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 April 30, 2004 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) (631-755-5500) - -------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.01 par value New York 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. _X_ Yes No ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 125-2). _X_ Yes No ___ As of May 24, 2004 the Registrant had 30,841,000 shares of Common Stock Outstanding. ENZO BIOCHEM, INC. FORM 10-Q April 30, 2004 INDEX PAGE NUMBER PART I - FINANCIAL INFORMATION - ------- Item 1. Financial Statements Consolidated Balance Sheet - April 30, 2004 (unaudited) and July 31, 2003 (audited) 3 Consolidated Statement of Operations For the nine months ended April 30, 2004 and 2003 (unaudited) 4 Consolidated Statement of Operations For the three months ended April 30, 2004 and 2003 (unaudited) 5 Consolidated Statement of Cash Flows For the nine months ended April 30, 2004 and 2003 (unaudited) 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Item 4. Controls and Procedures 16 Part II - Other Information Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 19 2 ENZO BIOCHEM, INC PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET April30, July 31, 2004 2003 (unaudited) (audited) --------- --------- (In thousands) ASSETS Current assets: Cash and cash equivalents ........................... $ 59,879 $ 63,268 Marketable securities ............................... 15,341 15,154 Accounts receivable, less allowance for doubtful accounts ............................. 17,186 17,266 Inventories ......................................... 3,047 3,422 Prepaid expenses .................................... 1,652 2,233 Deferred taxes ...................................... 2,874 1,014 Prepaid taxes ....................................... 127 542 Income tax receiveable .............................. 695 -- --------- --------- Total current assets .................................. 100,801 102,899 Property and equipment, at cost less accumulated depreciation and amortization ....................... 2,332 2,200 Goodwill .............................................. 7,452 7,452 Deferred patent costs, less accumulated amortization .. 2,680 3,166 Other ................................................. 157 161 --------- --------- $ 113,422 $ 115,878 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable ............................. $ 1,250 $ 1,321 Accrued legal fees ................................. 1,810 1,915 Other accrued expenses ............................. 431 551 Accrued research and development expenses .......... 55 453 Accrued payroll .................................... 481 703 Deferred rent ...................................... 145 232 --------- --------- Total current liabilities ............................. 4,172 5,175 Deferred taxes ........................................ 1,046 1,235 Deferred rent ......................................... -- 87 Commitments and contingencies 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 30,857,000 AND 30,507,000 OUTSTANDING AT APRIL 30, 2004 AND 29,975,100 at July 31, 2003 ................... 308 300 Additional paid-in capital .......................... 205,866 199,082 Treasury stock ...................................... (5,669) -- Accumulated deficit ................................. (92,155) (89,916) Accumulated other comprehensive loss ................ (146) (85) --------- --------- Total stockholders' equity ............................ 108,204 109,381 --------- --------- $ 113,422 $ 115,878 ========= ========= 3 ENZO BIOCHEM, INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) Nine Months Ended April 30, 2004 2003 -------- -------- (In thousands, expect per share data) Revenues: Research product revenues .......................... $10,942 $20,612 Clinical laboratory services ....................... 22,123 21,496 -------- -------- 33,065 42,108 Costs and expenses: Cost of research product revenues .................. 1,238 2,012 Cost of clinical laboratory services ............... 7,457 6,777 Research and development expense ................... 6,354 5,086 Selling expense .................................... 3,483 3,615 General and administrative expense ................. 7,428 6,253 Provision for uncollectible accounts receivable .... 8,354 6,432 Legal expense ...................................... 4,116 2,554 -------- -------- 38,430 32,729 -------- -------- (Loss) income before interest income and benefit (provision) for taxes on income ........... (5,365) 9,379 Interest income ...................................... 902 1060 (Loss) income before provision for taxes on income ... (4,463) 10,439 Benefit (provision) for taxes on income .............. 2,224 (4,072) -------- -------- Net (loss) income .................................... ($2,239) $6,367 ======== ======== Net (loss) income per common share: Basic ............................................. ($0.07) $0.21 Diluted ........................................... ($0.07) $0.21 ======== ======== Denominator for per share calculation: Basic ............................................. 30,082 29,888 ======== ======== Diluted ........................................... 30,082 30,467 ======== ======== 4 ENZO BIOCHEM, INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) Three Months Ended April 30, 2004 2003 -------- -------- (In thousands, expect per share data) Revenues: Research product revenues .......................... $4,215 $4,181 Clinical laboratory services ....................... 7,550 7,459 -------- -------- 11,765 11,640 Costs and expenses: Cost of research product revenues .................. 441 285 Cost of clinical laboratory services ............... 2,619 2,432 Research and development expense ................... 2,073 1,664 Selling expense .................................... 1,290 1,062 General and administrative expense ................. 