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 31,1999
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.
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(Exact name of registrant as specified in its charter)
NEW YORK 13-286620
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
60 EXECUTIVE BLVD., FARMINGDALE, NEW YORK 11735
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(Address of Principal Executive office) (Zip Code)
(516-755-5500)
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $0.01 PAR VALUE THE AMERICAN STOCK EXCHANGE
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(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 8, 1999 the Registrant had 25,100,300 shares of Common Stock
outstanding.
ENZO BIOCHEM, INC.
FORM 10-Q
October 31, 1999
INDEX
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PAGE
NUMBER
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - October 31, 1999
and July 31, 1999 3
Consolidated Statement of Operations
For the three months ended October 31, 1999 and 1998 4
Consolidated Statement of Cash Flows
For the three months ended October 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
2
ENZO BIOCHEM, INC.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET
October 31, July 31,
1999 1999
(unaudited)
----------------------------
(in Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 44,277 $ 43,218
Accounts receivable, less allowance for doubtful accounts 17,062 15,007
Inventories 1,472 1,427
Deferred taxes 1,186 1,186
Other 622 847
-------- --------
Total current assets 64,619 61,685
Property and equipment, at cost, less accumulated depreciation and
amortization 2,983 2,824
Cost in excess of fair value of net tangible assets acquired, less accumulated
amortization 8,471 8,563
Deferred patent costs, less accumulated amortization 4,249 4,312
Deferred taxes 1,389 1,389
Other 127 127
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$ 81,838 $78,900
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-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,778 $ 1,196
Income taxes payable -- 300
Other accrued expenses 862 866
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Total current liabilities 2,640 2,362
Deferred liabilities 860 890
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; 25,081,000 shares at October 31,1999 and 24,957,700,
shares at July 31,1999 251 250
Additional paid-in capital 93,624 92,452
Accumulated deficit (15,537) (17,054)
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Total stockholders' equity 78,338 75,648
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$ 81,838 $78,900
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See accompanying notes
3
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Three Months Ended October 31,
1999 1998
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(In thousands, except per share data)
Revenues:
Research product revenues $4,332 $3,498
Clinical laboratory services 7,280 7,026
----- -----
Total operating revenues 11,612 10,524
Costs and expenses:
Cost of research product revenues 1,921 2,017
Cost of clinical laboratory services 2,057 2,117
Research and development expense 1,253 1,070
Selling expense 699 657
Provision for uncollectable accounts receivable 2,486 2,438
General and administrative expenses 2,146 1,972
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Total costs and expenses 10,562 10,271
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Income before interest income and provision for taxes on
income 1,050 253
Interest income - net 564 510
----- -----
Income before provision for taxes on income 1,614 763
Provision for taxes on income (97) (58)
---- ----
Net income $1,517 $705
====== ====
Net income per common share:
Basic $.06 $.03
==== ====
Diluted $.06 $.03
==== ====
Denominator for per share calculation:
Basic 25,079 24,891
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Diluted 26,679 25,704
====== ======
See accompanying notes
4
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Three Months Ended October 31,
1999 1998
--------------------------------
(In Thousands)
Cash flows from operating activities:
Net income $ 1,517 $ 705
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of property
and equipment 198 207
Amortization of costs in excess of fair
value of tangible assets acquired 93 93
Amortization of deferred patent costs 171 165
Issuance of stock warrants as compensation for services
performed 30 37
Provision for uncollectable accounts receivable 2,486 2,438
Accretion of interest on note receivable -- (58)
Deferred liabilities (30) --
Change in assets and liabilities:
Note receivable - J & J settlement -- 5,000
Accounts receivable before provision for
uncollectable amounts (4,540) (2,256)
Inventories (45) 55
Other 227 (49)
Trade accounts payable and other accrued expenses 257 (78)
Accrued legal fees -- (149)
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(1,153) 5,405
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Net cash provided by operating activities 364 6,110
--- -----
Cash flows from investing activities:
Capital expenditures (339) (313)
Patent costs deferred (108) (101)
Security deposits -- (2)
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Net cash used in investing activities (447) (416)
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Cash flows from financing activities:
Payments of obligations under capital lease and
long term debt -- (9)
Proceeds from exercise of stock options 1,142 21
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Net cash provided by financing activities 1,142 12
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Net increase in cash and cash equivalents 1,059 5,706
Cash and cash equivalents at the beginning of the year 43,218 33,543
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Cash and cash equivalents at the end of the period $ 44,277 $ 39,249
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5
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999
(Unaudited)
1. The consolidated balance sheet as of October 31, 1999, the consolidated
statements of operations for three months ended October 31,1999 ("2000 Period")
and 1998 ("1999 Period") and the consolidated statement of cash flows for the
three months ended October 31, 1999 and 1998 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, 1999 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 1999 Annual Report on Form 10-K. The results
of operations for the three months ended October 31, 1999 are not necessarily
indicative of the results that may be expected for the full year.
