SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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, 1999
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ___________________
Commission File Number 1-9974
ENZO BIOCHEM, INC.
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(Exact name of Registrant as Specified in Its Charter)
New York 13-2866202
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(State or Other jurisdiction I.R.S. Employer
of Incorporation or Organization) Identification No.)
60 Executive Boulevard,
Farmingdale, New York 11735
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(Address of Principal Executive Offices) (Zip Code)
(516) 755-5500
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(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value The American Stock Exchange
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(Title of Each 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 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. |X|
The aggregate market value of the Common Stock held by nonaffiliates as of
October 20, 1999 was approximately $482,510,700.
As of October 20, 1999, the Registrant had 25,099,736 shares of Common
Stock outstanding
Part of Form 10-K Document Incorporated by Reference
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Part III - Items 11, 12 and 13 In the Company's Proxy Statement to be
filed with the Securities and Exchange
Commission no later than November 29, 1999
Part IV - Certain exhibits listed Prior filings made by the Company
in response to Item under the Securities Act of 1999 and
14(a)(3) the Securities Exchange Act of 1934
2
PART I
Item I. Business
Introduction
Enzo Biochem, Inc. (the "Company" or "Enzo") develops, manufactures and
markets health care products based on molecular biology and genetic engineering
techniques, and also provides diagnostic services to the medical community. The
business activities of the Company are performed by one of the Company's three
wholly-owned subsidiaries--Enzo Diagnostics, Inc., Enzo Therapeutics, Inc., and
Enzo Clinical Labs, Inc. ("Enzo Diagnostics", "Enzo Therapeutics" and "Enzo
Clinical Labs", respectively). These activities are: (1) research and
development, manufacture and marketing of diagnostic research products and
therapeutic products through Enzo Diagnostics and Enzo Therapeutics, and (2) the
operation of a clinical reference laboratory through Enzo Clinical Labs. For
information relating to the Company's business segments, see Note 12 of the
Notes to Consolidated Financial Statements.
For the fiscal year ended July 31, 1999 (fiscal 1999), approximately 37%
of the Company's operating revenues was derived from product sales and
approximately 63% was derived from clinical reference laboratory services. For
the fiscal years ended July 31, 1998 and 1997 (fiscal 1998 and fiscal 1997,
respectively), approximately 31% and 38% of the Company's operating revenues
were derived from product sales and approximately 69% and 62% were derived from
clinical reference laboratory services.
Product Development Activities
The Company's product development programs incorporate various scientific
areas of expertise, including recombinant DNA, monoclonal antibody development,
enzymology, microbiology, biochemistry, molecular biology, organic chemistry,
and fermentation. The Company's activities in research and development are
performed by the Company's professional and scientific staff. To a lesser
extent, research and development is pursued in collaboration with outside
consultants at research and academic institutions.
The primary focus of the Company's current research is the development of
products based on two technology platforms -- genetic modulation and immune
modulation. The Company is funding its research programs through its operating
cash flows and cash and cash equivalents. It also is seeking joint ventures and
collaborative relationships.
Through Enzo Diagnostics, the Company develops products based on gene
identification and a major component of this technology platform is, the
Company's proprietary BioProbe(R) nucleic acid probe products. The Company has
devoted a major portion of its research and development activities to develop
simple and reliable test formats and protocols for the commercialization of
probe products, as well as other diagnostic products for the diagnostic and
medical research markets. The Company has continued to introduce new products
based on its proprietary technology into the research market during fiscal 1999.
The product development programs of the Company include the use of its
BioProbe(R) technology for the development of tests to detect sexually
transmitted diseases such as AIDS, herpes, chlamydia, gonorrhea and other
infectious diseases including tuberculosis, cytomegalovirus, hepatitis and
Epstein-Barr virus (implicated in mononucleosis). The Company currently markets
several such products.
The Company, through Enzo Therapeutics, is developing therapeutic
applications based on its genetic modulation and immune modulation technologies.
In May 1987, the Company entered into an agreement with the Research Foundation
of the State University of New York, granting the Company certain exclusive
rights to "genetic antisense" a technology that uses specially constructed genes
inserted into cells to regulate the functioning of target genes. The Company has
patents and pending applications covering this technology. In fiscal 1999, the
company began studies for products using its proprietary immune modulation
platform.
In fiscal 1998, the Company entered into a licensing agreement with Japan
Tobacco, Inc. for use of this technology in Japan. This agreement is the first
agricultural licensing agreement involving the Company's proprietary technology
and covers the development of new and improved strains of rice. The Company
believes that this technology will be the basis for the Company to derive
meaningful revenues in the future.
Whenever the Company complements its internal research and development
activities with collaborative research arrangements with academic and private
research institutions or consultants on specific projects, the Company typically
supplies funds to cover salaries, materials, certain laboratory equipment and a
portion of the overhead. In all such collaborative research arrangements, the
Company reserves the patent and commercial rights to any product or process
developed. The location of the
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Company in the greater New York area affords the Company access to and
interaction with a large number of research institutions and qualified
scientists.
In the fiscal years ended July 31, 1999, 1998 and 1997, the Company
incurred costs of $4,427,000, $3,983,500 and $3,561,900, respectively, for
research and development activities.
Clinical Reference Laboratory
The Company, through Enzo Clinical Labs, operates a clinical reference
laboratory that offers full diagnostic services to the greater New York medical
community. The services Enzo Clinical Labs provides include chemistry, blood
tests, cytology studies, tissue pathology, hormone studies, and diagnostic
procedures that seek to detect precancerous conditions, cancers in cervical
specimens and sexually transmitted diseases. Enzo Clinical Labs provides these
services primarily to physicians as well as to clinics, and other clinical
laboratories. Enzo Clinical Labs operates a regional clinical reference
laboratory on Long Island and also operates eleven satellite patient service
centers in the greater New York area, including a stat laboratory in Manhattan.
The patient service center collects the specimens as requested by the physician.
The specimens are sent through the Company's in-house courier system to the
Company's laboratory for testing. A "STAT" lab is a laboratory that has the
ability to perform certain routine tests quickly and report results to the
physician immediately.
Patient specimens are delivered to the Company accompanied by a test
request form. These forms, which are completed by the physician, indicate the
tests to be performed and provide the necessary billing information. Once this
information is entered into the computer system, the tests are performed and the
results are entered primarily through a computer interface or manually. Most
routine testing is completed by early the next morning, and test results are
printed and prepared for distribution. Some physicians have local printer
capability and have reports printed out directly in their offices. Physicians
who request that they be called with a result are so notified in the morning.
The Company currently offers over 2,000 different routine and esoteric
clinical laboratory tests or procedures. Several hundred of these are frequently
used in general patient care by physicians to establish or support a diagnosis,
to monitor treatment or medication or to search for an otherwise undiagnosed
condition. These routine and esoteric procedures are most often used by
practicing physicians in their outpatient office practices.
Approximately 88% and 92% at July 31, 1999 and 1998, respectively, of the
Company's net accounts receivable related to its clinical reference laboratory
business which operates in the New York Metropolitan area. The Company believes
that the concentration of credit risk with respect to accounts receivable are
limited due to the diversity of the Company's client base. However, the Company
provides services to certain patients covered by various third-party payors,
including the Federal Medicare program. Revenue, net of contractual allowances,
from direct billings under the Federal Medicare program during each of the
fiscal years ended July 31, 1998 and 1997 approximated 10% and 12%, respectively
of the Company's total revenue. For the year ended July 31, 1999, 1998 and 1997
no other payor accounted for more than 10% of the Enzo Clinical Labs revenues.
In addition, the Company utilizes its clinical reference laboratory to
evaluate and demonstrate the benefits of the Company's diagnostic products (see
Note 12 of the Notes to Consolidated Financial Statements for segment
information and operating revenues and profits).
Business Objectives
The current business objectives of the Company are (1) to develop;
manufacture and market on a worldwide basis diagnostic and therapeutic products
based on the Company's technology platforms of genetic modulation and immune
modulation, and (2) to perform diagnostic tests for the U.S. health care
community. The Company's research and development efforts are directed to both
short and long-term projects. Diagnostic products require less time to
commercialize than therapeutic products because the procedures required for
attaining government clearance are less time consuming. Therapeutic products,
once developed, require extensive clinical testing and compliance. This process
can range from three to five years and, in some instances, longer.
At such time, if ever, as the Company's self-funded research activities
and programs demonstrates technical feasibility and potential commercial
importance, the Company expects that it will have the option to pursue the
opportunity on its own or to associate with another entity for development and
ultimate marketing of the product. There can, however, be no assurance that an
acceptable partner could be found if sought. The Company's strategy is to retain
ownership with respect to development and marketing of a product or process
unless there is a compelling business reason to its licensed products or
process.
4
Marketing Strategy
Product Development Activities
The Company has been successful in obtaining clearance from the Federal
Drug Administration ("FDA") for a number of in vitro diagnostic products for
sale to the clinical diagnostic market through Enzo Diagnostics. Among these
products are four DNA probe products based on the Company's BioProbe(R) nucleic
acid probe technology and developed and manufactured by the Company. The Company
believes that significant delays will not be encountered with any future probe
product submissions to the FDA since products based on this technology have been
FDA cleared. However, there can be no assurance that delays will not be
incurred.
Through Enzo Diagnostics, the Company manufactures and markets its
BioProbe(R) nucleic acid probe products to the research market, where FDA
clearance is not required. These research products include products that allow
researchers to make and detect their own non-radioactive DNA and RNA probes.
Also included in this product line are complete kits that contain all the
reagents necessary to detect various disease-causing organisms in clinical
samples.
During fiscal 1998, the Company developed the BioArray(TM) Labeling
Systems, a product line designed and optimized to meet the needs of those
research scientists using microchip array assays. The BioArray(TM) products
provide efficient labeling, strong signals and clear displays characteristics
that are required for microchip assays. These products are manufactured and sold
by Enzo Diagnostics to researchers directly and through the company's worldwide
distribution network.
Enzo Diagnostics manufactures and markets a variety of in situ
hybridization kits. These PathoGene(R) DNA probe kits detect the presence of
specific pathogens, including human papillomavirus (HPV), herpes simplex virus,
cytomegalovirus, Epstein-Barr virus, adenovirus, hepatitis B virus and Chlamydia
trachomatis. The Company's BioPap(R) DNA probe kits detect several types of HPV
in Pap smear samples. The Company has developed an enhanced detection procedure
with increased sensitivity that enables the pathologist to identify the pathogen
when only small numbers of the organism are present. These products compete
directly with products labeled with various radioactive isotopes, as well as
with products based on antibody assays.
In addition to the in situ hybridization kits, Enzo Diagnostics also
manufactures and markets products based on the Company's proprietary microplate
hybridization format. Microplate hybridization assay kits have been developed
for the detection of the AIDS-causing virus, HIV-1. Kits are also available to
detect HIV-2, another strain of the AIDS virus, hepatitis B virus, the
tuberculosis-causing bacterium (MTB) and members of the MTB complex. An enhanced
version of the microplate assay has been developed to detect the hepatitis virus
directly in serum and is aimed at the blood bank market.
Enzo's HIV test was one of the first commercial DNA probe tests for this
pathogen in the microplate format. Unlike AIDS tests that detect antibodies to
HIV-1, the DNA probe test detects nucleic acid DNA unique to the virus.
Individuals may carry HIV for months before developing antibodies, therefore a
test directed at the virus can provide earlier detection. Because Enzo's HIV
microplate hybridization assay can be used as a means to quantify the virus,
researchers can determine HIV levels in patients and study relationships between
these levels and other disease indicators such as antibody production or
appearance of symptoms. This product is currently marketed to the research
community.
In the early stages of infection, a pathogen may be present in very small
amounts and may be difficult to detect. Samples, however, can be treated in a
way that produces copies of the pathogen's nucleic acid, if it is present. This
amplification process is one possible approach to detect very low levels of
infection. All of Enzo's microplate assays can be used to detect the presence of
these pathogens in amplified, as well as unamplified samples. In order to fully
integrate its technology, Enzo has developed a simplified amplification process
for multicopy production of nucleic acid. A patent application was filed in
January 1994 and this proprietary amplification process was incorporated into
the microplate assay format, thus providing a totally integrated assay system.
This approach is being developed for use with the hepatitis assay system and
will form the basis for all Enzo's microplate assays.
In addition to nucleic acid-based products, the Company produces and sells
other types of research products, such as monoclonal antibodies. The products
are marketed through direct sales, an extensive product catalog, advertising in
scientific and trade journals and U.S. and foreign distributors. In fiscal 1993,
Enzo Diagnostics began to expand its non-exclusive distribution arrangements for
its proprietary products in both the U.S. and foreign markets with companies
having worldwide distribution and with companies having local foreign
distribution. In fiscal 1994, the Company continued to expand these distribution
arrangements and began a policy of using joint labels on all products marketed
by its distributors.
In April 1994, the Company signed a multi-year non-exclusive worldwide
distribution and supply agreement with Boehringer Mannheim Biochemicals (Roche
Diagnostics GmbH). Under the terms of this agreement, Roche Diagnostics GmbH
distributes to the global medical research market, a broad range of biochemical
products and reagents manufactured and supplied by Enzo. The agreement includes
products based on nonradioactive DNA probe technology and includes products that
were developed and marketed by Roche Diagnostics GmbH prior to the agreement, as
well as products developed by the Company, all of which are
5
covered by Enzo patents. The agreement took effect in April 1994 and extends for
the life of the last patent to expire for products involved.
In February 1995, a multi-year non-exclusive distribution agreement was
signed with Amersham International under which Amersham markets a broad group of
products that had been developed and marketed by Amersham, as well as products
developed by Enzo Diagnostics. All products are based on nonradioactive DNA
labeling technologies covered by Enzo patents. A multi-year non-exclusive
distribution agreement, also covering the Company's line of proprietary DNA
labeling products and reagents was concluded in May 1995 with Dako A/S, a
privately-held international company with headquarters in Copenhagen, Denmark
and subsidiaries worldwide, including the Dako Corporation based in Carpinteria,
California. In September 1995 a similar multi-year non-exclusive distribution
agreement was concluded with VWR Scientific Products, a leader in the medical
research market that was formerly an operating unit of Baxter Health Care. In
fiscal 1997 a previous distribution agreement with Sigma Chemical Co. was
expanded and an additional multi-year nonexclusive distribution agreement was
concluded with Wako Chemical Co., a leader in the medical research market in
Japan.
