UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(Amendment No. 1)
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2006
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 001-09974
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.)
527 Madison Avenue
New York, New York 10022
- ------------------------------------- -------
(Address of principal executive offices) (Zip Code)
(212) 583-0100
--------------
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
--------------------- -------------------------------------------
Common Stock, $.01 par value The New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes |_| No |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes |_| No |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934).
Yes |_| No |X|
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant was approximately $355,971,000 as of January
31, 2006.
The number of shares of the Company's common stock, $.01 par value, outstanding
at September 30, 2006 was approximately 32,274,500.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement delivered to shareholders in
connection with the Annual Meeting of Shareholders held on January 23, 2007 are
incorporated by reference into Part III of this annual report.
EXPLANATORY NOTE
The purpose of this Amendment No. 1 on Form 10-K/A (the "Amendment") to the
Annual Report on Form 10-K for the fiscal year ended July 31, 2006 of Enzo
Biochem, Inc. (the "Company"), which was filed with the Securities and Exchange
Commission on October 13, 2006 (the "Original Filing"), is to include an
explanatory paragraph in the Report of Independent Registered Public Accounting
Firm emphasizing the Company's adoption of Statement of Financial Accounting
Standards No. 123(R), which was inadvertently excluded from Ernst & Young LLP's
report in the Original Filing. Other than including such paragraph and
clarification, there have been no changes made to the Original Filing. The
Amendment continues to speak as of the date of the Original Filing and the
Company has not updated the disclosure in this Amendment to speak to any later
date.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) (1) Consolidated Financial Statements
Consolidated Balance Sheets - July 31, 2006 and 2005
Consolidated Statements of Operations- Years ended July 31,
2006, 2005 and 2004
Consolidated Statements of Stockholders' Equity and
Comprehensive (Loss) Income - Years ended July 31, 2006,
2005 and 2004
Consolidated Statements of Cash Flows - Years ended July 31,
2006, 2005 and 2004
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the required information
is included in the consolidated financial statements or the notes thereto or
because they are not required.
(3) Exhibits
The following documents are filed as Exhibits to this Annual Report on
Form 10-K:
Exhibit
No. Description
--- -----------
3(a) Certificate of Incorporation, as amended March 17, 1980.(1)
3(b) June 16, 1981 Certificate of Amendment of the Certificate of
Incorporation. (2)
3(c) Certificate of Amendment to the Certificate of Incorporation. (3)
3(d) Bylaws. (1)
10(c) Employment Agreements with Elazar Rabbani. (5)
10(d) Employment Agreement with Shahram Rabbani. (5)
10(e) Employment Agreement with Barry Weiner. (5)
10(f) 1994 Stock Option Plan. (6)
10(g) Agreement with Corange International Limited (Boehringer
Mannheim) effective April 1994. (19) (7)
10(h) Agreement with Amersham International effective February 1995. (7)
10(i) Agreement with Dako A/S effective May 1995. (7)
10(j) Agreement with Baxter Healthcare Corporation (VWR Scientific
Products) effective September 1995. (7)
10(k) Agreement with Yale University and amendments thereto. (7)
10(l) Agreement with The Research Foundation of the State of New York
effective May 1987. (7)
10(m) 1999 Stock Option Plan filed. (8)
10(n) Amendment to Elazar Rabbani's employment agreement. (9)
10(o) Amendment to Shahram Rabbani's employment agreement. (9)
10(p) Amendment to Barry Weiner's employment agreement. (9)
10(s) Settlement and License Agreement with Digene Corporation effective
as of September 30, 2004 (10) (12)
10(t) Joint Stipulation and Order of Dismissal with Prejudice dated
October 14, 2004 (10) (12).
10(u) 2005 Equity Compensation Incentive Plan (11)
10(v) Lease agreement with Pari Management (13)
10(w) Settlement and Release Agreement between the Company and
Sigma Aldrich (14)
14(a) Code of Ethics (10)
21 Subsidiaries of the registrant:
Enzo Clinical Labs, Inc., a New York corporation.
Enzo Life Sciences, Inc., a New York corporation.
Enzo Therapeutics, Inc., a New York corporation.
Enzo Realty, LLC, a New York Corporation
23 Consent of Independent Registered Public Accounting Firm filed
herewith.
31(a) Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 filed herewith.
31(b) Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 filed herewith.
32(a) Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 filed herewith.
32(b) Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 filed herewith.
Notes to exhibits
(1) The exhibits were filed as exhibits to the Company's Registration
Statement on Form S-18 (File No. 2-67359) and are incorporated
herein by reference.
(2) This exhibit was filed as an exhibit to the Company's Form 10-K for
the year ended July 31, 1981 and is incorporated herein by
reference.
(3) This exhibit was filed with the Company's Annual Report on Form
10-K for the year ended July 31, 1989 and is incorporated herein by
reference.
(5) This exhibit was filed with the Company's Annual Report on Form
10-K for the year ended July 31, 1994 and is incorporated herein by
reference.
(6) This exhibit was filed with the Company's Annual Report on Form
10-K for the year ended July 31, 1995 and is incorporated herein by
reference.
(7) This exhibit was filed with the Company's Annual Report on Form
10-K for the year ended July 31, 1996 or previously filed amendment
thereto and is incorporated herein by reference.
(8) This exhibit was filed with the Company's Registration Statement on
Form S-8 (333-87153) and is incorporated herein by reference.
(9) This exhibit was filed with the Company's Annual Report on Form
10-K for the year ended July 31, 2000 and is incorporated herein by
reference.
(10) This exhibit was filed with the Company's Annual Report on Form
10-K for the year ended July 31, 2004 and is incorporated herein by
reference.
(11) This exhibit was filed as an exhibit to the Company's Proxy
Statement of Schedule 14A filed on January 19, 2005 and is
incorporated herein by reference.
(12) These exhibits are subject to a confidential treatment request
pursuant to securities exchange act rules. (13) This exhibit was
filed with the Company's Annual Report on Form 10-K for the year
ended July 31, 2006 and is incorporated herein by reference.
(14) This exhibit was filed with the Company's current report on Form
8-K on September 21, 2006 and is incorporated herein by reference.
(b) See Item 15(a) (3), above.
(c) See Item 15(a) (2), above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ENZO BIOCHEM, INC.
Date: March 30, 2007 By: /s/ Elazar Rabbani Ph.D.
------------------------
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
By: /s/ Elazar Rabbani Ph.D. March 30, 2007
-----------------------------
Elazar Rabbani
Chairman of Board of Directors
(Principal Executive Officer)
By: /s/ Shahram K. Rabbani March 30, 2007
--------------------------
Shahram K. Rabbani,
Secretary, Treasurer and Director
By: /s/ Barry W. Weiner March 30, 2007
-----------------------
Barry W. Weiner,
President, Chief Financial Officer, and Director
By: /s/ John B. Sias March 30, 2007
--------------------
John B. Sias, Director
By: /s/ John J. Delucca March 30, 2007
-----------------------
John J. Delucca, Director
By: /s/ Irwin Gerson March 30, 2007
--------------------
Irwin Gerson, Director
By: /s/ Melvin F. Lazar March 30, 2007
-----------------------
Melvin F. Lazar, Director
By: /s/ Stephen B. H. Kent March 30, 2007
--------------------------
Stephen B. H. Kent, Director
52
FORM 10-K, ITEM 15(a) (1) and (2)
ENZO BIOCHEM, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements and financial statement schedule
of Enzo Biochem, Inc. are included in Item 15(a):
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets -- July 31, 2006 and 2005 F-3
Consolidated Statements of Operations --
Years ended July 31, 2006, 2005 and 2004 F-4
Consolidated Statements of Stockholders' Equity and Comprehensive
(Loss) Income -- Years ended July 31, 2006, 2005 and 2004 F-5
Consolidated Statements of Cash Flows --
Years ended July 31, 2006, 2005 and 2004 F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts --
Years ended July 31, 2006, 2005 and 2004 S-1
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Enzo Biochem, Inc
We have audited the accompanying consolidated balance sheets of Enzo Biochem,
Inc. (the "Company") as of July 31, 2006, and 2005, and the related consolidated
statements of operations, consolidated statements of stockholders' equity and
comprehensive (loss) income and consolidated statements of cash flows for each
of the three years in the period ended July 31, 2006. Our audits also included
the financial statement schedule listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Enzo Biochem, Inc.
at July 31, 2006 and 2005, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended July 31, 2006,
in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, effective
August 1, 2005, the Company adopted Statement of Financial Accounting Standards
No. 123(R), "Share-Based Payment."