In fiscal 1998, the Company adopted the provisions of SFAS No. 128,
"Earnings Per Share", which was effective for both interim and annual financial
statements for periods ending after December 15, 1997. SFAS 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options and warrants. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to SFAS 128 requirements.
The following table sets forth the computation of basic and diluted earnings per
share pursuant to SFAS 128.
Three Months Ended October 31,
1999 1998
------------------------------
(In Thousands, except per share data)
Numerator:
Net income for numerator for basic and diluted earnings per
common share $1,517 $705
------ ----
------ ----
Denominator:
Denominator for basic earnings per common equivalent share during the
period 25,079 24,891
Effect of dilutive securities
Employee and director stock options and warrants 1,600 813
----- ---
Denominator for diluted earnings per common equivalent share and assumed
conversions 26,679 25,704
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Basic earnings per share $.06 $.03
---- ----
---- ----
Diluted earnings per share $.06 $.03
---- ----
---- ----
6
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999
(Unaudited)
Note 2 - SEGMENT INFORMATION
-------------------
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131") and retroactively
applied it to fiscal 1998. The adoption of SFAS No. 131 had no impact on the
Company's reported net income or shareholders' equity. The Company has two
reportable segments: research and development and clinical reference
laboratories. The Company's research and development segment conducts research
and development activities as well as selling products derived from these
activities. The clinical reference laboratories provide diagnostic services to
the health care community. The Company evaluates performance based on income
before provision for taxes on income. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. Costs excluded from income before provision for taxes on
income and reported as other consist of corporate general and administrative
costs which are not allocable to the two reportable segments. Management of the
Company assesses assets on a consolidated basis only and therefore, assets by
reportable segment has not been included in the reportable segments below.
The following financial information (in thousands) represents the reportable
segments of the Company:
Research and Development Clinical Reference Laboratories
Three Months Ended October 31, Three Months Ended October 31,
1999 1998 1999 1998
----------------------------------------------------------------------
Operating revenues:
Research product revenues $4,332 $3,498 -- --
Clinical laboratory services -- -- $7,280 $7,026
Cost and expenses:
Cost of research product revenues 1,921 2,017 -- --
Cost of clinical laboratory services -- -- 2,057 2,117
Research and development expense 1,253 1,070 -- --
Interest income -- -- 1 --
Income before provision for taxes on
income $ 851 $ 136 $ 702 $ 571
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------ ------ ------ ------
Other Consolidated
Three Months Ended October 31, Three Months Ended October 31,
1999 1998 1999 1998
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Operating revenues:
Research product revenues --- --- $4,332 $3,498
Clinical laboratory services --- --- 7,280 7,026
Cost and expenses:
Cost of research product revenues --- --- 1,921 2,017
Cost of clinical laboratory services --- --- 2,057 2,117
Research and development expense --- --- 1,253 1,070
Interest income $563 $510 564 510
Income before provision for taxes on $61 $57 $1,614 $763
--- --- ------ ----
--- --- ------ ----
7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999
(Unaudited)
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 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. On April 3, 1997, the
European Patent Office rejected Calgene's opposition that had been lodged
against the Company's related European antisense patent, thereby upholding the
patent's validity. On May 23, 1997, the Japanese Patent Office issued a related
antisense patent owned by the Company.