During fiscal 1998, Enzo Diagnostics continued expanding its non-exclusive
distribution network. In October 1997, the Company signed an agreement with
Li-Cor, Inc, a developer of instrumentation for biological sciences, under which
Enzo will produce and supply its proprietary DNA labeling and detection reagents
to be used in conjunction with Li-Cor's automated DNA sequence analysis systems
for the medical research market. In May 1998, the Company concluded an agreement
with Affymetrix, Inc. under which Enzo will be the sole supplier of specified
proprietary nucleic acid labeling and detection products for Affymetrix'
microchip array systems.
In January 1999, the Company through Enzo Diagnostics further expanded its
distribution network by concluding a worldwide distribution agreement with NEN
Life Science Products, Inc. Under the agreement NEN began to distribute a broad
range of Enzo's biochemical products and reagents to the global medical research
market. The agreement covers products manufactured by NEN and based on both
Enzo's and NEN's proprietary non-radioactive DNA labeling and detection
technologies, that were marketed by NEN prior to the agreement, as well as
products developed by Enzo, all of which are covered by Enzo patents. With the
signing of this agreement, the issue of prior sales and past infringement by NEN
was satisfactorily resolved.
The Company, because of its various proprietary diagnostic technologies,
may pursue entering into joint ventures with other biotechnology companies or
other health care companies with marketing resources and/or complementary
technology or products in order to more fully take advantage of market
opportunities.
Clinical Reference Laboratory
Enzo Clinical Labs is a major regional clinical reference laboratory
offering full service diagnostic testing in the greater New York marketplace.
Its services are marketed by a professional sales force who serve client
physicians, clinics, nursing homes and other clinical laboratories in the area.
A key marketing strategy has been the strategic placement of a network of
patient service centers, where patients can go to have samples taken upon the
request of their physicians. The Company operates a stat laboratory at its
Manhattan patient service center, affording its client physicians rapid test
turnaround. The diagnostic service business provides Enzo Diagnostics with a
practical application of its products, making it possible to more appropriately
tailor diagnostic products to the end-user. The Company's nucleic acid probe
products offer Enzo Clinical Labs a marketing tool to offer nucleic acid based
tests.
The Company offers its services through direct sales representatives.
Sales representatives market the laboratory services primarily to physicians,
clinics, hospitals and other laboratories. The Company's sales representatives
are compensated through a combination of salaries, commissions and bonuses, at
levels commensurate with each individual's qualifications and responsibilities.
Commissions are primarily based upon the individual's productivity in generating
new business for the Company.
The Company also employs customer service representatives ("CSR's") to
interact with clients on an ongoing basis. CSR's monitor the status of the
services being provided to clients, act as problem solvers, provide information
on new testing developments and serve as the client's regular point of contact
with the Company. CSR's are compensated with a salary commensurate with each
individual's qualifications and responsibilities.
Health care reform, the shift to managed care and increased competition by
hospitals all had an impact on the clinical laboratory testing industry. The
Company expects these trends to continue and plans to respond by shifting
additional sales staff to support the managed care market segment.
6
Technology and Product Development
The major focus of the Company's diagnostic product development program
has been toward the commercialization of nucleic acid probe-based in vitro
diagnostics. Nucleic acid probes had been radioactive and required complex
protocols to their use. To develop probe technology into useful commercial
products, it was necessary to develop methods that were for, easy-to-use, easy
to interpret, readily automatable and sensitive enough to detect the presence of
low levels of pathogen. As a result of this product development effort, the
Company has developed a broad technology base for the labeling, detection,
sensitivity enhancement, signal amplification and testing formats of nucleic
acid probe products. Patent protection has been aggressively pursued for this
technology base. At the end of fiscal 1999 some 186 patents worldwide had been
granted to or licensed by the Company in this area of technology. In fiscal 1997
and continuing during fiscal 1998 and 1999, the Company began to receive
revenues from the distribution agreements related to these patents and believes
that the patents have positioned the Company to derive more revenues in the
future as the markets for these products continue to develop. These patents
cover a variety of nucleic acid probe products, chelation technology for easy
radioactive labeling, signal amplification methods, sensitivity enhancements,
and automatable formats.
BioProbe(R) Nucleic Acid Probe Labeling and Signal Generating Systems
Traditionally, nucleic acid probes used in biomedical research and
recombinant DNA technology have been radioactively labeled with isotopes of
hydrogen, phosphorous, carbon or iodine. Radioactive materials have historically
provided researchers with the most sensitive and, in many cases, the only means
to perform many important experimental or analytical tests. However, limitations
and drawbacks are associated with the use of radioactive compounds. For example,
radioactive materials are often very unstable and have a limited shelf life.
Because of the potentially hazardous nature of radioactive materials, their use
must be licensed and elaborate safety precautions must be maintained during the
preparation, utilization and disposal of radioisotopes. In addition, radioactive
nucleotides are extremely expensive and there instability increases usage cost.
To overcome the limitations of radioactively labeled probes, the Company,
has developed proprietary technologies that allow DNA probes to be used
effectively without the use of radioactivity. These technologies permit the
application of genetic analysis in a clinical setting without the shelf life,
licensing and disposal problems associated with radioactively labeled probes.
In December 1987, a patent for the technology used in nonradioactive DNA
probe labeling was issued to (`Yale") University. In July 1994 and in September
1995 additional patents, broadening the coverage were also issued to Yale. The
Company has an exclusive license for these patents from Yale for their life.
Pursuant to such license agreement, the Company is obligated to pay Yale
royalties equal to a percentage of sales. The Company is obligated to pay Yale
an annual minimum royalty fee of $200,000, which shall continue through the end
of the term of the exclusive license.
The near term application of nucleic acid probe systems in the human
health care area is in bacterial and viral diagnostics. Nucleic acid probe
diagnostics can be developed for any organism. Advantages of the nucleic acid
probes for the direct detection of pathogens in human diagnostics are speed
(less than an hour for test results as compared to days), greater specificity,
and the capability of diagnosing a disease in an early or latent stage of
development.
Radioactive Labeling Systems
The Company has developed a new method for labeling molecules with
radioisotopes that is safer, faster, simpler and more cost effective than
traditional methods of radiolabeling. This method is to be used in those
applications requiring more sensitivity than non-radioactive materials permit.
This method permits radiolabeling of a wide range of molecules for use in a
variety of applications, including in vivo imaging, therapeutics, and clinical
assays. With this technology stable products are radiolabeled just prior to use,
thereby overcoming inherent limitations of classical radiolabeling technologies.
The Company's method for radiolabeling maximizes the sensitivity while
minimizing radiation exposure and radioactive waste.
In November 1987, the Company received two U.S. patents protecting aspects
of its versatile technology for linking radioactive ions or biotin to various
biologically active molecules for diagnostic and therapeutic uses. Since that
time additional patents covering aspects of this technology have been issued to
the Company.
Automatable Test Formats
In February 1991, the Company was granted a U.S. patent for its nucleic
acid probe technology that generates a signal in solution. This technology
enables the development of probe-based tests that can be readily automated and
measured by instrumentation. With this technology, probes can be detected by
either chemiluminescent, fluorescent or colorimetric methods. The Company has
developed test kits employing this technology and currently supplies such kits
to the research market. The first kits launched in fiscal 1992, include a test
for HIV-1, the virus that causes AIDS and a test for the organism causing
tuberculosis. Tests for other viruses, including HIV-2 another strain of the
AIDS virus and hepatitis were later introduced to researchers. A more
7
sensitive assay that can detect hepatitis B virus directly in serum and geared
to the blood banking market was developed. More recently the Company's
amplification technology was integrated with the enhanced hepatitis assay. The
Company is developing an instrument-based automatable system employing this and
other proprietary Enzo technologies.
Rapid, On-Site Diagnostics
The Company also has developed a gel-based diagnostic test technology that
is geared to accurate, rapid, and one-step tests. The ease of performing and
interpreting tests based on this proprietary gel technology makes these tests
well suited for at-home and doctor's office use. The Company has developed a
fecal occult blood test to screen for colorectal cancer based on the gel
technology and has received FDA clearance to market this test to the physician's
offices. The Company is exploring other tests based on the gel technology.
Monoclonal Antibodies
The Company markets a panel of monoclonal antibodies that are being used
in pathology laboratories to help identify the original source of a metastatic
cancer and the type of cancer in undifferentiated cancer cells. The ability to
identify the origin and type of cancer aids in the diagnosis of cancer and
assists physicians in prescribing therapy. In order to offer a full line of
state-of-the-art research products, the Company is actively engaged in expanding
its line of monoclonal antibodies.
Therapeutic Technology and Product Development
Through Enzo Therapeutics, the Company is applying its technological
capabilities for manipulating genetic material towards the development of
therapeutic treatments for a variety of infectious diseases and cancers. During
fiscal 1998, the Company improved a new gene delivery system that is designed to
provide universal and efficient delivery of any gene to any cell. The
GenSert(TM) Universal Delivery System is being combined with Enzo's antisense
technology in its therapeutic development program. The Company has also
developed techniques for stably attaching drugs and radioisotopes to proteins
and DNA. The Company is working towards the development of products relating to
HIV, certain cancers and hepatitis, however, no products have been finalized and
there can be no assurance that any such products will even be successfully
developed.
In May 1987, Enzo entered into an agreement with The Research Foundation
of the State of New York ("SUNY"), granting the Company certain exclusive rights
to its genetic antisense technology. Three U.S. applications were subsequently
issued as patents by the U.S. Patent and Trademark Office. The first patent
issued in March 1993; a second patent issued in May 1993; the third patent
issued in December 1993. Similar patents covering this technology have been
issued in Europe and in Japan. See Item 3- Legal Proceedings.
This antisense technology theoretically offers a way to control the
expression of any gene in any organism, therefore the Company believes it has
broad therapeutic and agricultural applications. For example, genetic antisense
could make possible a new approach to controlling viral diseases and cancers. It
could also be used to control viral diseases in animals and agriculturally
important plants and could lead to a variety of other desirable traits in
animals and in agricultural crops. Genetic antisense has proven to be effective
in a variety of organisms, including plants, animals and bacteria. Researchers
have developed transgenic mice that are resistant to murine leukemia virus and
tomato plants that produce tomatoes that do not spoil upon ripening. The Company
is currently in human clinical studies with an antisense product for the
treatment of HIV-1 infection. It is also exploring the development of a number
of other antisense-based therapeutic products.
Because genetic antisense has such broad application, the Company is
exploring collaborative business relationships of various types with other
companies to develop the applications that Enzo is not interested in retaining
for its own activities. The Company is itself involved in applying genetic
antisense to human therapeutic products and it recognizes that the technology
also holds important implications for crops, as well as animal husbandry and
industrial uses. In January 1998, the Company entered into a licensing agreement
with Japan Tobacco, Inc., for use of the Company's patented genetic antisense
technology in Japan. This agreement is the first agricultural licensing
agreement involving Enzo's proprietary technology and covers the development of
new and improved strains of rice.
In January 1995, the Company, through Enzo Therapeutics, signed a
collaborative research agreement with Cornell University on behalf of Cornell's
Medical College, aimed at evaluating the Company's genetic antisense technology
for use in managing the treatment of HIV-1, the AIDS-causing virus. Early
research results indicated that this technology could be applied to inhibiting
the function of genes necessary for HIV-1 to grow within the cell. In
preclinical studies, Enzo scientists and collaborators were able to demonstrate
stable resistance to HIV in human immune cells in culture that were treated with
the Company's HIV product. These results were published in May 1997 in the
Journal of Virology, a peer-reviewed publication of the American Society for
Microbiology. The ability of Enzo's genetic antisense construct to enable immune
cells to withstand the effects of infection by HIV-1 is an extremely important
step in the development of an effective clinical product. Notwithstanding the
foregoing, there can be
8
no assurances that the Company's preclinical success in culture can be repeated
in human trials. A key element in the success was the development by Enzo
scientists of the Stealth Vector(TM), the antisense construct designed to
localize in the cell nucleus, where it could be most effective. The
StealthVector(TM) was also designed to be "invisible" to the human immune
system, so as not to trigger an immune response.
In October 1997, Enzo Therapeutics signed an agreement with the University
of California, San Francisco ("UCSF") to conduct the first human trials of the
StealthVector(TM), the Company's genetic antisense medicine to treat HIV-1
infected individuals. This product, designed to stop the growth of the virus,
has been developed to protect human immune cells against infection by a broad
spectrum of strains of HIV-1 including its mutational variants. The primary
investigators for this Phase I trial, physicians at UCSF have extensive
experience and expertise in the evaluation of new drugs for the treatment of
immunodeficient patients.
An Investigational New Drug ("IND") application was filed with the FDA by
the Company and in March 1998, Enzo Therapeutics received clearance from the FDA
to initiate the Phase I trial of its Stealth Vector(TM) therapeutic product for
HIV-1. In July 1998 the Phase I clinical trial was initiated and is currently on
going. In addition to providing an evaluation of the safety of the product,
certain aspects of the trial will provide insight on how to formulate and
deliver this medicine in the most effective manner.
In February 1996, the Company initiated a joint research program with
scientists at the Albert Einstein College of Medicine in New York City, geared
towards the development of a specific therapeutic product for the treatment of
hepatitis B based on the Company's proprietary technologies. During fiscal 1998,
Enzo scientists, working with researchers at Einstein, were successful in
developing mice hosting functional human liver cells that can support the growth
of hepatitis B virus. Until now, one of the major problems in hepatitis research
has been the lack of viable animal models capable of supporting the infection
and replication of the virus in human hepatic cells in vivo. This was the first
time this type of animal model system capable of supporting the growth of
hepatitis B virus in human hepatocytes has been reported. These experimental
mice, that can mimic hepatitis infection in humans, can function as an animal
model system for evaluation new therapeutic modalities to treat hepatitis B.
In April 1998, the Company, through Enzo Therapeutics, initiated a joint
research program with Hadassah University Hospital in Jerusalem, Israel aimed at
a preclinical analysis of various therapeutic products using Enzo's proprietary
immune modulation technology. This program was designed to study the efficacy of
therapeutic treatments based on certain of Enzo's technologies, including oral
tolerization, in areas in which the immune response is a major complication in
the management of disease and in the control of graft Vs host disease (GvHD), a
major complication of bone marrow and stem cell transplantation, accounting for
much of the failure of these transplants. GvHD is an immune response mounted by
the engrafted tissue or cell population against the recipient and can
occasionally lead to death. There is currently no effective treatment for
chronic GvHD, however the results of this preclinical studies carried out under
this joint research program have demonstrate that Enzo's immune modulation
technology could be effective in negating the effects of GvHD by controlling the
immune response mounted by the donor tissue or cells. Clinical protocols have
been developed and human trials are expected to begin in the next fiscal year.