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Enzo Biochem,
Inc.'s internal control over financial reporting as of July 31, 2006, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated October 5, 2006, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Melville, New York
October 5, 2006
F-2
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
July 31,
-----------------------------
Current assets: 2006 2005
--------- ---------
Cash and cash equivalents ................................................................. $ 69,854 $ 76,981
Marketable securities ..................................................................... -- 6,714
Accounts receivable, net of allowance for doubtful accounts of $1,033
in 2006 and $2,292 in 2005 ............................................................. 10,447 13,421
Inventories ............................................................................... 2,401 2,876
Prepaid expenses .......................................................................... 1,465 1,848
Recoverable and prepaid income taxes ...................................................... 1,931 1,329
Deferred taxes ............................................................................ -- 900
--------- ---------
Total current assets ......................................................................... 86,098 104,069
Property, plant, and equipment, net of accumulated depreciation
and amortization of $8,247 in 2006 and $7,279 in 2005 .................................... 5,848 2,670
Goodwill ..................................................................................... 7,452 7,452
Patent costs, net of accumulated amortization of $9,770 in 2006
and $9,695 in 2005 ........................................................................ 1,257 1,333
Other ........................................................................................ 869 942
--------- ---------
Total assets ................................................................................. $ 101,524 $ 116,466
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade .................................................................. 1,304 2,414
Accrued liabilities ....................................................................... 4,403 4,866
Other current liabilities ................................................................. 230 509
--------- ---------
Total current liabilities .................................................................... 5,937 7,789
Deferred taxes ............................................................................... -- 260
Long term installment payable, net of current portion ........................................ -- 150
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: 32,844,200 at July 31, 2006 and 32,526,800 at July 31, 2005 ................... 328 325
Additional paid-in capital ................................................................ 236,002 230,644
Less treasury stock at cost: 569,700 shares at July 31, 2006
and 384,400 shares at July 31, 2005 ................................................... (8,499) (5,994)
Accumulated deficit ....................................................................... (132,244) (116,577)
Accumulated other comprehensive loss ...................................................... -- (131)
--------- ---------
Total stockholders' equity ................................................................... 95,587 108,267
--------- ---------
Total liabilities and stockholders' equity ................................................... $ 101,524 $ 116,466
========= =========
F-3
The accompanying notes are an integral part of
these consolidated financial statements
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Years ended July 31,
------------------------------------------------
2006 2005 2004
-------- -------- --------
Revenues:
Product revenues and royalty income ................................. $ 7,900 $ 10,546 $ 12,972
Clinical laboratory services ........................................ 31,926 32,857 28,672
-------- -------- --------
39,826 43,403 41,644
Costs and expenses and other (income):
Cost of product revenues ............................................ 2,174 2,197 2,518
Cost of clinical laboratory services ................................ 13,917 12,548 10,586
Research and development expense .................................... 7,896 8,452 8,078
Selling, general, and administrative expense ........................ 24,971 20,069 14,367
Provision for uncollectible accounts receivable ..................... 3,633 4,967 11,987
Legal expense ....................................................... 7,388 5,476 6,340
Interest income ..................................................... (3,144) (1,523) (1,152)
Gain on patent litigation settlement ................................ -- (14,000) --
-------- -------- --------
56,835 38,186 52,724
(Loss) income before income taxes ...................................... (17,009) 5,217 (11,080)
Benefit (provision) for income taxes ................................... 1,342 (2,213) 4,848
-------- -------- --------
Net (loss) income ...................................................... ($15,667) $ 3,004 ($ 6,232)
======== ======== ========
Net (loss) income per common share:
Basic ............................................................... ($ 0.49) $ 0.09 ($ 0.20)
======== ======== ========
Diluted ............................................................. ($ 0.49) $ 0.09 ($ 0.20)
======== ======== ========
Weighted average common shares outstanding:
Basic ............................................................... 32,215 32,097 31,700
======== ======== ========
Diluted ............................................................. 32,215 32,763 31,700
======== ======== ========
F-4
The accompanying notes are an integral part of
these consolidated financial statements
ENZO BIOCHEM, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE (LOSS) INCOME
YEARS ENDED JULY 31, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON TREASURY COMMON ADDITIONAL TREASURY
STOCK STOCK STOCK PAID-IN STOCK ACCUMULATED
SHARES SHARES AMOUNT CAPITAL AMOUNT DEFICIT
------ ------ ------ ------- ------ -------
Balance at July 31, 2003................................. 29,975,100 --- $300 $199,082 --- ($89,916)
Net (loss) for the year ended July 31, 2004.............. --- --- --- --- --- (6,232)
Unrealized loss on available-for-sale
securities, net of tax............................... --- --- --- --- --- ---
Surrender of common stock for exercise of stock options.. --- 349,900 --- --- ($5,669) ---
Exercise of stock options (see Note 2)................... 873,900 --- 9 6,556 --- ---
Issuance of stock for employee 401(k) plan match......... 15,800 --- --- 282 --- ---
Comprehensive (loss)..................................... --- --- --- --- --- ---
-----------------------------------------------------------------------
Balance at July 31, 2004................................. 30,864,800 349,900 309 205,920 (5,669) (96,148)
Net income for the year ended July 31, 2005.............. --- --- --- --- --- $3,004
Unrealized gain on available-for-sale
securities, net of tax............................... --- --- --- --- --- ---
Reclassification adjustment for net loss
realized and reported in net income...................... --- --- --- --- --- ---
Valuation reserve........................................
5% stock dividend (fair value on date declared).......... 1,543,600 17,500 15 23,418 --- (23,433)
Surrender of common stock for exercise of stock options.. --- 17,000 --- (325) ---
Tax benefit for stock options exercised.................. --- --- --- 124 --- ---
Exercise of stock options (see Note 2)................... 100,300 --- 1 830 --- ---
Issuance of stock for employee 401(k) plan match......... 18,100 --- 0 352 --- ---
Comprehensive income..................................... --- --- --- --- --- ---
-----------------------------------------------------------------------
Balance at July 31, 2005................................. 32,526,800 384,400 325 230,644 (5,994) (116,577)
Net (loss) for the year ended July 31, 2006.............. --- --- --- --- --- (15,667)
Realized loss on available-for-sale
securities, net of tax............................... --- --- --- --- --- ---
Surrender of common stock for exercise of stock options.. --- 185,300 --- --- (2,505) ---
Exercise of stock options (see Note 2)................... 285,030 --- 3 3,113 --- ---
Issuance of stock for employee 401(k) plan match......... 32,370 --- --- 402 --- ---
Share based compensation charges......................... --- --- --- 1,763 --- ---
Stock options issued for consulting services............. --- --- --- 80 --- ---
Comprehensive (loss)..................................... --- --- --- --- --- ---
------------------------------------------------------------------------
Balance at July 31, 2006................................. 32,844,200 569,700 $328 $236,002 ($8,499) ($132,244)
=======================================================================
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
(LOSS) INCOME EQUITY (LOSS) INCOME
------------- ------ -------------
Balance at July 31, 2003................................. ($85) $109,381
Net (loss) for the year ended July 31, 2004.............. --- (6,232) ($6,232)
Unrealized loss on available-for-sale
securities, net of tax............................... (161) (161) (161)
Surrender of common stock for exercise of stock options.. --- (5,669) ---
Exercise of stock options (see Note 2)................... --- 6,565 ---
Issuance of stock for employee 401(k) plan match......... --- 282 ---
--------
Comprehensive (loss)..................................... --- --- ($6,393)
-------------------------------- ========
Balance at July 31, 2004................................. (246) 104,166
Net income for the year ended July 31, 2005.............. --- 3,004 $3,004
Unrealized gain on available-for-sale
securities, net of tax............................... 43 43 43
Reclassification adjustment for net loss
realized and reported in net income...................... 122 122 122
Valuation reserve........................................ (50) (50) (50)
5% stock dividend (fair value on date declared).......... --- --- ---
Surrender of common stock for exercise of stock options.. --- (325) ---
Tax benefit for stock options exercised.................. --- 124 ---
Exercise of stock options (see Note 2)................... --- 831 ---
Issuance of stock for employee 401(k) plan match......... --- 352 ---
--------
Comprehensive income..................................... --- --- $3,119
-------------------------------- ========
Balance at July 31, 2005................................. (131) 108,267
Net (loss) for the year ended July 31, 2006.............. --- (15,667) $(15,667)
Realized loss on available-for-sale
securities, net of tax............................... 131 131 131
Surrender of common stock for exercise of stock options.. --- (2,505) ---
Exercise of stock options (see Note 2)................... --- 3,116 ---
Issuance of stock for employee 401(k) plan match......... --- 402 ---
Share based compensation charges......................... --- 1,763 ---
Stock options issued for consulting services............. --- 80 ---
--------
Comprehensive (loss)..................................... --- --- ($15,536)
-------------------------------- ========
Balance at July 31, 2006................................. --- $95,587
================================
F-5
The accompanying notes are an integral part of
these consolidated financial statements
ENZO BIOCHEM, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years ended July 31,
-----------------------------------
2006 2005 2004
---- ---- ----
OPERATING ACTIVITIES
Net (loss) income ................................................................... ($15,667) $ 3,004 ($ 6,232)
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation and amortization of property, plant and equipment ............... 1,049 1,020 1,076
Amortization of patent costs ................................................. 75 1,312 1,286
Provision for uncollectible accounts receivable .............................. 3,633 4,967 11,987