2,353 2,114 Provision for uncollectible accounts receivable .... 2,849 2,234 Legal expense ...................................... 1,337 225 -------- -------- 12,962 10,016 -------- -------- (Loss) income before interest income and benefit (provision) for taxes on income .................... (1,197) 1,624 Interest income ...................................... 306 398 -------- -------- (Loss) income before provision for taxes on income ... (891) 2,022 Benefit (provision) for taxes on income .............. 431 (789) -------- -------- Net (loss) income .................................... (460) $1,233 ======== ======== Net (loss) income per common share: Basic .............................................. ($0.02) $0.04 ======== ======== Diluted ............................................ ($0.02) $0.04 ======== ======== Denominator for per share calculation: Basic .............................................. 30,203 29,889 ======== ======== Diluted ............................................ 30,203 30,409 ======== ======== 5 ENZO BIOCHEM, INC CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) Nine Months Ended April 30, 2004 2003 -------- -------- (In Thousands) Cash flows from operating activities: Net (loss) income ...................................... (2,239) $6,367 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization of property and equipment .......................................... 793 760 Amortization of deferred patent costs ................ 900 649 Provision for uncollectible accounts receivable ...... 8,354 6,432 Issuance of stock for 401 K plan ..................... 282 -- Deferred rent ........................................ (174) (147) Deferred taxes ....................................... (2,010) -- Changes in operating assets and liabilities: Accounts receivable before provision for uncollectible amounts ............................ (8,274) (4,052) Inventories ........................................ 375 (25) Income taxes receiveable ........................... (695) -- Prepaid expenses ................................... 581 (179) Prepaid taxes ...................................... 415 1,968 Trade accounts payable and other accrued expenses ......................................... (191) (959) Income taxes payable ............................... -- 1,632 Accrued research and development expenses .......... (398) -- Accrued legal fees ................................. (105) 610 Accrued payroll .................................... (222) (156) -------- -------- Total adjustments .................................. (369) 6,533 -------- -------- Net cash (used in) provided by operating activities ........................ (2,608) 12,900 -------- -------- Cash flows from investing activities: Capital expenditures ................................... (938) (636) Patent costs deferred .................................. (414) (300) Purchase of marketable securities ...................... (287) -- Security deposits ...................................... 4 (6) -------- -------- Net cash used in investing activities ................ (1,635) (942) -------- -------- Cash flows from financing activities: Proceeds from the exercise of stock options ............ 841 23 Proceeds from insurance loss ........................... 13 -- -------- -------- Net cash provided by financing activities ............ 854 23 -------- -------- Net (decrease) increase in cash and cash equivalents ..... (3,389) 11,981 Cash and cash equivalents at the beginning of the period ............................................. 63,268 67,135 -------- -------- Cash and cash equivalents at the end of the period ....... $59,879 $79,116 ======== ======== SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS - --------------------------------------------------- In April 2004, certain officers of the Company had exercised incentive stock options. The Company had issued 769,290 shares of common stock, and the Officers swapped matured share. The Company recorded the 349,932 shares received as Treasury Stock. 6 ENZO BIOCHEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004 (Unaudited) NOTE 1. BASIS OF PRESENTATION The consolidated financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended July 31, 2003 and notes thereto contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the nine months ended April 30, 2004 are not necessarily indicative of the results to be expected for the entire fiscal year ending July 31, 2004. STOCK BASED COMPENSATION PLANS The Company accounts for stock option grants to employees under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. Pro forma information regarding net loss applicable to common stockholders is required by FASB Statement No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which also requires that the information be determined as if the Company has accounted for its stock options under the fair value method of that statement. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. In December 2002, the FASB issued Statement No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition to SFAS No. 123's fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income. While SFAS No. 148 does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB No. 25. The Company adopted SFAS No. 148 effective January 31, 2003. 