UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Mark one [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ______________ Commission File Number 1-9974 ENZO BIOCHEM, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New York 13-2866202 - --------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 60 Executive Blvd., Farmingdale, New York 11735 - ----------------------------------------- ---------- (Address of principal executive office) (Zip Code) (516-755-5500) --------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.01 par value The American Stock Exchange - ----------------------------- ------------------------------------------- (Title of Class) (Name of each Exchange on which Registered) Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant has required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X__ No _____ As of March 7, 1997 the Registrant had 23,176,400 shares of Common Stock outstanding. ENZO BIOCHEM, INC. FORM 10-Q January 31, 1997 INDEX ----- PAGE NUMBER ------ PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet - January 31, 1997 and July 31, 1996 3 Consolidated Statements of Operations For the six months ended January 31, 1997 and 1996 5 Consolidated Statement of Operations For the three months ended January 31, 1997 and 1996 6 Consolidated Statement of Cash Flows For the six months ended January 31, 1997 and 1996 7 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II Item 2. Changes in Securities 14 ENZO BIOCHEM, INC. PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED BALANCE SHEET January 31, July 31, 1997 1996 (unaudited) --------------------- (in thousands) ASSETS Current assets: Cash and cash equivalents $23,209 $17,793 Accounts receivable, less allowance for doubtful accounts 10,414 10,488 Current portion of note receivable - litigation settlement 5,000 5,000 Inventories 1,791 1,810 Other 2,302 823 ------- ------- Total current assets 42,716 35,914 Property and equipment, at cost, less accumulated depreciation and amortization 2,945 3,107 Long term portion of note receivable - litigation settlement 4,564 9,114 Cost in excess of fair value of net tangible assets acquired, less accumulated amortization 9,490 9,675 Deferred patent costs, less accumulated amortization 4,753 4,878 Other 152 150 ------- ------- $64,620 $62,838 ======= ======= 3 ENZO BIOCHEM, INC. LIABILITIES AND STOCKHOLDERS' EQUITY
January 31, July 31, 1997 1996 (unaudited) --------------------- (in thousands) Current liabilities: Trade accounts payable $ 860 $ 1,281 Accrued legal fees 23 1,392 Accrued leasehold costs -- 2,950 Other accrued expenses 533 776 Current portion of long-term debt 36 35 Current portion of obligations under capital leases 27 29 -------- -------- Total current liabilities 1,479 6,463 Long-term debt 28 47 Obligations under capital leases 53 67 Other deferred liabilities 1,008 1,008 Stockholders' equity: Preferred Stock, $ .01 par value; authorized 25,000,000 shares; no shares issued or outstanding Common Stock, $ .01 par value; authorized 75,000,000 shares; shares issued and outstanding; 23,168,000 shares at January 31, 1997 and 21,624,900 shares at July 31, 1996 232 216 Additional paid-in capital 89,913 83,450 Accumulated deficit (28,093) (28,413) -------- -------- Total stockholders' equity 62,052 55,253 -------- -------- $ 64,620 $ 62,838 ======== ========
See accompanying notes 4 ENZO BIOCHEM, INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Six Months Ended January 31, -------------------------- 1997 1996 -------------------------- (In thousands, except per share data) Revenues: Research product sales $ 6,116 $ 6,246 Clinical laboratory services 9,618 10,318 -------- -------- Total operating revenues 15,734 16,564 Costs and expenses: Cost of research product sales 3,710 3,513 Cost of clinical laboratory services 3,383 3,545 Research and development expenses 1,857 1,275 Selling expenses 1,267 1,281 Provision for uncollectable accounts receivable 2,566 1,354 General and administrative expenses 3,651 4,229 -------- -------- Total costs and expenses 16,434 15,197 Income (loss) before interest and provision for income taxes (700) 1,367 Interest income net 1,038 764 -------- -------- Income before provision for income taxes 338 2,131 Provision for taxes on income (18) (670) -------- -------- Net income $ 320 $ 1,461 ======== ======== Net income per share $ 0.01 $ 0.06 ======== ======== Weighted average common shares 23,926 23,549 ======== ======== See accompanying notes 5 ENZO BIOCHEM, INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Ended January 31, ------------------------------------- 1997 1996 ------------------------------------- (In thousands, except per share data) Revenues: Research product sales $ 2,943 $ 3,209 Clinical laboratory services 4,786 4,799 -------- -------- Total operating revenues 7,729 8,008 Costs and expenses: Cost of research product sales 1,786 1,699 Cost of clinical laboratory services 1,688 1,678 Research and development expenses 949 690 Selling expenses 668 676 Provision for uncollectable accounts receivable 1,030 584 General and administrative expenses 1,969 2,258 -------- -------- Total costs and expenses 8,090 7,585 Income (loss) before interest and provision for income taxes (361) 423 Interest income net 560 387 -------- -------- Income before provision for income taxes 199 810 Provision for taxes on income (1) (253) -------- -------- Net income $ 198 $ 557 ======== ======== Net income per share $ 0.01 $ 0.02 ======== ======== Weighted average common shares 23,902 23,518 ======== ======== See accompanying notes 6 ENZO BIOCHEM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Six Months Ended January 31, ------------------------------------- 1997 1996 ------------------------------------- (In thousands, except per share data) Cash flows from operating activities: Net income $ 320 $ 1,461 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 433 452 Amortization of costs in excess of fair value of tangible assets acquired 185 186 Amortization of deferred patent costs 300 240 Provision for uncollectable accounts receivable 2,566 1,354 Expense related to leasehold -- 130 Accretion of interest on note receivable (450) (353) Other 142 95 Change in assets and liabilities: Note receivable - J & J settlement 5,000 5,000 Accounts receivable before provision for uncollectable amounts (2,492) (2,989) Inventories 20 (210) Prepaid expense 220 47 Trade accounts payable and other accrued expenses (615) (441) Accrued legal fees (40) 60 Income taxes payable -- (598) Deferred liabilities -- 80 ------- ------- 5,269 3,053 ------- ------- Net cash provided by operating activities $ 5,589 $ 4,514 ------- -------
7 ENZO BIOCHEM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Six Months Ended January 31, ------------------------------------- 1997 1996 ------------------------------------- (In Thousands) Cash flows from investing activities: Capital expenditures (272) (195) Patent costs deferred (175) (137) Security deposits (1) 3 -------- -------- Net cash used in investing activities (448) (329) Cash flows from financing activities: Payments of obligations under capital lease (32) (46) Proceeds from exercise of stock options 307 1,162 -------- -------- Net cash provided by used in financing activities 275 1,116 Net increase in cash and cash equivalents 5,416 5,301 Cash and cash equivalents at the beginning of the year 17,793 11,068 -------- -------- Cash and cash equivalents at the end of the period $ 23,209 $ 16,369 ======== ========
8 ENZO BIOCHEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 31, 1997 (Unaudited) 1. The consolidated balance sheet as of January 31, 1997, the consolidated statement of operations for six months ended January 31, 1997 ("1997 Period") and 1996 ("1996 Period") and the consolidated statement of cash flows for the six months ended January 31, 1997 and 1996 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at January 31, 1997 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1996 Annual Report on Form 10-K. The results of operations for the six months ended January 31, 1997 are not necessarily indicative of the results that maybe expected for the full year. In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This standard is effective for the Company's financial statements beginning in the first quarter of fiscal 1997. SFAS No. 121 establishes the accounting for the impairment of long-lived assets, certain identifiable intangibles and the excess of cost over net assets acquired, related to those assets to be held and used in operations, whereby impairment losses are required to be recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets and certain identifiable intangibles that are expected to be disposed of. In the opinion of the Company's management, the adoption of SFAS No. 121 did not have a material effect on the consolidation results of operations or financial condition of the Company. 2. On October 19, 1994 the Company executed a settlement agreement with Johnson & Johnson, Inc. in the aggregate amount of $35.0 million pursuant to which the Company received $15.0 million, and a promissory note requiring Johnson & Johnson and its subsidiary, Ortho Diagnostics, Inc., to pay $5.0 million a year for each of the four successive anniversaries of said date. These future payments are recorded at net present value discounted using an interest rate of 5.25%. Pursuant to the terms of the settlement, all of the Company's 9 ENZO BIOCHEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 31, 1997 (Unaudited) grants, licenses and intellectual property have been returned to the Company in totality. 