Preclinical animal studies begun in fiscal 1998 and continuing this year
demonstrate the efficacy of Enzo's immune modulation technologies as a means of
treating inflammatory bowel disease, including Crohn's disease and ulcerative
colitis. Further studies are planned to explore this use as a therapeutic
modality.
During fiscal 1999, preclinical laboratory studies showed strong promise
for the Company's proprietary immune modulation technology as a therapeutic
modality to treat the undesirable immune responses that lead to serious liver
damage among patients suffering form chronic hepatitis B virus. In collaboration
with researchers at the Liver Unit of Hadassah University Hospital in Jerusalem,
Israel, oral administration of specific hepatitis B proteins was successful in
controlling the anti-viral immune response to hepatitis B in laboratory animals.
In other studies in collaboration with researchers at the Albert Einstein
College of Medicine in New York City, Enzo scientists were successful in using
this technology to treat primates infected with hepatitis B virus. The animals
were given oral doses of the medicine, either before infection with the virus or
after infection. When the medicine was given after HBV infections, the animals
showed a decrease in their liver pathology and the liver enzymes returned to
normal levels. When the medicine was given before infections with the virus, the
animal never developed liver pathology and the liver enzymes remained at normal
levels. Thus Enzo's hepatitis B therapy was successful in preventing or treating
the liver disease conditions. Based on these and other laboratory studies,
clinical protocols have been developed to determine the treatment's efficacy in
humans and in July 1999, a human clinical study was initiated and is ongoing at
the Liver Unit at Hadassah University Hospital in Jerusalem.
Enzo has filed several patent applications covering this technology,
including the unique animal model, as well as therapeutic products and
protocols.
According to the latest figures published by the World Health
Organization, some 2 billion people today are infected by hepatitis B, of whom
350 million are chronically infected and therefore at risk of death from liver
disease.
9
Notwithstanding the foregoing, there can be no assurances that the
Company's success in pre-clinical and early stage trials can be repeated in
later stage and/or human trials.
Manufacturing
The Company's nucleic acid probe products contained in its PathoGene(R)
and BioPap(TM) product lines are manufactured by using recombinant DNA
techniques and traditional chemical synthesis methods. The DNA sequence, which
codes for a specific infectious agent or particular trait, is isolated by
cloning. The sequence is then introduced into a plasmid, commonly one that grows
in E. coli bacterium, and the bacterium serves as a reproduction vehicle with
the application of standard fermentation procedures. The reproduced quantities
of the specific DNA sequences are purified from the bacteria and then labeled so
they can be detected. The detection system usually employs a non-radioactive
visualization molecule, such as a color-changing enzyme-substrate or a
fluorescent substance. The production of DNA probes does not require large
manufacturing facilities because the yields from the bacteria are high and only
small quantities of nucleic acids are required.
Monoclonal antibodies specific to certain substances are produced by
fusing a type of mouse cancer cell with certain antibody-producing white blood
cells from the spleens of mice that had been immunized with the targeted
substance. The hybrid cells which make antibodies with the desired
characteristics are then cultured to produce large quantities of that one
discrete type of antibody. Monoclonal antibody production does not require
extensive facilities.
The Company's manufacturing operation uses exempt quantities of tritium
((3)H) in its research and development activities and manufacturing operations.
For the fiscal year ended July 31, 1999 the Company has not had an accumulation
of tritium to be disposed.
Information Systems
The Company believes that with respect to its clinical reference
laboratory business, the health care provider's need for data will continue to
place high demands on its information systems staff. The Company believes that
the efficient handling of information involving clients, patients, payors and
other parties will be a critical factor in the Company's future success. (See
Item 7- Management's Discussion and Analysis of Financial Condition and Results
of Operations-Year 2000)
Quality Assurance
The Company considers the quality of its clinical reference laboratory
tests to be of critical importance, and it has established a comprehensive
quality assurance program designed to help assure accurate and timely test
results. In addition to the compulsory external inspections and proficiency
programs demanded by the Medicare program and other regulatory agencies, Enzo
Clinical Labs has in place systems to emphasize and monitor quality assurance.
The Company's laboratory is subject to on-site evaluation by the College of
American Pathologies ("CAP") proficiency testing program, New York State survey
and the Company's own internal quality control programs.
External Proficiency/Accreditation's
Enzo Clinical Labs participates in numerous externally administered, blind
quality surveillance programs, including the CAP program. The blind programs
supplement all other quality assurance procedures and give Enzo Clinical Labs'
management the opportunity to review its technical and service performance from
the client's perspective.
The CAP accreditation program involves both on-site inspections of the
laboratory and participation in the CAP's proficiency testing program for all
categories in which the laboratory is accredited by the CAP. The CAP is an
independent nongovernmental organization of board certified pathologists which
offers an accreditation program to which laboratories can voluntarily subscribe.
A laboratory's receipt of accreditation by the CAP satisfies the Medicare
requirement for participation in proficiency testing programs administered by an
external source. The Company's clinical laboratory facilities are accredited by
the CAP.
Regulation of Pharmaceutical Products
New drugs are subject to regulation under the Federal Food, Drug and
Cosmetic Act, and biological products, in addition to being subject to certain
provisions of that Act, are regulated under the Public Health Service Act. The
Company believes that products developed by it or its collaborators will be
regulated either as biological products or as new drugs. Both statutes and the
regulations promulgated thereunder govern, among other things, the testing,
manufacturing, safety, efficacy, labeling, storage, record keeping, advertising
and other promotional practices involving biologics or new drugs, as the case
may be. FDA approval or other clearances must be obtained before clinical
testing, and before manufacturing and marketing, of biologics and drugs. At the
FDA, the
10
Center for Biological Evaluation and Research ("CBER") is responsible for the
regulation of new biologics and the Center for Drug Evaluation and Research
("CDER") is responsible for the regulation of new drugs.
Any gene therapy products (one of the areas in which the Company is
developing products) developed by the Company will require regulatory clearances
prior to clinical trials and additional regulatory clearances prior to
commercialization. New human gene therapy products, as therapeutics, are subject
to regulation by the FDA and comparable agencies in other countries. The precise
regulatory requirements with which the Company will have to comply are uncertain
at this time due to the novelty of the human gene therapies currently under
development. Currently, each protocol is reviewed by the FDA on a case-by-case
basis. The FDA has published "Points to Consider" guidance documents with
respect to the development of gene therapy protocols.
Obtaining FDA approval has historically been a costly and time-consuming
process. Generally, in order to gain FDA approval, a developer first must
conduct pre-clinical studies in the laboratory and, if appropriate, in animal
model systems, to gain preliminary information on safety and efficacy. The
results of these studies are submitted as a part of an investigational new drug
("IND") application, which the FDA must review before human clinical trials of
an investigational drug can start. The IND application includes a detailed
description of the clinical investigations to be undertaken.
In order to commercialize any products, the Company (sponsor) files an IND
and will be responsible for initiating and overseeing the clinical studies to
demonstrate the safety and efficacy necessary to obtain FDA approval of any such
products. For Company sponsored INDs, the Company as sponsor will be required to
select qualified clinical sites (usually physicians within medical institutions)
to supervise the administration of the products, and ensure that the
investigations are conducted and monitored in accordance with FDA regulations
and the general investigational plan and protocols contained in the IND.
Clinical trials are normally done in three phases, although the phases may
overlap. Phase I trials, concerned primarily with the safety and preliminary
effectiveness of the drug, involve fewer than 100 subjects. Phase II trials
normally involve a few hundred patients and are designed primarily to
demonstrate effectiveness in treating or diagnosing the disease or condition for
which the drug is intended, although short-term side effects and risks in people
whose health is impaired may also be examined. Phase III trials are expanded
clinical trials with larger numbers of patients and are intended to gather the
additional information for proper dosage and labeling of the drug. Clinical
trials generally take two to five years, but the period may vary. Recent
regulations promulgated by the FDA may shorten the time periods and reduce the
number of patients required to be tested in the case of certain life-threatening
diseases, which lack available alternative treatments.
The FDA receives reports on the progress of each phase of clinical
testing, and it may require the modification, suspension, or termination
clinical trials if an unwarranted risk is presented to patients. Human gene
therapy products are a new category of therapeutics. There can be no assurance
as to the length of the clinical trial period, the number of patients the FDA
will require to be enrolled in the clinical trials in order to establish the
safety, efficacy and potency of human gene therapy products, or that the
clinical data generated in these studies will be acceptable to the FDA to
support marketing approval.
After completion of clinical trials of a new product, FDA marketing
approval must be obtained. If the product is regulated as a new biologic, CBER
will require the submission and approval of both a Product License Application
("PLA") and an Establishment License Application before commercial marketing of
the Biologic. If the product is classified as a new drug, the Company must file
a New Drug Application ("NDA") with CDER and receive approval before commercial
marketing of the drug. The NDA or PLA must include results of product
development, pre-clinical studies and clinical trials. The testing and approval
processes require substantial time and effort and there can be no assurance that
any approval will be granted on a timely basis, if at all. NDAs and PLAs
submitted to the FDA can take, on average, two to five years to receive
approval. If questions arise during the FDA review process, approval can take
more that five years. Notwithstanding the submission of relevant data, the FDA
may ultimately decide that the NDA or PLA does not satisfy its regulatory
criteria for approval and require additional clinical studies. Even after FDA
regulatory clearances are obtained, a marketed product is subject to continual
review, and later discovery of previously unknown problems or failure to comply
with the applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market as well as
possible civil or criminal sanctions. In addition, the FDA may condition
marketing approval on the conduct of specific post-marketing studies to further
evaluate safety and effectiveness.
If a developer obtains designations by the FDA of a biologic or drug as an
"orphan" drug for a particular use, the developer may request grants from the
federal government to defray the costs of qualified testing expenses in
connection with the development of such drug. Orphan drug designation is given
to drugs for rare diseases, including many genetic diseases. The first applicant
who has obtained designation of a drug as an orphan drug and who obtains
approval of a marketing application for such drug is entitled to marketing
exclusivity for a period of seven years. This means that no other company can
market a molecularly identical orphan drug for the use approved by the FDA for
seven years after the approval.
11
Regulation of Diagnostics
The diagnostic products developed by the Company or its collaborators are
likely to be regulated by the FDA as medical devices. The nature of the FDA
requirements applicable to such diagnostic devices depends on their
classification by the FDA. A diagnostic device developed by the Company or its
collaborators would be automatically classified as a Class III device, requiring
pre-market approval, unless the sponsor could demonstrate to the FDA, in the
required pre-market notification procedure, that the device was substantially
equivalent to an existing device that has been classified in Class I or Class II
or to a pre-1976 device that has not yet been classified. If the Company or its
collaborators are unable to demonstrate such substantial equivalence, it would
be required to undertake the time consuming process, comparable to that for new
drugs, of conducting pre-clinical studies, obtaining an investigational device
exemption to conduct clinical tests, filing a pre-market approval application,
and obtaining FDA clearance.
If the Company or its collaborators can demonstrate substantial
equivalence to a Class I product, the "general controls" of the Food, Drug, and
Cosmetic Act- chiefly adulteration, misbranding, and good manufacturing practice
requirements - will apply. If substantial equivalence to a Class II device can
be shown, the general controls plus "special controls" - such as performance
standard, guidelines for safety and effectiveness, and postmarket surveillance-
will apply. While demonstrating substantial equivalence to a Class I or Class II
product is not as costly or time-consuming as the pre-market approval process
for Class III devices, it also involves conducting clinical tests to
demonstrate, equivalence, or that any differences between the new device and
devices already on the market do not affect safety or effectiveness.
Other - Regulation
The Company's business is and will be subject to regulation under various
state and federal environmental laws, including the Occupational Safety and
Health Act, the Recourse Conservation and Recovery Act and the Toxic Substances
Control Act. These and other laws govern the Company's use, handling and
disposal of various biological, chemical and radioactive substances used in and
wastes generated by its operations. The Company believes that it is in material
compliance with applicable environmental laws and that its continual compliance
therewith will not have a material adverse effect on its business.
The Company has in-house personnel to expedite the preparation and filing
of documentation necessary for FDA clearances and approvals, patent issuances
and licensing agreements. The Company has received clearance from the FDA to
market five of its in vitro diagnostic products. The Company also has several
products in various stages of clinical trial evaluation which, if successful,
are expected to be carried through the FDA process.
Clinical Laboratory Regulation and Reimbursement
The clinical laboratory industry is also subject to significant
governmental regulation at the Federal, state and local levels. Under the
Clinical Laboratory Improvement Act of 1967 and the Clinical Laboratory
Improvement Amendments of 1988 (collectively, as amended, "CLIA"), virtually all
clinical laboratories, including the Company's, must be certified by the Federal
government. Many clinical laboratories also must meet governmental standards,
undergo proficiency testing and are subject to inspection. Certificates or
licenses are also required by various state and local laws.
The health care industry is undergoing significant change as third-party
payors, such as Medicare (serving primarily patients 65 and older) and Medicaid
(serving primarily indigent patients) and insurers, increase their efforts to
control the cost, utilization and delivery of health care services. In an effort
to address the problem of increasing health care costs, legislation has been
proposed or enacted at both the Federal and state levels to regulate health care
delivery in general and clinical laboratories in particular. Some of the
proposals include managed competition, global budgeting and price controls.
Although the Clinton Administration's health care reform proposal, initially
advanced in 1994, was not enacted, such proposal or other proposals may be
considered in the future. 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. 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.
In 1992, the U.S. Department of Health and Human Services ("HHS")
published regulations implementing CLIA. The quality standards and enforcement
procedure regulations became effective in 1992, although certain personnel,
quality control and proficiency testing requirements are currently being phased
in by HHS. The quality standards regulations divide all tests into three
categories (waivered, moderate complexity and high complexity) and establish
varying requirements depending upon the complexity of the test performed. A
laboratory that performs high complexity tests must meet more stringent
requirements than a laboratory that performs only moderate complexity tests,
while those that perform only one or more of either routine "waivered" tests may
apply for a waiver from most requirements of CLIA. The Company's facility is
certified by CLIA to perform high complexity testing. Generally, the HHS
regulations require, for laboratories that perform high complexity or moderate
complexity tests, the
12
implementation of systems that ensure the accurate performance and reporting of
test results, establishment of quality control systems, proficiency testing by
approved agencies and biennial inspections.
The sanction for failure to comply with these regulations may be
suspension, revocation or limitation of a laboratory's CLIA certificate
necessary to conduct business, significant fines and criminal penalties. The
loss of a license, imposition of a fine or future changes in such Federal, state
and local laws and regulations (or in the interpretation of current laws and
regulations) could have a material adverse effect on the Company.