Write-off and/or reserve for obsolete inventory .............................. 596 -- --
Deferred taxes ............................................................... 640 891 (1,651)
Share based compensation charges ............................................. 1,763 -- --
Options issued to consultant ................................................. 80 -- --
Issuance of stock for 401(k) employer match .................................. 402 352 282
Deferred rent ................................................................ -- (87) (233)
Realized loss on sales of marketable securities .............................. 154 200 --
Tax benefit on stock option exercises ........................................ -- 124 --
Other ........................................................................ -- (51) 2
Changes in operating assets and liabilities:
Accounts receivable ......................................................... (659) (3,593) (9,515)
Inventories ................................................................. (120) 558 (13)
Prepaid expenses ............................................................ 383 (747) 400
Recoverable and prepaid income taxes ........................................ (602) 2,578 (3,365)
Accounts payable - trade .................................................... (1,110) 322 771
Accrued liabilities ......................................................... (463) 1,620 (377)
Other current liabilities ................................................... (279) 509 --
------------------------------------
Adjustments ........................................................................ 5,542 9,975 650
Net cash (used in) provided by operating activities ...................... (10,125) 12,979 (5,582)
INVESTING ACTIVITIES
Capital expenditures ............................................................ (4,227) (1,276) (1,304)
Patent costs .................................................................... -- (20) (444)
Sales of marketable securities .................................................. 6,760 10,692 (2,349)
Purchases of marketable securities .............................................. (69) (249) --
Security deposits and other ..................................................... 73 -- --
------------------------------------
Net cash provided by (used in) investing activities ...................... 2,537 9,147 (4,097)
FINANCING ACTIVITIES
Proceeds from the exercise of stock options ..................................... 611 506 896
Payment of long term installment payable ........................................ (150) (150) --
Other ........................................................................... -- -- 14
------------------------------------
Net cash provided by financing activities ................................ 461 356 910
Net (decrease) increase in cash and cash equivalents ................................ (7,127) 22,482 (8,769)
Cash and cash equivalents at the beginning of year .................................. 76,981 54,499 63,268
------------------------------------
Cash and cash equivalents at the end of year ........................................ $ 69,854 $ 76,981 $ 54,499
====================================
F-6
The accompanying notes are an integral part of
these consolidated financial statements
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Enzo Biochem, Inc. (the "Company") is engaged in research, development,
manufacturing and marketing of diagnostic and research products based on genetic
engineering, biotechnology and molecular biology. These products are designed
for the diagnosis of and/or screening for infectious diseases, cancers, genetic
defects and other medically pertinent diagnostic information and are distributed
in the United States and internationally. The Company is conducting research and
development activities in the development of therapeutic products based on the
Company's technology platform of genetic modulation and immune modulation. The
Company also operates a clinical laboratory that offers and provides diagnostic
medical testing services to the health care community in the greater New York
and New Jersey area. The Company operates in three segments (see Note 13).
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Enzo Clinical Labs, Enzo Life
Sciences, Enzo Therapeutics and Enzo Realty LLC ("Realty") Realty was formed in
fiscal 2006 to acquire a building (see Note 5). All intercompany transactions
and balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk primarily consist of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities. The Company's cash equivalents are
invested in diverse financial instruments with high credit ratings. The Company
believes the fair value of the aforementioned financial instruments approximates
the current value due to the immediate or short-term nature of these items.
Concentration of credit risk with respect to the Company's life sciences segment
is mitigated by the diversity of the Company's clients and their dispersion
across many different geographic regions. To reduce risk, the Company routinely
assesses the financial strength of these customers and, consequently, believes
that its accounts receivable credit exposure, with respect to these customers,
is limited.
The Company believes that the concentration of credit risk with respect to
clinical laboratory's accounts receivable is limited due to the diversity of the
Company's client base, the number of insurance carriers it deals with, and its
numerous individual patient accounts. As is standard in the health care
industry, substantially all of the Company's clinical laboratory's accounts
receivable is with numerous third party insurance carriers and individual
patient accounts. The Company also provides services to certain patients covered
by various third-party payers, including the Federal Medicare program. The
clinical laboratory industry is characterized by a significant amount of
uncollectible accounts receivable resulting from the inability to receive
accurate and timely billing information in order to forward it to the third
party payers for reimbursement, and the inaccurate information received from the
covered individual patients for unreimbursed unpaid amounts.
F-7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
REVENUE RECOGNITION
Product revenues
Revenues from product sales are recognized when the products are shipped, the
sales price is fixed or determinable and collectibility is reasonably assured.
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 product revenues.
The Company did not recognize any revenue from these distributors during the
year ended July 31, 2006. During the years ended July 31, 2005, and 2004, the
manufacturing and processing cost of these products sold was $0.7 million, and
$7.4 million, respectively. The revenue from these non-exclusive distribution
agreements are recognized when shipments are made to their respective customers
and reported to the Company.
Royalties
Royalty revenues are recorded in the period earned. Royalties received in
advance of being earned are recorded as deferred revenues.
Clinical laboratory services
Revenues from the clinical laboratory are recognized upon completion of the
testing process for a specific patient and reported to the ordering physician.
These revenues and the associated accounts receivable are based on gross amounts
billed or billable for services rendered, net of a contractual adjustment, which
is the difference between amounts billed to payers and the expected approved
reimbursable settlements from such payers.
The following are tables of the clinical laboratory segment's net revenues and
revenue percentages by revenue category for the years ended July 31, 2006 and
2005:
Net revenues Year ended Year ended
July 31, 2006 July 31, 2005
------------- -------------
Revenue Category (In 000'S) (In %) (In 000'S) (In %)
- ---------------- ---------- ------ ---------- ------
Medicare $7,462 23 $6,906 21
Third party carriers 17,680 56 17,528 53
Patient self-pay 4,925 15 6,904 21
HMO's 1,859 6 1,519 5
----- - ----- -
Total $31,926 100% $32,857 100%
======= ==== ======= ====
The Company provides services to certain patients covered by various third-party
payers, including the Federal Medicare program. Revenue, net of contractual
expense, from direct billings under the Federal Medicare program during the
years ended July 31, 2006, 2005 and 2004 were approximately 23%, 21% and 26%,
respectively, of the Clinical Lab segment's revenue. Laws and regulations
governing Medicare are complex and subject to interpretation for which action
for noncompliance includes fines, penalties and exclusion from the Medicare
programs. The Company believes that it is in compliance with all applicable laws
and regulations and is not aware of any pending or threatened investigations
involving allegations of potential wrongdoing.
F-8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
CONTRACTUAL ADJUSTMENTS
The Company's estimate of contractual adjustments is based on significant
assumptions and judgments, such as its interpretation of the applicable payer's
reimbursement policies, and bears the risk of change. The estimation process is
based on the experience of amounts approved as reimbursable and ultimately
settled by payers, versus the corresponding gross amount billed to the
respective payers. The contractual expense is an estimate that reduces gross
revenue, based on gross billing rates, to amounts expected to be approved and
reimbursed. The Company adjusts the contractual expense estimate periodically,
based on its evaluation of historical settlement experience with payers,
industry reimbursement trends, and other relevant factors.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are reported at realizable value, net of allowances for
doubtful accounts, which is estimated and recorded in the period of the related
revenue.
For the Clinical Labs segment, the allowance for doubtful accounts represents
amounts that the Company does not expect to collect after the Company has
exhausted its collection procedures. The Company estimates its allowance for
doubtful accounts in the period the related services are billed and adjusts the
estimate in future accounting periods as necessary. It bases the estimate for
the allowance on the evaluation of historical collection experience, the aging
profile of accounts receivable, the historical doubtful account write-off
percentages, payer mix, and other relevant factors.
The allowance for doubtful accounts includes the balances, after receipt of the
approved settlements from third party payers for the insufficient diagnosis
information received from the ordering physician which result in denials of
payment, and the uncollectible portion of receivables from self payers,
including deductibles and copayments, which are subject to credit risk and
patients' ability to pay. During the years ended July 31, 2006 and 2005, the
Company determined an allowance for doubtful accounts less than 210 days and
wrote off 100% of accounts receivable (for all payers) over 210 days, as it
assumed those accounts are uncollectible. The Company adjusts the historical
collection analysis for recoveries, if any, on an ongoing basis.
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 also assesses the
current state of its billing functions in order to identify any known collection
issues in order to assess the impact, if any, on the allowance 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. Should circumstances change (e.g. shift
in payer mix, decline in economic conditions or deterioration in aging of
receivables), our estimates of net realizable value of receivables could be
reduced by a material amount.
F-9
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
The following is a table of the Company's net accounts receivable by segment.
The Clinical Labs segment's net receivables are detailed by billing category and
as a percent to its total net receivables: At July 31, 2006 and 2005,
approximately 88% and 94%, respectively, of the Company's net accounts
receivable relates to its clinical labs business, which operates in the greater
New York and New Jersey area.