7 ENZO BIOCHEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004 (Unaudited) The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation for the periods ended April 30, 2004 and 2003: Nine Months Three Months Ended April 30, Ended April 30, 2004 2003 2004 2003 ------ ------ ------ ------ (In thousands, except for share data) Net (loss) income, as reported ($2,239) $6,367 ($460) $1,233 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards 2,285 2,330 983 937 ------ ------ ------ ------ Pro forma net (loss) income (4,524) 4,037 (1,443) $296 ====== ====== ====== ====== Earnings (loss) per share: Basic - as reported $(.07) $.21 $(.02) $.04 Basic - pro forma $(.15) $.14 $(.05) $.01 Diluted - as reported $(.07) $.21 $(.02) $.04 Diluted - pro forma $(.15) $.13 $(.05) $.01 The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". The following table sets forth the computation of basic and diluted earnings per share pursuant to SFAS 128. Nine Months Three Months Ended April 30, Ended April 30, 2004 2003 2004 2003 ------ ------ ------ ------ (In thousands, except for share data) Numerator: Net income (loss) for numerator for basic and diluted earnings per common share ($2,239) $6,367 ($460) $1,233 Denominator: Denominator for basic earnings per common equivalent share during the period 30,082 29,888 30,203 29,889 Effect of dilutive securities Employee and director stock options and warrants -- 579 -- 520 ------ ------ ------ ------ Denominator for diluted earnings (loss) per common equivalent share and assumed conversions 30,082 30,467 30,203 30,409 ====== ====== ====== ====== Basic earnings (loss) per share ($.07) $.21 ($.02) $.04 ====== ====== ====== ====== Diluted earnings (loss) per share ($.07) $.21 ($.02) $.04 ====== ====== ====== ====== The following table summarized, for each period presented, the number of shares excluded form the computation of diluted earnings per share, as their effect upon potential issuance was anti-dilutive. Nine Months Three Months Ended April 30, Ended April 30, 2004 2003 2004 2003 ------ ------ ------ ------ (In thousands) Employee and director stock options and warrants 916 -- 617 -- 8 ENZO BIOCHEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004 (Unaudited) The Company declared a 5% stock dividend on June 10, 2003 payable July 14, 2003 to shareholders of record as of June 30, 2003. The shares and per share data have been adjusted to retroactively reflect this stock dividend for all periods presented. Inventories Inventories consist of the following as of: April 30, 2004 July 31, 2003 -------------- ------------- (In thousands) Raw Materials $111 $168 Work in process 1,889 2,058 Finished products 1,047 1,196 ------ ------ $3,047 $3,422 ====== ====== 9 ENZO BIOCHEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2004 (Unaudited) Note 3 - SEGMENT INFORMATION The Company follows the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). 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 CLINICAL REFERENCE OTHER CONSOLIDATED AND DEVELOPMENT NINE MONTHS NINE MONTHS NINE MONTHS NINE MONTHS ENDED APRIL 30, ENDED APRIL 30, ENDED APRIL 30, ENDED APRIL 30, 2004 2003 2004 2003 2004 2003 2004 2003 ------- ------- -------- ------- ------ -------- -------- ------- Operating revenues: Research product revenues $10,942 $20,612 -- -- -- -- 10,942 $20,612 Clinical laboratory services -- -- $22,123 $21,496 -- -- 22,123 $21,496 Cost and expenses: Cost of research product revenues .. 1,238 2,012 -- -- -- 1,238 2,012 Cost of clinical laboratory services -- 7,457 6,777 -- -- 7,457 6,777 Research and development expense 6,354 5,086 -- -- -- 6,354 5,086 Provision for uncollectible accounts receivable 8,354 6,432 -- -- 8,354 6,432 Other costs and expenses 1,740 2,171 7,053 5,870 6,234 4,381 15,027 12,422 Interest income -- -- 902 1,060 902 1,060 Income (loss) before provision for taxes on income $1,610 $11,343 (741) $2,417 (5,332) $(3,321) (4,463) $10,439 ======= ======= ======== ======= ====== ======== ======== ======= THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS ENDED APRIL 30, ENDED APRIL 30, ENDED APRIL 30, ENDED APRIL 30, 2004 2003 2004 2003 2004 2003 2004 2003 ------- ------- -------- ------- ------ -------- -------- ------- Operating revenues: Research product revenues $4,215 $4,181 -- -- -- $4,215 4,181 Clinical laboratory services -- -- $7,550 $7,459 -- 7,550 7,459 Cost and expenses: Cost of research product revenues 441 285 -- 441 285 Cost of clinical laboratory services -- 2,619 2,432 -- 2,619 2,432 Research and development expense 2,073 1,664 -- 2,073 1,664 Provision for uncollectible accounts receivable 2,849 2,234 2,849 2,234 Other costs and expenses 642 606 2,396 1,942 1,942 853 4,980 3,401 Interest income -- 306 398 306 398 Income (loss) before provision for taxes on income 1,059 $1,626 (314) $851 (1,636) $(455) (891) $2,022 ======= ======= ======== ======= ====== ======== ======== =======
10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. See "Forward-Looking and Cautionary Statements." Because of the foregoing factors, you should not rely on past financial results as an indication of future performance. We believe that period-to-period comparisons of our financial results to date are not necessarily meaningful and expect that our results of operations might fluctuate from period to period in the future. Enzo Biochem, Inc. (the "Company" or "Enzo") is a leading life sciences and biotechnology company focused on harnessing genetic processes to develop research tools, diagnostics and therapeutics. Enzo also provides clinical laboratory services to the medical community. In addition, our work in gene analysis has led to our development of significant therapeutic product candidates, several of which are currently in clinical trials, and several are in preclinical studies. The business activities of the Company are performed by the Company's three wholly owned subsidiaries. These activities are: (1) research and development, manufacturing and marketing of biomedical research products and tools through Enzo Life Sciences and research and development of therapeutic products through Enzo Therapeutics, and (2) the operation of a clinical reference laboratory through Enzo Clinical Labs. For information relating to the Company's business segments, see Note 2 of the Notes to Consolidated Financial Statements. The Company's source of revenue has been from the direct sales of research products of labeling and detection reagents for the genomics and sequencing