UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Mark one
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended July 31, 1998
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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
- ---------------------------- ---------------------------
(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]
As of October 26, 1998, the Registrant had 24,891,240 shares of Common
Stock outstanding.
The aggregate market value of the Common Stock held by nonaffiliates
as of October 26, 1998 was approximately $234,505,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Items 11, 12 and 13 To be included in the Company's Proxy
Statement to be filed with the Securities
and Exchange Commission no later than
November 27, 1998.
Part IV - Certain exhibits listed Included in prior filings made by the
in response to Item Company under the Securities Act of
14(a)(3) 1933 and the Securities Exchange Act
of 1934
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PART I
Item 1. 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 medical 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 10 of the Notes to Consolidated Financial Statements.
For the fiscal year ended July 31, 1998 (fiscal 1998), approximately
31% of the Company's operating revenues was derived from product sales and
approximately 69% was derived from clinical reference laboratory services. For
the fiscal years ended July 31, 1997 and 1996 (fiscal 1997 and fiscal 1996,
respectively), approximately 38% of the Company's operating revenues were
derived from product sales and approximately 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, 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 -- gene identification and gene
regulation. 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, 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 1998.
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 such as 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 gene regulation technology. 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 obtained
three patents covering this technology.
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 Company in the greater New York area affords the
Company access to and interaction with a large number of research institutions
and qualified scientists.
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In the fiscal years ended July 31, 1998, 1997 and 1996, the Company
incurred costs of approximately $3,984,000, $3,562,000 and $3,083,000,
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, nursing homes 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 computer interface or manually. Most
routine testing is completed by early the next morning, and tests 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 92% and 93% at July 31, 1998 and 1997, respectively, of
the Company's net accounts receivable relate 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, 1997 and 1996 approximated
10%, 12% and 14%, respectively of the Company's total revenue. For the year
ended July 31, 1998, 1997 and 1996 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 11 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 gene identification and gene
regulation, 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
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.
MARKETING STRATEGY
Product Development Activities
The Company has been successful in obtaining clearance from the 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
4
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 directly to the researcher and through its distributors.
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, 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 new 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 also 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. Under the terms of this agreement, Boehringer Mannheim 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 Boehringer Mannheim prior to the agreement, as well as
products developed by the Company, all of which are 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
5
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 distributing agreement was concluded with
Wako Clinical Co., a leader in the medical research market in Japan.
During fiscal 1998, Enzo Diagnostics continued expanding its
non-exclusive distribution agreements. 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' microclip array systems.
At July 31, 1998 and 1997, 4% and 5% of the Company's net accounts
receivable relate to amounts due from Boehringer Mannheim and Amersham,
collectively. Operating revenues from Boehringer Mannheim represented
approximately 21% and 25% of consolidated operating revenues in each of fiscal
1998 and 1997 respectively.
The Company had previously entered into distribution agreements with
certain Johnson & Johnson, Inc. (J&J) subsidiaries in Europe, one of which
continues to be in effect. Ortho Diagnostics continues to be the Company's
distributor for marketing, distribution and sale in Italy for the Company's
BioProbe(R) and other products.
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 BioProbe(R) nucleic
acid probe products offer Enzo Clinical Labs a marketing tool by establishing it
among the first 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.
TECHNOLOGY AND PRODUCT DEVELOPMENT
The major focus of the Company's product development program has been
toward the commercialization of nucleic acid probe-based IN VITRO diagnostics.
Initially, nucleic acid probes were radioactive and required complex protocols
to perform. To develop them into useful commercial products required making such
products 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 1998
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some 181 patents issued 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 considerably more revenues in
the future as the markets for these products continue to develop. These
patents cover a variety of BioProbe(R) 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 their instability increases usage cost.
To overcome the limitations of radioactively labeled probes, the
Company, starting with basic technology licensed from Yale University ("Yale"),
has developed a proprietary technology that allows DNA probes to be used
effectively without the use of radioactivity. This development permits 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 primary patent for the technology that is essential
to the development of nonradioactive DNA probe diagnostics was issued to Yale.
In July 1994 and in September 1995 additional patents, broadening the coverage
of the primary patent were also issued to Yale. The Company has an exclusive
license for both patents from Yale for the life of the patents. 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 the BioProbe(R) nucleic acid probe system
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 the HIV-1, the virus that causes AIDS and a test for the organism causing
tuberculosis. Tests for other viruses, including HIV-2 and hepatitis were later
introduced to researchers. A more 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.
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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 cancers and infections. Enzo is
exploring applications of antisense nucleic acids employing various proprietary
technologies. 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. Also, the
Company has developed techniques for stably attaching drugs and radioisotopes to
proteins and DNA. The Company is working towards, INTER ALIA, 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. application
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. For example,
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 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 StealthVector(TM), the antisense construct
designed to localize in the cell nucleus,
8
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 Food
and Drug Administration (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. 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 novel gene regulation and delivery
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 is 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 evaluating 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 is designed to study the
efficacy of therapeutic treatments based on certain of Enzo's technologies,
including oral toleration, in areas in which immune response is a major
complication in the management of disease and the control of graft of organ
rejection after transplantation. Preclinical animal studies are already underway
and preliminary results, presented in May 1998 at a meeting of the American
Association of Gastronenteology, demonstrate the efficacy of this technology as
a means of treating inflammatory bowel disease, including Crohn's disease and
ulcerative colitis.
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 BioProbe(R) 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
(3H) in its research and development activities and manufacturing operations.
For the fiscal year ended July 31, 1998 the Company has not had an accumulation
of tritium to be disposed.
9
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 non-governmental 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 laboratory is 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 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
10
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 of
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.
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 cannot predict, however, whether new regulators and agencies.