3. In March 1993, the Company filed suit in the United States District Court for the District of Delaware charging patent infringement and acts of unfair competition against Calgene, Inc. and seeking a declaratory judgment of invalidity concerning Calgene, Inc.'s plant antisense patent. On February 9, 1994, the Company filed a second suit in the United States District Court for the District of Delaware charging Calgene with infringement of a second antisense patent owned by the Company. Calgene filed a counterclaim in the second Delaware action seeking a declaration that a third patent belonging to the Company is invalid. The two Delaware actions were consolidated and were tried to the Court in April 1995. Following trial, the Court issued a decision that was adverse to Enzo but subsequently withdrew that decision. Both sides have submitted additional materials and motions. The Court has not issued any further decision or ruled on the motions. The Company intends to appeal from any adverse judgment. There can be no assurance that the Company will be successful in this matter or that Calgene will not be successful. However, even if the Company is not successful, management does not believe there will be a significant monetary impact. 4. On December 1, 1985, the Company entered into an Agreement with the City of New York to lease, over a fifty-year term, a six-story building located in New York City. In the fourth quarter of fiscal 1996, the Company negotiated a settlement with the City of New York to relieve the Company from any further obligations related to the lease and to return the building to the City and the Company agreed to pay the City $2,950,000 in full settlement of all of the City's claims for unpaid taxes and rent. The Company issued to the City 213,623 10 ENZO BIOCHEM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 31, 1997 (Unaudited) shares of the Company's common stock in August 1996 in consideration of the settlement amount. As a result of this settlement with the City, the Company incurred a charge against earnings in the amount of approximately $7.6 million in the fourth quarter of fiscal 1996. Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources The Company at January 31, 1997, had cash and cash equivalents of $23,209,000, an increase of $5,416,000 from July 31, 1996. The Company had working capital of $41,237,000 at January 31, 1997 compared to $29,451,000 at July 31, 1996. The Company's income before taxes for the 6 month period ended January 31, 1997 was $338,000 which includes depreciation and amortization aggregating approximately $918,000. The Company's positive cash flow from operations was sufficient to meet its current cash needs for the research and development programs and other investing activities. Net cash provided by operating activities for the 6 month period ended January 31, 1997 was approximately $5,589,000 and includes $5.0 million of cash received in connection with the litigation settlement with Johnson & Johnson, Inc. as compared to net cash provided by operating activities of $4,514,000 for the 1996 period which also includes $5.0 million of cash received in connection with the litigation settlement with Johnson & Johnson, Inc. The increase in net cash provided by operating activities from the 1996 period to the 1997 period was primarily due to the Company's decrease in net income from January 31, 1997, an increase provision for uncollectable 11 accounts receivable of $1,212,000 offset by the decrease in accounts receivable, and the decrease in income taxes payable. Net cash used in investing activities increased by $119,000 from the 1996 period primarily as a result of an increase in capital expenditures. Net cash provided by financing activities decreased by $841,000 from the 1996 period primarily as a result of the decrease in proceeds from the exercise of stock options. Results of Operations Six months ended January 31, 1997 compared with six months ended January 31, 1996 Revenues from operations for the period ended January 31,1997 decreased by $830,000 over revenues from operations for the period ended January 31,1996. This decrease was due to a decrease of $130,000 in the mix of research products sales resulting primarily from the Company's non-exclusive distribution agreements for the Company's products and by a decrease of $700,000 in revenue for the clinical reference laboratory operation. The decrease in revenues from the clinical laboratory operations resulted primarily from a reduction in reimbursement rates from the Medicare program and, to a lesser extent, a decrease in volume from unprofitable diagnostic screening tests. Cost of sales increased by approximately $35,000 