markets, as well as through non-exclusive distribution agreements with other companies. Another source of revenue has been from the clinical laboratory service market. Clinical laboratory services are provided to patients covered by various third party insurance programs, including Medicare and self payors for the services provided. The clinical laboratory is subject to seasonal fluctuations in operating results. Volume of testing generally declines during the summer months, the year-end holiday periods and other major holidays. In addition, volume declines due to inclement weather may reduce net revenues. Therefore, comparison of the results of successive quarters may not accurately reflect trends or results for the full year. For the nine months ended April 30, 2004 and 2003, respectively, approximately 33% and 49% of the Company's operating revenues were derived from research product sales and approximately 67% and 51% were derived from clinical laboratory services. Liquidity and Capital Resources At April 30, 2004, our cash and cash equivalents and marketable securities totaled $75.2 million, a decrease of $3.4 million from July 31, 2003. We had working capital of $96.6 million at April 30, 2004 compared to $97.7 million at July 31, 2003. Net cash used by operating activities for the period ended April 30, 2004 was approximately $2.6 million as compared to net cash provided by operating activities of $12.9 million for the period ended April 30, 2003. The decrease in net cash provided by operating activities was primarily due to the net loss in the 2004 period as compared to the net income in the 2003 period. 11 Net cash used in investing activities increased approximately $.7 million from the 2003 period, primarily as a result of an increase investment in marketable securities and an increase in capital expenditures. Net cash provided by financing activities increased by $.8 million from the 2003 period primarily as a result of the increase in proceeds from the exercise of stock options. We believe that our current cash position is sufficient for our foreseeable liquidity and capital resource needs, although there can be no assurance that future events will not alter such view. Management is not aware of any material claims, disputes or settled matters concerning third-party reimbursements that would have a material effect on our financial statements. Critical Accounting Policies General The Company's discussion and analysis of its financial condition and results of operations are based upon Enzo Biochem, Inc. consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses; these estimates and judgments also affect related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to contractual allowance, allowance for uncollectible accounts, intangible assets and income taxes. The Company bases its estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. REVENUE RECOGNITION Revenues from the clinical laboratory are recognized as services are rendered upon completion of the testing process for a specific patient. 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, exclusive of certain non-exclusive distribution agreements, are recognized when the products are shipped. The Company has certain non-exclusive distribution agreements, which provide for consideration to be paid to the distributors for the manufacture of certain products. The Company records such consideration provided to distributors under these non-exclusive distribution agreements as a reduction to research product revenues. The revenue from these non-exclusive distribution agreements are recognized when shipments are made to their respective customers and reported to the Company. CONTRACTUAL ALLOWANCES The percentage of the Company's revenues derived from Medicare, third party payers, commercial insurers and managed care patients continue to increase. The Medicare regulations and various managed care contracts are often complex and may include multiple reimbursement mechanisms for different types of services provided in our clinical laboratory. 12 We estimate the allowance for contractual allowances on a payer-specific basis given our interpretation of the applicable regulations and historical calculations. However, the services authorized and provided and related reimbursement are often subject to interpretation that could result in payments that differ from our estimates. Additionally, updated regulations occur frequently that necessitates continual review and assessment of the estimation process by management. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company's ability to collect outstanding receivables from third party payers is critical to its operating performance and cash flows. The primary collection risk lies with uninsured patients or patients for whom primary insurance has paid but a patient portion remains outstanding. The Company estimates the allowance for doubtful accounts primarily based upon the age of the accounts since invoice date. The Company continually monitors its accounts receivable balances and utilizes cash collections data to support the basis for its estimates of the provision for doubtful accounts. Significant changes in payer mix or regulations could have a significant impact on the Company's results of operations and cash flows. In addition, the Company has implemented a process to estimate and review the collections of its receivables based on the period they have been outstanding. Historical collection and payor reimbursement experience is an integral part of the estimation process related to reserves for doubtful accounts. The Company also assesses the current state of its billing functions in order to identify any known collection or reimbursement issues in order to assess the impact, if any, on the reserve estimates, which involves judgment. The Company believes that the collectibility of its receivables is directly linked