11
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 to 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 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 1998 and 1997, the Company derived
approximately 10% and 12%, respectively of its net sales 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
12
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.
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 1998 the Company owned or licensed 36 U.S. and some 160 foreign patents
and had filed approximately 214 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 si 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 the BioProbe(R) 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
13
technology is covered by three U.S. patents 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, 1998, the Company employed 189 full-time and
41 part-time employees. Of the full-time employees, 32 were engaged in research,
development, manufacturing and marketing of research products and 157 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.
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
Secretaries 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 to 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.
14
(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.
Item 2. PROPERTIES
The following are the principal facilities of the Company:
Approximate Approximate Approximate
Floor Annual Expiration
Location Principal Operations Area (sq. ft.) Base Rent Date
- -------- -------------------- -------------- --------- -----------
60 Executive Blvd. Corporate 40,000 $1,020,000 November 30, 2004
headquarters,
clinical reference
and development
facilities (See
note 6 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 owned 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 court held two of the
Company's three antisense patents invalid and not infringed. The Court declined
to act on Calgene's claim that the Company's third antisense patent was invalid,
citing lack of evidence. The Court further held that the Calgene
15
antisense patent was not invalid. Enzo has appealed the District Court's
judgment to the U.S. Court of Appeals for the Federal Circuit. There can be
no assurance that the Company will be successful in its appeal. If the
Company is successful in its appeal, it expects that the case would be
remanded for further proceedings before the District Court, and there can be
no assurance that the Company will be successful in such further proceedings.
However, even if the Company is not successful, management does not believe
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, 1998.
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
1997 Fiscal Year (August 1, 1996
to July 31, 1997):
1st Quarter $19 1/8 $13 1/2
2nd Quarter $21 $15 1/2
3rd Quarter $17 3/4 $12 1/4
4th Quarter $16 3/8 $13 7/8
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
On October 26, 1998, the last sale price of the Common Stock of the
Company as reported on the American Stock Exchange was $11 15/16.
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 September 13, 1996, the Company declared a 5% stock dividend payable
on October 29, 1996 to shareholders of record on October 8, 1996. On December
15, 1997, the Company declared another 5% stock dividend payable January 23,
1998 to shareholders of record as of January 9, 1998.
16
Item 6.
Selected Financial Data
(In thousands, except per share data)
For the Years Ended July 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
OPERATING RESULTS:
Operating revenues $40,417 $34,939 $34,490 $31,701 $22,799
Litigation settlement, net of legal fees -- -- -- 21,860 --
Write-down of leasehold interest
and related costs -- -- 7,613 11,400 600
Interest income, net 1,885 1,799 1,640 941 87
Income (loss) before benefit (provision)
for taxes on income
and extraordinary items 2,570 1,564 (7,508) 9,749 2,156
Benefit (provision) for taxes on
income 822 (111) (199) (4,131) 2,945
Income (loss) before extraordinary
items 3,392 1,453 (7,707) 5,618 5,101
Extraordinary items:
Gain on extinguishment of debt -- -- -- -- 150
Net income (loss) $ 3,392 $ 1,453 $(7,707) $ 5,618 $ 5,251
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Basic net income (loss) per common share:
Income (loss) before extraordinary items $ 0.14 $ 0.06 $ (.32) $ .24 $ .22
Extraordinary gain -- -- -- -- .01
------- ------- ------- ------- -------
Net income (loss) $ 0.14 $ 0.06 $ (.32) $ .24 $ .23
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Diluted net income (loss) per common share (1):
Income (loss) before extraordinary items $ 0.13 $ 0.06 $ (.32) $ .23 $ .21
Extraordinary gain -- -- -- -- .01
------- ------- ------- ------- -------
Net Income (loss) $ 0.13 $ 0.06 $ (.32) $ .23 $ .22
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Denominator for per share calculation:
Basic 24,653 24,162 23,840 23,105 22,543
Diluted 25,746 25,498 23,840 24,229 23,759
FINANCIAL POSITION:
Working capital $52,973 $43,232 $29,451 $24,449 $17,153
Total assets $72,153 $67,419 $62,838 $72,458 $65,043
Long-term debt and obligation under
capital lease -- $ 46 $ 114 $ 4,698 $ 4,379
Stockholders' equity $68,783 $64,009 $55,253 $61,113 $51,245
(1) In fiscal year 1996, potentially dilutive securities have not been included
because the effect of their inclusion would have been anti-dilutive.
17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Company, at July 31, 1998 had cash and cash equivalents of $33.5
million, an increase of $8.3 million from July 31, 1997. The Company had net
working capital of $53.0 million at July 31, 1998 compared to $43.2 million at
July 31, 1997.
The Company's income before taxes was $2.6 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 1998 fiscal year was
approximately $8.3 million which also includes $5 million of cash received in
connection with the litigation settlement as compared to net cash provided by
operating activities of $7.7 million for the 1997 fiscal year. The increase in
net cash provided by operating activities from fiscal 1997 to fiscal 1998 was
primarily due to the Company's net income for 1998, which included an increase
in the provision for uncollectible accounts receivable of $4.0 million, offset
by an increase in the change in deferred income taxes of $1.0 million and an
increase in the change in accounts receivable of approximately $4.7 million.
Net cash used by investing activities in fiscal 1998 amounted to
approximately $1.0 million as a result of capital expenditures and deferred
patent costs as compared to net cash used by investing activities of $1.2
million in fiscal 1997. The decrease relates primarily to reduced capital
expenditures in fiscal 1998 compared to fiscal 1997.
Net cash provided by financing activities of $1.1 million in fiscal
1998 as compared to $0.9 million in fiscal 1997 represents a increase of $0.2
million. This increase was attributable primarily to an increase of stock
options and warrants exercised during fiscal 1998.