Net accounts receivable As of As of
July 31, 2006 July 31, 2005
------------- -------------
Billing Category (In 000'S) (In %) (In 000'S) (In %)
- ----------------- ---------- ------ ---------- ------
Clinical Labs
- -------------
Medicare $1,367 15 $1,594 13
Third party carriers 4,025 44 6,742 54
Patient self-pay 3,294 36 3,819 30
HMO's 475 5 394 3
--- - --- -
Total Clinical Labs 9,161 100% 12,549 100%
==== ====
Total Life Sciences 1,286 872
----- ---
Total accounts receivable $10,447 $13,421
======= =======
Changes in the Company's allowance for doubtful accounts are as follows:
In 000's July 31, 2006 July 31, 2005
- -------- ------------- -------------
Beginning balance $2,292 $2,770
Provision for doubtful accounts 3,633 4,967
Write-offs (4,892) (5,445)
------ ------
Ending balance $1,033 $2,292
====== ======
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid corporate debt instruments with
maturities of three months or less at the time acquired by the Company.
MARKETABLE SECURITIES
Investments with a maturity greater than three months at the date of purchase
are designated as marketable securities. During the year ended July 31, 2006,
the Company sold all investments designated as marketable securities and had no
investments in marketable securities as of July 31, 2006.
At July 31, 2005, management designated marketable securities held by the
Company as available-for-sale securities, in accordance with of Statement of
Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". Available-for-sale securities were
carried at fair value with the unrealized losses reported in stockholders'
equity under the caption "Accumulated other comprehensive loss". The Company
periodically reviewed its investment portfolio to determine if there was an
impairment that is other than temporary. In testing for impairment, the Company
considers, among other factors, the length of time and the extent of a
security's unrealized loss, the financial condition and near term prospects of
the issuer, economic forecasts and market or industry trends. The cost of
marketable securities sold was based on the original cost basis plus any
reinvested dividends.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Work-in-process and finished goods inventories consist of material, labor and
manufacturing overhead.
F-10
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost, and depreciated on the
straight-line basis over the estimated useful lives of the various asset
classes. The useful life for the building is 30 years. The useful life for
laboratory machinery and equipment and office furniture and computer equipment
ranges from 3-5 years. Leasehold improvements are amortized over the term of the
related leases or estimated useful lives of the assets, whichever is shorter.
GOODWILL
Goodwill represents the cost of acquired businesses in excess of the fair value
of assets acquired, including separately recognized intangible assets, less the
fair value of liabilities assumed in the business acquisition. The Company uses
a non-amortization approach to account for purchased goodwill. Under this
approach, goodwill is not amortized, but instead is reviewed for impairment. All
of the Company's goodwill is related to its clinical laboratory segment. Prior
to adopting SFAS No. 142, "Goodwill and Other Intangibles" ("SFAS 142"), the
Company recorded amortization of goodwill aggregating approximately $9.8
million.
Under the non-amortization provisions of SFAS 142, goodwill is subject to at
least an annual assessment for impairment by applying a fair-value based test.
The Company performs the annual impairment testing during the fourth quarter of
its fiscal year. Based on this testing, there has been no impairment to Goodwill
recorded on the accompanying balance sheets as of July 31, 2006 and 2005.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the recoverability of the carrying value of long-lived
assets, primarily property, plant and equipment, for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be fully recoverable. Should indicators of impairment exist, the carrying
values of the assets are evaluated in relation to the operating performance and
future undiscounted cash flows of the underlying business. The net book value of
an asset is adjusted to fair value if its expected future undiscounted cash flow
is less than its book value. No impairment losses were identified during the
years ended July 31, 2006, 2005 or 2004.
PATENT COSTS
The Company capitalizes certain legal costs directly incurred in pursuing patent
applications as patent costs. When such applications result in an issued patent,
the related costs are amortized over a ten year period or the life of the
patent, whichever is shorter, using the straight-line method. The Company
reviews its issued patents and pending patent applications, and if it determines
to abandon a patent application or that an issued patent no longer has economic
value, the unamortized balance in deferred patent costs relating to that patent
is immediately expensed. The Company estimates amortization for patent costs at
July 31, 2006 to be at approximately $79,000 in each of the next five fiscal
years.
COMPREHENSIVE (LOSS) INCOME
SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130"), requires reporting
and displaying of comprehensive loss and its components. In accordance with SFAS
130, the Accumulated Other Comprehensive Loss, which is comprised of net
unrealized losses on marketable securities, is disclosed as a separate component
of stockholders' equity.
F-11
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
SHIPPING AND HANDLING COSTS
Product revenue shipping and handling costs included in selling expense amounted
to approximately $226,000, $299,000, and $384,000 for years ended July 31, 2006,
2005, and 2004, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
ADVERTISING
All costs associated with advertising are expensed as incurred. Advertising
expense, included in Selling, general and administrative expense approximated
$128,000, $57,000 and $18,000 for the years ended July 31, 2006, 2005 and 2004,
respectively.
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 carryforwards and other
items be reduced by a valuation allowance when it is more likely than not that
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.
SEGMENT REPORTING
The Company follows SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information" ("SFAS 131") which establishes standards for reporting
information on operating segments in interim and annual financial statements. An
enterprise is required to separately report information about each operating
segment that engages in business activities from which the segment may earn
revenues and incur expenses, whose separate operating results are regularly
reviewed by the chief operating decision maker regarding allocation of resources
and performance assessment and which exceed specific quantitative thresholds
related to revenue and profit or loss. The Company's operating activities are
reported in three segments (see Note 13).
NET (LOSS) INCOME PER SHARE
The Company applies SFAS No. 128, "Earnings per Share."("SFAS 128"). SFAS 128
establishes standards for computing and presenting earnings per share. Basic net
income (loss) per share represents net income (loss) divided by the weighted
average number of common shares outstanding during the period. The dilutive
effect of potential common shares, consisting of outstanding stock options, is
determined using the treasury stock method in accordance with SFAS 128. Diluted
weighted average shares outstanding for 2006 and 2004 do not include the
potential common shares from stock options because to do so would have been
antidilutive. Accordingly, basic and diluted net loss per share is the same in
fiscal 2006 and 2004. The number of potential common shares ("in the money
options") excluded from the calculation of diluted earnings per share during the
years ended July 31, 2006, 2005 and 2004 was 423,000, 0, and 798,000 shares,
respectively.
F-12
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
The following table sets forth the computation of basic and diluted net (loss)
income per share pursuant to SFAS 128 for the years ended July 31:
IN 000'S 2006 2005 2004
- -------- ---- ---- ----
Numerator:
Net (loss) income $(15,667) $3,004 $(6,232)
========= ====== ========
Denominator:
Weighted-average common shares outstanding- Basic
32,215 32,097 31,700
Effect of dilutive stock options - - 666 - -
--- --- ---
Weighted-average common shares outstanding - Diluted
32,215 32,763 31,700
====== ====== ======
Net (loss) income per share
Basic $(.49) $.09 $(.20)
====== ==== ======
Diluted $(.49) $.09 $(.20)
====== ==== ======
For the years ended July 31, 2006, 2005 and 2004, the effect of approximately
1,916,000, 818,000, and 554,000 respectively, of outstanding "out of the money"
options to purchase common shares were excluded from the calculation of diluted
net (loss) income per share because their effect would be anti-dilutive.
SHARE-BASED COMPENSATION
Effective August 1, 2005, the Company adopted SFAS No. 123(R), "Share-Based
Payment" ("SFAS 123(R)") and related interpretations which superseded the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related interpretations. SFAS
123(R) requires that all share-based compensation be recognized as an expense in
the financial statements and that such cost be measured at the fair value of the
award. SFAS 123(R) was adopted using the modified prospective method, which
requires the Company to recognize compensation expense on a prospective basis.
Therefore, prior period financial statements have not been restated. Under this
method, in addition to reflecting compensation expense for new share-based
awards, expense is also recognized to reflect the remaining service period of
awards that had been included in pro-forma disclosures in prior periods.
With the adoption of SFAS 123(R), the Company is required to record the fair
value of share-based compensation awards as an expense. In order to determine
the fair value of stock options on the date of grant, the Company utilizes the
Black-Scholes option-pricing model. Inherent in this model are assumptions
related to expected stock-price volatility, option life, risk-free interest rate
and dividend yield. While the risk-free interest rate and dividend yield are
less subjective assumptions, typically based on factual data derived from public
sources, the expected stock-price volatility and option life assumptions require
a greater level of judgment which make them critical accounting estimates. The
Company uses an expected stock-price volatility assumption that is primarily
based on historical realized volatility of the underlying stock during a period
of time. No employee or director stock options were granted during the year
ended July 31, 2006.