The Company is also subject to state regulation. CLIA provides that a
state may adopt more stringent regulations than Federal law. The State of New
York's clinical laboratory regulations contain provisions that are more
stringent than Federal law. The Company's laboratory has continuing programs to
ensure that their operations meet all applicable regulatory requirements.
Containment of health care costs, including reimbursement for clinical
laboratory services, has been a focus of ongoing governmental activity. In 1984,
Congress established a Medicare fee schedule for clinical laboratory services
performed for patients covered under Part B of the Medicare program.
Subsequently, Congress imposed a national ceiling on the amount that can be paid
under the fee schedule. Laboratories must accept the scheduled amount as payment
in full for most tests performed on behalf of Medicare beneficiaries and must
bill the program directly. In fiscal 1999 and 1998, the Company derived
approximately 13% and 10%, respectively of its revenue from tests performed for
beneficiaries of Medicare and Medicaid programs. In addition, the Company's
other business depends significantly on continued participation on these
programs because clients often want a single laboratory to perform all of their
testing services. Since 1984, Congress has periodically reduced the ceilings on
Medicare reimbursement to clinical laboratories from previously authorized
levels. Because a significant portion of the Company's costs are relatively
fixed, these Medicare reimbursement reductions have a direct adverse effect on
the Company's net earnings and cash flows. The Company cannot predict if
additional Medicare reductions will be implemented.
On January 1, 1993, numerous changes in the Physicians' Current Procedural
Terminology ("CPT") were published. The CPT is a coding system that is published
by the American Medical Association. It lists descriptive terms and identifying
codes for reporting medical and medically related services. The Medicare and
Medicaid programs require suppliers, including laboratories, to use CPT codes
when they bill the programs for services performed. HCFA implemented these CPT
changes for Medicare and Medicaid on August 1, 1993. The CPT changes have
altered the way the Company bills Medicare and Medicaid for some of its
services, thereby reducing the reimbursement the Company receives from those
programs for some of its services. In March 1996, the HCFA implemented changes
in the policies used to administer Medicare payments to clinical laboratories
for the most frequently performed automated blood chemistry profiles. Among
other things, the changes established a consistent standard nationwide for the
content of the automated chemistry profiles. Another change incorporated in the
HCFA proposal requires laboratories performing certain automated blood chemistry
profiles to obtain and provide documentation of the medical necessity of tests
included in the profiles for each Medicare beneficiary. Reimbursements have been
reduced as a result of this change.
Future changes in Federal, state and local regulations (or in the
interpretation of current regulations) affecting governmental reimbursement for
clinical laboratory testing could have a material adverse effect on the Company.
The Company is unable to predict, however, whether and what type of legislation
will be enacted into law. The Medicare and Medicaid anti-kickback laws prohibit
intentionally paying anything of value to influence the referral of Medicare and
Medicaid business.
Infectious Wastes and Radioactive Materials
The Company is subject to licensing and regulation under Federal, state
and local laws relating to the handling and disposal of medical specimens,
infectious and hazardous waste and radioactive materials as well as to the
safety and health of laboratory employees. All Company laboratories are operated
in accordance with applicable Federal and state laws and regulations relating to
biohazard disposal of all facilities specimens and the Company utilizes outside
vendors for disposal of such specimens. Although the Company believes that it is
currently in compliance in all material respects with such Federal, state and
local laws, failure to comply could subject the Company to denial of the right
to conduct business, fines, criminal penalties and/or other enforcement actions.
Occupational Safety
In addition to its comprehensive regulation of safety in the workplace,
the Federal Occupational Safety and Health Administration ("OSHA") has
established extensive requirements relating to workplace safety for health care
employers, including clinical laboratories, whose workers may be exposed to
blood-borne pathogens such as HIV and the hepatitis B virus. These regulations,
among other things, require work practice controls, protective clothing and
equipment, training, medical follow-up, vaccinations and other measures designed
to minimize exposure to, and transmission of, blood-borne pathogens. The use of
controlled substances in testing for drugs of abuse is regulated by the Federal
Drug Enforcement Administration.
13
Proprietary Technology - Patents
As novel techniques, processes, products or microorganisms are developed
during the course of its research and development activities, the Company will
seek U.S. and, if deemed necessary, foreign patents. At the end of fiscal 1999
the Company owned or licensed 36 U.S. and some 163 foreign patents and had filed
approximately 215 U.S. and foreign patent applications covering products,
methods and procedures resulting from the Company's internal or sponsored
research projects. Patents relating to the BioProbe(R) nucleic acid probe system
have issued in the U.S. and Europe. Management believes that additional patents
will issue shortly and over the next several years with respect to the Company's
pending applications. There can be no assurance, however, that patents will be
issued on pending applications or that any issued patents will have commercial
benefit. The Company does not intend to rely on patent protection as the sole
basis for protecting its proprietary technology. It also relies on its trade
secrets and continuing technological innovation. The Company's policy is to have
its employees sign confidentiality agreement prohibiting the employee from
disclosing any confidential information about the Company, including the
Company's technology or trade secrets.
In some instances, the Company may enter into royalty agreements with
collaborating research parties in consideration for the commercial use by the
Company of the developments of their joint research. In other instances a patent
may be obtained by the collaborating party with the Company receiving a license
to use the patented subject matter. In such cases, the Company will seek to
secure exclusive licenses.
In other instances, the Company may have an obligation to pay royalties
to, or reach a royalty arrangement with, a third party in consideration of the
Company's use of developments of such third party. The Company has an exclusive
licensing agreement with Yale for the technology used in nucleic acid probe
products. The agreement covers licensed patents owned by Yale and licensed to
the Company for the life of the patents which expire not earlier than 2004. See
"Business-Technology and Product Development -BioProbe(R) Nucleic Acid Probe
Labeling and Signal Generating System."
In fiscal 1987, the Company entered into an agreement with The Research
Foundation of the State University of New York giving the Company exclusive
rights to a genetic engineering technology using antisense nucleic acid control
methodologies. This technology is covered by three U.S. patent applications
subsequently issued as patents by the U.S. Patent and Trademark Office. The
first patent issued in March 1993; a second patent issued in May 1993; the third
patent issued in December 1993. The term of the license agreement extends
through the life of such patents as may issue therefrom. See
"Business-Technology and Patent Development - Therapeutic Technology and Product
Development."
Human Resources
As of July 31, 1999, the Company employed 189 full-time and 41 part-time
employees. Of the full-time employees, 33 were engaged in research, development,
manufacturing and marketing of research products and 156 at the clinical
reference laboratories. The scientific staff of the Company possesses a wide
range of experience and expertise in the areas of recombinant DNA, nucleic acid
chemistry, molecular biology and immunology. The Company believes that relations
with its employees are good.
Competition
The Company's biotechnology activities compete with pharmaceutical,
chemical, energy, and food companies which are diversifying into biotechnology,
and with specialized biotechnology firms in the United States and elsewhere.
Competition from existing companies and from newly formed private enterprises is
expected to increase.
Most of the Company's competitors in the biotechnology industry are
performing research in many of the same areas as the Company. Many of these
competitors are larger and have greater financial and other resources than the
Company. The primary competitive factors in the biotechnology field are the
ability to create and maintain scientifically advanced technology during a
period of rapid technological development, to attract and retain a breadth and
depth of human resources, to develop proprietary products or processes and to
have available adequate financial resources for bridging the often substantial
time lag between technical concept and commercial implementation.
The Company's clinical reference laboratories activity, which is conducted
in the New York metropolitan area, competes with numerous national and local
entities, some of which are larger and have greater financial resources than the
Company. Enzo Clinical Labs competes primarily on the basis of the quality and
specialized nature of its testing, reporting and information services, its
reputation in the medical community, the pricing of its services, its
reliability and speed in performing diagnostic tests, and its ability to employ
qualified laboratory personnel. The Company also believes that its ability to
compete also depends on its ability to make investments in equipment and
management information systems.
14
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement. The
Company desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this section herein in
order to do so. Accordingly, the Company hereby identifies the following
important factors that could cause the Company's actual financial results to
differ materially from those projected, forecast, estimated, or budgeted by the
Company in forward-looking statements.
(a) Heightened competition, including the intensification of price
competition.
(b) Impact of changes in payor mix, including the shift from
traditional, fee-for-service medicine to managed-cost health care.
(c) Adverse actions by governmental or other third-party payors,
including unilateral reduction of fee schedules payable to the
Company.
(d) The impact upon the Company's collection rates or general or
administrative expenses resulting from compliance with Medicare
administrative policies including specifically the HCFA's recent
requirement that laboratories performing certain automated blood
chemistry profiles obtain and provide documentation of the medical
necessity of tests included in the profiles for each Medicare
beneficiary.
(e) Failure to obtain new customers, retain existing customers or
reduction in tests ordered or specimens submitted by existing
customers.
(f) Adverse results in significant litigation matters.
(g) Denial of certification or licensure of any of the Company's
clinical laboratories under CLIA, by Medicare programs or other
Federal, state or local agencies.
(h) Adverse publicity and news coverage about the Company or the
clinical laboratory industry.
(i) Inability to carry out marketing and sales plans.
(j) Loss or retirements of key executives.
(k) Impact of potential patent infringement by others or the Company.
(l) Inability to obtain patent protection or secure and maintain
proprietary positions on its technology.
15
Item 2. Properties
The following are the principal facilities of the Company:
Approximate Approximate
Floor Annual Expiration
Location Principal Operations Area (sq. ft.) Base Rent Date
- -------- -------------------- -------------- --------- ----
60 Executive Blvd. Corporate headquarters, 40,000 $1,080,000 November 30, 2004
clinical reference and
development facilities (See
note 4 of Notes to
Consolidated Financial
Statements)
527 Madison Ave. Executive office 6,400 $ 288,000 December, 2003
New York, NY
Management believes that the current facilities will be adequate for
current operating needs and in the foreseeable future.
Item 3. Legal Proceedings
In March 1993, the Company filed suit in the United States District Court
for the District of Delaware charging patent infringement and acts of unfair
competition against Calgene, Inc. and seeking a declaratory judgment of
invalidity concerning Calgene's plant antisense patent. On February 9, 1994, the
Company filed a second suit in the United States District Court for the District
of Delaware charging Calgene with infringement of a second antisense patent
owned by the Company. Calgene filed a counterclaim in the second Delaware action
seeking a declaration that a third patent belonging to the Company is invalid.
The two Delaware actions have been consolidated and were tried to the Court in
April 1995. In addition, the Company filed suit on March 22, 1994 in the United
States District Court for the Western District of Washington against Calgene and
the Fred Hutchinson Cancer Research Center, alleging that the defendants had
conspired to issue a false and misleading press release regarding a supposed
"patent license" from Hutchinson to Calgene, and conspired to damage the
Company's antisense patents by improperly using confidential information to
challenge them in the Patent Office. The Complaint further charges that
Hutchinson is infringing and inducing Calgene to infringe the Company's
antisense patents. On February 2, 1996, the Delaware Court issued an opinion
ruling against Enzo and in favor of Calgene, finding certain Enzo claims
infringed, but the patent, as a whole not infringed, and finding the claims at
issue invalid for lack of enablement. Calgene's patent was found valid
(non-obvious) over the prior art. On February 29, 1996, the Delaware Court
issued an Order withdrawing its February 2, 1996 Opinion. On April 3, 1997, the
European Patent Office rejected Calgene's opposition that had been lodged
against the Company's related European antisense patent, thereby upholding the
patent's validity. On May 23, 1997, the Japanese Patent Office issued a related
antisense patent owned by the Company.
On June 1, 1998, the U.S. District Court for the District of Delaware
issued its final decision in the case. In its decision the District Court held
two of the Company's three antisense patents invalid and not infringed. The
District Court declined to act on Calgene's claim that the Company's third
antisense patent was invalid, citing lack of evidence. The District Court
further held that the Calgene antisense patent was not invalid. Enzo appealed
the District Court's judgment to the U.S. Court of Appeals for the Federal
Circuit and Calgene cross-appealed. On September 24, 1999, the Court of Appeals
issued its decision, rejecting Calgene's effort to invalidate Enzo's patent in
genetic antisense technology, U.S. Patent No. 5,272,065, thus leaving it valid
and standing. The Court of Appeals also clarified the District Court's judgment
regarding two other of Enzo genetic antisense patents (5,190,931 and 5,208,149),
limiting judgment of invalidity only to the claims of the two patents which had
been asserted against Calgene. The Court of Appeals remanded the case to the
District Court for determination of whether the case was exceptional, which
related to Calgene's claim for attorney fees. On October 7, 1999, Calgene filed
a petition for rehearing directed to the Court of Appeal's disposition of
Calgene's cross-appeal as to Enzo patent. There can be no assurance that the
Company will be successful in connection with Calgene's petition for rehearing
and Calgene's claim that the case is exceptional, the latter to be there subject
of further proceedings in the District Court. However, even if the Company is
not successful, management does not believe there will be a significant monetary
impact.
In June 1999, the Company filed suit in the United States District Court
for the Southern District of New York against Gen-Probe Incorporated, Chugai
Pharma U.S.A., Inc., Chugai Pharmaceutical Co., Ltd., bioMerieux, Inc.,
bioMerieux SA, and Becton Dickinson and Company, charging them with infringing
the Company's U.S. Patent 4,900,659, which concerns probes for
16
the detection of the bacteria that causes gonorrhea. The case remains at an
early stage. There can be no assurance that the Company will be successful in
these proceedings. However, even if the Company is not successful, management
does not believe that there will be a significant monetary impact.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were brought to a vote of the Company's stockholders in the fourth
fiscal quarter ended July 31, 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock of the Company is traded on the American Stock Exchange
(Symbol:ENZ). The following table sets forth the high and low price of the
Company's Common Stock for the periods indicated as reported on the American
Stock Exchange.
High Low
---- ---
1998 Fiscal Year (August 1, 1997
to July 31, 1998):
1st Quarter $21 1/4 $14 3/4
2nd Quarter $17 3/16 $12 1/4
3rd Quarter $16 1/2 $12 5/8
4th Quarter $15 1/2 $11 3/4
1999 Fiscal Year (August 1, 1998
to July 31, 1999):
1st Quarter $12 1/2 $6 3/8
2nd Quarter $13 3/4 $9 5/8
3rd Quarter $12 15/16 $8
4th Quarter $19 15/16 $9 3/4
On October 20, 1999, the last sale price of the Common Stock of the
Company as reported on the American Stock Exchange was $24 11/16.