The Company's net accounts receivable of $14.2 million and $12.0
million represent 128 days and 125 days of operating revenues at July 31, 1998
and 1997 respectively. The change in net accounts receivable is due to an
increase in accounts receivable at the clinical reference laboratory of
approximately $2.0 million and a increase of research products accounts
receivable of approximately $ 0.2 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 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 a
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
18
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
due to an increase esoteric screening tests not usually covered by third party
insurance carriers.
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.
The operating profit from research and development activities and
related costs amounts to $0.5 million in fiscal 1998, as compared to an
operating profit of $0.4 million in fiscal 1997. The increase in the profit is
principally related to the decrease in lower profit margin sales of product from
the non-exclusive distribution agreements. The operating profit from the
clinical reference laboratories activities amounted to $2.2 million (8% of
operating revenues) as compared to $1.6 million (7% of operating revenues) 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.
Fiscal 1997 Compared to Fiscal 1996
Revenues from operations for the fiscal year ended July 31, 1997
("fiscal 1997") increased by $0.4 million over revenues from operations for the
fiscal year ended July 31, 1996 ("fiscal 1996"). This increase was due to an
increase of $0.2 million in revenues from research product sales over revenue
for the similar activity in fiscal 1996 and an increase of $0.2 million in
revenues for the clinical reference laboratory operations. The increase in
research product sales resulted primarily from the Company's non-exclusive
distribution agreements for the Company's products and generally was the result
of higher volume of sales of product. The increase in revenues from the clinical
laboratory operations resulted primarily from an increase in volume of
diagnostic screening tests.
Cost of sales increased by $0.12 million as a result of the increase of
$0.06 million in the cost of sales of research products from the Company's
distribution agreements activities and an increase in the cost of clinical
laboratory services of $0.06 million. This increase is primarily due to the
costs related to the increased volume of tests.
Research and development expenses increased by $0.5 million as a
result of an increase in research programs and the increased amortization of
patent costs.
The provision for uncollectible accounts receivable decreased by $1.1
million primarily due to an additional provision of $3.5 million in the fourth
quarter of fiscal 1996 to reflect the reduced reimbursements received by the
Company from Medicare and other third party insurers who generally follow the
reimbursement policies of Medicare offset by the continuing effects in 1997 of
such reduced reimbursements and collections.
The Company's net accounts receivable from the clinical laboratory
operations of $11.1 million and $9.0 million represent an average of 186 and 153
days of operating revenue at July 31, 1997 and 1996, 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 1997. 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.
Selling and general and administrative expenses decreased by $0.4
million primarily due to a decrease in legal fees in fiscal 1997.
19
The operating profit from research and development activities and
related costs amounts to $0.4 million in fiscal 1997, as compared to $0.5
million in fiscal 1996. The decrease in the profit is principally related to the
increase in research and development expenses from the diagnostic division. The
operating profit from the clinical reference laboratories activities amounted to
$1.6 million (7% of operating revenues) as compared to $0.1 million (.6% of
operating revenues) in fiscal 1996. This increase resulted principally from the
decrease in the provision for uncollectible accounts receivable.
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. While the Company believes that the Year
2000 will not have a material adverse effect on the Company's financial
position, liquidity or results of operations, there is no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted and would not have an adverse effect on the Company's systems.
For the "Year 2000" issue the Company has identified those
systems that require changes to accommodate the Year 2000. It has identified
four areas of concern. They are the laboratory's operations and billing systems,
the general accounting systems and the telephone systems and the two systems
outside of its control; one being the payor systems and the other being the
vendor systems. At the present time, it appears that the laboratory systems will
be completely updated with new hardware and software an approximate cost of
$600,000. The general accounting systems (which are supplied by an outside
vendor) will cost the Company approximately $15,000 to upgrade and are scheduled
for conversion during the third quarter of the next fiscal year. The payor
systems are being converted per instructions on the part of each payor (i.e.
Medicare, Medicaid, insurance companies, etc.).
During May 1998, the General Accounting Office ("G.A.O.") warned the
House Ways and Means Oversight Panel, "If progress is not made faster to assure
correct and prompt claims processing and payment when the year 2000 dawns, the
potential impact on the revenue and cash flow of pathologists, radiologists,
laboratories, and other providers could be catastrophic, including improper
denials and payments that are late or incorrect. Health Care Finance
Administration (HCFA) has yet to determine the total number of providers likely
to be affected." HCFA has begun developing business continuity and contingency
plans and expects to release drafts soon. Still, GAO warns, the agency doesn't
appear to have documented the severity of Year 2000 failures on its core
business. Among options reportedly being considered in this regard is to give
advance payments to providers in late 1999. The failure of the government to so
address these concerns may have a significant adverse impact on the Company's
financial results.
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.
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 71) has been 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
20
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 55) has been a Director of the Company since
January 1982. Since October 1993, Mr. Delucca has been 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, 1998, there were four (4) 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 (1) formal meeting and the
Stock Option Committee had three formal meetings in fiscal 1998.
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.
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 54) 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 46) 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 47) has served as President of the Company
since November 1996 and as 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
21
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 a M.B.A. from Boston University.
DR. NORMAN E. KELKER (age 59) 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 58) 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 50) 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 58) 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 MS from Yale
University.
DAVID C. GOLDBERG (age 41) is Vice President of Business Development.
Prior to joining Enzo in 1985, he was employed at DuPont NEN Products. He
received an MS from Rutgers University and an MBA from New York University.
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 27, 1998 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 filed with the Securities and Exchange
Commission on or before November 27, 1998 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 27, 1998 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, 1998 and 1997
Consolidated Statement of Operations-
Years ended July 31, 1998, 1997 and 1996
Consolidated Statement of Stockholders' Equity-
Years ended July 31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows-
Years ended July 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements.