F-13
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
In November 2005, the FASB issued FSP FAS 123(R)-3, "Transition Election Related
to Accounting for the Tax Effects of Share-Based Payment Awards", to provide an
alternate transition method for the implementation of SFAS No. 123(R). Because
some entities do not have, and may not be able to re-create, information about
the net excess tax benefits that would have qualified as such had those entities
adopted SFAS No. 123(R) for recognition purposes, this FSP provides an elective
alternative transition method. The method comprises (a) a computational
component that establishes a beginning balance of the additional paid in capital
pool ("APIC pool") related to employee compensation and (b) a simplified method
to determine the subsequent impact on the APIC pool of employee awards that are
fully vested and outstanding upon the adoption of SFAS No. 123(R). The Company
is evaluating the principles set forth in this FSP to determine its APIC pool.
The implementation date is one year from the later of the initial adoption of
SFAS No. 123(R) or the effective date of FSP FAS 123(R)-3.
Prior to August 1, 2005, the Company accounted for employee stock option plans
under the intrinsic value method in accordance with APB 25. Under APB 25,
generally no compensation expense is recorded when terms of the award are fixed
and the exercise price of employee and director stock options equals or exceeds
the fair value of the underlying stock on the date of the grant.
As a result of adopting SFAS 123(R), the Company's net loss for the year ended
July 31, 2006 was approximately $1.6 million higher, than if the Company had
continued to account for share-based compensation under APB No. 25. Basic and
diluted loss per share for the year ended July 31, 2006 were increased by $0.05
per share as a result of adopting SFAS 123(R). SFAS 123(R) also requires that
excess tax benefits related to stock option exercises be reflected as financing
cash inflows instead of operating cash inflows. For the year ended July 31,
2006, no excess tax benefits were recognized. Other share-based compensation
expense relating to the fair value of restricted shares and restricted stock
units issued and vested during the year ended July 31, 2006 was approximately
$172,000 (see Note 8).
The following table sets forth the amount of expense related to share-based
payment arrangements included in specific line items in the accompanying
Statement of operations for the year ended July 31, 2006:
In 000's
--------
Cost of products $21
Research and development 249
Selling, general and administrative 1,493
------
$1,763
======
As of July 31, 2006, there was $2.0 million of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the Company's stock option and restricted stock plans, which will be recognized
over a weighted average remaining life of approximately one and a half years.
During the years ended July 31, 2005 and 2004, the Company followed the
provisions of FASB Statement No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") to provide alternative
methods of transition to SFAS 123's fair value method of accounting for
stock-based employee compensation. SFAS 148 also amends the disclosure
provisions of SFAS 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 148 did
not amend SFAS 123 to require companies to account for employee stock options
using the fair value method, as SFAS 123(R) did, the disclosure provisions of
SFAS 148 are applicable to all companies with share-based employee compensation
method of SFAS 123 or the intrinsic value method of APB 25.
F-14
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
On June 3, 2005, the Board of Directors approved the acceleration of vesting of
unvested "out of the money" stock options held by employees, including executive
officers and directors. The stock options considered as out of the money were
those with an exercise price that was $1.50 or more than the closing price of
the Company's common stock on June 3, 2005 of $14.82. All other terms and
conditions of these "out of the money" options remain unchanged. As a result of
the acceleration, options to purchase approximately 666,000 shares of the
Company's common stock (which represented approximately 21% of the Company's
then outstanding stock options) became exercisable immediately. The accelerated
options ranged in exercise prices from $16.39 to $19.02 and the weighted average
exercise price of the accelerated options was $17.55 per share. The total number
of options subject to acceleration included options to purchase 575,000 shares
held by executive officers and directors of the Company. This action was taken
to avoid expense recognition in future financial statements upon adoption of
SFAS 123(R). The accelerated vesting of the "out of the money" options did not
result in a charge in the Company's statement of operations for the year ended
July 31, 2005 based on U.S. generally accepted accounting principles. The
Company reported approximately $10.1 million of pro forma compensation expense
for the year ended July 31, 2005, of which $6.0 million was applicable to the
accelerated "out of the money" options.
Pro forma information regarding net income (loss) applicable to common
stockholders is required under SFAS 123, as if the Company has accounted for its
stock options under the fair value method. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period. The fair value for these options was estimated
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for all grants in the years ended July 31, 2005 and 2004: no
dividend yield, weighted-average expected life of the option of seven years,
risk-free interest rate ranges of 3% to 6.88% and a volatility of 71% and 74%,
respectively, for all grants.
The following table illustrates the effect on net income (loss) if the Company
had applied the fair value recognition provisions of SFAS 123 (in 000's, except
per share):
Years Ended July 31, 2005 2004
- -------------------- ---- ----
Reported net income (loss) $3,004 $(6,232)
Pro forma compensation expense (10,129) (3,239)
-------- -------
Pro forma net (loss) $(7,125) $(9,471)
======== =======
Pro forma net (loss) per share:
Basic $(.22) $(.30)
Diluted $(.22) $(.30)
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections ("SFAS 154"), a replacement of APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements." SFAS 154 changes the requirements for the accounting for
and reporting of a change in accounting principle. Previously, most voluntary
changes in accounting principles required recognition via a cumulative effect
adjustment within net income for the period of the change. SFAS 154 requires
retrospective application to prior periods' financial statements, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS 154 is effective for accounting changes made in
fiscal years beginning after December 15, 2005; however, SFAS 154 does not
change the transition provisions of any existing accounting pronouncements. The
adoption of SFAS 154 is not expected to have a material impact on the Company's
financial condition or results of operations.
F-15
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,
"Accounting for Income Taxes" ("SFAS 109")", to clarify the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS 109. This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. The
provisions of FIN 48 are effective for fiscal years beginning after December 15,
2006. The Company has not evaluated the impact of FIN 48 on its financial
statements at this time.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to current year
presentation.
NOTE 2 - SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS
In the years ended July 31, 2006, 2005 and 2004, net income taxes paid by or
(refunded to) the Company approximated ($1,374,000), $3,566,000 and $219,000
respectively.
In fiscal 2006, certain officers of the Company exercised 227,800 stock options
in a non-cash transaction. The officers surrendered 185,300 shares of previously
owned shares of the Company's common stock to exercise the stock options. The
Company recorded approximately $2.5 million, the market value of the surrendered
shares, as treasury stock.
In fiscal 2005, a director of the Company exercised 31,660 stock options in a
non-cash transaction. The director surrendered 17,000 previously owned shares of
the Company's common stock to exercise the stock options. The Company recorded
approximately $325,000, the market value of surrendered shares, as treasury
stock.
In fiscal 2004, certain officers of the Company exercised 769,300 stock options
in a non-cash transaction. The officers surrendered 349,900 of previously owned
shares of the Company's common stock to exercise the stock options. The Company
recorded approximately $5.7 million, the market value of the surrendered shares,
as treasury stock.
In fiscal 2004, the Company purchased the assets of a privately held company for
$650,000, of which $350,000 was paid during fiscal 2004 and $150,000 during
fiscal 2006. The remaining $150,000 is to be paid in fiscal 2007 on the
thirty-sixth month anniversary date of the acquisition.
NOTE 3 - MARKETABLE SECURITIES
Marketable securities are recorded at fair value. The Company had no investments
in marketable securities at July 31, 2006. The following is a summary of
available-for-sale securities at July 31, 2005:
In 000's Fair Value Unrealized Holding (Loss)
- -------- ---------- -------------------------
Income bond mutual fund $5,639 $(126)
Marketable debt securities:
U.S. Government and agency securities 449 -
Corporate debt securities 626 (5)
--- -
(Average of remaining maturity of debt $6,714 $(131)
securities was approximately four months at ====== ======
July 31, 2005)
F-16
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
During fiscal 2006, the Company realized proceeds of approximately $6.8 million
from maturities and sales of marketable securities, on which it realized a loss
of approximately $154,000, based on the average cost. During fiscal 2005, the
Company realized proceeds of approximately $10.7 million from maturities and
sales of marketable securities, on which it realized a loss of approximately
$200,000, based on the average cost. There were no realized gains or losses on
marketable security transactions during fiscal 2004. The Company's cost basis in
marketable securities as of July 31, 2005 was approximately $6.8 million.