to the quality of its billing processes, most notably, those related to obtaining the correct information in order to bill effectively for the services provided. Revisions in reserve for doubtful accounts estimates are recorded as an adjustment to bad debt expense. The Company believes that its collection and reserves processes, along with the close monitoring of its billing processes, helps reduce the risk associated with material revisions to reserve estimates resulting from adverse changes in collection and reimbursement experience and billing operations. INCOME TAXES The Company accounts for income taxes under the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The liability method requires that any tax benefits recognized for net operating loss carry forwards and other items be reduced by a valuation allowance where it is more likely than not the benefits may not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under the liability method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates the requirement to recognize impairment losses on long-lived assets used in operations 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. Company management believes that no impairment to its long-lived assets has occurred. 13 Results of Operations NINE MONTHS ENDED APRIL 30, 2004 COMPARED WITH NINE MONTHS ENDED APRIL 30, 2003 Revenues from operations for the nine months ended April 30, 2004 were $33.1 million a decrease of $9.0 million over revenues from operations for the nine months ended April 30, 2003. This decrease was due to a decrease of $9.7 million in revenues from our research product sales operations offset by an increase of $.6 million in revenues from clinical reference laboratory operation over revenues for such activities in the period ended April 30, 2003. The decrease in research product sales resulted primarily from a decrease in direct sales of research products of labeling and detection reagents for the genomics and sequencing markets related to the decrease sales based on the termination of a contract with one major distributor. The increase of clinical laboratory services revenue was due primarily to increased volume of higher priced esoteric tests. Clinical laboratory services are provided to patients covered by various third party payor programs, including Medicare and health maintenance organizations ("HMO's"). Billings for services are included in revenue net of allowances for contractual discounts and allowances paid for differences between the amounts billed and the estimated amount to be paid. Recent trends had indicated a decrease in the collection rates from the Medicare Program, certain third party payors and HMO's. The clinical laboratory is subject to seasonal fluctuations in operating results. Volume of testing generally declines during the summer months, harsh winter conditions, the year-end holiday periods and other major holidays. In addition, volume declines due to inclement weather may reduce net revenues. Therefore, comparison of the results of successive quarters may not accurately reflect trends or results for the full year. The cost of research products sold decreased by $.8 million from the prior nine month period. This decrease was primarily due to the decrease in expenditures related to the decreased sales based on the termination of a contract with one major distributor. The cost of clinical laboratory services increased by $.7 million during this period primarily due to an increase in costs associated with certain esoteric tests and the costs related to the accelerated process of performing more tests in-house. Research and development expenses increased by approximately $1.2 million as a result of an increase in the expenses related to the clinical trial activities and other research projects. Selling expenses were comparable to the prior year. General and administrative expenses increased by $1.2 million due to the increase in overall insurance costs and an increase in data processing personnel costs and an increase in legal personnel costs. The Company's legal expenses increased by $1.6 million to $4.1 million from $2.6 million as compared to the previous year. This increase is primarily due to the increase in patent infringement proceedings and the increase in the overall legal activities on these infringement proceedings. The Company's provision for uncollectible accounts receivable increased by $1.9 million to $8.3 million from $6.4 million as compared to the same nine month period last year at the clinical laboratory division. The percentage of the provision for uncollectible accounts receivable as a relationship to revenue for clinical laboratory services increased to 38% for 14 these nine months ended as compared to 30% for the same nine month period last year. This increase was primarily due to the change in the mix of payors. Interest income was comparable to last years prior nine months ended. For the nine months ended April 30, 2004, the Company recorded a benefit for income taxes of $2.0 million based upon the combined effective federal, state and local income tax rates. For the nine months ended April 30, 2003, the Company recorded a provision for income taxes of $4.1 million which was based on the combined effective federal, state and local income tax rates. Income (loss) before (provision) benefit for taxes on income from the research and development segment activities and related costs was $1.6 million in for period ended April 30, 2004, as compared to income before provision for taxes on income of $11.3 million in for period ended April 30, 2003. The decrease in the income resulted primarily from a decrease in direct sales of research products of labeling and detection reagents for the genomics and sequencing markets to one major distributor. Income (loss) before provision for taxes on income from the clinical reference laboratories segment amounted to a