22
(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)
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 filed herewith. (14)
10(q) Agreement with BioHealth Laboratories, Inc. shareholders filed herewith. (15)
10(r) Agreement with Johnson & Johnson, Inc. filed herewith. (16)
10(s) 1993 Incentive Stock Option Plan. (16)
23
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) (20)
10(aa) Agreement with Dako A/S effective May 1995. (18) (20)
10(bb) Agreement with Baxter Healthcare Corporation (VWR
Scientific Products) effective September 1995. (18) (19)
10(cc) Agreement with Yale University and amendments thereto. (19) (20)
10(dd) Agreement with The Research Foundation of the State of New
York effective May 1987. (18) (20)
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.
25 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.
24
(8) These exhibits were filed as exhibits to the Company's Quarterly Report
on Form 10-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.
(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 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, 1998 -- none
(c) See Item 14(a)(3), above.
(d) See Item 14(a)(2), above.
*************
25
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 28, 1998 By: /s/ Elazar Rabbani
---------------------
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.
/s/ Elazar Rabbani October 28, 1998
- --------------------------------
Elazar Rabbani
Chairman of Board of Directors
(Principal Executive Officer)
/s/ Shahram K. Rabbani October 28, 1998
- --------------------------------
Shahram K. Rabbani,
Chief Operating Officer, Secretary
and Director (Principal Financial and
Accounting Officer)
/s/ Barry W. Weiner October 28, 1998
- --------------------------------
Barry W. Weiner,
President and Director
- --------------------------------
John B. Sias, Director
- --------------------------------
John J. Delucca, Director
26
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, 1998 and 1997 F-3
Consolidated Statement of Operations --
Years ended July 31, 1998, 1997 and 1996 F-4
Consolidated Statement of Stockholders' Equity --
Years ended July 31, 1998, 1997 and 1996 F-5
Consolidated Statement of Cash Flows --
Years ended July 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-8
Schedule II - Valuation and Qualifying
Accounts --Years ended July 31, 1998, 1997 and 1996 F-21
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, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended July 31, 1998. 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, 1998 and 1997 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
July 31, 1998, 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 herein.
/s/ Ernst & Young LLP
Melville, New York
October 14, 1998
F-2
ENZO BIOCHEM, INC.
CONSOLIDATED BALANCE SHEET
July 31, 1998 and 1997
ASSETS 1998 1997
------ ----------- ------------
Current assets:
Cash and cash equivalents $33,542,500 $ 25,250,400
Accounts receivable, less allowance
for doubtful accounts of $5,148,500 in
1998 and $4,105,200 in 1997 14,196,400 11,985,400
Current portion of note receivable --
litigation settlement 4,941,600 5,000,000
Inventories 1,393,000 1,559,000
Deferred Taxes 471,000 ---
Other 843,900 1,811,400
----------- ------------
Total current assets 55,388,400 45,606,200
Property and equipment, at cost less
accumulated depreciation and amortization 2,569,900 2,909,900
Long-term portion of note receivable --
litigation settlement --- 4,688,600
Cost in excess of fair value of net tangible
assets acquired, less accumulated
amortization of $3,869,100 in 1998 and
$3,498,600 in 1997 8,934,200 9,304,700
Deferred patent costs, less accumulated
amortization of $3,402,600 in 1998 and
$2,762,600 in 1997 4,558,700 4,757,600
Deferred Taxes 554,000 ---
Other 148,200 152,400
----------- -----------
$72,153,400 $67,419,400
----------- -----------
----------- -----------
LIABILITIES AND
STOCKHOLDERS' EQUITY 1998 1997
-------------------- ---- ----
Current liabilities:
Trade accounts payable $ 1,439,100 $ 1,088,900
Income taxes payable 164,000 128,000
Other accrued expenses 803,400 1,089,500
Current portion of long-term debt 8,900 37,700
Current portion of obligations
under capital leases --- 30,200
----------- -----------
Total current liabilities 2,415,400 2,374,300
Long-term debt --- 8,900
Obligations under capital leases --- 36,800
Other deferred liabilities 955,000 990,500
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: 24,905,300 in
1998 and 23,329,900 in 1997 249,100 233,300
Additional paid-in capital 92,102,700 90,736,200
Accumulated deficit (23,568,800) (26,960,600)
----------- -----------
Total stockholders' equity 68,783,000 64,008,900
----------- ----------
$72,153,400 $67,419,400
----------- ----------
----------- ----------
See accompanying notes
F-3
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended July 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
Revenues:
Research product revenues $12,660,900 $13,189,600 $12,946,300
Clinical laboratory services 27,756,100 21,748,900 21,544,000
----------- ----------- -----------
40,417,000 34,938,500 34,490,300
Costs and expenses:
Cost of research product revenues 7,496,600 8,410,200 8,351,000
Cost of clinical laboratory services 8,247,200 7,153,400 7,088,700
Research and development expense 3,983,500 3,561,900 3,083,000
Selling expense 2,728,000 2,718,800 2,714,800
Provision for uncollectable accounts receivable 9,627,500 5,633,600 6,702,900
General and administrative expense 7,648,600 7,696,100 8,085,100
Writedown of leasehold interest and related costs --- --- 7,613,400
----------- ----------- -----------
39,731,400 35,174,000 43,638,900
----------- ----------- -----------
Income (loss) before interest income, net and
benefit (provision) for taxes on income 685,600 (235,500) (9,148,600)
Interest income, net 1,884,600 1,799,300 1,640,200
----------- ----------- -----------
Income (loss) before benefit (provision) for taxes
on income 2,570,200 1,563,800 (7,508,400)
Benefit (provision) for taxes on income 821,600 (111,000) (199,100)
----------- ----------- -----------
Net income (loss) $ 3,391,800 $ 1,452,800 $(7,707,500)
----------- ----------- -----------
----------- ----------- -----------
Net income (loss) per common share:
Basic $ .14 $ .06 $ (.32)
------ ------ ------
------ ------ ------
Diluted $ .13 $ .06 $ (.32)
------ ------ ------
------ ------ ------
Denominator for per share calculation:
Basic 24,653,000 24,162,000 23,840,000
----------- ----------- -----------
----------- ----------- -----------
Diluted 25,746,000 25,498,000 23,840,000
----------- ----------- -----------
----------- ----------- -----------
See accompanying notes.