The following is a summary of accumulated other comprehensive loss, relating to
the Company's investments in marketable securities which were classified as
available for sale securities:
In 000's Accumulated Loss Tax (Expense) Accumulated Loss
- -------- Before Tax or Benefit Net of Tax
---------- ---------- ----------
Fiscal 2003 - unrealized losses $(139) $54 $(85)
------ --- -----
Balance - July 31, 2003 $(139) $54 $(85)
Fiscal 2004 - unrealized losses (262) 101 (161)
----- --- -----
Balance - July 31, 2004 $(401) $155 $(246)
Fiscal 2005 - realized losses 200 (78)
Fiscal 2005 - unrealized gain
and valuation allowances 70 (77) 115
-- ---- ---
Balance - July 31, 2005 (131) -- (131)
Fiscal 2006 - realized losses, net 131 -- 131
--- -- ---
Balance - July 31, 2006 $-- $-- $--
==== ==== ===
NOTE 4 - INVENTORIES
At July 31, 2006 and 2005 inventories - net of reserves of $238,000 and $0,
respectively, consist of:
In 000's 2006 2005
- -------- ---- ----
Raw materials $38 $52
Work in process 1,518 1,767
Finished products 845 1,057
--- -----
$2,401 $2,876
====== ======
NOTE 5 - PROPERTY, PLANT, AND EQUIPMENT
At July 31, 2006 and 2005 property, plant, and equipment consist of:
In 000's 2006 2005
- -------- ---- ----
Building $2,470 --
Laboratory machinery 2,242 $2,098
Office furniture and computer equipment 5,696 5,080
Leasehold improvements 2,975 2,771
----- -----
13,383 9,949
Accumulated depreciation and amortization (8,247) (7,279)
------- -------
5,136 $2,670
Land and land improvements 712 --
--- --
$5,848 $2,670
====== ======
In June 2006, the Company acquired land and building aggregating $3,182,000,
which upon completion of improvements, will be primarily used for the Company's
Life Sciences and Therapeutics research and development and manufacturing
operations.
F-17
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
NOTE 6 - INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS 109. The
benefit (provision) for income taxes is as follows:
Fiscal Year Ended July 31, (In 000's) 2006 2005 2004
- ------------------------------------- ---- ---- ----
Current benefit (provision):
Federal $2,047 $(1,386) $3,287
State and local (65) 64 (191)
Deferred (provision) benefit (640) (891) 1,752
----- ----- -----
Benefit (provision) for income taxes $1,342 $(2,213) $4,848
====== ======== ======
Deferred tax assets and liabilities arise from temporary differences between the
tax basis of assets and liabilities and their reported amounts in the financial
statements. The components of deferred tax assets (liabilities) as of July 31,
2006 and 2005 are as follows:
In 000's July 31, 2006 July 31, 2005
- -------- ------------- -------------
Deferred tax assets:
Federal tax carryforward losses $3,315 --
Provision for uncollectible accounts receivable 404 $889
State and local tax carry forward losses 1,080 245
Depreciation 14 33
Research and development and other tax credit carryforwards 405 -
Realized and unrealized losses on marketable securities 138 129
--- ---
Gross deferred tax assets 5,356 1,296
----- -----
Deferred tax liabilities:
Deferred patent costs (280) (293)
Other, net (220) (234)
----- -----
Gross deferred tax liabilities (500) (527)
----- -----
Net deferred tax assets - before valuation allowance $4,856 $769
Less: valuation allowance (4,856) (129)
------- -----
Deferred tax assets, net -- $640
== ====
Pursuant to SFAS 109, the Company recorded a valuation allowance during the year
ended July 31, 2006 equal to its net deferred tax assets at July 31, 2005 and
for net deferred tax assets generated in fiscal 2006. The Company believes that
the valuation allowance is necessary as it is not more likely than not that the
deferred tax assets will be realized in the foreseeable future based on positive
and negative evidence available at this time. This conclusion was reached
because of uncertainties relating to future taxable income, in terms of both its
timing and its sufficiency, which would enable the Company to realize the
deferred tax assets. During fiscal 2005, the Company determined that it was not
more likely than not that it would generate taxable income against which the
deferred tax asset for the realized and unrealized losses on marketable
securities could be applied. Therefore, the Company established a valuation
reserve against that deferred tax asset.
As of July 31, 2006, the Company had a U.S. federal net operating loss
carryforward of approximately $9.7 million. The U.S. federal tax loss expires in
2024 if not fully utilized by then. Utilization is dependent on generating
sufficient taxable income prior to expiration of the tax loss carryforward.
There was no U.S. federal net operating loss carryforward as of July 31, 2005.
As of July 31, 2006 and 2005, the Company has state and local tax carry forward
losses of approximately $21.1 million and $5.1 million, respectively.
F-18
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
The benefit (provision) for income taxes were at rates different from U.S.
federal statutory rates for the following reasons:
Year Ended July 31, 2006 2005 2004
- ------------------- ---- ---- ----
Federal statutory rate 34% (34%) 34%
Expenses not deductible for income tax return purposes (4%) (2%) (3%)
State income taxes, net of (benefit) of federal tax deduction. 5% (6%) 4%
Change in valuation allowance (28%) -- --
Benefit of foreign sales -- 1% 2%
Fixed asset basis difference -- -- 8%
Other 1% (1%) (1%)
-- ---- ----
8% (42%) 44%
== ===== ===
NOTE 7 - ACCRUED LIABILITIES AND OTHER CURRENT LIABILITIES
At July 31, 2006 and 2005, Accrued liabilities consist of:
In 000's 2006 2005
- -------- ---- ----
Legal $1,974 $2,717
Payroll, benefits, and commissions 868 652
Research and development 408 286
Professional fees 369 413
Outside reference lab testing 122 30
Other 662 768
--- ---
$4,403 $4,866
====== ======
At July 31, 2006 and 2005 other current liabilities consist of:
In 000's 2006 2005
- -------- ---- ----
Installment payable $150 $150
Deferred revenue 80 359
-- ---
$230 $509
==== ====
NOTE 8 - STOCKHOLDERS' EQUITY
TREASURY STOCK
In fiscal 2006, certain officers of the Company exercised 227,800 stock options
in a non-cash transaction. The officers surrendered 185,300 shares of previously
owned shares of the Company's common stock to exercise the stock options. The
Company recorded approximately $2.5 million, the market value of the surrendered
shares, as treasury stock.
In fiscal 2005, a director of the Company exercised 31,660 stock options in a
non-cash transaction. The director surrendered 17,000 previously owned shares of
the Company's common stock to exercise the stock options. The Company recorded
approximately $325,000, the market value of surrendered shares, as treasury
stock.
In fiscal 2004, certain officers of the Company exercised 769,300 stock options
in a non-cash transaction. The officers surrendered 349,900 of previously owned
shares of the Company's common stock to exercise the stock options. The Company
recorded approximately $5.7 million, the market value of the surrendered shares,
as treasury stock.
F-19
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
INCENTIVE STOCK OPTION PLANS
The Company has incentive stock option plans ("1994 plan","1999 plan" and "2005
plan") under which the Company may grant options for up to 1,336,745 shares
(1994 plan), up to 2,312,356 shares (1999 plan) and up to 1,000,000 shares (2005
plan) of common stock. No additional options may be granted under the 1994 plan.
The exercise price of options granted under such plans is equal to or greater
than fair market value of the common stock on the date of grant. The options
granted pursuant to the plans may be either incentive stock options or non
statutory options. Stock options generally become exercisable at 25% per year
after one year and expire ten years after the date of grant. The 2005 plan
provide for the issuance of restricted stock and restricted stock unit awards
which generally vest over a two to four year period.
A summary of the information pursuant to the Company's stock option plans for
the years ended July 31, 2006, 2005 and 2004 is as follows:
2006 2005 2004
-------------------------------------------------------------------------------
Weighted - Weighted - Weighted -
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ---------- ------- ---------- ------- ----------
Outstanding at
beginning of year 3,154,125 $12.61 2,856,801 $11.86 3,397,087 $9.88
Granted 100,000 $24.84 431,975 $16.57 428,925 $17.02
Exercised (285,030) $10.93 (100,332) $7.39 (917,539) 7.16
Cancelled (91,368) $12.61 (34,319) $11.64 (51,672) $10.13
--------- --------- ----------
Outstanding at
end of year 2,877,727 $13.20 3,154,125 $12.61 2,856,801 $11.86
========= ========= ==========
Exercisable at
end of year 2,554,148 $12.78 2,126,442 $11.28 1,770,492 $10.54
========= ========= ==========
Weighted average fair value of
options
granted during year $1.01 $11.76 $12.40
====== ====== ======
The aggregate intrinsic value of stock options exercised during the years ended
July 31, 2006 and 2005, including the non-cash transactions (see Note 2) was
$0.7 million and $0.9 million, respectively. The aggregate intrinsic value of
options both outstanding and exercisable at July 31, 2006 is approximately $3.7
million.
The following table summarizes information for stock options outstanding at July
31, 2006:
Options outstanding Options exercisable
------------------- --------------------------
Weighted-Average Weighted- Weighted-
Range of Exercise Remaining Average Exercise Average Exercise
prices Shares Contractual Life Price Shares Price
----- ------ ---------------- ----- ------ -----
$5.45-8.08 289,020 2.2 years $5.64 289,020 $5.64
$8.33-12.25 1,502,111 4.4 years $11.09 1,378,906 $10.91
$12.93-19.02 906,719 7.4 years $16.82 806,345 $16.60
$20.20-24.84 161,644 2.9 years $23.02 61,644 $21.42
$36.05 18,233 3.4 years $36.05 18,233 $36.05
--------- ------
2,877,727 2,554,148
========= =========
F-20
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
During the year ended July 31, 2006, the Company granted 100,000 options to a
consultant with an exercise price of $24.84, which vest over six months and have
a two year term. The fair value of these options at July 31, 2006 is $101,000.