loss of $.8 million for period ending April 30, 2004, as compared to income of $2.4 million for fiscal 2003. The decrease in income before taxes for the clinical laboratory segment was primarily due to the increase in costs based on an increase in volume of esoteric tests being ordered by physicians. These esoteric tests have higher pricing levels as compared to the regular tests performed at the laboratory, and also due to an increase in the provision for uncollectible accounts receivable due to the change in the estimate of uncollectible receivables percentages. THREE MONTHS ENDED APRIL 30, 2004 COMPARED WITH THREE MONTHS ENDED APRIL 30, 2003 Revenues from operations for the three months ended April 30, 2004 were $11.8 million an increase of $.1 million over revenues from operations for the three months ended April 30, 2003. This increase was primarily due to an increase of $.1 million in revenues from our clinical laboratory operations. The revenues from the research product sales operation were comparable to the previous three month period. The cost of research products sold increased by $.2 million as compared to the prior year's three months. This increase was primarily due to the initial start up costs related to the production of certain new products just recently introduced to the market. The cost of clinical laboratory services increased by $.2 million during this period primarily due to an increase in cost associated with certain esoteric tests. Research and development expenses increased by approximately $.4 million as a result of an increase in the expenses related to the clinical trial activities and other research projects. Selling expenses increased by $.2 million during the three months ended, as compared to the prior year's three months. This increase was primarily due to an increase in personnel headcount of sales from our clinical laboratory operation. General and administrative expenses increased by $.2 million due to the increase in data processing personnel costs and an increase in legal personnel costs. The Company's legal expenses increased by $1.1 million to $1.3 million from $.2 million as compared to the previous year. This increase is primarily due to the increase in patent infringement proceedings and the increase in the overall legal activities on these infringement proceedings. 15 The Company's provision for uncollectible accounts receivable increased by $.6 million to $2.8 million from $2.2 million as compared to the same three month period last year at the clinical laboratory division. The percentage of the provision for uncollectible accounts receivable as a relationship to revenue increased to 38% for these three months ended as compared to 30% for the same three month period last year. This increase was primarily due to the change in the mix of payors. Interest income was comparable to last years prior three months ended. For the three months ended April 30, 2004, the Company recorded a benefit for income taxes of $.4 million based upon the combined effective federal, state and local income tax rates. For the three months ended April 30, 2003, the Company recorded a provision for income taxes of $.8 million which was based on the combined effective federal, state and local income tax rates. Income (loss) before (provision) benefit for taxes on income from the research and development segment activities and related costs was $1.1 million in for period ended April 30, 2004, as compared to income before provision for taxes on income of $1.6 million in for period ended April 30, 2003. The decrease in the income resulted primarily from a decrease in direct sales of research products of labeling and detection reagents for the genomics and sequencing markets to one major distributor. Income (loss) before provision for taxes on income from the clinical reference laboratories segment amounted to a $(.3) million for period ending April 30, 2004, as compared to income of $.9 million for fiscal 2003. The decrease in income before taxes for the clinical laboratory segment was primarily due to the increase in costs based on an increase in volume of esoteric tests being ordered by physicians. These esoteric tests have higher pricing levels as compared to the regular tests performed at the laboratory, and also due to an increase in the provision for uncollectible accounts receivable due to the change in the estimate of uncollectible receivables percentages. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in investment grade corporate and U.S. government securities. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. Item 4. Controls and Procedures Under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-14c within 90 days of the filing date of this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation. 16 PART II - Other Information Item 1. LEGAL PROCEEDINGS In June 1999, the Company filed suit in the United States District Court for the Southern District of New York against Gen-Probe Incorporated, Chugai Pharma U.S.A., Inc., Chugai Pharmaceutical Co., Ltd., bioMerieux, Inc., bioMerieux SA, and Becton Dickinson and Company, charging them with infringing the Company's U.S. Patent 4,900,659, which concerns probes for the detection of the bacteria that causes gonorrhea. On January 26, 2001, the court granted the defendants' motion for summary judgment that the Company's patent is invalid. On July 15, 2002, the Court of Appeals for the Federal Circuit reversed the judgment of invalidity and remanded the case to the district court for further proceedings. In March 2003, settlements have been reached with bioMerieux and Chugai; the settlements did not have a material monetary impact on the Company. There can be no assurance that the Company will be successful in the on-going proceedings. However, even if the Company is not successful, management does not believe that there will be a significant adverse