leasehold costs -- 2,950 Other accrued expenses 569 776 Current portion of long-term debt 35 35 Current portion of obligations under capital leases 27 29 ------- ------- Total current liabilities 2,705 6,463 Long-term debt 38 47 Obligations under capital leases 60 67 Other deferred liabilities 1,009 1,008 Stockholders' equity: Preferred Stock, $ .01 par value; authorized 25,000,000 shares no shares issued or outstanding Common Stock, $ .01 par value; authorized 75,000,000 shares; shares issued and outstanding; 23,076,000 shares at October 31,1996 and 21,624,900 shares at July 31,1996 231 216 Additional paid-in capital 88,458 83,450 Accumulated deficit (28,291) (28,413) -------- -------- Total stockholders' equity 60,398 55,253 ------ ------ $ 64,210 $ 62,838 -------- -------- -------- -------- See accompanying notes 4 ENZO BIOCHEM, INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Ended October 31, _____________________________ 1996 1995 ____________________________________ (In thousands, except per share data) Revenues: Research product sales $ 3,173 $ 3,037 Clinical laboratory services 4,832 5,519 ----- ----- Total operating revenues 8,005 8,556 Costs and expenses: Cost of research product sales 1,924 1,814 Cost of clinical laboratory services 1,695 1,867 Research and development expenses 908 585 Selling expenses 599 605 Provision for uncollectable accounts receivable 1,536 770 General and administrative expenses 1,682 1,971 ----- ----- Total costs and expenses 8,344 7,612 Income (loss) before interest and provision for income taxes (339) 944 Interest income (expense) net 478 377 ------ ------- Income before provision for income taxes 139 1,321 Provision for taxes on income (17) (417) ------- --------- Net income $ 122 $ 904 ------- ------- ------- ------- Net income per share $ 0.01 $ 0.04 ------ ------ ------ ------ Weighted average common shares 23,809 23,647 ------ ------ ------ ------ See accompanying notes 5 ENZO BIOCHEM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Three Months Ended October 31, __________________________ 1996 1995 ________________________________ (In thousands, except per share data) Cash flows from operating activities: Net income $ 122 $ 904 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 212 217 Amortization of costs in excess of fair value of tangible assets acquired 93 92 Amortization of deferred patent costs 150 120 Provision for uncollectable accounts receivable 1,536 770 Accretion of interest on note receivable (250) (225) Other 8 108 Change in assets and liabilities: Note receivable - J & J settlement 5,000 5,000 Accounts receivable before provision for uncollectable amounts (949) (1,705) Inventories 74 (34) Prepaid expense 228 242 Trade accounts payable and other accrued expenses (427) (377) Accrued legal fees (18) (66) Income taxes payable -- (802) Deferred liabilities -- 42 ----- ----- 5,657 3,382 ----- ----- Net cash provided by operating activities $ 5,779 $ 4,286 ------- ------- 6 ENZO BIOCHEM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Three Months Ended October 31, __________________________ 1996 1995 ___________________________ (In Thousands) Cash flows from investing activities: Capital expenditures (88) (62) Patent costs deferred (50) (48) Security deposits 6 -- --- ----- Net cash used in investing activities (132) (110) Cash flows from financing activities: Payments of obligations under capital lease (16) (25) Proceeds from exercise of stock options 94 246 ______ ______ Net cash provided by used in financing activities 78 221 ------ ------ Net increase in cash and cash equivalents 5,725 4,397 Cash and cash equivalents at the beginning of the year 17,793 11,068 ------ ------ Cash and cash equivalents at the end of the period $ 23,518 $ 15,465 -------- -------- -------- -------- 7 ENZO BIOCHEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS October 31, 1996 (Unaudited) 1. The consolidated balance sheet as of October 31, 1996, the consolidated statement of operations for three months ended October 31, 1996 ("1997 Period") and 1995 ("1996 Period") and the consolidated statement of cash flows for the three months ended October 31, 1996 and 1995 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at October 31, 1996 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1996 Annual Report on Form 10-K. The results of operations for the three months ended October 31, 1996 are not necessarily indicative of the results that maybe expected for the full year. 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 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, the adoption of SFAS No. 121 did not have a material effect on the consolidation results of operations or financial condition of the Company. 2. On October 19, 1994 the Company executed a settlement agreement with Johnson & Johnson, Inc. in the aggregate amount of $35.0 million pursuant to which the Company received $15.0 million, and a promissory note requiring Johnson & Johnson and its subsidiary, Ortho Diagnostics, Inc., to pay $5.0 million a year for each of the four successive anniversaries of said date. These future payments are recorded at net present value discounted using an interest rate of 5.25%. Pursuant to the terms of the settlement, all of the Company's 8 ENZO BIOCHEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS October 31, 1996 (Unaudited) grants, licenses and intellectual property have been returned to the Company in totality. 