The fair value of the options, which will be accounted for as a variable
instrument, will be fair valued and recognized as expense over the six month
vesting term. The assumptions used to fair value this option grant as of July
31, 2006 were as follows: risk free interest rate of 4.97%, expected term of 2
years, expected volatility of 49%, and no dividend yield. In connection with the
options issued to this consultant, the Company recognized an expense of
approximately $80,000 in selling, general and administrative expense in the
accompanying statements of operations for the year ended July 31, 2006.
RESTRICTED STOCK AWARDS
During fiscal 2006, the compensation committee of the Company's board of
directors approved grants of 84,950 restricted stock and restricted stock unit
awards (the "Awards") under the 2005 Plan to the Company's directors and certain
officers and employees. The Awards vest in full upon the recipient's continued
employment or director service over either two, three or four years. Share-based
compensation expense is recorded over the vesting period on a straight-line
basis. The Awards will be forfeited if the recipient ceases to be employed by or
serve as a director of the Company, as defined in the Award grants. The Awards
settle in shares of the Company's common stock on a one-for-one basis. As of
July 31, 2006, all Awards were unvested.
A summary of the information pursuant to the Company's Awards for the year ended
July 31, 2006 is as follows:
Weighted - Average
Awards Award Price
------ -----------
Outstanding at
beginning of year -- --
Awarded 84,950 $12.29
Forfeited (7,500) $13.13
------ ------
Outstanding at end of year 77,450 $12.21
====== ======
Weighted average market value of Awards
granted during year $12.29
======
As of July 31, 2006, there were approximately 629,000 shares available for grant
under the Company's stock option plans.
STOCK DIVIDENDS
During fiscal 2005, the Company's board of directors declared a 5% stock
dividend on October 5, 2004 payable November 15, 2004 to shareholders of record
as of October 25, 2004. The fiscal 2004 per share data was adjusted
retroactively to reflect the stock dividend declared on October 5, 2004. The
Company recorded a charge to accumulated deficit and offsetting credits to both
common stock and additional paid-in capital of $23,433,400 in fiscal 2005, which
reflects the fair value of the stock dividends on the dates of declaration.
NOTE 9 - EMPLOYEE BENEFIT PLAN
The Company has a qualified Salary Reduction Profit Sharing Plan (the "Plan")
for eligible employees under Section 401(k) of the Internal Revenue Code. The
Plan provides for voluntary employee contributions through salary reduction and
voluntary employer contributions at the discretion of the Company. For the years
ended July 31, 2006, 2005 and 2004, the Company authorized employer matched
contributions of 50% of the employees' contribution up to 10% of the employees'
compensation, payable in Enzo Biochem, Inc. common stock. The 401(k) employer
matched contributions expense was $402,300, $351,600, and $282,200, in fiscal
years 2006, 2005, and 2004, respectively.
F-21
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
NOTE 10 - GAIN ON PATENT LITIGATION SETTLEMENT, LICENSE AGREEMENT AND ROYALTY
INCOME
In fiscal 2005, the Company as plaintiff finalized and executed a settlement and
license agreement with Digene Corporation to settle a patent litigation lawsuit
(the "Agreement"). Under the terms of the Agreement, the Company received an
initial payment of $16.0 million, would earn in the first "annual period"
(October 1, 2004 to September 30, 2005) a minimum royalty payment of $2.5
million, and receive a minimum royalty of $3.5 million in each of the next four
annual periods. In addition, the Agreement provides for the Company to receive
quarterly running royalties on the net sales of Digene products subject to the
license until the expiration of the patent on April 24, 2018. These quarterly
running royalties are fully creditable against the minimum royalty payments due
in the first five years of the Agreement. The balance, if any, of the minimum
royalty payment is recognized in the final quarter of the applicable annual
royalty period.
As a result of the Digene Agreement, the Company recorded a gain on patent
litigation settlement of $14.0 million during the year ended July 31, 2005 and
deferred $2 million, which was earned from net sales of the Company's licensed
products covered by the Agreement during the first annual period. During the
years ended July 31, 2006 and 2005, the Company recorded royalty income under
the Agreement of approximately $3.1 million and $1.6 million, respectively,
which is included in the Life Sciences segment.
NOTE 11 - COMMITMENTS
LEASES
The Company leases equipment, office and laboratory space under several
non-cancelable operating leases that expire between January 2007 and March 2017.
An entity owned by certain executive officers/directors of the Company owns the
building that the Company leases as its main facility for laboratory, research,
and manufacturing operations. In March 2005, the Company amended and extended
the lease for another 12 years. In addition to the minimum annual rentals of
space, the lease is subject to annual increases, based on the consumer price
index. Annual increases are limited to 3% per year. Rent expense, inclusive of
real estate taxes, under this renewed lease and the prior lease approximated
$1,337,000, $1,289,000, and $1,370,000 during fiscal years 2006, 2005, and 2004,
respectively.
Total consolidated rent expense incurred by the Company during fiscal 2006,
2005, and 2004 was approximately $2,257,000, $2,140,000, and $1,801,000
respectively. Minimum future annual rentals under non-cancelable operating
leases as of July 31, 2006, are as follows:
Years ended July 31, In 000's
-------------------- --------
2007 $2,663
2008 2,505
2009 2,384
2010 2,337
2011 2,044
Thereafter 8,429
-----
$20,362
=======
Employment Agreements
The Company has employment agreements with certain executive officers that are
cancelable at any time but provide for severance pay in the event an executive
officer is terminated by the Company without cause, as defined in the
agreements. Unless cancelled earlier, the contracts expire through May 2008.
Aggregate minimum compensation commitments, exclusive of any severance
provisions, for the years ended July 31, 2007 and 2008 are $1,490,000 and
$870,000, respectively
F-22
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
NOTE 12- CONTINGENCES
LITIGATION
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., 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.
The defendants have answered the individual Complaints and asserted a variety of
affirmative defenses and counterclaims. Fact discovery is ongoing. The Court
issued a claim construction opinion on July 10, 2006. The Company and Sigma
Aldrich ("Sigma") entered into a Settlement Agreement and Release effective
September 15, 2006 (the "Agreement"). Pursuant to the Agreement, the Company's
litigation with Sigma was dismissed and the Company will recognize $2 million on
settlement in the first quarter ending October 31, 2006. There can be no
assurance that the Company will be successful with the remaining outstanding
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.
The Company has not recorded revenue under these distribution agreements in
fiscal 2006. The Company recorded revenue from only Perkin Elmer in fiscal 2005.
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. The Affymetrix
Complaint also seeks 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 Affymetrix 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.
Initial pleadings have been completed and discovery has commenced. The Court
issued a Markman (claim construction) opinion on July 10, 2006. The Company did
not record any revenue from Affymetrix during the fiscal years ended July 31,
2006, 2005 and 2004.
F-23
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
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 was filed after Enzo rejected Roche's
latest cash offer to settle Enzo's claims for, INTER ALIA, alleged breach of
contract and misappropriation of Enzo's assets. The Complaint seeks declaratory
judgment (i) of patent invalidity with respect to Enzo's 4,994,373 patent (the
"'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 with appropriate affirmative defenses and counterclaims.
Enzo filed an Answer and Counterclaims on November 3, 2004 alleging multiple
breaches of the 1994 Agreement and related infringement of Enzo's `373 patent.
Discovery has commenced. The Court issued a Markman opinion on July 10, 2006.
The Company did not record any revenue from Roche during the fiscal year ended
July 31, 2006. The Roche agreement remains in force to date.
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
Glaser v. Hyman Gross, Barry Weiner, Enzo Biochemical Inc., Elazar Rabbani,
Shahram Rabbani, John Delucca, Dean Engelhardt, Richard Keating, Doug Yates, and
Does I-50, Case No. CA-02-1242-A (the "Glasser Action"), in the U.S. District
Court for the Eastern District of Virginia. This complaint was filed by an
investor in the Company who had filed for bankruptcy protection and his family.
The complaint alleged securities fraud, breach of fiduciary duty, conspiracy,
and common law fraud and sought 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. Plaintiffs thereafter appealed the
decision to the United States Court of Appeals for the Fourth Circuit. On March
21, 2005, the Fourth Circuit affirmed the lower Court's prior dismissal of all
claims asserted in the action, with the sole exception of a portion of the claim
for common law fraud and remanded that remaining portion of the action to the
U.S. District Court for the Eastern District of Virginia. On May 20, 2005,
defendants again moved the District Court to dismiss the sole remaining claim
before it. On July 14, 2005, the District Court granted defendants' renewed
motion to dismiss. On July 29, 2005, Plaintiffs moved to amend their Complaint
for reconsideration. On August 19, 2005, the Court denied Plaintiffs' motion to
amend and entered final judgment dismissing the complaint. Thereafter,
Plaintiffs appealed the order and judgment to the Fourth Circuit. On September
16, 2006, the United States Court of Appeals for the Fourth Circuit affirmed the
dismissal of the Complaint relating to the Glasser Action. Although the Glasser
plaintiffs still have the option of requesting a rehearing before the Fourth
Circuit or petitioning for a writ of certiorari from the United States Supreme
Court, absent such further relief, the Glasser Action will be closed. The
Company continues to believe that the Glasser Action and the remaining complaint
have no merit whatsoever and intends to continue to defend the actions
vigorously.