On June 1, 1998, the U.S. District Court for the District of Delaware
issued its final decision in the case. In its decision the District Court held
two of the Company's three antisense patents invalid and not infringed. The
District Court declined to act on Calgene's claim that the Company's third
antisense patent was invalid, citing lack of evidence. The District Court
further held that the Calgene antisense patent was not invalid. Enzo appealed
the District Court's judgment to the U.S. Court of Appeals for the Federal
Circuit and Calgene cross-appealed. On September 24, 1999, the Court of Appeals
issued its decision, rejecting Calgene's effort to invalidate Enzo's patent in
genetic antisense technology, U.S. Patent No. 5,272,065, thus leaving it valid
and standing. The Court of Appeals also clarified the District Court's judgment
regarding two other of Enzo's genetic antisense patents (5,190,931 and
5,208,149), limiting judgment of invalidity only to the claims of the two
patents which had been asserted against Calgene. The Court of Appeals remanded
the case to the District Court for determination of whether the case was
exceptional, which related to Calgene's claim for attorney fees. On October 7,
1999, Calgene filed a petition for rehearing directed to the Court of Appeal's
disposition of Calgene's cross-appeal as to Enzo's `065 patent. The petition was
denied on December 1, 1999. Calgene may file a petition for the case to be heard
by the U.S. Supreme Court. There can be no assurance that the Company will be
successful in connection with Calgene's petition for rehearing and Calgene's
claim that the case is exceptional, the latter to be their subject of further
proceedings in the District Court. However, even if the Company is not
successful, management does not believe there will be a significant monetary
impact.
8
In June 1999, the Company filed suit in the United States District
Court for the Southern District of New York against Gen-Probe Incorporated,
Chugai Pharma U.S.A., Inc., Chugai Pharmaceutical Co., Ltd., bioMerieux, Inc.,
bioMerieux SA, and Becton Dickinson and Company, charging them with infringing
the Company's U.S. Patent 4,900,659, which concerns probes for the detection of
the bacteria that causes gonorrhea. The case remains at an early stage. There
can be no assurance that the Company will be successful in these proceedings.
However, even if the Company is not successful, management does not believe that
there will be a significant monetary impact.
Item 2- Management's Discussion and Analysis of Financial Condition and Results
of Operations
LIQUIDITY AND CAPITAL RESOURCES
The Company at October 31, 1999, had cash and cash equivalents of
$44,277,000 an increase of $1,059,000 from July 31,1999. The Company had working
capital of $61,979,000 at October 31, 1999 compared to $59,323,000 at July
31,1999.
The Company's net income before taxes for the three months ended
October 31,1999 was $1,614,000 which includes depreciation and amortization
aggregating approximately $462,000. 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 three month period
ended October 31, 1999 was approximately $364,000 and as compared to net cash
provided by operating activities of $6,110,000 for the 1999 period which
included $ 5.0 million of cash received in connection with the litigation
settlement with Johnson & Johnson, Inc. The decrease in net cash provided by
operating activities from the 1999 period to the 2000 period was primarily due
to the payment in full of the Johnson & Johnson litigation settlement during the
1999 period.
Net cash used in investing activities increased by $31,000 from the
1999 period primarily as a result of an increase in capital expenditures.
Net cash provided by financing activities increased by $1,130,000 from
the 1999 period primarily as a result of the increase in proceeds from the
exercise of stock options.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED OCTOBER 31,1999 COMPARED WITH THREE MONTHS ENDED OCTOBER 31,
- -------------------------------------------------------------------------------
1998
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Revenues from operations for the three month period ended October
31,1999 increased by $1,088,000 compared to revenues from operations for the
three month period ended October 31, 1998. This increase was due to an increase
of $254,000 in revenue from the clinical reference laboratory operation and by
the increase of $834,000 of research product sales. The increase in research
product sales resulted primarily from an increase in the sales from the
Company's non-exclusive distribution agreements. The increase in revenues from
the clinical reference laboratory operations resulted primarily from an increase
in esoteric testing revenue.
9
Cost of sales decreased by approximately $156,000 as a result of a
decrease in the cost of clinical laboratory services of $60,000 and an decrease
of $96,000 in the cost of sales of research products from the Company's
distribution agreements activities.
Research and development expenses increased by approximately $183,000
as a result of an increase in expenses associated with the research programs.
General and Administrative expenses increased approximately by
$174,000, primarily due to an increase in legal fees.
The provision for income taxes for the three months ended October 31,
1999 and 1998 are based on the alternative minimum tax method and current state
and local income taxes provided relate primarily to taxes computed based upon
capital.
10
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.
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(registrant)
Date: December 16, 1999 by: /S/SHAHRAM K. RABBANI
----------------------
Chief Operating Officer,
Secretary and Treasurer
11