3. In March 1993, the Company filed suit in the United States District Court for the District of Delaware charging patent infringement and acts of unfair competition against Calgene, Inc. and seeking a declaratory judgment of invalidity concerning Calgene, Inc.'s plant antisense patent. On February 9, 1994, the Company filed a second suit in the United States District Court for the District of Delaware charging Calgene with infringement of a second antisense patent owned by the Company. Calgene 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. 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. 4. 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 213,623 9 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. 5. In April, 1994, the Company signed a non-exclusive worldwide distribution and supply agreement with Boehringer Mannheim Biochemicals. During fiscal 1995 similar agreements were signed with Amersham International and with Dako A/S. In September 1995, a fourth agreement was concluded with VWR Scientific Products (acquired from Baxter Healthcare). Under the terms of these agreements, the distributor companies sell to the global medical research market, a broad range of biochemical products and reagents manufactured and supplied by Enzo. The agreements include products based on nonradioactive DNA probe technology and include products that were developed and marketed by these companies prior to the agreement, as well as products developed by Enzo, all of which are covered by Enzo patents. The agreements extend for the life of the last patent to expire for products involved. Item 2- Management's Discussion and Analysis of Financial Condition and Results of Operations LIQUIDITY AND CAPITAL RESOURCES The Company at October 31,1996, had cash and cash equivalents of $ 23.5 million, an increase of $ 5.7 million from July 31,1996. The Company had net working capital of $ 39.7 million at October 31,1996 compared to $ 29.5 million at July 31,1996. The Company's income before taxes was $ 139,000 which includes depreciation and amortization aggregating approximately $ 455,000. 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 for the October 31, 1996 quarter was approximately $ 5.8 million and includes $ 5.0 million of cash received in connection with the litigation settlement with Johnson & Johnson, Inc. as compared to net cash provided by operating activities of $ 4.3 million for the prior period. The increase in net cash provided by operating activities from the 1996 period to the 1997 period was primarily due to the Company's decrease in net income from October 31, 1996 and an increase provision for uncollectable accounts receivable of $ 766,000, offset by the decrease in accounts receivable and the decrease in income taxes payable. 10 Net cash used by investing activities increased by $ 22,000 from the 1996 period primarily as a result of an increase in capital expenditures. Net cash provided by financing activities decreased by $ 143,000 from the 1996 period primarily as a result of the decrease in proceeds from the exercise of stock options. RESULTS OF OPERATIONS THREE MONTHS ENDED OCTOBER 31, 1996 COMPARED WITH THREE MONTHS ENDED OCTOBER 31, 1995 Revenues from operations for the period ended October 31,1996 decreased by $ 551,000 over revenues from operations for the period ended October 31,1995. This decrease was due to an increase of $ 136,000 in revenues from research product sales resulting primarily from the Company's non-exclusive distribution agreements for the Company's products offset by a decrease of $ 687,000 in revenue for the clinical reference laboratory operation. The decrease in revenues from the clinical laboratory operations resulted primarily from a reduction in reimbursements rates from the Medicare program and to a lesser extent, a decrease in volume from unprofitable diagnostic screening tests. Cost of sales decreased by approximately $ 62,000 as a result of an increase of 110,000 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 $ 172,000. This decrease is primarily due to the improved efficiencies of performing certain diagnostics screening tests. Research and development expenses increased by approximately $ 323,000 as a result of an increase in research programs and to a lesser extent the increase in amortization of patent costs. The provision for uncollectable accounts receivable increased by $ 766,000 primarily due to the fact that additional reserves were needed primarily to cover lower collection rates under the Federal Medicare programs and other third-party insurance carriers. The health care industry is undergoing significant change as third-party payors, such as Medicare and insurers, increase their efforts to control the cost, utilization and delivery of health care services. In particular, the Company believes that reductions in reimbursement for Medicare services will continue to be implemented from time to time. Reductions in the reimbursement rates of other third-party payors are likely to occur as well. Furthermore, the Company cannot predict the effect health care reform, if enacted, would have on its business, and there can be no assurance that such reforms, if enacted, would not have a material adverse effect on the Company's business and operations. 11 Selling and general and administration expenses decreased by $ 295,000 primarily due to a decrease in legal fees and the overall improved efficiencies at the clinical reference laboratory. 12 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. ENZO BIOCHEM, INC. ------------------ (registrant) Date: December 13, 1996 by:/s/ Shahram K. Rabbani ---------------------- Chief Operating Officer, Secretary and Treasurer 13