On June 7, 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 is 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 answered the complaint on July 29, 2004. The answer
pleads affirmative defences of invalidity, estoppels and laches and asserts
counterclaims of non-infringement and invalidity. Fact discovery is ongoing. A
one-day Markman hearing was held on May 25, 2006 and the parties are currently
waiting for a Markman ruling. Dispositive motions due dates are based on the
Markman ruling date.
F-24
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
The trial date is currently scheduled for December 1, 2006. 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.
NOTE 13 - SEGMENT REPORTING
The Company has three reportable segments: Life Sciences, Therapeutics, and
Clinical Labs. The Company's Life Sciences segment develops, manufactures, and
markets products to research and pharmaceutical customers. The Company's
Therapeutic segment conducts research and development activities for therapeutic
drug candidates. The Clinical Labs segment provides diagnostic services to the
health care community. Prior to fiscal 2006, the Life Sciences and Therapeutics
segments were reported together as the Research and Development segment. The
fiscal 2005 and 2004 segment information has been restated to reflect this
change. The Company evaluates segment performance based on segment income (loss)
before taxes. Costs excluded from segment income (loss) before taxes and
reported as other consist of corporate general and administrative costs which
are not allocable to the three reportable segments.
Management of the Company assesses assets on a consolidated basis only and
therefore, assets by reportable segment have not been included in the reportable
segments below. The accounting policies of the reportable segments are the same
as those described in the summary of significant accounting policies.
The following financial information (in thousands) represents the operating
results of the reportable segments of the Company:
YEAR ENDED JULY 31, 2006
Revenues: Life Sciences Therapeutics Clinical Labs Other Consolidated
- -------- ------------- ------------ ------------- ----- ------------
Product revenues and royalty income $7,900 -- -- -- $7,900
Clinical laboratory services -- -- $31,926 -- 31,926
------ -------- ------- --------- ---------
7,900 -- 31,926 -- 39,826
Cost and expenses and other (income):
- -------------------------------------
Cost of products 2,174 -- -- -- 2,174
Cost of clinical laboratory services -- -- 13,917 -- 13,917
Research and development 3,659 $4,237 -- -- 7,896
Provision for uncollectible accounts -- -- 3,633 -- 3,633
Selling, general and administrative and legal 2,260 -- 14,322 15,777 32,359
Interest income -- -- -- (3,144) (3,144)
------ -------- ------- --------- ---------
(Loss) income before income taxes ($193) ($4,237) $54 $(12,633) $(17,009)
====== ======== === ========= =========
Depreciation and amortization included above $180 $12 $897 $35 $1,124
==== === ==== === ======
Share-based compensation included in above:
- -------------------------------------------
Cost of products $21 -- -- -- $21
Research and development 106 $143 -- -- 249
Selling, general and adminstrative and legal 87 -- $539 $867 1,493
-- -- ---- ---- -----
Total $214 $143 $539 $867 $1,763
==== ==== ==== ==== ======
Capital expenditures $3,332 $6 $860 $29 $4,227
====== == ==== === ======
F-25
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
YEAR ENDED JULY 31, 2005
Life Sciences Therapeutics Clinical Labs Other Consolidated
------------- ------------ ------------- ----- ------------
REVENUES:
Product revenues and royalty income $10,546 -- -- -- $10,546
Clinical laboratory services -- -- $32,857 -- 32,857
-------- -------- ------ -------- -------
10,546 -- 32,857 -- 43,403
Cost and expenses and other (income):
- -------------------------------------
Cost of products 2,197 -- -- -- 2,197
Cost of clinical laboratory services -- -- 12,548 -- 12,548
Research and development 5,340 $3,112 -- -- 8,452
Provision for uncollectible accounts -- -- 4,967 -- 4,967
Selling, general and administrative and legal 2,405 -- 12,505 $10,635 25,545
Interest income -- -- -- (1,523) (1,523)
Gain on patent litigation settlement (14,000) -- -- -- (14,000)
-------- -------- ------ -------- -------
Income (loss) before income taxes $14,604 ($3,112) $2,837 ($9,112) $5,217
======= ======== ====== ======== ======
Depreciation and amortization included above $1,382 $13 $887 $50 $2,332
====== === ==== === ======
Capital expenditures $126 $40 $1,100 $10 $1,276
====== === ====== === ======
YEAR ENDED JULY 31, 2004
Life Sciences Therapeutics Clinical Labs Other Consolidated
------------- ------------ ------------- ----- ------------
REVENUES:
Product revenues $12,972 -- -- -- $12,972
Clinical laboratory services -- -- $28,672 -- 28,672
-------- ------- -------- ------- --------
12,972 -- 28,672 -- 41,644
Cost and expenses and other (income):
- -------------------------------------
Cost of products 2,518 -- -- -- 2,518
Cost of clinical laboratory services -- -- 10,586 -- 10,586
Research and development 5,661 $2,417 -- -- 8,078
Provision for uncollectible accounts 1,753 -- 10,234 -- 11,987
Selling, general and administrative and legal 1,922 -- 9,331 $9,454 20,707
Interest income -- -- -- (1,152) (1,152)
-------- ------- -------- ------- --------
(Loss) income before income taxes $1,118 $(2,417) ($1,479) ($8,302) ($11,080)
====== ======= ======= ======= ========
Depreciation and amortization included above $1,397 $17 $903 $45 $2,362
====== === ==== === ======
Total capital expenditures $70 $7 $1,142 $85 $1,304
====== === ====== === ======
The Company's reportable segments are determined based on the services they
perform, the products they sell, and the royalties they earn, not on the
geographic area in which they operate. The Company's Clinical Labs segment
operates 100% in the United States with all revenue derived from this country.
The Life Sciences segment earns product revenue both in the United States and
foreign countries and royalty income in the United States. The following is a
summary of the Life Sciences segment revenues attributable to customers located
in the United States and foreign countries:
In 000's 2006 2005 2004
- -------- ---- ---- ----
United States $6,361 $7,985 $8,029
Foreign countries 1,539 2,561 4,943
----- ----- -----
$7,900 $10,546 $12,972
====== ======= =======
F-26
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2006 AND 2005
NOTE 14 - SUMMARY OF SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains statement of operations information for each
quarter of the years ended July 31, 2006 and 2005. The Company believes that the
following information reflects all normal recurring adjustments necessary for a
fair presentation of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of results for any future
period.
Unaudited quarterly financial data (in thousands, except per share amounts) for
fiscal 2006 and 2005 is summarized as follows:
Quarter Ended
---------------------------------------------------------------------------
FISCAL 2006 OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
2005 2006 2006 2006
---- ---- ---- ----
Total revenues $10,165 $10,116 $9,630 $9,915
Gross profit 6,143 6,300 5,658 5,634
Loss before income taxes (3,163) (5,098) (3,793) (4,955)
Net loss (3,286) (4,439) (3,436) (4,506)
Basic loss per common share ($0.10) ($0.14) ($0.11) ($0.14)
Diluted loss per common share ($0.10) ($0.14) ($0.11) ($0.14)
Quarter Ended
---------------------------------------------------------------------------
FISCAL 2005 OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
2004 2005 2005 2005
---- ---- ---- ----
Total revenues $10,301 $11,235 $11,000 $10,867
Gross profit 6,812 7,820 7,035 6,991
Income (loss) before income taxes 12,173 (944) (2,553) (3,459)
Net income (loss) 7,021 (528) (1,497) (1,992)
Basic income (loss) per common share $0.22 ($0.02) ($0.05) ($0.06)
Diluted income (loss) per common share $0.22 ($0.02) ($0.05) ($0.06)
F-27
ENZO BIOCHEM, INC
SCHEDULE II - VALUATION
AND QUALIFYING ACCOUNTS
Years ended July 31, 2006, 2005 and 2004
(in thousands)
Charged Charged
Balance at (credited) to other
Year ended Beginning to costs accounts- Deductions- Balance at
July 31, Description of period and expenses describe describe end of period
-------- ----------- --------- ------------ --------- ----------- -------------
2006 Allowance for doubtful accounts receivable $2,292 $3,633 --- $4,892 (1) $1,033
2005 Allowance for doubtful accounts receivable 2,770 4,967 --- 5,445 (1) 2,292
2004 Allowance for doubtful accounts receivable 2,257 11,987 --- 11,474 (1) 2,770
2006 Deferred tax asset valuation allowance 129 4,727 --- - 4,856
2005 Deferred tax asset valuation allowance - 129 --- - 129
2006 Reserve for obsolete inventory - 596 --- 358 (2) 238
(1) Write-off of uncollectible accounts receivable.
(2) Write-off of obsolete inventory.
S-1