As of October 20, 1999, the Company had approximately 1,350 record holders
of its Common Stock.
The Company has not paid a cash dividend on its Common Stock and intends
to continue to follow a policy of retaining future earnings to finance its
operations. Accordingly, the Company does not anticipate the payment of cash
dividends to holders of Common Stock in the foreseeable future.
On December 15, 1997, the Company declared a 5% stock dividend payable
January 23, 1998 to shareholders of record as of January 9, 1998.
17
Item 6. Selected Financial Data
For the Years Ended July 31,
-----------------------------------------------------
(In thousands, except per share data)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Operating Results:
Operating revenues $44,319 $40,417 $34,939 $34,490 $31,701
Litigation settlement, net of legal fees -- -- -- -- 21,860
Write-down of leasehold interest
and related costs -- -- -- 7,613 11,400
Interest income, net 1,984 1,885 1,799 1,640 941
Income (loss) before benefit (provision)
for taxes on income 5,387 2,570 1,564 (7,508) 9,749
Benefit (provision) for taxes on
income 1,128 822 (111) (199) (4,131)
Net income (loss) $6,515 $3,392 $1,453 ($7,707) $5,618
====== ====== ====== ======= ======
Basic net income (loss) per common share: $0.26 $0.14 $0.06 ($.32) $.24
===== ===== ===== ===== ====
Diluted net income (loss) per common share (1): $0.26 $0.13 $0.06 ($.32) $.23
===== ===== ===== ===== ====
Denominator for per share calculation:
Basic 24,933 24,653 24,162 23,840 23,105
Diluted 25,477 25,746 25,498 23,840 24,229
Financial Position:
Working capital $59,323 $52,973 $43,232 $29,451 $24,449
Total assets $78,901 $72,153 $67,419 $62,838 $72,458
Long-term debt and obligation under
capital lease -- -- $46 $114 $4,698
Stockholders' equity $75,648 $68,783 $64,009 $55,253 $61,113
(1) In fiscal year 1996, potentially dilutive securities have not been included
because the effect of their inclusion would have been anti-dilutive.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
The Company, at July 31, 1999 had cash and cash equivalents of $43.2
million, an increase of $9.7 million from July 31, 1998. The Company had net
working capital of $59.3 million at July 31, 1999 compared to $53.0 million at
July 31, 1998.
The Company's income before taxes was $5.4 million which includes
depreciation and amortization aggregating approximately $1.9 million. 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. The Company believes that its current cash position is sufficient
for its foreseeable liquidity and capital resource needs, although there can be
no assurance that future events will not alter such view.
Net cash provided by operating activities for the 1999 fiscal year was
approximately $11.1 million which also includes $5.0 million of cash received in
connection with the litigation settlement as compared to net cash provided by
operating activities of $8.3
18
million for the 1998 fiscal year. The increase in net cash provided by operating
activities from fiscal 1998 to fiscal 1999 was primarily due to the Company's
increase in net income for fiscal 1999.
Net cash used by investing activities in fiscal 1999 amounted to
approximately $1.5 million as a result of capital expenditures and deferred
patent costs as compared to net cash used by investing activities of $1.0
million in fiscal 1998. The increase relates primarily to increased capital
expenditures in fiscal 1999 compared to fiscal 1998.
Net cash provided by financing activities of $.2 million in fiscal 1999 as
compared to $1.1 million in fiscal 1998 represents a decrease of approximately
$.9 million. This decrease was attributable primarily to a decrease in proceeds
from stock options and warrants exercised during fiscal 1999.
The Company's net accounts receivable of $15.0 million and $14.2 million
represent 124 days and 128 days of operating revenues at July 31, 1999 and 1998
respectively. The change in net accounts receivable is due to an increase in
accounts receivable at the clinical reference laboratory of approximately $.1
million and an increase of research products accounts receivable of
approximately $.7 million.
On October 19, 1994, the Company executed a settlement agreement with
Johnson & Johnson, Inc. (J&J) pursuant to which the Company received $15.0
million and a promissory note requiring J&J 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%. The litigation settlement
amounted to approximately $21.9 million, net of legal fees. Pursuant to the
terms of the settlement, all of the Company's grants, licenses and intellectual
property have been returned to the Company in totality.
Management is not aware of any material claims, disputes or settled
matters concerning third-party reimbursements which would have a material effect
on the Company's financial statements.
Results of Operations
Fiscal 1999 Compared to Fiscal 1998
Revenues from operations for the fiscal year ended July 31, 1999 increased
by $3.9 million over revenues from operations for the fiscal year ended July 31,
1998. This increase was due to an increase of $.3 million in revenues from the
clinical reference laboratory operations over revenue for the similar activity
in fiscal 1998 and a increase of $3.6 million in revenues from research product
sales. The increase in revenues from the clinical laboratory operations resulted
primarily from an increase in volume of diagnostic screening tests and an
increase in esoteric testing revenue. The increase in research product sales
resulted primarily from an increase in sales from the non-exclusive distribution
agreements and an increase in direct sales of research products. The cost of
research product revenues increased by $.4 million primarily as a result of the
Company's increase in sales from the distribution agreements activities.
Research and development expenses increased by approximately $.4 million
as a result of an increase in research programs and the increased amortization
of patent costs.
The provision for uncollectible accounts receivable increased by $.3
million primarily due to increased revenues at the clinical reference laboratory
and reduced reimbursements received by the Company from Medicare and other third
party insurers who generally follow the reimbursement policies of Medicare.
The Company's net accounts receivable from the clinical laboratory
operations of $13.2 million and $13.1 million represent an average of 172 days
of operating revenue at July 31, 1999 and 1998, respectively. The Company
expects that in the future, as a result of the revised Medicare reimbursement
policies, the Company will receive reimbursements and cash flows at the clinical
reference laboratory at lower rates then those realized in fiscal 1999. The
Company will continue its efforts at attempting to control costs associated with
the performance of the tests; however, there can be no assurance that such
efforts will be successful.
Income before benefit (provision) for taxes on income from research and
development activities and related costs amounts to $2.7 million in fiscal 1999,
as compared to income before benefit (provision) for taxes on income of $.2
million in fiscal 1998. The increase in the profit is principally related to the
increase in sales of product from the non-exclusive distribution agreements.
Income before benefit (provision) for taxes on income from the clinical
reference laboratories activities amounted to $2.4 million (9% of clinical
laboratory services) as compared to $2.2 million (8% of clinical laboratory
services) in fiscal 1998. This increase resulted principally from the increase
in the operating revenues of esoteric testing.
19
In fiscal 1999, the Company recorded a benefit for income taxes of $1.1
million versus a benefit of $.8 million in fiscal 1998. In the fourth quarter of
fiscal 1999, the Company recorded a deferred tax benefit of $1.6 million
resulting from a reversal of a portion of the deferred tax asset valuation
allowance. This was based on management's determination that it was more likely
than not that a portion of the deferred tax asset would be realized.
Fiscal 1998 Compared to Fiscal 1997
Revenues from operations for the fiscal year ended July 31, 1998 ("fiscal
1998") increased by $5.5 million over revenues from operations for the fiscal
year ended July 31, 1997 ("fiscal 1997"). This increase was due to an increase
of $6.0 million in revenues from the clinical reference laboratory operations
over revenue for the similar activity in fiscal 1997 and offset by a decrease of
$0.5 million in revenues from research product sales. The increase in revenues
from the clinical laboratory operations resulted primarily from an increase in
volume of diagnostic screening tests and an increase in esoteric testing
revenue. The decrease in research product sales resulted primarily from a
decrease in lower profit margin sales from the non-exclusive distribution
agreements.
The increase in the cost of clinical laboratory services of $1.1 million
was primarily due to the costs related to the increased volume of higher costing
esoteric tests. However, as a percentage of clinical laboratory services, the
cost of sales decreased by 3%, due to the higher sales volume which absorbed the
fixed costs of performing these tests. The cost of research product revenues
decrease of $0.9 million from the Company's distribution agreements activities
was primarily the result of the decrease in the sales of lower priced products.
Research and development expenses increased by approximately $0.4 million
as a result of an increase in research programs and the increased amortization
of patent costs.
The provision for uncollectible accounts receivable increased by $4.0
million primarily due to increased revenues at the clinical reference laboratory
and reduced reimbursements received by the Company from Medicare and other third
party insurers who generally follow the reimbursement policies of Medicare.
Also, increases in esoteric screening tests not usually covered by third party
insurance carriers contributed to this increase.
The Company's net accounts receivable from the clinical laboratory
operations of $13.1 million and $11.1 million represent an average of 172 and
186 days of operating revenue at July 31, 1998 and 1997, respectively. The
Company expects that in the future, as a result of the revised Medicare
reimbursement policies, the Company will receive reimbursements and cash flows
at the clinical reference laboratory at the lower rates realized in fiscal 1998.
The Company will continue its efforts at attempting to control costs associated
with the performance of the tests, however; there can be no assurance that such
efforts will be successful.
Income before benefit (provision) for taxes on income from the clinical
reference laboratories activities amounted to $2.2 million (8% of clinical
laboratory services) as compared to $1.5 million (7% of clinical laboratory
services) in fiscal 1997. This increase resulted principally from the increase
in the operating revenues of esoteric testing.
In fiscal 1998, the Company recorded a benefit for income taxes of $0.8
million versus a tax provision of $0.1 million in fiscal 1997. In the fourth
quarter of fiscal 1998, the Company recorded a deferred tax benefit of $1.0
million resulting from a reversal of a portion of the deferred tax asset
valuation allowance. This was based on management's determination that it was
more likely than not that a portion of the deferred tax asset would be realized.
Year 2000
The "Year 2000" issue is the result of computer systems that were
programmed in prior years using a two digit representation for the year.
Consequently, in the Year 2000, date sensitive computer programs may interpret
the date "00" as 1900 rather than 2000. The Company has completed an assessment
of its system affected by the Year 2000 issue.
The Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues. Due to the general uncertainty inherent in
the Year 2000 problem, resulting in part from the uncertainty of the Year 2000
readiness for third-party vendors and payers, the Company is unable to determine
at this time whether the consequences of potential Year 2000 business
disruptions will have a material impact on the Company's results of operation,
liquidity and financial condition.
For the "Year 2000" issue, the Company has identified those systems that
require changes to accommodate the Year 2000. The systems were completely
upgraded with new hardware and new software with an approximate cost of $500,000
which have been capitalized as property and equipment. The payor systems are
being converted per instructions on the part of each payor (i.e. Medicare,
Medicaid, insurance companies, etc.).
20
The Company could experience collection delays if Medicare or other large
third party payers (such as insurance companies) experience Year 2000 problems.
Medicare carriers are being required to implement new programs required by the
1997 Balanced Budget Act at the same time that they are attempting to make their
systems Year 2000 compliant. In September 1998, the General Accounting Office
reported that "HCFA and its contractors are behind schedule in repairing,
testing and implementing the mission-critical systems supporting Medicare" and
concluded that "it is highly unlikely that all of the Medicare systems will be
compliant in time to ensure the delivery of uninterrupted benefits and services
into the year 2000." However, HCFA is expected to develop contingency plans that
may include making estimated payments to providers based on historical claims
experience in the event of a system failure during the Year 2000.
While the Company believes that its Year 2000 readiness program
significantly reduces the potential adverse effect of any such disruptions, the
Company cannot guarantee that the Year 2000 problem will not result in
significant business disruptions.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted in a separate section of this
report. See Item 14(a) (1) and (2)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors - The following sets forth certain information regarding
directors of the Company who are not executive officers of the Company.
Information with respect to directors of the Company who are also executive
officers of the Company appears below under the subcaption "Executive Officers."
The Company has a classified Board of Directors consisting of three classes.
JOHN B. SIAS (age 72) has been a Director of the Company since January
1982. Mr. Sias has been President and Chief Executive Officer of Chronicle
Publishing Company since April 1993. From January 1986 until April 1993, Mr.
Sias was President of ABC Network Division, Capital Cities/ABC, Inc. From 1977
until January 1986 he was the Executive Vice President, President of the
Publishing Division (which includes Fairchild Publications) of Capital Cities
Communications, Inc.
JOHN J. DELUCCA (age 56) has been a Director of the Company since January
1982. Since January 1999, Mr. Delucca has been Chief Financial Officer &
Executive Vice President, Finance & Administration of Coty, Inc. From October
1993 until January 1999, he was Senior Vice President and Treasurer of RJR
Nabisco, Inc. From January 1992 until October 1993, he was managing director and
Chief Financial Officer of Hascoe Associates, Inc. From October 1, 1990 to
January 1992 he was President of The Lexington Group. From September 1989 until
September 1990, he was Senior Vice President-Finance of the Trump Group. From
May 1986 until August 1989, he was senior Vice President-Finance at
International Controls Corp. From February 1985 until May 1986, he was a Vice
President and Treasurer of Textron, Inc. Prior to that he was a Vice President
and Treasurer of the Avco Corporation, which was acquired by Textron.
During the fiscal year ended July 31, 1999, there were five formal
meetings of the Board of Directors, several actions by unanimous consent and
several informal meetings. The Board of Directors has an Audit Committee and
Stock Option Committee. The Audit Committee had one formal meeting and the Stock
Option Committee had three formal meetings in fiscal 1999.
The Audit Committee is authorized to review proposals of the Company's
auditors regarding annual audits, recommend the engagement or discharge of the
auditors, review recommendations of such auditors concerning accounting
principles and the adequacy of internal controls and accounting procedures and
practices, to review the scope of the annual audit, to approve or disapprove
each professional service or type of service other than standard auditing
services to be provided by the auditors, and to review and discuss the audited
financial statements with the auditors. Its members are Shahram K. Rabbani and
Messrs. Sias and Delucca.
21
The Stock Option Committee has the plenary authority in its discretion to
determine the purchase price of the Common Stock issuable upon the exercise of
each option, to determine the employees to whom, and the time or times at which,
options shall be granted and the number of shares to be issuable upon the
exercise of each option, to interpret the plans, to prescribe, amend and rescind
rules and regulations relating to them, to determine the term and provisions of
the respective option agreements and to make all other determinations deemed
necessary or advisable for the administration of the plans. Its members are
Messrs. Sias and Delucca.
The Company does not have a formal Executive Committee or Nominating Committee
of the Board of Directors.