as a result of an increase of $ 197,000 in the cost of sales of research products from the Company's distribution agreements activities offset by a decrease in the cost of clinical laboratory services of $162,000. This decrease is primarily due to the improved efficiencies of performing certain diagnostics screening tests. The increase in the cost of research products is primarily due to the change in mix of products distributed. Research and development expenses increased by approximately $582,000 as a result of an increase in research programs and to a lesser extent the increase in amortization of patent costs. The provision for uncollectable accounts receivable increased by $1,212,000 primarily due to the fact that additional reserves were needed during the six months entered January 31, 1997 primarily to cover lower collection rates under the Federal Medicare programs and other third-party insurance carriers. The health care industry is undergoing significant change as third-party payors, such as Medicare and other insurers, increase their efforts to control the cost, utilization and delivery of health care services. In particular, the Company believes that reductions in reimbursement for Medicare services will continue to be implemented from time to time. Reductions in the reimbursement rates of other third-party payors are likely to occur as well. Furthermore, the Company 12 cannot predict the effect health care reform, if enacted, would have on its business, and there can be no assurance that such reforms, if enacted, would not have a material adverse effect on the Company's business and operations. Selling and general and administration expenses decreased by $592,000 primarily due to a decrease in legal fees and the overall improved efficiencies at the clinical reference laboratory. Three months ended January 31, 1997 compared with three months ended January 31, 1996 Revenues from operations for the period ended January 31,1997 decreased by $279,000 over revenues from operations for the period ended January 31,1996. This decrease was due to a decrease of $266,000 in the mix of research products sales primarily from the Company's non-exclusive distribution agreements and by a decrease of $13,000 in revenue for the clinical reference laboratory operation. The decrease in revenues from the clinical laboratory operations resulted primarily from a reduction in reimbursements rates from the Medicare program and to a lesser extent, a decrease in volume from unprofitable diagnostic screening tests. Cost of sales increased by approximately $97,000 as a result of an increase of $87,000 in the cost of sales of research products from the Company's distribution agreements activities and by a increase in the cost of clinical laboratory services of $10,000. Research and development expenses increased by approximately $259,000 as a result of an increase in research programs and to a lesser extent the increase in amortization of patent costs. The provision for uncollectable accounts receivable increased by $446,000 primarily due to the fact that additional reserves were needed during the three months ended January 31, 1997 primarily to cover lower collection rates under the Federal Medicare programs and other third-party insurance carriers. The health care industry is undergoing significant change as third-party payors, such as Medicare and insurers, increase their efforts to control the cost, utilization and delivery of health care services. In particular, the Company believes that reductions in reimbursement for Medicare services will continue to be implemented from time to time. Reductions in the reimbursement rates of other third-party payors are likely to occur as well. Furthermore, the Company cannot predict the effect health care reform, if enacted, would have on its business, and there can be no assurance that such reforms, if enacted, would not have a material adverse effect on the Company's business and operations. Selling and general and administration expenses decreased by $297,000 primarily due to a decrease in legal fees and the overall improved efficiencies at the clinical reference laboratory. 13 PART II Item 2- Changes in Securities The Company issued an aggregate of 416,521 shares of Common Stock in August 1996, in October 1996 and in December 1996 in exchange for the cancellation of an aggregate of $6,171,871 owed or to be owed by the Company to certain creditors of the Company. The shares were registered pursuant to a registration statement declared effective in February 1997. 14 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. ENZO BIOCHEM, INC. ------------------ (registrant) Date: March 13, 1997 by: /s/ Shahram K. Rabbani ----------------------- Chief Operating Officer, Secretary and Treasurer 15