F-4
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended July 31, 1998, 1997 and 1996
Common Common Additional Total
Stock Stock paid-in Accumulated Shareholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
Balance at July 31, 1995 21,334,600 $213,500 $81,605,000 $(20,705,900) $61,112,600
Issuance of stock for employee 401(k) plan 10,200 100 145,700 --- 145,800
Net loss for the year ended July 31, 1996 --- --- --- (7,707,500) (7,707,500)
Increase in common stock and paid-in capital due to
exercise of stock options and warrants 280,100 2,800 1,699,300 --- 1,702,100
---------- -------- ----------- ------------ -----------
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
---------- -------- ----------- ------------ -----------
---------- -------- ----------- ------------ -----------
See accompanying notes.
F-5
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended July 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ 3,391,800 $ 1,452,800 $(7,707,500)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization of property and equipment 853,000 887,900 894,400
Amortization of costs in excess of fair value of net tangible assets
acquired 370,500 370,400 370,600
Amortization of deferred patent costs 640,000 586,800 547,200
Provision for uncollectible accounts receivable 9,627,500 5,633,600 6,702,900
Writedown of leasehold interest and related costs --- --- 7,613,400
Deferred income tax benefit (1,025,000) --- ---
Issurance 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 (253,000) (575,000) (992,600)
Issuance of stock for employee 401K plan 134,500 128,900 145,800
Deferred liabilities (35,500) (17,500) 168,200
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 (11,838,500) (7,130,800) (6,275,900)
Inventories 166,000 251,500 387,000
Other assets 967,500 710,300 161,900
Trade accounts payable and accrued expenses 64,100 109,000 143,900
Income taxes payable 36,000 128,000 (1,074,000)
Accrued legal fees --- --- 64,200
----------- ----------- -----------
Total adjustments 4,863,700 6,225,400 13,857,000
----------- ----------- -----------
Net cash provided by operating activities 8,255,500 7,678,200 6,149,500
(Continued on following page.)
F-6
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended July 31, 1998, 1997, and 1996
1998 1997 1996
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures $ (577,700) $ (691,000) $ (651,100)
Patent costs deferred (441,100) (465,800) (363,000)
Decrease (increase) in security deposits 4,200 (2,700) (28,400)
----------- ----------- -----------
Net cash used by investing activities (1,014,600) (1,159,500) (1,042,500)
Cash flows from financing activities:
Payments of obligations under capital leases (8,900) (28,800) (52,600)
Proceeds from the exercise of stock options and warrants 1,097,800 811,100 1,702,100
Payment of loans payable to bank and long term debt (37,700) (34,600) (31,700)
Proceeds from the issuance of common stock --- 286,300 ---
Payment for common stock offering costs --- (95,000) ---
----------- ----------- -----------
Net cash provided by financing activities 1,051,200 939,000 1,617,800
----------- ----------- -----------
Net increase in cash and cash equivalents 8,292,100 7,457,700 6,724,800
Cash and cash equivalents at the beginning of the year 25,250,400 17,792,700 11,067,900
----------- ----------- -----------
Cash and cash equivalents at the end of the year $33,542,500 $25,250,400 $17,792,700
=========== =========== ===========
See accompanying notes.
F-7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
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. 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 which range from August 1998 to
October 1998. The market values of these securities, as determined by quoted
sources, aggregated $32,440,000 at July 31, 1998 and approximated cost at
July 31, 1998.
CONCENTRATION OF CREDIT RISK
Approximately 92% and 93% at July 31, 1998 and 1997, respectively, of the
Company's net accounts receivable relate to its clinical reference laboratory
business which 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,
1997 and 1996 approximated 10%, 12% and 14%, respectively of revenue. The
provision for uncollectible accounts receivable increased by $4,000,000 in
fiscal 1998, primarily due to increased revenues, reduced reimbursements
received by the Company from Medicare and other third party insurers who
generally follow the reimbursement policies of Medicare. The fiscal 1998
increase is also attributable to an increase in esoteric screening tests not
usually covered by third party insurers. In fiscal 1996, the Company recorded an
additional provision for uncollectable accounts receivable of $3,500,000 based
on trends that became evident in the fourth quarter, that additional reserves
were needed primarily to cover lower collection rates under the Federal Medicare
program and other third-party payors. 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.
F-8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
Note 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
CONCENTRATION OF CREDIT RISK (CONT'D)
At July 31, 1998 and 1997, 4% and 5% of the Company's net accounts receivable
relate to amounts due from Boehringer Mannheim and Amersham, collectively, under
non-exclusive distribution and supply agreements. Operating revenues from
Boehringer Mannheim represented approximately 21% and 25% of consolidated
operating revenues in fiscal 1998 and 1997, respectively.
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 twenty or 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.
F-9
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
Note 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
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 SFAS No. 109, "Accounting for Income
Taxes." 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.
RECLASSIFICATIONS
Certain prior year's balances have been reclassified to conform with the 1998
presentation.
IMPAIRMENT OF LONG-LIVED ASSETS
In fiscal 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". 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 (LOSS) PER SHARE
In fiscal 1998, the Company adopted the provisions of SFAS No. 128, "Earnings
Per Share", which was effective for both interim and annual financial statements
for periods ending after December 15, 1997. SFAS 128 replaced the previously
reported primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options and warrants. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where necessary, restated to conform to SFAS 128 requirements.