(b) Executive Officers - The following table sets forth the names and
positions of all of the current executive officers of the Company:
Name Position
---- --------
Elazar Rabbani, Ph.D. Chief Executive Officer, Chairman of
the Board of Directors
Shahram K. Rabbani Chief Operating Officer, Secretary,
Treasurer
Barry W. Weiner President
Norman E. Kelker, Ph.D. Senior Vice President
Dean Engelhardt, Ph.D. Senior Vice President
Herbert B. Bass Vice President of Finance
Barbara E. Thalenfeld, Ph.D. Vice President, Corporate Development
David C. Goldberg Vice President, Business Development
DR. ELAZAR RABBANI (age 55) has served as President and a Director of the
Company since its organization in 1976. Dr. Rabbani received his B.A. degree
from New York University in Chemistry and his Ph.D. degree in Biochemistry from
Columbia University. He is a member of the American Society for Microbiology.
SHAHRAM K. RABBANI (age 47) has served as Chief Operating Officer,
Secretary, and Treasurer of the Company since November 1996, as Executive Vice
President from September 1981 to November 1996 and as Vice President, Treasurer
and a Director of the Company since its organization. Mr. Rabbani received a
B.A. degree in chemistry from Adelphi University.
BARRY W. WEINER (age 48) has served as President of the Company since
November 1996 and as a Director of the Company since its organization. Mr.
Weiner has served as an Executive Vice President of the Company from September
1981 to November 1996, as a Vice President of the Company from the Company's
organization to November 1996 and as Secretary of the Company from March 1980 to
November 1996. He was employed by Colgate-Palmolive Company, New York, New York
from August 1974 until March 1980, when he joined the Company on a full-time
basis. Mr. Weiner received his B.S. degree in Economics from New York University
and M.B.A. from Boston University. Mr. Weiner is a Director of the New York
State Biotechnology Association.
DR. NORMAN E. KELKER (age 60) has been a Vice President of the Company
since September 1981. Effective January 1, 1989, he was promoted to Senior Vice
President. From 1975 until he joined the Company, Dr. Kelker was an Associate
Professor in the Department of Microbiology of the New York University School of
Medicine. He holds a Ph.D. from Michigan State University.
DR. DEAN ENGELHARDT (age 59) has been Vice President since September 1981.
Effective January 1, 1989, he was promoted to Senior Vice President. Prior to
joining the Company he was Associate Professor of Microbiology at Columbia
University College of Physicians and Surgeons. He obtained his Ph.D. from
Rockefeller University.
HERBERT B. BASS (age 51) is Vice President of Finance of the Company.
Prior to his promotion, Mr. Bass was the Corporate Controller of Enzo. Before
joining Enzo in 1986, Mr. Bass held various positions at Danziger & Friedman,
Certified Public Accountants, from 1979 to 1986, the most recent of which was
audit manager. For the preceding seven years he held various positions at
Berenson & Berenson, C.P.A's. Mr. Bass holds a Bachelor degree in Business
Administration from Baruch College.
DR. BARBARA E. THALENFELD (age 59) is Vice President of Corporate
Development and has been with Enzo since 1982. Prior to joining the Company she
held an NIH research fellowship at Columbia University. She received a Ph.D.
from Hebrew University-Hadassah Medical Center and an M.S. from Yale University.
DAVID C. GOLDBERG (age 42) is Vice President of Business Development.
Prior to joining Enzo in 1985, he was employed at DuPont NEN Products. He
received an M.S. from Rutgers University and an MBA from New York University.
22
Dr. Elazar Rabbani and Shahram K. Rabbani are brothers and Barry W. Weiner
is their brother-in-law.
Item 11. Executive Compensation
The information required under this item will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission on or before November 29, 1999 and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission on or before November 29, 1999 and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information required under this item will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission on or before November 29, 1999 and is incorporated herein by
reference.
PART IV
Item 14. Exhibits. Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Consolidated Financial Statements
Consolidated Balance Sheet - July 31, 1999 and 1998
Consolidated Statement of Operations-
Years ended July 31, 1999, 1998 and 1997
Consolidated Statement of Stockholders' Equity-
Years ended July 31, 1999, 1998 and 1997
Consolidated Statement of Cash Flows-
Years ended July 31, 1999, 1998 and 1997
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. (11)
3(d) Bylaws. (1)
23
4(d) Form of Note Indenture. (3)
10(a) 1980 Stock Option Plan. (1)
10(b) Investment Agreement between the registrant and Johnson
& Johnson Development Corp., dated June 25, 1982. (4)
10(c) Agreement between the registrant and Ortho Diagnostic
System, Inc. dated June 25, 1982. (5)
10(d) 1983 Incentive Stock Option Plan. (6)
10(e) Letter Agreement between the Company and Ortho
Diagnostic Systems, Inc. dated as of January 1, 1985.
(7)
10(f) Lease Agreement dated as of December 1, 1985. (8)
10(g) Indenture of Mortgage and Trust dated as of December 1,
1985. (8)
10(h) Letter of Credit Agreement dated as of December 1, 1985.
(8)
10(i) Leasehold Mortgage and Security Agreement dated as of
February 5, 1986. (8)
10(j) Loan Agreement dated as of December 31, 1985. (8)
10(k) Restricted Stock Plan. (8)
10(p) Agreement with First New York Bank for Business. (14)
10(q) Agreement with BioHealth Laboratories, Inc.
shareholders. (15)
10(r) Agreement with Johnson & Johnson, Inc. (16)
10(s) 1993 Incentive Stock Option Plan. (16)
10(t) Employment Agreement with Elazar Rabbani. (16)
10(u) Employment Agreement with Shahram Rabbani. (16)
10(v) Employment Agreement with Barry Weiner. (16)
10(w) 1994 Stock Option Plan (17).
10(x) Stipulation of Settlement with the City of New York.
(18)
10(y) Agreement with Corange International Limited (Boehringer
Mannheim) effective April 1994. (19)(20)
10(z) Agreement with Amersham International effective February
1995. (18)(21)
10(aa) Agreement with Dako A/S effective May 1995. (18)(21)
l0(bb) Agreement with Baxter Healthcare Corporation (VWR
Scientific Products) effective September 1995. (18)(19)
10(cc) Agreement with Yale University and amendments thereto.
(19)(21)
10(dd) Agreement with The Research Foundation of the State of
New York effective May 1987. (l8)(21)
24
l0(ee) 1999 Stock Option Plan filed. (20)
11 Computation of per-share earnings filed herewith.
21 Subsidiaries of the registrant:
Enzo Clinical Labs, Inc., a New York corporation.
Enzo Diagnostics, Inc., a New York corporation.
Enzo Therapeutics, Inc., a New York corporation.
23 Consent of Independent Auditors filed herewith.
27 Financial Data Schedule filed herewith.
Notes to (a)(3)
(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) These exhibits were filed as exhibits to the Company's Current Report on
Form 8-K dated April 4, 1986 and are incorporated herein by reference.
(4) This exhibit was filed as an exhibit to the Company's Current Report on Form
8-K dated June 29, 1982 and is incorporated herein by reference.
(5) This exhibit was filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended July 31, 1983 and is incorporated herein by reference.
(6) This exhibit was filed with the Company's definitive proxy statement dated
February 4, 1983 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, 1985 and is incorporated herein by reference.
(8) These exhibits were filed as exhibits to the Company's Quarterly Report on
Form l0-Q for the quarter ended January 31, 1986 and are incorporated herein by
reference.
(9) This exhibit was filed as an exhibit to the Company's Registration Statement
on Form S-2(33-7657) and is incorporated herein by reference.
(10) This exhibit was filed as an exhibit to the Company's Current Report on
Form 8-K dated July 12, 1990 and is incorporated herein by reference.
(11) 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.
(12) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1990 and is incorporated herein by reference.
(13) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1991 and is incorporated herein by reference.
(14) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1992 and is incorporated herein by reference.
25
(15) This exhibit was filed as an exhibit to the Company's Registration
Statement on Form S-3 (33-72170) and is incorporated herein by reference.
(16) 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.
(17) 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.
(18) 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 by reference.
(19) This exhibit was filed with the Company's Annual Report on Form 10-K for
the year ended July 31, 1997 or previously filed Amendment thereto and is
incorporated by reference.
(20) This exhibit was filed with the Company's Registration Statement on Form
S-8 (333-87153) and is incorporated herein by references
(21) These exhibits are subject to a confidential treatment request pursuant to
Securities Exchange Act Rule 24b-2
(b) The Company's Current Reports on Form 8-K filed during the quarter ended
July 31, 1999 -- none
(c) See Item 14(a)(3), above.
(d) See Item 14(a)(2), above.
*************
26
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: October 26, 1999 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: Elazar Rabbani Ph.D. October 26, 1999
- ---------------------------
Elazar Rabbani
Chairman of Board of Directors
(Principal Executive Officer)
By: Shahram K. Rabbani October 26, 1999
- ---------------------------
Shahram K. Rabbani,
Chief Operating Officer, Secretary
and Director (Principal Financial and
Accounting Officer)
By: Barry W. Weiner October 26, 1999
- ---------------------------
Barry W. Weiner,
President and Director
- ---------------------------
John B. Sias, Director
- ---------------------------
John J. Delucca, Director
27
FORM 10-K, ITEM 14(a) (1) and (2)
ENZO BIOCHEM, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and financial statement
schedules of Enzo Biochem, Inc. are included in Item 14(a):
Report of Independent Auditors F-2
Consolidated Balance Sheet -- July 31, 1999 and 1998 F-3
Consolidated Statement of Operations --
Years ended July 31, 1999, 1998 and 1997 F-4
Consolidated Statement of Stockholders' Equity --
Years ended July 31, 1999, 1998 and 1997 F-5
Consolidated Statement of Cash Flows --
Years ended July 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-8
Schedule II - Valuation and Qualifying
Accounts -- Years ended July 31, 1999, 1998 and 1997 F-19
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 Auditors
Board of Directors and Stockholders
Enzo Biochem, Inc.
We have audited the accompanying consolidated balance sheets of Enzo Biochem,
Inc. (the "Company") as of July 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended July 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(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 generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Enzo
Biochem, Inc. at July 31, 1999 and 1998 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
July 31, 1999, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Melville, New York
October 15, 1999
F-2
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEET
July 31, 1999 and 1998
ASSETS 1999 1998
---- ----
Current assets:
Cash and cash equivalents $43,218,000 $33,542,500
Accounts receivable, less allowance for doubtful accounts of $6,027,000 in 1999 and
$5,148,500 in 1998 15,007,700 14,196,400
Current portion of note receivable -- litigation settlement -- 4,941,600
Inventories 1,426,700 1,393,000
Deferred taxes 1,186,300 471,000
Other 846,700 843,900
----------- -----------
Total current assets 61,685,400 55,388,400
Property and equipment, at cost less accumulated depreciation and amortization 2,824,200 2,569,900
Cost in excess of fair value of net tangible assets acquired, less accumulated amortization
of $4,239,600 in 1999 and $3,869,100 in 1998 8,563,700 8,934,200
Deferred patent costs, less accumulated amortization of $4,080,400 in 1999 and $3,402,600 in 1998 4,311,900 4,558,700
Deferred taxes 1,388,700 554,000
Other 127,000 148,200
----------- -----------
$78,900,900 $72,153,400
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $1,196,100 $1,439,100
Income taxes payable 300,000 164,000
Other accrued expenses 866,300 803,400
Current portion of long-term debt -- 8,900
----------- -----------
Total current liabilities 2,362,400 2,415,400
Deferred liabilities 890,500 955,000
Commitments and contingencies (Notes 5, 6, and 9)
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:
24,957,700 in 1999 and 24,905,300 in 1998 249,600 249,100
Additional paid-in capital 92,452,200 92,102,700
Accumulated deficit (17,053,800) (23,568,800)
----------- -----------
Total stockholders' equity 75,648,000 68,783,000
----------- -----------
$78,900,900 $72,153,400
=========== ===========
See accompanying notes
F-3
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended July 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Revenues:
Research product revenues $16,278,600 $12,660,900 $13,189,600
Clinical laboratory services 28,040,800 27,756,100 21,748,900
----------- ----------- -----------
44,319,400 40,417,000 34,938,500
Costs and expenses:
Cost of research product revenues 7,883,700 7,496,600 8,410,200
Cost of clinical laboratory services 8,285,000 8,247,200 7,153,400
Research and development expense 4,427,000 3,983,500 3,561,900
Selling expense 2,782,800 2,728,000 2,718,800
Provision for uncollectable accounts receivable 9,960,800 9,627,500 5,633,600
General and administrative expense 7,577,400 7,648,600 7,696,100
----------- ----------- -----------
40,916,700 39,731,400 35,174,000
----------- ----------- -----------
Income (loss) before interest income, net and benefit (provision) for taxes on income 3,402,700 685,600 (235,500)
Interest income, net 1,983,900 1,884,600 1,799,300
----------- ----------- -----------
Income before benefit (provision) for taxes on income 5,386,600 2,570,200 1,563,800
Benefit (provision) for taxes on income 1,128,400 821,600 (111,000)
----------- ----------- -----------
Net income $6,515,000 $3,391,800 $1,452,800
=========== =========== ===========
Net income per common share:
Basic $.26 $.14 $.06
==== ==== ====
Diluted $.26 $.13 $.06
==== ==== ====
Denominator for per share calculation:
Basic 24,933,000 24,653,000 24,162,000
=========== =========== ===========
Diluted 25,477,000 25,746,000 25,498,000
=========== =========== ===========
See accompanying notes.
F-4
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended July 31, 1999, 1998 and 1997
Common Common Additional Total
Stock Stock paid-in Accumulated Shareholders'
Shares Amount Capital deficit equity
------ ------ ------- ------- ------
Balance at July 31, 1996 21,624,900 $216,400 $83,450,000 $(28,413,400) $55,253,000
Increase in common stock and paid-in capital due to
5% stock dividend (fair value on date declared $18,225,000) 1,080,000 10,800 (10,800) -- --
Net income for the year ended July 31, 1997 -- -- -- 1,452,800 1,452,800
Increase in common stock and paid-in capital due to
exercise of stock options and warrants 203,000 2,000 809,100 -- 811,100
Increase in common stock and paid-in capital due to
exchange of stock for debt, net of offering costs 415,000 4,000 6,072,800 -- 6,076,800
Issuance of stock for employee 401(k) plan 7,000 100 128,800 -- 128,900
Proceeds from the issuance of common stock -- -- 286,300 -- 286,300
---------- -------- ----------- ------------ -----------
Balance at July 31, 1997 23,329,900 233,300 90,736,200 (26,960,600) 64,008,900
Increase in common stock and paid-in capital due to
5% stock dividend (fair value on date declared $18,010,800) 1,166,500 11,700 (11,700) -- --
Net income for the year ended July 31, 1998 -- -- -- 3,391,800 3,391,800
Increase in common stock and paid-in capital due to
exercise of stock options and warrants 399,200 4,000 1,093,800 -- 1,097,800
Increase in common stock and paid-in capital due to
issuance of warrants as compensation for services performed -- -- 150,000 -- 150,000
Issuance of stock for employee 401(k) plan 9,700 100 134,400 -- 134,500
---------- -------- ----------- ------------ -----------
Balance at July 31, 1998 24,905,300 249,100 92,102,700 (23,568,800) 68,783,000
Net income for the year ended July 31, 1999 -- -- -- 6,515,000 6,515,000
Increase in common stock and paid in capital due to
exercise of stock options and warrants 34,200 300 162,200 -- 162,500
Issurance of stock for employee 401(k) plan 18,200 200 187,300 -- 187,500
---------- -------- ----------- ------------ -----------
Balance at July 31, 1999 24,957,700 $249,600 $92,452,200 $(17,053,800) $75,648,000
========== ======== =========== ============ ===========
See accompanying notes.