monetary impact to the Company. On March 6, 2002, the Company was named, along with certain of its officers and directors among others, in a complaint entitled Lawrence F. Glaser and Maureen Glaser, individually and on behalf of Kimberly, Erin, Hannah, and Benjamin Glasser v. Hyman Gross, Barry Weiner, Enzo Biochemical Inc., Elazar Rabbani, Shahram Rabbani, John Delucca, Dean Engelhardt, Richard Keating, Doug Yates and Docs 1-50, in the U.S. District Court for the Eastern District of Virginia. The complaint was filed by an investor in the Company who has filed for bankruptcy protection and his family. The complaint alleged securities and common law fraud and breach of fiduciary duty and seeks in excess of $150 million in damages. On August 22, 2002, the complaint was voluntarily dismissed; however a new substantially similar complaint was filed at the same time. On October 21, 2002, the Company and the other defendants filed a motion to dismiss the complaint, and the plaintiffs responded by amending the complaint and dropping their claims against defendants Keating and Yates. On November 18, 2002, the Company and the other defendants again moved to dismiss the Amended Complaint. On July 16, 2003, the Court issued a Memorandum Opinion dismissing the Amended Complaint in its entirety with prejudice. Plaintiffs thereafter moved for reconsideration but the Court denied the motion on September 8, 2003. The plaintiffs subsequently appealed to the Fourth Circuit and that appeal is presently pending. The Company does not believe that the complaint has any merit and was correctly dismissed, and intends to continue to defend the complaint vigorously in any event. In March 2002, Enzo Life Sciences, a subsidiary of the Company, filed suit in the United States District Court for the District of Delaware against Digene Corp., charging it with infringing Enzo Life Sciences' U.S. Patent No. 6,221,581 B1, which concerns a novel process for detecting nucleic acids of interest. On May 31, 2002, Digene filed counterclaims in that suit against Enzo Life Sciences and the Company, including business tort counterclaims relating to the '581 patent. Digene further contends that the Company has caused it substantial damage by interfering with business and financial opportunities. There can be no assurance that the Company and Enzo Life Sciences will be successful in these proceedings. However, even if Enzo Life Sciences is not successful in its patent infringement suit, management does not believe that there will be a significant adverse monetary impact to the Company. With respect to Digene's counterclaims, the Company and Enzo Life Sciences believe them to be without merit and intend to defend themselves vigorously. On June 10, 2004, the district court issued its decision on construction of the claims (referred to as a "Markman" ruling) of the '581 patent. A Markman ruling sets forth the scope of the products and methods that are embraced by the claims. In its decision, the district court ruled in favor of Enzo Life Sciences and against Digene on all disputed issues concerning construction of the patent claims. Following issuance of that decision, the district court adjourned the scheduled start of the first phase of the trial, which was to have started on June 15, 2004 on the issues of infringement and damages (all other issues, including validity and Digene's counterclaims, were to be tried separately). The district court has not yet set a new trial date, but the Company expects that a trial date will be scheduled within the next several months if the case is not otherwise resolved. In October 2002, the Company filed suit in the United States District Court of the Southern District of New York against Amersham plc, Amersham Biosciences, Perkin Elmer, Inc., Perkin Elmer Life Sciences, Inc., Sigma-Aldrich Corporation, Sigma Chemical Company, Inc., 17 Molecular Probes, Inc. and Orchid Biosciences, Inc. In January 2003, the Company amended its complaint to include defendants Sigma Aldrich Co. and Sigma Aldrich, Inc. The counts set forth in the suit are for breach of contract; patent infringement; unfair competition under state law; unfair competition under federal law; tortious interference with business relations; and fraud in the inducement of contract. The complaint alleges that these counts arise out of the defendants' breach of distributorship agreements with the Company concerning labeled nucleotide products and technology, and the defendants' infringement of patents covering the same. In April, 2003, the Court directed that individual complaints be filed separately against each defendant. Enzo has done so and has added Yale for technical reasons relating to its standing to enforce the four Yale patents of which Enzo is exclusive licensee. Yale and Enzo are aligned in protecting the validity and enforceability of the subject patents. A number of the defendants have answered the individual complaints and asserted a variety of affirmative defenses and counterclaims. In addition, two of the Defendants filed motions to dismiss Enzo's patent infringement claims as to four of the patents-in-suit on the grounds that Enzo is not the exclusive licensee of such patents. By order dated March 11, 2004, the court denied the motions to dismiss. The moving defendants then moved the court to certify its decision to the Federal Circuit Court of Appeals for appellate review. This motion is currently pending before the court. Although the court has now lifted all discovery stays, due to the motions to dismiss and the pending motion for certification, discovery has yet to re-commence in earnest. While fact discovery is currently scheduled to close on November 5, 2004, it is anticipated that the court will extend this deadline given the extensive motion practice. There can be no assurance that the Company will be successful in this litigation. However, even if the Company