F-10
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
Note 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
In fiscal 1996, 2,675,400 shares of potentially dilutive securities have not
been included because the effect of their inclusion would have been
anti-dilutive. The net income (loss) per share amounts for fiscal 1997 and 1996
have been retroactively adjusted to reflect the 5% stock dividends declared in
December 1997 and September 1996. (See Note 12)
The following table sets forth the computation of basic and diluted net
income (loss) per share pursuant to SFAS 128.
1998 1997 1996
----------- ----------- -----------
Numerator:
Net income (loss) for numerator for
basic and diluted net income (loss)
per common share $ 3,391,800 $ 1,452,800 $(7,707,500)
=========== =========== ===========
Denominator:
Denominator for basic net income
(loss) per common share-weighted-average shares 24,653,000 24,162,000 23,840,000
Effect of dilutive employee and director stock
options and warrants 1,093,000 1,336,000 ---
----------- ----------- -----------
Denominator for diluted net income (loss) per
share-adjusted weighted-average shares 25,746,000 25,498,000 23,840,000
=========== =========== ===========
Basic net income (loss) per share $.14 $.06 $(.32)
==== ==== =====
Diluted net income (loss) per share $.13 $.06 $(.32)
==== ==== =====
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information" which is
effective for years beginning after December 15, 1997. SFAS No. 131 established
standards for the way the public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographical areas, and major customers. Since SFAS No.
131 is not required to be applied to interim financial statements in the initial
year of adoption, the Company is not required to disclose segment information in
accordance with SFAS No. 131 until the fiscal year ended July 31, 1999, if
applicable. In the Company's first quarter of fiscal 2000 report, and in
subsequent quarters, it would present the interim disclosures required by SFAS
No. 131 for both fiscal 2000 and 1999, if applicable. Management does not expect
that adoption of SFAS No. 131 will have a significant impact on the Companies
determination of its operating segments.
F-11
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
Note 2 - SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS
In the years ended July 31, 1998, 1997 and 1996, the Company paid cash for
interest of approximately $5,000, $17,000 and $27,000, respectively.
In the years ended July 31, 1998, 1997 and 1996, the Company paid cash for
income taxes of approximately $176,000, $20,000 and $1,323,000 respectively,
and received refunds of income taxes previously paid of approximately $9,000
in fiscal 1998, $45,000 in fiscal 1997 and $35,000 in fiscal 1996.
OTHER NONCASH ITEMS:
During fiscal 1996, approximately $1,418,000 has been accrued for construction
costs, rent and legal fees related to the New York City leasehold.
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 related to the sale
of the New York City leasehold.
Note 3 - INVENTORIES
At July 31, 1998 and 1997 inventories consist of:
1998 1997
---------- ----------
Raw materials $ 68,300 $ 56,800
Work in process 927,700 1,095,300
Finished products 397,000 406,900
---------- ----------
$1,393,000 $1,559,000
========== ==========
Note 4 - PROPERTY AND EQUIPMENT
At July 31, 1998 and 1997 property and equipment consist of:
1998 1997
---------- ----------
Laboratory machinery and equipment $2,128,300 $2,189,400
Leasehold improvements 2,231,200 2,223,200
Office furniture and equipment 4,189,100 3,940,100
---------- ----------
8,548,600 8,352,700
Accumulated depreciation and amortization 5,978,700 5,442,800
---------- ----------
$2,569,900 $2,909,900
========== ==========
F-12
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
Note 4 - PROPERTY AND EQUIPMENT (CONT'D)
During fiscal 1996, the Company made extensive efforts to find a developer for
its leasehold interest in a building in New York City and the Company commenced
negotiations with the City of New York to also assist the Company in identifying
a buyer or developer for the leasehold interest. Simultaneously, the Company
commenced negotiations with the City for a full surrender of the leasehold
interest back to the City. Based on the limited interest in the leasehold by any
developer, the Company determined that it was in the best interest of the
Company to negotiate a complete and full settlement with the City. On July 31,
1996, the Company negotiated a settlement with the City of New York to relieve
the Company from any further obligations related to the lease and to return the
building to the City and the Company agreed to pay the City $2,950,000 in full
settlement of all of the City's claims for unpaid taxes and rent. The Company
issued to the City 213,623 shares of the Company's common stock in August 1996
in consideration of the settlement amount. If the City did not receive the net
proceeds of $2,950,000 upon the sale of such stock by March 17, 1996, the City
would return the remaining shares not sold, if any, and the Company would have
paid the difference in cash. The Company would receive the net proceeds in
excess of $2,950,000. The excess or deficiency of the net proceeds received by
the Company or paid to the City shall be recorded to additional paid-in capital.
On March 18,1997, the Company received approximately $286,000 in excess of the
settlement price of $2,950,000 and such excess was recorded as additional
paid-in capital. As a result of this settlement with the City, the Company
incurred a charge against earnings in the amount of approximately $7,613,000 in
the fourth quarter of fiscal 1996 which was comprised of $6.2 million in
writedown of net book value of the leasehold property and the balance of $1.4
million is related to the final settlement for unpaid rent and real estate taxes
on the property.
Note 5 - LEASE OBLIGATIONS
Capital leases
The Company leased certain office equipment and computers under capital lease
agreements in prior years. The remaining cost and accumulated amortization of
assets acquired under capitalized leases is approximately $259,000 and $171,000
at July 31, 1997.
Operating Leases
Enzo Clinical Labs, Inc. ("Enzo Clinical Labs"), a wholly-owned subsidiary of
the Company, leases its office and laboratory space under several leases which
expire between September 1, 1998 and November 30, 2004. Certain officers of the
Company own the building which 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 $924,000, $982,000
and $942,000 in fiscal 1998, 1997 and 1996, respectively.