F-5
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended July 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income $6,515,000 $3,391,800 $1,452,800
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and equipment 883,300 853,000 887,900
Amortization of costs in excess of fair value of net tangible assets
acquired 370,500 370,500 370,400
Amortization of deferred patent costs 677,800 640,000 586,800
Provision for uncollectible accounts receivable 9,960,800 9,627,500 5,633,600
Deferred income tax benefit (1,550,000) (1,025,000) --
Issuance of warrants as compensation for services performed -- 150,000 --
Legal expenses converted into stock -- -- 142,300
Other -- 6,600 --
Accretion of interest on note receivable (58,400) (253,000) (575,000)
Issuance of stock for employee 401(k) plan 187,500 134,500 128,900
Deferred liabilities (64,500) (35,500) (17,500)
Changes in operating assets and liabilities:
Note receivable - litigation settlement 5,000,000 5,000,000 5,000,000
Accounts receivable before provision for uncollectible amounts (10,772,100) (11,838,500) (7,130,800)
Inventories (33,700) 166,000 251,500
Other assets (2,800) 967,500 710,300
Trade accounts payable and accrued expenses (180,100) 64,100 109,000
Income taxes payable 136,000 36,000 128,000
----------- ----------- ----------
Total adjustments 4,554,300 4,863,700 6,225,400
----------- ----------- ----------
Net cash provided by operating activities 11,069,300 8,255,500 7,678,200
(Continued on following page.)
F-6
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended July 31, 1999, 1998, and 1997
1999 1998 1997
---- ---- ----
Cash flows from investing activities:
Capital expenditures $(1,137,600) $(577,700) $(691,000)
Patent costs deferred (431,000) (441,100) (465,800)
Decrease (increase) in security deposits 21,200 4,200 (2,700)
----------- ----------- -----------
Net cash used by investing activities (1,547,400) (1,014,600) (1,159,500)
Cash flows from financing activities:
Payments of obligations under capital leases (8,900) (8,900) (28,800)
Proceeds from the exercise of stock options and warrants 162,500 1,097,800 811,100
Payment of loans payable to bank and long term debt -- (37,700) (34,600)
Proceeds from the issuance of common stock -- -- 286,300
Payment for common stock offering costs -- -- (95,000)
----------- ----------- -----------
Net cash provided by financing activities 153,600 1,051,200 939,000
----------- ----------- -----------
Net increase in cash and cash equivalents 9,675,500 8,292,100 7,457,700
Cash and cash equivalents at the beginning of the year 33,542,500 25,250,400 17,792,700
----------- ----------- -----------
Cash and cash equivalents at the end of the year $43,218,000 $33,542,500 $25,250,400
=========== =========== ===========
See accompanying notes.
F-7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999, 1998 and 1997
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. 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 reference laboratory
that offers and provides diagnostic medical testing services to the health care
community.
Summary of significant accounting policies
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
Cash equivalents consist of short-term debt securities of domestic companies
that the Company intends to hold to maturity that range from August 1999 to
October 1999. The market values of these securities, as determined by quoted
sources, aggregated $42,637,800 and $32,440,000 at July 31, 1999 and 1998,
respectively, and approximated cost at the respective dates.
Concentration of credit risk
Approximately 88% and 92% at July 31, 1999 and 1998, respectively, of the
Company's net accounts receivable relate to its clinical reference laboratory
business that operates in the New York Metropolitan area. Concentration of
credit risk with respect to accounts receivable are limited due to the diversity
of the Company's client base. However, the Company provides services to certain
patients covered by various third-party payors, including the Federal Medicare
program. Revenue, net of contractual allowances, from direct billings under the
Federal Medicare program during each of the fiscal years ended July 31, 1998 and
1997 approximated 10% and 12%, respectively of revenue. The provision for
uncollectible accounts receivable increased by $333,300 in fiscal 1999,
primarily due to increased revenues. The fiscal 1999 increase is also
attributable to an increase in esoteric screening tests not usually covered by
third party insurers. Management is not aware of any material claims, disputes
or settled matters concerning third-party reimbursements which would have a
material effect on the Company's financial statements.
At July 31, 1999 and 1998, 2% and 4% of the Company's net accounts receivable
relate to amounts due from the one major distributor, under a non-exclusive
distribution and supply agreement. Research product revenues from the
distributor represented approximately 22% and 21% and 25% of consolidated
operating revenues in fiscal 1999, 1998 and 1997, respectively.
F-8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999, 1998 and 1997
Note 1 - Business and summary of significant accounting policies (Cont'd)
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property and equipment
Equipment is being depreciated on the straight-line and accelerated methods over
the estimated useful lives of the assets. Leasehold improvements are amortized
over the term of the related leases or estimated useful lives of the assets,
whichever is shorter.
Amortization of intangible assets
The cost in excess of fair value of net tangible assets acquired is being
amortized on the straight-line method over periods of fifteen to forty years.
Patent costs
The Company has filed applications for United States and foreign patents
covering certain aspects of its technology. The costs incurred in filing such
applications have been deferred and are amortized over the estimated useful
lives of the patents beginning upon issue. Costs related to unsuccessful patent
applications are expensed.
Revenue Recognition
Revenues from services from the clinical reference laboratory are recognized
when services are provided. The Company's revenue is based on amounts billed or
billable for services rendered, net of contractual adjustments and other
arrangements made with third-party payors to provide services at less than
established billing rates. Revenues from research product sales are recognized
when the products are shipped.
Reimbursement Contingencies
Laws and regulations governing the Medicare and Medicaid programs are complex
and subject to interpretation for which action for noncompliance includes fines,
penalties and exclusion from the Medicare and Medicaid 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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). SFAS
No. 109 requires the liability method of accounting for income taxes. Under the
liability method of SFAS No. 109, 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. SFAS No. 109 requires that any tax benefits
recognized for net operating loss carryforwards and other items be reduced by a
valuation allowance where 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 SFAS No. 109, 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.
F-9
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999, 1998 and 1997
Note 1 - Business and summary of significant accounting policies (Cont'd)
Impairment of Long-Lived Assets
In fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No.
121"). 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 of long-lived assets and certain identifiable intangibles that are
expected to be disposed of. The adoption of SFAS No. 121 did not have a material
effect on the consolidated results of operations or financial condition of the
Company.
Net income per share
In fiscal 1998, the Company adopted the provisions of SFAS No. 128, "Earnings
Per Share" ("SFAS No. 128"). SFAS No. 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options and warrants. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to SFAS No.128 requirements.
The net income per share amounts for fiscal 1997 has been retroactively adjusted
to reflect the 5% stock dividends declared in December 1997 (See Note 11).
The following table sets forth the computation of basic and diluted net income
per share pursuant to SFAS No. 128.
1999 1998 1997
---- ---- ----
Numerator:
Net income for numerator for
basic and diluted net income per
common share $6,515,000 $3,391,800 $1,452,800
========== ========== ==========
Denominator:
Denominator for basic net income per
common share-weighted-average
shares 24,933,000 24,653,000 24,162,000
Effect of dilutive employee and
director stock options and
warrants (a) 544,000 1,093,000 1,336,000
---------- ---------- ----------
Denominator for diluted net income
per share-adjusted
weighted-average shares 25,477,000 25,746,000 25,498,000
========== ========== ==========
Basic net income per share $.26 $.14 $.06
==== ==== ====
Diluted net income per share $.26 $.13 $.06
==== ==== ====
(a) Potentially dilutive employee and director stock options and warrants
that have been excluded from this amount because they are anti-dilutive
amounted to 724,000, 89,000 and 71,000 in fiscal 1999,1998 and 1997,
respectively.
F-10
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999, 1998 and 1997
Note 2 - Supplemental disclosure for statement of cash flows
In the years ended July 31, 1999, 1998 and 1997, the Company paid cash for
interest of approximately $0, $5,000 and $17,000, respectively.
In the years ended July 31, 1999, 1998 and 1997, the Company paid cash for
income taxes of approximately $286,000, $176,000 and $20,000 respectively, and
received refunds of income taxes previously paid of approximately $0 in fiscal
1999, $9,000 in fiscal 1998 and $45,000 in fiscal 1997.
Other noncash items:
In fiscal 1997, the Company issued 415,000 shares of common stock in exchange
for approximately $6,172,000 in accrued legal fees and costs.
Note 3 - Inventories
At July 31, 1999 and 1998 inventories consist of:
1999 1998
---- ----
Raw materials $108,100 $68,300
Work in process 833,400 927,700
Finished products 485,200 397,000
---------- ----------
$1,426,700 $1,393,000
========== ==========
Note 4 - Property and equipment
At July 31, 1999 and 1998 property and equipment consist of:
1999 1998
---- ----
Laboratory machinery and equipment $2,349,200 $2,128,300
Leasehold improvements 2,266,500 2,231,200
Office furniture and equipment 4,848,800 4,189,100
---------- ----------
9,464,500 8,548,600
Accumulated depreciation and amortization 6,640,300 5,978,700
---------- ----------
$2,824,200 $2,569,900
========== ==========
Note 5 - Lease obligations
Enzo Clinical Labs, Inc. ("Enzo Clinical Labs"), a wholly-owned subsidiary of
the Company, leases its office and laboratory space under several leases that
expire between September 1, 1999 and November 30, 2004. Certain officers of the
Company own the building that Enzo Clinical Labs uses as its main facility. In
addition to the minimum annual rentals of space, this lease is subject to an
escalation clause. Rent expense under this lease approximated $986,000, $924,000
and $982,000 in fiscal 1999, 1998 and 1997, respectively.
Total consolidated rent expense incurred by the Company during fiscal 1999, 1998
and 1997 was approximately $1,527,000, $1,382,000 and $1,149,000 respectively.
Minimum annual rentals under operating lease commitments for fiscal years ending
July 31 are as follows:
2000 $1,258,000
2001 1,210,000
2002 1,192,000
2003 1,232,000
2004 1,055,000
Thereafter 318,000
----------
$6,265,000
==========
F-11
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999, 1998 and 1997
Note 6 - Litigation
Johnson & Johnson, Inc.
On October 19, 1994, the Company executed an agreement in settlement of various
disputes in relation to research and development agreements between the Company
and Ortho Diagnostic Systems Inc.("Ortho"), a subsidiary of Johnson & Johnson
(J&J). Pursuant to this settlement agreement, the Company received $15.0 million
in cash, of which $6.5 million related to amounts due under the agreements
referred to above, and a promissory note requiring J&J and Ortho to pay a total
of $5.0 million a year for each of the four successive anniversaries of said
date. Pursuant to the terms of the settlement, all of the Company's grants,
licenses and intellectual property have been returned to the Company in
totality. The remainer of the future payments were recorded at their net present
value of $4.9 million at July 31, 1998 in the accompanying consolidated balance
sheet, using a discount rate of 5.25%.
Patent Infringement - Calgene, Inc.
In March 1993, the Company filed suit in the United States District Court for
the District of Delaware charging patent infringement and acts of unfair
competition against Calgene, Inc. and seeking a declaratory judgment of
invalidity concerning Calgene, Inc.'s plant antisense patent. On February 9,
1994, the Company filed a second suit in the United States District Court for
the District of Delaware charging Calgene with infringement of a second
antisense patent owned by the Company. Calgene filed a counterclaim in the
second Delaware action seeking a declaration that a third patent belonging to
the Company is invalid. The two Delaware actions were consolidated and were
tried to the Court in April 1995. In addition, the Company filed suit on March
22, 1994 in the United States District Court for the Western District of
Washington against Calgene and the Fred Hutchinson Cancer Research Center,
alleging that the defendants had conspired to issue a false and misleading press
release regarding a supposed "patent license" from Hutchinson to Calgene, and
conspired to damage the Company's antisense patents by improperly using
confidential information to challenge them in the Patent Office. The Complaint
further charges that Hutchinson is infringing and inducing Calgene to infringe
the Company's antisense patents. On February 2, 1996, the Delaware Court issued
an opinion ruling against Enzo and in favor of Calgene, finding certain Enzo
claims infringed, but the patent, as a whole not infringed, and finding the
claims at issue for lack of enablement. Calgene's patent was found valid
(non-obvious) over the prior art. On February 29, 1996, the Delaware Court
issued an Order withdrawing its February 2, 1996 Opinion. On April 3, 1997, the
European Patent Office rejected Calgene's opposition that had been lodged
against the Company's related European antisense patent, thereby upholding the
patent's validity. On May 23, 1997, the Japanese Patent Office issued a related
antisense patent owned by the Company.
On June 1, 1998, the U.S. District Court for the District of Delaware
issued its final decision in the case. In its decision the District Court held
two of the Company's three antisense patents were invalid, and not infringed.
The District Court declined to act on Calgene's claim that the Company's third
antisense patent was invalid citing lack of evidence. The District Court further
held that the Calgene antisense patent was not invalid. Enzo appealed the
District Court's judgment to the U.S. Court of Appeals for the Federal Circuit
and Calgene cross-appealed. On September 24, 1999, the Court of Appeals issued
its decision, rejecting Calgene's effort to invalidate Enzo's patent in genetic
antisense technology, U.S. Patent No. 5,272,065, thus leaving it valid and
standing. The Court of Appeals also clarified the District Court's judgment
regarding two other of Enzo's genetic antisense patents (5,190,931 and
5,208,149), limiting judgment of invalidity only to the claims of the two
patents which had been asserted against Calgene. The Court of Appeals remanded
the case to the district court for determination of whether the case was
exceptional, which related to Calgene's claim for attorney fees. On October 7,
1999, Calgene filed a petition for rehearing directed to the Court of Appeal's
disposition of Calgene's cross-appeal as to Enzo patent. There can be no
assurance that the Company will be successful in connection with Calgene's
petition for rehearing and Calgene's claim that the case is exceptional, the
latter to be the subject of further proceedings in the district court. However,
even if the Company is not successful, management does not believe there will be
a significant monetary impact.