is not successful, management does not believe that there will be a significant adverse monetary impact to the Company. On October 28, 2003, the Company and Enzo Life Sciences, Inc., a subsidiary of the Company, filed suit in the United States District Court of the Eastern District of New York against Affymetrix, Inc. The Complaint alleges that Affymetrix improperly transferred or distributed substantial business assets of the Company to third parties, including portions of the Company's proprietary technology, reagent systems, detection reagents and other intellectual property. The Complaint also charges that Affymetrix failed to account for certain shortfalls in sales of the Company's products, and that Affymetrix improperly induced collaborators and customers to use the Company's products in unauthorized fields or otherwise in violation of the agreement. The Complaint seeks full compensation from Affymetrix to the Company for its substantial damages, in addition to injunctive and declaratory relief to prohibit, among other things, Affymetrix's unauthorized use, development, manufacture, sale, distribution and transfer of the Company's products, technology, and/or intellectual property, as well as to prohibit Affymetrix from inducing collaborators, joint venture partners, customers and other third parties to use the Company's products in violation of the terms of the agreement and the Company's rights. Subsequent to the filing of the Complaint against Affymetrix, Inc. referenced above, on or about November 10, 2003, Affymetrix, Inc. filed its own complaint against the Company and its subsidiary, Enzo Life Sciences, Inc., in the United States District Court for the Southern District of New York, seeking among other things, declaratory relief that Affymetrix, Inc., has not breached the parties' agreement, that it has not infringed certain of Enzo's Patents, and that certain of Enzo's patents are invalid, and damages for alleged breach of the parties' agreement, unfair competition, and tortuous interference, as well as certain injunction relief to prevent alleged unfair competition and tortuous interference. The Company does not believe that the complaint has any merit and intends to defend vigorously. Affymetrix also moved to transfer venue of Enzo's action to the Southern District of New York, where other actions commenced by Enzo were pending as well as Affymetrix's subsequently filed action. On January 30, 2004, Affymetrix's motion to transfer was granted. Accordingly, the Enzo and Affymetrix actions are now both pending in the Southern District of New York. Pleadings have not been completed and discovery has not commenced. 18 On June 2, 2004 Roche Diagnostic GmbH and Roche Molecular Systems, Inc. (collectively "Roche") filed suit in the U.S. District Court of the Southern District of New York against Enzo Biochem, Inc. and Enzo Life Sciences, Inc. (collectively "Enzo"). The complaint seeks declaratory judgment (i) of patent invalidity with respect to Enzo's 4,994,373 patent, (ii) of no breach by Roche of its 1994 Distribution and Supply Agreement with Enzo (the "1994 Agreement"), (iii) that non-payment by Roche to Enzo for certain sales of Roche products does not constitute a breach of the 1994 Agreement, and (iv) that Enzo's claims of ownership to proprietary inventions, technology and products developed by Roche are without basis. In addition the suit claims tortious interference and unfair competition. The Company does not believe that the complaint has merit and intends to vigorously respond to such action. On June 8, 2004, the Company and its wholly-owned subsidiary, Enzo Life Sciences, Inc., filed suit in the United States District Court for the District of Connecticut against Applera Corporation and its wholly-owned subsidiary Tropix, Inc. The complaint alleges infringement of six patents (relating to DNA sequencing systems, labelled nucleotide products, and other technology). Yale University is the owner of four of the patents and the Company is the exclusive licensee. Accordingly, Yale was also a plaintiff in the lawsuit. Yale and Enzo are aligned in protecting the validity and enforceability of the patents. Enzo Life Sciences is the owner of the remaining two patents. The complaint seeks permanent injunction and damages (including treble damages for wilful infringement). Defendants' answers to the complaint are due in early July of 2004. It is anticipated that the answers will include multiple affirmative defences, and potentially, counterclaims. A trial date has not been set. Discovery has not yet commenced. There can be no assurance that the Company will be successful in this litigation. Even if the Company is not successful, management does not believe that there will be a significant adverse monetary impact on the Company. 19 Item G. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. Exhibit 31(a) Certification of Elazar Rabbani, Ph.D. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31(b) Certification of Barry Weiner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32(a) Certification of Elazar Rabbani, Ph.D. pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32(b) Certification of Barry Weiner pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) REPORTS ON FORM 8-K. One Form 8-K dated March 16, 2004, furnished to the Securities and Exchange Commission during the quarter ended April 30, 2004, pursuant to Item 12 of Form 8-K. Pursuant to General Instruction B of Form 8-K, information furnished pursuant to Item 12 is not deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934, is not incorporated by reference into this Report on Form 10-Q and Enzo does not intend to incorporate that report on Form 8-K by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. 20 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: June 14, 2004 by: /s/ Barry Weiner ---------------- Chief Financial Officer,