F-13
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
NOTE 5-LEASE OBLIGATIONS CONT'D
Total consolidated rent expense incurred by the Company during fiscal 1998, 1997
and 1996 was approximately $1,382,000, $1,149,000 and $1,227,000 respectively.
Minimum annual rentals under operating lease commitments for fiscal years ending
July 31 are as follows:
1999 1,016,000
2000 1,148,000
2001 1,166,000
2002 1,192,000
2003 1,232,000
Thereafter 1,374,000
----------
$7,128,000
==========
Note 6 - LITIGATION
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. These future payments are 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%.
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 owned 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 court held two of the
Company's three antisense patents were invalid, and not infringed. The court
declined to act on Calgene's claim that the Company's third antisense patent
was invalid citing lack of evidence. The court further held that the Calgene
antisense patent was not invalid. Enzo has appealed the district court's
judgement to the U.S. court of appeals for the Federal Circuit. There can be no
assurance that the Company will be successful in its appeal. If the Company is
successful in its appeal, it expects that the case would be remanded for
further proceedings before the district court, and there can be no assurance
that the Company will be successful in such further proceedings. However, even
if the Company is not successful, management does not believe there will be a
significant monetary impact.
F-14
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
NOTE 7 - INCOME TAXES
The tax provision (benefit) is calculated under the provisions in Statement
of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes".
1998 1997 1996
---------- ---------- ----------
Current
Federal $ (76,000) $ (38,000) $ ---
State and local (127,400) (73,000) (199,100)
Deferred
Change in deferred tax asset valuation reserve 1,025,000 --- ---
---------- ---------- ----------
Benefit (provision) for income taxes $ 821,600 $ (111,000) $ (199,100)
========== ========== ==========
Current Federal income taxes provided for in fiscal 1998 and 1997 are based on
the alternative minimum tax method. Current State and local income taxes
provided for in fiscal 1998, 1997 and 1996 relate primarily to state and local
taxes computed based upon capital.
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:
1998 1997
----------- -----------
Deferred tax liability:
Deferred patent costs $(1,907,000) $(1,986,000)
Deferred tax assets:
Provision for uncollectable accounts
receivable 1,587,000 1,163,000
Net operating loss carryforwards 6,779,000 8,656,000
Alternative minimum tax credits 665,000 577,000
Other 399,000 414,000
----------- -----------
9,430,000 10,810,000
Valuation allowance for deferred tax assets (6,498,000) (8,824,000)
----------- -----------
Net deferred tax asset $ 1,025,000 $ 0
=========== ===========
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 has provided a full valuation allowance for the net
deferred tax asset at July 31, 1997 and 1996. In Fiscal 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 $2,326,000 and
$747,000 in fiscal 1998 and 1997, respectively, and increased $2,822,000 in
fiscal 1996.
The Company has net operating loss carryforwards of approximately $16,167,000
which are due to expire through 2011. The Company utilized $1,877,000 and
$887,000 of their net operations loss benefits in fiscal 1998 and 1997,
respectively. The Company also has alternative minimum tax credits which do not
expire.
F-15
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
NOTE 7- INCOME TAXES (CONT'D)
The (benefit) provision for income taxes were at rates different from U.S.
federal statutory rates for the following reasons:
1998 1997 1996
----- ----- -----
Federal statutory rate 34% 34% 34%
Expenses not deductible for income
tax return purposes 7% 13% (2%)
State income taxes, net of federal 3% 4% (2%)
No benefit of net operating losses --- --- (33%)
Change in valuation reserve related
to benefits from net operating losses (76%) (44%) ---
----- ----- -----
(32%) 7% (3%)
===== ===== =====
NOTE 8 - STOCK OPTIONS AND WARRANTS
In fiscal 1997, the Company adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The new standard 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 a nonqualified stock option plan, 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 the 5%
stock dividends declared on December 15, 1997 and September 13, 1996. (See Note
12)
NONQUALIFIED STOCK OPTION PLAN
The Company has a nonqualified stock option plan (the "Plan") under which
options for up to 833,490 shares of Common Stock may be issued. No additional
options may be granted under such plan. The exercise price of options granted
under the terms of the Plan will be determined by the Board of Directors.
A summary of nonqualified stock option transactions for the three years ended
July 31, 1998 is as follows:
Number
of Shares Exercise Price
--------- --------------
Outstanding - July 31, 1996 139,615 2.92
Exercised (139,615) 2.92
---------
Outstanding - July 31, 1997 and 1998 ---
=========
The options granted are generally exercisable at 25% per year after one year and
expire ten years after the date of grant.
F-16
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
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. 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, 1998 and 1997 under FAS 123 and for the year ended July
31,1996 under APB 25 are as follows:
1998 1997 1996
------------------------ ------------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ------- --------- ------- --------- ------
Outstanding at
beginning of
year 2,124,989 $ 8.13 2,148,760 $ 7.73 1,967,789 $ 6.71
Granted 273,000 13.51 116,550 14.79 375,401 13.49
Exercised (212,612) 3.72 (73,618) 5.86 (123,071) 4.13
Terminated (16,126) 12.41 (66,703) 10.62 (71,359) 7.21
--------- --------- ---------
Outstanding at
end of year 2,169,251 $ 9.15 2,124,989 $ 8.11 2,148,760 $ 7.73
--------- ------- --------- ------- --------- ------
Exercisable at
end of year 1,602,767 1,446,253 1,102,329
========= ========= =========
Weighted average
fair value of
options granted
during year $ 9.40 $ 10.86 $ 9.80
========= ========= =========
The following table summarizes information for stock options outstanding at
July 31, 1998:
Exercise Price Options Outstanding Options Exercisable
-------------- ------------------- -------------------
$1.30-2.92 220,884 220,884
2.92-6.70 244,174 244,174
6.70-15.75 1,675,081 1,117,996
15.75-38.05 29,112 19,713
--------- ---------
2,169,251 1,602,767
========= =========
F-17
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
NOTE 8 - STOCK OPTIONS AND WARRANTS (CONT'D)
The weighted average remaining contractual life of these options is 6.5 years.