F-12
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999, 1998 and 1997
Note 6 - Litigation (Cont'd)
Patent Infringement - Other
In June 1999, the Company filed suit in the United States District Court for the
Southern District of New York against Gen-Probe Incorporated, Chugai Pharma
U.S.A., Inc., Chugai Pharmaceutical Co., Ltd., bioMerieux, Inc., bioMerieux SA,
and Becton Dickinson and Company, charging them with infringing the Company's
U.S. Patent 4,900,659, which concerns probes for the detection of the bacteria
that causes gonorrhea. The case remains at an early stage. There can be no
assurance that the Company will be successful in these proceedings. However,
even if the Company is not successful, management does not believe that there
will be a significant monetary impact.
Note 7 - Income taxes
The tax benefit (provision) is calculated under the provisions in SFAS No. 109.
1999 1998 1997
---- ---- ----
Current
Federal $(108,000) $(76,000) $(38,000)
State and local (313,600) (127,400) (73,000)
Deferred 1,550,000 1,025,000 --
---------- --------- ---------
Benefit (provision) for income taxes $1,128,400 $821,600 $(111,000)
========== ========= =========
Current Federal income taxes provided for in fiscal 1999, 1998, and 1997 are
based on the alternative minimum tax method.
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
The components of deferred income taxes are as follows:
1999 1998
---- ----
Deferred tax liability:
Deferred patent costs $(1,804,000) $(1,907,000)
Deferred tax assets:
Provision for uncollectable accounts
receivable 1,517,000 1,587,000
Net operating loss carry forwards 4,473,000 6,779,000
Alternative minimum tax credits 586,000 665,000
Other 373,000 399,000
----------- -----------
6,949,000 9,430,000
Valuation allowance for deferred tax assets (2,570,000) (6,498,000)
----------- -----------
Net deferred tax asset $2,575,000 $1,025,000
=========== ===========
F-13
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999, 1998 and 1997
Note 7 - Income taxes (Cont'd)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will be realized. The ultimate realization of the deferred tax asset is
dependent upon the generation of future taxable income. Management considers
scheduled reversals of deferred tax liabilities, projected future taxable income
and tax planning strategies which can be implemented by the Company in making
this assessment. The Company had provided a full valuation allowance for the net
deferred tax asset at July 31, 1997. In fiscal 1999 and 1998, management
reversed a portion of the deferred tax asset valuation allowance as management
considered that it was more likely than not that a portion of the deferred tax
asset would be realized. The valuation allowance decreased $3,928,000,
$2,326,000 and $747,000 in fiscal 1999, 1998 and 1997, respectively.
The Company has net operating loss carry forwards of approximately $10,708,000
which are due to expire through 2011. The Company realized a benefit from the
utilization of net operating loss carry forwards of $2,306,000, $1,877,000 and
$877,000 in fiscal 1999, 1998 and 1997, respectively. The Company also has
alternative minimum tax credits which do not expire.
The (benefit) provision for income taxes were at rates different from U.S.
federal statutory rates for the following reasons:
1999 1998 1997
---- ---- ----
Federal statutory rate 34% 34% 34%
Expenses not deductible for income
tax return purposes 4% 7% 13%
State income taxes, net of federal tax deduction
and change in deferred tax asset valuation reserve -- (2%) 4%
Change in deferred tax asset valuation reserve and
benefits recognized from net operating losses (59%) (71%) (44%)
--- --- ---
(21%) (32%) 7%
=== === ===
Note 8 - Stock options and warrants
In fiscal 1997, the Company adopted the disclosure provisions of SFAS No. 123.
SFAS No. 123 defines a fair value method of accounting for the issuance of stock
options and other equity instruments. Under the fair value method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Pursuant to SFAS No. 123, companies are encouraged, but are not required, to
adopt the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," but are required to disclose in a note to the consolidated financial
statements proforma net income and per share amounts as if the Company had
applied the new method of accounting. SFAS No. 123 also requires increased
disclosures for stock-based compensation arrangements.
The Company has elected to comply with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations, in accounting for its stock options because, as discussed
below, the alternative fair value accounting provided for under SFAS No. 123,
requires use of option valuation models which were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the data of grant, no compensation expense is recognized.
The Company has an incentive stock option plan and a restricted stock incentive
plan and has issued other options and warrants, as described below. All share
information has been adjusted to reflect a 5% stock dividend declared on
December 15, 1997 (See Note 11).
F-14
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999, 1998 and 1997
Note 8 - Stock options and warrants (Cont'd)
Incentive stock option plan
The Company has an incentive stock option plan ("1983 plan") under which the
Company may grant options for up to 1,041,863 shares of common stock. No
additional options may be granted under the 1983 plan. The exercise price of
options granted under such plan is equal to or greater than fair market value of
the common stock on the date of grant. The Company has stock option plans ("1993
plan" and "1994 plan") under which the Company may grant options for up to
1,736,438 shares (1993 plan) and for up to 1,099,744 shares (1994 plan) of
common stock. No additional options may be granted under the 1993 plan or the
1994 plan. During fiscal 1999, the Company set up a new incentive stock option
plan ("1999 plan") under which the Company may grant up to 950,000 shares of
common stock. The options granted pursuant to the plans may be either incentive
stock options or nonstatutory options. To date, the Company has only granted
incentive stock options under these plans.
A summary of the information pursuant to the Company's stock options plans for
the years ended July 31, 1999, 1998 and 1997 under SFAS No. 123 is as follows:
1999 1998 1997
------------------------------ -------------------------------- --------------------------------
Weighted -Average Weighted -Average Weighted -Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
Outstanding at
Beginning of
year 2,169,251 $9.15 2,124,989 $8.13 2,148,760 $ 7.73
Granted 603,500 8.41 273,000 13.51 116,550 14.79
Exercised (26,432) 5.98 (212,612) 3.72 (73,618) 5.86
Terminated (45,380) 13.40 (16,126) 12.41 (66,703) 10.62
--------- --------- ---------
Outstanding at
end of year 2,700,939 $8.98 2,169,251 $9.15 2,124,989 $ 8.11
========= ----- ========= ----- ========= ------
Exercisable at
end of year 1,793,183 1,602,767 1,446,253
========= ========= =========
Weighted average
fair value of
options granted
during year $5.80 $9.40 $ 10.86
===== ===== =======
The following table summarizes information for stock options outstanding at July
31, 1999:
Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------------
Weighted-Average
Range of Remaining Weighted-Average Weighted-Average
Exercise prices Shares Contractual Life Exercise Price Shares Exercise Price
- --------------- ------ ---------------- -------------- ------ --------------
$1.30 122,788 2.3 years $1.30 122,788 $1.30
$2.70 - $2.92 102,760 0.1 years 2.73 102,760 2.73
$3.89 95,641 3.2 years 3.89 95,641 3.89
$5.62 - $6.59 9,456 3.6 years 5.91 9,456 5.91
$6.63 - $9.83 1,435,447 5.8 years 7.42 1,102,947 7.54
$10.13 - $14.17 859,409 8.2 years 12.39 304,416 13.48
$15.71 - $17.46 75,438 7.0 years 16.47 55,175 16.75
--------- ---------
2,700,939 1,793,183
========= =========
F-15
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999, 1998 and 1997
Note 8 - Stock options and warrants (cont'd)
Incentive stock options generally become exercisable at 25% per year after one
year and expire ten years after the date of grant.
Pro-forma information regarding net income and net income per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for its
stock options under the fair value method of that statement. The fair value for
these options was estimated at the date of grant using a Black-Sholes option
pricing model with the following assumptions: risk free interest rate ranging
from 4.54% to 6.88%; no dividend yield; volatility factor of the expected market
price of the Company's common stock of .72 for grants prior to July 31, 1997,
.69 for grants during fiscal year 1998 and .68 for grants during fiscal year
1999, and a weighted-average expected life of the options of 7 years at July 31,
1999, 1998 and 1997.
The Black-Sholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions incliding the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
1999 1998 1997
---- ---- ----
Pro forma net income: $4,426,080 $1,841,000 $477,000
Pro forma net income per share:
Basic $.18 $.08 $.02
Diluted $.18 $.07 $.02
The SFAS No. 123 method of accounting has not been applied to options granted
prior to Aug 1, 1995. As a result, the pro forma compensation cost may not be
representative of that to be expected in future years.
Restricted stock incentive plan
The Company has a restricted stock incentive plan whereby the Company may award
up to 231,525 shares of its common stock. Under the terms of the plan, any
shares issued are restricted in regard to sales and transfers for a period of
five years after award. Such restrictions begin to expire at 25% per year after
the second year of ownership. As of July 31, 1999, the Company has not awarded
any shares of common stock under this plan.
Other options and warrants
As part of the restructuring of the Debenture in November 1991, the Company
issued warrants to purchase 297,510 shares of common stock with an exercise
price of $1.72 per share expiring ten years after the date of issue. In fiscal
1999, 1998 and 1997, 7,800, 186,579 and 7,497 of these warrants were exercised,
respectively. In fiscal 1996, the Company issued warrants to purchase 89,854
shares of common stock with an exercise price ranging from $9.06 to $15.87 per
share which expire five years after the date of issue. In fiscal 1996, 10,473 of
these warrants were exercised and 12,679 were canceled.
**********
As of July 31, 1999, the Company has reserved 4,853,800 shares under the
arrangements described above.
F-16
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999, 1998 and 1997
Note 9 - Commitments
The Company has an exclusive licensing agreement to an invention covered by
licensed patents. Under this agreement, the Company is required to make certain
minimum royalty payments of $200,000 per year through the life of the patents.
Note 10 - 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, 1999, 1998 and 1997, the Company has authorized employer
contributions of 50% of the employees' contribution up to 6% of the employees'
compensation in Enzo Biochem, Inc. common stock. The 401(k) employer
contributions expense was $188,000, $135,000 and $129,000 in fiscal years 1999,
1998, and 1997, respectively.
Note 11 - Stock dividend
On December 15, 1997, the Company declared a 5% stock dividend payable January
23, 1998 to shareholders of record as of January 9, 1998. The stock price on the
date of declaration was $15.44.
F-17
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999, 1998 and 1997
Note 12 - Segment Information
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131") and retroactively
applied it to fiscal 1998 and 1997. The adoption of SFAS No. 131 had no impact
on the Company's reported net income or shareholders' equity. The Company has
two reportable segments: research and development and clinical reference
laboratories. The Company's research and development segment conducts research
and development activities as well as selling products derived from these
activities. The clinical reference laboratories provide diagnostic services to
the health care community. The Company evaluates performance based on income
before benefit (provision) for taxes on income. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. Costs excluded from income before benefit
(provision) for taxes on income and reported as other consist of corporate
general and administrative costs which are not allocable to the two reportable
segments. Management of the Company assesses assets on a consolidated basis only
and therefore, assets by reportable segment has not been included in the
reportable segments below.
The following financial information (in thousands) represents the reportable
segments of the Company:
Research and Development Clinical Reference Laboratories
Fiscal Year Ended July 31, Fiscal Year Ended July 31,
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
--------------------------------------------------------------
Operating revenues:
Research product revenues $16,279 $12,661 $13,190 -- -- --
Clinical laboratory services -- -- -- $28,041 $27,756 $21,749
Cost and expenses:
Cost of research product revenues 7,884 7,497 8,410 -- -- --
Cost of clinical laboratory services -- -- -- 8,285 8,247 7,153
Research and development expense 4,427 3,983 3,562 -- -- --
Depreciation and amortization 744 691 629 1,188 1,173 1,216
Interest income -- -- -- 23 39 25
Income before benefit (provision) for taxes on
income $2,661 $157 $157 $2,363 $2,195 $1,461
------ ---- ---- ------ ------ ------
Other Consolidated
Fiscal Year Ended July 31, Fiscal Year Ended July 31,
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
-----------------------------------------------------------
Operating revenues:
Research product revenues -- -- -- $16,279 $12,661 $13,190
Clinical laboratory services -- -- -- 28,041 27,756 21,749
Cost and expenses:
Cost of research product revenues -- -- -- 7,884 7,497 8,410
Cost of clinical laboratory services -- -- -- 8,285 8,247 7,153
Research and development expense -- -- -- 4,427 3,983 3,562
Depreciation and amortization -- -- -- 1,932 1,864 1,845
Interest income $1,961 $1,846 $1,774 1,984 1,885 1,799
Income before benefit (provision) for taxes on
income $363 $218 $(54) $5,387 $2,570 $1,564
---- ---- ---- ------ ------ ------
The Company's reportable segments are determined based on the services they
performed and the products they sell, not on the geographic area in which they
operate. The Company's clinical reference laboratories segment operates 100% in
the United States with all revenue derived from this country. The research and
development segment earns revenue both in the United States and foreign
countries. The following is a summary of research and development revenues
attributable to customers located in the United States and foreign countries:
1999 1998 1997
---- ---- ----
United States $3,813 $1,171 $767
Foreign Countries 12,466 11,490 12,423
------ ------ ------
$16,279 $12,661 $13,190
======= ======= =======
F-18
ENZO BIOCHEM, INC.
SCHEDULE II - VALUATION
AND QUALIFYING ACCOUNTS
Years ended July 31, 1999, 1998 and 1997
Additions
---------
Balance at Charged Charged
Beginning (credited) to costs to other (Additions) Balance at
Description of period and expenses accounts Deductions end of period
- ----------- --------- ------------ -------- ---------- -------------
1999
Allowance for doubtful accounts receivable $5,148,500 $9,960,800 -- $9,082,300 (1) $6,027,000
Allowance for deferred tax valuation $6,498,000 ($1,550,000) -- $2,378,000 $2,570,000
1998
Allowance for doubtful accounts receivable $4,105,200 $9,627,500 -- $8,584,200 (1) $5,148,500
Allowance for deferred tax valuation $8,824,000 $(1,025,000) -- $1,301,000 $6,498,000
1997
Allowance for doubtful accounts receivable $5,398,000 $5,633,600 -- $6,926,400 (1) $4,105,200
Allowance for deferred tax valuation $9,571,000 -- -- $747,000 $8,824,000
(1) Write-off of uncollectable accounts receivable.
F-19