Incentive stock options generally become exercisable at 25% per year after one
year and expire tens years after the date of grant.
Pro-forma information regarding net income (loss) and net income (loss) per
share is required by FAS 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 weight-average
assumptions: risk free interest rates, 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 and .69 for grants during fiscal
year 1998, and a weighted-average expected life of the options of 7 years at
July 31, 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:
1998 1997 1996
----- ---- ----
Pro forma net income (loss): $1,841,000 $477,000 $(8,225,000)
Pro forma net income (loss) per share:
Basic $.07 $.02 $(.35)
Diluted $.07 $.02 $(.35)
The FAS 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, 1998, the Company has not awarded
any shares of common stock under this plan.
OTHER OPTIONS AND WARRANTS
In fiscal 1982, the Company issued 35,423 warrants in connection with the sale
of stock. These warrants were exercisable at $7.91 per share through June 1996
of which 17,711 warrants were exercised in fiscal 1994 and in fiscal 1996. As
part of the restructuring of the Debenture in November 1991, the Company issued
additional 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
1998, 1997 and 1996, 186,579, 7,497 and 4,631 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, 1998, the Company has reserved 3,938,032 shares under the
arrangements described above.
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.
F-18
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
Note 10 - Lines of business
The Company operates two lines of business: (i) conducting research and
development activity and selling products derived from such research and (ii)
operating a clinical reference laboratory which provides diagnostic services to
the health care community. The following financial information (in thousands)
with respect to such lines of business (industry segments) is based on the
guidelines contained in Statement of Financial Accounting Standards No. 14.
At July 31, 1998 and for At July 31, 1997 and for
the year then ended the year then ended
----------------------------------- -----------------------------------
Research Clinical Research Clinical
and Reference and Reference
Development Laboratories Total Development Laboratories Total
----------- ------------ ----- ----------- ------------ -----
Operating revenues:
Sales and diagnostic services $12,661 $27,756 $40,417 $13,190 $21,749 $34,939
======= ======= ======= ======= ======= =======
Operating profit $479 $2,168 $2,647 $409 $1,565 $1,974
==== ====== ==== ======
Investment income 1,889 1,817
Corporate expenses (1,966) (2,227)
Writedown of leasehold interest
and related costs --- ---
Income (loss) before benefit
(provision) for taxes on income $2,570 $1,564
====== ======
Identifiable assets $12,318 $25,262 $37,580 $18,034 $24,097(a) $42,131
======= ======= ======= =======
Corporate assets, principally
cash and cash equivalents and
short-term investments 34,573 25,288
------ ------
$72,153 $67,419
======= =======
Depreciation and amortization $691 $1,173 $1,864 $629 $1,216 $1,845
==== ====== ====== ==== ====== ======
Property and equipment
expenditures $111 $467 $578 $86 $605 $691
==== ==== ==== === ====
Corporate property and
equipment expenditures --- ---
--- ---
$578 $691
==== ====
At July 31, 1996 and for
the year then ended
--------------------------------------
Research Clinical
and Reference
Development Laboratories Total
----------- ------------ -----
Operating revenues:
Sales and diagnostic services $12,946 $21,544 $34,490
======= ======= =======
Operating profit $449 $124 $573
==== ====
Investment income 1,667
Corporate expenses (2,135)
Writedown of leasehold interest
and related costs (7,613)
Income (loss) before benefit
(provision) for taxes on income $(7,508)
========
Identifiable assets $22,309 $22,731(a) $45,040
======= ==========
Corporate assets, principally
cash and cash equivalents and
short-term investments 17,798
------
$62,838
=======
Depreciation and amortization $576 $1,236 $1,812
==== ====== ======
Property and equipment
expenditures $45 $388 $433
=== ====
Corporate property and
equipment expenditures 266
----
$699
====
(a) Includes cost in excess of fair value of net tangible assets acquired of
$8,934 in 1998, $9,305 in 1997 and $9,675 in 1996.
F-19
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
NOTE 11 - 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, 1998, 1997 and 1996, the Company has authorized employer
contributions of 50%, 50% and 25%, respectively, of the employees' contribution
up to 6% of the employees' compensation in Enzo Biochem, Inc. common stock. The
401(k) employer contributions expense was $135,000, $129,000 and $146,000 in
fiscal years 1998, 1997, and 1996, respectively.
NOTE 12 - STOCK DIVIDEND
On September 13, 1996, the Company declared a 5% stock dividend payable on
October 29, 1996 to shareholders of record as of October 8, 1996. The stock
price on the date of declaration was $16.875. On December 15, 1997, the Company
declared another 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-20
ENZO BIOCHEM, INC.
SCHEDULE II - VALUATION
AND QUALIFYING ACCOUNTS
Years ended July 31, 1998, 1997 and 1996
Additions
---------
Charged
Balance at (credited) Charged
beginning to costs to other Additions) Balance at
Description of period and expenses accounts Deductions end of period
- ----------- --------- ------------ -------- ---------- -------------
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
1996
- ----
Allowance for doubtful accounts receivable $2,127,000 $6,702,900 --- $3,431,900(1) $5,398,000
Allowance for deferred tax valuation $6,749,000 --- --- $(2,822,000) $9,571,000
(1) Write-off of uncollectable accounts receivable.
F-21